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Ohio Supreme Court: Revised Code Closes Door on Mortgage Avoidance Actions

Posted By USFN, Monday, February 22, 2016
Updated: Wednesday, February 24, 2016

February 22, 2016

 

by Rick DeBlasis
Lerner, Sampson & Rothfuss – USFN Member (Kentucky, Ohio)

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 R.C. 1301.401, a new provision of the Ohio Revised Code, (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. Syllabus. 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, 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, 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. Darren and Angela Messer are owners of a home located in Canal Winchester, Ohio, which they bought with the help of a first mortgage loan. The Messers initialed each page and signed the mortgage. It is recorded with the county recorder. However, there is no notary signature following the acknowledgement clause.

The Messers filed a chapter 13 bankruptcy petition. Their chapter 13 plan provides, in part, that the debtors will file an adversary complaint in the bankruptcy court, exercising the trustee’s “strong-arm power” whereby a bona fide purchaser may avoid a defective mortgage and treat its holder as an unsecured creditor to receive, with all other unsecured creditors, a fraction of its claim. The plan was confirmed, and the Messers instituted the adversary proceeding. The mortgagee moved to dismiss, asserting 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 Supreme Court focused entirely on the language of R.C. 1301.401, which it found to be clear, broad, and unambiguous. If the mortgage is of record, defects in its execution will not render it subject to attack by an erstwhile “bona fide purchaser.”

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