In re Nowak

820 N.E.2d 335, 104 Ohio St. 3d 466
CourtOhio Supreme Court
DecidedDecember 17, 2004
DocketNo. 2004-0272
StatusPublished
Cited by48 cases

This text of 820 N.E.2d 335 (In re Nowak) is published on Counsel Stack Legal Research, covering Ohio Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re Nowak, 820 N.E.2d 335, 104 Ohio St. 3d 466 (Ohio 2004).

Opinions

Alice Robie Resnick, J.

{¶ 1} This case comes to us as a certified question of state law from the Bankruptcy Appellate Panel of the United States Sixth Circuit Court of Appeals, pursuant to S.CtPrac.R. XVIII. The panel has certified the following facts to us:

{¶ 2} “Debtors, Michael and Christine Nowak, executed a mortgage on real estate that they owned in favor of [petitioner] P[CF]S Financial (Provident Bank) on March 6, 1998. On March 20, 2001, the Debtors filed a chapter 7 bankruptcy case. The chapter 7 trustee [respondent Lydia Spragin III] filed an adversary proceeding under § 544(a) and (b)(1) of the Bankruptcy Code seeking to avoid the mortgage of PCFS Financial. Following a hearing, the bankruptcy court found that the mortgage had not been properly attested by two witnesses as required by [former] Ohio Rev.Code § 5301.01 and then held that [former] Ohio Revised Code § 5301.234 was unconstitutional.

{¶ 3} “* * * The bankruptcy court thus held that the mortgage could be avoided by the chapter 7 trustee notwithstanding [former] Ohio Revised Code § 5301.234 * *

{¶ 4} In addition to the certified facts, it is undisputed that the Nowaks’ mortgage had been recorded but had been executed in the presence of only one witness and covers property located at 4931 Shady Brooke Run, Medina, Ohio.

{¶ 5} The panel has certified the following question for our determination:

[468]*468{¶ 6} “Does [former] Ohio Revised Code § 5301.234 violate Ohio Constitution Article II, § 15(D), which states:

{¶ 7} “ ‘No bill shall contain more than one subject, which shall be clearly-expressed in its title. No law shall be revived or amended unless the new act contains the entire act revived, or the section or sections amended, and the section or sections amended shall be repealed.’ ”

{¶ 8} For the reasons that follow, we answer the certified question in the affirmative.

I

BACKGROUND

{¶ 9} In order to provide a clear perspective of the current issue, we begin our analysis with a brief description of the interplay between federal bankruptcy law and Ohio mortgage law that surrounded the enactment of former R.C. 5301.234.

{¶ 10} The certified issue arises out of the panel’s attempt to determine whether respondent is entitled to avoid the Nowaks’ mortgage under Section 544(a)(3), Title 11, U.S.Code, which involves a mixture of federal and state law. Section 544(a)(3) enables a bankruptcy trustee to avoid any transfer of the debtor’s property that would be avoidable by a hypothetical bona fide purchaser. See In re Zaptocky (C.A.6, 2001), 250 F.3d 1020, 1023-1024. However, Section 544(a)(3) provides the trustee with the rights and powers of a bona fide purchaser of real property “without regard to any knowledge of the trustee.” The federal courts have interpreted this language to mean that the trustee’s ability to avoid a particular transfer of the debtor’s property cannot be defeated by evidence of his or her actual knowledge of the transfer. Id. at 1027. See, also, In re Sandy Ridge Oil Co., Inc. (C.A.7, 1986), 807 F.2d 1332, 1334-1336. Thus, the critical inquiry under Section 544(a)(3) is whether the trustee, standing in the place of a bona fide purchaser, would be charged with constructive knowledge of the transfer sought to be avoided. “Since this mortgage concerns real property located in Ohio, this inquiry is governed by Ohio law.” In re Zaptocky, 250 F.3d at 1024.

{¶ 11} As a matter of Ohio law, a bona fide purchaser of real property cannot be charged with constructive knowledge of a prior unrecorded mortgage. R.C. 5301.25; Emrick v. Multicon Builders, Inc. (1991), 57 Ohio St.3d 107, 109, 566 N.E.2d 1189; Thames v. Asia’s Janitorial Serv., Inc. (1992), 81 Ohio App.3d 579, 587, 611 N.E.2d 948. Before the enactment of former R.C. 5301.234, this rule encompassed recorded mortgages that were defectively executed under former R.C. 5301.01, which provided, “The [mortgagor’s] signing shall be acknowledged [469]*469* * * in the presence of two witnesses, who shall attest the signing and subscribe their names to the attestation.” S.B. No. 114, 145 Ohio Laws, Part I, 1034, 1037. Since only properly executed mortgages were entitled to be recorded, a mortgage attested by only one witness, even though recorded, could not serve as constructive notice to a subsequent bona fide purchaser. See Citizens Natl. Bank v. Denison (1956), 165 Ohio St. 89, 94-95, 59 O.O. 96, 133 N.E.2d 329; Amick v. Woodworth (1898), 58 Ohio St. 86, 50 N.E. 437, paragraph two of the syllabus; Thames at 588, 611 N.E.2d 948; State ex rel. Puthoff v. Cullen (1966), 5 Ohio App.2d 13, 15-16, 34 O.O.2d 61, 213 N.E.2d 201. Consequently, bankruptcy trustees were able to avoid recorded Ohio mortgages that contained fewer than two attesting signatures. See, e.g., In re Baker (Bankr.N.D.Ohio 2003), 300 B.R. 298, 303-304; In re Haviaras (N.D.Ohio 2001), 266 B.R. 792, 796; In re Zaptocky, 250 F.3d at 1027-1028.

{¶ 12} Former R.C. 5301.234 was the first measure designed by the General Assembly to address this problem. Enacted as part of Am.Sub.H.B. No. 163, 148 Ohio Laws, Part I, 960, 1043-1044, effective June 30, 1999, former R.C. 5301.234 provided:

{¶ 13} “(A) Any recorded mortgage is irrebuttably presumed to be properly executed, regardless of any actual or alleged defect in the witnessing or acknowledgment on the mortgage, unless one of the following applies:

{¶ 14} “(1) The mortgagor, under oath, denies signing the mortgage.

{¶ 15} “(2) The mortgagor is not available, but there is other sworn evidence of a fraud upon the mortgagor.

{¶ 16} “(B) Evidence of an actual or alleged defect in the witnessing or acknowledgment on the mortgage is not evidence of fraud upon the mortgagor and does not rebut the presumption that a recorded mortgage is properly executed.

{¶ 17} “(C) The recording of a mortgage is constructive notice of the mortgage to all persons, including without limitation, a subsequent bona fide purchaser or any other subsequent holder of an interest in the property. An actual or alleged defect in the witnessing or acknowledgment on the recorded mortgage does not render the mortgage ineffective for purposes of constructive notice.”

{¶ 18} Former R.C. 5301.234 solved the avoidance problem by allowing the recording of a defectively executed mortgage to serve as constructive notice to subsequent bona fide purchasers. It did not, however, repeal or change the execution requirements under former R.C. 5301.01. Instead, former R.C. 5301.01 and 5301.234 coexisted from June 30, 1999, until February 1, 2002, when R.C. [470]*4705301.234 was repealed and R.C. 5301.01 was amended.1 2001 Am.SubJLB. No. 279.

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Bluebook (online)
820 N.E.2d 335, 104 Ohio St. 3d 466, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-nowak-ohio-2004.