The Supreme Court of Ohio recently clarified in a decision issued in Deutsche Bank Nat’l Trust Co. vs. Holden 2016-Ohio-4603; 2016 Ohio LEXIS 1803, that equitable rights and remedies which a party holds in and to a mortgage lien on real property are separate and apart from the legal rights and remedies a party holds in and to the underlying promissory note which is secured by the mortgage. In a typical residential lending situation a third party lending institution lends money to borrowers which enables the borrowers to purchase a home on credit, the legal instrument memorializing the loan is a promissory note which provides the lending institution legal rights and remedies as the creditor under the promissory note. The owner of the home then executes a separate mortgage instrument (which is typically filed of record in the county where the real estate is located) in favor of the lending institution, which pledges the real estate as collateral to secure repayment of the loan.
In the Deutsche Bank case, the individual debtors under a certain Promissory Note provided Deutsche Bank with a mortgage interest in their residence to secure repayment under the Note. The individual debtors subsequently defaulted in their payment obligations under the Note and filed personal bankruptcies and listed the Note as a dischargeable debt. Deutsche Bank proceeded with a foreclosure lawsuit in an effort to collect upon the mortgage lien, which was not considered to be dischargeable in bankruptcy. Deutsche Bank was careful in its foreclosure lawsuit not to seek a judgment against the individual debtors of the Note personally because their personal obligations were discharged in through the bankruptcy action.
The Appellate Court concluded that only the current holder of both the Note and the mortgage interest had standing to file a foreclosure action, and therefore Deutsche Bank could not proceed with the foreclosure action because the obligations under the Note were discharged in bankruptcy.
The Supreme Court reversed the Appellate Court and clarified that an action on the promissory note is separate and distinctive from an action on a mortgage securing the Note. The party which holds the interest in the Note (as creditor) has the right at law to seek recovery and a personal judgment against the maker of the Note, whereas the holder of the interest in the Mortgage (the mortgagee) has a separate equitable right and standing to foreclosure upon and seek a judicial sale of the pledged collateral to recover any amounts due and owing under the mortgage. The debtors filing of personal bankruptcies and the discharging of the personal obligations under the Note, do not negatively impact the mortgagee's legal standing and ability to pursue a foreclosure action and seek a judicial sale of the pledged collateral to satisfy amounts due and owing.
Thus, the Ohio Supreme Court clarified the long-standing position that an action for a personal judgment on a promissory note and an action to enforce mortgage covenants are "separate and distinct" remedies. If a debtor under the Note files a bankruptcy, the mortgagee must be careful not to request a judgment against the debtor in their underlying foreclosure complaint, but it is clearly permitted to pursue rights available to it under the mortgage.
For questions or concerns regarding enforcing rights or interests under Promissory Notes or Mortgages please contact one of the lawyers in Reminger’s Corporate & General Business or Real Estate Practice Groups.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
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