Opinion
Case No. 11-30562 Adv. No. 11-3269
12-09-2011
In re: LINDA J. KOOGLE, Debtor JEFFREY M. KELLNER, CHAPTER 13 TRUSTEE, Plaintiff v. CITY OF KETTERING, OHIO, Defendant
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Guy R. Humphrey
United States Bankruptcy Judge
Judge Humphrey
Chapter 13
Decision Denying City of Kettering's Motion to Dismiss
I. Introduction
Through this adversary proceeding, the Chapter 13 trustee seeks to avoid a mortgage based upon the theory that the mortgage is defective because of the manner in which the acknowledgment clause was written and completed. The defendant moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure which is made applicable to this adversary proceeding by Bankruptcy Rule 7012(b) on the basis that the complaint fails to state a claim upon which relief can be granted. However, although the defendant couches its motion as one to dismiss under Federal Rule of Civil Procedure 12(b)(6), it appears that the defendant, which has yet to file an answer to the complaint, actually seeks a judgment on the merits that the acknowledgment substantially complied with Ohio law. The trustee has opposed that motion.
Thus, on the first page of its Motion, the City states: "The facts alleged by the Trustee do not, as a matter of law, establish a basis under Ohio law to avoid the Second Mortgage (as defined below) and the Complaint must be dismissed pursuant to Rules 12(b)(6) and 7012." On page 2 of the Motion, the City similarly states: "The facts alleged in the Complaint do not, as a matter of applicable Ohio law, establish a basis to avoid the City's Second Mortgage. Notwithstanding the Trustee's assertions to the contrary, the certificate of acknowledgment in the Second Mortgage (the "Acknowledgment") is in compliance with the Ohio statutes and the Acknowledgement is valid in accordance with established precedent of the Ohio Supreme Court."
Construing the complaint in the light most favorable to the trustee and accepting all well-pleaded allegations as true, the court determines that the complaint cannot be dismissed on its merits because the plaintiff has pleaded a claim under Ohio law and federal bankruptcy law to avoid the mortgage if the facts alleged by the plaintiff are established at trial or through a properly filed motion for summary judgment. Thus, if properly established, the facts plead by plaintiff establish a basis to avoid the mortgage on the theory that the acknowledgment clause, as completed by the notary, is not in substantial compliance with Ohio law.
The parties stated in their respective legal memoranda relating to the defendant's motion to dismiss that there were no disputed material issues of fact and suggested that the court could determine the proceeding on its merits based upon the motion to dismiss filings. However, prior to the court's issuance of this decision, the plaintiff filed a separate motion for summary judgment, to which the defendant responded by asking the court to defer ruling on the motion for summary judgment until after the court ruled on the plaintiff's motion to dismiss. See docs. 8 & 9. Based upon the defendant's request, the court is deferring ruling on plaintiff's motion for summary judgment until that motion is fully briefed. See doc. 11.
II. Undisputed Facts and Positions of the Parties
The Chapter 13 trustee, Jeffrey M. Kellner (the "Trustee"), filed a complaint to avoid a mortgage held by the City of Kettering, Ohio on the debtor's residence (the "Property") (doc. 1). The complaint seeks to avoid Kettering's mortgage and recover the value of the Property for the bankruptcy estate. The following facts are not in dispute. See Defendant's Reply to the Trustee's Response (doc. 7, p. 1).
On April 29, 2005, Linda J. Koogle, fka Linda J. Ostendorf, (the "Debtor"), in consideration of the sum of $21,544.00, granted a mortgage (the "Mortgage") on her residence located in Kettering, Ohio in favor of the City of Kettering (the "City"). The Mortgage was expressly subject to a mortgage previously granted to Fifth Third Bank.
The Mortgage was prepared by the Law Director for the City and executed in the presence of two witnesses, both of whom signed it on the witness signature lines. One of the two witnesses appears to have been the notary. The Mortgage included an acknowledgment clause which states as follows:
STATE OF OHIO, MONTGOMERY COUNTY, SS:
Before me, a notary public in and for said county, personally appeared the above-named Mortgagor, Steven R. Cummins, and acknowledged the signing and sealing of the foregoing conveyance to be the voluntary act and deed of the Mortgagor, for the uses and purposes therein expressed.
