Opinion
No. 01-22384, Adv. No. 02-01123
February 10, 2003
Stephen D. Hobt, Attorney For Plaintiff.
Amelia Bower, Plunkett Cooney P.C., Columbus, Ohio, Attorney For Wells Fargo Mtg.
Amy L. Arrighi, Cleveland, Ohio, Attorney For Citifinancial, Inc.
Wendy Smith Welsh, Painesyille, Ohio, Attorney For John Crocker, Lake County Treasurer.
Peter N. Wozniak, Cleveland, Ohio, Attorney For State Of Ohio, Dept. Of Taxation.
Brenda T. Bodnar, Algis Sirvaitis Assoc., Cleveland, Ohio, Attorney For Debtors.
Michael Arnovitz, Attorney For G.E. Capital Mtg. Ser. Inc.
MEMORANDUM OF OPINION AND ORDER
The matter before the court is the Motion for Summary Judgment ("Motion"), filed by the Defendant, Wells Fargo Mortgage ("Wells Fargo"). In response to the motion, Plaintiff Waldemar J. Wojcik, Chapter 7 Trustee ("Trustee") filed a brief in opposition. The Court acquires subject matter jurisdiction over these proceedings pursuant to 28 U.S.C. § 157 (a) and (b), 28 U.S.C. § 1334, and General Order Number 84 of this District. Following a duly noticed hearing on the motion, the Court makes the following findings and conclusions:
On October 13, 1998, Dale and Patricia Skiljan (Debtors), obtained a loan from Decision One Mortgage Company, LLC, Ltd. (Decision One) in the principal sum of $144,000.00. Debtors executed a mortgage to Decision One upon their residence located at 3697 Indiana Sweet in the City of Perry, Lake County, Ohio. The mortgage in favor of Decision One was filed for record with the Lake County Recorder on October 13, 1998 and recorded as instrument number 980046633 of the Lake County Records.
The subject mortgage deed and note were subsequently assigned to Wells Fargo Mortgage (Wells Fargo). On December 18, 2001, Dale and Patricia Skiljan filed their voluntary petition under Chapter 7 of the Bankruptcy Code. On March 13, 2002, Trustee filed the above-styled Complaint, wherein he seeks to avoid the mortgage deed of Wells Fargo pursuant to § 544(a) of the Bankruptcy Code and § 5301.01 of the Ohio Revised Code ("O.R.C."). Trustee alleges that the mortgage deed was executed at the Debtors' home in the presence of only one witness, in violation of applicable state law. In its Answer, Wells Fargo argues, relying on § 5301.234 of the O.R.C, that its mortgage was presumptively valid under Ohio Law.
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Wells Fargo now moves for summary judgment on two bases: (1) that O.R.C. § 5301.234 applies here by virtue of the recent Ohio Supreme Court case In re Stewart, 96 Ohio St.3d 67 (2002) and (2) that, as a result of the Stewart decision, the mortgage held by Wells Fargo is not voidable by the Trustee pursuant to § 544(a) of the Bankruptcy Code. The Ohio Supreme Court in Stewart held: "Former R.C. 5301.234 can be applied to presume the validity of a mortgage in a bankruptcy case filed after the effective date of the statute when the mortgage at issue in the bankruptcy case was recorded before the statute's effective date."
The matter was before the court on a certified question of state law from the Bankruptcy Appellate Panel of the United States Sixth Circuit Court of Appeals. The panel certified the following question: Can Ohio Revised Code Section 5301.234 be applied to presume the validity of a mortgage in a bankruptcy case filed after the effective date of the statute, when the mortgage at issue in the bankruptcy case was recorded before the statute's effective date? The certified question was answered in the affirmative.
Wells Fargo argues that Stewart applies to bar the Trustee's action. Wells Fargo also contends that as a result of the ruling of the Stewart ruling, the Trustee cannot prove by clear and convincing evidence that the subject mortgage was not properly executed pursuant to Ohio Rev. Code § 5301.01. Also, Wells Fargo argues that the recording of the mortgage is constructive notice to the trustee of the interest of Wells Fargo in the debtor's real property. Ohio Rev. Code § 5301.25(A),Tiller v. Hinton, 19 Ohio St.3d 66 (1985); Basil v. Vincello, 50 Ohio St.3d 185 (1990). Hence, the Trustee should not be able to qualify as a bona fide purchaser under § 544(a)(3).
Trustee addresses the effect of Stewart in his response to the motion for summary judgment stating that the Ohio Supreme Court did not address the issue of whether O.R.C. § 5301.234 was constitutional, nor whether § 5301.234 can apply to an adversary proceeding filed after its repeal. As such, the Trustee asserts that the Stewart decision has no bearing on this proceeding.
