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It is common for the plaintiff in a foreclosure case to have acquired the note and mortgage from the original lender. Typically, the original note holder transfers its rights in the note by indorsing the original note or signing an allonge¹ and then delivering the original note to the new note holder. 

The original note holder also executes an assignment of the mortgage, which is then filed in the county records. When the new note holder files a foreclosure action, it alleges it is the holder of the note and mortgage, and attaches those documents as exhibits to the complaint. 

Can a borrower defend a foreclosure by challenging the validity of the indorsement, or allonge, or the assignment of the mortgage? This issue was illuminated in an April 13, 2017 Ohio appeals court decision in Deutsche Bank Natl. Trust Co. v. Baxter.² 

Ohio courts are required to scrutinize the plaintiff's documents to decide whether the plaintiff can enforce the note or mortgage, according to a 2012 Ohio Supreme Court decision.³ In the Baxter case, the plaintiff claimed to have acquired the note and mortgage from the original note holder, New Century Mortgage Corporation. As part of the evidence, the plaintiff presented the original note, which contained an indorsement in blank, i.e. signed on behalf of New Century without identifying the new holder. As the party in possession of the note, the plaintiff claimed it was entitled to enforce the note. The mortgage had been assigned to the plaintiff in 2009, on behalf of New Century under a power of attorney.

The borrower challenged both the assignment of the mortgage and the indorsement of the note, because New Century had filed bankruptcy in 2007. Under bankruptcy law, filing for bankruptcy revokes a power of attorney. The mortgage assignment had been executed in 2009, two years after the power of attorney had been revoked by the bankruptcy filing. The indorsement of the note was undated, and therefore it may or may not have been executed after the bankruptcy filing.

The court decided the issue of whether the indorsement of the note had been executed prior to or after New Century's bankruptcy filing was irrelevant, because at the time the plaintiff filed the foreclosure complaint, the plaintiff was in possession of the original note indorsed in blank. This proved the plaintiff was entitled to enforce the note.

The assignment of the mortgage, which was executed after New Century's bankruptcy filing, was probably defective due to being signed by an attorney-in-fact under a revoked power of attorney. Nevertheless, the court reiterated that under Ohio law, the mortgage "follows the note" it secures. The physical transfer of a note indorsed in blank is an equitable assignment of the mortgage, regardless of whether the mortgage is validly assigned. Because the plaintiff had the original note, the fact that the mortgage assignment was not executed by an authorized signer was irrelevant. (Please Note: The same should be true even if no assignment had been executed at all, although we recommend obtaining and recording a valid assignment of the mortgage, in addition to obtaining a valid transfer of the original note.)

The court in the Baxter case added a second roadblock to the mortgagor's attempted defense, by reiterating Ohio law that a mortgagor lacks standing to challenge a mortgage assignment if the mortgagor is not a party to, or a third-party beneficiary of, the assignment. Because of this, the claim that the mortgage was not properly assigned, was immaterial.

The plaintiff filed its foreclosure in 2009 and attached a copy of the note without any indorsement, as an exhibit. In that original case, the plaintiff was granted a judgment, but the judgment was subsequently declared void and the case was dismissed because the assignment of the mortgage was not signed by an authorized signer, and there was no indorsement of the note. 

The plaintiff refiled the complaint, attaching the indorsed note as an exhibit. It took over seven years from the plaintiff’s original foreclosure filing date, to finally obtain this favorable Ohio appeals court decision.

Upon acquiring a loan, due diligence should always be performed to ensure the valid execution of documents transferring the note and mortgage. Although the plaintiff ultimately won in the Baxter case, the plaintiff could have avoided a seven-year litigation quest and substantial attorneys' fees by performing that due diligence.

For more information, please contact Larry R. Rothenberg, Esq. Mr. Rothenberg is an attorney with more than 35 years of legal experience who has been recognized by Martindale-Hubbell as a leader in his field, and has been selected in multiple editions of Ohio Super Lawyers. He is a shareholder in Weltman’s Real Estate Default Group in Cleveland, Ohio.