In Deed - A Witness to Change in the Execution of Real Estate Documents

A Publication of Skidmore & Associates, A Legal Professional Association

By: Eric E. Skidmore, Esq.

On November 2, 2001, Governor Taft signed into law Substitute House Bill (Sub. H. B.) 279, which repealed part of Ohio Revised Code (O.R.C.) Section 5301.01 requiring two witnesses to attest, sign and subscribe their names to documentation associated with real estate transactions (i.e., deeds, leases, mortgages, land contracts). Sub. H. B. 279 also repealed other sections of the O.R.C. related to the execution of real estate instruments. To understand the "why" and the "how" of this change, one needs to look back at the evolution of the "two witnessing" principle, identify "what" was changed and "who" benefitted.

The attesting and witnessing requirement concerning conveyances of real estate by deed can be traced back to the Northwest Ordinance of July 13, 1787.1 The Ordinance of 1787 provided that no conveyance of real estate could be valid, unless "attested by two witnesses [which was to remain in effect] ... until the Governor and Judges should adopt laws...."2

In August, 1795, a law was adopted by the provisional governor and judges, which was borrowed from the state of Pennsylvania and published in Cincinnati, Ohio providing that "all deeds ... shall be acknowledged by one of the grantors ... or approved by one or more of the subscribing witnesses ... and shall be recorded ... and every such deed and conveyance that shall ... not be proved and recorded, as aforesaid, shall be adjudged fraudulent and void against any subsequent purchase, or mortgagee ...."3 The object of the ordinances was to give solemnity and notoriety to the transaction, and to preserve the evidence of it lessening the dangers of perjury and protecting against fraudulent and clandestine conveyances.4

The two witness requirement received plenty of legislative and judicial attention. The act of 1795 was amended in 1798, 1802, 1805, 1818, 1820, 1831 and 1833.5 The formalities were expanded to apply to mortgages, leases and land contracts. For decades, the Ohio courts have nullified and invalidated deeds6, leases7, and mortgages8, because the instruments were defectively witnessed. In 1953, O.R.C. 5301.01 was enacted, which prescribed as follows: "(1) the instrument must be signed by the grantor, vendor, mortgagor or lessor; (2) such signing must be acknowledged by him and in the presence of two witnesses, who must attest the signing and subscribe their names to the attestation; and (3) such signing must be acknowledged by the grantor, vendor, mortgagor or lessor before a notary public ... who must certify the acknowledgment and subscribe his name ...." (Emphasis added) O.R.C. 5301.01 perpetuated the two witness requirement, until the language "in the presence of two witnesses" was repealed by Sub. H. B. 279, effective February 1, 2002, nearly 215 years after it was introduced in the Northwest Ordinance of 1787.

After 200 years of existence, what was the impetus for change in the witnessing requirement? Unfortunately, I do not believe there is a reduced risk of perjury; nor fraudulent conveyances, which continue to congest our court system. The reason for repealing the witnessing requirement did not come as a result of the legislature's concern for the detrimental consequences to those executing defective land contracts, leases, deeds or assignments otherwise the change would have come sooner. The change came as a result of a recent conflict between lenders and one who stands in the shoes of a mortgagor as a bonafide purchaser for value and a hypothetical judgment lienor - the bankruptcy trustee.

For decades, residential lenders possessed an impregnable position as secured creditors under the provisions of the Bankruptcy Code (Code). In Chapter 7 and 13 bankruptcy cases the debtor and debtor's counsel kowtowed to residential secured creditors because of the many remedies available under the Code (i.e., relief from automatic stay, conversion, dismissal, adequate assurances). However, bankruptcy trustees are also afforded powerful duties and responsibilities of lien avoidance under Sections 544, 547 and 550 of the Code. In the past, there were few instances of conflict between the secured lenders orbit of statutory power and the omnipotent authority of a bankruptcy trustee. Since the late 1990's, a wave of mortgage refinancing appeared in Northeast Ohio, and bankruptcy trustees began to challenge the casual practices of escrow closings regarding the execution of mortgage instruments.

The nature of these escrow closings usually consist of a finance company relying upon a real estate agent or title company to circulate loan instruments to a residential buyer ("mortgagor") for signature, or a representative going to the borrower's home to obtain signatures. The prospective buyer is supposed to execute the mortgage before two attesting witnesses as required by O.R.C. 5301.01. This simple formality is breached in either of two ways: (1) The real estate agent or title representative witnesses and notarizes the borrower's signature to the mortgage without the presence of a second witness, therein, obtaining it after the fact and without the borrower present; or (2) the representative appears at the borrower's home to witness the borrower's signature and there is no other attesting witness or notary whereupon the representative returns to the place of business to obtain the requisite signatures after the fact and outside the presence of the borrower. The title company guarantees or warrants that the deed or mortgage is free from defect. The mortgage is then recorded with a latent defect, and subsequently assigned to another mortgage provider. This becomes the classic or typical "one witness mortgage" scenario.

