Update: On October 8, 2014, the Supreme Court of Ohio handed down a merit decision in this case.  Read the analysis here.

On January 8, 2014, the Supreme Court of Ohio heard oral argument in the case of Bank of American, N.A. v. George M. Kuchta, et al., 2013-0304. At issue in this case is whether defendants can bring a lack of standing challenge in a foreclosure action in a post-judgment motion without having appealed the judgment. This case comes to the Supreme Court of Ohio by way of conflict certification.

Case Background

Wells Fargo originally owned the note and mortgage on the Kuchtas’ house.  But it was the Bank of America, plaintiff-appellant, that filed a complaint of foreclosure against the Kuchtas, claiming it was the then-holder of the promissory note and assignee of the mortgage. In their answer the Kuchtas alleged lack of standing, stating there was no proof in the complaint that the mortgage had been assigned to Bank of America.  It was undisputed that Bank of America was not assigned the mortgage until nine days after the complaint was filed.

Bank of America filed a motion for summary judgment seeking the balance due on the note and to foreclose the mortgage, which the trial court granted. The Kuchtas did not raise the standing issue in opposition to the summary judgment motion, and did not appeal the judgment. After filing a motion to stay a sheriff’s sale, the Kuchtas filed a Civ. R. 60(B) motion to vacate the judgment of foreclosure. The Kuchtas argued that the Bank was neither the owner nor assignee of the note and mortgage at the time the complaint was filed, and therefore the final judgment should be vacated.

The trial court denied the 60(B) motion to vacate after finding that the Kuchtas did not present a meritorious defense of fraud. This ruling was made before the decision in Schwartzwald. The Ninth District Court of Appeals reversed on the authority of Schwartzwald,  and certified a conflict.

Certified conflict question

“When a defendant fails to appeal from a trial court’s judgment, can a lack of standing be raised as a part of a motion for relief from judgment?”

Read the oral argument preview of this case here.

Key Precedent

Fed. Home Loan Mortg. Corp. v. Schwartzwald, 2012-Ohio-5017  (a plaintiff’s standing is to be determined as of the filing of the complaint and standing is necessary to invoke the jurisdiction of the court.) (Read the blog’s analysis of this decision here.)

Conflict Case

PNC Bank, Nat’l Ass’n v. Botts, 2012-Ohio-5383 (10^th dist.) (plaintiff’s lack of standing cannot be challenged in a post judgment motion.)

At Oral Argument

The Bank’s Argument

There are three different kinds of cases impacted by this issue.  Category one involves those cases in which the defendant entered an appearance, raised the issue of standing, the issue was determined, but no appeal was filed. Category two involves cases in which the defendant enters an appearance and defends, but does not raise the standing issue. Category three involves default judgments, of which there are two types—one in which the defendant just ignores the lawsuit, but later belatedly does something about it, and another in which the defendant really is unable to address the lawsuit and later tries to do something about it.  In the first two categories of cases, of which this case is one, the normal rules of res judicata apply. The issue of standing cannot be re-raised in a 60(B) motion because no appeal was taken from the judgment. Default judgment cases (category three) raise more complicated issues. The competing interests are protecting the finality of judgments versus getting the correct judgments.

Since Schwartzwald was decided there has been confusion about standing and subject matter jurisdiction. They are not the same thing.  If a common pleas court tried to hear a patent case, there is no subject matter jurisdiction.  But what is lacking in this case is not subject matter jurisdiction. Common Pleas courts have subject matter jurisdiction over foreclosure cases.  Where a court does have jurisdiction over that type of dispute, the question becomes whether that jurisdiction was erroneously invoked. What was lacking in this case was a justiciable controversy.  The Court needs to clarify that when it repeatedly said in Schwartzwald  that standing was necessary “to invoke the jurisdiction of the court,” it did not mean the common pleas court lacked subject matter jurisdiction.

Even though the underlying facts of this case are similar, this case is not governed by Schwartzwald. Had there been a direct appeal in this case, it would have been governed by Schwartzwald and the Bank would have lost. But this case is about res judicata. It is about the collateral attack on a judgment through the auspices of a 60(B) motion.  The issue raised in this case could have been corrected on direct appeal, but it simply was not.

Kuchtas’ Argument

Former Ohio Attorney General Marc Dann argued for the Kuchtas. (Dann resigned as AG in 2008 amidst a scandal, and had his law license suspended by the high court for six months at the end of 2012. His license was reinstated in June of 2013. None of this has anything to do with the merits of the case he argued, and he is now back in the game.)

