Court Opinion

ID: 9494025
Source: CourtListenerOpinion
Date Created: 2023-08-05 15:26:53.277774+00
Date Added: 2024-06-11T17:56:10.498232
License: Public Domain

BATCHELDER, Circuit Judge,
dissenting.
Chase Manhattan Bank (“Chase”) appeals the order of the bankruptcy court, affirmed by the Bankruptcy Appellate Panel of the Court of Appeals for the Sixth Circuit (“BAP”), permitting the Trustee in Bankruptcy to avoid the debtors’ mortgage to Chase because it had not been properly executed. Because I believe that the majority errs on two fronts, I must respectfully dissent.
First, decisional law from Ohio’s state courts should control the majority’s analysis. But it does not. Instead, a bankruptcy court opinion, which does not control this panel’s interpretation of Ohio law, drives the majority’s analysis. Second, to the extent that the majority purports to interpret and apply decisional law from Ohio’s courts, I believe the majority misreads that decisional law.
The majority acknowledges that the question of whether a mortgage on real property is valid falls squarely within the domain of the law of the state where the property is located. See Watson v. Ken-lick Coal Co., Inc., 498 F.2d 1183, 1190 (6th Cir.1974) (“Property law is, and must be, a creature of state law, with peculiar nuances in each jurisdiction.”). In this case, the law is Ohio’s. When faced with a *1029question of Ohio law, the majority must interpret and apply that law as would Ohio’s state courts. See C & H Entm’t, Inc. v. Jefferson County Fiscal Ct., 169 F.3d 1023, 1026 (6th Cir.1999); 28 U.S.C. § 1652 (Rules of Decision Act).1 But the majority does not.
Rather than adhere to what Ohio’s state courts have said about Ohio law, the majority follows Helbling v. Krueger (In re Krueger), No. 98-18686, Adv. No. 99-1016, 2000 WL 895601 (Bankr.N.D.Ohio Jun. 30, 2000). In so doing, I believe the majority runs afoul of the Rules of Decision Act because the Act applies not only to a state’s substantive law, but to the state courts’ construction of that law. See Doggrell v. Great Southern Box Co., Inc., of Miss., 206 F.2d 671, 674 (6th Cir.1953). Hence, we cannot dispense with what Ohio courts have said about Ohio law simply because we might prefer the analysis and result offered by a federal bankruptcy judge’s view of Ohio law.
At issue in this case is how an Ohio court would resolve the inconsistency between the testimony of the debtors and the title company representative with regard to the execution of the mortgage. Ohio law is clear on this question and has been clear for a long time. In 1887, the Ohio Supreme Court held that “where a party, who has in fact signed a deed that purports to be acknowledged in due form of law, claims that the certificate is false, the security of title and the repose of society require that he should establish the fact by clear and convincing proof. A mere preponderance is not sufficient.” Ford v. Osborne, 45 Ohio St. 1, 12 N.E. 526, 527 (1887). Nearly half a century later, an Ohio court of appeals addressed a case in which the mortgagors sought to invalidate a $2,500 mortgage they had granted the Coshocton Bank. On its face, the mortgage appeared to have been properly executed and recorded. The appellate court held, “It [the mortgage] therefore carries with it a presumption of validity, and in order to destroy its effect as a mortgage it must be shown to be defective by the contesters, and by a preponderance of the evidence.” Coshocton Nat'l Bank v. Hagans, 40 Ohio App. 190, 178 N.E. 330, 330 (1931). As in the case now before us, the notary and witnesses in Coshocton National Bank testified that they had no independent knowledge or recollection of the signing but that they never signed any instrument as witnesses or as notary unless the parties were present and signed the instrument in their presence. The court held, “This is all that could reasonably be expected under the circumstances, and a positive statement of an inflexible rule always adhered to by a notary or witness must carry great weight in the consideration of their evidence.” Id. (Emphasis added).
More recently; another Ohio court of appeals reiterated the Ohio Supreme Court’s rule that the presumption of validity flowing from a deed that appears on its face to have been executed in due form may be overcome only by clear and convincing evidence, and that the burden of proof is on the party challenging the validity of the deed’s execution. See Weaver v. Crommes, 109 Ohio App. 470, 167 N.E.2d 661 (1959). Other recent Ohio decisions have held explicitly that, in contrast to the *1030great weight that must be accorded to the testimony of the notary, the testimony of the mortgagors “is insufficient in law to overcome the certificate of acknowledgment by the notary.” Paramount Fin. Co. v. Berk, 179 N.E.2d 788, 788 (1962). See Society Nat’l Bank v. Andrasic, No. 12447, 1986 WL 398, at *2 (Ohio Ct.App. Nov. 5, 1986) (following Paramount ).2
Furthermore, the Ohio Legislature has enacted legislation that takes Ohio law one step further. A recent bankruptcy court opinion explains:
In the last few years chapter 7 trustees in this district have elicited testimony from several debtors at their 341 creditors’ meeting that only one of the two named attesting witnesses was actually present when the mortgage on their property was signed. This has resulted in the threat that a substantial number of mortgages, whose validity and enforceability are otherwise unquestioned, could be avoided by trustees in bankruptcy. In response to that threat, the Ohio legislature enacted Ohio Rev.Code § 5301.234 which, in general, would preclude impeachment of the attestation and acknowledgment of a facially valid mortgage except in cases of actual fraud and would make the recording of a facially valid mortgage constructive notice to all persons, including specifically bona fide purchasers, thus cutting off the trustee’s attack under section 544(e) of the Bankruptcy Code. However, Ohio Rev.Code § 5301.234 became effective June 30, 1999, ... [and] every opinion in which this section has been considered has denied it retroactive application.
