Mortgage Execution: Even a “Teensy-Weensy Boo-Boo” Can Come Back To Bite You

Wells Fargo Bank, N.A. v. Gordon (In re Codrington), 716 F.3d 1344 (11th Cir. 2013) –

A Chapter 7 trustee sought to use his strong arm powers as a hypothetical bona fide purchaser to avoid a security deed.  He argued that a minor error in execution meant that the security deed did not provide constructive notice to a purchaser even though it had been accepted for recording.

As discussed in prior blog posts (for example, Bankruptcy “Strong Arm” Powers: Bye Bye Mortgage), recording a document typically provides constructive notice under applicable state law.  However, if the document is not properly recorded, that generally means that a bona fide purchaser can acquire the property free and clear of the claims evidenced by the document.  Under section 544 of the Bankruptcy Code, a trustee (or debtor-in-possession) can assert the rights of a hypothetical bona fide purchaser under state law, which can allow a trustee to avoid unrecorded or improperly recorded mortgages in a bankruptcy.

The applicable state statute in this case provided:

In order to admit a mortgage to record, it must be attested by or acknowledged before an officer as prescribed for the attestation or acknowledgement of deeds of bargain and sale; and, in the case of real property, a mortgage must also be attested or acknowledged by one additional witness.  In the absence of fraud, if a mortgage is duly filed, recorded, and indexed on the appropriate county land records, such recordation shall be deemed constructive notice to subsequent bona fide purchasers.

In a 2011 decision the state supreme court concluded that in order for a document to be “duly filed, recorded, and indexed,” the document must on its face appear to comply with the recording requirements.  If a mortgage lacked one of the required attestations, it was defective on its face, and thus was ineligible for recording and would not be deemed to provide constructive notice.

With respect to the security deed at issue, the signature page contained an attestation by an official witness, but was not signed by an unofficial witness.  However there was a Waiver of Borrower’s Rights Rider that was properly acknowledged before both official and unofficial witnesses.  In addition, both the security deed and the rider indicated that the rider should be incorporated into the security deed by reference – although the only rider specifically listed in the security deed was a different rider, and the rider did not specifically identify the security deed or the encumbered property.

The lender (Wells Fargo) argued that there was no reason the unofficial witness was required to sign on the main signature page, and a signature on the rider was sufficient since it was all one document.  It also argued that the language in both the security deed and the rider incorporating the rider into the security deed by reference reached the same result.  Not surprisingly, the chapter 7 trustee took the opposite position.

After reviewing the arguments and the decisions of the bankruptcy court and district court, the 11th Circuit elected to certify two questions to the state supreme court:

 (1) Whether a security deed that lacks the unofficial witness signature should be considered “duly filed, recorded[,] and indexed” as required by [state statute] such that a subsequent hypothetical bona fide purchaser would have constructive notice when the deed incorporates the covenants, terms, and provisions of a rider that contains the attestations required by [statute] and said rider is filed, recorded, and indexed with the security deed?

(2) If the answer to question one (1) is in the negative, whether such a situation would nonetheless put a subsequent hypothetical bona fide purchaser on inquiry notice?

Wells Fargo Bank, N.A. v. Gordon (In re Codrington), 691 F.3d 1336 (11th Cir. 2012).

In Wells Fargo Bank, N.A. v. Gordon, 292 Ga. 474 (Ga. Feb. 18, 2013), the state supreme court advised that the security deed did not provide constructive notice, nor was it sufficient to put a purchaser on inquiry notice.

On the first question, the security deed lacked the signature of the unofficial witness.  Therefore it was ineligible for recording and did not provide constructive notice.  End of story.

On the question of whether incorporating the rider served to cure the defect, the state supreme court elected to adopt the analysis of a bankruptcy court in another case:

By attesting a document, an individual signifies that he has witnessed the execution of the particular document.  Black’s Law Dictionary 117 (5th Ed. 1979) (citations omitted).  Thus the signature of the [the unofficial witness], which appears on the adjustable rate rider, attests to the proper execution of that document only.  Although the adjustable rate rider is incorporated into the terms of the deed to secure debt, the deed to secure debt itself remains improperly attested and ineligible for recordation.

Thus, the state court concluded that the documents did not provide constructive notice, with the comment that “it costs nothing for lenders or their agents to review their paperwork to make sure the proper signatures are in place before submitting documents to the superior court clerk for recording.”

In discussing whether the properly executed waiver was sufficient to provide “inquiry notice,” the state court noted that the waiver identified the lender and grantors, but only generally referenced a security deed and did not describe the property encumbered by the security deed.  Given the failure to identify the affected property, the waiver was not sufficient to put a bona fide purchaser on notice.

Based on these responses to the certified questions, the 11th Circuit affirmed the district court judgment that the security deed and rider did not provide sufficient notice to defeat a hypothetical bona fide purchaser.  The consequence of this determination is that the lien of the security deed can be avoided in the bankruptcy.

In some states there are remedial provisions that provide that once a document is actually recorded, it will be deemed to be in compliance with many of the recording requirements even if it is not.  Regardless, that was not the case here.  One missing signature was fatal.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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