Oral Argument Preview: Does a Recorded but Defectively Executed Mortgage Constitute Constructive Notice of an Encumbrance? In re: Daren A. Messer, Angela Messer, Debtors Daren Messer & Angela Messer v. JPMorgan Chase Bank, NA

Update: On February 16, 2016, the Supreme Court of Ohio handed down a merit decision in this case.  Read the analysis here.

Read the analysis of the argument here.

On October 14, 2015, the Supreme Court of Ohio will hear oral argument in the case of In re: Daren A. Messer, Angela Messer, Debtors Daren Messer & Angela Messer v. JPMorgan Chase Bank, NA, Case Number 2014-2036.  At issue in this case are the certified state law questions of (1) whether R.C. 1301.401 applies to all recorded mortgages in Ohio, and (2) whether R.C. 1301.401 acts to provide constructive notice to the world of a recorded mortgage that was deficiently executed under R.C. 5301.01.

Case Background

Daren and Angela Messer jointly owned a residence in Canal Winchester, Ohio.  On November 26, 2007, they received a loan from  M/I Financial Corporation, secured by a mortgage that was assigned to Mortgage Electronic Registration Systems, Inc. (MERS) as nominee for M/I Financial Corp. Angela Messer signed for the mortgage individually and as attorney-in-fact for Daren Messer. The notary acknowledgement on the mortgage was left blank, and it is unclear whether the Messers executed the mortgage in front of a notary. On December 4, 2007, the mortgage was filed in the office of the Franklin County Recorder, absent notary acknowledgement. On June 25, 2013, MERS assigned all of its interest in the mortgage to JPMorgan Chase Bank, NA (JPMorgan Chase). The Assignment of Mortgage was filed in the Office of the Franklin County Recorder on July 8, 2013.

On September 19, 2013, Daren and Angela Messer filed a voluntary petition in bankruptcy under Chapter 13 in the United States Bankruptcy Court for the Southern District of Ohio. On December 20, 2013, the Messers filed a complaint to avoid the mortgage lien because the mortgage lacked the requisite notary acknowledgement. JPMorgan Chase responded on March 14, 2014 with a motion to dismiss and/or for judgment on the pleadings. A hearing on the motions occurred in Bankruptcy Court on June 27, 2014.

The Bankruptcy Judge found no controlling precedent as to R.C. 1301.401 as it applies to mortgages. Finding that such guidance was dispositive of the case, on November 21, 2014, the Bankruptcy Judge, sua sponte, certified questions of state law to the Supreme Court of Ohio. The court agreed to answer the following:

  1. “Does R.C. 1301.401 apply to all recorded mortgages in Ohio?”
  2. “Does R.C. 1301.401 act to provide constructive notice to the world of a recorded mortgage that was deficiently executed under R.C. 5301.01?”

Key Statutes and Precedent

11 U.S.C. § 544(a)(1) (The Bankruptcy Trustee…may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by a creditor that extends credit to the debtor at the time of the commencement of the case…)

11 U.S.C. § 544(a)(3) (The trustee shall have 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 a purchaser exists.)

R.C. 1301.401 (Part of the Ohio Uniform Commercial Code)(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.)

R.C. 5301.25(A) (All deeds, land contracts referred to in division (A) (21) of section 317.08 of the Revised Code, and instruments of writing properly executed for the conveyance or encumbrance of lands, tenements, or hereditaments, other than as provided in division (C) of this section and section 5301.23 of the Revised Code, shall be recorded in the office of the county recorder of the county in which the premises are situated. Until so recorded or filed for record, they are fraudulent insofar as they relate to a subsequent bona fide purchaser having, at the time of purchase, no knowledge of the existence of that former deed, land contract, or instrument)

R.C. 5301.01(B) (If a mortgage was executed prior to February 1, 2002, and was not acknowledged in the presence of, or was not attested by, two witnesses as required by this section prior to that date, the instrument is deemed properly executed and is presumed to be valid (absent fraudulent activity), and the recording of the instrument in the office of the county recorder of the county in which the subject property is situated is constructive notice of the instrument to all persons including subsequent purchasers)

