{¶ 1} Fairbanks Capital Corporation (“Fairbanks”) and Jonathan Robinson, defendants-appellants, appeal from a judgment of the Franklin County Court of Common Pleas, in which the trial court granted summary judgment to Mortgage Electronic Registration Systems (“MERS”), plaintiff-appellee.
{¶ 2} Tempest Properties and Management Corporation (“Tempest”) was the title owner of certain real property located in Columbus, Ohio. Eric Odita was Tempest’s president and owner. On August 21, 1998, Odita granted a first mortgage on this real property to Labyrinth Mortgage аnd Investment Company (“Labyrinth”) in the amount of $3,500. This mortgage was recorded on August 27, 1998. Odita then granted a second mortgage to Labyrinth on August 21, 1998, in the amount of $75,000. Odita signed the second mortgage in his individual capacity, and it was acknowledged by a notary public on August 21. The second mortgage was also recorded on August 27, 1998. The second mortgage was re-recorded on September 22, 1998. The re-recorded mortgage included Tempest as the mortgagor, and Odita signed in his representative capacity as president of Tempest. However, his signature was not notarized properly on the re-recorded mortgage. MERS now holds this re-recorded mortgage (“MERS mortgage”).
{¶ 3} On October 22, 1999, First National Security Corporation (“First National”) filed a foreclosure action against Odita, Tempest, and Labyrinth on the property. First National obtained a judgment against the parties on June 1, 2000. On October 30, 2000, Tempest sold the property to Robinson for $105,000. Robinson obtained a mortgage from Old Kent Mortgage Company (“Old Kent”) in the amount of $84,000. Fairbanks now holds the mortgage. The mortgage was recorded on Novеmber 22, 2000. Robinson’s and Old Kent’s Department of Housing and Urban Development (“HUD”) settlement statement specifically provided for a $75,000 payoff of the MERS mortgage. However, apparently, the $75,000 payoff never occurred.
1. The trial court erred in determining that plaintiff-appellee, MERS, was entitled to priority to the full extent of its mortgage plus interest where said mortgage was defectively executed and therefore not entitled to record pursuant to Citizens National Bank v. Denison, 16[5] Ohio St. 89 [59 O.O. 96 ,133 N.E.2d 329 ] (1956).
2. The trial court erred in failing to recognize the long-standing mortgage priority principle in Ohio that states that mortgage lien priority is determined by the first propеrly executed and recorded mortgage pursuant to O.R.C. § 5301.23.
3. The trial court erred in permitting plaintiff-appellee, MERS, to reform its defectively executed mortgage where the record illustrated that plaintiffappellee never affirmatively pled reformation nor any facts relative to mistake in accordance with Ohio Civil Rule 9(B).
{¶ 5} As appellants argue their first and second assignments of error together, we will also address them together. Appellants argue in their first assignment of error that the trial court erred in determining that MERS was entitled to priority to the full extent of its mortgage plus interest where the MERS mortgage was defectively executed and thus not entitled to record. Appellants argue in their second assignment of error that the trial court erred in failing to recognize the long-standing mortgage priority principle that mortgage lien priority is determined by the first properly executed and recorded mortgage pursuant to R.C. 5301.23.
{¶ 6} The trial court granted summary judgment to MERS. When reviewing a motion for summary judgment, courts must proceed cautiously and award summary judgment only when appropriate.
Franks v. Lima News
(1996),
{¶ 7} Appellants concede that MERS was entitled to lien priority to the extent that its mortgage paid off prior liens, or $34,418.80. For purposes of appeal, appellants contest only whether MERS was entitled to lien priority to the full extent of its defectively executed mortgage. Appellants rely largely upon R.C. 5301.01 and 5301.25 and
Citizens Natl. Bank v. Denison
(1956),
{¶ 8} The statute of conveyances, R.C. 5301.01(A), рrovides:
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 acknowledgement and subscribe the official’s name to the certificate of the acknowledgement.
{¶ 9} R.C. 5301.25(A) provides:
All deeds, land contracts * * * and instruments of writing properly executed for the conveyance or encumbrance of lands, tenements, or hereditaments * * * shall be recorded in the office of the county recorder of the county in which the premises are situated, and until so recorded or filed for record, they are fraudulent, so far as relates to a subsequent bona fide purchaser having, at the time of purchase, no knowledge of the existence of such former deed or land contract or instrument.
