Opinion
Case No. 05-16512, Adversary Case No. 06-1320.
May 29, 2008
MEMORANDUM OF DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
The chapter 7 trustee ("Trustee") seeks to avoid two mortgage liens transferred to the Defendants ("Chase"). The Court must decide cross-motions for summary judgment. See Docs. 25 26.
The issue presented is whether a mortgage is properly executed under Ohio law where: (1) the mortgage identifies two grantors; (2) the mortgage contains the apparent signatures of both grantors; (3) each page of the mortgage contains the apparent initials of both grantors; and (4) the acknowledgment clause references only one of the grantors. For the reasons stated below, the Court holds that such a mortgage is not properly executed as to the interest of the grantor that is not referenced in the acknowledgment clause.
FACTS
The Trustee challenges two mortgages. For identification purposes, the Court will refer to the individual mortgages by the page number assigned by the recorder's office: (1) 9798 1863 ("Mortgage 1863"); and (2) 9798 1885 ("Mortgage 1885").
Chase argues that the copies of the mortgages attached to the Trustee's summary judgment motion are unauthenticated. However, Chase attached identical copies to its summary judgment motion. Therefore, the Court does not deem authentication to be a material issue.
Both mortgages: (1) identify Benjamin and Shantel Thomas as the mortgagors; (2) contain the initials "ST" and "BT" on each page; and (3) contain two signatures immediately preceding the acknowledgment clause. On both mortgages, the signatures are written on lines identified as follows: Shantel I Thomas Borrower Borrower
________________________________ ______________________________Thus, one signature is written above the name of Shantel Thomas and the other signature does not have a name under it.
The certificates of acknowledgment on the two mortgages differ slightly. Both certificates state:
This instrument was acknowledged before me this 30th of September, 2004, by[.]
Thereafter, Mortgage 1863 contains the preprinted name of Shantel I. Thomas and Mortgage 1885 contains the handwritten name of Shantel I. Thomas. Neither certificate references Benjamin Thomas.
Both mortgages were recorded when the Thomases filed their chapter 7 petition.
ANALYSIS
I. Bona Fide Purchaser
The Trustee seeks to avoid Chase's liens, pursuant to 11 U.S.C. § 544(a)(3), to the extent that they encumber Benjamin Thomas's one-half interest in the property. Section 544(a)(3) vests a trustee with the state law rights of a bona fide purchaser, on the date of the bankruptcy filing, if that status was attainable under state law. In re Michigan Lithographing Co., 997 F.2d 1158, 1159 (6th Cir. 1993); Drown v. Argent Mortgage Co., LLC (In re Bunn), 376 B.R. 835, 842 (Bankr. S.D. Ohio 2007). Under Ohio law, "[a] bona fide purchaser is one `who takes property 1) for valuable consideration, 2) in good faith, and 3) absent notice of any adverse claims.'" Groza-Vance v. Vance, 162 Ohio App. 3d 510, 526 (Ohio Ct.App. 2005). Therefore, a hypothetical purchaser who has purchased for valuable consideration, in good faith and without actual knowledge "is bound by an encumbrance upon land only if he has constructive . . . knowledge of the encumbrance." See Tiller v. Hinton, 19 Ohio St. 3d 66, 68 (1985). Consequently, the Trustee is vested with the state law rights of a bona fide purchaser if a hypothetical purchaser, on the petition date, did not possess constructive knowledge of Chase's liens.
The Trustee's original complaint did not reference 11 U.S.C. § 544, citing only 11 U.S.C. § 547. See Doc. 1. Consequently, Chase argues that the Trustee may not proceed under § 544. However, the Trustee filed an amended complaint citing both § 544 and § 547. See Doc. 36. The filing of the amended complaint was authorized by an agreed order executed by Chase. See Doc. 34. Moreover, "`the failure in a complaint to cite a statute, or to cite the correct one, in no way affects the merits of the claim,' because `factual allegations alone are what matters.'" Consolidated Edison Co. v. UGI Utilities, Inc., 423 F.3d 90, 104 (2d Cir. 2005); see also Greene v. City of Memphis, 535 F.2d 976, 978 (6th Cir. 1976) ("That Greene failed to specifically allege a section 1983 claim cannot preclude him from recovering on a section 1983 claim, should the allegations show and the proof support such a claim.").
