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15 years of Trustee mortgage avoidance comes to an end

February 17th, 2016

On February 16, 2016, the Ohio Supreme Court issued a slip opinion deciding In re Messer et al. The Court found that constructive notice of the mortgage was imparted to all persons dealing with the real estate pursuant to R.C. 1304.401 once the mortgage was recorded even if possible defects in the execution of a mortgage exist. . In re Messer, Slip Opinion No. 2016-Ohio-510. The Ohio Supreme Court's decision is contrary to a significant line of cases finding that improperly executed instrument is not entitled to be recorded, and that even if recorded, fails to impart constructive notice to those dealing with the real estate. Most people dealing with real estate might have actual notice or a duty of inquiry as a result of a recorded but defective instrument. However, the "strong arm" powers of a Bankruptcy Code have allowed the Bankruptcy Trustee to avoid a mortgage that does not give constructive notice under state law based on the Bankruptcy Code embodying a principal that a Trustee cannot be imputed with actual or inquiry notice, only constructive notice. For a decade and a half, Trustees have been avoiding mortgages in Ohio due to a lack of proper witnessing or acknowledging. The effect of avoidance to a mortgage lender is that the debt becomes unsecured with the mortgage lender being paid a pro-rata share with other unsecured creditors or nothing at all. The Ohio Legislature changed the law in 2002 to best resolve the Trustee's attempts to avoid mortgages for a defect in the witness requirement. See R.C. 5301.01(B). Now, by enacting RC 1301.401 in 2013, and with this confirmation by the Supreme Court of Ohio, the proverbial door has closed shut on nearly all such arguments for a Trustee's avoidance of a recorded mortgage.