WITNESS my hand and notarial seal this 29 day of April , 2005.
Constance L. Caslin
Notary Public
The Debtor filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on February 8, 2011. The Trustee subsequently commenced this adversary proceeding to avoid the Mortgage pursuant to his rights and powers as a bona fide purchaser under 11 U.S.C. § 544(a)(3). The basis for the Trustee's avoidance action is that the City's interest in the Debtor's residence was not perfected in accordance with applicable Ohio law because the acknowledgment clause in the Mortgage was defective. The City filed its motion to dismiss (doc. 4) (the "Motion"), arguing that the acknowledgment is in substantial compliance with Ohio law and, therefore, that the Mortgage cannot be avoided.
III. Legal Analysis
A. Jurisdiction
This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334 and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (F), (K) and (O).
B. Standard of Review
A motion to dismiss under Federal Rule of Civil Procedure ("FRCP") 12(b)(6), applicable to adversary proceedings through Bankruptcy Rule ("BR") 7012(b), for failure to state a claim upon which relief can be granted challenges the legal sufficiency of a complaint. In determining a motion to dismiss, the court must "construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff." Jones v. City of Cincinnati, 521 F.3d 555, 559 (6th Cir. 2008), quoting, DirecTV, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). However, in determining such a motion, a court "need not accept as true legal conclusions or unwarranted factual inferences." Id.
The court questions whether FRCP 12(b)(6) is properly invoked here. That rule is concerned with the technical sufficiency of the allegations and not the merits of the claim. See Reed Elsevier, Inc. v. The Law.net Corp., 269 F.Supp.2d 942, 947 (S.D. Ohio 2003). The thrust of the City's Motion is that that the acknowledgment clause of the Mortgage substantially complies with the applicable Ohio statutes, relying on Dodd v. Bartholomew, 44 Ohio St. 171, 5 N.E. 866 (1886), not that the complaint was insufficiently pled. The assertion by a defendant that the mortgage, and specifically the acknowledgment clause of the mortgage, substantially complies with Ohio law appears to be a defense to the avoidance claim that could and should have been asserted through an answer, rather than an issue affecting the plaintiff's statement of his claims. Thus, the court believes the better approach would have been for the City to have answered the complaint and asserted the substantial compliance defense in its answer, then moved for judgment on the pleadings or for summary judgment, in either of which the merits of the Trustee's claim and the defense of substantial compliance might properly be considered. Nevertheless, a premature motion for judgment on the pleadings may be considered as a motion for failure to state a claim for which relief can be granted when filed prior to the filing of the answer. See Geir v. Educational Service Unit No. 16, 144 F.R.D. 680, 686 (D. Neb. 1992); and Geltman v. Verity, 716 F.Supp. 491, 492 (D. Colo. 1989). Further, the standards governing motions under FRCP 12(b)(6) and FRCP 12(c) are the same, making such motions difficult to distinguish and practically interchangeable when the merits of the plaintiff's claims are contested. See Roth v. Guzman, 650 F.3d 603, 605 (6th Cir. 2011); Kendall Holdings, Ltd. v. Eden Cryogenics, LLC, 2010 WL 3894166 at **2-3 (S.D. Ohio 2010) (J. Sargus); and Moxley v. Vernot, 555 F.Supp. 554, 556 (S.D. Ohio 1982) (J. Rice).
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C. Application of Ohio Law Concerning Mortgage Acknowledgments to the Mortgage
Under well-established law, a trustee may avoid certain defectively executed or recorded mortgages and recover the property or its value for the benefit of the estate's creditors using his "strong arm powers" under Bankruptcy Code § 544. See Reiser v. Fifth Third Mortgage Co. (In re Wahl), 407 B.R. 883, 892-94 (Bankr. S.D. Ohio 2009). A mortgage granted upon Ohio real estate may be avoided when the acknowledgment clause of the mortgage is not in substantial compliance with Ohio law. Noland v. Burns (In re Burns), 435 B.R 503, 511-12 (Bankr. S.D. Ohio 2010) (discussion of Ohio law regarding defectively executed acknowledgment clauses and the doctrine of substantial compliance). In this case, the Trustee maintains that the acknowledgment clause is insufficient because it does not name the Debtor, but instead names Steven R. Cummings who is indisputably not a party to the Mortgage.
