Field v. Wells Fargo Home Mortgage (In re Jared), 474 B.R. 521 (Bankr. S.D. Ohio 2011) –

In Jared, the chapter 7 trustee sought to avoid two mortgages on registered land that (a) were noted on the certificates of title to the land and (b) included proper mailing addresses and parcel numbers, but (c) referenced incorrect lots in the legal description.  Given that mortgages are often avoided under Ohio law for even trivial errors, you might expect the trustee to prevail.  However,  that was not the case.

The trustee first argued that she did not have constructive notice of the mortgages, and thus was able to avoid them as a bona fide purchaser.  (See prior blog posts for discussion of the ability to avoid mortgages based on asserting the rights of a hypothetical bona fide purchaser of real estate, including [*insert link].)  The trustee cited a prior bankruptcy case in which a court held that a chapter 7 trustee does not have constructive notice of a mortgage with an incorrect legal description of correct address and parcel number.  However, that case involved unregistered land. The Jared court noted that constructive notice is irrelevant for registered land.  Under the statute regarding registered land, a good faith purchaser is free from all encumbrances except those noted on the certificate of title.

However, that leaves the question of which properties were encumbered by the mortgages given the deficiencies in the legal description.  The court found that this was a question of Ohio contract law.  Given the discrepancy between the mailing address and parcel number on the one hand, and the legal description including incorrect lot numbers on the other, the scope and validity of the lien was ambiguous so that the intent of the parties could be determined based on extrinsic evidence.  In this case the fact that the county recorder registered the mortgages on the titles of certificate for the applicable property, and the mortgagors listed the applicable property as their own real estate, the court determined that the parties intended to encumber that property.

The trustee also argued that the mortgages were defectively executed, citing one of the Ohio cases where a mortgage was deemed not to provide constructive notice because it did not comply with the statutory requirement that there be two witnesses.  However, the court again found that this applied to the traditional recordation system, but not the land registration system.  Under the traditional system, “a properly executed mortgage must be filed with the appropriate county recorder’s office in order to create a perfected interest in the property…  If land falls under the registration system, however, liens and encumbrances must be registered”  (quoting a prior case).

The court went on to note that even if the cases regarding defective execution of a mortgage were applicable to registered land, they did not extend to cases where there are errors in the legal description by analogy.  The execution requirements are a specific statutory condition for recording in the traditional system, while the Sixth Circuit has held that Ohio law does not require a legal description for mortgages.  Where a mortgage correctly referenced the parcel number and the street address of a property but omitted a legal description, the mortgage was not defectively executed according to the Sixth Circuit.

Often very minor technical errors can lead to avoiding a mortgage in bankruptcy.  However, as illustrated by this case, errors are not always fatal.

Vicki R. Harding, Esq.