The U.S. Court of Appeals for the First Circuit recently rejected a bankruptcy trustee’s effort to avoid a mortgage on the basis that the acknowledgment signed by the borrowers’ attorney-in-fact was defective under Massachusetts law, holding that the acknowledgment was not materially defective because as a matter of agency law the attorney-in-fact’s signature was the borrowers’ “free act and deed.”

A copy of the opinion in HSBC Bank USA, N.A. v. Lassman is available at: Link to Opinion.

The borrowers purchased a parcel of “registered land” in 1994 in North Attleboro, Mass. (the “subject property”). “Registered land” is real property for which a certificate of title is recorded with the Massachusetts Land Court, governed by chapter 184 of the Massachusetts General Laws.

In April 2004, the borrowers signed a power of attorney authorizing their attorney-in-fact to execute a mortgage encumbering the subject property. The attorney-in-fact subsequently signed a note and mortgage, which were “registered on the certificate of title” for the property in the Registry of Deeds of the Massachusetts Land Court for the county where the property was located.

Attached to the mortgage was a certificate of acknowledgment, signed by the attorney-in-fact, which attested that he appeared before the notary to sign the mortgage on behalf of the borrowers.

The borrowers filed separate bankruptcy cases. The bankruptcy trustee appointed for both cases then filed an adversary proceeding against the original lender’s successor-in-interest seeking to avoid the mortgage pursuant to 11 U.S.C. § 544(a)(3), which “put[s] the estate in the shoes of the creditor whose lien is avoided.”

The two adversary actions were consolidated. In the consolidated action, the trustee argued that subsection 544(a)(3) permits him to avoid the subject mortgage where such a transfer is voidable under state law by a bona fide purchaser, section 29 of chapter 183 of the Massachusetts General Laws requires a valid certificate of acknowledgment along with the recorded mortgage, and the subject mortgage was voidable because the certificate of acknowledgment was “materially defective” under section 29.

Specifically, the trustee argued that the certificate of acknowledgment was “materially defective” because it did not clearly state the mortgage was signed as the “free act and deed” of the borrowers. If only the attorney-in-fact appeared to sign, the bankruptcy trustee argued, then it was his “free act and deed” while acting under the power of attorney, not that of the borrowers.

The mortgagee filed a motion to dismiss, arguing:

(a) section 29 did not apply to the subject mortgage because that section is part of chapter 183, which governs “recorded land” and the encumbered property is “registered land,” governed by chapter 185;

(b) if section 29 did apply, the certificate of acknowledgment complied with its requirements because it made clear that the execution of the mortgage was the free act and deed of the borrowers; and

(c) even if the certificate of acknowledgment did not comply with the formal requirements of section 29, it still provided constructive notice of the mortgage to bona fide purchasers, which is all that state law requires to prevent a bona fide purchaser from voiding the mortgage.

The mortgagee also filed a motion asking the bankruptcy court to certify to the Massachusetts Supreme Judicial Court “the question of whether a ‘mortgage encumbering registered land, whose certificate of acknowledgment is … ambiguous regarding whether the execution … was the voluntary act of the mortgagors, but which … is noted on the certificate of title of such registered land, provides constructive notice.’”

The motion to dismiss was converted into a motion for summary judgment, after which the bankruptcy court denied both motions, ordering the mortgagee to show cause why summary judgment should not be entered in the trustee’s favor.

After briefing, the bankruptcy court granted summary judgment in the trustee’s favor, finding that (a) a certificate of acknowledgment was required for the subject mortgage by section 29, even though the property was “registered land;” (b) the certificate of acknowledgment at issue was ambiguous as to who appeared before the notary; (c) this rendered it materially defective because it was unclear whether the execution of the mortgage was the free act and deed of the mortgagors; and (d) the defective certificate of acknowledgment and other loan documents did “not suffice to provide constructive notice of the mortgage to a bona fide purchaser.”

The mortgagee appealed the bankruptcy court’s order to the district court, which reversed the bankruptcy court’s summary judgment ruling in favor of the trustee because the certificate of acknowledgment was not materially defective. The trustee appealed the district court’s order to the Circuit Court of Appeals.

On appeal, the First Circuit concluded that the certificate of acknowledgment complied with section 29 of chapter 183 and was not materially defective because even if it were read to reflect that only the attorney-in-fact appeared before the notary, it “still [did] all that it needed to do.”

The Court held that this is because the certificate of acknowledgment expressly stated that the attorney-in-fact was appearing for the borrower under the power of attorney recorded along with the mortgage, and the power of attorney specifically authorized the attorney-in-fact to sign the mortgage.

In addition, the First Circuit held, the certificates of acknowledgment accompanying the power of attorney stated that the borrowers each signed the power of attorney forms “voluntarily for [their] stated purpose.” Under the common law of agency in Massachusetts, the voluntary act and deed of an agent acting within the scope of his authority “was the voluntary act and deed of his principal.”

The Court rejected the trustee’s argument that the certificate of acknowledgment at issue was defective because its language differed from the official form for an individual acting under a power of attorney in an appendix to chapter 83 and the model certificate of acknowledgment published by the Land Court.

The First Circuit reasoned that even though the language differed, the subject certificate of acknowledgment made clear that the attorney-in-fact appeared as the borrowers’ attorney pursuant to the recorded power of attorney forms, which in turn clearly reflected that the borrowers “voluntarily granted the power to execute the mortgage to [the attorney-in-fact]. And, indeed, the [borrowers] acknowledged those power of attorney forms as their fee act and deed.” The Court held that nothing more was required under section 29.

Finally, the Court explained that the form acknowledgments were permissive, not mandatory, and the Massachusetts Supreme Judicial Court had confirmed that “[t]he acknowledgment required for proper recording of a mortgage … need not take any one specific form.”

Accordingly, the First Circuit affirmed the district court’s order in favor of the mortgagee.