It has become a regular exercise in the federal bankruptcy courts in Ohio to examine mortgage instruments for flaws in the execution of a mortgage. This exercise allows trustees to have the mortgage instruments found invalid, and the formerly secured creditor to usually end up with unsecured creditor status. This can be the case, even though it is clear that the parties to the mortgage signed it as otherwise indicated.

For an example, see In Re Sauer, 417 BR 523 (Bkrtcy S.D. Ohio 2009), a 2009 decision in which the failure of the notary to have printed the name of one of the parties in the acknowledgement when executing the mortgage resulted in the mortgage being found invalid. The case provides other cites of cases in which errors in acknowledgements have been found to void mortgages.

The obvious lesson from these examples is that lawyers acting as closing agents and/or title agents must be certain that all details of the execution of such documents have been properly completed, and in compliance with Ohio law. However, there may be other issues with which to be concerned as well.

For example, in doing a title search and providing an opinion of title, a lawyer and her/his employees may wish to review the signature and acknowledgement section of any mortgage carefully. If an attorney opines that a mortgage provides security in real estate, and the validity of the mortgage is later challenged, could that place the lender or other interested party in a position in which they did not expect to be placed with respect to the mortgage?

Counsel for a debtor in bankruptcy may wish to review mortgages carefully as well. If a debtor wishes to reaffirm on a mortgage after filing bankruptcy, a challenge to the validity of the mortgage on which the debtor intends to reaffirm may create some issues for the

debtor and counsel in completing any reaffirmation of debt as intended by the debtor.

Often, title insurance is in place to protect the lender from any ultimate loss if the mortgage is defective. However, title insurance companies, in OBLIC’s recent experience, will bring claims against their agents for any errors in closing the transaction for which a loss payment is made. Attorney-title agents, in particular, should take extra care in closing transactions, and reviewing the execution of mortgages securing the lender’s interest.

The trend toward challenging any potential defect in a mortgage likely arose with the financial crisis, and the foreclosure actions and bankruptcies being filed in conjunction therewith. Although some transactions may have involved examples of “predatory” lending, that is not an issue in determining whether or not an otherwise legitimate transaction was secured by a valid mortgage. Unless minor defects in execution are resolved in Ohio by way of some statutory reform, it appears this issue will continue to pose risk to lawyers engaged in real estate practice, and particularly those closing real estate transactions.