Improper Recorded Mortgage by Lender in Ohio

Mortgage Registration/Recording Decision in Ohio

Mortgage Electronic Registration Systems (MERS)v.Odita, et al., Fairbanks Capital Corporation et al.

Case Law
Mortgage Electronic Registration Systems (MERS) v. Odita, et al., Fairbanks Capital Corporation et al. Case No. 04AP-255, (2004 Ohio 5546)

October 19, 2004

Tempest Properties and Management Corporation represented by its President and owner Odita owns a real property situated in Columbus, Ohio. Odita borrowed a sum of money from Labyrinth Mortgage and Investment Company and secured it with this property. The mortgage was recorded. Another mortgage was made in favor of Labyrinth and Odita signed this in his personal capacity and which was later acknowledged before a notary public. Although this mortgage was recorded already, it was re-recorded later on with Tempest as the mortgagor and Odita signed in his capacity as president of Tempest. The signature of Odita was not properly acknowledged by the notary. The dispute in this case revolved around this second re-recorded mortgage which MERS holds.

A foreclosure action was filed by First National against Tempest, Odita, and Labyrinth. It was able to obtain a judgment. Tempest sold the property to Robinson who in turn obtained a mortgage from Old Kent Mortgage. This was now held by Fairbanks and was also recorded. Thereafter, Robinson and Old Kent made a settlement and paid off the mortgage to MERS. This pay off actually did not transpire so that MERS filed a complaint for money, foreclosure and other relief against Odita, Robinson, Labyrinth and Fairbanks. The complaint was amended to include Tempest. Robinson, Fairbanks and MERS filed separately motions for summary judgment.

Fairbanks and Robinson claim that the failure to include Tempest before acknowledgement was fatal and rendered the mortgage as improperly executed. Thus the non inclusion during acknowledgement will have the effect of not granting MERS priority over subsequently filed mortgages. MERS on the other hand claimed that Robinson and Fairbanks had actual notice and could not claim priority because they are not buyers in good faith and for value. Moreover, it claimed that it is entitled to equitable subrogation because its interest was recorded before that of Robinson and Fairbanks.

The trial court granted summary judgment in favor of MERS based on the principle of equitable subrogation and the fact that both parties had actual knowledge of the mortgage with MERS. Moreover, the trial court passed upon the issue of reformation of the mortgage to include the execution of Odita as president of Tempest.

The following issues were presented by the appellees for the resolution of the appellate court: a) whether or not MERS was entitled to the full extent of the mortgage notwithstanding the defect in the execution of the mortgage and therefore not entitled to be recorded in conformity with the ruling of the court in the case of Citizens National Bank v. Denison, 16[5] Ohio St. 89 (1956). b) Whether or not the trial court failed to observe and apply the priority principle as stated in O.R.C. §5301.23 which in substance means that mortgage lien priority is determined by the first validly executed and registered mortgage. c) Whether or not the trial court was correct in allowing reformation of the defectively executed mortgage despite the absence of alleged facts of mistake or an affirmative request for reformation.

Anent the first issue raised, the Court explained a mortgage that is defective in its execution cannot be subject to recordation or registration. Thus, even if the defective execution of mortgage is registered it does not give any priority of lien over those registered subsequently. Recordation of the defectively executed mortgage has no effect. Applying this principle enunciated in the case of Citizens National Bank v. Denison, to the case at bar the defect in execution of the mortgage, i.e. Odita’s signature in behalf of the of Tempest was not properly acknowledged before a notary, it does not have priority of lien over subsequent validly executed mortgages. MERS’ and the trial court’s arguments to the effect that since the appellants had actual knowledge of the defect, the registration could not have given constructive knowledge that it is valid by virtue of the recordation. The Appellate court cited inter alia the cases of Langmede v. Weaver (1901), 65 Ohio St. 17, 34 and Priority Mortgage & Inv. Co. v/ Flesariu (1924), 2 Ohio Law Abs 760 which addressed the issue pointedly as—defectively executed mortgage does not have priority lien over subsequent legal interests and liens even if such subsequent legal interests and liens had actual notice of such defect.

Anent the third issue of reformation of the instrument, the appellate court ruled that the trial court erred in reforming the instrument because reformation can be done only upon mutual mistake of the parties. The trial court in ordering the reformation had actually ordered the re-execution of an improperly executed agreement and this had created a new agreement. Courts are not allowed to supply the formalities of an agreement.

Thus, the decision of the trial court was reversed insofar as the finding the MERS is entitled to priority of lien beyond the extent to which its mortgage paid off the two prior liens. The case was remanded to the trial court for hearing based on this ruling.

Lesson Learned: The case was brought before the Franklin County Court of Common Pleas and was later appealed to the Court of Appeals of Ohio, Tenth District, Franklin County.

This case clarified the principle of priority of lien which only applies when there is a validly executed mortgage. Thus, any improperly executed mortgage even if registered and recorded does not cure such invalidity as to deprive the subsequent legal interests and liens even if there is actual notice of such invalidity. In many jurisdictions, it appears that a defective mortgage is superior to subsequent legal interests and lien when acquired with notice of such defect. However, in Ohio the rule is otherwise because of the recording/registration statutes as well as its consistent enunciation of such legal precedent in its cases.

By Kevin Levonas and Giselle G.