II. Constructive Notice vs. Inquiry Notice
The concept of constructive knowledge set forth in Tiller has been explained as follows:
In order to eliminate some possible confusion, we point out that the doctrine of "constructive knowledge" encompasses two distinct rules relative to bona-fide purchasers of real property, only one of which was being applied by the Supreme Court in Tiller. The first rule is the "common law" or "equitable" rule that a purchaser will be charged with knowledge of a previous encumbrance upon real property when he has knowledge of facts which would induce a prudent person to make an inquiry by which he would have or could have obtained knowledge of the prior encumbrance. Such a person is deemed to have actual knowledge as a result of having "constructive" or "implied" knowledge, is not a bona-fide purchaser and takes the property subject to the prior encumbrance. This equitable constructive-notice rule, however, has only been applied in Ohio in the absence of a recording statute.
The second rule is that the proper recording of those instruments referenced in R.C. 5301.25(A) serves as "constructive" notice of that interest or encumbrance to all who claim through or under the grantor by whom such deed was executed. Such notice, in this statutory sense, is "constructive" because the subsequent purchaser is deemed to have notice of the record whether he reviewed it or not.
. . . The reference, therefore, to "constructive knowledge" in Tiller, supra, is to the rule that a record serves as constructive knowledge, not the equitable rule that actual knowledge will be implied from knowledge of facts outside the title record which induces inquiry.
Thames v. Asia's Janitorial Service, Inc., 81 Ohio App. 3d 579, 587-88 (Ohio Ct.App. 1992). Citing the "first rule" set forth in Thames, Chase contends that the Trustee is not a bona fide purchaser if he possessed inquiry notice. Given that Chase's mortgages are subject to recording, pursuant to Ohio Rev. Code § 5301.25(A), inquiry notice is irrelevant. The issue is whether a hypothetical purchaser possessed record notice of Chase's liens. See Bunn, 376 B.R. at 843 ("because the Mortgage in question was recorded, the Court looks to the second rule [discussed in Thames] to determine whether a hypothetical, good-faith purchaser would have notice of the record").
III. Properly Executed
Both of Chase's mortgages were recorded at the time of the bankruptcy filing. However, under Ohio law, a recorded mortgage that is not "properly executed" is treated as if unrecorded. See § 5301.25(A); In re Nowak, 104 Ohio St. 3d 466, 468-69 (2004); Citizens Nat'l Bank v. Denison, 165 Ohio St. 89, 94-95 (1956); Mortgage Electronic Registration Sys. v. Odita, 159 Ohio App. 3d 1, 5 (Ohio Ct.App. 2004). The defectively executed mortgage is "fraudulent insofar as [it] relate[s] to a subsequent bona fide purchaser having, at the time of purchase, no knowledge of the existence of that former . . . instrument." § 5301.25(A). The question before the Court is whether Chase's mortgages were "properly executed" as to Benjamin Thomas's one-half interest where the certificates of acknowledgment do not reference Mr. Thomas.
In Ohio, the grantor of a mortgage must sign the mortgage and acknowledge the signing. Ohio Rev. Code § 5301.01. Additionally, the acknowledgment must be certified by a notary or a specified public official. Id. The Supreme Court of Ohio has issued two decisions addressing the effect of a certificate of acknowledgment upon the validity of a mortgage. See Dodd v. Bartholomew, 44 Ohio St. 171, 177 (1886); Smith's Lessee v. Hunt, 13 Ohio 260 (1844).
In Smith's Lessee, Ezekiel Folsom executed a mortgage as the sole grantor. The certificate of acknowledgment provided: "Personally appeared __________, who acknowledged that he did sign and seal the foregoing instrument, and that the same is his free act and deed." The court concluded that the mortgage was "defectively executed." Smith's Lessee, 13 Ohio at 269.
