Opinion
Case No. 02-18847, Adversary No. 04-1386.
July 21, 2005.
Decision on Cross Motions for Summary Judgment
Introduction
Now before the Court are cross-motions for summary judgment in an adversary proceeding that involves an attempt by the trustee, Eileen Field to avoid a mortgage on real property jointly owned by the debtor, Patricia Wheeler and her non-debtor spouse, Harry R. Wheeler. In its motion, defendant attached several exhibits, including the relevant mortgage documents, answers to certain interrogatories and requests for admissions. Based upon these exhibits and its application of Ohio law, defendant argues that the trustee may not avoid the mortgage because the acknowledgment clause "substantially complies" with O.R.C. § 5301.01 (2001).
In the alternative, defendant also argues that even if the acknowledgment clause is defective as to the debtor, the defendant's mortgage on the debtor's interest in the property is still valid because the mortgage was properly acknowledged as to the non-debtor spouse's signature. This allowed the defendant to properly record the mortgage and bestowed constructive notice upon the trustee of all of the mortgage documents, including the debtor's grant of a mortgage to the defendant. As a consequence, defendant asserts that the trustee was put on constructive notice of the defendant's mortgage on the debtor's share of the property, the trustee's ability to avoid the mortgage was thereby eliminated.
Trustee filed a memorandum in opposition to defendant's motion seeking either a denial of defendant's motion, or a grant of summary judgment in her favor. In her memorandum, trustee argues that the debtor's signature on the mortgage was not properly acknowledged in accordance with O.R.C. § 5301.01. Trustee further asserts that as a result of the defective acknowledgment she may avoid defendant's mortgage attaching to the debtor's interest in the property as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a)(3) (2005).
Legal Standard
Motions for summary judgment are governed by F.R.Civ.P. 56 which is incorporated into bankruptcy practice by F.R.B.P. 7056. That rule provides in part that a motion for summary judgment is to be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." The moving party bears the initial burden of showing that there is no issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323-324 (1986). The nonmoving party, however, bears the ultimate burden of showing that a genuine issue of material fact exists. In doing so, the nonmoving party cannot rest on its pleadings, but must, in response, offer some evidence which demonstrates a genuine issue of material fact for trial. Id.
Facts
On December 24, 2001, the debtor, Patricia Wheeler, and her non-debtor husband, Harry R. Wheeler, as joint owners of a parcel of real property executed a mortgage in favor of the defendant. The mortgage was recorded in the Hamilton County Recorder's office on February 2, 2001. The debtor and her spouse signed the mortgage in the presence of a notary public. In addition, the debtor and her spouse initialed each page of the note and mortgage. Despite the fact that the debtor's signature and initials appear on both the note and mortgage documents, the debtor's name does not appear on the notary's acknowledgment clause. The sole name contained in the acknowledgment clause is that of the non-debtor spouse.
Discussion
The primary issue in this case is whether the defendant satisfied the requirements contained in O.R.C. § 5301.01 when executing the mortgage. If the defendant failed to satisfy the requirements, the trustee may avoid the mortgage by utilizing her status as a hypothetical bona fide purchaser under 11 U.S.C. 544(a)(3). Amick v. Woodworth, 50 N.E. 437, 440 (Ohio 1898).
11 U.S.C. 544(a)(3) states:
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 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 purchaser exists
The language of O.R.C. § 5301.01 reads as follows:
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, country engineer, notary public, or mayor, who shall certify the acknowledgment and subscribe the official's name to the certificate of the acknowledgment.
In Ohio, caselaw indicates that substantial, rather than strict compliance is sufficient to properly execute a mortgage in accordance with O.R.C. § 5301.01. Mid-American Natl. Bank Trust Co. v. Gymnastics Intl. Inc., 451 N.E. 2d 1243, 1246 (Ohio. App. 1982) (holding that the acknowledgment clause substantially complied with O.R.C. § 5301.01 where the clause incorrectly identified the corporation as the signor of the mortgage rather than the corporate officers who actually signed the mortgage on behalf of the corporation). The Ohio Supreme Court has stated that courts must review the nature of the error in the context of the entire instrument to determine if the "instrument supplies within itself the means of making the correction." Dodd v. Bartholomew, 5 N.E. 866 (1886) (notary acknowledgment clause containing the incorrect middle initial of the husband and the incorrect first name of the wife was nevertheless still valid). It is clear however that when an acknowledgment clause fails to indicate the name of a sole grantor, the resulting mortgage is unenforceable against subsequent bona fide purchasers. Lessee v. Hunt, 13 Ohio 260 (1844), See Generally In re Wolfzorn, Adv. No. 03-1674 (Bankr. S.D. Ohio Sept. 30, 2004).
In the current case, the debtor's name does not appear within the notary public's acknowledgment clause. The only person named in the clause is the debtor's spouse. Defendant argues that despite this defect, the mortgage still substantially complies with O.R.C. § 5301.01. Defendant cites to In re Fryman, 314 B.R. 137 (Bankr. S.D. Ohio 2004) as support for its position. Defendant says that the facts contained in Fryman are similar to the set of facts currently before the Court.
In Fryman, two individuals granted a mortgage interest in jointly held property, but the acknowledgment clause contained the name of only one of the grantors. Id. at 138. Both grantors signed at the appropriate location on the mortgage and initialed each page of the mortgage. Id. Despite the failure to specifically list both grantors in the acknowledgment clause, theFryman Court found that the mortgage was still valid as to both grantors' conveyances and substantially complied with O.R.C. § 5301.01. Id. at 139. The Fryman court's rationale was based upon the existence of three distinct facts. Id.
