Class Action Case Filed
A class action lawsuit(1) presenting these circumstances was filed by eleven Ohio borrowers who paid their lenders’ attorney’s fees.  One of the borrowers made payment in full in the amount required by her lender’s payoff statement, which included the lender’s attorney’s fees.  By contrast, the other borrowers reinstated or otherwise worked out their loan defaults by paying their delinquent amounts as well as their lenders’ attorney’s fees.

In their class action lawsuit, all of the borrowers claimed that the lenders’ requirement that the borrowers pay the lenders’ attorney’s fees as a condition of the lenders dismissing the foreclosures, was wrongful.  The trial court ruled in favor of the lenders and granted the lenders’ motions to dismiss the case for failure to state a claim upon which relief may be granted, and the Court of Appeals affirmed the decision. The case was then appealed to the Ohio Supreme Court.

Ohio Supreme Court Dissects the Issue
In a unanimous decision issued on February 3, 2009, the Ohio Supreme Court reiterated the well-established Ohio law that a stipulation in a mortgage to the effect that the lender is entitled to the inclusion of its attorney’s fees in its judgment following a borrower’s default, is void, with certain exceptions.  Therefore, unless a case falls within the exceptions, a lender’s attorney’s fees incurred by reason of a default may not be included in a payoff (redemption) figure.  However, the court distinguished a reinstatement or loan workout situation from a payoff / redemption. 

The court noted that upon a borrower’s default, the lender is entitled to be paid in full.  Because Ohio does not have a state statute granting a borrower the right to reinstate a loan after default, a defaulting borrower’s right to reinstate the mortgage is purely contractual, arising solely from the terms of the mortgage agreement.  If the defaulting borrower chooses to exercise his contractual right to reinstate the loan and have the foreclosure dismissed, the lender is entitled to recover its attorney’s fees if the mortgage agreement contains such a provision.  Of course, the attorney’s fees must be fair, just and reasonable.

A Contract of Adhesion?
Where a term in a contract is not the product of free and understanding negotiation between parties with equal bargaining power, the term may be deemed to be a “contract of adhesion,” and therefore, unenforceable.  The borrowers argued that when they signed their mortgage agreements, they had no opportunity to negotiate the provision in the mortgage conditioning the right to reinstate the loan after default on the condition that they pay their lender’s attorney’s fees incurred by reason of their default.  Hence, the borrowers claimed that as a contract of adhesion, the provision for attorney’s fees should be unenforceable.  However, even though these particular borrowers did not, in fact, have any opportunity to negotiate those terms of the mortgage agreement, the court rejected the “contract of adhesion” argument. 

In its decision, the court reviewed the process by which the Fannie Mae / Freddie Mac uniform mortgage forms, were promulgated by Fannie Mae and Freddie Mac following public meetings in 1971.  During that process, forty witnesses testified, representing both the lending industry and consumer groups, and others submitted prepared statements.  Hence, the court recognized that the uniform mortgage forms used by the lenders were the result of sophisticated parties, all with competing interests and wielding significant bargaining power, freely entering discussions, compromises and negotiations.

Therefore, the court was persuaded that both borrowers and lenders in general were the beneficiaries of the negotiations that culminated in the inclusion of the attorney’s fee provision in the uniform mortgage forms.  Even though the borrowers in this particular case were not involved in those negotiations, nevertheless, the mortgage form could not be deemed a contract of adhesion.

Yes to Fees upon Reinstatement 
The court ruled that the lenders were entitled, based on the express terms of the mortgage, to recover their attorney’s fees from the borrowers who had reinstated or otherwise worked out their defaulted loans, and the borrowers did not have a valid cause of action against the lender.  

No to Fees upon Payoff / Redemption
The one borrower who had paid attorney’s fees in connection with payment in full (redemption) obtained a different result.  The court held that unlike a reinstatement situation, that borrower was not voluntarily exercising a contractual right prior to judgment in exchange for the surrender of some other right by the lender.  Instead, the borrower was entitled to a dismissal of the foreclosure upon paying the entire debt without also paying the lender’s attorney’s fees. 

Some Exceptions to the Rule
There are some exceptions to Ohio’s rule that attorney’s fees may not be awarded to the party who prevails in a civil lawsuit.  Some examples established by statute or case law, where attorney’s fees may be awarded are:

- In favor of a lender in a non-consumer contract of indebtedness providing for attorneys fees to be granted, where the original amount of the debt was in excess of $100,000.00.(2) 

- In favor of a tenant whose landlord wrongfully withheld the security deposit upon termination of the lease.(3)

- In favor of a condominium association, where provisions contained in the declaration of condominium ownership and/or condominium bylaws requiring that a defaulting unit owner be responsible for the payment of attorney’s fees incurred by the unit owners’ association in either a collection action or a foreclosure for unpaid common assessments.(4)

(1) Wilborn v. Bank One, 2009-Ohio-306.
(2) ORC §1301.21.
(3) ORC § 5321.16.
(4) Nottingdale Homeowners’ Assn. Inc. v. Darby, (1987), 33 Ohio St.3d 32.
(5) ORC § 1345.09

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