For years, it was generally accepted that mortgage creditors and bankruptcy trustees could assert the status of a bona fide purchaser and treat a defectively notarized mortgage as if that mortgage did not exist. On February 16, 2016, our Supreme Court provided clarity regarding the legal effects of R.C. §1301.401 and provided protection to lenders regardless of whether their mortgages were defective.
In Re Messer, 2016-Ohio-510 was a referral to the Ohio Supreme Court from the Bankruptcy Court for the Southern District of Ohio. Mr. and Mrs. Messer (the “Messers”) owned real property in Ohio. In order to finance the purchase of the property, the Messers executed and delivered a mortgage to Mortgage Electronic Registration Systems (“MERS”) as nominee for M/I Financial Corp. The mortgage was later assigned to JP Morgan Chase Bank, N.A. (“Chase”). Although the mortgage was correctly signed by the Messers, the notary failed to certify the mortgage acknowledgment, although the notary did notarize other documents at the time of the closing. The Franklin County Recorder accepted and recorded the mortgage on December 4, 2007.
On September 19, 2013, about six years after the defective mortgage was recorded, the Messers filed a Chapter 13 bankruptcy petition. The Messers scheduled the mortgage as the secured claim of Chase.
On December 20, 2013, the Messers filed an adversary proceeding against Chase seeking to extinguish the defective mortgage. Bankruptcy Judge Caldwell referred the state law questions to the Ohio Supreme Court for resolution.
The two questions for resolution were whether R.C. §1301.401 applies to all recorded mortgages in Ohio, and whether this statute provides constructive notice to the world of the existence and contents of a recorded mortgage that was deficiently executed under R.C. §5301.01. The Court answered each question in the affirmative.
The Court began its analysis by considering R.C. §5301.01(A) which sets forth the requirements for a mortgage in Ohio. The section states:
A *** mortgage *** shall be signed by the *** mortgagor ***. The signing shall be acknowledged by the *** mortgagor *** before a judge or clerk of a court of record in this state, or a county auditor, county engineer, notary public, or mayor, who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgement.
Thereafter, the Court considered R.C. §1301.401 and concluded that it provides that the recording of certain documents provides constructive notice:
(B) The recording with any county recorder of any document described in division (A)(1) of this section *** shall be 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, including, but not limited to, any transfer, conveyance, or assignment reflected in that record.
(C) Any 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 time that the record was first *** tendered to a county recorder for recording.
The Messers made several arguments contending that R.C. §1301.401 was not applicable to rescue a defective mortgage which failed to comply with R.C. §5301.01(A). The Court rejected each argument.
First, the Messers argued that R.C. §1301.401’s placement in the portion of the Revised Code relating to Ohio’s Uniform Commercial Code (“UCC”) means that the statute applies only to transactions governed by the UCC and does not apply to mortgages. The Court disposed of this argument noting that R.C. §1301.401’s clear and broad language indicates that it applies to “any document described in Division (A)(1)” of the section. Further, the Court held that R.C. §1301.401(A)(1) clearly states that any document described or referred to in R.C. §317.08 is included in R.C. §1301.401. Thus, the Court held that based on the unambiguous statutory language of R.C. §1301.401, this statute applies to all recorded mortgages in Ohio.
Not ready to surrender, the Messers argued that application of R.C. §1301.401 to recorded mortgages was inconsistent with R.C. §5301.25(A) and cannot provide constructive notice to a bona fide purchaser if the mortgage was not properly executed.
Again, the Court rejected this argument. The Court held that R.C. §1301.401 does not contradict R.C. §5301.25(A), but simply provides that the act of recording a mortgage provides constructive notice to the whole world of the existence and contents of the mortgage documents.
Finally, the Messers argued that, in enacting R.C. §5301.01(B) (providing for constructive notice for mortgages executed prior to February 1, 2002 and not acknowledged in the presence of, or not attested by, two witnesses) and R.C. §5301.23(B) (providing constructive notice where the mortgage document omitted the current mailing address of the mortgagee) show that if the General Assembly wished to create a constructive notice for deficiency-executed mortgages, it would have done so in R.C. Chapter 5301.
This final argument was also rejected by the Court. The Court stated that the existence of R.C. §5301.01(B) and R.C. §5301.23(B) does not preclude the General Assembly from recognizing other instances in which the recording of a deficiently-executed mortgage can provide constructive notice.
The Messer case is important because prior to the enactment of R.C. §1301.401, a defective mortgage was deemed not to provide constructive notice. See Rhiel v. The Huntington National Bank (In Re Phalen), 445 B.R. 830 (Bankr. S.D. Ohio 2011). R.C. §1301.401 dispenses with the notion that a filed instrument is “not filed” if defectively executed. Therefore, because the bankruptcy Trustee’s avoidance powers under 11 U.S.C. §544 are only effective if there is a lack of constructive notice, R.C. §1301.401 bars the Trustee from successfully defeating the interest of a mortgage lender whose mortgage is defectively executed, but nevertheless recorded. This is great news for most lenders.