Could Time-Barred Debts Secured by Mortgages Rise from the Grave?

The Ohio Supreme Court, in overturning 150 years of jurisprudence that ”if the promissory note dies, the mortgage dies with it,“ has potentially created a cottage industry for unscrupulous debt collectors that could cause old mortgages to rise from the grave.

In Deutsche Bank Nat. Trust Co. v. Holden, 147 Ohio St.3d 85 (2016), the Supreme Court in a 7-0 decision, held that actions on a promissory note and foreclosure of a mortgage are distinct causes of action.  In part, the Supreme Court stated:

{¶ 25} We have long recognized that an action for a personal judgment on a promissory note and an action to enforce mortgage covenants are “separate and distinct” remedies. (citations omitted). Based on the distinction between these causes of action—i.e., one is an action on a contract, while the other is an action to enforce a property interest created by the mortgage—we have explained that “the bar of the note or other instrument secured by mortgage does not necessarily bar an action on the mortgage.” Kerr v. Lydecker, 51 Ohio St. 240, 253, 37 N.E. 267 (1894); accord Bradfield at 325, 65 N.E. 1008 (holding that an action for ejectment can be maintained after the statute of limitations on the note has expired); Simon, 126 Ohio St. at 350, 185 N.E. 425 (“For the purpose of subjecting the land to the payment of the mortgage debt, no personal judgment was ever necessary”).

The decision in Holden is incredible for two reasons:

First, the Supreme Court relied upon Kerr for the proposition that debts that re time-barred can nonetheless form the basis to foreclose the corresponding mortgage.  Kerr, however, held the exact opposite of what the Supreme Court stated. Indeed, the trial court in Kerr actually held that “when a note is secured by the mortgage, … the mortgage will be available as a security to the note in an action for foreclosure and sale until the note shall be either paid or barred by the statute.”

Second, in holding that “the bar of the note or other instrument secured by mortgage does not necessarily bar an action on the mortgage,” the 8th District Court of Appeals did not limit application to situations where the note is discharged in bankruptcy.  As noted by the Supreme Court in Bank of New York Mellon v. Walker, 78 N.E.3d 930, 2017-Ohio-535 (8th Dist. 2017):

{¶ 22} Here, as in Holden, if the statute of limitations bars recovery on the note, Bank of New York is a party entitled to enforce the note, but cannot obtain a judgment on it. Bank of New York is in the same position as Deutsche Bank in Holden. Holden makes clear that there are separate remedies attendant to the mortgage, which means the mortgage is no longer a mere incident to the note.

{¶ 23} This court is hesitant to extend Holden beyond the bankruptcy context, but there is no language in that opinion that would strictly limit the available remedies beyond the context addressed there. The rationale applies equally here: where a party cannot obtain a judgment on the note because of an infirmity that applies only to the note, the party may still seek to enforce the valid obligations contained within the mortgage, including ejectment or foreclosure.

{¶ 24} Therefore, Bank of New York, if unable to enforce the note due to the expiration of the statute of limitations, is still entitled to enforce the mortgage under the longer, unexpired period for a specialty set forth in former R.C. 2305.04.

In addition to the fact that Holden is a departure from over 150 years of well-reasoned jurisprudence, the Supreme Court opened the door for mortgage-holders to enforce a mortgage even though the underlying debt is time-barred.  Unscrupulous debt collectors are now free to acquire debts that are barred by the statute of limitations for mere pennies and foreclose the mortgage if the instrument has not been released.

Debts that were literally dead (with attempted collection constituting a violation of the Fair Debt Collections Practices Act) may, in fact, be re-born with mortgagees commencing foreclosure actions on unreleased mortgages that were long thought to be unenforceable.

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