An Analysis of Ohio’s Recent Case Law Regarding Pre-Foreclosure Breach Letter Requirements

Prior to accelerating a loan in the State of Ohio, lenders are required to notify the borrower of the default and acceleration of the loan through a default letter (also referred to as a breach letter). Generally, default letters include notice of the default, the action required to cure the default and reinstate the loan, a date by which the default must be cured, and a notice that failure to cure may result in acceleration and sale of the property to satisfy the debt. As a matter of course, lenders should review any specific additional requirements within the terms of the note and mortgage to ensure the notice of default is properly issued to the borrower.  

New Notice of Default Required Following Loan Transfer in Ohio Foreclosure Cases

Ohio’s Second District Court of Appeals determined that lenders must send a new notice of default to borrowers when a loan is transferred prior to the commencement of a foreclosure action.

Ohio’s Second District Court of Appeals recently clarified the requirements for lenders to evidence proper notice of default to entitle the lender to judgment in Ohio. In U.S. Bank N.A. v. Clarke ^[1], the Second District held when a lender dismisses a foreclosure action, a new notice of default must be sent to the borrower prior to the commencement of a new foreclosure action.  

In Clarke, Defendant Elizabeth M. Clarke appealed the trial court’s Judgment Entry arguing that the Plaintiff failed to meet conditions precedent, specifically that Plaintiff failed to properly send written notice of default prior to the filing of the foreclosure. Plaintiff opposed this argument, noting that its predecessor in interest sent a notice of default letter to Clarke for failure to make loan payments prior to commencing a foreclosure action in 2015.  

However, the 2015 action was dismissed by Plaintiff’s predecessor. The interest in the note and mortgage was transferred to Plaintiff, who began the new foreclosure action in 2021, relying on the notice of default issued by its predecessor. In the trial court, Plaintiff relied on the notice of default sent by its predecessor in 2014 as evidence that it satisfied all conditions precedent, and as such, judgment should be awarded to Plaintiff. The trial court agreed with Plaintiff’s argument, and a decree of foreclosure was granted in favor of Plaintiff.

In the appeal of the trial court’s ruling, Clarke relied on the case U.S. Home Ownership, LLC v. Young[2], which the Court of Appeals agreed was controlling in the case. Overturning the trial court’s judgment, the Second District cited the language of Young, stating:

“When a mortgagee issues a notice of default, commences a foreclosure action, and then dismisses the action, 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 further explained:

“Just like in Young, the mortgage required the ‘lender’ to issue a notice of default as a condition precedent. [Plaintiff] is the ‘lender’ and ‘Note Holder’ for purposes of this foreclosure action. As such, [Plaintiff] was required to issue a notice of default before it could proceed with its foreclosure action.”

Since Plaintiff relied upon a notice of default issued by its predecessor in interest, foreclosure was improper.

Analysis and Application

While the Second District is currently the minority opinion in Ohio, the holding in Clarke has recently been adopted in other jurisdictions, notably Ohio’s First Appellate District^[3].  In practice, this will require lenders to take additional precautions prior to proceeding in any jurisdiction where these requirements have been adopted. Specifically, lenders should review whether they issued the notice of default prior to proceeding with a foreclosure filing.

Additionally, a review should be conducted to determine whether a prior action had been filed and subsequently dismissed, which would require the issuance of a new notice of default. Plaintiffs will no longer be able to rely on a notice of default issued by predecessors in interest. MDK is positioned to assist both lenders and servicers to ensure proper compliance with the requirement prior to proceeding with a foreclosure action.  

Key Takeaways:

1. New Notice Requirement: In Ohio, lenders must issue a new notice of default to borrowers when a loan is transferred prior to initiating a new foreclosure action, as affirmed by the U.S. Bank N.A. v. Clarke case.
2. Dismissed Foreclosure Actions: If a foreclosure action is dismissed, the lender or its successor must send a new notice of default before proceeding with a subsequent foreclosure action.
3. Jurisdictional Variances: While Ohio’s Second District is currently in the minority, this ruling has been adopted in other jurisdictions, such as Ohio’s First Appellate District, making it important for lenders to stay informed on local requirements.
4. Lender Compliance: Lenders can no longer rely on notices of default issued by predecessors in interest and must ensure proper issuance of new notices to comply with pre-foreclosure requirements.

^[1] U.S. Bank N.A. v. Clarke, 2024 Ohio 278 (2nd Dist.)

^[2] U.S. Home Ownership, LLC v. Young, 2018 Ohio 1059 (2nd Dist.)

^[3] U.S. Bank N.A. v. Tye, 2024 Ohio 2922 (1st Dist.)