The requirements for a valid mortgage in Ohio are set forth by statute. The court, therefore, will begin its analysis with Ohio Revised Code § 5301.01(A) which states:
A . . . mortgage . . . shall be signed by the . . . mortgagor . . . . The signing shall be acknowledged by the . . . mortgagor . . . before a judge or clerk of a court of record in this state, or a county auditor, county engineer, notary public, or mayor, who shall certify the acknowledgment and subscribe the official's name to the certificate of acknowledgment.In order to meet these statutory requirements, (1) the mortgagor must sign the mortgage; (2) the mortgagor must acknowledge his or her signature before a notary public; (3) the notary public must certify the acknowledgment; and (4) the notary public must subscribe his or her name to the certificate of acknowledgment. Burns, 435 B.R. at 509. The Trustee alleges that neither the second nor the third element has been met with respect to the Second Mortgage.
Ohio has adopted the Uniform Recognition of Acknowledgments Act which is codified at Ohio Revised Code §§ 147.51-58. The requirements for a notary's certification of an acknowledgment are (1) that the person acknowledging appear before the notary and acknowledge that he or she signed the instrument and (2) that the notary either know the person acknowledging or have satisfactory evidence that the person acknowledging is the person described in and who executed the instrument. See Ohio Rev. Code § 147.53.
Any discussion pertaining to whether the acknowledgment clause in the Mortgage was defective must begin with the Ohio Supreme Court's decision in Smith's Lessee v. Hunt, 13 Ohio 260 (1844), which predates both Ohio Rev. Code §§ 5301.01(A) and 147.53. In Smith's Lessee, the mortgage contained an acknowledgment clause which left the space blank where the grantor's name should have been inserted. Because the name of the grantor and "blank" were not synonymous, the court could not infer that the person named in the mortgage was, in fact, the grantor. Id. at 269. As a result, the mortgage was defectively executed and did not convey title. Id. Numerous Ohio bankruptcy courts have applied the holding in Smith's Lessee in determining that the mortgage in question was defective and invalid as to third parties, including a subsequent bona fide purchaser. See Rhiel v. Huntington Nat'l Bank (In re Phalen), 445 B.R. 830 (Bankr. S.D. Ohio 2011); Terlecky v. Chase Home Finance, LLC (In re Sauer), 417 B.R. 523, 533 (Bankr. S.D. Ohio 2009); Wahl, 407 B.R. 883, 888-89; Hardesty v. U.S. Bank, NA, (In re Schmidt), 445 B.R. 865, 866 (Bankr. S.D. Ohio 2011); Simon v. Citimortgage, Inc. (In re Doubov), 423 B.R. 505, 512 (Bankr. N.D. Ohio 2010); Helbring v. Mortgage Electronic Registration Systems, Inc. (In re Cala), 2008 Bankr. LEXIS 1451 (Bankr. N.D. Ohio May 6, 2008); and Field v. ABN AMRO Mortgage Group (In re Wheeler), 2005 Bankr. LEXIS 2912 (Bankr. S.D. Ohio July 21, 2005).
In addition, the Bankruptcy Appellate Panel for the Sixth Circuit has concluded that the acknowledgment clause in an Ohio mortgage which failed to include the names of the debtors who signed it was defective and could thus be avoided by a bankruptcy trustee. See Geygan v. World Savings Bank, FSB (In re Nolan), 383 B.R. 391 (B.A.P. 6th Cir. 2008). The bankruptcy appellate panel did not rely on the holding in Smith's Lessee for its decision, but rather on its own line of cases which had construed the Kentucky statute governing acknowledgments. Because the applicable Ohio statute was virtually identical to the Kentucky statute, the panel predicted that an Ohio court would determine that an acknowledgment in a recorded mortgage which did not identify the individuals who signed it was defective. Id. at 396.
