Appellate Court Addresses Constructive Notice, Missing Legal Descriptions on Mortgage

On Feb. 4, 2016, the Eighth District Court of Appeals handed down a noteworthy decision that deals with constructive/actual notice due to a missing legal description on a mortgage.

I want to take a moment to thank my good friend Donald P. McFadden for his input and suggestion to blog about this case, which is Acacia on the Green v. Jefferson, No. 102778, 2016-Ohio-386, 2016 WL 542627.

Arguments are being presented that the Ohio Legislature should take up this issue and require all mortgages to have legal descriptions. Such arguments miss the entire point of the Acacia decision, which is wholly dependent on the facts of that case. It also ignores the recent decision from the Ohio Supreme Court in In re Messer as well as the key decision on notice and legal descriptions from In re Bunn. Let me explain.

Relevant facts from Acacia:

• Sal Culotta buys property from TED Properties, LLC.  In order to finance his purchase Culotta obtains a first mortgage from MERS and gives back a second mortgage to TED. This second mortgage to TED has no legal description, no street address and no tax identifier for the property.

• Culotta sells to Jefferson two years later. Jefferson finances with mortgages to First Horizon. Culotta’s mortgage to MERS gets paid from the proceeds of Jefferson’s first mortgage to First Horizon. Culotta’s seller carry back mortgage does not get paid in the Jefferson deal.

• TED gets an affidavit from the title examiner who searched title for the First Horizon transaction in which the title examiner testifies that he easily found the TED mortgage and reported that fact to First Horizon’s title company twice.

• First Horizon’s expert testified that due to the lack of a legal description he could not “find the mortgage.”

The recorder’s index shows:

Recorder's Index in Acacia v Jefferson

• The deed and both mortgages were executed on the same day, June 24, 2005.

• All three instruments were notarized by the same person.

• All three instruments were filed on the same day.

• The deed shows that consideration for the sale was $440,000 which is the amount of the MERS and TED mortgages.

The appellate court held that First Horizon had notice of the TED mortgage:

¶ 27: “looking at the three documents together, it was obvious that the TED mortgage was granted to Culotta so that he could purchase the Acacia property.”

¶ 29: “the mortgage was within the chain of title because it was easily found by searching the grantor’s name.”

¶30: “there was evidence that First Horizon had actual notice of the mortgage.”

“[the title examiner] notified [the title agent] twice about the TED mortgage
. . . for whatever reason [the title agent] never notified First Horizon about
the TED mortgage and made no effort to extinguish the interest.”

¶ 31: “based on the unique facts of this case, where a title examiner for the mortgagee located the mortgage with ease and notified the mortgagee’s agent of the prior encumbrance, the mortgagee had both constructive and actual notice of the TED mortgage.”

So, what do we learn from Acacia that we don’t already know? In In re Bunn, 578 F. 3d 487 (6th Cir. 2009), the appellate court held that Ohio does not require “a precise legal description of the property subject to [a] mortgage.” In Bunn, there was no legal description but there was a street address and tax identifier.

In addition, “a reasonably prudent real estate purchaser, upon discovering that a residential lot has a mortgage that describes the lot by address but not by plat number when both address and plat number are on the granting deed and the seller owns no other real estate in the county, is unlikely to proceed as if the lot were unencumbered.”

The court in Acacia expressed a similar rationale, bolstered by the examiner’s testimony that he readily found the TED mortgage. In other words, “common sense” should prevail rather than the stricter view that the missing legal description was fatal. Therefore, I view Acacia as an extension of Bunn. While I don’t agree that the TED mortgage created constructive notice in the chain of title, the tension that exists between finding a mortgage and choosing to ignore the mortgage has never made sense to me.  

We should also not discount the effect of the recent decision in In re Messer, No. 2014-2036, 2016-Ohio-510, 2016 WL 761650 on the result in Acacia. Please note that Messer was decided on Feb. 16, 2016 and Acacia on Feb. 4, 2016.

In Messer the Ohio Supreme Court held that R.C. § 1301.401 “acts to provide constructive notice to the world of the existence and contents of a recorded mortgage that was deficiently executed under R.C. 5301.01” and “R.C. 1301.401 applies to all recorded mortgages in Ohio.”

 Following the result in Messer, First Horizons would have had constructive notice of the TED mortgage regardless of the evidence submitted by the title examiner.

            R.C. § 1301.401 states, in relevant part:

(B) The recording with any county recorder of any document described in division (A)(1) of this section or the filing or recording with the secretary of state of any document described in division (A)(2) of this section shall be constructive notice to the whole world of the existence and contents of either document as a public record and of any transaction referred to in that public record, including, but not limited to, any transfer, conveyance, or assignment reflected in that record.

(C) Any person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record as of the time that the record was first filed with the secretary of state or tendered to a county recorder for recording.

Logically, if there is constructive notice under Messer and Bunn of a mortgage that is filed without a formal or informal description, the advocates for legislative action to overturn Acacia want to fix something that is not, in fact, broken.

The key to Acacia is not to demand that all mortgages have “legal descriptions” but, rather, to conclude that if a buyer or other “purchaser,” including a title examiner, discovers a mortgage in the recorder’s index that shows some connection to an existing deed or mortgage, that purchaser ignores the mortgage at his own risk. As I have written about the decision in Messer, the concept that a buyer could know about a mortgage but choose to ignore it has never made sense.

The Ohio Legislature should decline the invitation to carve out exceptions to Messer or to minimize the result in Bunn. Instead, we should look at Acacia with the same caveat that the court announced, “based on the unique facts of this case,” there was constructive notice of a seller carry back mortgage that had no formal or informal legal description. Nothing else needs to be said.

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