OHIO APPELLATE COURT REVERSES BANK’S SUMMARY JUDGMENT CREATING NEW AND HIGHER STANDARD FOR SATISFYING CONDITIONS PRECEDENT

About two years ago Ohio’s Second District Court of Appeals reversed a summary judgment of foreclosure entered in favor of U.S. Home Ownership, LLC (“USHO”) and against Collin L. Young (“Young”). U.S. Home Ownership, LLC v. Young, 109 N.E.3d 681, 683 (Ohio Ct. App. 2018). The Second District found there to be factual issues which prevented summary judgment. At the time it was issued the decision did not draw much attention as it addressed the usual foreclosure issues, i.e., standing, lost note, authentication and admissibility of evidence, etc., and resolved them in the usual way – with one exception. The Court adopted a higher standard for complying with conditions precedent and this exception warrants discussion.

Young’s note and mortgage changed hands multiple times.ⁱ At some point Young defaulted and one of USHO’s predecessors, CSH Fund IV, LLC (“CSH”), initiated foreclosure proceedings.ⁱⁱ On April 4, 2012, prior to initiating the foreclosure, CSH’s servicer sent Young a 30-day demand notice.ⁱⁱⁱ CSH filed its foreclosure case in October 2012 and dismissed it in September 2013 for reasons not pertinent to this article. After dismissal CSH transferred Young’s loan to Capital Income and Growth Fund, LLC (“Capital Income”), which in turn transferred it to USHO.

USHO sent out a 30-day demand notice on February 5, 2014 and then filed its own foreclosure against Young in May 2015.^iv The lower tribunal granted summary judgment in favor of USHO finding there to be no genuine issues of material fact in dispute.^v Young appealed and the Second District found there to be multiple factual issues which prevented summary judgment. Most notably was the Court’s findings with regard to conditions precedent. The Second District found that USHO’s affiant failed to properly authenticate the February 2014 demand notice, so satisfaction of conditions precedent rested on the sufficiency and admissibility of the April 2012 demand notice sent by CSH’s servicer.

The District Court found^vi that the April 2012 demand notice did not satisfy conditions precedent because “Paragraph 22 of the Mortgage requires that notice of default be sent by the ‘[l]ender,’ and Subparagraph 7(C) of the Note requires that notice of default be sent by the ‘[n]ote [h]older.’^vii The Court explained that since CSH (via its agent) sent the April 2012 notice and CSH “was no longer the mortgagee or the holder of the note” USHO failed to satisfy the notice requirements of the note and mortgage. Notably, the Court also added that “when a mortgagee issues a notice of default, commences a foreclosure action and then dismisses the action [as was the case here], the mortgagee (or its successor in interest) must send a new notice of default if it wishes to commence a second action against the mortgagor.” The Court reversed USHO’s foreclosure judgment and remanded the matter for further proceedings.^viii

Although the Second District cited to several other cases to support this finding, those cases did not stand for the premise cited and this opinion is a clear departure from well-settled case law on the issue of conditions precedent. Despite this apparent departure from established precedent which would usually draw industry-wide attention and more litigation, only two^ix other cases (both originating in Ohio) have cited to the Second District’s opinion since it was issued in March of 2018. Notably, neither of those cases refer to the seemingly novel requirements regarding the demand letters. Time will tell if this Second District opinion will be applied in other jurisdictions, but as for best practices we recommend lenders carefully review demand letters prior to initiating suit to ensure they comply with the specific requirements of the note and mortgage. Given the risk of substantial fee exposure on this issue and the minimal effort required to ensure compliance with conditions precedent, we also recommend redemanding after a dismissal.