Sixth Circuit Denies Claim To Avoid Mortgage Based On Allegedly Defective Certificates Of Acknowledgement

In Hardesty v. CitiFinancial, Inc.,¹ the Sixth Circuit affirmed the bankruptcy court’s denial of the trustee’s request to avoid the debtors’ mortgages with the creditor based on allegedly defective certificates of acknowledgement in the mortgage documents under Ohio law.

Ohio law provides that defectively executed transfers of land are not binding on subsequent bona fide purchasers who take the land without knowledge of the defectively executed transfer. Because a bankruptcy trustee has the same rights that a bona fide purchaser would enjoy under applicable state law, the trustee is able to avoid a mortgage that was improperly executed under Ohio law. The burden is on the trustee, however, to demonstrate that the mortgage was improperly executed.

Under Ohio Revised Code §§ 5301.01(A) and 147.54(c), in order for a mortgage to be executed properly, it must, among other things, include a certificate of acknowledgment containing “the words ‘acknowledged before me,’ or their substantial equivalent.” The certificates of acknowledgment at issue in Hardesty contained the phrase “executed before me.” Thus, the issue in the case was whether the phrase “executed before me” was the substantial equivalent of the phrase “acknowledged before me.” The bankruptcy judge determined, and the Bankruptcy Appellate Panel summarily affirmed, that it was.

On appeal, the Sixth Circuit noted that, in determining whether alternate terminology is the substantial equivalent of “acknowledged before me,” consideration must be given to the definition of the phrase under Ohio Code § 147.541, which includes the following four elements: (1) the person acknowledging appeared before the person taking the acknowledgement; (2) he acknowledged he executed the instrument; (3) he executed the instrument for the purposes stated therein; and (4) the person taking the acknowledgement knew or had satisfactory evidence that the person acknowledging was the person named in the instrument or certificate.

The court found that the language of the certificate used in the mortgage documents easily satisfied the first two elements. The phrase “before me” indicated that the debtors physically appeared before the person taking the acknowledgement. Moreover, under Ohio law, a person who signs a document in the presence of another acknowledges his signature to the latter. With respect to the third element, the court found that additional language in the certificate established that the debtors had examined and read the mortgage and signed “the foregoing instrument.” As such, the debtors executed the mortgage for the purposes stated therein. Regarding the fourth element, the court found that the certificate not only referred to the debtors by their individual names but also referred to them as “the individuals who . . . executed the foregoing instrument.” Based on this double reference, the court held that the notary public’s certification was based upon satisfactory evidence of the debtors’ identities. Therefore, the court concluded that the trustee did not carry his burden of proving the avoidability of the mortgage.

Posted by: Ali Razzaghi