In most instances, this defect will go unnoticed, because it is not apparent on its face - until the borrower files bankruptcy. Upon filing bankruptcy, the borrower ("debtor") testifies at a first meeting of creditors which is hosted by a bankruptcy trustee. Bankruptcy trustees routinely probe the facts and circumstances surrounding the borrower's execution of their home mortgage. The borrower does not recall two witnesses or a notary being present or recollects only one person was present when the mortgage was executed at the home.

The bankruptcy trustee files suit in an attempt to invalidate the mortgage, so when the home is liquidated, the proceeds are distributed to the general unsecured creditors rather than the lender who lent the funds to purchase the home. The lender becomes a general, unsecured creditor without priority. Once this fact pattern replicates as the economy slips into a downturn, the losses to residential lenders exponentially increase with devastating consequences. The lenders only recourse is against the title insurance underwriter. In the late 1990's the bankruptcy courts began to invalidate the one witness mortgages in Northeast Ohio.9 The mortgage and lending institutions coupled with the title insurance carriers stood to benefit most from the repeal of the two witnessing requirement.

In March, 1999, Governor Taft signed into law the Transportation Budget Bill, being Am. Sub. H. B. 163, creating O.R.C. 5301.234.10 This was a "pork barrel" attempt by the legislature to change the recording statutes associated with the controversy over a secured lender's predicament in one witness mortgage cases. O.R.C. 5301.234 created an "irrefutable presumption" that any recorded mortgage was properly executed. O.R.C. 5301.234 became effective on June 30, 1999, and seemed to create retroactive remedies to lenders in the one witness mortgage contest. O.R.C. 5301.234 deepened the controversy and the bankruptcy trustees began to challenge its constitutionality. On June 21, 2001, Bankruptcy Judge Baxter held that O.R.C. 5301.234 was unconstitutional, and that a bankruptcy trustee could avoid a mortgage which was not executed in the presence of two witnesses as required by O.R.C. 5301.11 On September 6, 2001, District Court Jude O'Malley held the "irrefutable presumption" of O.R.C. 5301.234 to be constitutional.12 The litigation involving one witness mortgage cases was not going to subside anytime soon - unless the legislature took immediate action.

Coincidentally, one month before the decision in the Barkley Case, H. B. 279 was introduced in the Ohio House to repeal the two witness requirement. Sub. H. B. 279 passed on October 10, 2001 thereby being introduced into the Ohio Senate. Sub. H. B. 279 was passed by the Ohio Senate on October 17, 2001 and signed by Governor Taft on November 2, 2001. Sub. H. B. 279 eliminated the requirement that real estate documents be signed and acknowledged in the presence of two witnesses. It also repealed O.R.C. 5301.234 in its entirety. Sub. H. B. 279 included a retrospective provision concerning the general presumption of validity of such instruments prior to its effective date of February 1, 2002. Not only are lenders excused from the two witness requirement in the future, but their prior defectively executed mortgages are presumptively valid against third-parties, including a bankruptcy trustee, thereby providing counsel on behalf of secured creditors the legislative authority to defeat avoidance claims in one witness mortgage suits filed after February 1, 2002. In all likelihood, avoidance suits pending prior to February 1, 2002 will probably continue until resolved or litigated. New filings will be on the wane unless the constitutionality issues of the new O.R.C. 5301.01 are tested and contested.

From a drafting perspective, sub. H. B. 279 provided statutory forms for deeds and mortgages to include the following:

"Executed before me on ___________ day of ___________ by _______________ who under penalty of perjury in violation of Section 2921.11 of the Revised Code, represented to me to be said person ...

_______________________________
(signature of Judge or Officer taking the Acknowledgment)."

However, the Ohio General Assembly subsequently modified these and other statutory forms in Am. H. B. 470 to include the following statement:

"Executed this __________day of __________ ...

________________________________
(signature of Grantor)."

Am. H. B. 470 was signed by Governor Taft on January 30, 2002 and became effective January 31, 2002.

The attorneys of Skidmore & Associates understand the changes associated with the passage of Sub. H. B. 279 and Am. H. B. 470 from the buyer, seller, real estate agent, title, lender and bankruptcy perspectives in the transactional and litigation context. If you have any interest in learning more about these changes in executing real estate documents, feel free to contact one of the Firm's attorneys.

[This article has been prepared for the purpose of disseminating information only and should not be interpreted or construed in any way as legal advice.]