R.C. 317.08(A)(19) (The county recorder shall record in the official records all of the following instruments that are presented for recording, upon payment of the fees prescribed by law: Mortgages, including amendments, supplements, modifications, and extensions of mortgages, or other instruments of writing by which lands, tenements, or hereditaments are or may be mortgaged or otherwise conditionally sold, conveyed, affected, or encumbered)

In re Bunn, 578 F. 3d 487, 490 (6th Cir. 2009) (a recorded mortgage, despite a defect in the description of the property, gives constructive notice to third parties under Ohio law)

The Messers’ Argument

A mortgage is a contract governed by Ohio contract law as found in Chapter 5301 of the Ohio Revised Code. There is no aspect of a mortgage that is governed by the Uniform Commercial Code. Since R.C. 1301.401 is contained within the Uniform Commercial Code, it applies only to transactions under the UCC, and does not apply to mortgages.

Furthermore, R.C. 1301.401 is inconsistent with R.C. 5301.01(B) which provides for constructive notice only for a mortgage executed prior to February 1, 2002 that was not notarized. If the legislature had intended for R.C. 1304.401 to apply to mortgages, it would have incorporated a similar provision.

The Messers also focus on the language of R.C. 5301.25(A) as referring to instruments of writing properly executed and recorded.  If a mortgage does not meet the statutory requirements, it is not entitled to be recorded and is treated as if it were not recorded. Such documents do not constitute notice to subsequent bona fide purchasers. Since the mortgage in this case was not properly executed, it does not constitute notice under 5301.25(A).

JPMorgan Chase’s Argument

The certified questions should be answered in the affirmative.

Notarization is merely a part of the process for recordable documents. R.C. 1301.401 does not eliminate the need for mortgages to be notarized. Rather, R.C.1301.401 establishes constructive notice for all recorded mortgages. Recording is “a system for constructive notice through which the world determines the status of title to property.” A recorded mortgage without notary authorization does not negate the constructive notice of the recording.

The Messers seek to create a loophole to defeat the constructive notice created by the recording. This loophole does not exist, because the lack of notarization does not bear on the fact that the Messers willingly and intentionally encumbered the property with a mortgage. The recording of the mortgage—despite this defect—is ultimately what controls.

JPMorgan Chase asserts that a reasonably prudent purchaser would view a recorded—though defective—mortgage as an indication that the property is encumbered. Since a potential purchaser would not disregard this mortgage, the only party that stands to benefit from the nullification of a mortgage based on its defect would be a party wishing to gain from the error.

Messers’ Proposed Proposition of Law No. 1

R.C. 1301.401 does not apply to recorded mortgages in Ohio.

Messers’ Proposed Proposition of Law No. 2

R.C. 1301.401 does not act to provide constructive notice to the world of a recorded mortgage that was deficiently executed under R.C. 5301.01.

JPMorgan Chase’s Proposed Counter-Proposition of Law No. 1

A recorded mortgage provides constructive notice to bona fide purchasers dealing with real property which is the subject of the mortgage.

JPMorgan Chase’s Proposed Counter-Proposition of Law No. 2

A defectively executed, recorded mortgage provides constructive notice to bona fide purchasers dealing with real property which is the subject of the mortgage.

JPMorgan Chase’s Proposed Counter-Proposition of Law No. 3

The recording of a mortgage creates a rebuttable presumption that the mortgage is properly executed.

Amicus in Support of JPMorgan Chase

Amicus, Ohio Land Title Association (OLTA), represents the interests of title insurance agents, underwriters, abstractors and real estate attorneys. OLTA asserts that statutory interpretation begins with the plain language of the statute. “R.C. 1301.401(A)(1) very clearly defines a ‘public record’ as ‘[a]ny document described or referred to in section 317.08 of the Revised Code.’” Because the statute plainly applies to mortgages, the legislative intent—including the statute’s placement within the UCC—falls to the plain meaning of the statute. Furthermore, “[i]f the legislature only intended for R.C. 1301.401 to apply to transactions subject to the UCC, then it would not have referred to R.C.317.08 in the statute at all.” R.C. 1301.401(B) defeats any potential belief that “a document which is recorded, and thus readily found by searching a county recorder’s index, does not provide constructive notice simply because there is a defect in its execution.” Finally, under R.C. 1301.401(C), constructive notice attaches not at time of recording, but at the time the document is tendered for recording.

Student Contributor: Connie Kremer

 

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