By Rick D. DeBlasis
Lerner Sampson & Rothfuss [1]
On February 16, 2016, the Ohio Supreme Court closed the door on mortgage avoidance actions based on a defect in execution where the mortgage has been recorded. See, In re Messer, Slip Opinion 2016-Ohio-510. Effectively reversing 200 years of Ohio jurisprudence, a unanimous Court held that a new Ohio statute, R.C. 1301.401: (1) applies to all recorded mortgages in Ohio; and (2) acts to provide constructive notice to the world of the existence and contents of a recorded mortgage that was deficiently executed. Compare Johnston v. Haines, 2 Ohio 55 (1825) (“…the mere fact of recording a deed, without the legal requisites, gives it no validity.”); Citizens National Bank v. Denison [2], 165 Ohio St. 89, 133 N.E.2d 329 (1956) (“A mortgage by two persons is not properly executed in accordance with the provisions of R.C. 5301.01, [3] and is not entitled to record under R.C. 5301.25, and the recording thereof does not constitute constructive notice to subsequent mortgagees, where there is a failure to follow the statutory requirements…”).
The Messer case began, as defective mortgage cases often do, in the bankruptcy court. Daren and Angela Messer are owners of a home located in Canal Winchester, Ohio, which they bought with the help of a mortgage loan. The Messers initialed each page and signed the mortgage. It is recorded with the county recorder. But, there is no notary signature following the acknowledgement clause.
The Messers filed a Chapter 13 bankruptcy and instituted an adversary proceeding to remove the mortgage from their home due to the execution defect. The mortgagee moved to dismiss arguing that R.C. 1301.401 enacts a change in Ohio law, such that an interest holder can no longer claim bona fide purchaser status and can no longer seek to avoid a defective, but recorded, mortgage. The bankruptcy court noted:
Upon reviewing the briefing of both Parties and the arguments made at the hearing on Defendant’s Motion to Dismiss, this Court determined that its interpretation of O.R.C. §1301.401 would be dispositive of the case. Upon research, this Court found no interpretation of O.R.C. §1301.401 by the Supreme Court of Ohio – or any other court. There is no dispute in this case that the Mortgage was improperly executed under O.R.C. §5301.01, and there is no dispute that prior to the enactment of O.R.C. §1301.401 the Plaintiffs could have avoided the mortgage. The questions concern whether the new statute changes the result.
The bankruptcy court asked the Ohio Supreme Court for the answer. The Supreme Court focused entirely on the language of R.C. 1301.401, which it found to be unambiguous. If the mortgage is of record, defects in its execution will not render it subject to attack by an erstwhile “bona fide purchaser.”