Daily Development for Monday, August 5, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Today's DD is based upon a report by Burt Rush of First American Title Insurance and first appeared in that company's internet publication "LandSake."

RECORDING ACTS; CONSTRUCTIVE NOTICE; NOTARIZATION: A deed of trust recorded with erroneous information in the notary's jurat, due mainly to use of the wrong form, is null and void for purposes of imparting constructive notice.

In re Crim, ___ S.W.3d ___ (July 15, 2002)

Edward and Jayne were owners of real property in Nashville. On June 6, 1997, the couple gave a deed of trust for $103,000 against the property, to a mortgage broker. Because Edward could not attend the signing, the deed of trust was executed by Jayne only. On the line provided for Edward's signature, Jayne wrote "Edward J. Crim, Sr. POA Jayne Crim." ("POA," of course, meaning "power of attorney.")

There was no question about validity of the power of attorney, or Jayne's authority to sign on behalf of Edward.

The notary prepared and signed a jurat (i.e., certificate of acknowledgment), stating:

"On this 6th day of June, 1997, before me personally appeared Edward J. Crim, Sr. and Jayne Crim, to me known to be the persons described in and who executed the foregoing instrument, and who acknowledged the execution of the same to be their free act and deed. Witness my hand and seal"

The deed of trust was then recorded.

Later, in January 2001, Edward and Jayne filed a Chapter 7 bankruptcy. A trustee in bankruptcy was appointed, and the trustee filed an adversary proceeding to avoid the 1997 deed of trust. This action was based on Bankruptcy Code section 544(a)(1) and (3), which allows a trustee or debtor in possession to avoid an interest in a debtor's real property that is not perfected as of the date of commencement of bankruptcy. This is the so-called "trustee avoiding power," or "strong-arm power." In this case, the trustee argued that the deed of trust was not perfected, as against claims of a hypothetical judicial lien creditor or bona fide purchaser, because it was not properly acknowledged.

The bankruptcy court certified the following questions to the Tennessee Supreme Court:

"(a) Whether the deed of trust was improperly acknowledged under Tennessee law;

(b) If so, does the defective acknowledgment render the deed of trust void or voidable by a judicial lien creditor or a bona fide purchaser?"

The Court held (5-0) that, with respect to Edward's interest in the property, (a) the deed of trust was improperly acknowledged, and (b) it was therefore null and void, and could not impart constructive notice to a judicial lien creditor or a bona fide purchaser.

The Court reasoned the acknowledgment was defective because it contained false statements about circumstances under which the signature of Edward was authenticated. This defect rendered the acknowledgment void and, therefore, also rendered the deed of trust void to the extent it was unacknowledged.

In part, the Court based its decision on its earlier decision in the case of In re Marsh, 12 S.W.3d 449 (Tenn. 2000). In Marsh case, the Tennessee Supreme Court held that a deed of trust bearing a notary jurat, but not also bearing the notary's seal, was void and "unperfected"--even though the deed of trust had been recorded many years before being challenged in the borrowers' bankruptcy case.

In the present case, the Court explained that a specific form of jurat is available and approved for use when a document is signed under a power of attorney. Had the correct form been used, the acknowledgment would have been valid and the deed of trust "perfected" by recording.

There was no "substantial compliance" with the requirements of the statute, it stated, because one later reading the deed of trust in the record would recognize that the signature itself purported to be by an attorney while the notarization appeared to state that the husband had personally signed the deed of trust, thus giving rise to a question of validity. This renders the notarization void and no constructive notice can then be provided.

On the other hand, with respect to Jayne's signature, the Court said the deed of trust was properly acknowledged and enforceable. Since the property was held by the couple as tenants by the entirety, and under Tennessee law a spouse acting alone may encumber only his or her right of survivorship in entireties property, the Court concluded the deed of trust was valid and enforceable as against Jayne's right of survivorship interest, only.

The case was returned too the bankruptcy court for disposition of the trustee's claims.

Reporter's Comment 1: What a mess! Seems (to me) the bankruptcy court is now stuck with issues even more baffling than those with which it began. Who wants to tell us what the judge is likely to do with a deed of trust encumbering Jayne's right of survivorship? What value should be placed on the property, thus encumbered? After all, the difference in value of the property as 'originally' (thought to be) encumbered versus this 'pared down' version determines the value of the 'asset' won by the trustee in this case, for the benefit of the unsecured creditors.

To view the Marsh posting, from the LandSakes Archive, click on the link below.

http://firstam.com/landsakes/html/email/022300defdocs.html

Reporter's Comment 2: Of course, many will wonder if title insurance was involved in the Crim case. David Dickson (Memphis, TN) supplies this report:"Chicago Title was the insurer. Same lawyers tried Crim and Marsh for the title companies. I talked to the litigator and he said at the last minute the party attending the closing pulled out the POA and they just didn't dot the i's and cross the t's.

He and I talked about the "real reason" for these suits. Get the Trustee's commission up and generate fees for the Trustee and the Trustee's lawyers since in many cases the biggest single creditor is the holder of the note secured by the deed of trust under attack."

Editor's Comment 1: For a discussion of what rights a mortgagee has vs a non-debtor spouse, see Vander Weert v. Vander Weert, 700 A.2d 894 (N.J.Super. 1997) the DD for 4/20/98; Morris v. Solesbee, 892 S.W.2d

281 (Ark. 1995), the DD for 10/2/95, both on the DIRT website.

Editor's Comment 2: Now down to the real question - was the policy of the state concerning notarization advanced by the ruling here? If, indeed, the wife had a valid power of attorney and state law authorized parties having such powers to execute mortgages, then, in effect, the husband did execute the document, at least technically speaking. Did the notaries' statement to this effect fail to provide any of the protection that a true notarization would have done? It appears that the answer is "no."

But the court says that state law prescribed the form of jurat to be used when a attorney executes for another. The juxtaposition of a signature clearly given through a power of attorney and a notarization appropriate only for an actual signing would, in the court's view, give rise to a question of validity, and thus it is inappropriate to conclude that constructive notice should arise.

The case seems consistent with Marsh in this analysis, but both cases appear to establish for notarization formalities a requirement of certainty that the author suspects is not made a condition of constructive notice in other areas of recording law. Assume, for instance, that the instrument contains some ambiguity as to the nature of the interest transferred, but that it is quite possible, from information set forth in the instrument, to make inquiry and correct the ambiguity. In such cases, the normal rule is that a duty of inquiry will apply and that the instrument provides constructive notice.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

ABOUT DIRT:

DIRT is an Internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 ‑ 10 messages per workday.

Daily Developments are posted every workday.

To subscribe to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Dirt [your name]

To cancel your subscription to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Dirt

For information on other commands, send the message Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses specifically upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named "Brokerdirt." But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT, as Brokerdirt carries all DIRT traffic in addition to the residential discussions.

To subscribe to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Brokerdirt [your name]

To cancel your subscription to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Brokerdirt

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.

DIRT has a WebPage at: http://www.umkc.edu/dirt/