Creating Thriving Communities Through Land Use And Real Estate Law

Another Bankruptcy Notary Case, But This Time The Bank Prevails

In a recent decision which we hope indicates that the Bankruptcy Court is less open to the bankruptcy trustees’ ever-creative arguments for avoiding mortgages, the United States Bankruptcy Court for the District of Massachusetts, Eastern Division, recently turned down a request from the Chapter 7 Trustee of the Debtor’s estate to invalidate a mortgage held by Wells Fargo due to alleged defects with the notary certificate.

This matter presented a typical set of facts, with one twist.  The Debtor purchased his property, and on June 21, 2007, executed the mortgage at issue.  The mortgage documents were recorded, consecutively, in the following order: the mortgage, a rider, an exhibit containing a legal description of the property, and two certificates of acknowledgement.  Here’s the twist – on December 12, 2014 (over 7 years after executing the mortgage), the Debtor recorded a Notice of Homestead.  On December 19, 2014, the Debtor filed a voluntarily petition pursuant to Chapter 7 of the Bankruptcy Code.

The Trustee alleged that because the notary certificates were recorded after the mortgage, rider, and property description, the mortgage was not “entitled to be recorded at the Registry due to the missing notary acknowledgement” and could therefore be avoided.  As stated by the Court:

“The Trustee notes that neither acknowledgement refers to the Mortgage, nor do they contain page numbers to signify to which documents they refer. Accordingly, the Trustee contends, it simply cannot be inferred from a review of all the recorded documents that the Debtor executed the Mortgage voluntarily or as his free act and deed. The Trustee argues, therefore, that the Mortgage is materially and patently defective and cannot give proper notice to prospective purchasers.”

After setting out the applicable Massachusetts law pertaining to mortgage notary requirements (or at least the Massachusetts law as interpreted in prior Bankruptcy Court decisions), the Court concluded that:

“It is apparent to this Court, as it would be to any hypothetical bona fide purchaser, that the Mortgage and the Rider constitute a single integrated document recorded at the same time and consecutively paginated by the Registry of Deeds . . . It is clear from a review of the recorded pages that the two certificates of acknowledgment refer to these two signatures of the Debtor. Neither the precise order of the pages nor the inclusion of the Description of Property confuses the issue. Any hypothetical bona fide purchaser would be put on notice that the Mortgage and the incorporated Rider were signed voluntarily by the Debtor.”

Practically speaking, this decision should have been inevitable – the precise recording order of documents is not mandated by statute or otherwise in Massachusetts, so long as the notary certificate is “endorsed or upon or annexed to” the mortgage.  Clearly those requirements were met here.  Unfortunately, given the recent line of notary-clause-related bankruptcy cases, this decision stands out.

As to the twist – in a somewhat unusual request, the Trustee had also requested a declaration that the Trustee assumes the status of the first‐position mortgage holder on the real property in question, senior to the Debtor’s homestead exemption.  As the Court states:

“The Trustee further argues that the avoided transfer is preserved for the benefit of the estate under 11 U.S.C. § 551. The Trustee asserts that preservation puts the estate in the shoes of the creditor whose lien is avoided. Thus, while the unperfected Mortgage is unenforceable against third parties, it remains valid against the Debtor. Additionally, the Trustee contends that because the Mortgage was recorded prior to the Debtor’s declaration of homestead, the claim of homestead is not effective as against the Trustee and remains subordinate to the Mortgage. Thus, the Trustee would have the Court conclude that pursuant to § 551, the avoided Mortgage is preserved for the benefit of the bankruptcy estate and the Trustee should be deemed to have assumed Wells Fargo’s first position Mortgage against the [] Property, superior in priority to the Debtor’s claim of homestead.”

Having found in the bank’s favor as to the validity of the mortgage, the Court did not reach the merits of the Trustee’s claim to assume a priority position over the claim of homestead.  However, this issue is likely to arise again in another case, should the facts present a similar story.