{¶ 10} MERS does not contest in this appeal that the signature on the second mortgage was defective insofar as Odita’s signature on behalf of Tempest was not acknowledged by a notary public. We аgree. See
Citizens Natl. Bank,
{¶ 11} A defectively executed mortgage is not entitled to record, and even if it is recorded, the defective mortgage is treated as though it has not been recorded. 69 Ohio Jurisprudence 3d (2004), Mortgages and Deeds of Trust, Section 103, As Against Subsequent Legal Intеrests. In
Citizens Natl. Bank,
supra, the Ohio Supreme Court held that under R.C. 5301.25, the recording of a defectively executed mortgage does not establish a lien with priority over subsequently recorded mortgages properly executed and that the rule is applicable to situations in which, by evidence, the defective condition of the conveyance is disclosed as well as to instances in which the instrument is defective on its face. Id.
{¶ 13} However, MERS asserts that because appellants had actual knowledge of MERS’s prior, defectively executed mortgage, they did not take their mortgage without notice and that appellants’ subsequent mortgage cannot have priority over MERS’s mortgage, even though it was defectively executed. MERS maintains that Citizens Natl. Bank stands only for the proposition that instruments that are not entitlеd to be recorded or that are defectively executed, such as those that have not been acknowledged as prescribed in R.C. 5301.01, do not serve as constructive notice to a subsequent purchaser even though recorded. MERS contends that the holding in Citizens Natl. Bank does not apply to situations, such as in the present case, in which the subsequent mortgagee takes with actual knowledge of the prior, defectively executed mortgage. Thus, MERS contends that a subsequent mortgagee who takes with actual knowledge of the prior defective mortgage cannot claim priority over the prior mortgage. MERS also points to the language in R.C. 5301.25 that indicates that until a mortgage is recorded, it is “fraudulent insofar as [it] relate[s] to a subsequent bona fide purchaser having, at the time of purchase, no knowledge of the existence of such former deed or land contract, or instrument.” MERS construes this code section to mean that even if a defectively executed mortgage is considered unrecorded, it loses priority only to a subsequent purchaser without notice but not to a subsequent purchaser with actual notice. MERS also cites numerous cases in its appellate brief for the proposition that R.C. 5301.25 permits an unrecorded mortgage to claim priority over a subsequently recorded mortgage if the subsequent mortgagee had knowledge of the existence of the former mortgage. Apparently, the trial court agreed with MERS’s reading of Citizens Natl. Bank, R.C. 5301.25, and the other cases cited by MERS in finding that MERS’s defectively executed mortgage was entitled to priority over appellants’ subsequent mortgagе because appellants had actual knowledge of the prior defectively executed mortgage.
{¶ 14} MERS and the trial court misconstrue both
Citizens Natl. Bank
and R.C. 5301.25. Nowhere in
Citizens Natl. Bank
does the Ohio Supreme Court limit paragraph one of its syllabus to situations in which only constructive notice is alleged. Although the particular facts in
Citizens Natl. Bank
concern con
{¶ 15} This court’s research reveals significant authority for the proposition that a defectively executed mortgage is invalid as to a subsequent mortgagee or lienholder, even if the subsequent mortgagee/lienholder had actual knowledge of the prior defectively executed mortgage. One recent commentator succinctly summarized Ohio law on this subject as follows: “In Ohio, * * * a defectively executed mortgage will be afforded no priority over subsequent legal interests or liens, even where the subsequent legal interests or liens were acquired with actual notice of the mortgage.” Dunaway, Law of Distressed Real Estate (2004), Section 78:3, Effect of Defectively Executed Mortgage. Numerous cases support this interpretation of the state of Ohio law on the subject. See, e.g.,
Langmede v. Weaver
(1901),
{¶ 16} Further, contrary to MERS’s contention that the holding in pаragraph one of
Citizens Natl. Bank
does not apply to a subsequent mortgagee who takes with actual notice of the prior defectively executed mortgage, a relatively recent case has applied
Citizens Natl. Bank
to find that a subsequent mortgagee with actual knowledge of a prior defectively executed mortgage is entitled to priority over the prior mortgage. In
Majestic Homes, Inc. v. Figgers
(Nov. 27, 1985), Lorain App. No. 3831,
{¶ 17} The couple filed a petition in bankruptcy some time after the construction of the new home. Bank one, the holder of the first mortgages on both the new and old homes, foreclosed on the new home, and the house was ordered sold. Bank two received no part of the proceeds of this sale. Through a series of assignments, bank two’s note and mortgage on the old home eventually came into the possession of an investment company.
