US Bank, NA v. Desmond

United States Court of Appeals
For the First Circuit
No. 16-1465
IN RE: SAFINA N. MBAZIRA,
Debtor.
___________________
U.S. BANK, N.A., as Trustee of the J.P. Morgan Mortgage
Acquisition Corp. 2005-FRE1 Asset Backed Pass-through
Certificates, Series 2005-FRE1,
Appellant,
OCWEN LOAN SERVICING, LLC,
Defendant,
v.
JOHN O. DESMOND, Chapter 11 Trustee of the Estate of Safina N.
Mbazira,*
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Indira Talwani, U.S. District Judge]
Before
Howard, Chief Judge,
Thompson and Kayatta, Circuit Judges.
* John O. Desmond, Chapter 11 Trustee of the Estate of Safina
N. Mbazira, has been substituted as appellee for Safina N. Mbazira.
Jason A. Manekas, with whom Bernkopf Goodman LLP was on brief,
for appellant.
David G. Baker for appellee.
October 1, 2021
HOWARD, Chief Judge. This appeal arises out of an
adversary action filed in a Chapter 11 proceeding in the Bankruptcy
Court for the District of Massachusetts. The subject of the action
is a mortgage granted by the debtor, Safina Mbazira, and held by
U.S. Bank, N.A. Under the so-called "strong arm" provision of the
Bankruptcy Code, 11 U.S.C. § 544, the bankruptcy court allowed
Mbazira to void the mortgage because the certificate of
acknowledgement accompanying it failed to state that Mbazira
signed the mortgage as her free act and deed. After the district
court affirmed, U.S. Bank timely appealed. For the following
reasons, on de novo review, we affirm the judgment of the
bankruptcy court.
I.
A.
The facts are undisputed. Mbazira purchased a home in
Waltham, Massachusetts in July 2005, which she financed through
two mortgages. This matter only concerns the first, which had an
initial principal of $528,000. Under Massachusetts law, a mortgage
must include a "certificate of acknowledgment," signed before a
notary public or similar official, that the grantor has voluntarily
signed the mortgage instrument. See McOuatt v. McOuatt, 69 N.E.2d
806, 809-10 (Mass. 1946); Mass. Gen. Laws ch. 183, § 30. Although
a notarized certificate of acknowledgment accompanied Mbazira's
mortgage, the space for her name was left blank. Mbazira's
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handwritten initials, however, do appear on the bottom of the
page.1
The original mortgagee -- Mortgage Electronic
Registration Systems -- assigned its interest to U.S. Bank in 2008.
Both mortgagees registered their interests with Massachusetts'
Land Court.2 In September 2013, U.S. Bank initiated pre-
foreclosure proceedings against Mbazira and obtained an "Order of
Notice" from the Land Court, which was registered the following
month. The original interest in the mortgage, U.S. Bank's current
interest, and the pre-foreclosure Order of Notice each appear on
the Certificate of Title in the Land Court registration.
B.
Two months after U.S. Bank initiated the pre-foreclosure
proceedings, Mbazira filed for Chapter 11 bankruptcy. The
petition identified the mortgage at issue here as "unliquidated"
and "disputed" with a claim amount of $564,700. Mbazira then
commenced an adversary proceeding against U.S. Bank, seeking to
"avoid" the mortgage because her name is missing from the
certificate of acknowledgment. See 11 U.S.C. §§ 506, 544, 551.
1The year was also left blank, but the parties do not make
any arguments regarding this omission.
2 Massachusetts' Land Court, as its name implies, hears
"cases involving real estate and land use, and oversees the
Commonwealth's system for the registration of title to real
property." Land Court, Mass.gov, https://www.mass.gov/orgs/land-
court.
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Under the Bankruptcy Code, a mortgage may be avoided if a
hypothetical bona fide purchaser of the mortgaged properly would
not be charged with constructive notice of the mortgage. In re
Daylight Dairy Products, Inc., 125 B.R. 1, 3 (Bank. D. Mass. 1991)
(citing 11 U.S.C. § 544(a)). The effect of avoidance is to render
the debt unsecured, leaving the creditor to stand at the end of
the line with other unsecured creditors in sharing unencumbered
assets of the debtor.
U.S. Bank sought to dismiss the adversary proceeding.
It advanced two arguments: The recording of a mortgage with such
a defect was effective to provide constructive notice of the
mortgage; and, in any event, registration of the mortgage provided
sufficient notice to subsequent bona fide purchasers. In the
alternative, U.S. Bank asked the bankruptcy court to certify to
Massachusetts' highest court the questions concerning the effect
of the missing name.
