In re Biggs

• Decision Date: 29 July 2004
• Docket Number: No. 03-5626.,03-5626.
• Citation: 377 F.3d 515
• Parties: In re Richard Glenn BIGGS and Kathy Jean Biggs, a/k/a Kathy Jean Melton, Debtors. Jeanne Burton Gregory, Trustee, Plaintiff-Appellee, v. Ocwen Federal Bank, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

377 F.3d 515

In re Richard Glenn BIGGS and Kathy Jean Biggs, a/k/a Kathy Jean Melton, Debtors Jeanne Burton Gregory, Trustee, Plaintiff-Appellee, v. Ocwen Federal Bank, Defendant-Appellant.

No. 03-5626.

United States Court of Appeals, Sixth Circuit.

Argued June 16, 2004.

Decided and Filed July 29, 2004.

Appeal from the United States District Court for the Middle District of Tennessee, Aleta A. Trauger, J Jeanne Burton Gregory (argued and briefed), Gibson, Gregory & Gwyn, Nashville, TN, for Plaintiff-Appellee.

Frank H. Reeves (argued), Hix & Gray, Nashville, TN, Thomas W. Lawless (briefed), Wilson & Associates, Nashville, TN, for Defendants-Appellants.

Before SILER, DAUGHTREY, and SUTTON, Circuit Judges.

OPINION

SUTTON, Circuit Judge.

In this bankruptcy case, Ocwen Federal Bank claims that a deed of trust is valid against subsequent purchasers of the property, even though the required acknowledgment omits the names of the individuals purporting to acknowledge their signatures on the deed. The bankruptcy and district courts each held that a deed of trust omitting this information was invalid under Tennessee law, and so do we. We affirm.

I.

On November 6, 1997, Richard and Kathy Biggs (the "debtors") executed a deed of trust on their Tennessee home, securing a $65,000 loan and naming Seacoast Equities, Inc. as the beneficiary. The deed of trust consisted of four pages and contained the following partially completed, standard acknowledgment form on the last page:

STATE OF TENNESSEE County ss: Davidson

On this 6 day of November 1997, before me personally appeared

[blank] to me known to be the person(s) described in and who executed the foregoing instrument, and who acknowledged the execution of the same to be [blank] free act and deed. Witness my hand and official seal.

My Commission Expires: Indefinite

(illegible signature and notary seal)

Notary Public

JA 24 (emphasis added to handwritten words). On January 12, 1998, Seacoast Equities recorded the deed of trust, then sold its interest in the deed to Ocwen Federal Bank.

On April 9, 2001, the debtors filed a bankruptcy petition under Chapter 7, after which the bankruptcy court assigned Jeanne Burton Gregory to be the trustee. As trustee, Gregory obtained the rights of "a bona fide purchaser of real property... from the debtor [who] has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists." 11 U.S.C. § 544(a)(3). Believing that the acknowledgment was defective and that her status as a bona fide purchaser gave her a superior interest in the debtors' home under Tennessee law, Gregory filed a complaint in the bankruptcy court to avoid the deed of trust held by Ocwen.

The parties moved for summary judgment, and the bankruptcy court granted Gregory's motion. In the absence of the debtors' names, the bankruptcy court reasoned, the acknowledgment was "not in substantial compliance [with Tennessee law] and that in order for a notarization to be effective, it must include the names of the people who appear before the notary." Bankr.Ct. Order Avoiding Lien. Ocwen appealed the decision to the district court, which affirmed. "The omission of the names in the acknowledgment," the district court determined, "cannot be viewed ... as [a] harmless or minor deviation[ ] from the standard form language set out in the statutes. It is at the core of what an acknowledgment is meant to do." D. Ct. Op. at 5.

II.

In reviewing a bankruptcy decision appealed to the district court, "[w]e accord no deference to the district court's decision [and] review de novo the bankruptcy court's conclusions of law." In re Kenneth Allen Knight Trust, 303 F.3d 671, 676 (6th Cir.2002).

A.

Commonly referred to as the "strong-arm clause," section 544(a) of the Bankruptcy Code allows the trustee to "avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by ... a bona fide purchaser of real property ... from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists." 11 U.S.C. § 544(a). More simply, the trustee hypothetically purchases the debtor's property at the commencement of the bankruptcy case, then determines whether it is subject to any valid prior interests. Here, then, the question is whether Ocwen's deed of trust amounts to a valid prior interest.

