A chapter 7 trustee successfully sought to avoid a mortgage using his “strong arm” powers on the basis that the mortgage was not properly acknowledged. Once again a mortgagee paid dearly for sloppy execution of a document.
Under applicable state law (Ohio), to be properly executed (1) a mortgage must be signed by the mortgagor, (2) the signature must be acknowledged before a notary public, (3) the notary public must certify the acknowledgment, and (4) the notary public must sign the certificate of acknowledgment. This case involves the requirement for certification by the notary public.
The mortgage was signed by the two individual debtors (David and Rebecca Sue Boothe). The acknowledgment stated:
Before me, a notary public in and for the above County, personally appeared the above named MORTGAGOR who acknowledged that (he-she-they) did sign the foregoing instrument, and that the same is (his-her-their) free act and deed.
The court noted that the pronouns were not circled or otherwise designated by the notary. The mortgage was accepted and recorded.
Under Section 544 of the Bankruptcy Code, a trustee can avoid any transfer of property that is voidable by a hypothetical bona fide purchaser of real property from the debtor as of the commencement of the case. The trustee can exercise these powers without regard to any actual notice to the trustee or any creditor, but is subject to constructive notice.
State law generally determines the existence and extent of property rights. Typically a bona fide purchaser can take title to real property free of unrecorded liens. (Normally a purchaser is subject to unrecorded liens where it has actual notice. However, that is not relevant for purposes of the Section 544 analysis.) Thus, if the Boothe mortgage was properly recorded, the trustee would have had constructive notice of the lien and could not avoid the mortgage; but if not, the mortgage could be avoided.
In Ohio, substantial compliance with the statutory recording requirements is sufficient. To determine whether there is substantial compliance, a court reviews the error and the entire document to determine whether the “instrument supplies within itself the means for making the correction.”
With respect to the issue in this case, “an acknowledgment clause must identify the mortgagor by name or contain information that permits the mortgagor to be identified by reference to the mortgage.” In what are referred to as “blank acknowledgment” cases, Ohio courts have determined that an acknowledgment is not in substantial compliance if it completely fails to identify the mortgagor.
In one case (Fryman) cited by the defendants, a husband and wife signed a mortgage, but the acknowledgment included the name of only the wife. However, it also recited that “‘they’ examined, read and signed the instrument as ‘their’ free act and deed.” The Fryman court decided that this was sufficient for substantial compliance. The use of plural pronouns was “especially compelling” and there were additional indicators, including the fact that both debtors signed the mortgage and initialed each page.
The Boothe court distinguished the Fryman case by noting that the plural pronouns were handwritten in the Fryman case, while the Boothe mortgage contained preprinted pronouns. The court also rejected the argument that the reference to “Mortgagor” was less confusing than listing one but not both of the debtors.
Another case cited by the defendants (Amadu) found substantial compliance where the acknowledgment referred to “Mortgagor” instead of using the mortgagor’s name. However, the term “Mortgagor” was defined in the mortgage by naming the mortgagor. So the certification was clear.
In contrast, the Boothe mortgage defined “Mortgagor(s)” as both debtors. Although the mortgage did not specifically define “Mortgagor,” the court found that the parenthetical “(s)” implied that the plural “Mortgagors” should have been used when referring to both.
In this case the reference to “Mortgagor” was not clear and the certification did not specifically use plural nouns. Consequently, the court found that (1) the mortgage did not substantially comply with the statutory recording requirements, (2) as a result it was not properly recorded and did not provide constructive notice, and (3) the mortgage could be avoided by the trustee using the strong arm powers of a bona fide purchaser of real estate.
The court also noted that the avoided mortgage was automatically preserved for the benefit of the bankruptcy estate. (In other words, to the extent that the mortgage was senior to other claims, distributions on account of the mortgage would be made to all creditors before distributions on account of the junior interests.)
As illustrated by this case (and many others), proper execution of a real estate document is critical. There are often very technical state recording requirements. Even a small mistake can be costly.