Harker v. PNC Mtg. Co. (In re Oakes), 581 B.R. 500 (6th Cir. B.A.P. 2018) –
A chapter 7 trustee sought to avoid a recorded mortgage with a defective acknowledgment using his strong arm powers. The bankruptcy court ruled in favor of the trustee, and the mortgagee appealed to the Bankruptcy Appellate Panel (BAP).
The consequences of a defective acknowledgment are determined in the first instance by state law. Typically, if a mortgage does not comply with recording requirements (such as being properly acknowledged), it should not be recorded. In many states, if a mortgage is nevertheless accepted and actually recorded, it will still be treated as though it is unrecorded and thus there will be no constructive notice of the mortgage to a purchaser. This in turn means that a bankruptcy trustee will likely be able to avoid the mortgage using the powers of a hypothetical bona fide purchaser of real estate that has perfected its interest.
Mortgages were routinely avoided in Ohio using this approach until the state statutes were amended to provide that the recording of a document “shall be constructive notice to the whole world of the existence and contents of [the document] as a public record and of any transaction referred to in the public record, including, but not limited to, any transfer, conveyance, or assignment reflected in that record.” As a result, under Ohio law as revised (which governs this case) if a mortgage is actually recorded, a bona fide real estate purchaser is no longer able to avoid the mortgage solely because execution or acknowledgment was defective.