Opinion ID: 2977808
Heading Depth: 3
Heading Rank: 1

Heading: The Mortgage

Text: Debtors Samuel G. Wilson and Liza Wilson granted the Creditors a mortgage in the original principal amount of $65,741.00 (“Mortgage”) on real property owned by the Wilsons and located at 2721 Country Road, Ashland, Kentucky. (Mortgage, Joint Appendix (“JA”) at 10.) The Creditors recorded the Mortgage in the Boyd County Clerk’s Office on May 16, 2001, and it is on record in Mortgage Book 772, Page 509 of that office. Douglas Strayer was the attorney who conducted the closing and acted as notary to accept the acknowledgment of the Wilsons. The Wilsons signed the Mortgage, and it was acknowledged as indicated below: IN WITNESS WHEREOF, the undersigned (has-have) signed this instrument on the date and year first above written. /s/ Samuel G. Wilson (Seal) SAMUEL G. WILSON /s/ Liza Wilson (Seal) LIZA WILSON STATE OF KENTUCKY COUNTY OF BOYD The foregoing instrument is acknowledged before me this 08 day of MAY, 2001. My commission expires 11-30-02. /s/ Douglas Strayer Prepared by /s/ Douglas Strayer /hw/ Bourbon Country, Kentucky (Id. at 12.) Though the instrument clearly indicates that the Wilsons signed the Mortgage, it is important to note that the Certificate of Acknowledgment itself does not identify the Wilsons as the 2 individuals who signed the Mortgage. B. The Bankruptcy Court’s Order Granting Summary Judgment to the Trustee The Wilsons filed for bankruptcy in the Eastern District of Kentucky on January 17, 2005. The duly-appointed Trustee for the Wilsons filed an adversary complaint pursuant to 11 U.S.C. §§ 544, 550, and 551 on May 13, 2005. Under 11 U.S.C. § 544, a trustee has the status of a bona fide purchaser of real property, and if a hypothetical bona fide purchaser can avoid a mortgage, the trustee can also avoid it. The Trustee in the instant case sought to avoid the Mortgage pursuant to 11 U.S.C. § 544 because the Certificate of Acknowledgment allegedly did not conform with the requirements of Ky. Rev. Statute § 423.130 and therefore did not provide the Trustee, a hypothetical bona fide purchaser, with notice under Ky. Rev. Stat. § 382.270. Burden v. The CIT Group/Consumer Finance, Inc., Adv. No. 05-1014 (Bankr. E.D. Ky. Aug. 16, 2005) (JA at 85). Section 423.130 of the Ky. Rev. Statute, part of the Kentucky Uniform Recognition of Acknowledgment Act enacted in 1970, provides as follows: The person taking an acknowledgment shall certify that: (1) The person acknowledging appeared before him and acknowledged he executed the instrument; and (2) The person acknowledging was known to the person taking the acknowledgment or that the person taking the acknowledgment had satisfactory evidence that the person acknowledging was the person described in and who executed the instrument. (Emphasis added.) Section 382.2701 of the Ky. Rev. Stat. provides as follows: 1 As the BAP noted, Ky. Rev. Stat. § 382.270 was amended effective July 12, 2006, and now provides that, so long as a mortgage containing a defective acknowledgment is lodged for record, that the mortgage “shall be deemed to be validly lodged and that all interested parties shall be on constructive notice of the contents thereof.” The parties in the instant case do not argue that the amended statute is retroactive. In any event, this argument would likely be unavailing. See Select Portfolio Servs. v. Burden (In Re Trujillo), 378 B.R. 526, 533 (B.A.P. 6th 3 No deed or deed of trust or mortgage conveying a legal or equitable title to real property shall be valid against a purchaser for a valuable consideration, without notice thereof, or against creditors, until such deed or mortgage is acknowledged or proved according to law and lodged for record. As used in this section “creditors” included all creditors irrespective of whether or not they have acquired a lien by legal or equitable proceedings or by voluntary conveyance. The Bankruptcy Court granted the Trustee’s summary judgment motion based on the factual similarities to Rogan v. America’s Wholesale Lender (In Re Vance), 99 F. App’x 25, 28 (6th Cir. 2004). In Vance, this court held, in an unpublished opinion, that the notary statement in a mortgage Certificate of Acknowledgment was defective under Ky. Rev. Stat. § 423.130 since it failed to state: (1) the identity and/or names of those who signed the mortgage; (2) the name of the county where the acknowledgment was taken; and (3) the date of the acknowledgment. Id. at 28. The Vance court concluded that the failure to comply with Ky. Rev. Stat. § 423.130 becomes significant in light of the requirements of Ky. Rev. Stat. § 382.270 because: Under 11 U.S.C. § 544(a)(3), if a bona fide purchaser