The court first pointed to the fact that the acknowledgment clause failed to list only one of the grantors, not both. Id. Second, the Fryman court pointed to the fact that the notary also served as a witness to the signing of the mortgage, and the witnessing was not challenged by the trustee. Id. The court determined that it would be inconsistent to discredit the notary's acknowledgment, when the notary's role as a witness was accepted by the trustee as proper. Id. Finally, the Fryman court determined that there were, "numerous other indicators apparent from the face of the mortgage itself to make the correction." Id. (citing Dodd, 5 N.E. at 866). The Fryman court made specific mention of the fact that both grantors signed the mortgage and initialed each page. It said further:
The balance of the acknowledgment clause recites that "they" examined, read, and signed the instrument of "their" free act and deed. The plural pronouns "they" and "their" are not pre-printed but are handwritten in by the notary.
In the current case, similar to Fryman, the acknowledgment clause refers only to one of the two grantors, the non-debtor spouse. Also similar to Fryman, the notary public served as a witness to the grantors' signatures in addition to acknowledging the signing. This Court agrees with the rationale of Fryman that it would be contradictory to discredit the notary's acknowledgment when the notary's actual witnessing of the signing of the mortgage by the debtor is unchallenged.
At the time the mortgage in question was executed, O.R.C. § 5301.01 (2001) a grantor's signature required two witnesses. The current version of O.R.C. § 5301.01 (2005) does not include the two witness requirement.
Unlike Fryman, however, where the notary made specific use of the term "they" or "theirs" within the acknowledgment clause, there is no language contained within the defendant's acknowledgment clause that indicates that the notary acknowledged the signature of anyone other than the non-debtor spouse, "Harry R. Wheeler, married". In addition, there is no pre-printed or typewritten language within the mortgage documents that indicate the debtor was even a party to the transaction. This is evidenced by the fact that the term "borrower" is defined in the mortgage as "Harry R. Wheeler, married".
Defendant advances an alternative basis in an attempt to validate the debtor's grant of a mortgage interest in the property. Defendant argues that even if the acknowledgment clause is improper as to the debtor's grant of her mortgage interest, the clause is still valid as to the non-debtor spouse and the mortgage is therefore properly recordable. Defendant further argues that as a result of the recording of the mortgage, the trustee, as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a)(3), was placed on constructive notice of the contents of the entire mortgage, including the debtor's grant of a mortgage interest to the defendant. As a result, defendant asserts that constructive notice of the mortgage eliminates the trustee's ability to utilize her hypothetical status of a bona fide purchaser.
A properly executed and recorded mortgage takes priority over a subsequent bona fide purchaser. O.R.C. § 5301.25 (2001),In re Winland, 276 B.R. 773, 780 (Bankr. N.D. Ohio 2001).
While it appears that no relevant Ohio caselaw exists, the vast majority of caselaw from other jurisdictions does not support defendant's position regarding constructive notice. In similar situations, where there are multiple grantors of a property interest, and not all of the grantors comply with the acknowledgment or attestation requirements of a particular state law, any subsequent recording of the interest is only valid against a subsequent bona fide purchaser as to the grantors who complied with the state law. People v. Donegan, 123 N.E. 71 (N.Y. 1919) (where four persons execute a deed and the acknowledgment of the deed by one of them is defective the recording of the deed as to the grantor whose acknowledgment was defective would not serve as notice to subsequent purchasers). In addition, the Michigan Supreme Court has stated:
We are all of opinion . . . that when a deed from several grantors is recorded, as to only a part of whom it is properly executed and witnessed, the record can only be evidence of the deed as to those parties by whom it has been duly witnessed, so as to entitle it to record had they been the only grantors named. In other words, a defective execution or attestation as to one grantor, cannot be aided by a perfect execution and attestation as to other parties. To hold otherwise would be to defeat the manifest object of the registry laws, and to open a wide door to fraud.
Hall v. Redson 10 Mich 21 (1862), Bell v. Sage, 212 P. 404, 406 (Cal.App. 3d Dist. 1922), Prudential Ins. Co. of Am. v. Holliday, 214 N.W. 2d 273, 275 (Neb. 1974), but see In re Barnacle, 623 A. 2d 445, 449 (R.I. 1993) (finding that a defectively executed mortgage that is recorded may impart constructive notice upon a subsequent purchaser).
Thus, in following the majority of other jurisdictions, this Court finds that while the non-debtor spouse complied with O.R.C. § 5301.01 and the recording of the defendant's mortgage interest in the non-debtor spouse's portion of the property imparts constructive notice to subsequent purchasers, this constructive notice is limited to the defendant's mortgage interest in the non-debtor spouse's share of the property. The failure to substantially comply with the acknowledgment requirement of O.R.C. § 5301.01 invalidates any recording of the defendant's mortgage on the debtor's share of the property. As a result, there was no constructive notice of the defendant's mortgage interest in the debtor's share of the property at the time the debtor filed her bankruptcy. Therefore, the trustee prevails in avoiding the interest as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a)(3).
Our conclusion that the execution of the mortgage was inadequate to comply with O.R.C § 5301.01 is reinforced by the fact that the mortgage was prepared by defendant. Where there is a question of construction of an instrument, the rule is that it must be construed against the drafter. Mead Corp. v. ABB Power Generation, Inc., 319 F. 3d 790, 797 (6th Cir. 2003).
For the reasons stated above, the Court concludes that the failure to indicate that the debtor's signature was properly acknowledged by the notary resulted in the failure to substantially comply with O.R.C. § 5301.01. As a result, the subsequent recording of that interest does not give constructive notice of the defendant's mortgage interest to any subsequent bona fide purchaser of the property. Thus, the trustee, as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a)(3)is able to avoid the defendant's mortgage on the debtor's interest in the property.
Accordingly, the plaintiff's motion for summary judgment will be GRANTED and the defendant's motion for summary judgment will be DENIED.