In re Sauer

• Decision Date: 25 September 2009
• Docket Number: Adversary No. 08-2178.,Bankruptcy No. 08-52152.
• Citation: In re Sauer, 417 B.R. 523 (Bankr. S.D. Ohio 2009)
• Parties: In re Adina M. SAUER, Debtor. Myron N. Terlecky, Chapter 7 Trustee, Plaintiff, v. Chase Home Finance, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

417 B.R. 523

In re Adina M. SAUER, Debtor Myron N. Terlecky, Chapter 7 Trustee, Plaintiff, v. Chase Home Finance, LLC, Defendant.

Bankruptcy No. 08-52152.

Adversary No. 08-2178.

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

September 25, 2009.

COPYRIGHT MATERIAL OMITTED

James A. Coutinho, for Plaintiff.

Holly N. Wolf, Columbus, OH, for Defendant.

Amelia A. Bower, Columbus, OH, for Defendant.

Adina M. Sauer, Westerville, OH, Debtor.

Thomas C. Lonn, Westerville, OH, for Debtor.

MEMORANDUM OPINION ON MOTION FOR SUMMARY JUDGMENT

JOHN E. HOFFMAN, Bankruptcy Judge.

I. Introduction

On March 13, 2008 ("Petition Date"), Adina M. Sauer ("Adina" or "Debtor") filed a voluntary Chapter 7 petition. Prior to the Petition Date, Adina and her husband, Jason M. Sauer ("Jason"), executed a mortgage that included a certificate of acknowledgment clause signed by a notary public. The certificate, however, is blank in the place where the persons acknowledging the signing of the mortgage—Adina and Jason—should have been identified. Contending that the blank in the certificate renders the mortgage defective under Ohio Revised Code § 5301.01, and thus not capable of being recorded, the Chapter 7 trustee, Myron N. Terlecky ("Trustee" or "Plaintiff"), seeks to avoid the entire mortgage, preserve it for the benefit of the estate and disallow the claim of Chase Home Finance, LLC ("Chase" or "Defendant"). Chase disputes that the mortgage is invalid, arguing that the Court should determine that the acknowledgment was proper based on the affidavit of the notary public that she acknowledged the signing. For the reasons explained below, the Court concludes that the mortgage is invalid because the certificate of acknowledgment does not reflect that the notary public properly certified Adina's acknowledgment. Accordingly, the Court grants summary judgment in favor of the Trustee on his cause of action to avoid the mortgage on the Debtor's one-half interest in the property and to preserve that mortgage for the benefit of the Debtor's estate. The Court also concludes that any claim held by Chase against the Debtor is unsecured. The Trustee, however, has not provided any basis for avoidance of the mortgage on the one-half interest held Jason, a non-debtor, and has not provided any basis for disallowance of any claim held by Chase.

II. Jurisdiction

The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. The adversary proceeding is a core proceeding. See 28 U.S.C. § 157(b)(2)(K).

III. Procedural and Factual Background

By the complaint ("Complaint"), the Trustee seeks a determination of the extent and validity of Chase's lien as a secured claim under 11 U.S.C. § 506(d) (Count I). He also seeks to avoid the mortgage pursuant to § 544(a)(3) (Count II), preserve the mortgage for the benefit of the Debtor's bankruptcy estate under § 551 (Count III) and disallow any claim Chase asserts under § 502 (Count IV). Following a pretrial conference, the parties agreed to a determination of the issues by dispositive motion. The matter is now before the Court on: (1) the Trustee's motion for summary judgment ("Motion") (Doc. 11); (2) Chase's brief in opposition ("Opp'n Br.") (Doc. 18); (3) the Affidavit of Kim A. Curtis in support thereof ("Curtis Affidavit") (Doc. 19); and (4) the Trustee's reply to Chase's opposition brief ("Reply") (Doc. 20).

The parties did not file a stipulation of facts, but the pleadings and the documents filed in the Debtor's bankruptcy case establish that the relevant facts are not in dispute. Adina is the owner of an undivided one-half interest in real property located at 4344 Valley Quail Boulevard South, Westerville, Ohio ("Property"). Jason— Adina's non-filing spouse—owns the other undivided one-half interest in the Property. Jason and Adina received the Property by way of a general warranty deed signed April 27, 2000 and recorded on May 4, 2000 as Instrument Number 200005040088167, in the Franklin County, Ohio Recorder's Office. See Complaint, Ex. A.

On or about October 18, 2002, Adina and Jason executed a mortgage encumbering the Property ("Mortgage") in favor of Wachovia Mortgage Corporation ("Wachovia"). The Mortgage was recorded on October 23, 2002 as Instrument No. 200210230268122 in the Franklin County, Ohio Recorder's Office. See Complaint, Ex. B. Page 14 of the Mortgage bears the signatures of Jason and Adina as the borrowers. Each page of the Mortgage—except for page 14—includes the initials of Jason and Adina. The Mortgage contains the following certificate of acknowledgment on page 15 ("Certificate of Acknowledgment"):

STATE OF OHIO,        Franklin County ss
                This instrument was acknowledged before me this 18th of October by
                    My Commission Expires:               Kim Curtis
                                                         Notary Public
                

The text reproduced above in italics was handwritten; the remainder was printed in one or more typefaces. Kim Curtis ("Ms. Curtis") subscribed her name to the Certificate of Acknowledgment as notary public. The Certificate of Acknowledgment bears two additional items—the notary public seal and notarial stamp of Ms. Curtis—that are not reproduced above. See id.