{¶ 18} The couple eventually sold the old home to a secоnd couple, who obtained financing from a mortgage company. The mortgage company’s title agent uncovered the prior mortgages in favor of bank one and the homebuilder. The sale price agreed upon, however, was only sufficient to pay off bank one’s mortgage. The title agent then contacted the homebuilder to see if it would be willing to release its mortgage on the old home, but the homebuilder never did so. The title agent proceeded to close the sale of the old property and paid the debt owed to bank one. The title agency insured that the title was clear and that the mortgage company’s mortgage was a first lien. The mortgage company then assigned its mortgage to a third bank (“bank three”). The homebuilder then filed an action to foreclose on the old home, seeking a determination that its mortgage was entitled to priority over the mortgage company’s subsequent
{¶ 19} In affirming the trial court, the court of appeals concluded that the homebuilder’s mortgage was improperly notarized and, therefore, defective pursuant to R.C. 5301.01. Therefore, the court of appeals agreed with the trial court that the homebuilder’s defective mortgage was not entitled to be recorded and, although recorded, it could have no priority over later properly executed and recorded mortgages. Id., citing
Wayne Bldg. & Loan Co. v. Hoover
(1967),
{¶ 20} In the present case, there is no disputе that the MERS mortgage was defectively executed because Odita failed to properly notarize his signature on it. Further, there is no dispute that appellants had actual notice of the prior defectively executed mortgage, as evidenced by the HUD settlement statement. Applying the line of precedents outlined above to the present case, we find that Odita and Tempest’s defectively executed mortgage to MERS was not entitled to record and, though recorded, did not have priority over appellants’ properly executed and recorded mortgage, despite appellants’ actual knowledge of MERS’s prior mortgage at the time of recordation.
{¶ 21} It would seem that, as a matter of principle, a defectively executed mortgage should be superior to a subsequent legal interest if the subsequent legal interest was acquired with notice of the prior defectively executed mortgage. See 69 Ohio Jurisprudence 3d, Mortgages and Deeds of Trust, Section 103, supra. However, “[w]hile this is the rule in many jurisdictions, the rule is othеrwise in Ohio because of the recording statutes.” Id. Notwithstanding, with property rights it is not necessary that the outcome be the best outcome possible in each case; only that the outcome be consistent across every case so as to provide reliability and predictability. In addressing an issue similar to that in the present case, the Ohio Supreme Court noted that it was constrained by cases that had been affirmed and adhered to by subsequent legal authority for many years. See
White v. Denman
(1853),
Stability and certainty in the law, are of the very first importance. Hardships may sometimes result from a stern adherence to general rules. This is unavoidable under any system of jurisprudence. Some barrier is essential to guard against uncertainty. If judicial decisions are subject to frequent change, it would disturb and unsettle the great landmarks of property. Thе certainty of a rule is often more important than the reason of it; and in the case now before us, we think that the maxim, stare decisis et non quieta movere, is the safe and judicial policy, and should be adhered to. If the law, as heretofore pronounced by the court, in giving a construction to the statute, ought not to stand, it is in the power of the Legislature to amend it without impairing rights acquired under it.
Id. at 115.
{¶ 22} Therefore, although this court recognizes that the current ruling may seem intuitively unfair or inequitable to some observers, because there exists a significant line of authority supporting thе ruling, we follow these precedents based upon stare decisis and to lend stability to future property transactions. For these reasons, appellants’ first and second assignments of error are sustained.
{¶ 23} Appellants argue in their third assignment of error that the trial court erred in permitting MERS to reform its defectively executed mortgage. Reformation of an instrument is an equitable remedy whereby a court modifies an instrument that, because of mutual mistake on the part of the original parties to the instrument, does not evince the aсtual intention of those parties.
Greenfield v. Aetna Cas. & Sur. Co.
(1944),
{¶ 25} Pursuant to Delfino, in the present case, the trial court could not reform the defectively executed mortgagе between MERS and Tempest, as to do so would be to supply the formalities required by R.C. 5301.01 and create a new agreement for the parties thereto. Thus, the trial court’s reformation of the prior mortgage was improper. For these reasons, the trial court erred in granting summary judgment, and appellants’ third assignment of error is sustained.
{¶ 26} Accordingly, appellants’ three assignments of error are sustained, the judgment of the Franklin County Court of Common Pleas granting summary judgment to MERS is reversed insofar as that court found that MERS was entitled to lien priority beyond the extent to which its mortgage paid off the two prior liens, and this matter is remanded to that court for proceedings consistent with this opinion.
Judgment reversed and cause remanded.