Actual Knowledge Of Defectively Acknowledged Mortgage & Bona Fide Purchaser Status

Is it possible for a "purchaser" of real estate (for this purpose, "purchaser" = a buyer of said real estate, or a lender acquiring a security interest thereupon) to have actual knowledge of a land document that is defectively acknowledged and recorded in the office of the local land record registry and still be treated as a  bona fide purchaser?

A 2010 federal district court ruling in northern Ohio concluded, based on a state appeals court case, that yes, it appears it is possible in some cases - at least in Ohio. An excerpt from the ruling, in which the district court, sitting in its appellate capacity, reviewed the ruling of an earlier federal bankruptcy court decision:

• Under Ohio law, it has long been established that a defective deed is not entitled to record and, even if recorded, must be treated as unrecorded, which means it does not afford constructive notice of the conveyance to all the world. See, e.g., Citizens National Bank in Zanesville v. Denison, 165 Ohio St. 89 (1956); Straman v. Rechtine, 58 Ohio St. 443 (1898); Amick v. Woodworth, 58 Ohio St. 86 (1898); Erwin v. Shuey, 8 Ohio St. 509 (1858); White v. Denman, 1 Ohio St. 110 (1853).
  
  This longstanding rule has been applied more recently as well. See, e.g., MERS v. Odita, 159 Ohio App.3d 1, 5 (Tenth Dist. 2004) ("a defective mortgage is treated as though it has not been recorded").
  
  Indeed, the Odita court held that a defectively executed, albeit recorded, mortgage was not entitled to priority over a subsequent mortgagee's properly executed and recorded mortgage, even though the subsequent mortgagee had actual knowledge of the prior mortgage. Id. at 9.
  
  In so holding, the Odita court acknowledged that its ruling may seem unfair given the actual knowledge of the subsequent mortgagee. However, after a careful historical analysis of Ohio law upon the subject (See Odita, Id. at 9-10), the court explained:
  
  [A]lthough 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 the ruling, we follow these precedents based upon stare decisis and to lend stability to future property transactions.
  
  Id. at 10.(1)

Source: Bank of Am., N.A. v. Corzin, Case No. 5:09 CV 2520, No. 08-54674, Case No. 09-503, 2010 U.S. Dist. LEXIS 8755 (N.D. Ohio Feb. 2, 2010).

(1) The Odita court's discussion of the apparent inequity in the case law, as it relates to sloppy banksters and other careless secured lenders, follows:

• {¶ 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 otherwise 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), 1 Ohio St. 110, 115, 1853 WL 2. The court was also mindful that its decision was based on the construction given to a statute, had relation to rights of property, and had become a rule of property in determining priorities among creditors. Id. The court then explained:
  
  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. The 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 the 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.