Last week, in a relatively unheralded decision (which didn't even rate an "official" summary by the Court's Public Information Office), the Ohio Supreme Court served notice that there's more than one way to look at certain aspects of the deepening foreclosure crisis. In Wilborn v. Bank One Corp., 2009-Ohio-306 (hat tip to Justin Ristau for his summary in a Bricker & Eckler Creditor Rights & Bankruptcy E-Alert which called my attention to the case), the Court arguably departed a bit from established precedent to uphold an attorney fee shifting provision in the context of a residential mortgage reinstatement following the commencement of foreclosure proceedings. Why? Because the stability of the market demanded it. But I'm getting ahead of myself here.
In my last post, I explained that generally speaking, everyone pays their own attorney fees in the United States, regardless of whether they wind up on the winning or losing side. I also mentioned that one exception to this general rule was when the parties agreed between themselves that a particular party or parties was entitled to recover their attorney fees from the other side in the event they ultimately prevailed. But that this sort of provision only really worked where both sides had relatively equal bargaining power.
Nearly all commercial loan documentation contain provisions obligating the borrower to pay the lender's attorney fees incurred in connection with the lender's enforcement of its rights under those documents. Many consumer mortgage documents also contain such a provision. However, in Ohio, up to now there have been several cases involving the enforceability of such provisions in the context of the enforcement of a debt -- and in foreclosure proceedings in particular -- which have generally found them to be against public policy and thus not enforceable.
What Wilborn Held. What make Wilborn interesting is that, particularly in the current foreclosure crisis and overall difficult financial situation, it would have been VERY EASY for the Court to strike down the attorney fee shifting provisions. While addressing a fairly unique fact pattern, the Court's naked capitalist reasoning and what it may portend for subsequent attorney fee shifting cases are worth examining.
In Wilborn, the Ohio Supreme Court's syllabus states:
A provision in a residential mortgage contract requiring a defaulting borrower to pay a lender's reasonable attorney fees as a condition of terminating pending lender-initiated foreclosure proceedings on a defaulted loan and reinstating the loan is not contrary to Ohio statutory or decisonal law or against Ohio public policy
Wilborn Facts and Procedural History. The case involved an appeal by 11 different plaintiffs in a class action (apparently a declaratory judgment action) challenging the enforceability of an attorney fee provision in a standarized residential mortgage. After the lender had initiated foreclosure proceedings (but prior to the entry of a foreclosure judgment decrees), the plaintiffs had all entered into some sort of reinstatement of their defaulted mortgage. In addition to bringing the defaulted mortgage current, the lender required the plaintiff borrowers to reimburse the lender for its attorneys fees and other collection costs. The trial court dismissed the case on the grounds that payment of attorney fees as a condition for reinstatement was permissible. The Court of Appeals affirmed.
The Reasoning. The Ohio Supreme Court acknowleged that two very ancient cases - namely Leavans v. Ohio Natl. Bank, 50 Ohio St. 591 (1893) and Miller v. Kyle, 85 Ohio St. 186 (1911) - had long stood for the proposition that attorney fee provisions in connection with the enforcement of a debt obligation, particularly in foreclosure situations, were not enforceable. It also recognized the holdings of Nottingdale Homeowners' Assn v. Darby, 33 Ohio St3d 32 (1987) and Worth v. Aetna Cas. & Sur. Co., 32 Ohio St3d 238 (1987) to the effect that such provisons had to be the product of bargaining between parties of equal strength.
Now in the current economic climate, the plaintiffs-borrowers probably expected - and I certainly would not have been surprised - the Ohio Supreme Court to apply these precedents easily and strike down the attorney fee provisons forcing poor defenseless folks on the verge of losing their homes to pay big bad banks for their legal costs in enforcing a mortgage that might even have been unfairly foisted upon the homeowner in the first place. But that's not what happened.
Not Against Public Policy
Instead, the Ohio Supreme Court first drew a distinction between foreclosure proceedings to enforce a mortgage and reinstatement. It held that "reinstatement is not the enforcement of a debt obligation" and that consequently the public policy considerations of the ancient cases concenring "imposition of a penalty' were simply not relevant. The Court explained:
A defaulting borrower is not entitled by law to have a mortgage loan reinstated. Upon a borrower's default, a lender is entitled to initiate foreclosure proceedings, to be paid in full, and to sever its relationship with the defaulting borrower. A defaulting borrrower's right to reinstate the mortgage loan arises solely from the terms of the residential mortgage agreement between the parties. Reinstatement occurs only when the defaulting borrower chooses reinstatement and consequently, chooses in the existing foreclosure proceeding to forgo those statutory protections arising from the foreclosure process. The defaulting borrower's agreement to pay the lender's attorney fees incurred in connection with the foreclosure proceedings is a reasonable exchange for the right to require the lender to reinstate the defaulted mortgage loan and to forbear the lender's legal rights to foreclose, be presently paid in full, and sever the relationship with the defaulted borrower.
