New Provision in Ohio Law May Help Secured Lenders Protect Their Mortgage Lien During Bankruptcy

In the past couple of years, I’ve written about the cost to lenders when there are technical errors in their recorded security documents, such as mortgages, and how they chose to correct those errors. See “Mortgage Execution in Ohio: the Twilight Zone where a person can both ‘know’ and ‘not know’ the same information” and “Lenders Beware: Mortgage Errors Can Really Cost You.”  

 

Bankruptcy trustees have filed numerous adversarial proceedings in Ohio seeking to remove a secured lender’s preference on mortgaged real property by asking the court to void mortgage on a technical defect in the acknowledgement clause. Courts have frequently sided with the bankruptcy trustees in these cases, holding that the defective acknowledgement in the mortgage due to its failure to strictly follow the requirements in RC §5301.01 renders the mortgage not entitled to be recorded (even though it was) and therefore it did not provide constructive notice (even though the trustee had actual notice). Recent legislation might just change the outcome of many of these cases.

 

The Legacy Trust Act (the “Act”) became effective March 27, 2013. Sub H.B. 479, which included the Act, also included modifications to other statutes to complement the Act.  RC §317.08 [Records to be kept by county recorder.] provides for the various types of records to be kept by the county records, which includes, among others, deeds, mortgages, leases, land installment contracts, affidavits and the like, and was amended by the Act to add a new category for transfers, conveyances or assignments of any type of “tangible or intangible personal property…”. The Act also amended RC §1301, the general provisions affecting commercial transactions to added a new section, RC §1301.401 [Effect of recording documents.]

 

RC §1301.401 provides that any document referenced in RC §317.08 and any document, the filing of which is required or allowed under Chapter 1309 [Secured Transactions], is a “public record.” This section also states that “[a]ny person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record as of the time that record was first filed with the secretary of state or tendered to a county recorder for recording.” (emphasis added)

 

It’s not unreasonable to argue that, based on the language in RC §1301.401, a bankruptcy trustee should be deemed to have had constructive notice of the mortgage at the time it was tendered to the recorder for recording.  Until a court in Ohio addresses the interplay between RC §1301.401 and RC §5301.01, we won’t know which provision will come out on top. However, look for lenders’ counsel to start using this new provision in the Act to buttress their arguments against voiding the lenders’ mortgages.

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