In re Jeanette Williams, 240 B.R. at 885-86. Although the Williams court held that the Ohio statute did not apply to that case, the court determined — on facts very similar to those in this case — that the Trustee did not meet her burden of proof necessary to overcome the presumption of validity of the mortgage, explaining that “the point where evidence on this issue becomes clear and convincing is much closer to the point where it dispels reasonable doubt than where it satisfies the preponderance test.” Id. at 889. Quoting the venerable Ohio case of Potter v. Potter, 27 Ohio St. 84, 85, 1875 WL 150 (1875), the court said, “[T]he presumption is so strongly in favor of the instrument that ... nothing short of a clear and convincing state of fact ... will warrant the court to interfere.” Williams, 240 B.R. at 890. I think it is worth noting the reason given by the Ohio Supreme Court in Potter for the strength of this presumption:
This principle rests upon the soundest reason and upon undisputed authority, and if not adhered to by the courts, or, when plainly disregarded, is not enforced by reviewing courts, the security and safety reposed in deliberately written instruments will be frittered away, and they will be left to all the uncertainty incident to the imperfect and ‘slippery memory’ of witnesses.
Potter, 27 Ohio St. at 85.
The newly enacted Ohio Rev.Code § 5301.234 does not apply to the Zap-tocky’s mortgage because that mortgage was executed in February of 1997. But the Ohio Legislature’s action is instructive — Ohio law, which previously disfavored such challenges, now expressly provides that, absent a showing of fraud, the presumption of validity of a recorded mortgage may not be overcome by evidence of defective execution of that mortgage.3
*1031In evaluating the validity of the Zap-tocky’s mortgage, neither the bankruptcy court nor the BAP considered that Ohio law accords great weight to a notary public’s testimony and discounts a mortgagor’s testimony with regard to the circumstances surrounding the execution of a mortgage. Instead, the bankruptcy court discounted the notary’s testimony that he always followed company policy — rather than crediting it with the “great weight” required by Coshocton National Bank— and credited the testimony of the mortgagors, the only competing evidence before the court, which, under Paramount and its progeny, is insufficient as a matter of law to overcome the testimony of the notary. Helbling v. Krueger — the opinion heavily relied upon by the majority — makes the same mistake. And it is distinguishable on its facts.
In Krueger, the key factor in discrediting the notary’s testimony was that the other witness was, like the notary, a closer for the mortgage company. The bankruptcy judge found incredible the notion that one closer would have been called away from his own busy schedule to go to the home of customers of another closer in order to witness a mortgage he was not closing. See Krueger, 2000 WL 895601, at *2. Those are not the facts here. Consequently, even if I were to agree that Krueger passes muster under the Rules of Decision Act (and I do not), I think it inapplicable to this case, which presents very different facts.
As a matter of Ohio law, in the face of Mr. Williams’s testimony that he would not, under any circumstances, close a loan without the proper number of witnesses being present, the debtors’ testimony is simply not sufficient to overcome the presumption that the mortgage was properly executed.4 Therefore, because it is clear that an Ohio court would have held that the presumption of validity of this mortgage had not been overcome by clear and convincing evidence, I would hold that the bankruptcy court’s finding of fact to the contrary is clearly erroneous.
Section 544(a) vests the Trustee with certain strong-arm powers to avoid transfers that would be voidable by a judicial lien creditor, unsatisfied execution creditor or bona fide purchaser of real property, as those are defined under applicable state law. See Bash v. Check (In re Check), 129 B.R. 492, 494 (Bankr.N.D.Ohio 1991). Whether the Trustee can be treated as either a judicial lien creditor or a bona fide *1032purchaser of real estate for the purpose of exercising strong arm power under section 544(a) is determined under applicable state law as of the time the bankruptcy is commenced. See Owen-Ames-Kimball Co. v. Michigan Lithographing Co. (In re Michigan Lithographing Co.), 997 F.2d 1158, 1159 (6th Cir.1993).
Because Chase’s mortgage was properly recorded before the Zaptockys filed their bankruptcy petition, the Trustee cannot, under Ohio law, stand in the shoes of a bona fide purchaser without notice. See City of Toledo v. Brown, 130 Ohio St. 513, 200 N.E. 750, 753 (1936). Nor can Chase’s valid lien be avoided by the Trustee standing in the shoes of a hypothetical judicial lien creditor. See Bank of Cleveland v. Sturges, 2 F. Cas. 626, 627 (D.Ohio 1840). Therefore, I would hold that the bankruptcy court erred as a matter of law when it allowed the Trustee to avoid Chase’s mortgage in the Zaptocky’s property. Accordingly, I would reverse the order of the bankruptcy court.

