Opinion
Case No. 3:01CV7219, Case No. 3:01CV7426, Case No. 3:01CV7220
December 12, 2002
ORDER
These are three mortgage avoidance cases, arising under 11 U.S.C. § 544, that have been consolidated. The debtors, now petitioners in the bankruptcy court, signed mortgages to the creditor defendants. Section 5301.01 of the Ohio Revised Code requires two witnesses to a mortgage.
Though not attested by two witnesses, the debtors signed the mortgages before a notary public. The mortgages were duly recorded before the filing of the bankruptcy proceedings.
The absence of a second witness, according to the plaintiff-trustee, necessitates a finding that the mortgages are defective. Thus, the plaintiff-trustee seeks to avoid the mortgages. Were this to occur, the creditor defendants would lose their status as secured creditors.
Section 544(A), the so-called "strong arm" provision of the Bankruptcy Code, enables a bankruptcy trustee to avoid transfers of property that would be avoidable by a bona fide purchaser. That section provides, in pertinent part:
(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).
Historically, a defective mortgage, even though recorded, did not put a bona fide purchaser on constructive notice of the encumbrance. See, e.g., Amick v. Woodworth, 58 Ohio St. 86, 102 (1898); Thames v. Asia's Janitorial Serv., Inc., 81 Ohio App.3d 579, 588 (1992). The Ohio General Assembly sought to abrogate this doctrine by enacting Amended Substitute House Bill 163, which was effective June 30, 1999, and which adopted O.R.C. § 5301.234. Subject to certain exceptions not applicable here, § 5301.234(A) provided that a recorded mortgage was "irrebuttably presumed to be properly executed, regardless of any actual or alleged defect in the witnessing or acknowledgment on the mortgage." Pursuant to 5301.234(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 acknowledgment on the recorded mortgage does not render the mortgage ineffective for purposes of constructive notice.
This provision was in effect at the time the Huffman and Tucholski mortgages were recorded on March 3, 2000, and October 21, 1999, respectively. In addition, with regard to the Rice debtors, who have appealed to this court from an adverse ruling in the bankruptcy court, this provision was in effect at the time of the bankruptcy court's decision.
Constitutional questions and challenges were raised with regard to § 5301.234 as originally enacted. The bill in which it was included contained legislation relating to a broad range of other subjects. Such multiplicity of subjects within one bill was alleged to have violated the "one subject" requirement of Art. II, § 15(D) of the Ohio Constitution, which states:
No bill shall contain more than one subject, which shall be clearly expressed in the title. No law shall be revived or amended unless the new act contains the entire act revived, or the section or sections amended shall be repealed.
These challenges led to repeal of § 5301.234 and enactment of amendments to § 5301.01 of the Revised Code. In pertinent part, that statute, signed by Governor Robert Taft on Nov. 2. 2001, provides in § 5301.01(B):
(1) If a . . ., mortgage, . . . 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 . . . mortgagor . . . 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.
The plaintiff-trustee argues, with regard to the Rice debtors, that § 5301.01, the most recent statute, cannot apply to those debtors because their hearing in the bankruptcy court predated enactment of that statute. The plaintiff-trustee also argues in the alternative, that § 5301.234 is not applicable to the Rice debtors because it has been repealed. The plaintiff-trustee also argues that, in any event, § 5301.234 is unconstitutional in light of the one-subject rule.
That constitutional challenge was upheld in In re Barkley, 263 B.R. 553, 558-59 (Bankr. N.D. Ohio 2001), in which the court stated that the "voluminous bill" of which § 5301.234 was a part:
amends, enacts, or repeals approximately 53 provisions of the Ohio Revised Code, although it does nothing to modify or repeal § 5301.01 which § 5301.234 materially affects. Consequently, this enactment is violative of Article II, Section 15(D) of the Ohio Constitution . . . .
This Court's examination of Bill Number 163 and the resulting § 5301.234 reveals no commonality of subject matters. The bill contains provisions in the following titles of the Ohio Revised Code: State Government (4 provisions); Counties (3); Municipal Corporations (1); Criminal Procedure (3); Liquor (5); Motor Vehicles (13); Public Utilities (1); Roads and Highways (15); and Taxation (3). Section 5301.234 was the only provision that related to Real Property. The provisions in the Counties title address the regional transit board, the regional transit authority, and suits against county officials — statutes that clearly do not bear relation to a mortgage recording law. Likewise, the sections of the Bill that concerned Motor Vehicles had no relation to the recording of mortgages. They addressed disposition of monies from vehicle registration, highway safety, privacy of personal information, renewal of vehicle registration, driver's license examinations, and the issuance of certificates of registration. A search of all other provisions of the Bill for commonality to § 5301.234 is similarly unfruitful.
