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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 Comment

  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.