On or about April 10, 2008, Wachovia assigned its interest in the Mortgage to Chase through a written assignment ("Assignment"). The Assignment was recorded on April 14, 2008 as Instrument No. 200804140056794 in the Franklin County, Ohio Recorder's office. See Complaint, Ex. C.

IV. Arguments of the Parties

In support of his request for a judgment avoiding the Mortgage, the Trustee makes a three-pronged argument: (1) the omission of Adina's name from the Certificate of Acknowledgment rendered the Mortgage defectively executed under Ohio law; (2) being defectively executed, the Mortgage was not entitled to be recorded and did not, despite its recording, put the Trustee on constructive notice of Chase's interest in the Property; and (3) as a hypothetical bona fide purchaser of the Property who is not charged with actual knowledge of Chase's interest, the Trustee may avoid the Mortgage under § 544(a)(3). In support of his position, the Trustee relies on prior opinions of this Court and other courts within this district and circuit, including decisions issued by the United States Court of Appeals for the Sixth Circuit in Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1028 (6th Cir.2001), and the Sixth Circuit Bankruptcy Appellate Panel ("BAP") in Geygan v. World Savs. Bank, FSB (In re Nolan), 383 B.R. 391, 396 (6th Cir. BAP 2008). See Motion at 5-9.

In its response, Chase concedes that the decisions cited by the Trustee support— and, in the case of the Sixth Circuit and BAP decisions, compel—the avoidance of the Mortgage. See Opp'n Br. at 4 ("Again, the plethora of cases that uphold the [T]rustee's powers as a bona fide purchaser are well established."). See also id. at 5-6 ("If we follow prior cases including [Nolan, 383 B.R. at 396], the answer is that the [T]rustee is entitled to legally ignore the [M]ortgage ...."). Chase, however, asks the Court to disregard this line of authority for two reasons. First, citing Citizens Nat'l Bank in Zanesville v. Denison, 165 Ohio St. 89, 133 N.E.2d 329 (1956)¹ and Logan v. CIT Group/Consumer Fin. Inc. (In re Cooperman), Adv. Pro. No. 06-2353, Doc. 58 (Bankr.S.D.Ohio Sept. 18, 2008), Chase contends that Ohio law permits the Court to look to extrinsic evidence—here, the Curtis Affidavit—to determine that the Mortgage was, despite its facial deficiency, in substantial compliance with the mortgage-execution requirements. See id. at 1-4. Second, relying on Argent Mortgage Co. v. Drown (In re Bunn), 2008 WL 4449551 (S.D.Ohio Sept. 30, 2008), aff'd, 578 F.3d 487 (6th Cir.2009), Chase argues that, even though the Mortgage was not entitled to be recorded, its actual recording—as well as the recording of a subordination agreement that references the Mortgage ("Subordination Agreement")—put the Trustee on inquiry notice of Chase's interest. Chase contends that such notice is sufficient to defeat the Trustee's status as a hypothetical bona fide purchaser. See id. at 4-7. In conclusion, Chase "invite[s] this Court to revisit the acknowledgment cases and consider whether some limitation on the breadth of the [T]rustee's [§ ] 544 powers is appropriate." Id. at 7.

In the Reply, the Trustee begins by reiterating the well-established case law holding that a certificate of acknowledgment is defective if it omits the name of the mortgagor whose signature is being acknowledged. See Reply at 2, 4-5. The Trustee then proceeds to counter Chase's arguments regarding the efficacy of both extrinsic evidence and inquiry notice to save the Mortgage from avoidance. First, the Trustee argues that, under Dodd v. Bartholomew, 44 Ohio St. 171, 5 N.E. 866 (1886), extrinsic evidence cannot be used to correct a facially defective mortgage; rather, any evidence used to show that a mortgage is in substantial compliance with the law must be found within the mortgage itself. Id. at 5-6. In this regard, the Trustee takes issue with Chase's reading of Cooperman, stating that "the decision [in Cooperman ] finding that the mortgage was valid was made because of corrective elements found within the mortgage itself" and that the court "did not find the means of correcting the defect from extrinsic evidence." Id. at 6-7. The Trustee also disputes Chase's interpretation of Denison, stating that "[a]t no time did the [Denison ] court announce a rule allowing for extrinsic evidence to substitute for the formalities of execution." Id. at 7. Thus, according to the Trustee, "[e]ven if the Notary's testimony six years after the fact were credible, the affidavit is not a part of the Mortgage and provides no means of making the correction." Id. at 8.

Second, the Trustee responds to Chase's...