Under Bankruptcy law, a Chapter 7 Trustee acquires the rights of a bona fide purchaser for value upon the filing of a Chapter 7 petition.  A bona fide purchaser takes real property subject only to liens that are properly perfected.  In cases where a lender’s mortgage was not executed in accordance with Ohio law, the Trustee is able to set the mortgage aside and sell the property free and clear of the lien.  The most common mistake that lenders make is not properly acknowledging the signatures of one or both of the debtors on the mortgage.  Ohio law requires that signatures of the mortgagors be acknowledged in the presence of a notary public.  Bankruptcy courts are routinely allowing Chapter 7 Trustees to avoid mortgages when the notary acknowledgment is not signed correctly.              

This issue arose recently during a case in which I was defending a mortgage lender in an avoidance action by the Trustee.  A husband and wife owned a piece of property jointly and granted my client a mortgage on the property to secure the loan.  The wife signed the mortgage on behalf of the husband pursuant to a valid power of attorney.  The wife subsequently filed a Chapter 7 bankruptcy.  The Chapter 7 Trustee filed an adversary complaint alleging that the mortgage loan was avoidable as to the husband, because the notary acknowledgment clause did not reference the wife’s signature on behalf of the husband.  The bankruptcy court ruled in my client’s favor, holding that the mortgage was signed pursuant to a power of attorney and that the notary’s acknowledgment of the wife’s signature was sufficient to convey the interest in the property.

Even though the bankruptcy court ruled in my client’s favor is this particular case, mortgage lenders need to be aware that Trustee’s are closely examining the notary acknowledgment section of mortgages.  Creditors should consult legal counsel for advice on the execution of mortgages in their respective jurisdictions.