By: Chrissy Dunn Dutton
The Ohio Supreme Court recently issued its decision in In re Messer, Slip Opinion No. 2016-Ohio-510, holding that a defectively executed recorded mortgage acts as constructive notice of that mortgage to the world.
In the opinion, the Court decided the following two questions of state law, which were certified from bankruptcy court: (1) whether R.C. 1301.401 applies to all recorded mortgages in Ohio; and (2) whether R.C. 1301.401 acts to provide constructive notice to the world of a recorded mortgage that was deficiently executed under R.C. 5301.01.
The court unanimously answered yes to both questions.
R.C. 1301.401(A) and 1301.401(C) provide that the recording of certain documents with the county recorder is constructive notice “to the whole world of the existence and contents of [the] document as a public record and of any transaction referred to in that public record…” and that “[a]ny person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record” as of the date and time of recording.
R.C. 5301.01, which sets forth the requirements for a mortgage in Ohio, provides, in relevant part, that a mortgage shall be signed by the mortgagor and the signing shall be acknowledged by the mortgagor in front of an appropriate state official who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgment.
The notary acknowledgment on the mortgage at issue was left blank, providing no indication as to whether the borrowers executed the mortgage in front of a notary. When the borrowers filed a Chapter 13 bankruptcy and a companion adversary proceeding, seeking to avoid the mortgage as defectively executed under R.C. 5301.01, the bankruptcy court determined that its interpretation of R.C. 1301.401 would be dispositive. However, finding no interpretation of that statute by any Ohio court, the bankruptcy court certified the questions of state law to the Ohio Supreme Court. In its order for certification to the Supreme Court, the bankruptcy judge noted that the borrowers may have been able to avoid the mortgage before O.R.C. §1301.401 was enacted. However, the court questioned whether O.R.C. §1301.401 changed this result.
The full impact of the decision remains to be seen, as the bankruptcy court has not yet issued a decision on whether the mortgage can be avoided in the underlying adversary proceeding. However the Supreme Court decision is likely dispositive of that issue. The finding that a recorded but defectively executed mortgage puts subsequent parties (including bankruptcy Trustees) on constructive notice is therefore likely to defeat avoidance actions typically brought under Sec. 544 of the U.S. Bankruptcy Code.