Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-06003/USCOURTS-ca8-05-06003-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

No. 05-6003EA

In re: *

*

Rick’s Auto Outlet of Monticello, LLC, *

*

Debtor. *

*

* Appeal from the United States

Renee Williams, * Bankruptcy Court for the 

* Western District of Arkansas

Plaintiff - Appellant. *

*

v. *

*

Wells Fargo Financial Mississippi 2, *

Inc. and Joseph Pieroni, *

*

Defendants - Appellees. *

*

Submitted: July 7, 2005

Filed: July 21, 2005 

Before SCHERMER, FEDERMAN, and MAHONEY, Bankruptcy Judges.

MAHONEY, Bankruptcy Judge.

Appellate Case: 05-6003 Page: 1 Date Filed: 07/21/2005 Entry ID: 1930850
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This is an appeal from an order of the bankruptcy court of February 9, 2005,

denying the Chapter 7 trustee’s complaint to avoid a lien on real property. For the

reasons stated below, we reverse.

Background

The debtor, Rick’s Auto Outlet of Monticello, ARkansas (the LLC), owned real

property in Monticello, Arkansas. A married couple, who were members of the LLC,

subsequently executed a deed of trust on property they owned as individuals and on

the property owned by the LLC. The deed of trust was signed by them individually,

and the acknowledgment identified them individually but not as members of the LLC,

and in fact contained no mention of the LLC.

The trustee argued that the acknowledgment on the deed of trust was improper

under Arkansas law and the deed was therefore avoidable. The bankruptcy court,

applying an Arkansas statute which provides that any instrument acknowledged

outside the state of Arkansas is valid if the acknowledgment complies with the laws

of the state in which it was executed, found that Mississippi law applied to the issue

because the acknowledgment was executed in Mississippi. 

The form of the acknowledgment does not comply on its face with the

Mississippi statute governing acknowledgments. However, the bankruptcy court read

Mississippi caselaw to hold that strict compliance with the acknowledgment statute

is not required. Instead, the acknowledgment must simply convey the fact that the

person executing the deed did so of his or her own free will. The court held that the

body of the deed of trust at issue contained all the necessary information to find that

the owners voluntarily mortgaged the land and signed the deeds of trust on their own

behalf and on behalf of the debtor LLC. 

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The trustee agrees that Mississippi law governs the validity of the

acknowledgment, but argues on appeal that Arkansas law governs whether the deed

of trust provides notice sufficiently to withstand challenge by the trustee under 11

U.S.C. § 544(a)(3).

Standard of Review

The bankruptcy court’s factual findings are reviewed for clear error and its

legal conclusions are reviewed de novo. Apex Oil Co. v. Sparks (In re Apex Oil Co.),

406 F.3d 538, 541 (8th Cir. 2005). The appellant challenges the bankruptcy court’s

holding that the deed of trust constitutes constructive notice.

Discussion

Mississippi has a statute describing the appropriate form of acknowledgment

for limited liability companies, Miss. Code Ann. § 89-3-7, but that acknowledgment

form was not used on this deed of trust. 

The trustee relies on the case of White v. Delta Foundation, Inc., 481 So. 2d

329 (Miss. 1985), for the proposition that a corporate acknowledgment has to make

clear that a corporation is executing the document by and through an authorized

officer or agent. The White case dealt with a foreclosure after the lender had

appointed a successor trustee. The body of the document was not clear as to whether

the original lienholder or a successor entity was making the change in trustees, and

the acknowledgment named only the successor trustee individually, not in his

corporate capacity. The court ruled that the deed was patently defective because the

acknowledgment was improper for a corporate party. 

The White court, however, noted that "[a] liberal interpretation of

acknowledgments encompasses examination of the body of the instrument itself, and

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an acknowledgment will not necessarily be deemed fatal for an omission which can

be supplied from the body of the instrument itself." 481 So. 2d at 333-34.

Nevertheless, since the body of the deed was ambiguous, the court could not rely on

it for clarification of the acknowledgment. 

As the bankruptcy court noted, a subsequent case, Estate of Dykes v. Estate of

Williams, 864 So. 2d 926 (Miss. 2003), also ruled that a defective acknowledgment

will not be held fatal for an omission that can be filled in from the body of the deed

itself. 

The federal district court in Mississippi followed the same rule in Morton v.

Resolution Trust Corp., 918 F. Supp. 985 (S.D. Miss. 1995). In Morton, the Mortons’

property was sold at foreclosure, twice. The trust deed holder, through a corporate

officer, had previously appointed a substitute trustee who conducted the first

foreclosure sale. Thereafter, the same corporate officer appointed another substitute

trustee who conducted a second sale. The parties disputed the validity of the first sale

because of an allegedly defective substitution-of-trustee document. The defendant

argued that the acknowledgment in that document was flawed because it did not

identify the person who signed it (the space for the name was left blank). This

argument relied on the statement in the White case that the acknowledgment’s failure

to identify the person who executed the instrument was fatal to the document. 

The district court disagreed with that argument, noting that the corporate

officer’s name appeared in the body of the substitution document as the person

authorized on behalf of the corporation to execute the document, and he signed it. In

light of Mississippi caselaw mandating “liberal interpretation of acknowledgments,”

the district court found that the bank officer’s name was readily ascertainable from

the document as a whole. The district court did, however, take pains to point out that

the document it was reviewing was executed prior to the statutory amendment

requiring a specific form of acknowledgment for corporate entities. That statutory

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amendment, section 89-3-7 of the Mississippi Code, and its subsections regarding

appropriate forms of acknowledgment in various representational capacities, require

identification of the signer, his or her capacity to sign on behalf of another entity, and

authorization by the entity to execute the document. The acknowledgment at issue

here contains none of those elements on behalf of the LLC. While the “grantor”

section of the deed of trust identifies the individuals as members of the LLC, nothing

in the signature block or acknowledgment would put a third party on notice that they

were executing it on behalf of the LLC. The debtor is not referenced in the signature

block or the acknowledgment; there is no signature on the debtor’s behalf; and there

is no indication whatsoever in any part of the document that the individuals were

authorized to act on the debtor’s behalf. 

Even with a liberal interpretation, this deed and acknowledgment does not

provide notice that the individuals who signed it were acting on behalf of the LLC.

An instrument that has not been properly acknowledged does not constitute notice to

creditors or subsequent purchasers. Miss. Code Ann. § 89-3-1. This statute applies

to all instruments which affect title to real property. White, 481 So.2d at 335. When

an instrument is defective and the defect is apparent, either by reference to the

acknowledgment alone or to the instrument as a whole, the instrument does not

provide constructive notice to third parties under Arkansas law. Hawkins v. First

Nat’l Bank (In re Bearhouse, Inc.), 99 B.R. 926, 928 (Bankr. W.D. Ark. 1989).

Because this instrument does not provide constructive notice of Wells Fargo

Financial Mississippi 2, Inc.’s and Joseph Pieroni’s interest in the LLC’s property,

the Chapter 7 trustee may avoid it.

Conclusion

The trustee’s complaint to avoid lien should have been granted. The order of

the bankruptcy court is reversed.

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