What’s On Their Minds: 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.

On October 14, 2015, the Supreme Court of Ohio heard 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.  This case involves two certified state law questions from Judge Charles M. Caldwell, U.S. Bankruptcy Judge for the Southern District of Ohio, Eastern Division:  (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 signatures on the mortgage were not notarized. On December 4, 2007, the mortgage was filed in the office of the Franklin County Recorder, without the 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. Finding no controlling state law precedent on point, Judge Caldwell certified the two questions stated above to the Supreme Court of Ohio.

Read the oral argument preview here.

Key Statutes and Precedent

11 U.S.C. § 544(a)(3) (enables a bankruptcy trustee to avoid any transfer of the debtor’s property that would be avoidable by a hypothetical bona fide purchaser. This section provides the trustee with the rights and powers of a bona fide purchaser of real property without regard to any knowledge of the trustee.)

R.C. 1301.401 (Part of the Ohio Uniform Commercial Code; effective March 27, 2013)(Subsection (A) defines public record as any document described in R.C. 317. 08. Subsection (B) states that the recording with any county recorder of any document described in division (A)(1) of this section shall be constructive notice to the whole world of the existence and contents of such documents 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. 5301.01(A) (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, county engineer, notary public, or mayor, who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgement.)

R.C. 5301.23(Ohio’s Race Statue)( All properly executed mortgages shall be recorded in the office of the county recorder of the county in which the mortgaged premises are situated and shall take effect at the time they are delivered to the recorder for record. If two or more mortgages pertaining to the same premises are presented for record on the same day, they shall take effect in the order of their presentation.)

R.C. 5301.01(B) (A mortgage improperly executed prior to February 1, 2002 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. 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. 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 Nowak, 2004-Ohio-6777 (On certified question from the Bankruptcy Appellate Panel of the United States Court of Appeals for the Sixth Circuit involving debtors’ mortgage executed in the presence of only one witness, the court held former R.C. 5301.234, which allowed the recording of a defectively executed mortgage to serve as constructive notice to subsequent bona fide purchasers, violated the single subject rule of the Ohio Constitution.)

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)

At Oral Argument

Arguing Counsel

Brett R. Sheraw, Fisher, Skrobot & Sheraw, LLC, Columbus, for Petitioners Daren and Angela Messer

Amelia A. Bower, Plunkett Cooney PC, Columbus, for Respondent JP Morgan Chase Bank

Messers’ Argument

Both certified questions should be answered in the negative.

There is no question that R.C. 1301.401 is a constructive notice statute. It provides constructive notice of the existence and content of certain public records and of any transactions contained in those records, including mortgages.  Despite this, R.C. 1301.401 does not apply to recorded mortgages. Despite the reference to such documents, R.C. 1301.041 is contained within the UCC, which doesn’t deal with the effects of mortgages at all. The court must look at where the statute is located and the history of the legislature with respect to the recording acts.

There are essentially four requirements for a mortgage to be recorded. These are set forth in R.C. 5301.01. Pursuant to R.C. 5301.25 in order to be recorded, those four conditions must be met. If they are not, the mortgage is not entitled to be recorded, and it is deemed fraudulent as against bona fide purchasers, which would include the bankruptcy trustee who steps into the shoes of a bona fide purchaser as of the date of the filing of the bankruptcy petition.  In other words, if the four statutory requirements are not met, there is no constructive notice provided by the filing of that mortgage.

If the court rules that R.C. 1301.401 does not apply, then the bankruptcy judge will probably rule that the mortgage is invalid. J.P. Morgan would become just like any other unsecured creditor who is owed money. All unsecured creditors would get a percentage of what they are owed.

Chapter 5301 of the Revised Code already deals with requirements for a mortgage and what happens if those requirements aren’t met and creates only two exceptions when constructive notice will be provided. Neither is pertinent here. The court should not allow  an interpretation of R.C. 1301.401 that would completely upset a statutory framework that governs mortgages completely.