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Where a mortgage was executed in the presence of one witness, before the enactment of O.R.C. § 5301.234, the issue is whether said statute may be applied so as to bar the trustee from setting aside the mortgage as being defective.
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Section 5301.234 of the O.R.C. provides:
(A) Any recorded mortgage is irrebuttably presumed to be properly executed, regardless of any actual or alleged defect in the witnessing or acknowledgment on the mortgage, unless one of the following applies:
(1) the mortgagor, under oath, denies signing the mortgage;
(2) the mortgagor is not available, but there is other sworn evidence of a fraud upon the mortgagor.
(B) Evidence of an actual or alleged defect in the witnessing or acknowledgement on the mortgage is not evidence of fraud upon the mortgagor and does not rebut the presumption that a recorded mortgage is properly executed.
(C) The recording of a mortgage is constructive notice of the mortgage to all persons, including without limitation, a subsequent bona fide purchaser or any other subsequent holder of an interest in the property. An actual or alleged defect in the witnessing or acknowledgement of the recorded mortgage does not render the mortgage ineffective for purposes of constructive notice.
Ohio Rev. Code Ann. § 5301.234. Section 5301.234 is to be read in conjunction with O.R.C. § 5301.01, which provides:
(A) A deed, mortgage, land contract as referred to in division (B)(2) of section 317.08 of the Revised Code, or lease of any interest in real property and a memorandum of trust as described in division (A) of section 5301.255 [5301.25.5] of the Revised Code shall be signed by the grantor, mortgagor, vendor, or lessor in the case of a deed, mortgage, land contract, or lease or shall be signed by the settlor and trustee in the case of a memorandum of trust. The signing shall be acknowledged by the grantor, mortgagor, vendor, or lessor, or by the settlor and trustee, 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.
(B)(1) If a deed, mortgage, land contract as referred to in division (B)(2) of section 317.08 of the Revised Code, lease of any interest in real property, or a memorandum of trust as described in division (A) of section 5301.255 [5301.25.5] of the Revised Code was executed prior to the effective date of this amendment and was not acknowledged in the presence of, or was not attested by, two witnesses as required by this section prior to that effective date, both of the following apply:
(a) The instrument is deemed properly executed and is presumed to be valid unless the signature of the grantor, mortgagor, vendor, or lessor in the case of a deed, mortgage, land contract, or lease or of the settlor and trustee in the case of a memorandum of trust was obtained by fraud.
(b) The recording of the instrument in the office of the county recorder of the county in which the subject property is situated is constructive notice of the instrument to all persons, including without limitation, a subsequent purchaser in good faith or any other subsequent holder of an interest in the property, regardless of whether the instrument was recorded prior to, on, or after the effective date of this amendment.
(2) Division (B)(1) of this section does not affect any accrued substantive rights or vested rights that came into existence prior to the effective date of this amendment.
Ohio Rev. Code Ann. § 5301.01.
11 U.S.C. § 544 (a)(3) affords the bankruptcy trustee with the rights of a hypothetical lien creditor:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.11 U.S.C. § 544 (a)(3). Summary judgment is proper if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Fed R. Bankr. P. 7056; Celotex Corp. v. Catrett, 477 U.S. 317, 322-323, 91 L.Ed.2d 265, 106 S.Ct. 2548 (1986). A fact is material if it would affect the determination of the underlying action. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986); Tennessee Dep't of Mental Health Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996). An issue of material fact is genuine where a rational fact-finder could find in favor of either party on the issue. Anderson, supra, 477 U.S. at 248-249; Structurlite Plastics Corp. v. Griffith (In re Griffith), 224 B.R. 27 (6th Cir. B.A.P. 1998).
In a motion for summary judgment, the initial burden is on the movant to establish an absence of evidence to support the nonmoving party's case. Celotex, supra, 477 U.S. at 322; Gibson v. Gibson (In re Gibson), 219 B.R. 195, 198 (6th Cir. B.A.P. 1998). The burden then shifts to the nonmoving party to demonstrate the existence of a genuine dispute. Lujan v. Defenders of Wildlife, 504 U.S. 555, 590, 119 L.Ed.2d 351, 112 S.Ct. 2130 (1992); In re Strbac, 235 B.R. 880, 882 (6th Cir. B.A.P. 1999).
The parties agree that there is no genuine issue of material fact in dispute in this proceeding. The applicability of summary judgment, therefore, depends upon whether the Wells Fargo is entitled to judgment as a matter of law. In the context of a § 544(a) avoidance action, the Trustee's rights are determined by applicable state law. Kimball Co. v. Michigan Lithographing Co. (In re Michigan Lithographing Co., 997 F.2d 1158, 1159 (6th Cir. 1994).
