The United States Court of Appeals for the Sixth Circuit recently held that a bankruptcy trustee could not avoid a mortgage based on allegedly defective certificates of acknowledgment in the mortgage documents, which used the words "executed before me" instead of "acknowledged before me" as explicitly provided under Ohio law.
A copy of the opinion is available at:
http://www.ca6.uscourts.gov/opinions.pdf/11a0134n-06.pdf
The Trustee in the underlying bankruptcy matter sought to avoid the debtors' mortgages with Citifinancial, Inc. ("Creditor") based on allegedly defective certificates of acknowledgment in the mortgage documents. The bankruptcy court held that the certificates complied with Ohio state law, the bankruptcy appellate panel affirmed and the Sixth Circuit affirmed, as well.
As you may recall, under the Bankruptcy Code, "a trustee has the same rights that a bona fide purchaser for value would enjoy under applicable state law, whether or not such a purchaser actually exists." 11 U.S.C. § 544(a)(3). "Ohio law dictates that defectively executed transfers of land are not binding on any subsequent bona fide purchasers for value who take the land without knowledge of such a transfer." Thus, "standing in the shoes of a hypothetical bona fide purchaser, a trustee can avoid a mortgage that was improperly executed under Ohio law. The trustee, however, has the burden of demonstrating that the mortgage was improperly executed."
Under Ohio law, a properly executed mortgage must include a certificate of acknowledgement which "shall be accepted in this state if . . . the certificate contains the words 'acknowledged before me,' or their substantial equivalent." In this case, Creditor utilized the phrase "executed before me" and, therefore, the issue before the Court was whether that phrase is the substantial equivalent of "acknowledged before me." The Court concluded the phrases were substantially equivalent.
The Court reasoned that to be a "substantial equivalent," "language of the instrument should communicate effectively the four-part meaning attributed to the phrase 'acknowledged before me' in the Ohio Code." Ohio's statutory definition of "acknowledged before me" includes four elements: "(A) The person acknowledging appeared before the person taking the acknowledgment; (B) He acknowledged he executed the instrument; (C) In the case of . . . [a] natural person, he executed the instrument for the purposes therein stated; (D) The person taking the acknowledgment either knew or had satisfactory evidence that the person acknowledging was the person named in the instrument or certificate."
In this case, the first and second elements were easily met because, among other reasons, the phrase "before me" "indicates that the mortgagors were physically in the presence of the … notary public." In addition, "under Ohio law, one who signs a document in the presence of another acknowledges his signature to the witness, absent some contrary evidence." Here, "there is no evidence to suggest that the Debtors did not sign in the presence of the notary."
Although the third element was less clear, the Court held that criteria was nonetheless satisfied because the "additional language in the Creditor's certificate established that the individual Debtors, by name, had 'examined and read the mortgage and did sign the foregoing instrument … of their free act and deed." Accordingly, "the mortgagors executed the Mortgage for the purposes therein stated and . . . the notary public so certified."
Finally, the fourth element was satisfied because "the notary in this case had certified not only execution by the named individuals but had also referred to them by name as "the individuals who . . .executed the foregoing instrument." This "double reference is an indication of satisfactory knowledge of identity that is equally as strong as that provided by the statutory short form." In addition, under Ohio law, "the rule is generally accepted that, in the absence of evidence to the contrary, public officers … will be presumed to have properly performed their duties and not to have acted illegally but regularly and in a lawful manner."
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
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RWutscher@kw-llp.com
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