Opinion
No. 01-177233, Adv. No. 01-1365
February 11, 2003
Stephen D. Hobt, Attorney For Plaintiff.
David A. Freeburg, Cleveland, Ohio, Attorney For Defendant First Indiana Bank.
Kathryn A. Williams, Attorney For Defendant Bankone National Assoc.
Harvey A. Snider, Solon, Ohio, Attorney For Defendant Michael Catherine Peterson.
Romi T. Fox, Lerner, Sampson Rothfus, Cincinnati, Ohio, Attorney For Defendant First Indiana Bank.
Peter H. Wozniak, Cleveland, Ohio, Attorney For Defendant Betty D. Montgomery, Attorney Federal Of Ohio.
MEMORANDUM OF OPINION AND ORDER
In this Chapter 7 proceeding, David O. Simon (Trustee) files this complaint to determine the priority, validity, and extent of liens and interests and to set aside the mortgage of First Indiana Bank (First Indiana) pursuant to 11 U.S.C. § 544 (a)(1), (a)(3), and Ohio Rev. Code Ann. § 5301.01. 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. Upon conclusion of a trial and an examination of the record, generally, the following findings and conclusions are hereby rendered.
I.
On March 10, 1998, Michael and Catherine Petersen (Debtors), obtained a loan from First First Indiana in the principal sum of $115,750.00. The Debtors executed a mortgage in favor of First Indiana on their residence located at 5075 Namer Road in the City of Solon, Cuyahoga County, Ohio. The subject mortgage was filed for record with the Cuyahoga County Recorder on March 16, 1998 and recorded in Volume 98-02776, Page 6 of the Cuyahoga County Records.
On July 25, 2001, Debtors filed their voluntary petition under Chapter 7 of the Bankruptcy Code. [Title 11, United States Code]. Trustee filed the above-referenced complaint asserting that the mortgage executed by the Debtors was defectively acknowledged, having been executed in the presence of, at most, one (1) witness in violation of O.R.C. § 5301.01. Trustee contends further that pursuant to §§ 544(a)(1) and (a)(3) of the Code, and O.R.C. 5301.01, the subject mortgage is avoidable as being unperfected as of the petition filing date.
First Indiana admits, in its answer, that the Debtors executed a mortgage in its favor on March 10, 1998, but generally denied all other relevant complaint allegations. It specifically denies (1) that the mortgage was not witnessed and executed properly under Ohio law and (2) that the mortgage is avoidable by the Trustee under § 544 of the Bankruptcy Code. In the alternative, First Indiana asserts that any interest inuring to the benefit of the Debtors' bankruptcy estate is subordinated to any interest held by it pursuant to § 550(e) of the Bankruptcy Code. [ 11 U.S.C. § 550 (e)].
II.
The first issue for the Court to determine is whether, based on the testimony adduced at trial, one or two witnesses were present at the mortgage execution. The second issue is whether the subject mortgage was executed in violation of applicable state law.
III.
Section 5301.01 of the Ohio Revised Code currently provides, in pertinent part:
(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 Revised Code Ann. § 5301.01 (2002). The "strong arm" clause of the Bankruptcy Code, 11 U.S.C. § 544 (a), grants a bankruptcy trustee the power to avoid transfers of property that would be avoidable by certain hypothetical lien creditors. Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020 (6th Cir. 2001). Section 544(a) provides:
Section 5301.01 was amended by the Ohio Legislature and became effective on February 1, 2002.
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 —
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
* * *
(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). A trustee is entitled to avoid a mortgage under section 544(a)(3) if a hypothetical bona fide purchaser would be able to avoid this mortgage. Since this mortgage concerns real property located in Ohio, this inquiry is governed by Ohio law. See Watson v. Coal Co. Inc., 498 F.2d 1183, 1190 (6th Cir. 1974). Herein, the Trustee's rights vested as of the bankruptcy petition filing date, July 25, 2001. Thus, the exception to amended § 5301.01 is applicable. That section provides that § 5301.01, as amended, does not affect any accrued substantive rights or vested rights that came into existence prior to the effective date of this amendment. Ohio Revised Code Ann § 5301.01(B)(2). Thus, at the time of the Debtors' bankruptcy filing, O.R.C. § 5301.01 required the attestation of two witnesses.