The City points out that, unlike the mortgages in Smith's Lessee and other cases in which the acknowledgment clause contained a blank space where the name of the mortgagor was supposed to be inserted, the Mortgage's acknowledgment clause contains the name of Steven R. Cummins following the term "the above-named Mortgagor." The City maintains that the holding in Smith's Lessee is therefore inapplicable and that the Ohio Supreme Court's subsequent decision in Dodd v. Bartholomew, 44 Ohio St. 171, 5 N.E. 866 (1886), is controlling. The Defendant argues that, applying Dodd, the acknowledgment clause substantially complies with the requirements for a valid acknowledgment under Ohio law and consequently is not defective.
The mortgagors who signed the mortgage in Dodd were Charles A. Clark and his wife, Sarah Clark. The officer certified, however, in the certificate of acknowledgment that the above-named "Charles B. Clark and Mary Clark, his wife, the grantors in the above-named instrument" personally came before him and acknowledged the signing and sealing of the instrument. The court characterized the inconsistency as "a mistake of the scrivener" and found that "there is no want of certainty as to the grantors in the deed." Dodd, 5 N.E. at 868. Any errors occurring in the acknowledgment clause were fixed by the grantors' signatures. Id. The court held that "a false description, whether of the subject-matter or the parties, does not vitiate the instrument, where the error appears on its face, and the instrument supplies within itself the means of making the correction." Id. at 867.
Construing Dodd, Ohio courts have applied the doctrine of substantial compliance to determine that a mortgage is valid and enforceable despite errors appearing in the acknowledgment clause. See Burns, 435 B.R. at 511-12. In Administrator of Veteran's Affairs v. City Loan Co., 1985 Ohio App. LEXIS 6697 (Ohio Ct. App. May 7, 1985), the acknowledgment clause listed the name of the mortgagee rather than the mortgagor who signed the mortgage. The court found that the printing of the defendant's name on the line reserved for the mortgagor's was a clerical mistake and that the identity of the mortgagor was obvious from the face of the mortgage. Id. at *6. In another case, the acknowledgment clause listed the name of the corporation instead of the names of its president and secretary-treasurer who executed the mortgage on the corporation's behalf. See Mid-American Nat'l Bank v. Gymnastics Int'l, Inc., 6 Ohio App. 3d 11, 451 N. E. 2d 1243 (Ohio Ct. App. 1982). The court found it apparent from the mortgage that the corporation, a legal fiction, appeared through its officers. It further noted that the notary public who certified the acknowledgment was also a witness and therefore saw the officers sign and acknowledge the mortgage. Id. at 13, 451 N.E.2d at 1245-46. See also Citifinancial, Inc. v. Howard, 2008 WL 4193051 at *5 (Ohio Ct. App. Sept. 15, 2008) (mortgage substantially complied with statutory requirements where the owner of the property signed in his individual capacity, but notary placed mortgagor's name in corporate acknowledgement section of the mortgage).
Bankruptcy courts have also applied Dodd so as not to invalidate mortgages that are in substantial compliance with the statutory requirements for acknowledgments. In Menninger v. First Franklin Financial Corp. (In re Fryman), 314 B.R. 137 (Bankr. S.D. Ohio 2004), both grantors signed the mortgage, but the acknowledgment clause contained the printed name of the grantor-wife only. Notwithstanding the absence of the grantor-husband's name in the acknowledgment clause, Judge Aug found that the mortgage substantially complied with Ohio Rev. Code § 5301.01. First, he noted that, unlike Smith's Lessee, the acknowledgment clause was blank as to only one of the two grantors and that the witnessing had not been challenged. Id. at 139. Second, the notary signed as a witness in addition to taking the acknowledgment. In the court's view, it would be inconsistent to discredit the notary's acknowledgment while accepting the notary's witnessing as proper. Id. Third, the notary had handwritten in the spaces provided the personal and possessory pronouns "they" and "their" leaving no doubt that the notary had acknowledged the signatures of both grantors. Id.; but see Wahl, 407 B.R. at 886-87 (distinguishing Fryman and finding that mortgage did not substantially comply with § 5301.01 under circumstances in which witnesses were no longer required for mortgages under Ohio law, only the wife's name appeared in print, and the acknowledgment clause did not use plural pronouns).
