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

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...