Lack of due diligence in the preparation or execution of conveyance documents in real estate transactions can result in priority disputes and other headaches for mortgage holders in foreclosures and/or Chapter 7 bankruptcy cases. As demonstrated in an Ohio bankruptcy case entitled In re Rosario(1) decided on March 9, 2009, an unwaived dower interest can mean big trouble for the mortgage holder.
Although many states have abolished the concept of dower, it still exists in Ohio. Ohio law provides that a dower interest is created automatically when the person’s spouse owns real property at any time during the marriage, and it generally terminates upon divorce, or upon the death of the spouse who owns the dower interest if the death occurs during the lifetime of the spouse who owns the property. Generally, upon sale of the property subject to a dower right, a person who has not relinquished or been barred from his or her dower right is entitled to the value of a life estate in one-third of the real property. The value of the dower interest is calculated with the use of various tables provided by state law or the IRS.
In the Rosario case, the husband obtained a loan to acquire property, and gave the lender a "purchase-money" mortgage. His wife’s name, and the fact the he was married, did not appear on the deed. The wife did not sign either the note or the mortgage. Hence, upon the recording of the deed conveying title to the property to the husband, the wife automatically became the owner of a dower interest, and she did not expressly waive it in favor of the lender’s mortgage. The property was worth $357,000, and therefore, the value of the dower interest was substantial.
When the husband and the wife filed a joint Chapter 7 bankruptcy case, the lack of the wife’s signature on the mortgage caught the attention of the Chapter 7 trustee. The trustee claimed that: (1) the wife’s dower interest was a part of the bankruptcy estate; (2) the dower interest was entitled to priority over the purchase-money mortgage; and (3) the trustee was not obligated to abandon the dower interest in the property.
Because the husband had failed to make payments as required by the terms of the note, and because the amount of outstanding liens far exceeded the market value of the property, the trustee did not contest the lender’s entitlement to an order granting relief from the stay in order to proceed with a foreclosure action. However, the key issue presented was whether the trustee could be required to abandon his interest in the property.
Although the dower interest was created instantaneously when the husband acquired title to the property, the lender, citing an 1859 case, argued that its purchase-money mortgage, nevertheless, was entitled to priority over the dower interest. However, the court rejected the argument, holding that unlike a dower interest, which is created instantaneously, the lien of a purchase-money mortgage is not created until it is filed for record. Therefore, according to the court, the dower interest took effect prior to the purchase-money mortgage and is entitled to priority.
The court discussed the various methods of calculating the dower interest, such as the Bowditch Table, the American Experience Table or the Internal Revenue Code Tables. The value of the dower interest on the $357,000 property varied widely depending on which table was used, with resulting calculations between $12,888 and $99,000. In ruling on the motion for abandonment, the bankruptcy court decided that it was not necessary to determine which method should be used, because even using the Bowditch Table, which resulted in the lowest of the three possible values for the dower interest, the value was still great enough to defeat the lender’s argument that the trustee should be required to abandon the dower interest in the property. Therefore, although the court granted the lender’s motion for relief from the stay, it overruled the lender’s motion to require the trustee to abandon the dower interest.
As a result, unless the state foreclosure court chooses to apply the law differently than the bankruptcy court when the particular property is sold through foreclosure, the foreclosure court will determine the value of the dower interest. The value of the dower interest will then be disbursed to the bankruptcy trustee, and the mortgage holder will only be entitled to the balance of the proceeds of the sale remaining after the distribution to the trustee. Assuming the proceeds of the sale will not be sufficient enough to pay both the dower interest and the mortgage, the mortgage holder will incur a loss.
The mortgage holder’s loss, being suffered as a result of this case, will be a direct result of the failures of the mortgage processor and the closer to make sure that the marital status of the mortgagor appeared on the mortgage, and to require the wife to sign the mortgage in order to waive her dower interest in favor of the mortgage. A little more diligence on the front end would have avoided a five-digit loss by the lender.
To review a complete copy of the case, go here.
(1) Case No. 08-14392 (N.D. Ohio March, 2009)
If you have any questions on this information, please contact Mr. Larry R. Rothenberg, Esq. Larry Rothenberg is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., L.P.A. He is the author of the Ohio Jurisdictional Section contained within the treatise, "The Law of Distressed Real Estate", published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania and Michigan. Larry can be reached at (216) 685-1135 or via e-mail at lrothenberg@weltman.com.
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