Section 5301.234 of the Revised Code, which mandated that one-witness mortgages were presumptively valid, 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). In Barkley, the Court ruled that § 5301.234 violated the one-subject rule of violation of Art. II, § 15(D) of the Ohio Constitution, which stated:
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.
To date, the Barkley decision is still good law.
IV.
In support of his complaint alleging that the mortgage was improperly witnessed by only one witness, the Trustee examined Catherine C. Petersen whose testimony was generally credible. She testified that she spoke with Richard Gaylor, a mortgage broker in Highland Heights, with whom her initial contact was in 1997. Gaylor informed her that the loan was approved and instructed her to appear at the closing. The closing agent, Douglas DeBiase, came to her home on March 10, 1998 to close the refinancing on their personal residence. He came alone by car in the early evening. The note with First Indiana was for $115,750.00. Ms. Petersen signed it with her husband in her home. No one else was at the closing on this mortgage. She thought it odd that the closing took place in her home. She described DeBiase as slender, and having worn glasses. The second mortgage was with Bank One at Richard Gaylor's office.
The Trustee's complaint and trial brief, in support, challenge only the mortgage in favor of First Indiana Bank.
The testimony offered by the co-debtor, Michael A. Petersen, was also credible. He had very little to do with arranging the mortgage refinancing, as his wife generally took care of the matter. He signed each document at the closing that required his signature. His testimony was consistent with that of his wife's, in that the closing occurred at their home in the presence of only DeBiase and his wife. He signed the note at his home on March 10, 1998, and signed the mortgage at the same time and place. He was certain that Richard Gaylor was not in his home on March 10, 1998.
During its case-in-chief, First Indiana examined Douglas DeBiase, a closing agent and notary for Tower City Title for the past five years. He was present at the closing on March 10, 1998. The thrust of his testimony was to describe his duties as a closing agent. He was familiar with the First Indiana mortgage (Ex. B). He signed it as a notary and as a witness, dated March 10, 1998. He testified that Richard Gaylor was the other witness. He described his practice of notarizing. He signed the Quitclaim Deed (Ex. D) as a notary and witness, dated March 10, 1998. He also acknowledged his signature appearing on the letter to close open end line of credit (Ex. F), the confirmation of lien discharged (Ex. G), the Correction Agreement (Ex. H), the addendum to mortgage (Ex. I), and the insufficient mortgage payoff agreement (Ex. J), all of which were dated March 10, 1998. The Closing Schedule (Ex. V) does not show a closing appointment with the Petersons. Upon cross-examination, Debiase testified the rules for closing were established by his employer, and that he had two closings on March 10, 1998. He testified as to having performed too many closings to have a specific recollection of the Petersons' closing, and that there were not two witnesses on each of his closings.
Richard Gaylor testified on behalf of First Indiana. In 1998, he was employed by Gulf Stream as branch manager and closing agent. He was familiar with the Petersons, having originated two home mortgage loans for them. He used Tower City Title on both mortgages. These loans were two separate transactions. He signed the First Indiana mortgage (Ex. B) as a witness on March 10, 1998. He witnessed closings if they occurred in his office, and has witnessed over 200 mortgages. He has never witnessed a document without seeing the person sign first. He was familiar with the quitclaim deed (Ex. D), which he signed as a witness. He was not a notary on March 10, 1998. He is also familiar with the letter to close open end line of credit (Ex. F), the confirmation of lien discharged (Ex. G), the Correction Agreement (Ex. H), the addendum to mortgage (Ex. I), and the insufficient mortgage payoff agreement (Ex. J), all of which he signed as a witness in his office and were dated March 10, 1998. He testified that four people were present: himself, Debiase, and the Petersons.