The bankruptcy court denied both U.S. Bank's motion to
dismiss and its request to certify any questions to the
Massachusetts Supreme Judicial Court ("SJC"). In re Mbazira, 518
B.R. 11, 23–24 (Bankr. D. Mass. 2014). It held that the incomplete
certificate of acknowledgment was materially defective under
Massachusetts law and that, therefore, third parties do not have
constructive notice of the encumbrance on the property. Id. at
22. The court then invited Mbazira to file a motion for judgment
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on the pleadings, which became a motion for summary judgment once
additional documents were appended. Following its prior ruling,
the court granted the Mbazira's motion and allowed her to avoid
the mortgage. In re Mbazira, No. 13-16586-WCH, 2015 WL 1543908,
at *1 (Bankr. D. Mass. Mar. 31, 2015).
With Mbazira's debt to U.S. Bank rendered unsecured and
its priority wiped away, U.S. Bank appealed to the district court,
which concurred with the bankruptcy court. We review the
bankruptcy court's decision directly, despite the intermediate
district-court decision. In re Sheedy, 801 F.3d 12, 18 (1st Cir.
2015). We assess the bankruptcy court's factual findings for clear
error and its legal conclusions de novo. Id.II.
Section 544 of the Bankruptcy Code -- known as the
"strong arm" clause -- permits a trustee3 to "avoid . . . any
obligation incurred by the debtor that is voidable by" a real or
hypothetical bona fide purchaser, regardless of any actual
knowledge of the obligation by the trustee. 11 U.S.C. § 544(a)(3).
Thus, the trustee can only void a mortgage obligation if it did
not have constructive notice of the encumbrance. Under
Massachusetts law there are two methods for giving constructive
3 11 U.S.C. § 1107(a) gives Mbazira, as the debtor-in-
possession, the same rights as a "trustee."
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notice to the world of a mortgage on real property: One can either
properly record the mortgage in the registry of deeds, Mass. Gen.
Laws ch. 183, § 4,4 or one can register the mortgage with the Land
Court, which provides the same notice to third parties as if it
were recorded, Mass. Gen. Laws ch. 185, § 58.5 U.S. Bank argues
that the mortgage here was properly recorded, and, if not, it was
nevertheless registered with the Land Court, which alone provides
the required notice. We take each contention in turn.
A.
As mentioned, a properly recorded mortgage provides
notice of a security interest, but a recording is not effective -
- indeed is literally barred under Massachusetts law -- unless
there is a certificate of acknowledgment or proof of its due
4 Mass. Gen. Laws ch. 183, § 4, states: "A conveyance of an
estate . . . shall not be valid as against any person, except the
grantor or lessor, his heirs and devisees and persons having actual
notice of it, unless it . . . is recorded in the registry of
deeds."
5 Mass. Gen. Laws ch. 185, § 58, states:
Every conveyance, lien, attachment, order,
decree, instrument or entry affecting
registered land, which would under other
provisions of law, if recorded, filed or
entered in the registry of deeds, affect the
land to which it relates, shall, if
registered, filed or entered in the office of
the assistant recorder of the district where
the land to which such instrument relates
lies, be notice to all persons from the time
of such registering, filing or entering.
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execution attached, Mass. Gen. Laws ch. 183, § 29.6 As explained
by the SJC, Massachusetts law requires the grantor to "acknowledge
that [he or she] has executed the instrument as [his or her] free
act and deed," and the statute requires that "a certificate
reciting that the grantor appeared before the officer making the
certificate and made such acknowledgment . . . be attached to the
instrument in order to entitle it to be recorded." Bank of Am.,
N.A. v. Casey, 52 N.E.3d 1030, 1035 (Mass. 2016) (quoting McOuatt,
69 N.E.2d at 809); see also Mass. Gen. Laws ch. 183, § 30(specifying the requirements for a certificate of acknowledgment).
Here, there is no certificate "reciting that [Mbazira]
appeared before the officer . . . and made such acknowledgement."
Bank of Am., 52 N.E. at 1035. There is, in fact, no certificate
reciting that anyone made any such acknowledgement because the
name was left blank. As the bankruptcy court observed, the plain
language of Massachusetts law, therefore, seems to render any
recording of this mortgage ineffective because it does not contain
a proper certification of acknowledgement. See In re Mbazira, 518
B.R. at 22.