In Drown v. Kondaur Capital Corp. (In re Amadu), 443 B.R. 145 (Bankr. S.D. Ohio 2010), the acknowledgment clause referred to the "above-named MORTGAGOR," but did not include the name of the grantor or any other name. In addition, the appropriate pronouns, "she" and "her" were not circled. Judge Preston noted, however, that the debtor was twice identified in the mortgage as the Mortgagor" and that the harm caused by the failure to circle the appropriate pronouns was minimized because the debtor was the sole mortgagor. Under these facts, she found that the omissions would not mislead a subsequent purchaser as to who acknowledged execution of the mortgage. Id. at 151-52.
The City argues that Dodd decided the identical issue in this case and is therefore controlling. According to the City, the first part of the "Dodd rule" concerns whether the error in the name of the party is apparent on its face. It maintains that the Debtor is identified by a defined term in the Acknowledgment and that because Steven R. Cummings is not a party to the Mortgage and had no involvement in the transaction, the reference to Steven R. Cummins is "an obvious typographical error and immaterial surplusage." See Defendant's Motion to Dismiss p. 9 ¶14 (doc. 4). The City states that the second part of the "Dodd rule" is whether the actual party can be identified with certainty from the four corners of the instrument. It contends that the Mortgage identifies the Debtor with certainty because the Acknowledgment refers to the "above-named Mortgagor," and the Debtor is named as the "Mortgagor" in both the opening paragraph of the Second Mortgage and on the signature line. Id. at ¶15. The City places great reliance on Amadu for its argument that the identification of the Debtor as the mortgagor is in substantial compliance with Ohio law. See Defendant's Reply to Trustee's Response (doc. 7) p. 6.
The court finds that Amadu is clearly distinguishable. The acknowledgment clause in that case referred to the "above named MORTGAGOR," but did not place any name in the space provided. Accordingly, there was nothing in the instrument that would mislead a subsequent purchaser concerning who acknowledged the signing of the mortgage. In contrast, insertion of "Steven R. Cummins" in the space following the words "above-named Mortgagor" in the Acknowledgment offers contradictory evidence that it was Steven R. Cummins and not Linda J. Koogle, fka Linda J. Ostendorf, who acknowledged his execution of the Mortgage. The court cannot say that this contradictory evidence would not mislead a subsequent bona fide purchaser or that, as in Fryman, the insertion of the personal pronoun left no doubt that the notary took the acknowledgment of the grantor. In the instant case, the Acknowledgment did not employ any personal pronouns. Perhaps if the Acknowledgment had indicated that the above-named mortgagor had acknowledged her signing of the Mortgage to be her voluntary act and deed, some clarity would have prevailed given that Steven R. Cummins appears to be a male, but the Acknowledgment instead used the gender neutral phrase "the voluntary act and deed of the Mortgagor."
In Burns, this court allowed that listing a completely different name for the mortgagor might be more confusing even than a blank acknowledgment clause. 435 B.R. at 512. Those exact facts are alleged here. If the name inserted in the space provided for that of the mortgagor had been some variation of Linda J. Koogle, fka Linda J. Ostendorf, the Dodd decision would likely apply. The same would be true if the name of the mortgagee, the City of Kettering, had been so inserted. See Administrator of Veteran's Affairs, 1985 Ohio App. LEXIS at *6 supra. However, given the lack of certainty as to the identity of the person whose signature was acknowledged caused by the insertion of the name, Steven R. Cummins, a person entirely unrelated to the transaction, in the space provided for the name of the mortgagor in the Acknowledgment, the court cannot find, as a matter of law, that the Mortgage is in substantial compliance with Ohio Rev. Code § 5301.01.
IV. Conclusion
For all these reasons, the Defendant's Motion to Dismiss (doc. 4) is denied. The court is concurrently entering an order on this decision.
IT IS SO ORDERED. Copies to: Harold W. Wampler, III, 1343 Woodman Drive, Dayton, OH 45432 (Counsel for the Plaintiff) Adam J. Biehl, 10 West Broad St., Ste 2100, Columbus, OH 43215 (Counsel for the Defendant)