Mortgage loans are the lifeblood of lending in Ohio. They provide relatively safe, steady income to financial institutions while offering borrowers ready access to one of life’s necessities. But mortgage lending is not without its complexities—we need only look to the late 2000s for countless examples. Yet not all problems arise from a borrower’s simple failure to pay a loan. On occasion, our borrowers pay us, but not the taxman. In such cases, what options do financial institutions have? Several, and the Ohio Supreme Court just confirmed a vital safety net available to all mortgage lenders in tax foreclosure cases.1
When a landowner fails to pay his or her property taxes, the local treasurer may sue for foreclosure.2 This often puts the mortgage lender in a difficult spot: how should it respond to a borrower who is making his loan payments but not paying his real estate taxes?
Often times, it is best to countersue for foreclosure to maintain some measure of control in the lawsuit. But sometimes, financial intuitions are unwilling or unable to countersue. It is in those situations that the Ohio Supreme Court recently confirmed that lenders have an important right after the property sells: redemption.
In a typical successful mortgage foreclosure lawsuit, the case culminates when the county sheriff sells the mortgaged land at a public auction. He or she must sell that land for at least twothirds of its appraised value. But in a tax foreclosure, the sheriff may sell the land, without appraisal, for the unpaid taxes.3 For example, a sheriff may sell land worth $500,000 that is subject to a $475,000 mortgage and $5,000 tax lien, for $5,000. That auction, once confirmed, extinguishes the $475,000 mortgage leaving the lender with no collateral.4
As a result, a lender often finds itself in a precarious position during tax foreclosure lawsuits. When facing a tax-foreclosure auction, lenders typically bid an amount sufficient to protect the value of their mortgages. If, however, a lender neglects to bid and faces the complete loss of collateral, not all is lost. In Donaker v. Parcels of Land, the Ohio Supreme Court held that mortgage lenders could redeem their collateral after a sheriff’s sale concludes. This means that a mortgage lender may pay the auctioned land’s delinquent taxes (and other fees) even if that land sells to a third party. But the lender must do so before the trial court confirms the sale. This is a vital safety net for Ohio’s lenders.
In the Donaker case, the Coshocton County Treasurer filed suit against Brandi and Troy Wagner because they failed to pay about $825 in real estate taxes. The Treasurer named Vanderbilt Mortgage and Finance, Inc. in its lawsuit because that company owned an $85,000 mortgage on the Wagners’ land. Vanderbilt, however, did not respond to the lawsuit and lost its ability to assert an interest in the Wagners’ land. Eventually, the Coshocton County Sheriff sold the land to a third party for about $15,000. If that sale had proceeded to confirmation, Vanderbilt would have lost its mortgage. But before that sale could be confirmed, Vanderbilt invoked its right to redeem the Wagners’ land.
Vanderbilt redeemed the Wagners’ land by depositing $6,000 with the court—an amount sufficient to pay the back taxes and court costs. Under Ohio Revised Code 5721.25, Vanderbilt’s payment terminated the foreclosure process effectively returning the Wagners’ land to prelawsuit status. In short, Vanderbilt protected its mortgage by paying the Wagners’ taxes.
The Coshocton County Treasurer objected to redemption and challenged Vanderbilt’s right to redeem, taking the matter to the Ohio Supreme Court. There, the Supreme Court rejected the Treasurer’s arguments and held that Ohio’s mortgage lenders may pay their borrower’s real estate taxes and stop foreclosure even after the mortgaged land is sold at public auction. In brief, the Supreme Court confirmed that Ohio mortgage lenders may disregard the unfavorable results of a tax foreclosure sale by paying the delinquent real estate taxes (and other fees) before the trial court confirms that sale.
In the Donaker case, the Ohio Supreme Court formally recognized Ohio mortgage lenders’ right to protect their collateral against low-dollar auctions. That right, however, should not be part of a lender’s ordinary practices. Lenders will find themselves in far better positions, fiscally and otherwise, by addressing tax foreclosures head-on through answers and counterclaims, if necessary. Disregarding the Wagner lawsuit nearly cost Vanderbilt its mortgage. It took multiple levels of review to save its $85,000 mortgage—a costly endeavor to be sure. Therefore, we recommend the use of experienced legal counsel when evaluating tax-foreclosure lawsuits, unpaid taxes, and the related sheriff’s auctions.
1 Donaker v. Parcels of Land (In re Foreclosure of Liens for Delinquent Land Taxes by Action in Rem, 2014-Ohio-3656 (Sept. 2, 2014).
2 Ohio Rev. Code § 5721.37.
3 Ohio Rev. Code § 5721.16.
4 Ohio Rev. Code § 5721.39(B).