Thus, at the time of the bankruptcy court hearing in the Rice case the traditional rule — that a defective mortgage, even when recorded, did not place a bona fide purchaser on notice of the defect, and could be avoided — was in effect. The decision of the bankruptcy court to the contrary will be reversed and the mortgage in Rice will be avoided.
Because no hearings have yet been held with regard to the Huffman and Tucholski debtors, § 5301.01, as amended, if retroactive, applies. I conclude that § 5301.01, as amended, has retroactive application.
The predecessor enactment, § 5301.234, had been held to have been retroactive. In re Haviaras, 266 B.R. 792, 297 (N.D. Ohio 2001). But other courts disagreed with this assessment, and had held that § 5301.234 could not be applied retroactively. In re Farrell, 269 B.R. 181, 185 (Bankr. S.D. Ohio 2001).
When the General Assembly repealed § 5301.234 and adopted its amendments to § 5301.01, it made its legislative intent clear in Substitute House Bill 279 with regard to the issue of retroactivity. Section 3 of that Bill stated that the Assembly "declares its intent that the amendment made by this act to section 5301.01 of the Revised Code is retrospective in its operation and is remedial in its application to instruments described in that section that were executed or recorded prior to the effective date of this act, except that the amendment does not affect any substantive rights or vested rights that came into existence prior to the effective date of this act."
Article II, § 28 of the Ohio Constitution provides:
The general assembly shall have no power to pass retroactive laws, or laws impairing the obligation of contracts; but may, by general laws, authorize courts to carry into effect, upon such terms as shall be just and equitable, the manifest intention of parties, and officers, by curing omissions, defects, and errors, in instruments and proceedings, arising out of their want of conformity with the laws of this state.
I agree with the creditor defendants that § 5301.01, as amended is a remedial provision, which seeks to accomplish the "curing [of] . . . defects, . . . in instruments . . ., arising out of their want of conformity with the laws" of Ohio. There can be no doubt that, when the debtors signed the mortgages, they and the mortgagees intended to enter into lawful mortgages. Section 5301.01, as amended, accomplishes that intent. Consequently, adoption of the provision, and its expressly retroactive scope, do not violate Art. II, § 28. See generally, Bielat v. Bielat, 87 Ohio St.3d 350, 355-56 (2000); Goshen v. Purchell, 11 Ohio St. 641, 646 (1860).
The plaintiff-trustee seeks nonetheless to avoid those mortgages by contending that her "substantive rights" had vested by virtue of the debtors having filed their bankruptcy petitions prior to enactment of the amendments to § 5301.01. Those rights, having vested, cannot be undone, the plaintiff-trustee argues, through application of the amendment to § 5301.01 in light of the express statement in § 5301.01(B)(2) that § 5301.01(B)(1), which, inter alia, abrogated the two-witness rule, "does not affect any accrued substantive rights or vested rights that came into existence prior to the effective date of this amendment."
In response, defendants contend that, by operation of§ 5301.234, and its remedying of the defect that otherwise would have permitted avoidance of the mortgages, caused no right of avoidance to vest in the plaintiff-trustee. This contention cannot survive the ruling that enactment of§ 5301.234 violated the one subject rule, and thus is not constitutional under Art. II, § 15(D) of the Ohio Constitution. I uphold, accordingly, the plaintiff-trustee's contention that the Huffman and Tucholski mortgages, like the Rice mortgage, can be avoided.
The plaintiff-trustee also asserts claims for slander of title. She has not responded to the defendants' motion for summary judgment with regard to those claims, which shall, consequently, be dismissed. Conclusion
In light of the foregoing, it is
ORDERED THAT:
1. Plaintiff-trustee's motion for summary judgment be granted, and the defendants' motion for summary judgment be denied with regard to the avoidance of the mortgages at issue in this case; and
2. Defendants' motion for summary judgment be granted, and plaintiff-trustee's motion for summary judgment be denied with regard to the claims of the plaintiff-trustee for slander of title.