Appellate Law Update: Protecting Ohio’s Lenders During Foreclosure

Foreclosure lawsuits are exacting masters. One mistake, however small, can taint everything that comes after. Aurora Loan Services recently experienced this first hand when a missed lien extended its foreclosure by more than three years—a mistake that could cost that lender its collateral.

Issues arose for Aurora shortly before it sued Stefanie Young in 2007 for mortgage foreclosure. Aurora, like most lenders, obtained a preliminary judicial report before foreclosing to identify who had an interest in its collateral. That report only showed Aurora’s mortgage and standard tax liens. But Stephanie had actually mortgaged her property to her parents about 20 days after records were searched for Aurora’s judicial report. As a result, Aurora wasn’t aware of the mortgage and didn’t name Stefanie’s parents in its foreclosure case—a mistake that would prove costly.[1]

Aurora eventually obtained a judgment against Stefanie, who then filed for Chapter 13 bankruptcy protection. In her bankruptcy case, Stephanie listed her parents as secured creditors who held a $57,000 mortgage on her property. About four years later, she stopped paying her loan in bankruptcy, so the foreclosure resumed. In the end, Aurora bought Stefanie’s property at the foreclosure sale and took ownership through Nationstar Mortgage, a related company.

The mortgage to Stephanie’s parents survived Aurora’s foreclosure because foreclosure cases do not purge liens owned by those who are not parties to the case.[2] So, Nationstar owned a property that was subject to a $57,000 first mortgage lien after years of litigation. In response, it sued Stephanie’s parents to invalidate their mortgage (a quiet title lawsuit).

In that case, Stephanie’s parents argued that Nationstar could not use a quiet title claim to challenge their mortgage because Aurora didn’t object to their mortgage during Stephanie’s bankruptcy case. In other words, Aurora had one chance to challenge the mortgage, and when Aurora didn’t, it lost that chance forever (the claim preclusion doctrine).

The trial court agreed and entered judgment against Nationstar. But after two appeals, the Ninth District Court of Appeals held that claim preclusion didn’t apply because Stephanie’s parents failed to raise that doctrine correctly—a lucky break for Aurora and Nationstar to be sure.[3] Even so, the trial court in the quiet title lawsuit must still decide whether the mortgage to Stephanie’s parents is valid. If it is, Nationstar will lose at least $57,000. If not, Nationstar will hold Stephanie’s former property free from liens—the goal of every lender that purchases real estate at a foreclosure sale.

No lender wants to be Nationstar in this case. Aurora’s failure to include Stefanie’s parents in the foreclosure lawsuit snowballed into three more years of litigation and appeals—an expensive and time-consuming process. And despite success on appeal, ultimate success for Nationstar still isn’t guaranteed. The trial court could find the parent’s mortgage valid.

What is the lesson from the Nationstar case for Ohio’s lenders? Be conscientious. Mistakes are not unique to missed liens. Standing (i.e., loan ownership), CFPB compliance, loans servicing, and accounting, just to name a few, can equally mire a typical foreclosure in avoidable costs and extended proceedings. But careful action before and after loan default often allows lenders to avoid cases like these.

[1] There is always a gap period between a preliminary judicial report’s effective date and the date of foreclosure filing. Usually, lenders file a final judicial report to account for liens that arise during the gap period. It does not appear that Aurora did so in this case, however.

[2] See, e.g., UAP-Columbus v. Young, 10th Dist. Franklin No. 11AP-926, 2012-Ohio-2471, ¶ 19.

[3] Nationstar Mortg. LLC v. Young, 9th Dist. Summit No. 28134, 2016-Ohio-8287.

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