To be valid under Tennessee law, a deed of trust must be registered and acknowledged:

Any of such instruments [including deeds of trust] not so... acknowledged and registered, or noted for registration, shall be null and void as to existing or subsequent creditors of, or bona fide purchasers from, the makers without notice.

Tenn.Code Ann. § 66-26-103 (emphasis added). "[A]n acknowledgment... is the formal statement of the person signing the document that his [or her] signature was freely done." In re Marsh, 12 S.W.3d 449, 453 (Tenn.2000) (quotation omitted).

To facilitate real-estate transactions, the Tennessee legislature has provided statutory forms that fulfill the acknowledgment requirement, and all of the forms require the notary to include the names of the individuals acknowledging their signatures. See Tenn.Code Ann. §§ 66-22-107 (individuals), -108 (corporations and partnerships), & -114 (agency relationships). While adherence to the statutory forms guarantees that an acknowledgment will be treated as valid, the Tennessee legislature has said that "no specific form or wording [is] required in such certificate and [ ] the ownership of property, or the determination of any other right or obligation, shall not be affected by the inclusion or omission of any specific words." Id. § 66-22-114(b). On top of this general relaxation of the acknowledgment requirement, Tennessee specifically forgives defective acknowledgments that in either "substance" or "intent" comply with the requirement. The first statute, the "substantial compliance" savings statute, reads:

The unintentional omission by the clerk or other officer of any words in a certificate of an acknowledgment, or probate of any deed or other instrument, shall in nowise vitiate the validity of such deed, but the same shall be good and valid to all intents and purposes, if the substance of the authentication required by law is in the certificate.

Id. § 66-26-113; see also In re Akins, 87 S.W.3d 488, 492 (Tenn.2002) (emphasis added). The second statute, the "intent" savings statute, reads:

Any certificate clearly evidencing intent to authenticate, acknowledge or verify a document shall constitute a valid certificate of acknowledgment for purposes of this chapter and for any other purpose for which such certificate may be used under the law. It is the legislative intent that no specific form or wording be required in such certificate and that the ownership of property, or the determination of any other right or obligation, shall not be affected by the inclusion or omission of any specific words.

Tenn.Code Ann. § 66-22-114(b) (emphasis added). We consider each savings statute in turn.

B.

Two recent decisions by the Tennessee Supreme Court, In re Marsh, 12 S.W.3d 449 (Tenn.2000), and In re Crim, 81 S.W.3d 764 (Tenn.2002), point the way in explaining why Ocwen fails to satisfy the "substantial compliance" test. In re Marsh involved a missing notary seal on an acknowledgment to a deed of trust. In holding that the missing seal rendered the deed of trust void against subsequent purchasers of the property, the court explained the significance of acknowledgments. An acknowledgment "authenticates the due execution of a document and is the formal statement of the person signing the document that his [or her] signature was freely done," and "aids in ensuring that the instrument was not fraudulently executed." In re Marsh, 12 S.W.3d at 453 (quotation omitted). A missing notary seal, the court concluded, "is more substantial than the simple omission of statutory language or the use of a different, yet equivalent word.... [A] seal is either affixed or not affixed; this requirement is not subject to substantial-compliance analysis." Id. at 454.

In re Crim emphasized the importance of identifying the parties who acknowledge the deed. Using a power of attorney, a wife attempted to sign a deed of trust on behalf of her husband, but the notary used an acknowledgment form saying that both the husband and wife personally appeared before him and acknowledged their signatures. 81 S.W.3d at 766. Building on In re Marsh, the court held that "the discrepancy in this case between the certificate of acknowledgment and the signatures on the deed of trust lends uncertainty about the legal effectiveness of the instrument." Id. at 768; see also In re Marsh, 12 S.W.3d at 453 ("A creditor or purchaser who examines a deed of trust should be able to assume that if it contains an acknowledgment ... then it has been properly authenticated and is valid, that is, free from apparent forgery or fraud."). "Substantial-compliance analysis is not proper" in a setting like this one, the court reasoned, because "the notary failed to use the prescribed statutory form of acknowledgment, with the result that the certificate of acknowledgment contains false statements and indicates a lack of compliance [with Tennessee law]." In re Crim, 81 S.W.3d at 769-70.

As In re Marsh and In re Crim indicate and as earlier decisions confirm, the 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. See Figuers v. Fly, 137 Tenn. 358, 193 S.W. 117, 120 (1917) ("A certificate of acknowledgment is an act which must in the...