The Schwartzwald case held that a Plaintiff in a foreclosure case that does not hold the note or mortgage at the time it files the complaint lacks standing, and the court therefore lacks jurisdiction.  The big question that this left open was: what effect does that have on all of the faulty foreclosures that have already been completed?  We may now have some insight into this thanks to a case that was reversed and remanded just last month, Washington Mutual Bank v. Wallace.

In 1999 Wallace purchased her home with financing from Norwest Mortgage.  The note attached to the complaint had not been endorsed by Norwest and the mortgage was in favor of Norwest.  In July 2008, Washington Mutual filed a complaint for foreclosure, alleging that it was the holder of Wallace's note and mortgage.  The following month, on August 14, 2008, Wells Fargo Bank, successor to Norwest, executed an Assignment of Mortgage to Washington Mutual, "together with the Promissory Note secured thereby and referenced therein."  The Assignment was recorded on August 21, 2008.

Wallace never filed an answer and the Court granted default judgment against her on August 20, 2008.  Wallace did not appeal.  But, about nine months later, on May 11, 2009, Wallace filed a Motion to Vacate a Void Judgment.  Wallace claimed that because Washington Mutual failed to establish that it was the holder of the note and mortgage, the court lacked standing and its default judgment was void.

On May 14, 2009, Wallace filed a Motion for Relief from Judgment, arguing that it should be granted because Washington Mutual falsely represented that it held the note and mortgage when it filed its complaint, and that she had a meritorious defense to the action - that Washington Mutual lacked standing to bring the foreclosure.

The trial court overruled both motions and Wallace appealed. The court of appeals affirmed the trial court's default judgment, relying in part on one of its earlier cases in which it held that "when the appellants failed to raise their real-party-in-interest objection or defense in the trial court at a time when the issue could have been effectively dealt with, the objection or defense was deemed waived."  The Court then concluded that "the fact that WaMu did not become the real party in interest in the 2008 foreclosure until 34 days after WaMu commenced the action but before final judgment was entered in that action did not deprive the trial court of subject-matter jurisdiction to enter default judgment against Wallace and in favor of WaMu."

Wallace then appealed to the Ohio Supreme Court, which accepted the appeal with a stay on briefing until the Court decided Schwartzwald.  Schwartzwald, of course, held that "a party commencing litigation must have standing to sue in order to present a justiciable controversy and invoke the jurisdiction of the common pleas court," and "a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest."

Washington Mutual urged the Court to reactivate the Wallace appeal for briefing and oral argument, arguing that the issue raised was not addressed by Schwartzwald.  The difference, according to Washington Mutual, was that in Schwartzwald the defendants actively defended the action, raising the issue of standing in their answer -- and in Wallace the defendant did not defend, default judgment was rendered against her, and she did not appeal.

In essence, Washington Mutual presented the problem now created by Schwartzwald: what is the retro-active effect of the case on past foreclosures where the Schwartzwald problem was never raised? According to Washington Mutual:

This case affords the Court to opportunity to address how the rule in Schwartzwald applies to motion to vacate judgments, whether a lack of standing is a component of subject matter jurisdiction, and whether a lack of standing can be waived.  If-- as contended here-- a plaintiff's failure to prove standing at the time of the complaint deprives a common pleas court of subject matter jurisdiction-- then every judgment rendered in Ohio could be attacked.  Because void judgments are not subject to time limits of Civil Rule 60(B), those attacks would throw into question literally hundred of thousands of cases that have long been over.

Wallace argued that the propositions of law in both were identical and the Schwartzwald Court ruled on each of those points:

The Court ruled that standing is a necessary component of a common pleas court's jurisdiction.  And it held that standing must be established as of the filing of the complaint.  It clearly stated that Civ. R. 17(A) cannot be used to cure a lack of standing.  And the Court made clear that its decision is premised on the fact that Freddie Mac was not entitled to enforce the note, and therefore had suffered no injury, at the time it filed suit.

The Ohio Supreme Court denied Washington Mutual's motion and reversed the court of appeals decision and remanded the case to the trial court for further proceedings consistent with Schwartzwald. 

The sale of the Wallace property was confirmed on January 24, 2011, though it appears that Washington Mutual assigned its bid to its successor-in-interest and receiver, JP Morgan Chase Bank, which still holds title today.

Though the Supreme Court did not provide any written opinion to provide guidance on the issue, it appears that it may never be too late to challenge a judgment in a foreclosure case that is void for lack of standing under Schwartzwald.  How then will the title industry deal with many properties plagued by old Schwartzwald problems?

Underwriters have begun to require exceptions on policies to make it clear that they will not cover claims related to attempts to set aside foreclosure judgments or subsequent sales based on lack of standing arguments.  But, many policies have already been issued without such exceptions.  Is there any way to cure this type of defect?

One possibility may be quiet title actions brought by the "new owners," but this was unsuccessfully tried in Massachusetts.  Following the Massachusetts Supreme Court case, U.S. Bank v. Ibanez, which was similar to Schwartzwald, a homeowner plagued by defective title filed a "try title" action and the Court dismissed it for lack of standing. 

Francis Bevilacqua had purchased the property from U.S. Bank after it foreclosed on Pablo Rodriguez.  U.S. Bank, unfortunately, did not hold the mortgage at the time it purported to foreclose.  Thus, U.S. Bank never acquired title to the property - the sale was "wholly void."  Because U.S. Bank did not hold title to the property, it could not convey tile to Bevilacqua which was fatal to Bevilacqua's claim to "own" the property for purposes of his try title action.

Interestingly, Rodriquez did not even attempt to defend his title.  Nevertheless, the trial court explained that the mere fact that Bevilacqua had a deed recorded in his name was irrelevant.  The court wrote that "in the classic example, a litigant could go to the registry, record a deed to the Brooklyn Bridge, commence suit, hope that the true owners ignored the suit or... could not be readily located and [would thus] be defaulted, and secure a judgment."

[For more on Bevilacqua v. Rodriguez, see Bevilacqua v. Rodriguez-- Mass. Buyers out of Foreclosure Get the [Mostly] Bad News.]

Though I think the court got the Bevilacqua case wrong, it does have some merit and if followed in Ohio it would make it very difficult to cure Schwartzwald defects.  In at least some of these types of cases, the foreclosures are long over and the party who would have standing to institute a new foreclosure would have little incentive to do so.  Those people who have been wrongly foreclosed on, who may have standing to file a quiet title action, have likely moved on and probably have little interest in getting involved.  Yet, those who have purchased foreclosed properties with defective title may have trouble obtaining title insurance or selling their homes.

We may have to wait for the next big Ohio Supreme Court case to provide us with the answer.

Though it has created a lot of uncertainty, the Schwartzwald case is certainly a landmark case in Ohio.  Attorney Andrew M. Engel, who represented Schwartzwald and Wallace, deserves kudos.  2012 was a great year for him and he has provided homeowners with a great, and much needed, defense in foreclosure actions.