1. Northwest Territory Ordinance of 1787, Sec. 2 (the application of Sec. 2 of the Northwest Territory Ordinance of 1787, the Land Ordinance of 1795, and the applicable sections of Ohio’s State Constitution in 1802, is reviewed in Lessee of Moore v. Vance, 1 Ohio 1 (1821)).
2. Id.
3. 1 Chase 167, 168 (1795); Moore, 1 Ohio at 11 (it should be noted that in 1795, Ohio had not been admitted as a state in the Union).
4. Id.
5. 1 Chase at 210, 343, 484; 2 Chase 1011, 1139, 1843 (1817); 3 Chase 1840 (1831).
6. Basil v. Vincello, 50 Ohio St. 3d 185 (1990) (legal title to parcel of real property did not pass where grantor signed deed outside presence of both witnesses); Patterson’s Lessee v. Pease, 5 Ohio 190 (1831) (grantor may maintain suit for title if no witnesses sign); Zerby v. Wilson, 3 Ohio 42 (1827) (admissions by a party cannot be made to take the place of a subscribing witness to a deed); Courcier v. Graham, 1 Ohio 330 (1824) (since June 1, 1805, two witnesses have been necessary to execute a deed).
7. Richardson v. Bates, 8 Ohio St. 3d 257 (1985) (a lease, being neither attested nor acknowledged, according to the provisions of the statute so governing its execution, is defective as a lease, and of no binding obligation); Langmede v. Weaver, 65 Ohio St. 17 (1901) (gas and oil lease for more than three years must be witnessed by two witnesses); Abbott v. Bosworth, 36 Ohio St. 605 (1881) (lease for ninety-nine years must have two witnesses); RKO Distributing Corp. v. Film Center Realty Co., 53 Ohio App. 438 (Hamilton 1936) (where a lease is defective in that it has no attesting witnesses, the same legal consequence follows as completely as if the instrument should be found defective in more than one respect); Fulton v. Dody, 7 Ohio Dec. 503 (Com. Pl. 1897).
8. Citizens Natl. Bank in Zanesville v. Denison, 165 Ohio St. 89 (1956) (a mortgage by two persons which is not signed and acknowledged by either mortgagor in the presence of two witnesses, and to which the signing by one mortgagor was not in fact acknowledged before a notary public is not constructive notice to subsequent mortgagees); White v. Denman, 1 Ohio 110 (1953) (where a mortgage is defective in its execution by having the name of but one witness subscribed to the attestation clause, the official signature of a justice of the peace will not supply the deficiency in the attestation); Am. Bank of Port Clinton v. Swartzlander, 21 Ohio Law Abs. 134 (Ottawa 1935) (where a recorded mortgage contains only one subscribing witness and after the error is discovered the name of another witness is added without re-execution, the mortgage is defectively executed); Priority Mortgage Inv. Co. v. Flesariu, 2 Ohio Law Abs. 760 (1924 ) (mortgage having only one attesting witness was effective between mortgagor and mortgagee but was not effective as to third person acquiring an interest in or lien upon the realty, even though third person had knowledge of mortgage).
9. In Re: Burns, 269 B.R. 20 (B.A.P. 6th Cir. 2001) (Chapter 7 trustee could avoid mortgage on Ohio real estate owned by debtors where mortgage was not witnessed by at least two witnesses, as required under Ohio law); In Re: Barkely, 263 B.R. 553 (Bankr. N.D. Ohio 2001) (mortgage which is not executed in presence of two witnesses, as required under Ohio law, is deemed valid and is not entitled to be recorded); In Re: Lepelley, 233 B.R. 802 (Bankr. N.D. Ohio 1999) (a suit brought by trustee, in exercise of his strong-arm powers as a subsequent boa fide purchaser, to set aside mortgages not having been properly executed and not entitled to be recorded under Ohio law, trustee satisfied burden of overcoming presumptive validity of mortgage, which appeared to have been validly executed on its face, by introducing credible testimony of notary and of Chapter 7 debtor-mortgagor that mortgage was not signed in presence of two witnesses as required under Ohio law; accordingly, the mortgage was avoidable under strong-arm provision); In Re: Burnham, 231 B.R. 270 (Bankr. N.D. Ohio 1999) (under Ohio law, an invalid mortgage lien is binding only between the borrower and the lender and is not effective against a valid judgment lien or against a bankruptcy trustee, in his or her capacity as _hypothetical judicial lien creditor_); In Re: Zaptocky, 231 B.R. 260 (Bankr. N.D. Ohio 1998), aff’d, 232 B.R. 76 (B.A.P. 6th Cir. 1999), aff’d, 250 F.3d. 1020 (2001).
10. Ohio Rev. Code Ann. _ 5301.234(A) (West 2001) provided “Any recorded mortgage is irrefutably presumed to be properly executed, regardless of any actual defect in the witnessing ... on the mortgage...”
11. Barkley, 263 B.R. at 553 (Bankr. J. Baxter held that the Ohio legislature’s enactment of _ 5301.234 was violative of Article II, Sec. 15(D) of the Ohio Constitution).
12. In Re: Haviaras, 266 B.R. 792 (Bankr. N.D. Ohio 2001) (Dist. Ct. J. O’Malley affirmed a Bankruptcy Court’s conclusion that any defects in witnessing of a mortgage were not such as to permit a bankruptcy trustee to avoid the mortgage in exercise of its strong-arm powers).

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