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In Jared, the chapter 7 trustee sought to avoid two
mortgages on registered land that (a) were noted on the
certificates of title to the land and (b) included proper mailing
addresses and parcel numbers, but (c) referenced incorrect lots in
the legal description. Given that mortgages are often avoided
under Ohio law for even trivial errors, you might expect the
trustee to prevail. However, that was not the case.
The trustee first argued that she did not have constructive
notice of the mortgages, and thus was able to avoid them as a bona
fide purchaser. (See prior blog posts for discussion of the
ability to avoid mortgages based on asserting the rights of a
hypothetical bona fide purchaser of real estate, including [*insert
link].) The trustee cited a prior bankruptcy case in which a
court held that a chapter 7 trustee does not have constructive
notice of a mortgage with an incorrect legal description of correct
address and parcel number. However, that case involved
unregistered land. The Jared court noted that constructive notice
is irrelevant for registered land. Under the statute
regarding registered land, a good faith purchaser is free from all
encumbrances except those noted on the certificate of title.
However, that leaves the question of which properties were
encumbered by the mortgages given the deficiencies in the legal
description. The court found that this was a question of Ohio
contract law. Given the discrepancy between the mailing
address and parcel number on the one hand, and the legal
description including incorrect lot numbers on the other, the scope
and validity of the lien was ambiguous so that the intent of the
parties could be determined based on extrinsic evidence. In
this case the fact that the county recorder registered the
mortgages on the titles of certificate for the applicable property,
and the mortgagors listed the applicable property as their own real
estate, the court determined that the parties intended to encumber
that property.
The trustee also argued that the mortgages were defectively
executed, citing one of the Ohio cases where a mortgage was deemed
not to provide constructive notice because it did not comply with
the statutory requirement that there be two witnesses.
However, the court again found that this applied to the traditional
recordation system, but not the land registration system.
Under the traditional system, "a properly executed mortgage
must be filed with the appropriate county recorder's office in
order to create a perfected interest in the property... If
land falls under the registration system, however, liens and
encumbrances must be registered" (quoting a prior
case).
The court went on to note that even if the cases regarding
defective execution of a mortgage were applicable to registered
land, they did not extend to cases where there are errors in the
legal description by analogy. The execution requirements are
a specific statutory condition for recording in the traditional
system, while the Sixth Circuit has held that Ohio law does not
require a legal description for mortgages. Where a mortgage
correctly referenced the parcel number and the street address of a
property but omitted a legal description, the mortgage was not
defectively executed according to the Sixth Circuit.
Often very minor technical errors can lead to avoiding a
mortgage in bankruptcy. However, as illustrated by this case,
errors are not always fatal.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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