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Investors and others purchasing properties that have been the subject of a previous foreclosure should be aware of the Ohio Supreme Court decision in the case captioned Federal Home Loan Mortgage Corporation v. Schwartzwald, et al, 2012-OHIO-5017, decided on October 31, 2012. The case calls into question the validity of title arising out of foreclosure cases where the mortgage was not properly assigned to the plaintiff prior to the filing of the foreclosure complaint.

Here are the facts:

Mr. and Mrs. Schwartzwald had executed a Promissory Note secured by a Mortgage to Legacy Mortgage in 2006. The Mortgage contained a blank endorsement to Wells Fargo. Federal Home Loan Mortgage Corporation (FHLMC) filed a foreclosure complaint against Schwartzwald on April 15, 2009. However, Wells Fargo did not assign the subject note and mortgage to FHLMC until May 15, 2009, one month after the foreclosure complaint was filed. The Schwartwalds filed a Motion for Summary Judgment in the Greene County Common Pleas Court, in which they asserted that FHLMC lacked standing to foreclose. That motion was denied. The court entered a foreclosure judgment in favor of FHLMC and the property was sold at a Sheriff’s Sale. FHLMC purchased the property at the sale.

On Appeal to the Second District Court of Appeals, the decision of the trial court was upheld. The Appellate Court held that although FHLMC lacked standing at the time the foreclosure complaint was filed, that defect was cured by the assignment of the note and mortgage prior to the entry of the foreclosure judgment.

The Ohio Supreme Court disagreed and reversed the decision of the Court of Appeals. The Court held the issue was a jurisdictional one. Because the mortgage had not been properly assigned at the time the foreclosure complaint was filed, the plaintiff did not have standing to file the complaint. Standing is necessary before the Court has jurisdiction to hear the case. Since it is a jurisdictional requirement, standing as of the date the foreclosure complaint was filed was the determining factor. The later assignment, even if before judgment was entered, does not cure the defect.

What the decision means for you:

The Ohio Supreme Court equated lack of standing with lack of jurisdiction that cannot be cured after the fact. In other cases, State Courts and Federal Courts in Ohio have held that where there is a lack of jurisdiction, any judgment entered in the case is not merely voidable but void. That means that a foreclosure sale based upon a void judgment could be set aside. The decision calls into question the status of many properties that went through foreclosure where the mortgage had not been properly assigned when the complaint was filed.

Further, a later purchaser of a property that was sold at Sheriff’s sale pursuant to a void judgment would not be treated as a “bona fide purchaser”, so title held by subsequent purchasers could also be in question.

Title agents have been instructed by their underwriters to take exceptions to the policy when confronted by this situation, so a title policy issued since the Schwartzwald decision will probably not insure against this title defect. When purchasing property, always buy title insurance and look for any exception related to this issue. If you think you might be faced with a Schwartzwald problem, contact a real estate attorney.