Menninger v. Mortgage Electronic Registration System (In Re Bowling)
2004 WL 2004293, 314 B.R. 127, 2004 Bankr. LEXIS 1315 (2004)
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Rule of Law:
Under Ohio Revised Code § 5301.01, a mortgage must be acknowledged in the physical presence of a notary to be validly executed. A bankruptcy trustee may avoid a mortgage lien if they prove by clear and convincing evidence, which can include the debtor's uncontroverted testimony, that the notary was not present at the signing.
Facts:
- Charles T. Bowling owned real estate in Oxford, Ohio, which he acquired while married.
- His wife, Cathy Bowling, was not named as a grantee on the deed.
- On July 12, 2001, Charles Bowling executed a promissory note and a mortgage on the property in favor of Alta Financial Corporation, a predecessor to Mortgage Electronic Registration Systems (MERS).
- The mortgage document included a certificate stating that Mr. Bowling's signature was acknowledged in the presence of a notary, Sharon R. Eisenhut.
- Mr. Bowling later stated in a sworn affidavit that the closing took place at his home with only his wife and a man named 'John' present, and that the notary, Sharon R. Eisenhut, was not present.
- Cathy Bowling did not sign the mortgage, and thus did not relinquish her dower interest in the property.
- On January 21, 2003, Charles and Cathy Bowling filed for Chapter 7 bankruptcy.
Procedural Posture:
- The Debtors, Charles and Cathy Bowling, filed a Chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of Ohio.
- The appointed Bankruptcy Trustee filed an adversary complaint in the same court against Mortgage Electronic Registration Systems (MERS) to avoid its mortgage on the Debtors' property.
- MERS filed a Motion for Summary Judgment, arguing the mortgage was valid.
- The Trustee filed a Cross Motion for Summary Judgment and an opposition to MERS's motion, arguing the mortgage was defectively executed.
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Issue:
Does a mortgage executed without the physical presence of the attesting notary public fail to meet the formal requirements of Ohio Revised Code § 5301.01, thereby allowing a bankruptcy trustee to avoid the lien under the strong-arm powers of 11 U.S.C. § 544(a)?
Opinions:
Majority - J. Vincent Aug, Jr.
Yes. A mortgage executed without the physical presence of a notary public is defectively executed under Ohio law and is avoidable by a bankruptcy trustee. The court reasoned that the 2002 amendment to Ohio Revised Code § 5301.01, while eliminating the two-witness requirement for mortgages, expressly retained the requirement that the mortgagor's signature be acknowledged before a notary. A mortgage that fails to meet this requirement is not properly executed, is not entitled to be recorded, and therefore does not provide constructive notice to third parties like a bona fide purchaser, the status a bankruptcy trustee assumes under § 544(a). The court also found that Ohio law does not have a per se rule preventing a mortgagor’s testimony alone from overcoming the presumption of a valid notarization. Here, the Trustee presented clear and convincing evidence of the defect through Mr. Bowling's uncontroverted affidavit, which MERS failed to rebut with any evidence of its own, such as an affidavit from the notary or evidence of its standard business practices.
Analysis:
This decision clarifies that the 2002 amendment to Ohio's mortgage execution statute (§ 5301.01) did not eliminate the strict requirement for a notary's presence at signing. It solidifies the bankruptcy trustee's power to avoid mortgages with latent execution defects, thereby converting a secured creditor into an unsecured one. The ruling significantly impacts lending practices by highlighting that a lender's failure to rebut a debtor's sworn testimony about a defective closing can be fatal to its security interest. For future cases, this precedent confirms that the evidentiary burden on a lender is not met by simply resting on the notarized document; they must produce affirmative evidence when a credible challenge is raised.
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