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Is Your Mortgage Truly Recorded? | in Mortgage Servicing > Document Management |  |
Servicing Management, October 2005.
Is your mortgage in a state which is a “race,” “notice” or “race-notice” state? The answer will determine whether a defectively executed mortgage is entitled to priority over a properly executed mortgage that is subsequently recorded.
The answer in Ohio is perfectly clear, according to a recently decided case - Mortgage Electronic Registration System (MERS) v. Odita. Ohio is a race state.
A race state is a state having a law relating to recording real estate instruments, declaring “First in time, first in right.” This means that a recorded deed or mortgage takes precedence over a subsequently recorded instrument. Hence, a recorded deed will prevail over a subsequent deed from the same grantor to a different grantee. A recorded mortgage will have priority over a subsequently recorded mortgage.
But what if the first deed or mortgage was not recorded, and the grantee of the second deed or mortgage had actual knowledge of the prior unrecorded instrument? It might seem unfair that the subsequent grantee, who knew that there was a prior deed or mortgage, should receive a windfall due to the prior grantee’s failure to record its deed or mortgage.
The result might be different in a “non-race” state, but as explained by the court in the Odita case, in a race state like Ohio, the race rule prevails even if the result might not seem fair. Even more seemingly unfair is a case like Odita, where the prior mortgage was actually recorded, although it was defectively executed.
The facts
The property was originally owned by a corporation, whose president was Mr. Odita. Odita, in his individual capacity, granted a mortgage to a lender. Both Odita’s signature and the notary’s (jurat) provision stated that Odita had signed in his individual capacity. The execution of the mortgage was obviously defective, because the property was owned not by Odita personally, but by the corporation.
This defect apparently came to light, and the mortgage was corrected to show that the corporation was the grantor. Odita signed the revised mortgage again, this time correctly in his capacity as president of the corporation. Unfortunately, the parties apparently overlooked the requirement that not only was the new signature by Odita in his representative capacity, but that the revised mortgage also needed a new notarization specifically stating that Odita’s signature appeared before a notary who acknowledged his representative signature.
The mortgage was re-recorded, with the new signature, but still with the old notarization. The mortgage was subsequently assigned to MERS.
The corporation then sold the property to Mr. Robinson, and Robinson’s purchase money mortgage to Old Kent Mortgage Co. was recorded. The HUD-1 settlement statement showed a payoff to MERS but, apparently, the funds were never delivered.
Old Kent subsequently assigned its mortgage to Fairbanks Capital Corp. (now Select Portfolio Servicing). A foreclosure was filed on behalf of MERS, and the battle lines between MERS and Fairbanks, as to priority, were drawn. The trial court decided that MERS’ mortgage was valid and entitled to priority, and Fairbanks appealed.
The arguments
MERS conceded that the notarization of its mortgage was defective. After all, Ohio law is clear that all mortgages must be acknowledged by the grantor before a notary or other authorized official. Although the MERS mortgage contained an acknowledgement, Odita’s acknowledgement was in his individual capacity, and therefore was not the acknowledgement of the grantor - the corporation.
MERS based its argument on an Ohio statute which states that until an instrument is recorded, it is ineffective as to subsequent bona fide purchasers having no knowledge of the prior instrument. Hence, MERS argued that because Old Kent had actual knowledge of MERS’ mortgage, the statute should not apply.
Fairbanks conceded that its assignor, Old Kent, had actual knowledge of MERS’ mortgage when Old Kent’s loan was made. The HUD-1 was undeniable evidence. However, Fairbanks argued, in effect, that because Ohio is a race state, Old Kent’s actual knowledge of the prior mortgage should be irrelevant. Its argument was that even though MERS’ mortgage was accepted by the county recorder and was recorded, MERS’ mortgage was not entitled to be recorded because the notarization did not show the acknowledgment of the grantor.
The court of appeals reversed the trial court’s decision and ruled in favor of Fairbanks, agreeing with Fairbanks that the execution of MERS’ mortgage was not in compliance with the statute regarding acknowledgments and, therefore, even though the county recorder accepted MERS’ mortgage and recorded it, the mortgage is deemed a nullity.
The court stated, “One recent commentator succinctly summarized Ohio law on this subject as follows: In Ohio, a defectively executed mortgage will be afforded no priority over subsequent legal interests or liens which were acquired with actual notice of the mortgage.”
Hence, Fairbanks’ mortgage was given priority, except to the extent that the loan secured by MERS’ mortgage was used to pay off prior liens.
Equitable?
Foreclosure is recognized to be an action in equity, and courts often use that principle to implement a decision based on fairness, if not the strict letter of the law. However, in the Odita case, the concept of fairness did not carry the day.
The court even expressly stated that its ruling may seem intuitively unfair or inequitable. However, the court, in effect, decided that it is more important for the rule to be clear and to follow prior case authority in order to lend stability to future property transactions.
Unlike Ohio and some other states which are race states, legislatures in many other states enacted a notice or race-notice statute, in order that actual notice could be taken into account. However, the clear rule in Ohio and other race states is that actual notice of a prior unrecorded instrument is irrelevant.
Also, Ohio law previously required the signatures of two witnesses to the grantor’s signature. This gave fertile ground for Chapter 7 bankruptcy trustees to file adversary actions seeking to set aside mortgages, under sections 544(a) and (b)(1) of the Bankruptcy Code.
If the debtor testified that there were not two witnesses present at the signing, the bankruptcy trustee could prevail. Lenders who were not the loan originator had a difficult time locating the witnesses to have them testify to the contrary.
Fortunately, Ohio’s law changed in 2002 and abolished the requirement for two witnesses, although the requirement for the grantor’s acknowledgment to the notary remains. If the acknowledgement is defective, or is missing altogether, the mortgage remains vulnerable to attack by the bankruptcy trustee.
So, when is a recorded mortgage not a recorded mortgage? In a race state, it is when the mortgage is executed defectively and, therefore, the recorded mortgage is deemed a nullity, as if the mortgage were never recorded.
The lesson is clear. Among other things, the names of the grantors of the mortgage, their signatures, and the names shown in the notary’s clause must be identical. Rigorous adherence to all of the state’s technical requirements for execution of the real estate instrument is essential.
Larry Rothenberg is the partner in charge of the real estate and foreclosure department of Weltman, Weinberg & Reis Co. LPA, and president of Attorneys Title Agency Inc. He can be reached at (216) 685-1135. |
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