Defective Notarization Can Invalidate a Mortgage

By Howard Goldman

NotarizationSeemingly small failures in the process of notarizing a mortgage can make enforcement of the terms and conditions of such document difficult.  One crucial step in the notary process is proper acknowledgment.  An acknowledgment is a formal statement of the notary that the signor’s execution of the mortgage was his or her “free act and deed.”  Massachusetts law provides, “The acknowledgment of a [mortgage] . . .shall be by one or more of the grantors or by the attorney executing it.”  M.G.L. ch. 183 § 30.

So what could possibly go wrong?  This Client Update reflects upon the lessons learned from a recent bankruptcy court case considering a defective acknowledgment, and offers best practices to employ throughout the notarization process to avoid bankruptcy court’s invalidation of the mortgage.

Potential pitfalls

The recent appellate bankruptcy decision in Steven Weiss, Chapter 7 Trustee v. Wells Fargo Bank, N.A. considered a defect in the notarization of a mortgage signed pursuant to a power-of-attorney provision.  The acknowledgment, which was signed by the notary and affixed to the mortgage, stated that the attorney-in-fact “acknowledged to [the notary] that he/she/they signed it voluntarily for its stated purpose.”  The notary failed to fill in the blank space on the acknowledgment reserved for the form of identification that the signors used to identify themselves.  When the mortgagors filed for bankruptcy, the bankruptcy trustee claimed that the mortgage was invalid because, among other reasons, the acknowledgment failed to indicate whose free act and deed the notary was verifying.[i]

With respect to the legal standard for proper acknowledgment, the United States Bankruptcy Appellate Panel for the First Circuit, quoting the seminal case of McOuatt v. McOuatt, stated: “[n]o particular words are necessary as long as they amount to an admission that [the mortgagor] has voluntarily and freely executed the instrument” (emphasis added).[ii]  Finding the mortgage invalid, the court explained that because of the notary’s failure to attend to the blank space and the unclear wording about whether the voluntariness related to the mortgagors or the attorney, the language “fail[ed] to unequivocally express that the execution of the Mortgage was the free act and deed of the principals, i.e., the [mortgagors], and that this flaw is, indeed, fatal.”[iii]

Courts in other cases have similarly invalidated mortgages as a result of defective acknowledgments under Massachusetts law.  In Agin v. Mortgage Electronic Registration Systems, Inc. (In re Giroux), for instance, the acknowledgment contained a space followed by a comma where the name(s) of the debtor(s) should been inserted, and the court concluded that because the certificate of acknowledgment omitted the names of the parties who executed and acknowledged the mortgages, the documents were materially defective and unrecordable.[iv]

The consequences of defective notarization can be immense.  Under the so-called “strong-arm powers” established in Section 544(a) of the Bankruptcy Code, a trustee in bankruptcy can avoid any transfer of property of a debtor or obligation incurred by a debtor if that transfer or obligation would be avoidable by (1) the holder of a perfected judicial lien against the debtor, or (2) a bona fide purchaser of property from the debtor.  A bona fide purchaser is one who purchases without knowledge of defects in the mortgage.  In other words, a defect in the notarization of a mortgage could set an otherwise secured party back to the position of an unsecured creditor during bankruptcy.

The resulting lesson: don’t mince words when it comes to clarifying that the mortgagor, not his or her attorney, is making the conveyance voluntarily.  A mortgagee should closely review the executed mortgage and make any modifications needed to cure a defective notarization as soon as possible so as to prevent the invalidation of the mortgage in bankruptcy.  If the mortgagee catches the defect before bankruptcy is initiated, the mortgagee should take curative action in the appropriate state court, identifying the defect as a “mutual mistake” and requesting that the mortgage be corrected.

 Best Practices

Below we summarize some best practices on properly notarizing written instruments:

1.         Be sure the notarization is properly stamped. It may sound obvious, but courts have invalidated written instruments due to problems with stamps.  A notary public is supposed to obtain a new seal or stamp when he or she renews his or her commission, receives a new commission, or changes his or her name.  The notarial seal or stamp must include: the notary public’s name exactly as indicated on the commission; the words “notary public,” “Commonwealth of Massachusetts” or “Massachusetts”, and “my commission expires on [commission expiration date]” or “commission expires on [commission expiration date]” or “commission expires [commission expiration date]”; and a facsimile of the great seal of the Commonwealth of Massachusetts.

2.         Be sure that the acknowledgment properly is dated. The date of the acknowledgment may be either before or after the date of execution appearing on the instrument.

3.         Be sure that the name of the notary or other official before whom the acknowledgment has been made is legible. It is suggested that the name of the notary or other official taking the acknowledgment be typed or printed below the signature line for such notary or other official.

4.         Be sure that the date that a notary public’s commission expires is indicated beneath his or her name.

5.         Be sure that the notary fills out the form of identification used to identify the person signing the acknowledgment.

6.         Finally, if an attorney is signing the acknowledgment through a power-of-attorney provision, the names of the grantors must appear on the acknowledgment, and the acknowledgment must make it clear that the grantors, not the attorney, executed the written instrument voluntarily. Below, we provide an example of language that one could use in a power-of-attorney context to satisfy the standard articulated in the bankruptcy case described above:

“On this _____ date of ___________, 20____, before me, the undersigned notary public, personally appeared ___________________ (name of document signer), as attorney-in-fact for ____________ (name(s) of grantor(s)) and provided to me through satisfactory evidence of identification, which were ____________________ (must fill in), to be the person whose name is signed on the preceding or attached document, and acknowledged to me that __________ (THE GRANTORS), through __________ (the attorney), signed it voluntarily for its stated purpose.”

Summary

Proper notarization is a necessary step in creating a valid and enforceable mortgage.  Formal acknowledgment that the execution of the instrument was the signor’s “free act and deed” is one crucial part of the notary process.  In Massachusetts, as in other states, failure to closely adhere to the acknowledgment requirements can have negative implications.  A mortgagee, for instance, could lose its security in a bankruptcy proceeding, falling back to the position of unsecured creditor.  If, however, a mortgagee catches a defect before bankruptcy is initiated, the mortgagee can cure the defect in land court as a “mutual mistake.”  By carefully considering the best practices described above, one can avoid these costly pitfalls and help ensure that a mortgage will survive potential legal challenges in court.

 


[i] Steven Weiss, Chapter 7 Trustee, Plaintiff–Appellant, v. Wells Fargo Bank, N.A., Defendant–Appellee, 498 B.R. 392 (U.S. Bank. App. 1st Cir. Oct. 1, 2013)

[ii] 69 N.E.2d 806, 810 (Mass. 1946).

[iii] Steven Weiss, supra note 1.

[iv] No. 08-1261, 2009 WL 1458173, 2009 Bankr. LEXIS 3429 (Bankr. D. Mass. May 21, 2009), aff’d, No. 09-CV-10988-PBS, (D. Mass. Nov. 17, 2009).