United States: Mortgage Execution Errors: If You Make A Mistake, Try Not To Do It In Ohio

Last Updated: February 25 2013
Article by Vicki Harding

McClatchey v. GMAC Mortgage, LLC (In re Lacy), 483 B.R. 126 (Bankr. S.D. Ohio 2012)

Lacy is one more in a long list of cases where an Ohio mortgage was attacked based on defects in execution. Although the Ohio statute requires only "substantial compliance" with the statutory execution requirements, mortgages are sometimes avoided based on seemingly trivial technical defects.

The debtor, Mr. Lacy, had executed a valid power of attorney appointing Ms. Iacuzzo as his attorney-in-fact to execute documents in connection with the acquisition and financing of a property. Using the power of attorney, Ms. Iacuzzo executed a mortgage on behalf of Mr. Lacy.

The first page of the mortgage included the following:

"Borrower" is CHARLES L. LACY , UNMARRIED

The signature block included the following:

– BORROWER – CHARLES L. LACY, BY, GINA MARIE IACUZZO
HIS ATTORNEY IN FACT – DATE –

The acknowledgment stated that it was acknowledged before the notary by:

CHARLES L. LACY , U [The court noted that this appeared to be copied from the first page, where "U" was the first letter of "Unmarried."]

Since it was Ms. Iacuzzo, not Mr. Lacy, that appeared before the notary, the acknowledgement was incorrect.

The Ohio statute requires that (1) the mortgagor must sign the mortgage, (2) the signature must be acknowledged before a notary public or other authorized public official, and (3) the notary must certify the acknowledgment. With respect to certification, the notary is supposed to certify that the person acknowledging (a) appeared and acknowledged execution of the instrument, and (b) was known to the notary or the notary had satisfactory evidence of the person's identity. The Ohio statute also defined the phrase "acknowledged before me" to mean that the instrument is acknowledged by the attorney-in-fact when a person is acknowledging as principal through an attorney-in-fact.

A failure to satisfy these requirements means that the mortgage is not effective to provide constructive notice to a subsequent bona fide purchaser. Under Section 544 of the Bankruptcy Code, a trustee can exercise "strong arm" powers, including the rights of a bona fide purchaser to avoid a mortgage. So, the issue was whether the error in the acknowledgment was sufficient to render the mortgage ineffective as to a bona fide purchaser, so that the mortgage could be avoided under the Bankruptcy Code.

The chapter 7 bankruptcy trustee argued that the defect was sufficient to cause the mortgage to be ineffective, while the mortgagee argued that there was "substantial compliance" under the Ohio statute so that the mortgage was effective against a bona fide purchaser, and thus should not be avoided.

The court reviewed a number of cases interpreting the effect of various errors in execution:

  • A notary forgot to fill in the name of the person acknowledging the instrument. So it read "personally appeared ________________, who acknowledged..." In an 1844 case, the Ohio Supreme Court held that this did not meet the certification requirement since "blank" and the person who signed as grantor were not synonymous.
  • An acknowledgment referenced the "above-named Charles B. Clark" while the instrument was signed by "Charles A. Clark." In that case the court found that it was apparent on its face who signed, and the reference to the "above-named" grantor caused the document to be in substantial compliance.
  • In a case involving execution of a power of attorney, both the grantor and grantee signed the document, but only the name of the grantee appeared in the acknowledgment. Since the grantor is required to sign a power of attorney and there was no information in the acknowledgment clause identifying the grantor, it failed to comply with the statutory requirements.
  • A contract was signed by Hans C. Owen, Jr. as secretary of a company, while the acknowledgment referenced Hans C. Owen, Sr., the president of the company. A Connecticut court found this to be incorrect and insufficient because according to the acknowledgement it appeared that an entirely different person had signed than actually did.
  • A wife signed a mortgage on her own behalf and as attorney-in-fact for her husband, but the acknowledgment identified both spouses as having personally appeared. In that case an Ohio bankruptcy court held that the acknowledgment was sufficient since it certified as to the wife, and her acknowledgment was the only one that needed to be certified since she was the only one that signed. The reference to the husband was rejected as surplusage.
  • An individual mortgagor signed a mortgage, but the certificate represented that "personally appeared the above named mortgagor(s) The City Loan Company who acknowledged that (he)(she)(they) did sign the foregoing instrument." Although the acknowledgment included the name of the entity mortgagee instead of the individual mortgagor, it correctly referenced the "above named mortgagor." In that case, an Ohio court held that the certification requirement was met.
  • A husband and wife executed powers of attorney authorizing their children to act on their behalf. The son signed a mortgage in the name of his parents followed by his own signature and the initials "POA." The lower Ohio court found that this was substantial compliance. On appeal, the Court of Appeals agreed that the mortgage was valid based on the fact that the powers of attorney were valid. A defective acknowledgement certificate causes a mortgage to be invalid only with respect to subsequent bona fide purchasers, and in this case the heirs who attacked the mortgage were not bona fide purchasers. Consequently the Court of Appeals did not reach the issue of whether the certificate was defective.

After reviewing these and other cases, the Lacy court concluded that, while an argument could be made that the acknowledgment was sufficient, this case was closer to the cases holding that the certificate was invalid, causing the mortgage to be ineffective.

When the notary stated that the instrument was "acknowledged before me," the notary was purportedly certifying that Mr. Lacy appeared in person and that he was known to the notary or provided satisfactory evidence to the notary that he was the person taking the acknowledgment. That was incorrect.

Although the court found it to be a close call, it concluded that the certificate was not in substantial compliance with the statutory requirements, and therefore the mortgage was avoidable. As a consequence, GMAC was treated as having an unsecured claim, and the lien of the mortgage was preserved for the benefit of the estate. (This means that the trustee could assert the lien for the benefit of the estate to obtain a distribution ahead of any junior lienholders.)

As illustrated by these and other cases (see Bankruptcy "Strong Arm" Powers: Bye Bye Mortgage), details can be very important; and if you are going to make a mistake in execution of a mortgage, try not do it in Ohio.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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