Mortgage Execution in Ohio: the Twilight Zone where a person can both 'know' and 'not know' the same information

Ohio law regarding the execution of mortgages can be quite strict and the failure of lenders to follow it can have significant consequences, including the lender's loss of its position as a secured creditor in a debtor's bankruptcy.

Ohio Revised Code section 5301.01 requires 4 separate acts to properly execute a mortgage:

    1.  the mortgage shall be signed by the mortgagor;
    2.  the mortgagor shall acknowledge his signing in front of a notary pubic, or other qualified official;
    3.  the official shall certify the acknowledgement; and
    4.  the official shall subscribe his name to the certificate of acknowledgement.

(see Drown v. GreenPoint Mortgage Funding, Inc. (In re Leahy), 376 B.R. 826 (Bankr. S.D. Ohio 2007))

If a mortgage was defectively executed, it was not entitled to be recorded, and even if it was recorded, it must be treated as though it had not been recorded. An unrecorded mortgage does not provide constructive notice of the mortgage to a bona fide purchaser, and therefore such bona fide purchaser takes priority over the mortgage.  In bankruptcy, a trustee has the rights of a bona fide purchaser regardless of his actual notice of a mortgage.

Challenges on this issue typically attack the acknowledgement.  Under Ohio Revised Code section 147.541, a certificate of acknowledgement will be recognized if it contains the words "acknowledged before me" or their substantial equivalent.  The term "acknowledged before me" means that person doing the acknowledging appeared before the person taking the acknowledgment (i.e., the notary), acknowledging that he/she executed the instrument for the purposes stated in the acknowledgment.

Ohio courts in the past have upheld acknowledgments that they found were in "substantial compliance" with ORC 5301.01, and bankruptcy courts have recognized Ohio's "substantial compliance" doctrine.  To determine whether a or not a mortgage execution substantially complies with ORC 5301.01, a reviewing court will typically consider "the nature of the error and the balance of the document to determine whether or not the 'instrument supplies within it self the means of making the correction'" (Menninger v. First Franklin Financial Corp. (In re Fryman), 314 B.R. 137 (Bankr. S. D. Ohio 2004)--quoting Dodd v. Bartholomew, 44 Ohio St. 171 1886)).

Here's where it gets confusing....a notary acknowledgment that names the wrong party has better chance of being upheld than a blank acknowledgement.  Never mind that giving an incorrect name in the acknowledgement clause may sometimes provide less assurance of the instrument's genuineness that if the acknowledgement had been left blank. (see Bank of American, N.A. v Harold Corzin, Trustee, 5:09 CV 2520, Memorandum Opinion issued on 2/2/2010 by Judge David D. Dowd, Jr., for US District Court, Norther District of Ohio, Eastern Division) [I'm not aware of a single case under Ohio law where a blank acknowledgment has been found to be in substantial compliance. If anyone knows of such a case, I'd love to hear about it.]

The end result? A debtor can validly own of the property, sign the mortgage, initial every page including the acknowledgement page, and the mortgage can be recorded and the bankruptcy trustee can have actual knowledge of all of the above, and still the mortgage will be set aside if the mortgage is not properly executed under Ohio law.

While courts have acknowledged the counterintuitiveness and even injustice of some of these decisions, it is not their job to cure the lenders' documentation issues and they will not.

Lender's need to beware and take sufficient care in documenting their loans or risk suffering grave consequences; and if you are counsel for the borrower being asked to provide a legal opinion on a mortgage loan, take care when reviewing the mortgage execution and acknowledgement.

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