J.P. Morgan Chase’s Argument

Both certified questions should be answered in the affirmative.

R.C. 1301.041 applies to all mortgages in Ohio, and clearly states that all documents recorded create constructive notice.

The second certified question requires the court to look at two different concepts. The first is the concept of constructive notice, which is the statute. Constructive notice is the means by which a bona fide purchaser for value knows what is in the land records. It’s what creates stability in the land records. And in the real world, a title examiner not only reads the indexes to ascertain what will affect the property, but looks at the actual documents. Just because a notary didn’t notarize a mortgage doesn’t obviate the rule that the mortgage is valid as between the parties. No title examiner would exclude this mortgage because it was not notarized.

It has been the rule in Ohio for over 100 years that a mortgage that is procured by fraud or forgery is not constructive notice and that does not change under R.C. 1301.401. A fraudulently executed mortgage would be one which was not executed in front of a notary—but that was not the case here. While it is not in this record, there was a notary present when this mortgage was executed—the Bank now has an affidavit to the effect that the notary just failed to sign her name to the mortgage, and that affidavit has been filed with the recorder’s office. If the bankruptcy judge were to have an evidentiary hearing in this case, that would come into the record. If a mortgage appears to be facially invalid but turns out to be fine, then constructive notice would kick in. That is the case here.

The end result of this case in the bankruptcy case if it were to proceed without the certified questions is that the debtors get their house for free (counsel conceded under questioning by the Chief that this was not literally the case, but noted that in the trade the cases are called “get the house for free cases” because the bank just gets a small percentage of the total along with all the other unsecured creditors.) If the debtors successfully complete their Chapter 13 plan JP Morgan Chase will be ordered to release its mortgage. The practical reality in the Chapter 13 world is debtors attack their own mortgages which has never been allowed under Ohio law. So, subject to the general rule that mortgages that are procured by fraud or forgery do not constitute constructive notice, an otherwise deficiently executed mortgage does provide constructive notice to the world.

This court has held that the constructive noticed statutes and the recording statutes co-exist-one does not eliminate the other. That ruling should hold.

What Was On Their Minds

The Need for a Bankruptcy Tutorial

Is it only the note the debtors would be paying on, asked Chief Justice O’Connor? The Bank would stand in the same category as the credit card creditors and everything else, so it would be pennies on the dollar that would then be owed? How does the bankruptcy trustee figure out how much of the outstanding debt is to be paid? Will the debtors be able to secure this home for less than what the note? Could the trustee sell the house?

Isn’t the trustee in the shoes of the signers of the mortgage, asked Justice O’Neill?

What Actually Happens Here, and Who Benefits?

I am not knowledgeable about bankruptcy, but I am having a hard time understanding what the benefit is to your client to even litigate this, Justice Pfeifer commented to counsel for the Messers. How does this all unwind, if 1301.401 does not apply?  Does it all go into a common pot to be divvied up among the unsecured creditors, which would now include the Bank? And what happens to the house? Chief Justice O’Connor asked a number of similar questions.

The Lack of Notarization

Did the Messers sign this mortgage in front of a notary, asked Chief Justice O’Connor? (I don’t know, said their lawyer, who was not the lawyer in bankruptcy court. Yes, said the lawyer for the Bank, conceding that was not in the record) Were there other documents signed at the same time without notarization?  Was this a practice of the Bank’s?

The Statutes

Wouldn’t the court have to overlook the very specific reference to mortgages in 317.08 (A)(19) to answer the questions in the negative, asked Justice French? Don’t we always have to look first at the language of a statute before we even reach legislative intent?

Placement of R.C. 1301.401 in the UCC Section of the Code

What is the significance of the placement of this statute in the UCC section of the Code, asked Justice Laniznger?

The Messers Role in All This

Why should the Messers, whose signatures were not notarized, be able to benefit from that lack of propriety, asked Justice French?

In an expression of what seemed to be the prevailing sentiment of the day, Justice O’Neill commented that the Messers were claiming the mortgage was defective because of the failure to notarize their own signatures.