The certified question in this case should be answered yes. The issue of standing can be raised at any time, including on appeal. This court has been very clear historically that subject matter jurisdiction cannot be waived. Article IV of the Ohio Constitution limits the subject matter jurisdiction of the Ohio Courts to “justiciable controversies.” We don’t get to the fact that common pleas courts have the power to hear foreclosure cases until we get past the justiciability threshold in Article IV, which we cannot in this case.  If there was no demonstration that the parties had an adverse interest at the time the complaint was filed, there was nothing for the court to hear.

As to the failure to file a direct appeal in this case, the Kuchtas are more like the category three cases described by the Bank in which a default judgment is entered, but not because of any willful avoidance by the Kuchtas. They were pro se litigants. While the Kuchtas did raise the issue of standing in their answer, they did this by downloading a form from a legal aid website. It was more in the nature of a factual statement than a legal defense. The Bank prepared a judgment entry in its favor before the summary judgment motion was even filed.  Furthermore, the Kuchtas had been enticed by Wells Fargo, the only financial institution they personally had dealt with, not to defend by a promise they would be carefully and appropriately considered for a loan modification. The validity of judgments is just as important as the finality of judgments.

Res judicata should only apply to those cases in which the issue of jurisdiction was directly raised and fully and fairly litigated. That does not happen in a default judgment situation. This case was akin to a default, so res judicata should not apply.

What Was on Their Minds

The Schwartzwald Decision

In Schwartzwald we were talking about the standing of the plaintiff to bring the case, weren’t we, asked Justice Lanzinger?

If you have a note, and I sue on it, what basis does a court have to enter judgment in my favor? I wouldn’t have any basis to file a claim, would I, asked O’Donnell? Is this case governed by Schwartzwald, asked Justice O’Donnell? (no, said the Bank’s counsel, it is a matter of res judicata). Had there been a direct appeal, then would this case have been controlled by Schwartzwald asked Justice O’Donnell? (yes, said the Bank’s counsel).  Does the Court need to clarify its holding in Schwartzwald, O’Donnell asked?

Default Judgment Cases

Since Botts was a default judgment case, is there really a conflict with the Kutcha case, asked Justice O’Donnell? (yes, said the Bank’s lawyer.  In the interpretation of Schwartzwald.)

Which of the two types of default was Botts asked Justice Lanzinger of the Bank’s counsel, who had differentiated two types of defaults in his argument.  It didn’t matter to the Tenth District, he said, because in Botts  it held the issue of standing couldn’t be raised in any post judgment motion.  But could the issue be raised for persons in the second type of default judgment case, Lanzinger asked?

Why shouldn’t this case be seen as having been fully and fairly litigated since the Bank filed for summary judgment and no contrary evidence was presented, asked Justice French?

Did the defendants try to retain counsel, asked Chief Justice O’Connor? Is the defense arguing this case as a default judgment case? The justiciability of this case was never determined initially?  (yes, said defense counsel, it is more like Botts).

Standing, Subject Matter Jurisdiction; Res Judicata

If a court that is entertaining motions and ruling on decisions does not have jurisdiction to consider the matter right from the beginning, how can it be considered res judicata, asked Justice O’Neill?

In a key question of the day, Justice Lanzinger asked whether the defendants were asking the Court to hold that standing is part of subject matter jurisdiction? Later she asked if collateral attacks on standing should be allowed in default judgments in mortgage foreclosure cases?  She commented that would open up everything for collateral attack, and would weaken res judicata.  (Defense counsel repeated, only if the matter of jurisdiction had been directly raised and fully and fairly litigated.) Putting the issue in an answer is not raising it, Lanzinger asked?

Why shouldn’t res judicata apply in this case asked Justice O’Donnell? Did the defendants raise standing in this case?

60(B) Relief From Judgment

Is this case different from Schwartzwald because it is a collateral attack on a judgment through the auspices of a 60(B) motion for relief from judgment, asked Justice O’Donnell? The underlying circumstances are similar, but it is a procedurally different fact pattern?  (yes, said the Bank’s lawyer).

The grounds for a 60(B) motion are fraud, misrepresentation, or misconduct of the adverse party. Doesn’t that clearly fit the Bank here asked Justice Pfeifer?

Would the merits of the 60(B) motion be significant since the trial court dismissed it for lack of standing, asked Justice O’Neill?

Remedies and Damages

What happens to those people who purchase foreclosed properties at a sheriff’s sale, in good faith, who think they have clear title, asked Justice Lanzinger? (defense counsel referenced two statutes that protects such purchasers).