He was also familiar with the Bank One Mortgage to the Peterson' (Ex. M), to which he was the loan officer on the mortgage, but did not sign it.
On cross-examination, he specifically recalled the Petersons' closing in his office. He recalled that Catherine was upset due to the misspelling of her name on documents. It was a quitclaim deed to reconvey the property from herself to herself and her husband.
He also testified he was familiar with the Bank One Mortgage (Ex. M), because he was given a copy of it at the closing.
Lastly, First Indiana examined Marilyn Mannario, President of Tower City Title (Tower City). She described her company's business. She was familiar with two of the Petersons' loan files, from being a custodian of records for Tower City, which only does mortgage closings. All Tower City closing agents are in-house employees. She was familiar with the quitclaim deed (Ex. D). She is also familiar with the letter to close open end line of credit (Ex. F), the confirmation of lien discharged (Ex. G). On cross-examination, she testified that the Closing Schedule (Ex. V) was received from Tower City's payroll records.
DISCUSSION
Based on the testimony adduced and a review of the record, the Trustee has not met his burden of proving there was only one witness to the execution of the mortgage granted to First Indiana. Douglas DeBiase (Debiase) and Rick Gaylor (Gaylor)testified that each was a witness to the Debtors's mortgage. Although Debiase testified, on cross exam, that he does not specifically recall the Peterson closing, he testified on direct that he was a witness to the mortgage. Also, Gaylor testified he recalled Debiase's presence at the Debtors' home. Gaylor also specifically remembered co-debtor, Catherine Peterson, was upset due to the misspelling of her name of documents. The Trustee elicited no evidence to controvert this testimony.
A bankruptcy case with similar facts as the case at bar is this Court's decision in Simon v. First Union Mortg. Corp. (In re Burnham), 231 B.R. 270 (Bankr. N.D. Ohio 1999). Therein, the Plaintiff, Chapter 7 Trustee filed a complaint asking this Court to determine the priority and extent of liens and interests in the debtor's home and to set aside the mortgage on the basis that it was defectively executed. The Trustee alleged that, due to the defect, the mortgage was subject to avoidance under § 544 and applicable state law, because it was unperfected as of the bankruptcy petition filing date. The Trustee relied upon the testimony of the debtor that only one person had been present when she signed her mortgage and other closing documents. However, the closing agent testified that another witness was present in the room when debtor signed the mortgage papers.
This Court, in Burnham, held the Trustee was required to prove the mortgage was defective by clear and convincing evidence and noted that the Trustee's burden was virtually insurmountable because the complaint allegations were sufficiently controverted by credible trial witnesses. This Court ruled that two witnesses were present at the mortgage execution and, accordingly, avoidance under § 544 was unavailable to the Trustee. The subject mortgage is, facially, a validly executed mortgage under applicable Ohio law. Thusly, it is to be accorded a presumption of validity, unless overcome by persuasive evidence to the contrary.
Herein, the Trustee failed to demonstrate that the subject mortgage was executed by only one witness. The testimony presented at trial evidenced that the mortgage contained the signatures of all parties to the transaction, including the signatures of two witnesses, and an acknowledgment and signature of a notary public. Collectively, these findings evidence a validly executed mortgage under Ohio law. Indeed, the testimony adduced places the mortgagors' (Debtors') word against that of the notary and the attesting witnesses. However, in this case, the testimony of Gaylor and Debiase is given considerable weight. No evidence was presented by the Trustee to corroborate the Debtors? testimony that only one witness was present at the mortgage signing. Therefore, the Trustee has not overcome the presumption of validity by the requisite standard of clear and convincing evidence. See In re Zaptocky, 250 F.3d at 1024.
Having so determined that the Trustee has not met his burden of proof to avoid the subject mortgage, it is unnecessary to address First Indiana's § 550 argument. Accordingly, the Trustee's complaint to avoid the mortgage granted in favor of First Indiana Bank is hereby denied. Each party is to bear its respective costs.