In re Nowak

• Decision Date: 17 December 2004
• Docket Number: No. 2004-0272.,2004-0272.
• Citation: 820 NE 2d 335,104 Ohio St.3d 466
• Parties: IN RE NOWAK ET AL.
• Court: Ohio Supreme Court

104 Ohio St.3d 466

2004-Ohio-6777

820 NE 2d 335

2004-Ohio-6777

IN RE NOWAK ET AL.

No. 2004-0272.

Supreme Court of Ohio.

Submitted September 29, 2004.

Decided December 17, 2004.

COPYRIGHT MATERIAL OMITTED

McFadden & Associates Co., L.P.A. and David A. Freeburg, Cleveland, for petitioner, PCFS Financial.

Weick, Gibson & Lowry and Michael J. Moran, Cuyahoga Falls, for respondent, Lydia Spragin III, trustee.

Gregory W. Happ, Medina; Kegler, Brown, Hill & Ritter and John C. Deal, Columbus; McDonald, Frank, Hitzeman & Holman and Robert B. Holman, Oakwood Village, in support of petitioner, for amici curiae, First Union National Bank, First Union Home Equity Bank, N.A., and Ohio Land Title Association.

ALICE ROBIE RESNICK, J.

{¶ 1} This case comes to us as a certified question of state law from the Bankruptcy Appellate Panel of the United States Sixth Circuit Court of Appeals, pursuant to S.Ct.Prac.R. XVIII. The panel has certified the following facts to us:

{¶ 2} "Debtors, Michael and Christine Nowak, executed a mortgage on real estate that they owned in favor of petitioner PCFS Financial (Provident Bank) on March 6, 1998. On March 20, 2001, the Debtors filed a chapter 7 bankruptcy case. The chapter 7 trustee respondent Lydia Spragin III filed an adversary proceeding under § 544(a) and (b)(1) of the Bankruptcy Code seeking to avoid the mortgage of PCFS Financial. Following a hearing, the bankruptcy court found that the mortgage had not been properly attested by two witnesses as required by former Ohio Rev.Code § 5301.01 and then held that former Ohio Revised Code § 5301.234 was unconstitutional.

{¶ 3} "* * * The bankruptcy court thus held that the mortgage could be avoided by the chapter 7 trustee notwithstanding former Ohio Revised Code § 5301.234 * * *."

{¶ 4} In addition to the certified facts, it is undisputed that the Nowaks' mortgage had been recorded but had been executed in the presence of only one witness and covers property located at 4931 Shady Brooke Run, Medina, Ohio.

{¶ 5} The panel has certified the following question for our determination:

{¶ 6} "Does former Ohio Revised Code § 5301.234 violate Ohio Constitution Article II, § 15(D), which states:

{¶ 7} "`No bill shall contain more than one subject, which shall be clearly expressed in its title. No law shall be revived or amended unless the new act contains the entire act revived, or the section or sections amended, and the section or sections amended shall be repealed.'"

{¶ 8} For the reasons that follow, we answer the certified question in the affirmative.

I BACKGROUND

{¶ 9} In order to provide a clear perspective of the current issue, we begin our analysis with a brief description of the interplay between federal bankruptcy law and Ohio mortgage law that surrounded the enactment of former R.C. 5301.234.

{¶ 10} The certified issue arises out of the panel's attempt to determine whether respondent is entitled to avoid the Nowaks' mortgage under Section 544(a)(3), Title 11, U.S.Code, which involves a mixture of federal and state law. Section 544(a)(3) enables a bankruptcy trustee to avoid any transfer of the debtor's property that would be avoidable by a hypothetical bona fide purchaser. See In re Zaptocky (C.A.6, 2001), 250 F.3d 1020, 1023-1024. However, Section 544(a)(3) provides the trustee with the rights and powers of a bona fide purchaser of real property "without regard to any knowledge of the trustee." The federal courts have interpreted this language to mean that the trustee's ability to avoid a particular transfer of the debtor's property cannot be defeated by evidence of his or her actual knowledge of the transfer. Id. at 1027. See, also, In re Sandy Ridge Oil Co., Inc. (C.A.7, 1986), 807 F.2d 1332, 1334-1336. Thus, the critical inquiry under Section 544(a)(3) is whether the trustee, standing in the place of a bona fide purchaser, would be charged with constructive knowledge of the transfer sought to be avoided. "Since this mortgage concerns real property located in Ohio, this inquiry is governed by Ohio law." In re Zaptocky, 250 F.3d at 1024.

