The Case of the Vanishing Mortgage Challenge

When it comes to the law, the French phrase "plus ça change, plus c’est la meme chose" (the more things change the more they stay the same) is sometimes... well, apropos!

This was certainly the case when the Ohio Supreme Court recently announced its decision in In re Messer, 2016-Ohio-510. The Supreme Court concluded that (1) R.C. § 1301.401 applies to all recorded mortgages in Ohio; (2) 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.

Inquiring minds have asked about what the outcome of this decision means for real estate practitioners, debtors, creditors and bankruptcy trustees. 

For real estate lawyers who are concerned that Messer and R.C. § 1301.401 eliminate the need for mortgages to be notarized, there need be no such concern. Ohio law has consistently held that mortgages obtained through “fraud or forgery” do not meet the requirements of R.C.  § 5301.01. The “fraud and forgery” rule means that any mortgage not signed by the mortgagor or not acknowledged in the presence of a notary will be voidable upon a showing of “fraud or forgery.” 

R.C. § 1301.401 does not change that result. In short, Ohio has not suddenly decided that execution and notice are one and the same. Indeed, the rules for execution still require a mortgagor to sign and a notary to acknowledge. What has changed is the concept of notice. Simply put, R.C. §1301.401 eliminates the “now you see it, now you don’t” result. The new rule is “if you see it, you know about it.”

For creditors such as mortgage lenders and bankruptcy trustees (and Chapter 13 debtors acting derivatively) who previously relied upon the concept that they are bona fide purchasers for value, a deficiency in the execution of a mortgage (such as where the names of the mortgagors are not in the acknowledgment), it is a new day. The rest of us can go back to sleep, resting comfortably in the knowledge that the stability of land titles and the recording system have NOT been set back 500 years by Messer (as one veteran real estate practitioner has hypothesized).

Messer and R.C. § 1301.401 confirm what the law has been for years in Ohio until enterprising bankruptcy trustees challenged mortgages showing some defect(s) in execution. Cloaking themselves in their status as hypothetical bona fide purchasers, the trustees (and some creditors) successfully argued that such defects rendered mortgages invalid. Even though these mortgages were recorded, the trustees were able to void them. The age-tested argument that "the mortgagors signed" and "the notary notarized" (and the mortgagor got the money) held no sway against the tidal wave of challenges from trustees.

So where are we now? We are back where we were before these challenges became de rigeur. We all have constructive notice of recorded mortgages. Absent a showing that the mortgagor did not sign or the notary was not present (and thus did not acknowledge), the mortgage is not voidable by a bankruptcy court or invalid against a competing creditor holding the status of a bona fide purchaser (judgment lien creditors are not BFP’s – just to note).

Thus, plus ça change, plus c’est la meme chose.

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