This Mortgage

Other than the lack of a notary, is anything else wrong with this mortgage, asked Justice O’Neill?

In response to a representation from the lawyer for JP Morgan Chase that the bank had gotten an affidavit from the notary that she had been present for the signing, Chief Justice O’Connor asked what that would accomplish, and Justice O’Donnell later asked how, from this record, the court would know that the notary was present if there is no signature on the document. Would that create a fraud situation, he asked?

What does a title examiner do upon discovery a defectively executed mortgage, asked Chief Justice O’Connor?

Would a properly executed second mortgage control here if there were one, asked Justice Pfeifer?

The Certified Questions

As he almost always does, Justice O’Donnell asked what the court should write here, other than just answering the questions.

How it Looks from the Bleachers

To Professor Bettman

Like a win for J.P. Morgan Chase. I think Justice French said it all when she asked, “why should the Messers, whose signatures were not notarized, be able to benefit from that lack of propriety?”

This argument was more like a tutorial on a confusingly unfamiliar subject than a typical oral argument, because most, if not all, the justices were unfamiliar with the niceties of Chapter 13 bankruptcy proceedings. When I was an appellate judge I would advise lawyers arguing in fields with which judges were unfamiliar to take the time to explain the background, which I think Ms. Bower did quite well.  For those who are interested, In re Nowak, 2004-Ohio-6777 does a nice job explaining some of the bankruptcy stuff.

But I think irrespective of the inner workings of bankruptcy law, the court seemed fundamentally put off by the fact that the homeowners, who knew perfectly well that their house was mortgaged, were trying to capitalize on a technical mistake—the failure to notarize signatures which they clearly knew were their own– which would very much affect the amount the Bank is entitled to recover. As the Bank noted in its brief, the recording of a mortgage with an error in the acknowledgment does not change the fact that a land owner voluntarily encumbered his property, and knows it. The court is unlikely to agree to treat a defectively notarized mortgage as if it does not exist. As the Bank put it in its brief, “the rationale that defective mortgages are treated as nullities protects no one except those wishing to gain from the error.” That seems to express what the justices were feeling.

I think the court is unlikely to do much more than answer both questions in the affirmative—it has already held that a mortgage procured by fraud or forgery is not constructive notice, and nothing here changes that. As long as the Bank can prove that the notary was present, which no one seemed to have reason to doubt, then this mortgage was not procured by fraud and should provide constructive notice under the statute.

To Student Contributor Connie Kremer

I think JPMorgan Chase will prevail in the court’s answers to these certified questions.

The Justices seemed unconvinced, if not confused and skeptical of the argument presented on behalf of the Messers. Justice French asked if Mr. Sheraw would ask the Court to ignore the “very specific references to mortgages” in the statute. Mr. Sheraw answered by turning to legislative intent based on the location of the statutes (a point that was largely ignored, but succinctly rebutted, by counsel for JPMorgan Chase). Justice French redirected Mr. Sheraw, asking whether the court should first look to the plain language of the statute, turning only to legislative intent if the plain language was unclear. Justice French seemed unconvinced by his answer, going on to ask whether the Messers seek to benefit from ambiguity they created. Justice O’Neill seemed to share these concerns in asking “Are they, therefore, basically trying to avoid the mortgage based upon the notarization of their own signatures?” To which, Mr. Sheraw replied “Yes, but…”

Ms. Bower seemed to respond to the Justices’ potential confusion, asserting that a finding in favor of the Messers would result in situations in which “debtors attack their own mortgages, which was never allowed by Ohio law, they pay a percentage of the mortgage, and then they live there for free.” It seems that the Justices will find Ms. Bower’s argument compelling given her unquestioned assertion that the mortgage is valid between the parties (it appears undisputed that the Messers had in fact been paying on the mortgage prior to filing for bankruptcy). Furthermore, she responded to Chief Justice O’Connor, asserting that a title examiner reviewing the note would, in the practical world, approach a non-notarized mortgage as a lien on the property.

