Wilborn et al. v. Bank One Corporation et al., (2009), Ohio St.3d 546, 906 N.E.2d 396

The Ohio Supreme Court has recently upheld the right of a mortgagee to require payment of its attorney fees as a condition for terminating foreclosure proceedings. The Supreme Court’s decision further clarifies an exception to Ohio’s adherence to the “American rule” that a prevailing party in a civil action may not recover attorney fees as part of the cost of litigation. Additionally, the Court declined to apply Ohio’s statutory law regarding contractual agreements to pay attorneys fees in commercial transactions to residential-mortgage contracts.

In Wilborn et al., v. Bank One Corporation et al., borrowers filed a class-action complaint against various financial institutions alleging that provisions of residential-mortgage contracts requiring borrowers to pay lenders’ attorney fees as a condition of terminating foreclosure proceedings and reinstating the mortgages violated public policy and were unenforceable.

The lenders filed motions to dismiss for failure to state a claim upon which relief could be granted. The trial court granted the lenders’ motions and the Seventh District Court of Appeals affirmed. The Ohio Supreme Court accepted the appeal under its discretionary jurisdiction and upheld the lenders’ motions to dismiss.

Although the traditional view is that parties are responsible for their own attorney fees, an exception exits when parties to a contract have equal bargaining power and agree that the losing party is required to pay the prevailing party’s attorney fees. In these instances, agreements to pay another’s attorney fees are generally enforceable so long as the fees awarded are fair, just and reasonable.

In contrast, where a party has little or no bargaining power and has no realistic choice of terms, agreements to pay attorney fees are not enforceable. Similarly, a contract provision requiring the payment of attorney fees upon the enforcement of a lender’s rights, such as a foreclosure action, is unenforceable because it operates as a one-sided penalty. Such provisions are ordinarily included by the creditor and are in the creditor’s sole interest because the debtor is required to pay attorney fees upon default but nothing is required from the creditor. In other words, there is no quid pro quo. The Court has held that in these circumstances, the debtor’s promise to pay attorney fees is not arrived at through free and understanding negotiation.

In Wilborn, the borrowers argued that the provisions requiring attorney fees were not the product of free and understanding negotiations between parties with equal bargaining power because the lenders used standard, uniform mortgage form. The Court, however, rejected this argument and held that the terms contained in standard uniform mortgage forms, including the payment of attorney fees, were promulgated by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Thus, the Court found that the mortgage forms were the result of sophisticated parties, with competing interests and wielding significant bargaining power.

The Court further rejected the borrowers’ argument that the attorney-fee provisions served as a penalty that was triggered by the lenders enforcement of a debt obligation. The Court held that a defaulting borrower is not entitled by law to have a mortgage loan reinstated. Therefore, the borrower’s obligation to pay attorney fees does not arise solely as a consequence of the foreclosure action but instead only arises upon the borrower’s voluntary exercise of the contractual right to reinstate the mortgage loan.

In light of the Court’s decision in Wilborn, it is clear that mortgagees using uniform mortgage forms may request attorney fees as a condition of reinstating a mortgage loan. Mortgagees, however, should be careful that the attorney fee provisions are not automatically triggered upon the initiation of foreclosure proceedings.

If you would like a copy of this opinion or if you have any questions, please call one of our Financial Institution and Creditor Rights and Liabilities Practice Group members to discuss.

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