The U.S. Court of Appeals for the First Circuit recently affirmed a bankruptcy court's grant of a debtor's motion for summary judgment allowing the debtor to void a mortgage under the "strong arm" provision of the Bankruptcy Code.
In so ruling, the First Circuit held that the omission of a debtor's name from a certificate of acknowledgement is a material defect under Massachusetts law, and that this omission fails to charge a bona fide purchaser with constructive knowledge of the instrument. As such, the Court held that the mortgage could be avoided in bankruptcy by the debtor.
A copy of the opinion is available at: Link to Opinion
The appeal was brought a mortgagee after a Massachusetts bankruptcy debtor commenced an adversary action in a Chapter 11 proceeding in Bankruptcy Court.
The mortgagee initiated pre-foreclosure proceedings against the debtor and the filed for Chapter 11 bankruptcy. In the debtor's petition, the mortgage was identified as unliquidated and disputed. Because the debtor's name was missing from the certificate of acknowledgement, she then commenced an adversary proceeding against the mortgagee, seeking to avoid the mortgage.
As you may recall, "[u]nder the Bankruptcy Code, a mortgage may be avoided if a hypothetical bona fide purchaser of the mortgaged properly would not be charged with constructive notice of the mortgage." In re Daylight Dairy Products, Inc., 125 B.R. 1, 3 (Bank. D. Mass. 1991) (citing 11 U.S.C. § 544(a)). Avoidance of the mortgage leaves the debt unsecured and the creditor "to stand at the end of the line with other unsecured creditors in sharing unencumbered assets of the debtor."
The mortgagee argued that "[t[he recording of a mortgage with such a defect was effective to provide constructive notice of the mortgage; and, in any event, registration of the mortgage provided sufficient notice to subsequent bona fide purchasers." The bankruptcy court disagreed, and granted summary judgment in favor of the debtor. The district court concurred, and this appeal followed.
On appeal, the First Circuit noted that Massachusetts law allows for two methods for giving constructive notice of a mortgage on real property: properly record the mortgage in the registry of deeds (Mass. Gen. Laws ch. 183, § 4), or register the mortgage with the Land Court (Mass. Gen. Laws ch. 185, § 58.5).
Under Massachusetts law, "a properly recorded mortgage provides notice of a security interest, but a recording is not effective - - indeed is literally barred under Massachusetts law -- unless there is a certificate of acknowledgment or proof of its due execution attached." Mass. Gen. Laws ch. 183, § 29.6."
In addition, Massachusetts law requires the grantor to "acknowledge that [he or she] has executed the instrument as [his or her] free act and deed," and the statute requires that "a certificate reciting that the grantor appeared before the officer making the certificate and made such acknowledgment . . . be attached to the instrument in order to entitle it to be recorded." Bank of Am., N.A. v. Casey, 52 N.E.3d 1030, 1035 (Mass. 2016) (quoting McOuatt, 69 N.E.2d at 809); see also Mass. Gen. Laws ch. 183, § 30 (specifying the requirements for a certificate of acknowledgment).
In the instant recording, there was no such certificate because the name was left blank.
The First Circuit held that, based on the plain language of Massachusetts law, omitting the debtor's name would render the recording of the mortgage ineffective because there is not a proper certification of acknowledgment.
The First Circuit conceded there was no definitive law deeming this type of defect as material, but nevertheless held that the weight of the precedent leaned in favor of strictly construing the statutory requirements relating to certificates of acknowledgment. In fact, the Appellate Court noted, bankruptcy courts have deemed certificates of acknowledgement lacking the debtor's name to be materially defective under Massachusetts law.
The First Circuit reasoned that there was no reason to "resist the momentum of the precedent" especially because this type of defect is easily avoided. The Court saw no reason to "eliminate an express requirement that the Massachusetts legislature ha[d] specified as a condition for proper recording," and thus held that the recording of the mortgage was not effective to give constructive notice to third parties.
As to the mortgagee's second argument, that effective notice was given by registering the mortgage with the Land Court, the First Circuit found that this argument had no "toehold" in Massachusetts' statutes.
The mortgagee relied on Mass. Gen. Laws ch. 185, § 58, "in which the Massachusetts legislature provides that registration of a lien in the proper district 'be notice to all persons,' but that notice applies only to liens which, 'if recorded, filed or entered in the registry of deeds, affect the land to which it relates.'"
The First Circuit agreed with the bankruptcy's interpretation of Massachusetts law, stating that it "incorporates the filing standards for recorded land," including the acknowledgment requirement, "into the land registration system as the condition for the act of registration to be notice to third parties." In re Mbazira, 518 B.R. at 21.
Although the mortgagee argued that this reading of section 58 "is unsupported and would usurp the function of the Land Court's registration process," the First Circuit pointed out that they were not concerned with other kinds of notice or the other functions of the land registration system, but only with constructive notice. The Court stated actual notice to individuals who consult the land registry is unaffected. See In re Woodman, 497 B.R. 668, 670 n.2 & 673 (Bankr. D. Mass. 2013).
Finally, the mortgagee returned its focus back to section 58, arguing that "any document which a person could record that would affect the land would also provide notice once it is accepted for registration by the Land Court." However, the First Circuit reiterated, that because the mortgage here was lacking a proper certificate of acknowledgment, it was not a mortgage that could have been properly recorded. See Part II.A., supra; Mass. Gen. Laws ch. 183, § 29 ("No deed shall be recorded unless a certificate of acknowledgment or the proof of its execution . . . is endorsed or annexed to it.").
Despite the mortgagee's argument that the Land Court accepted the mortgage for registration and the mortgage appeared on the Certificate of Title, the First Circuit held that did not create constructive notice to third parties under Massachusetts law, because constructive notice is defined by state law and in Massachusetts, that requires a proper certificate of acknowledgment. See Mass. Gen. Lawsch. 185 § 58; id. ch. 183 § 4.
Therefore, because there was no constructive notice giving rise to a duty to conduct an investigation, the hypothetical bona fide purchaser would not be charged with inquiry notice.
For the above stated reasons, the First Circuit held that summary judgment was properly granted in favor of the debtor as the omission of the debtor's name from the certificate of acknowledgement created a material defect under Massachusetts law and a bona fide purchaser would not be charged with constructive knowledge of the instrument, and that the mortgage could therefore be avoided.
Ralph T. Wutscher
Maurice Wutscher LLP
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