At Risk: Lenders’ Right to Walk Away from a Worthless Mortgage After Foreclosure Judgment

By: Larry R. Rothenberg, Esq.

“The task of a judge is not to make the law – it is to apply the law.” This basic principle was expressed by U.S. Supreme Court nominee, Sonia Sotomayor, during her opening statements in her confirmation hearings. Yet lately, we are seeing examples of judges failing to follow this maxim in foreclosure cases. Some activist judges seek to impose their “fix” of the foreclosure crisis regardless of whether there is sound legal authority on which to base their rulings.

For example, in 2007, in a nationally publicized decision, a Cleveland federal court judge contravened a longstanding practice that was accepted by the courts, by requiring that before a plaintiff could be entitled to commence a foreclosure, the original or an assignment of the mortgage must be in the plaintiff’s name. Since that time, many judges adopted this requirement or imposed various new requirements or procedures to make foreclosures more cumbersome for the lender or to pressure the lender to accept an alternative to foreclosure.

In response to criticism by the courts and the media, the mortgage lending industry has made loss mitigation a focal point of its efforts where there is a responsive borrower. On the other hand, a borrower’s ignoring the debt and abandoning the property during a foreclosure, are often quickly followed by stripping, vandalism, and deterioration of the property. This, coupled with plummeting market values and overwhelmed REO inventories, has led to more decisions by lenders to abandon their own pending actions to foreclose. As a result, we now have the “toxic title,” where no one can or does take responsibility for the deteriorating property. This leads to decline and ruin of the property values in the neighborhood, and has created a new area for media exposure.

Under the Rules of Civil Procedure, prior to a judgment being entered, a plaintiff may, without seeking permission of the court, voluntarily dismiss its claims. However, after the foreclosure judgment has been entered, if the plaintiff desires to terminate the action, the plaintiff typically files a motion for the court’s approval, seeking to have the court vacate the judgment and dismiss the case. In the past, almost all judges readily granted such a motion, as it has always been a general assumption that a plaintiff in a foreclosure case has a right to decide whether to cause a sheriff’s sale to be scheduled.

However, storm clouds are now gathering over this issue. Some public officials complain that a plaintiff should have a duty to the neighbors not to leave the house unsold and unmaintained, and judges are taking notice. For approximately the past year, one Cuyahoga County Common Pleas Court judge has been routinely denying without comment, motions to vacate judgments and dismiss the case. The judge recently reviewed and identified cases where the foreclosure judgment was entered but the plaintiff has not scheduled a sheriff’s sale. She ordered the plaintiffs to cause sheriffs sales to be scheduled by a deadline which she provided, and when the plaintiffs did not take the necessary action, she filed an order for “the CEO, CFO or other responsible representative designated by them” to appear and show cause why the plaintiff should not be held in contempt of court for failure to comply with the court’s order. This action by the judge has gotten the media’s attention, and word is that other judges may copy the action.

There is no statute in Ohio imposing a duty on a plaintiff, in whose favor a foreclosure judgment has been entered, to follow through to cause the scheduling of a sheriff’s sale. If judges find mortgage lenders in contempt of court for failing to do so, we anticipate that cases will be appealed to the Court of Appeals. At that point, we can only hope that the Court of Appeals will apply the principle expressed by Judge Sotomayor, that the task of a judge is not to make the law, but only to apply law that is in existence. Generally, the making of new law is the province of the legislature rather than the courts. However, one Ohio State Representative has stated that he intends to introduce such a bill to impose a responsibility on foreclosure plaintiffs to complete foreclosures that they started.

In view of these developments, mortgage lenders should make an earlier and more extensive effort to identify properties on which it would not be worth completing the foreclosure. Those cases should be dismissed prior to the entry of judgment in order to be safe from unwanted actions that judges might take after the judgment has been entered.

For an article published in the Cleveland Plain Dealer on July 19, 2009 regarding this issue, click here.

If you have any questions on this information, please contact Mr. Larry R. Rothenberg, Esq. Larry Rothenberg is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., L.P.A. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania and Michigan. Larry can be reached at (216) 685-1135 or via e-mail at lrothenberg@weltman.com.

Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A. , an organization providing comprehensive creditor representation. The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship. Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles. ©2009

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