Update of Ohio Mortgage Case Law

Luther L. Liggett, Jr.
Bricker & Eckler LLP
March 2008

Three decisions recently were rendered by Ohio state and federal courts affecting the mortgage industry. A brief synopsis of each of the cases is below.

Wrong Legal Description Means No Mortgage

A borrower signed both a note and a mortgage, in an instance where the mortgage document contained a description of the real estate slightly different than the deed. The Court noted that the bank's agent "was solely and exclusively responsible for the preparation of and the recording of its Mortgage, including a proper legal description of the property."

The borrower filed bankruptcy, and the bankruptcy trustee, along with creditors sought to obtain the property free and clear of the mortgage lien.

The Court held that the mortgage never attached to the real estate, by virtue of the incorrect legal description. The mortgage "contained an insufficient legal description and is therefore found to be unperfected at the time the Debtors filed for relief under Bankruptcy Code."

In re McEowen, Case No. 07-53966, United States Bankruptcy Court, Southern District of Ohio, March 4, 2008

Mortgage "Acknowledgement" Requires Express Language

The United States Bankruptcy Appellate Panel of the Sixth Circuit, covering the entire State of Ohio, has held that a notary's signature on a mortgage that does not comply specifically with Ohio statutory requirements is non-conforming, resulting in an invalid mortgage.

Ohio Revised Code §5301.01(A) requires a mortgage to be signed by the borrower, and that the borrower's signature shall be "acknowledged" by the mortgagor before a Notary Public (or other official listed).

Ohio Revised Code §147.53 requires that the acknowledgement certify that the person appeared before the Notary, was known to the Notary, and that the person acknowledging was the person described in the mortgage. Ohio Revised Code §147.54 and §147.55 describe an adequate acknowledgement as follows:

In the case contested, the notary merely wrote the words, "Witness my hand this (date)."

The Court of Appeals held that such "witness" language is not defined in Ohio law, and could not satisfy the requirement for an acknowledgement. Moreover, the Court held that it was not sufficient simply to say "Acknowledged before me." Rather, the acknowledgement must include the names of the borrowers in the recitation.

The result is that the mortgage lien never attached in favor of the bank. Accordingly, a bankruptcy trustee could take first priority of the real estate, notwithstanding a bank loan.

In re Nolan, Debtors, Case No. 07-8013, Bankruptcy Appellate Panel of the Sixth Circuit, March 12, 2008

Mortgage Broker Liable for Civil Conspiracy and for Punitive Damages

The Hamilton County Court of Appeals has held that a mortgage broker can be liable for civil conspiracy and punitive damages, in a case where the mortgage broker created additional corporate entities for purposes of avoiding Ohio's Mortgage Broker Licensure laws.

In this case, the broker's affiliates would advertise a house for rent. When a customer responded, the affiliates would obtain the customer's credit report, and then work with a realtor to find a house for the customer. Once a customer selected a house, the company would purchase it, and appraise the house at an 80% loan-to-value ratio for refinancing.

The customer then executed a mortgage for an amount that was $5,000.00 more than the company had just paid for the home. The refinanced loan would show the house to be owned by the customer.

The customer made no payments on the loan. In the subsequent foreclosure action, the inflated appraisal was discovered.

Finding a violation of the Mortgage Broker Act, the Court held the broker liable in civil conspiracy, "a malicious combination of two or more persons to injure another person or property, in a way not competent for one alone, resulting in actual damages." The Court determined that the defendants had created one of the companies as nothing more than a shell corporation, holding the sole shareholder personally liable. The Court awarded actual damages under R.C. §1322.07, as compensation to recover the fees paid to the mortgage broker. In addition, the Court awarded punitive damages to two borrowers, each $25,000.00.

In affirming the result, the Court of Appeals ruled that:

In this case, given the long-standing, premeditated nature of the misconduct, which included the defendants' bilking of innocent buyers, as well as the limited amount of the punitive-damages award, we will not disturb the trial court's judgment with respect to punitive damages.

Roark v. Rydel (Hamilton), 174 Ohio App.3d 186, 2007-Ohio-6873