In Dodd, Charles A. Clark and Sarah Clark executed a mortgage. The certificate of acknowledgment referenced "the above-named Charles B. Clark and Mary Clark, his wife, the grantors in the above-named instrument." Distinguishing Smith's Lessee, the court held that the mortgage was valid. Dodd, 44 Ohio St. at 177-78. Smith's Lessee was distinguished because it involved "a defect in the execution of the mortgage." Id. at 177. Specifically, the certificate of acknowledgment in Smith's Lessee "did not, as in this case, refer to . . . the above-named grantor." Id. Although the Dodd certificate of acknowledgment misidentified the grantors, the mortgage was not defective because, unlike Smith's Lessee, the certificate of acknowledgment also referenced "the grantors in the above-named instrument."
Dodd drew a distinction between the "formalities as to the execution" and the "form and requisite certainty" of an instrument. Id. at 176-177. "The formalities as to the execution are prescribed by statute, and cannot be dispensed with." Id. For example, a mortgage must be signed and acknowledged. Id. at 177. By contrast, "[t]he form and requisite certainty of [the instrument] is left to the general rules of law." Id.
Because the "formalities as to the execution" had been satisfied, the court applied general rules of law to the "form and requisite certainty" of the instrument. Specifically, the court applied the following principle:
It is a well-settled principle, applicable to the construction of deeds and other instruments, that all their parts are to be construed together, and the meaning ascertained from a consideration of each and every part; and, in the application of this rule, it is uniformly held that a false description, whether of the subject-matter or of the parties, does not vitiate the instrument, where the error appears upon its face, and the instrument supplies within itself the means of making the correction.
Id. at 175-76. Given the proper execution of the instrument, the court concluded that the misidentification of the grantors did not render the mortgage invalid where the correct names of the grantors were evident from the signatures of the grantors. Id. at 176.
Like Smith's Lessee, and unlike Dodd, the certificates of acknowledgment in this case do not contain the phrase "the grantors in the above-named instrument" or any similar language that would avoid defective execution. Both certificates simply state: "This instrument was acknowledged before me this 30th of September, 2004, by Shantel I. Thomas." Consequently, the mortgages were not properly executed as to Benjamin Thomas's one-half interest in the property.
IV. Fryman
Chase contends that the outcome of this case should be governed by Menninger v. First Franklin Financial Corp. (In re Fryman), 314 B.R. 137 (Bankr. S.D. Ohio 2004). In Fryman, the grantors of the mortgage were identified as Phyllis and Ronald Fryman. The acknowledgment clause, however, contained only the pre-printed name of Phyllis Fryman.
The parties also cite two decisions where the person that was omitted from the certificate of acknowledgment was not identified as a grantor of the mortgage. See Field v. ABN AMRO Mortgage Group, Inc. (In re Wheeler), Ch. 7 Case No. 02-18847, Adv. No. 04-1386, 2005 WL 4057841 (Bankr. S.D. Ohio July 21, 2005); Field v. ABN AMRO Mortgage Group, Inc. (In re Wolfzorn), Ch. 7 Case No. 03-11175, Adv. No. 03-1674, 2004 Bankr. LEXIS 2440 (Bankr. S.D. Ohio Sept. 30, 2004). These decisions are distinguishable. When an individual is not identified as a grantor of a mortgage, the mortgage does not encumber that individual's interest under Ohio law even if the individual's name is listed in the certificate of acknowledgment. See Kindt v. ABN AMRO Mortgage Group, Inc. (In re Wallace), Ch. 7 Case No. 05-24918, Adv. No. 06-1322 (Bankr. S.D. Ohio Nov. 15, 2007) (Hopkins, J.). In the instant case, Benjamin Thomas is identified as a grantor of the mortgages.
Applying Ohio law, Fryman read Dodd differently than this Court.