{¶ 11} As a matter of Ohio law, a bona fide purchaser of real property cannot be charged with constructive knowledge of a prior unrecorded mortgage. R.C. 5301.25; Emrick v. Multicon Builders, Inc. (1991), 57 Ohio St.3d 107, 109, 566 N.E.2d 1189; Thames v. Asia's Janitorial Serv., Inc. (1992), 81 Ohio App.3d 579, 587, 611 N.E.2d 948. Before the enactment of former R.C. 5301.234, this rule encompassed recorded mortgages that were defectively executed under former R.C. 5301.01, which provided, "The mortgagor's signing shall be acknowledged * * * in the presence of two witnesses, who shall attest the signing and subscribe their names to the attestation." S.B. No. 114, 145 Ohio Laws, Part I, 1034, 1037. Since only properly executed mortgages were entitled to be recorded, a mortgage attested by only one witness, even though recorded, could not serve as constructive notice to a subsequent bona fide purchaser. See Citizens Natl. Bank v. Denison (1956), 165 Ohio St. 89, 94-95, 59 O.O. 96, 133 N.E.2d 329; Amick v. Woodworth (1898), 58 Ohio St. 86, 50 N.E. 437, paragraph two of the syllabus; Thames at 588, 611 N.E.2d 948; State ex rel. Puthoff v. Cullen (1966), 5 Ohio App.2d 13, 15-16, 34 O.O.2d 61, 213 N.E.2d 201. Consequently, bankruptcy trustees were able to avoid recorded Ohio mortgages that contained fewer than two attesting signatures. See, e.g., In re Baker (Bankr.N.D.Ohio 2003), 300 B.R. 298, 303-304; In re Haviaras (N.D.Ohio 2001), 266 B.R. 792, 796; In re Zaptocky, 250 F.3d at 1027-1028.

{¶ 12} Former R.C. 5301.234 was the first measure designed by the General Assembly to address this problem. Enacted as part of Am.Sub.H.B. No. 163, 148 Ohio Laws, Part I, 960, 1043-1044, effective June 30, 1999, former R.C. 5301.234 provided:

{¶ 13} "(A) Any recorded mortgage is irrebuttably presumed to be properly executed, regardless of any actual or alleged defect in the witnessing or acknowledgment on the mortgage, unless one of the following applies:

{¶ 14} "(1) The mortgagor, under oath, denies signing the mortgage.

{¶ 15} "(2) The mortgagor is not available, but there is other sworn evidence of a fraud upon the mortgagor.

{¶ 16} "(B) Evidence of an actual or alleged defect in the witnessing or acknowledgment on the mortgage is not evidence of fraud upon the mortgagor and does not rebut the presumption that a recorded mortgage is properly executed.

{¶ 17} "(C) The recording of a mortgage is constructive notice of the mortgage to all persons, including without limitation, a subsequent bona fide purchaser or any other subsequent holder of an interest in the property. An actual or alleged defect in the witnessing or acknowledgment on the recorded mortgage does not render the mortgage ineffective for purposes of constructive notice."

{¶ 18} Former R.C. 5301.234 solved the avoidance problem by allowing the recording of a defectively executed mortgage to serve as constructive notice to subsequent bona fide purchasers. It did not, however, repeal or change the execution requirements under former R.C. 5301.01. Instead, former R.C. 5301.01 and 5301.234 coexisted from June 30, 1999, until February 1, 2002, when R.C. 5301.234 was repealed and R.C. 5301.01 was amended.¹ 2001 Am.Sub.H.B. No. 279.

{¶ 19} Since former R.C. 5301.234's enactment, the federal courts have considered two objections to its application that are relevant to this case. One objection questions the validity of the statute's enactment under Section 15(D), Article II of the Ohio Constitution. The two federal courts that have addressed this issue have concluded that the statute was enacted in violation of the one-subject rule. In re Huffman (C.A.6, 2004), 369 F.3d 972; In re Barkley (Bankr.N.D.Ohio 2001), 263 B.R. 553. This court declined to answer the question when it was first certified to us in Hunter v. First Union Home Equity Bank (2001), 94 Ohio St.3d 1406, 759 N.E.2d 784.

{¶ 20} The other objection concerned the application of former R.C. 5301.234 to mortgages that were recorded prior to the statute's effective date. The federal courts were divided on this issue. Some concluded that the General Assembly did not intend the statute to apply to mortgages executed or recorded prior to the statute's effective date. See, e.g., In re Farrell (Bankr.S.D.Ohio 2001), 269 B.R. 181, 185, fn. 2; In re Caldwell (Bankr.S.D.Ohio 2000), 257 B.R. 241, 244-245. Other courts held that former R.C. 5301.234 was applicable to mortgages recorded before its effective date, but only in bankruptcy cases filed after its effective date. See In re Zaptocky, 250 F.3d at 1028, fn. 5; In re Haviaras, 266 B.R. at 797-799 (discussing both the General Assembly's intent and the constitutional proscription against the passage of retroactive laws in Section 28, Article II of the Ohio Constitution); In re Stewart (Bankr.S.D.Ohio 2000), 256 B.R. 259 (considering only legislative intent).

{¶ 21} The latter question reached this court by way of certification in In re Stewart, 96 Ohio St.3d 67, 2002-Ohio-3526, 771 N.E.2d 250. Aside from an introductory procedural statement, our entire opinion in that case reads as follows:

{¶ 22} "The panel certified the following question:

{¶ 23} "`Can Ohio Revised Code § 5301.234 be applied to presume the validity of a mortgage in a bankruptcy case filed after the effective date of the statute, when the mortgage at issue in the bankruptcy case was recorded before the statute's effective date?'

{¶ 24} "The certified question is answered in the affirmative."

{¶ 25} According to petitioner and supporting amici, our affirmative response to the certified question in Stewart implies a negative response to the present certified question. Although the certified question in Stewart makes no reference to the one-subject rule, they argue that in order to give an affirmative answer to the retroactivity question, we necessarily had to...