It seems to me that the Justices will be compelled by the plain language argument, as well as the practical effects argument raised by Ms. Bower. Further, I think their skepticism about Mr. Sheraw’s argument will weigh in their decision. They appeared critical of allowing the Messers to argue that their own signatures were invalid, all of which I think will result in a finding that favors JPMorgan Chase.

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One Response to What’s On Their Minds: 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

  1. On October 14th, 2015 the Ohio Supreme Court was asked to decide on two certified questions of law that Judge Charles Caldwell of the United States Bankruptcy Court for the Southern District of Ohio in Columbus certified. The questions of law may seem somewhat trivial to the general legal community but the questions are quite important to those who practice in Bankruptcy.

    The two questions were as follows:
    1. Does RC 1301.401 apply to all recorded mortgages in Ohio?
    2. Does RC 1301.401 act to provide constructive notice to the world of a recorded mortgage that was deficiently executed under RC 5301.01?

    After listening to oral arguments, there is very little doubt that the Court should side with the arguments of JP Morgan Chase which were made excellently by Amelia Bower, Esq. However I also want to clarify from a Debtor Counsel’s perspective some of the questions raised by the Court that I believe cast a very dark cloud should similar issues from the Bankruptcy Court come in front of the Supreme Court again.

    First it is important for everyone to understand the procedural posture of the Debtors in the underlying bankruptcy proceedings. The Debtors filed an Adversary Proceeding (it’s the Bankruptcy Rules of Procedure’s fancy term for a general Civil Proceeding initiated in Bankruptcy Court) to void a purported defective mortgage held by JP Morgan Chase Bank, N.A. In order to have standing to do this, the Debtors asserted their rights – as created by the Sixth Circuit Court of Appeals in In re Dickison – under what is known as “derivative standing”.

    Derivative Standing is an evolving concept in the Bankruptcy Court that allows a Debtor to assert actions using the Trustee’s Avoidance Powers which include under 11 USC 544(a)(1) and 11 USC 544(a)(3) the ability of a Bankruptcy Trustee to avoid a defective mortgage for the benefit of the estate. While this issue was not in front of the Supreme Court a considerable amount of time was spent on it during Appellant’s Oral Argument time. I was disappointed that a Bankruptcy Attorney did not handle the Oral Argument as the answers Appellant’s Counsel gave to the Court were both misleading and left a very negative connotation.

    Many are going to listen or watch the oral argument and find it nonsensical that a mortgage could be released and discharged if it is defective just because the matter is taking place in a Bankruptcy. The point of any Bankruptcy fundamentally is to allow Debtors who successfully complete all requirements under the particular Chapter they are filing under to discharge all of their liabilities and leave Bankruptcy with a fresh start. A fresh start for Debtors like the Messers who have clouds on their title includes the opportunity, for the betterment of the estate, to have a clean title at discharge.

    An avoidance action for a defective mortgage in a Bankruptcy is common practice in Chapter 7 or Chapter 13. What the Court and the general public needs to remember is this:
    1. The Messers are seeking to avoid a defect in their mortgage for the benefit of the estate (i.e. their creditors including JP Morgan Chase Bank, N.A.).
    2. If the Messers are successful at Bankruptcy Court, it would require the Messers to do the following in order to have the mortgage lien invalidated by JP Morgan Chase:
    a. They need to complete their Chapter 13 Plan and receive their discharge
    b. They are required to pay a certain amount of their debt, including the debt to JP Morgan Chase, over the length of their Plan – which in their case is 60 months;

    What bothers me the most is this notion that the Messers, or any debtor, are using the Bankruptcy Court to assert some special right and JP Morgan Chase is being unduly harmed in the process. The Messers are still going to have a financial responsibility to JP Morgan Chase through the Chapter 13. The Messers still have several major hoops to jump through to complete their Chapter 13 Plan and only at that time, if they were successful on the adversary, would the mortgage be released.

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