Strong Arm Powers: For Want Of An 'S' The Mortgage Was Lost

Hardesty v. Mortgage Electronic Registration Systems, Inc. (In re Boothe), 510 B.R. 154 (Bankr. S.D. Ohio 2013) -

A chapter 7 trustee successfully sought to avoid a mortgage using his "strong arm" powers on the basis that the mortgage was not properly acknowledged. Once again a mortgagee paid dearly for sloppy execution of a document.

Under applicable state law (Ohio), to be properly executed (1) a mortgage must be signed by the mortgagor, (2) the signature must be acknowledged before a notary public, (3) the notary public must certify the acknowledgment, and (4) the notary public must sign the certificate of acknowledgment. This case involves the requirement for certification by the notary public.

The mortgage was signed by the two individual debtors (David and Rebecca Sue Boothe). The acknowledgment stated:

Before me, a notary public in and for the above County, personally appeared the above named MORTGAGOR who acknowledged that (he-she-they) did sign the foregoing instrument, and that the same is (his-her-their) free act and deed.

The court noted that the pronouns were not circled or otherwise designated by the notary. The mortgage was accepted and recorded.

Under Section 544 of the Bankruptcy Code, a trustee can avoid any transfer of property that is voidable by a hypothetical bona fide purchaser of real property from the debtor as of the commencement of the case. The trustee can exercise these powers without regard to any actual notice to the trustee or any creditor, but is subject to constructive notice.

State law generally determines the existence and extent of property rights. Typically a bona fide purchaser can take title to real property free of unrecorded liens. (Normally a purchaser is subject to unrecorded liens where it has actual notice. However, that is not relevant for purposes of the Section 544 analysis.) Thus, if the Boothe mortgage was properly recorded, the trustee would have had constructive notice of the lien and could not avoid the mortgage; but if not, the mortgage could be avoided.

In Ohio, substantial compliance with the statutory recording requirements is sufficient. To determine whether there is substantial compliance, a court reviews the error and the entire document to determine whether the "instrument supplies within itself the means for making the correction."

With respect to the issue in this case, "an acknowledgment clause must identify the mortgagor by name or contain information that permits the...