[ Dodd] enunciated the principle that the court must review the nature of the error and the balance of the document to determine whether or not the "instrument supplies within itself the means of making the correction." Dodd v. Bartholomew, 44 Ohio St. 171, 5 N.E. 866 (1886). In other words, "substantial compliance" with Ohio Revised Code § 5301.01 is required.
Id. at 138. Based upon this standard, Fryman held that the mortgage was not subject to avoidance under § 544(a)(3) because: (1) the acknowledgment clause omitted only one of two grantors; (2) the purported initials of both grantors appeared on every page; (3) the purported signatures of both grantors appeared at the end of the mortgage; (4) the acknowledgment clause used plural pronouns; and (5) the notary also signed the mortgage as a witness. Id. at 139.
This Court respectfully disagrees with Fryman's interpretation of Dodd. Contrary to Fryman, this Court reads Dodd to say that courts should not supply "the means of making the correction" if the instrument was defectively executed. See Dodd, 44 Ohio St. at 176-77. To do so would impermissibly dispense with the formalities of execution. Id. According to Dodd's interpretation of Smith's Lessee, a mortgage is defectively executed if the certificate of acknowledgment omits the name of the grantor and does not contain additional identifying language such as "the grantors in the above-named instrument." Id. at 177.
The Court believes its interpretation of Dodd lends greater certainty and predictability to the recording system. If a certificate of acknowledgment omits the name of one or more grantors, it is clear that the mortgage was defectively executed as to the omitted grantors unless the certificate contains additional identifying language such as "the grantors in the above-named instrument." A substantial compliance standard would require the weighing of all aspects of the mortgage document and whether the totality of the circumstances constitutes substantial compliance with § 5301.01. The latter approach lends itself to significant subjectivity and uncertainty.
V. Hoover
"The mere signing of mortgage in the presence of an officer authorized to take an acknowledgment thereof may constitute a proper acknowledgment of such instrument within the meaning of Section 5301.01 Revised Code." Wayne Bldg. Loan Co. v. Hoover, 12 Ohio St. 2d 62, syllabus ¶ 2 (1967). In support of its summary judgment motion, Chase has submitted an affidavit executed by the notary, Scott C. Johnson. Mr. Johnson states that he would have notarized the mortgages only if he was present for the execution of the mortgages by the Thomases or if the Thomases acknowledged their execution of the mortgages. See Doc. 26 at Ex. C. Based upon this evidence, Chase contends that the mortgages were properly acknowledged under Hoover. Hoover did not involve an alleged defect with a certificate of acknowledgment. The issue in Hoover was whether a grantor must do something more than sign the mortgage in the presence of the notary to acknowledge execution of the same. For example, does the grantor need to say anything to the notary? Hoover concluded that signing the mortgage in the presence of the notary without saying anything constitutes an acknowledgment.
The Court is not persuaded by Chase's Hoover argument. First, it requires consideration of information that cannot be found in the chain of title, that being Mr. Johnson's affidavit. As noted previously when addressing Chase's inquiry notice argument, the only relevant question is whether a hypothetical purchaser possessed record notice of Chase's liens. A hypothetical purchaser searching the chain of title has no idea whether Mr. Johnson was present at the time that the mortgages were signed. Second, even if Benjamin Thomas acknowledged execution of the mortgages, there is still no certification of such acknowledgment. Acknowledgment and certification are two separate requirements under § 5301.01. Certification is necessary to give constructive notice. Otherwise, the hypothetical purchaser has no idea that the acknowledgment was made. Without certification, the chain of title simply reflects a mortgage that was not properly executed.
CONCLUSION
Because the mortgages were defectively executed under Dodd and Smith's Lessee, they were not "properly executed" as required by § 5301.25(A). As such, the mortgages are treated as if unrecorded, the Trustee may assume the rights of a bona fide purchaser under Ohio law, and prevails against Chase because of the absence of constructive notice at the time of the bankruptcy filing.
Accordingly, the Trustee's motion will be GRANTED and Chase's motion will be DENIED. A judgment will be entered avoiding Chase's liens to the extent that they encumber Benjamin Thomas's one-half interest in the property.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.