6 Mass. Gen. Laws ch. 183, § 29, states: "No deed shall be
recorded unless a certificate of its acknowledgment or of the proof
of its due execution, made as hereinafter provided, is endorsed
upon or annexed to it, and such certificate shall be recorded at
length with the deed to which it relates . . . ."
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U.S. Bank nevertheless contends that the omitted name
does not preclude recording from giving constructive notice of the
mortgage. It is true that Massachusetts law does not definitively
deem such a defect material.7 But the weight of precedent leans
decidedly in favor of strictly construing the statutory
requirement for certificates of acknowledgment. The bankruptcy
courts applying Massachusetts law have adhered to an
7 A review of rulings on a similar issue in other
jurisdictions reveals no consensus on the matter:
At least nine state jurisdictions have held that the omission
of the mortgagor's name is not a material defect. See Farm Bureau
Fin. Co., Inc. v. Carney, 605 P.2d 509 (Idaho 1980); Gardner v.
McAlester, 198 Okla. 547 (1946); Fahey v. Ottenheimer, 220 N.Y.S.
491 (N.Y. App. Div. 1927); Larson v. Elsner, 101 N.W. 307 (Minn.
1904); Milner v. Nelson, 53 N.W. 405 (Iowa 1892); Wilcoxon v.
Osborn, 77 Mo. 621 (1883); Magness v. Arnold, 31 Ark. 103 (1876);
Sanford v. Bulkley, 30 Conn. 344 (1862); Pickett v. Doe, 13 Miss.
(5 S. & M.) 470 (1845). Two states have validated certificates of
acknowledgment where the notary block included the wrong name.
See Edenfield v. Wingard, 89 So.2d 776 (Fla. 1956) (en banc);
Coates v. Smith, 160 P. 517 (Or. 1916).
By contrast, at least five state jurisdictions have found
that this type of omission does constitute a material defect. See
Seale Motor Co. v. Stone, 62 S.E.2d 824 (S.C. 1950) (predicting
that the omission would be material under either Kentucky or South
Carolina law); Thomas v. Davis, 2 So.2d 616 (Ala. 1941); Merritt
v. Yates, 71 Ill. 636 (1874); Buell v. Irwin, 24 Mich. 145 (1871);
Smith's Lessee v. Hunt, 13 Ohio 260 (1844). The Sixth Circuit has
predicted that Tennessee would also view this omission as a
material defect. See In re Biggs, 377 F.3d 515 (6th Cir. 2004)
(applying Tennessee law).
We note that federal bankruptcy courts in Ohio, a state with
a land registration system, have permitted trustees to avoid
mortgages with this very defect. See, e.g., In re Goheen, 739
(Bankr. S.D. Ohio 2012), aff'd, No. 10-16427, 2012 WL 2709802 (S.D.
Ohio July 6, 2012).
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interpretation that requires strict formality in the execution of
mortgage acknowledgments. See, e.g. In re Reznikov, 548 B.R. 606,
616 (Bankr. D. Mass. 2016) (holding that a certificate of
acknowledgment that merely stated that the debtor "duly
acknowledged" that she executed the mortgage but did not indicate
that the execution was voluntary or her "free act and deed" was
materially defective under state law), aff'd, 567 B.R. 239 (D.
Mass. 2017); see also In re Shubert, 535 B.R. 488, 500 (Bankr. D.
Mass. 2015) (same, but acknowledgment lacked even the "duly
acknowledged" language). And the bankruptcy courts have
specifically viewed certificates missing the debtor's name to be
materially defective under Massachusetts law. See In re Giroux,
No. 08-14708-JNF, 2009 WL 1458173, at *8 (Bankr. D. Mass. May 21,
2009) (not reported) (predicting "that the Massachusetts Supreme
Judicial Court would view the omission of the Debtor's name from
the acknowledgment as a material defect in the acknowledgment of
the Debtor's signature on the mortgage document"), aff'd sub nom.
Mortg. Elec. Registration Sys., Inc. v. Agin, No. 09-CV-10988-PBS,
2009 WL 3834002 (D. Mass. Nov. 17, 2009); see also In re Bower,
No. 10-10993-WCH, 2010 WL 4023396, at *5 (Bankr. D. Mass. Oct. 13,
2010) (adopting Giroux's reasoning and noting that "[m]ortgage
acknowledgments must be strictly executed in the manner proscribed
by Massachusetts law or they are invalid."). Indeed, the SJC
itself has twice declined an opportunity to question the presumed
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ineffectiveness of a missing name on a certificate of
acknowledgment. See Bank of Am., 52 N.E. 3d at 1039; McOuatt, 69
N.E.2d at 809.
