United States: Mortgage Acknowledgments: Tiny Deviation From Suggested Forms Can Spell Disaster

Weiss v. Wells Fargo Bank, N.A. (In re Kelley), 498 B.R. 392 (1st Cir. BAP 2013) –

A chapter 7 trustee sought to avoid a mortgage granted by the debtors on the basis that the acknowledgment was defective.  After the bankruptcy court granted the mortgagee's motion for summary judgment, the trustee appealed to the 1^st Cir. Bankruptcy Appellate Panel.

The debtors (Shawn and Annemarie Kelley) designated a third person (Shannon Obringer) as their attorney in fact to execute documents in connection with a refinancing of their property.  On the same date that the debtors executed a limited power of attorney in Massachusetts, Obringer executed a mortgage on their behalf in Pennsylvania.

She executed the mortgages for each of the debtors "by Shannon Obringer as attorney in fact."  The acknowledgment which followed the signatures stated as follows:

The trustee challenged the acknowledgment as defective because (1) it stated that the debtors appeared when they didn't, and (2) it did not state that the attorney in fact appeared before the notary public on behalf of the debtors to execute the mortgage as their "free act and deed."  He argued that the defects created "confusion and uncertainty" about the signatures.  The mortgagee countered that it was clear that the debtors were acting by their agent, who is the one who personally appeared.

This issue was key because the trustee's powers to assert the rights of a bona fide purchaser of real estate under Section 544 of the Bankruptcy Code to avoid a mortgage or other transfer of property are without regard to any actual knowledge of the trustee or creditors, but are subject to constructive knowledge – such as the constructive notice provided by a properly recorded document.  As reiterated by the BAP on appeal, under applicable state law if the acknowledgment was defective, the recorded mortgage would not provide constructive notice and could be avoided by a bona fide purchaser (and thus by the trustee).

The bankruptcy court sided with the mortgagee. While commenting that it would have been nice if the acknowledgment had been properly completed, the court agreed that it was clear that Obringer stood before the notary on behalf of the debtors.

On appeal, the trustee continued to assert that the acknowledgment was materially defective because (1) the debtors did not personally appear as indicated in the acknowledgment, (2) the method of verifying identification was left blank, and (3) the acknowledgment did not state that the mortgage was signed as the free act and deed of the debtors.

The BAP was not convinced by the first two points:  It was clear that appearance "by" an attorney in fact meant that Obringer appeared in a representative capacity, and the requirement to specify the evidence of identification was not based on the statute.  However, the third point turned out to be a winner for the trustee.

The court reviewed case law holding that there should be some sort of express statement that the grantors voluntarily and freely executed the instrument. It identified a statutory form (suggested but not mandatory) that addressed this requirement in the context of execution by a representive using the following language:

The court noted that the governor also published a form of acknowledgment by executive order:

The acknowledgment at issue in this case tracks the form suggested in the executive order.

In finding for the trustee, the BAP concluded that an acknowledgment by an agent must clearly state that execution was the free act and deed of its principals.  Although the acknowledgment stated that it was signed "'voluntarily for its stated purpose,' we are left to speculate whether the voluntariness relates to the principals (the Debtors) or to the attorney-in-fact (Obringer)."  Thus, the acknowledgment was defective, the mortgage did not provide constructive notice to a subsequent purchaser, and the mortgage could be avoided.

In some states once a document is accepted and recorded, it can no longer be challenged based on recording defects.  Obviously that is not the case in all states, as illustrated by this decision.  Although there have been a number of bankruptcy cases where sloppy acknowledgments have resulted in mortgages being avoided, this is a particularly scary case since it turned on deficiencies in language that was part of a publicly promulgated form.

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