Sometimes, mistakes in the execution and acknowledgment of mortgages happen during closing.  When they do, they need to be corrected.  However, sometimes correcting the problem can raise a big red flag for bankruptcy trustees that screams "Here I am... avoid me!"  This is exactly what happened in a recent case in the Bankruptcy Court for the Southern District of Ohio. 

First, I must give kudos to the Ohio Land Title Association for covering this case in their most recent edition of Title Topics.  Attorney Maria Mariano Guthrie, with Sikora Law LLC, wrote an excellent article explaining this case.  I must say, if you are in Ohio and not a member of the Ohio Land Title Association, you really are missing out on a valuable resource.

On September 10, 2004 an attorney closed a loan for Mikki Sue Gray with WMC Mortgage (WMC).  At the closing, Mrs. Gray provided the attorney with her identification so he could ensure that she was the person signing the note and mortgage. The attorney took Mrs. Gray's acknowledgment and subscribed his name to the mortgage.  However, he omitted her name and date of her signature from the acknowledgment.  The mortgage was recorded on September 15, 2004.

This was clearly an oversight... and one that title examiners have seen before.  Improper acknowledgments are probably more common than they should be.  But, when they happen and are discovered, they are usually corrected.  In this case, approximately eight months later WMC advised the attorney of the defect and he took steps to fix the problem.  The attorney typed the missing information on the original recorded mortgage, and hand-wrote the following notation on the first page: "Re-recorded to add date and name of mortgagor, p. 13."  The mortgage was then re-recorded on May 6, 2005.

Long after the "correction," on March 21, 2008, Mrs. Gray filed a voluntary Chapter 7 bankruptcy petition and the trustee sought to avoid the mortgage due to an improper acknowledgment.  WMC argued that the trustee could not avoid the mortgage because it met each of the requirements for a properly executed mortgage, the correction having been made before the petition was filed.

There is no doubt that the omitted information left the original mortgage defective, and therefore avoidable.  "An acknowledgment clause containing nothing relative to the mortgagor's identity is insufficient; rather an acknowledgment clause must either identify the mortgagor by name or contain information that permits the mortgagor to be identified by reference to the mortgage."  But wasn't the re-recorded mortgage sufficient to cure the defect? 

It would seem that the oversight was relatively minor and no one denied that Mrs. Gray did actually sign the mortgage.  The correction made when the document was re-recorded sufficiently explained the reason for the re-record and afterward the acknowledgment adequately described what transpired during the closing.

However, the Court said "no," the mortgage was still avoidable by the bankruptcy trustee because the attorney had no authority to amend the certificate of acknowledgment after the document on which it appears was recorded.  The Court applied the doctrine of functus officio, which means "having performed his or her office."  Or, a public officer is "without further authority or legal competence because the duties and functions of the original commission have been fully accomplished."

This leads to a conclusion that an improper acknowledgment cannot be corrected unilaterally by the notary - it requires the participation of mortgagor and the document must be re-acknowledged.  What does this mean for the common practice of using an affidavit to correct defective acknowledgments?  It is common to see the notary sign an affidavit that states that the omitted information was a "scrivener's error" and that the mortgagor did appear before the notary on the day of closing and "acknowledged that he or she did sign the instrument and that the same was his or her free and voluntary act and deed."  Again this contains all of the required information for a valid acknowledgment, except, of course, it is a unilateral act by the notary and the mortgagor is not actually re-acknowledging the document.  Thus, it would still be avoidable under the holding of this recent case.

What this really means is that the attempted correction is a huge red flag alerting a bankruptcy trustee that there is a mortgage of record that can be avoided for the benefit of unsecured creditors.  With the number of bankruptcies on the rise, and the plethora of defective acknowledgments of record, this will likely be a big problem for title insurers in the future.  Even those acknowledgments that have been "corrected" have most likely not been done so with a formal re-acknowledgment. 

Bankruptcy judges hold parties to much higher standard than state court judges in this regard.  It seem here to be a case of elevating form over substance.  There is no debate over whether Mrs. Gray actually signed the mortgage and it was recorded, which afforded adequate notice to third-parties.  This omission would seem to amount to harmless error, especially since it was re-recorded with the proper information.  But, when it comes to bankruptcy, you better have all of your "I's" dotted and your "T's" crossed because they will hold you to the letter of the law.

It would seem that if you come across a defective acknowledgment, the only course of action that will ensure the validity of the document is to have the mortgagor come back in an re-acknowledge it before you re-record it.  In fact, I'd be surprised if we don't see underwriting bulletins very soon alerting us all to this issue and requiring exactly that. 

It might be a good idea to get in the habit of checking the acknowledgments thoroughly before recording.  If you use a checklist of some sort in your process, make sure that this is included.

Of course, this was an Ohio case and the laws of other states may result in a different ruling by the bankruptcy courts.  But, it is always good to be aware of the kinds of things that bankruptcy trustees scrutinize for potential challenges.  It is best not to take chances with these sorts of things.

Robert A. Franco
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