Gordon v. Wells Fargo Bank, N.A. (In re Knight), 504 B.R. 668 (Bankr. N.D. Ga. 2014) –
A chapter 7 trustee sought to avoid a lien on the debtor’s interest in property by exercising his “strong arm” powers as a bona fide purchaser of real estate. The issue turned on whether the security deed had been properly witnessed, and thus whether it provided constructive notice of the lien to a bona fide purchaser under applicable state law.
This is another episode in a continuing saga: Under applicable state law, improperly executed or acknowledged documents may not be sufficient to provide constructive notice even if they have been accepted for recording. And if a document does not provide constructive notice, generally a trustee will be able to avoid the interest evidenced by the document. Using the “strong arm” powers under Section 544 of the Bankruptcy Code, a trustee may avoid transfers that are avoidable by a bona fide purchaser of real property, with the added factor that the trustee can exercise this right without regard to any actual knowledge (but generally subject to constructive knowledge).
Under Georgia law, to be “duly recorded” a real estate document “must be attested or acknowledged by an ‘official witness’ such as… a notary public… and it must also be attested or acknowledged by an additional ‘unofficial’ witness.” In this case:
- The debtor’s ex-husband (Mr. Knight) signed a security deed as borrower, and the debtor joined as the borrower’s spouse.
- Mr. Knight’s execution of the security deed was witnessed by a Florida notary, with the signature page followed by a notary page stating that both Mr. Knight and the debtor acknowledged to the notary that they executed the “instrument.”
- A Waiver of Borrower’s Rights was attached behind the security deed. The waiver was signed by Mr. Knight and the Florida notary on one page, followed by an additional page that was also signed by the closing attorney.
- A Closing Attorney’s Affidavit followed the waiver. This page was executed by the closing attorney and notarized by a Georgia notary public.
- All of this was followed by another borrower’s spouse signature page and another notary page stating that the debtor and Mr. Knight acknowledged to the Florida notary that they executed the “instrument.”
A defect in a document is “patent” if it is apparent on the face of the document, and the Georgia Supreme Court recently clarified that if a security deed has a “patent defect” the document does not provide constructive notice even if it is recorded. The critical fact in this case was that Mr. Knight’s signature on the security deed was witnessed only by the notary public, and not by an additional unofficial witness, which the trustee contended constituted a patent defect.
The lender (Wells Fargo) argued that the signature of the closing attorney on the Closing Attorney’s Affidavit was sufficient. It claimed that his signatures were “part and parcel” of the security deed, and the affidavit established that the attorney saw the execution of the documents and was witness to that fact.
The court did not reject out of hand that a signature on an attached document might be sufficient to attest to execution of a security deed. However, the language must be clear that the execution of the attached document clearly covers the security deed itself.
In this case the affidavit only stated that “Borrower(s) executed the Security Deed and Waiver of Borrower’s Rights.” In the court’s view, this did not make it clear that the attorney actually witnessed the execution. In fact, the debtor and Mr. Knight’s signatures were notarized in Florida, while the closing attorney’s signature was notarized in Georgia. In both states notaries may only notarize documents within their state borders. Thus, the court concluded that there was a “serious question” as to whether the closing attorney was actually present to witness execution of the security deed.
Wells Fargo relied on an 11th Circuit case in which execution of the closing attorney’s affidavit was sufficient to overcome a defect in the security deed. However that case involved a missing notary seal, and a notarized signature in the attached affidavit was sufficient to cure the defect in the official signature by establishing substantial compliance under a remedial statute. So, (1) the affidavit did not satisfy the attestation requirement, and (2) substantial compliance was not sufficient for an unofficial signature (since there was no similar remedial statute for unofficial signatures).
Instead the court relied on a different 11th Circuit case involving Wells Fargo and this same trustee that concluded execution of a rider incorporated into a security deed was not sufficient. (See Mortgage Execution: Even A “Teensy-Weensy Boo-Boo” Can Come Back To Bite You.)
Similarly, execution of the Attorney’s Closing Affidavit was not sufficient to meet the attestation requirement in this case. Thus, the court determined that the security deed was not duly recorded and did not provide constructive notice to the bona fide purchaser, so the trustee was entitled to avoid the security deed.
Note that in addition to avoiding the lien, the court held that “the Trustee is authorized to recover the deed or the value thereof from Wells Fargo for the benefit of the estate pursuant to 11 U.S.C. §§550 and 551.” Thus, the consequence of avoiding the lien was that a trustee had an option to either preserve the lien for the benefit of the estate or seek to recover the value of the lien from Wells Fargo. Not a happy prospect for a lender.