This is not to say that the case law requires any
specific magic words. As the Massachusetts Supreme Judicial Court
explained, "[n]o particular words are necessary as long as they
amount to an admission that [the grantor] has voluntarily and
freely executed the instrument." McOuatt, 69 N.E.2d at 810; see
also In re Demore, 844 F.3d 292, 298-99 (1st Cir. 2018).8 Here
though no words on this certificate indicate who has voluntarily
and freely executed the instrument.
All in all, we see no good reason to resist the momentum
of this precedent, even recognizing that it is not binding or
definitive, particularly because the statutory text appears quite
clear. This sort of defect is also quite easily avoided in the
first instance by the mortgagee at the time the mortgage is
granted, or even thereafter. See Bank of Am., 52 N.E.3d at 1039–
40 (explaining that an "affidavit filed and recorded . . . that
supplies the omitted names of the mortgagors, explains the
8 We have published one other opinion in this subject area,
but it concerns Vermont law. In that case we strictly construed
Vermont's acknowledgment requirements, finding that a certificate
of acknowledgment signed by only one of two required witnesses was
materially defective and thus the debtor could avoid the mortgage
in bankruptcy. In re Ryan, 851 F.2d 502, 512 (1st Cir. 1988).
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circumstances of the omission, and confirms that in fact the
affiant did witness the voluntary execution of the mortgage by the
mortgagors on the date stated operates to cure the original defect
in the acknowledgment"). We see no reason to, in effect, eliminate
an express requirement that the Massachusetts legislature has
specified as a condition for proper recording. Accordingly, we
conclude that the recording of the mortgage was not effective to
give constructive notice to third parties. Bank of Am., N.A. v.
Casey, 52 N.E.3d 1030, 1035 (2016).
B.
Having found that the attempted recording of the
mortgage did not give constructive notice of its existence, we
turn to U.S. Bank's alternative argument that effective notice was
given by registering the mortgage with the Land Court. That
argument finds no ready toehold in Massachusetts' statutes. U.S.
Bank notes that Mass. Gen. Laws ch. 185, § 54, provides that "[t]he
original certificate" of title "shall be conclusive as to all
matters contained therein, except as otherwise provided in this
chapter." U.S. Bank then directs us repeatedly to Mass. Gen. Laws
ch. 185, § 58, in which the Massachusetts legislature provides
that registration of a lien in the proper district "be notice to
all persons," but that notice applies only to liens which, "if
recorded, filed or entered in the registry of deeds, affect the
land to which it relates." And, as we have just explained,
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Massachusetts law bars the recording of any deed -- and nowhere
excludes mortgage deeds -- without a proper certificate of
acknowledgement. Mass. Gen. Laws ch. 183, § 29.9 In short, as
the bankruptcy court concluded, Massachusetts law "incorporates
the filing standards for recorded land," including the
acknowledgment requirement, "into the land registration system as
the condition for the act of registration to be notice to third
parties." In re Mbazira, 518 B.R. at 21.
This interpretation is supported by the Land Court
Guidelines on Registered Land, which expressly require all deeds
affecting registered land to include a certificate of
acknowledgment. See Commonwealth of Massachusetts Land Court
Guidelines on Registered Land 1 (Rev. Feb. 27, 2009),
http:// www.mass.gov/courts/docs/courts-and-judges/courts/land-court/guidelines-
registered-land.pdf (requiring that deeds, including mortgage deeds,
be acknowledged in accordance with [section] 29) Sept. 20, 2017));
accord Petrozzi v. Peninsula Council, Inc., No. 07-MISC-349279,
2011 WL 1459694, at *16 (Mass. Land Ct. Apr. 14, 2011) (noting
that an instrument "require[s] some manner of acknowledgment
compliant with [section] 30" to be "accepted for registration").
9U.S. Bank makes no argument that a deed can be filed or
entered so as to affect the land under section 58 even if it cannot
be recorded.
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U.S. Bank argues that reading section 58 to apply the
rules for recording to the registration scheme "is unsupported and
would usurp the function of the Land Court's registration process."
This argument makes too broad a claim. We are solely concerned
with constructive notice to third parties, not other kinds of
notice or the other functions of the land registration system;
actual notice to individuals who consult the land registry is
unaffected. See In re Woodman, 497 B.R. 668, 670 n.2 & 673 (Bankr.
