Does a Borrower Have a Right to a Notice of Default and an Opportunity to Cure Non-Monetary Defaults?

By Larry R. Rothenberg, Partner

The FNMA/FHLMC Uniform Single-family Residential Mortgage Requirement
 
Many mortgage forms, such as the FNMA/FHLMC uniform single-family residential mortgage for Ohio, require the lender to provide the borrower with a notice advising the borrower of a default and what they must do in order to cure that default, prior to the lender being entitled to accelerate the debt.  If the loan documents required  that the lender provide a notice of default and an opportunity to cure the default, and the lender fails to do so, the borrower could raise a valid affirmative defense in the foreclosure action.

Some states have a statute requiring that the lender provide a notice prior to acceleration of the debt, even if the loan documents do not contain such a requirement.   However, Ohio does not have such a statute.   Therefore, the courts in Ohio will only look to the loan documents in deciding whether the lender had such an obligation.

Fidelity Tax v. Hall

Such a situation was presented in the Ohio case of Fidelity Tax, LLC v. Hall[1], decided by a Court of Appeals on July 18, 2013.  The owner of a tax certificate, which it had purchased following the borrower’s nonpayment of real estate taxes, commenced the foreclosure.   The lender, which was named as a party in the case, filed a cross-claim seeking foreclosure on its mortgage.  The debt due to the tax certificate holder was subsequently resolved, and it dismissed its complaint. However, the lender proceeded with the action on its cross-claim to foreclose on its mortgage.

A Non-monetary Default

The property was a multi-family property, and therefore, the loan documents were not the FNMA/FHLMC single-family loan documents.  Instead, the note provided that the borrower would be in default not only based on a failure to pay, but also based on non-monetary circumstances.  The note specifically stated that the borrower would be in default if any creditor tries to take the borrower’s property, or by the borrower failing to provide, upon request, any financial statements that the lender may deem necessary.  Similarly, the mortgage provided that it would be in default if the borrower failed to pay taxes when due, or if a foreclosure action were commenced by any creditor against the mortgaged property.

Although the borrower had never missed a payment on the note, the lender sought foreclosure based on: (1) the borrower’s failure to make tax payments when due; (2) the initiation of the foreclosure by the tax certificate holder; and (3) the failure to provide financial statements requested by the lender.

Is The Default Curable?

The mortgage contained a “Right to Cure” provision stating that if the default is curable, it may be cured (and no event of default will have occurred) if the borrower, after the lender sends written notice demanding cure of the default, cures the default within 30 days; or if the cure requires more than 30 days, immediately initiates and continues to take steps sufficient to cure the default as soon as reasonably practical.

In defending the lender’s claim for foreclosure, the borrower argued that the lender had not provided him with a notice and a right to cure the defaults.  The lender controverted the borrower’s argument, by arguing that the provision in the mortgage providing a “right to cure” would only apply if the defaults were curable, and that the borrower’s defaults in the case (i.e. the borrower’s failure to pay taxes when due, and the initiation of the foreclosure by the tax certificate holder), were not curable.

No Right to Cure a Non-curable Default

The Court of Appeals agreed with the lender that curing these non-monetary defaults would be impossible.  After all, the borrower could not undo the fact that he had failed to pay his taxes timely, or that the tax certificate holder had initiated a foreclosure.  Therefore, the court stated that it would be a useless act to require the lender to send the borrower a notice of a right to cure the defaults. 

The Successor by Merger’s Standing to Foreclose

The court also rejected the borrower’s challenge to the lender’s standing to proceed with the foreclosure.  A recent Ohio Supreme Court decision requires that a mortgage holder seeking foreclosure must submit documentation to establish that it was the holder of the note and mortgage as of the date the foreclosure was commenced.[2]   The lender in the Hall case was the successor by merger to an entity which itself was the successor by merger to the original lender.  The borrower’s  challenge to the lender’s standing was based on the absence of any evidence of executed assignments of the mortgage from the acquired entities.

Relying on prior Ohio case law[3]  and the Ohio statute governing the effect of mergers[4] , the Court of Appeals stated that the absorbed company becomes a part of the resulting company following the merger, and the merged company has the ability to enforce agreements as if the resulting company had stepped in the shoes of the absorbed company.   Hence, all assets and property, (including mortgages) of each entity are deemed automatically transferred to the resulting company post-merger.   Therefore, the lender in the Hall case established its standing by producing evidence of the mergers, and no assignments of the mortgage were necessary.

For a complete copy of the Hall case, go here.

If you have any questions on this matter, please contact Mr. Larry R. Rothenberg, Esq. Larry is the partner in charge of WWR’s Real Estate Default Unit in the Cleveland office. He can be reached at 216.685.1135 and lrothenberg@weltman.com.

[1] 2013-Ohio-3165 (10th District, 2013). The 10th District covers Franklin County, Ohio
[2] Fed Home Loan Mtge. Corp. v. Schwartzwald, 134 Ohio St. 3d 13, 2012-Ohio-5017
[3] Acordia of Ohio, L.L.C v. Fishel, 133 Ohio St.3d 3d 356, 2012-Ohio-4648, ¶7  (“Acordia II).
[4] ORC §1701.82

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