The Bankruptcy Appellate Panel for the U.S. Court of Appeals for the Sixth Circuit ("Sixth Circuit BAP") recently affirmed a lower bankruptcy court's ruling that a refinanced mortgage was enforceable as to the interests of both husband and wife, where the wife did not execute the note and was not defined as a "borrower" in the body of the mortgage, but nonetheless initialed and signed the mortgage document as a "borrower" in the signature block.
In so ruling, the Sixth Circuit BAP considered the Ohio Supreme Court's answers to two certified questions stating that failing to identify a signatory by name in the body of the mortgage did not render the agreement invalid or unenforceable against the signatory's in rem rights as a matter of law, along with the language of the mortgage itself, to conclude that the lower bankruptcy court properly admitted parole evidence of the parties' intent in executing the mortgage, and the lower bankruptcy court did not err in entering judgment determining that the mortgage encumbered both the husband and wife's interests in the property.
A copy of the opinion is available at: Link to Opinion
A husband and wife executed a purchase money mortgage agreement secured by real property (the "Property") and identifying both the husband and wife as "Borrowers."
In February 2007, the original purchase money mortgage was refinanced, but only the husband executed and delivered the promissory note to the lender, and the wife was not listed as a "borrower" on the document. On the same date, both husband and wife executed a mortgage in connection with the refinancing (the "Mortgage"). Although the wife initialed each page of the Mortgage and signed as "Borrower" on the signature page, the husband was the only defined "Borrower" in the body of the Mortgage. The mortgage was later assigned to a different company ("Mortgagee").
In September 2014, husband and wife filed a joint chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of Ohio, which identified them as joint tenants with rights of survivorship to the Property.
The chapter 7 trustee subsequently ("Trustee") filed an adversary complaint for declaratory judgment seeking a declaration that the wife's interest in the Property was not encumbered the Mortgage because only her husband was named as a "Borrower" in the body of the Mortgage.
Due to the ambiguous nature of the Mortgage, the bankruptcy court considered parole evidence to determine the parties' intent in executing the Mortgage, and following a trial, a Judgment Order was entered holding that the Mortgage fully encumbered both the husband and wife's interests in the Property. The Trustee appealed.
Given conflicting opinions among federal and Ohio state courts, the Sixth Circuit BAP certified two questions to the Ohio Supreme Court to answer two unsettled questions of state law:
(1) whether an individual who is not identified in the body of a mortgage, but who signs and initials the mortgage is a mortgagor of his or her interest, and;
(2) is a mortgage signed and initialed by an individual whose name is not identified in the body of the mortgage, but whose signature is properly acknowledged pursuant to Ohio Rev. Code 5301, invalid as a matter of law such that parole evidence is not admissible to determine the intent of the individual in signing the mortgage?
The Ohio Supreme Court answered the certified questions by ruling: (1) that failure to identify a signatory by name within the body of the mortgage did not render the agreement unenforceable against the signatory's in rem rights, and; (2) that when signed, initialed and acknowledged by a signatory not named within the document itself, the mortgage is not invalid as a matter of law; thus, parole evidence is admissible to determine intent when ambiguities are present. Bank of New York Mellon v. Rhierl, No. 2018-Ohio-5081, 2018 WL 6778145 at *1, *45-5 (Dec. 20, 2018); Ohio Rev. Code Ann. 1335.03 (signature of a party itself makes a contract enforceable, rather than other methods of identification within the contract itself) (case law citations omitted).
While emphasizing the signature requirement of a contract, the Ohio Supreme Court's opinion also discussed the importance of consideration, and that a party's intent cannot be found by a signature alone—language within the document could limit a party's capacity and willingness to encumber certain property.
Thus, in considering the contractual terms as whole to determine a party's intent to be bound by contract, even if a signatory is not described within the body of the document, he or she is acting as a mortgagor absent any language within the mortgage that negates this presumption. Rhiel at *4 (internal citations omitted).
In supplemental briefing before the Sixth Circuit BAP, the appellant Trustee argued that the Ohio Supreme Court's ruling only held that it is possible for a person who signs, but is not named in a mortgage to pledge their property interest to the mortgagee only if the mortgage as a whole evinces that persons' intent to be bound, and as noted in a dissenting opinion from the Ohio Supreme Court's ruling, there was no such conveyance language pertaining to her within the Mortgage.
In addition, and notwithstanding the Ohio Supreme Court's holdings, the Trustee further argued that the bankruptcy court erred in permitting parole evidence and submitted case law from other states, including Massachusetts and Kentucky, along with prior decisions applying Ohio law to show that other bankruptcy courts have held that a person who signs a mortgage has not encumbered their share of the property if not defined as a "Borrower" within the body of the mortgage itself (case law citations omitted).
The appellee Mortgagee argued that the Supreme Court's answers to the certified questions are binding precedent, and Trustee could not use the dissenting opinion as a basis for reversal.
With the benefit of the Ohio Supreme Court's opinion answering the certified questions and independent review of the Mortgage, the Sixth Circuit BAP concurred with the bankruptcy court's findings that the Mortgage was ambiguous, as the text of the document suggests that the husband alone was the "Borrower," but the wife's signature and initial suggest that she also pledged her interest in the Property as "Borrower."
This term was susceptible to two competing, reasonable interpretations with respect to the identity of the mortgagor(s) and extent of property liable for the Note. Thus, the bankruptcy court's decision to consider parole evidence was correct.
At trial the bankruptcy court considered depositions, affidavits, other income-property transactions and testimony, along with consideration that the husband and wife both mortgaged their interests in the Property when obtaining the original purchase money mortgage to concluded that the Mortgage encumbered both of their interests in their joint tenancy. It also considered the fact that the lender's agent who prepared the closing documents prepared explicit instructions for the closing agent to require both husband and wife to sign the Mortgage, and the wife did so as instructed.
In addition, the Court noted, the Mortgage itself appeared to recognize that "any Borrower who co-signs this Security Instrument but does not execute the Note (a 'co-signer'): (a) is co-signing this Security instrument only to mortgage, grant and covey the co-signer's interest in the Property under the terms of this Security Instrument…" and contained no language that the refinancing lender intended to take a first mortgage in only half the Property. Lastly, the bankruptcy court found no evidence to suggest that the wife signed the Mortgage only to release her dower rights as she claimed, and the Property's description in the Mortgage.
Accordingly, the Sixth Circuit BAP found no clear error in the bankruptcy court's factual finding that the husband and wife intended to encumber their entire interest in the Property by signing the Mortgage to secure refinancing of their loan, and affirmed the bankruptcy court's ruling in favor of the Mortgagee.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Admitted to practice law in Illinois
Alabama | California | Florida | Georgia | Illinois | Massachusetts | New Jersey | New York | Ohio | Pennsylvania | Texas | Washington, DC
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates and webinar presentations are available on the internet, in searchable format, at:
Financial Services Law Updates
The Consumer Financial Services Blog™
California Finance Law Developments