What are the defendant’s damages in the case, asked Justice Pfeifer?  After all, they were in default on the loan.  (the right to fully and fairly litigate the claim and the right not to be sued by someone with whom you have no dispute, replied defense counsel.)

Following up, Chief Justice O’Connor asked, bottom line, what do they get at the end of the day? Are there to be damages against the lender? (that remains to be developed, defense counsel replied).

Isn’t this why we have an appeals process, asked Justice Lanzinger?

How it Looks from the Bleachers

To Professor Bettman

I’ve been mulling and mulling this over, but I am going to call this for the Bank, with a caveat. (My student contributor, Cam Downer, disagrees). Here is the problem. As the Court wrote repeatedly in Schwartzwald, “standing is required to invoke the jurisdiction of the common pleas court.” But the reason the Bank did not have standing in Schwartzwald was not because the common pleas court did not have subject matter jurisdiction. It was because the Bank was not the real party in interest when it filed suit, because at the time of filing, it had suffered no injury. As one court put it, the right of a plaintiff to bring a suit does not go to the issue of jurisdiction, but rather to the plaintiff’s right to relief. So I think in this case the Court is going to clarify what it meant about standing and jurisdiction in Schwartzwald.

I think Justice O’Donnell, author of Schwartzwald, and the justice who asked the most questions in this case, recognized this. To me, this set of remarks from him are the key remarks of the day:

O’Donnell noted that in Schwartwald  the Court clearly held that if a party was not the holder of the note and mortgage at the time suit was filed, it had no standing to file the action.  He went on to add, “that has morphed into a lack of subject matter jurisdiction of a court to hear a foreclosure case—that isn’t anything at all what we said—it is being transcended into something that it doesn’t say—maybe we referenced jurisdiction, but the fact is it is the right of the litigant to present a claim.  If you don’t have an injury you don’t have a right.”

He went on to add that the facts were similar in this case and Schwartzwald but the procedural posture was entirely different-this case raises 60(B) issues that Schwartzwald did not.

If the Court follows this route, then I think the result may well depend on whether the Court sees this case as one in which lack of standing was raised, and should have been appealed, or a case more in the nature of a default judgment. If the Court sees this is a defended case, since the then-unrepresented Kutchas did raise lack of standing in its answer and could have again to oppose the summary judgment motion, I think the Bank will win this case, and I think a majority will adopt the Bank’s first proposed proposition of law, namely “res judicata bars a defendant who participated in litigation from using a post-judgment motion to contest standing.” Justices Lanzinger, French, and O’Donnell seemed to be leaning this way, and the Chief may be as well.

But if the Court sees this as a default judgment case, I think the outcome could be different. In such a case the Court might allow lack of standing to be raised in a 60(B) motion. But this isn’t a certainty at all, because of the proverbial floodgates that could be opened with all the outstanding default judgments, as Justice Lanzinger noted. Botts, the certified conflict case, clearly is a default judgment case, and one in which the Tenth District unequivocally held that lack of standing cannot be raised post judgment, period, so the issue will need to be addressed.

I think the Bank’s lawyer did an excellent job with his three categories of cases, conceding that default judgment cases presented more difficult questions on this issue, while continuing to assert that Kutcha was not such a case.  While  Mr. Dann made some good points for the Kutchas about why this should be treated as if it were a default judgment case, I didn’t sense a majority was agreeing with him. At times he seemed to be irritating the justices, especially Justice Lanzinger.

The question of remedies is also an interesting one. For individuals who really do still owe on their loans, recovering damages from the banks for suing without proper standing is an interesting notion, one which defense counsel left for “future development.” Of course gaining time could be a benefit as well.

To Student Contributor Cameron Downer

It may be close, but looks like a win for the Kuchtas.

Justice O’Donnell was very vocal during Bank of America’s argument, raising over half of the questions given to the Bank’s counsel. Justice O’Donnell took issue with the notion that the Bank had a right to file a claim and did not see why the case should be distinguished from Schwartzwald. In addition, both Justice Pfeifer and Justice O’Neill asked questions about whether the Bank’s complaint constituted fraud or misrepresentation.

However, the tables turned once the Kuchtas, represented by former Ohio Attorney General Marc Dann, began argument. The Justices showed concern about whether the Kuchtas’ answer to the Bank’s complaint fully litigated the issue of standing. In addition, Chief Justice O’Connor and Justices Lanzinger, Pfeifer, and O’Neill all expressed concern that ruling for the Kuchtas  would lead to finality issues in which defendants could collateral attack foreclosure default judgments indefinitely by filing motions to vacate.

In all, I think the majority of Justices will find that Schwartzwald governs this case and rule in favor of the Kuchtas.