Return of the Performing Mortgage Debt After Judgment: Complying With the Ohio Supreme Court’s Recent Authority to Resolve Troubled Assets in Litigation
June 1st, 2013
Contributor: Michael D. Stultz
Foreclosures are tricky things. Probably in no other area of litigation do the plaintiff and defendant both wish there were another way. Many forces compel us to seek alternatives, both before and during the lawsuit: our own financial concerns, governmental savethe-dream programs, and the Ohio Supreme Court’s mediation initiatives, among others. And loan workouts do come: sometimes before a lawsuit is filed, sometimes after—but Ohio law and its civil rules don’t often keep up. How should an Ohio financial institution lawfully deal with a foreclosure workout? What if the default is resolved before judgment? What about after? Through a recent decision issued on May 28, 2013, the Ohio Supreme Court offered clarification, which bolsters long-standing best practices for financial institutions.
In Countrywide Home Loans Servicing, L.P. v. Nichpor,1 the Ohio Supreme Court considered whether creditors could dismiss a foreclosure case after the trial court granted judgment and after the property was set for sale. The Nichpor Court had to decide whether the creditor’s dismissal of its foreclosure case after it had obtained judgment was valid. Countrywide had obtained judgment against the borrowers, and the sheriff held the property sale. A third party made the high bid. But before the sale was confirmed, Countrywide attempted to dismiss the foreclosure case and filed it again. The borrowers opposed the new foreclosure case by arguing that the first judgment rendered the dismissal ineffective.2
In Nichpor, the Ohio Supreme Court held that judgments in foreclosure are final after trial courts enter them and, thus, not subject to dismissal. This has the practical impact of preventing Ohio’s financial institutions and other creditors from dismissing a foreclosure case after the trial court grants judgment, even if the borrower’s default is resolved or the parties negotiate a workout. There is, however, a way to finalize post-judgment cures and workouts that both memorializes the resolution and protects the financial institution from liability—a forbearance agreement.
A forbearance agreement is in the general sense a creditor’s agreement not to take some legally appropriate action (like a foreclosure sale or wage garnishment, for example) in exchange for something from the borrower (usually a promise to make payments over time). Although relatively simple in concept, forbearance agreements are remarkably powerful and flexible tools. Applied to foreclosure cases, forbearance agreements can be used to bring a debt cur- rent, permit repayment flexibility for a distressed borrower, or formalize default resolutions both before and after judgment.3
For example, if an Ohio financial institution and its mortgage borrower resolve an unpaid debt after judgment or the default is “cured” after judgment, that borrower may return to what appears to be normal monthly payments through a forbearance agreement.4 Under that agreement, the creditor would promise not to take the property to foreclosure sale so long as the borrower makes agreed-upon payments. Importantly, the financial institution should also insist upon and obtain comprehensive releases and promises not to sue from the borrower. In this example, the financial institution will have complied with recent Ohio Supreme Court authority while retuning a loan to “performing” status and protecting itself from lender liability or other claims from the borrower.
In Nichpor, the Ohio Supreme Court formally recognized the proper plain reading of Ohio’s civil rules as they concern foreclosure judgments. That ruling reemphasizes what has always been the best practice in Ohio when addressing a post-judgment foreclosure workout—the use of a forbearance agreement. Although simple and powerful in concept, forbearance agreements can be nuanced and complex in some circumstances. For those reasons, we recommend the use of experienced legal counsel when resolving post-judgment matters.
1 Countrywide Home Loans Servicing, L.P. v. Nichpor, Slip Opinion No. 2013-Ohio-3083. The Supreme Court issued its slip opinion on May 28, 2013.
2 The Sixth District Court of Appeals originally approved the dismissal as a legitimate use of Ohio’s civil rules. That decision was in direct conflict with precedent from the Second District Court of Appeals. As discussed, the Ohio Supreme Court reversed the Sixth District’s decision and upheld the finality of Ohio’s foreclosure judgments.
3 It is vital to note that Ohio’s judgments become unenforceable (dormant) if not executed upon at least once every five years. If a dormant judgment is not revived within ten years of dormancy, it becomes permanently unenforceable. Therefore forbearance agreements concerning judgments should either permit the creditor to execute upon the judgment at least once every five years (through a certificate of judgment, for example) or the forbearance period should be no longer than the current five-year execution period.
4 Note that once a loan is reduced to judgment, it ceases to exist in its prior form. This means that a borrower is technically unable to “cure” a default or return the prior repayment structure. A proper forbearance agreement can, however, simulate this result.
© 2013 Stultz & Stephan, Ltd.
This article is not a solicitation for business and is not intended to constitute legal advice on specific matters, create an attorney-client relationship, or be legally binding in any way
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