Generally, state law determines a party's interest in property. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). As such, Ohio state law controls. Where a party challenges the validity of a mortgage and seeks to avoid a mortgage lien, the burden of proof is upon the complainant. That burden must be satisfied by a clear and convincing evidence standard. Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1025 (6th Cir. 2001); Barkley v. Household Realty Corp. (In re Barkley), 263 B.R. 553 (Bankr. N.D. Ohio 2001).
A recent District Court opinion is analogous to the present proceeding. See Kovacs v. First Union Home Equity Bank (In re Huffman), 2002 U.S. Dist. LEXIS 23260 (N.D. Ohio 2002). This case is cited in neither of the party's briefs; nevertheless, the case closely parallels the facts and issues of the summary judgment motion at bar.
In Huffman, three cases were consolidated for the District Court's consideration. The plaintiffs, debtors in bankruptcy, executed mortgages with various creditors. The trustee sought to avoid the respective mortgages under § 544 because they were invalid. The creditors claimed the mortgages were valid under Ohio Rev. Code Ann. § 5301.01. The trustee and the creditors moved for summary judgment on all issues. The trustee alleged that the absence of a second witness to the signing of the mortgages made them defective. Under Ohio Rev. Code Ann. §§ 5301.01 and 5301.234 (repealed), the requirement for a second witness was abrogated. The District Court ruled that in regard to one group of debtors, Ohio Rev. Code Ann. § 5301.01 did not apply because their hearing in the bankruptcy court predated enactment of that statute. Also, the District Court ruled that the Ohio Rev. Code Ann. § 5301.234 did not apply because it had been repealed as unconstitutional. Regarding the second group of debtors, their hearing had not yet been held, but the district court nevertheless found that the trustee could also avoid these mortgages, reasoning that the trustee's "substantive rights" had vested because the debtors filed their bankruptcy petitions prior to enactment of the amendments to Ohio Rev. Code Ann. § 5301.01. Those rights, having vested, could not be undone due to the express statement in Ohio Rev. Code Ann. § 5301.01(B)(2) that § 5301.01(B)(1) did not affect any accrued substantive rights or vested rights that came into existence prior to the effective date of the amendment. The District Court granted the trustee's motion for summary judgment and denied the creditors' motions for summary judgment with regard to the avoidance of the mortgages.
The trustee also alleged slander of title,
The district court granted the creditors motions for summary judgment and denied the trustee's motion for summary judgment with regard to the claims for slander of title.
The same conclusion must be reached herein, as the dispositive facts are the same. Here, the Debtors filed for bankruptcy protection relief on December 18, 2001, before the enactment of O.R.C. § 5301.01 on February 1, 2002. Thus, the trustee can avoid the mortgage under II U.S.C. § 544. Here, as in Huffman, the trustee's "substantive rights" had vested because the debtors filed their bankruptcy petitions prior to enactment of the amendments to Ohio Rev. Code Ann. § 5301.01. Those rights, having vested, could not be undone due to the express statement in Ohio Rev. Code Ann. § 5301.01(B)(2) that § 5301.01(B)(1) did not affect any accrued substantive rights or vested rights that came into existence prior to the effective date of the amendment.
This Court adopts the Huffman rationale and conclusions of law. The Stewart decision, was rendered on July 24, 2002, several months prior toHuffman. Section 5301.234 of the Ohio Revised Code was declared unconstitutional by this Court in Myron Wasserman, Trustee v. Household Realty Corp (In re Barkley(, 263 B.R. 553 (Bankr.N.D. Ohio 2001). Although this Court declared O.R.C. § 5301.234 unconstitutional, the Ohio Supreme Court ruled that the statute was applicable when confronted with the specific fact pattern at bar today. Nevertheless, Huffman ruled that § 5301.234 is inapplicable as it has been rendered unconstitutional.
Herein, Trustee seeks to avoid the mortgagee by contending that his "substantive fights" had vested by virtue of the debtors having filed their bankruptcy petitions prior to enactment of the amendments to § 5301.01. Pursuant to the exception established in § 5301.01, those fights, having vested, cannot be undone.
Accordingly, Wells Fargo's Motion for summary judgment is hereby denied. Each party is to bear its respective costs. A trial schedule shall issue forthwith.
IT IS SO ORDERED.
JUDGMENT
A Memorandum Of Opinion And Order having been rendered by the Court in this proceeding,
IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that Wells Fargo's motion for summary judgment is hereby denied. Each party is to bear its repective costs. A trial schedule shall issue forthwith.