The Ohio Supreme Court has ruled that 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 decisional law or against Ohio public policy. See Wilborn v. Bank One Corp., 121 Ohio St.3d 546, 2009-Ohio-306.

Ohio has long adhered to the “American Rule” with respect to the recovery of attorney fees: a prevailing party in a civil action may not recover attorney fees as a part of the costs of litigation. See, e.g., Nottingdale Homeowners' Assn., Inc. v. Darby (1987), 33 Ohio St.3d 32, 33-34, 514 N.E.2d 702; State ex rel. Beebe v. Cowley (1927), 116 Ohio St. 377, 382, 156 N.E. 214. However, there are exceptions to this rule. Attorney fees may be awarded when a statute or an enforceable contract specifically provides for the losing party to pay the prevailing party's attorney fees, Nottingdale, 33 Ohio St.3d at 34, 514 E.E.2d 702, or when the prevailing party demonstrates bad faith on the part of the unsuccessful litigant, Pegan v. Crawmer (1997), 79 Ohio St.3d 155, 156, 679 E.E.2d 1129.

When the right to recover attorney fees arises from a stipulation in a contract, the rationale permitting recovery is the “fundamental right to contract freely with the expectation that the terms of the contract will be enforced.” Nottingdale at 36, 514 N.E.2d 702. Yet, the relative bargaining power of the parties will be considered. The presence of equal bargaining power and the lack of indicia of compulsion or duress are characteristics of agreements that are entered into freely. See id. at 35, 514 N.E.2d 702. In these instances, agreements to pay another's attorney fees are generally “enforceable and not void as against public policy so long as the fees awarded are fair, just and reasonable as determined by the trial court upon full consideration of all of the circumstances of the case.” Id. at syllabus. See also Worth v. Aetna Cas. & Sur. Co. (1987), 32 Ohio St.3d 238, 241-243, 513 N.E.2d 253 (an indemnity agreement requiring the payment of qualified legal expenses arising from free and understanding negotiation is enforceable and not contrary to Ohio's public policy). In contrast, agreements to pay attorney fees in a “contract of adhesion, where the party with little or no bargaining power has no realistic choice as to terms,” are not enforceable. Nottingdale, 33 Ohio St.3d at 37, 514 N.E.2d 702.

Similarly, contracts for the payment of attorney fees upon the default of a debt obligation are void and unenforceable. In the context of foreclosure actions, the Ohio Supreme Court stated in Leavans v. Ohio Natl. Bank (1893), 50 Ohio St. 591, 34 N.E. 1089, syllabus: “A stipulation in a mortgage to the effect that, in case an action should be brought to foreclose it, a reasonable attorney fee, to be fixed by the court, for the services of the plaintiff's attorney in the foreclosure action, should be included in the decree, and paid out of the proceeds arising from the sale of mortgaged property, is against public policy and void.” The rule in Leavans was affirmed several years later in Miller v. Kyle (1911), 85 Ohio St. 186, 97 N.E. 372, syllabus, which held: “It is the settled law of this state that stipulations incorporated in promissory notes for the payment of attorney fees, if the principal and interest be not paid at maturity, are contrary to public policy and void.” In other words, a provision in a mortgage or promissory note that awards attorney fees upon the enforcement of the lender’s rights when the borrower defaults, such as a foreclosure action that has proceeded to judgment, is unenforceable. The rationale for this rule as articulated in Leavans, and reaffirmed in Miller, is that “the stipulation to pay attorney fees operates as a penalty to the defaulting party and encourages litigation to establish either a breach of the agreement or a default on the obligation.” Worth, 32 Ohio St.3d at 242, 513 N.E.2d 253.

The syllabus law of Leavans and Miller has not been repudiated by the Ohio Supreme Court despite the recognition of numerous situations in which contractual stipulations for attorney fees may be enforced. Worth, 32 Ohio St.3d at 243, 513 N.E.2d 253 (“our decision today leaves undisturbed our holding in [Miller] and like cases”). See also New Market Acquisitions, Ltd. v. Powerhouse Gym (S.D. Ohio 2001), 154 F. Supp.2d 1213, 1226 (“it is true that the Ohio Supreme Court has never explicitly overruled Miller”).

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 borrower’s right to reinstate the mortgage loan arises solely from the terms of the residential-mortgage contract 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 defaulting borrower. Thus, a mortgage-reinstatement provision in a residential-mortgage contract 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 obligation to pay such fees does not arise solely as a consequence of the lender-initiated 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 foreclosure. Thus, reinstatement is not the enforcement of a debt obligation, and the public-policy concerns expressed in Miller and Leavans regarding the imposition of a penalty against a debtor upon default have no relevance.