The Schwartzwalds purchased a home in November 2006 with a mortgage from Legacy Mortgage in the amount of $251,250.  Legacy then endorsed the note to Wells Fargo, and assigned it the mortgage.  After falling on hard times in 2008, the Schwartzwalds moved to Indiana to find employment and eventually defaulted on their mortgage in January 2009.

In March 2009, the Schwartzwalds and Wells Fargo were negotiating a short sale.  In April 2009 the Schwartzwalds entered into a contract to sell the home, with a closing date in June 2009.  Despite the negotiations with Wells Fargo, on April 15, 2009 Federal Home Loan Mortgage Corporation (Freddie Mac) filed a foreclosure action.  Freddie Mac's complaint attached a copy of the mortgage to Legacy and alleged that "a copy of the note is currently unavailable."

Wells Fargo apparently told the Schwartzwalds that this was "standard procedure" and "don't worry about it because we are doing a short sale."  Unfortunately, due to delays in the process, the short-sale buyer rescinded their offer.

On May 15, 2009, a month after the complaint was filed, Wells Fargo assigned the note and mortgage to Freddie Mac, and a copy of the assignment was filed with the Court on June 17, 2009.  Both the Schwartzwalds and Freddie Mac moved for summary judgment.  The Schwartzwalds asserted that Freddie Mac lacked standing to foreclose on their property.

The trial court entered summary judgment in favor of Freddie Mac and ordered the property to be sold.  On appeal, the Second District Court of Appeals affirmed the decision finding that Freddie Mac "had established its right to enforce the promissory note as a nonholder in possession, because assignment of the mortgage effected a transfer of the note it secured." The court further explained that standing is not a jurisdictional prerequisite and that a lack of standing may be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A). Thus, the court concluded that although Federal Home Loan lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and transfer of the note prior to entry of judgment.

The court of appeals certified that its decision conflicted with other courts of appeals cases that held "that a lack of standing cannot be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A)."  The Ohio Supreme Court accepted the discretionary appeal.

The Ohio Supreme Court recognized that "standing is a jurisdictional requirement."  Because standing to sue is required to invoke the jurisdiction of the common pleas court, "standing is to be determined as of the commencement of suit."   Because Freddie Mac "failed to establish an interest in the note or mortgage at the time it filed suit, it had no standing to invoke the jurisdiction of the common pleas court."

The Court then explained the "real party in interest" requirement.  Civil Rule 17(A) requires that a complaint be brought in the name of the real party in interest.  This is to "enable the defendant to avail himself of evidence and defenses that the defendant has against the real party in interest, and to assure him finality of the judgment, and that he will be protected against another suit brought by the real party at interest on the same matter." 

According to the Court, "a common pleas court cannot substitute a real party in interest for another party if no party with standing has invoked its jurisdiction in the first instance... a litigant cannot pursuant to Civ.R. 17(A) cure the lack of standing after commencement of the action by obtaining an interest in the subject of the litigation and substituting itself as the real party in interest."

The case was reversed and dismissed!

Several court of appeals decisions post-Schwartzwald  have followed or attempted to distinguish that ruling.  For example, the Eighth District, in CitiMortgage v. Patterson, focused on the word "or" in the holding - "it failed to establish an interest in the note or mortgage at the time it filed suit."  That court held that Schwartzwald "stands for the proposition that a party may establish its interest in the suit, and therefore have standing to invoke the jurisdiction of the court when, at the time it files its complaint of foreclosure, it either (1) has had a mortgage assigned or (2) is the holder of the note."  It reinstated a foreclosure judgment where the lender attached a copy of the allonge to the note to its complaint, but the mortgage was not assigned until after the complaint was filed.

The Schwartzwald case is troubling for title insurers.  First, state and federal courts have held that a lack of standing, being a jurisdictional defect, renders any judgment not just voidable, but void.  A foreclosure sale premised on a void judgment would have to be set aside. Second, there is nothing in the decision that limits the Schwartzwald ruling to be prospective in nature.  What becomes of all of the foreclosures that have already gone to sale based on a potentially void judgment? 

Some underwriters have already issued bulletins requiring exceptions on title policies where foreclosures in the chain of title do not demonstrate that the foreclosing lender held the note and mortgage at the time the complaint was filed.  How far back in the chain the examiner must carefully review foreclosures for this problem is uncertain. 

Although subject matter jurisdiction can be raised at any time and cannot be waived, at least one court of appeal has explained that "although adverse parties may not confer jurisdiction upon a court by mutual consent, where none would otherwise exist, they may stipulate to the truth of facts that are sufficient to confer jurisdiction... In this way a party can be estopped from challenging either the facts which establish jurisdiction, or the facts which defeat jurisdiction."

Thus, if sufficient facts were alleged in the complaint to establish jurisdiction, whether those facts are true or not may not matter. As a practical matter, a party may be estopped from relitigating those facts to set aside a judgment. **

** [UPDATE: See More on Schwartzwald: Ohio Supreme Court Reverses Another Foreclosure.]

Examiners should also be cautious when relying on back-title, or when updating a prior policy.  It is unlikely that the prior examiner was looking for this particular issue and a more in depth search would be prudent. 

Until the courts have further reviewed this matter in light of Schwartzwald, title examiners will need to be extra cautious in reviewing not only pending foreclosures, but any prior foreclosure in the chain of title.  Undoubtedly, underwriters will be providing additional guidance to be disseminated to their agents and examiners as further developments occur.