Avoiding Mortgages (Again): Consider Carefully the Form of Execution / Acknowledgment When Using a Power Of Attorney

HSBC Bank USA, N.A. v. Lassman (In re DeMore), 844 F.3d 292 (1st Cir. 2016)

A chapter 7 trustee sought to avoid a mortgage using his strong arm powers based on an improper acknowledgment by a person executing the mortgage under a power of attorney. The bankruptcy court ruled in favor of the trustee; the district court reversed; and the trustee appealed to the 1st Circuit.

As is typical, under applicable state law (1) an unrecorded mortgage is voidable by a bona fide purchaser (which meant that it could be avoided by a trustee using his strong arm powers), and (2) if a mortgage is not properly acknowledged, it is unrecordable. In particular, a mortgage must be accompanied by a certificate of acknowledgment that must make it clear that the mortgage was executed as the “free act and deed” of the grantor.

The trustee argued that the mortgage he was seeking to avoid was not properly acknowledged because it did not make clear that the document was executed as the free act and deed of the mortgagor (as opposed to the attorney-in-fact). The mortgagee responded that (1) the acknowledgment did comply with statutory requirements, (2) the property was registered land and the statutory requirements applied only to recorded land, not registered land, and (3) regardless notation of the mortgage on the certificate of title for the registered land provided constructive notice.

A standard acknowledgment attests that a person appeared before a notary and acknowledged that execution of the document was that person’s “free act and deed.” In the case of a mortgage, the goal is to establish that the mortgagor executed the document voluntarily for its stated purpose of encumbering property.

It is clear that the owner of property can authorize an attorney-in-fact to execute a mortgage on the owner’s behalf under a power of attorney. However, in that circumstance: execution is whose
free act and deed – the mortgagor (who is not executing the document) or the attorney-in-fact?

The acknowledgment in this case read as follows (emphasis added):

On this 27th day of April, 2004, before me, the undersigned notary public[,] personally appeared [the mortgagors] by their attorney-in-fact [name][,] under Power of Attorney recorded herewith proved to me through satisfactory evidence of identification, which were drivers licenses to be the person whose name is signed on the proceeding attached document, and acknowledged to me that he/she signed it voluntarily and for its stated purpose.

(Note that (1) the underlined text was handwritten insertions to a typed form, and (2) a statement that a document is voluntarily signed is viewed as the equivalent of “free act and deed.”)

An appendix to the statute imposing the acknowledgment requirement included the following example form of “Acknowledgement of Individual Acting by Attorney”:

On this ____day of _____________ , 19__, before me personally appeared A B, to me known to be the person who executed the foregoing instrument in behalf of C D, and acknowledged that he executed the same as the free act and deed of said C D.

A similar model was published by the Land Court:

Then personally appeared the aforementioned John Doe and acknowledged the foregoing instrument to be the free act and deed of Mary Doe.

Thus the trustee argued that a proper acknowledgment of a mortgage by an attorney-in-fact must expressly state that it is executed by the attorney-in-fact on behalf of and as the free act and deed of the mortgagor. Since the acknowledgment in this case was ambiguous on that point the trustee claimed that it was materially defective. (This meant the mortgage would be treated as unrecorded, and thus voidable by the trustee.)

The court conceded that the certificate of acknowledgment in this case showed only that the attorney-in-fact, not mortgagors, appeared before the notary. However, it concluded it was sufficient. The referenced power of attorney specifically authorized the attorney-in-fact to do all things necessary to obtain a mortgage, “including without limitation the right to execute, acknowledge and deliver any and all documents.” In addition, the mortgagors acknowledged that they signed the power of attorney voluntarily for its stated purpose. Thus, the court concluded that the effect was that the attorney-in-fact stated that execution was both his and the mortgagors’ free act and deed.

The court found further support for its position in a model form set forth in an Executive Order (identified in the Land Court Guidelines as acceptable for registration):

On this ____day of _____________ , 20__, before me, the undersigned notary public, personally appeared ______________ (name of document signer), proved to me through satisfactory evidence of identification, which were ___________ , to be the person whose name is signed on the preceding or attached document, and acknowledged to me that (he) (she) signed it voluntarily for its stated purpose, … (as attorney in fact for the principal) …

Similar to the acknowledgment at issue, this form does not expressly state that the person signing the document is doing so as the free act and deed of the grantor.

Consequently, the 1st Circuit affirmed the District Court holding that the acknowledgment was sufficient so that the mortgage could not be avoided.

There are a significant number of cases avoiding mortgages based on minor technicalities relating to execution and acknowledgment. As this case demonstrates, in the end a challenger does not always win the day, but this is a key area that deserves strict attention.

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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