D. Mass. 2013). A person who investigated the Certificate of Title
for the property at issue would have gained actual knowledge of
U.S. Bank's interest, but the relevant scenario under the
Bankruptcy Code is that presented by a hypothetical bona fide
purchaser without actual notice. See 11 U.S.C. § 544(a).
U.S. Bank points to another provision of Massachusetts
law that allows owners of registered land to mortgage it via deed
and states that a registered mortgage will "take effect upon the
title only from the time of registration." Mass. Gen. Laws
ch. 185, § 67. Into this language U.S. Bank reads an assurance
that registering has an effect, no matter how done. But even
accepting this ambitious reading, we see no conflict with the
notion that the effect will not extend more broadly than making
the mortgage effective as against persons with actual notice.
Relatedly, section 54's admonition that certificates of title are
"conclusive as to all matters contained therein" also concerns
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actual notice, not constructive notice, contrary to U.S. Bank's
arguments otherwise.
Turning its focus back to the text of section 58,
U.S. Bank argues that "any document which a person could record
that would affect the land would also provide notice once it is
accepted for registration by the Land Court." But, as we have
explained, the mortgage here is not a mortgage that could have
been properly recorded given the absence of a properly executed
certificate of its acknowledgement. See Part II.A., supra; Mass.
Gen. Laws ch. 183, § 29 ("No deed shall be recorded unless a
certificate of acknowledgment or the proof of its execution . . .
is endorsed or annexed to it.").
Although U.S. Bank is correct that there is "no dispute
that the Mortgage was accepted by the Land Court for registration
and still appears on the Certificate of Title," those facts do not
create constructive notice to third parties under Massachusetts
law. Contrary to U.S. Bank's implication, "'constructive notice'
is not really 'notice,' as that word is commonly used, at all."
In re Ryan, 851 F.2d 502, 506 (1st Cir. 1988). "Instead,
constructive notice is a positive rule of state law that permits
the prior purchaser to gain priority over a latter purchaser,
regardless of whether the latter purchaser really knows of the
prior purchase." Id. (emphasis omitted). U.S. Bank makes the
conclusory argument that because the mortgage was accepted by the
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Land Court and added to the Certificate of Title, this would
"charge" the debtor with "constructive notice." But the only
"positive rule of state law" U.S. Bank can cite is section 58,
which, as discussed, applies the recording requirements to the
land registration scheme. U.S. Bank points to no other statute
that creates a rule for constructive notice to third parties
regarding mortgage documents, and U.S. Bank's argument that a
mortgage accepted for registration "should" provide constructive
notice is best saved for the state legislature.
U.S. Bank's invocation of inquiry notice is also
irrelevant to Mbazira's ability to avoid the mortgage under section
544 of the Bankruptcy Code. "[I]nquiry notice is not entirely
distinct from actual or constructive notice; rather, it is a duty
of a purchaser to conduct a reasonable investigation upon gaining
constructive or actual notice of facts which would make a prudent
person suspicious." In re Ryan, 851 F.2d at 511 (emphasis in
original). "Questions of a purchaser's duty, however, are by
definition in the sphere of constructive notice." Id. (emphasis
in original). And constructive notice is defined by state law,
which in this instance, requires a proper certificate of
acknowledgment. See Mass. Gen. Laws ch. 185 § 58; id. ch. 183
§ 4. Thus, without any constructive notice giving rise to the
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duty to conduct an investigation, the hypothetical bona fide
purchaser here cannot be charged with inquiry notice.10
III.
Over seven years have passed since the bankruptcy court
issued its first ruling that neither attempted recording nor
registration with the Land Court triggered constructive notice
given the defective certificate. Neither party has suggested that
the bankruptcy court's reasoning has created any significant
problems. As we have already noted, the defect at issue in the
certificate is obvious and readily guarded against by a mortgagee.
For the foregoing reasons, we think it best to leave matters as
they stand. And for the same reasons we see no substantial need
to certify a question to the SJC. We therefore hold that summary
judgment was properly granted for Mbazira because the omission of
Mbazira's name from the certificate of acknowledgement was a
material defect under Massachusetts law. As such, a bona fide
purchaser would not be charged with constructive knowledge of the
instrument, and therefore Mbazira can avoid the mortgage in
bankruptcy.
10U.S. Bank also argues that the mortgage and the
certificate of acknowledgment, together in context, comprise a
"materially complete" document that complies with state law. But
it conceded the omission of Mbazira's name on the certificate of
acknowledgment below and did not make this new "comprehensiveness"
argument until this appeal. Accordingly, we find that U.S. Bank
waived this argument and do not reach it.
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