hypothetically can avoid a mortgage, then the trustee may avoid the mortgage. Simon v. Chase Manhattan Bank, 250 F.3d 1020, 1024 (6th Cir. 2001). Kentucky has historically held that a defectively acknowledged security interest that is recorded does not provide protection from a subsequent party who lacks notice of the interest. See Smith v. Jackson, 232 Ky. 76, 22 S.W.2d 420 (Ky. 1929) (citing identical notice language as KRS § 382.270); Starr Piano Co. v. Petrey, 168 Ky. 530, 182 S.W. 624, 625 (Ky. 1916); see also State Street Bank and Trust Co. v. Heck's, Inc., 963 S.W.2d 626, 630, 45 3 Ky. L. Summary 25 (Ky. 1998) (a defectively recorded mortgage provides no protection unless a creditor can be charged with knowledge of the mortgage). These cases demonstrate that, in Kentucky, a defective acknowledgment of a mortgage that is recorded cannot provide constructive notice of a mortgage. Therefore, it also cannot provide protection from a bankruptcy trustee's status as a hypothetical bona fide purchaser lacking actual knowledge, which is conferred upon the trustee by federal bankruptcy law. Cir. 2007) (holding that amended Ky. Rev. Stat. § 382.270 may not be applied retroactively against a bankruptcy trustee when a debtor's petition was filed prior to the effective date of the amendment to the statute because such an application would be in conflict with the federal bankruptcy statute). 4 Id. The Bankruptcy Court found that the Wilsons’ Mortgage “is not any different in substance than the mortgage in Vance.” (In Re Wilson, JA at 87.) The Bankruptcy Court stated that the notary statement in the Certificate of Acknowledgment in the instant case was defective under Ky. Rev. Stat. § 423.130 because “it did not state the identity and/or names of the individuals who acknowledged the execution of the mortgage.” (Id.) Consequently, the Mortgage “was defectively acknowledged and insufficient to put the trustee, as a hypothetical bona fide purchaser, on notice.” (Id. 87-88, citing Vance, 99 F. App’x at 28.) The court therefore held that “the [Trustee] is entitled to judgment as a matter of law, that she may avoid the [Creditors’] lien pursuant to 11 U.S.C. § 544(a)(1) and (a)(3), and that it should be preserved for the benefit of the estate pursuant to 11 U.S.C. § 551.” (JA at 88.) C. The BAP’s Opinion The Creditors appealed the Bankruptcy Court’s order granting summary judgment to the Trustee to the BAP for the Sixth Circuit on August 24, 2005. The BAP affirmed the Bankruptcy Court’s decision, premising its holding on Vance, as well as Gregory v. Ocwen Fed. Bank (In Re Biggs), 377 F.3d 515 (6th Cir. 2004). See Burden v. CIT Group/Consumer Finance Inc. (In re Wilson), No. 08-8065, 2007 Bankr. LEXIS 3800 (B.A.P. 6th Cir. Nov. 14, 2007). In Biggs, 371 F.3d at 519, the Sixth Circuit addressed Tennessee law, which the BAP found is indistinguishable from Kentucky law on this point, and held that a bankruptcy trustee could avoid a mortgage because the notary acknowledgment failed to provide the names of the individuals who had signed the mortgage. In Re Wilson, 2007 Bankr. LEXIS 3800, at . The BAP found that the Sixth Circuit’s discussion in Biggs, set forth below, regarding the importance of naming the signor 5 in a Certificate of Acknowledgment was “particularly helpful”: [T]he authentication of a deed of trust is not a purposeless formality. The procedure serves to verify the identity of the individual signing the instrument and to establish a fraud-free system for recording the ownership of real property-a necessary prerequisite to any free market. In this instance, the integrity of the acknowledgment is placed in doubt because it omits the most important information on the acknowledgment form: who, if anyone, is doing the acknowledging? Failing to name the individuals who signed the deed of trust bears directly on the ability of a subsequent purchaser of real property to verify that the instrument was signed by the true property owners. Without it, a purchaser is left to wonder who appeared before the notary, if indeed anyone appeared before the notary, to acknowledge their signatures. In this sense, the missing names lend[] uncertainty about the legal effectiveness of the instrument, and for that reason alone the acknowledgment fails substantially to comply with Tennessee law. (Id. at -14, citing Biggs, 377 F.3d at 519.) Accordingly, the BAP stated that it was constrained by the Sixth Circuit’s decisions in Biggs and Vance and that the Bankrtupcy Court “did not err in finding that the acknowledgment clause in this case was defective and therefore did not provide constructive or inquiry notice to the Trustee.” In Re Wilson, 2007 Bankr. LEXIS 3800, at .