Thus, a mortgage reinstatement provison in a residential mortgage agreement creates no obligation on a defaulting borrower to pay a lender's attorney fees until the borrower exercises his or her choice to reinstate. Thus the borrower's obligations to pay such fees does not arise solely as a consequence of the lender-initated foreclosure action. instead, the obligation arises only upon the defaulting borrower's voluntary exercise of the contractual right to reinstate the mortgage loan, a right gained in exchange for the lender's surrender of the present right to foreclose.
No Negative Implication of ORC 1301.21
The Ohio Supreme Court also found unpersuasive the borrowers' argument that the negative implication of Ohio Rev. Code 1301.21 - which is relatvely recent (in the sense that it has become law during the course of my legal careeer) and DOES allow attorney fee shifting provisons in larger commercial loans - was that the General Assembly did not intend to all such provisons in the consumer mortgage context. Frankly, I thought this was a pretty good argument. but the Court simply put blinders on and said, well that's not what is says.
No Contract of Adhesion - Equal Bargaining Power Exists
Perhaps even more surprising was the Ohio Supreme Court's choice to go "big picture" when considering the relative bargaining strength of the parties to a residential mortgage. Instead of focusing on the obvious vast chasm in bargaining power between the individual homeowner and the lender, the Ohio Supreme Court instead chose to consider the entire business and commercial context in which the terms of the standarized mortgages were determined, launching into an extensive recitial of how Fannie Mae and Freddie Mac came to have standardized forms at all. Thus, according to the Ohio Supreme Court:
although none of the Borrowers or Lenders in this case were involved, those who did participate in the process that created the uniform mortgage forms were virtual proxies for the consumers and lenders who would eventually use the product. That process brought together many sophisticated parties with competing interests and significant bargaining power. The reinstatement provison, including the payment of attorney fees incurred by the lender as a condition of reinstatement, was thus agreed to in a representative process of free and understanding negotiation between parties with equal bargaining power.
Public Policy In Fact Demands Upholding Attorney Fee Shifting Provisions
In what must have seemed to the borrower-plaintiffs like adding insult to injury, the Ohio Supreme Court went on to conclude that not only did public policy not preclude enforcement of the attorney fee provisions- it in fact DEMANDED enforcement of such provisions. As the Ohio Supreme Court saw it, weighing in the balance was nothing less than the stability of Ohio's mortgage business itself:
public policy strongly favors the use of these uniform mortgage forms to further Congress's stated purpose and to permit the trading of Ohio's conventional mortgages on the secondary market. To declare some part of these forms unenforceable would make Ohio less competitive in the secondary mortgage market, thwarting the objectives of the Fannie Mae and Freddie Mac enabling legislation, denying lenders liquidity for their investment portfolios, and decreasing the capital available to borrowers for mortgages. in light of the economic difficulties afflicting the national economy as of late, and particularly in the housing sector, our decision today also serves the public policy of this state by avoiding further destabilization,
Bone to the Borrower
Almost as an afterthought, the Ohio Supreme Court threw borrowers a bone in a footnote to the effect that of course the amount of attorneys fees must still be "fair, just and reasonable as determined by the trial court upon full consideration of all the circumstances of the case."
Some Thoughts and Implications. While the gulf in bargaining power between consumer advocates and lenders is not nearly so wide as that between lender and consumer borrower, I'm not altogether convinced that characterizing the parties involved in hammering out the standardized mortgage forms as being of equal bargaining strength is all that accurate.
In addition, while I "get" the distinction between foreclosure as a debt enforcement procedure and the "privilege" of reinstatement, I'm not convinced that such a distinction necessarily matters when it comes to public policy. Personally, I've always felt that with consumer obligations such as auto loans or home mortgages, a slight presumption towards the consumer was not necessarily a bad thing. My rationale is that, unlike business and commercial loans, in which someone has voluntarily decided to enter the business world in the hopes of making considerable money (and therefore needs to be willing to accept the risks of failure), home and auto loans are part of the fabric of everyday existence in America and are essentially unavoidable obligations. As such, it is more appropriate for there to be protections for the borrower.
Perhaps one of the ironic outcomes of this decision is that small commercial enterprises involved in commercial transactions with larger more powerful business partners may now actually have greater protection against an attorneys fee provision than the average consumer mortgage borrower.