. See also Sherlund v. Lincoln Nat’l Life Ins. Co., No. 88-1585, 1989 WL 76159, at *3 (6th Cir. July 13, 1989) (“Indeed, unless Congress or the Constitution require otherwise, the Act mandates application of relevant state law even if the basis for jurisdiction is a federal question.”); Watson v. McCabe, 527 F.2d 286, 288 (6th Cir.1975) ("Application of the Rules of Decision Act, 28 U.S.C. § 1652 (1970), does not depend on the jurisdictional basis for an action, [citations omitted] The law to be applied by a federal court depends on the nature of the issue under consideration. If the issue is a federal matter, federal law will apply. If the issue concerns a non-federal matter, state substantive law applies.”).

. See also Simon v. First Union Mortgage Corp. (In re Burnham), 231 B.R. 270, 274 (Bankr.N.D.Ohio 1999) (same); Baumgart v. Ford Consumer Fin. (In re Sal amone), 231 B.R. 628, 633 (Bankr.N.D.Ohio 1999) (same).

. Ohio Rev.Code § 5301.234 provides:
*1031(A) Any recorded mortgage is irrebuttably presumed to be properly executed, regardless of any actual or alleged defect in the witnessing or acknowledgment on the mortgage, unless one of the following applies:
(1) The mortgagor, under oath, denies signing the mortgage.
(2) The mortgagor is not available, but there is other sworn evidence of a fraud upon the mortgagor.
(B) Evidence of an actual or alleged defect in the witnessing or acknowledgment on the mortgage is not evidence of fraud upon the mortgagor and does not rebut the presumption that a recorded mortgage is properly executed.
(C)The recording of a mortgage is constructive notice of the mortgage to all persons, including without limitation, a subsequent bona fide purchaser or any other subsequent holder of an interest in the property. An actual or alleged defect in the witnessing or acknowledgment on the recorded mortgage does not render the mortgage ineffective for purposes of constructive notice.

. Notably, this same bankruptcy court correctly applied Ohio law on this issue in at least two subsequent cases. See In re Burnham, 231 B.R. at 275; In re Salamone, 231 B.R. at 633-34.