In re Jones, Bankruptcy No. 01-10733.

• Decision Date: 27 September 2002
• Docket Number: Bankruptcy No. 01-10733.,Adversary No. 01-0074 KJC.
• Citation: 284 B.R. 92
• Parties: In re Heridan S. JONES, Jr., Debtor. Sheridan S. Jones, Jr., and Christine Shubert, Plaintiffs, v. The Money Store, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

284 B.R. 92

In re Heridan S. JONES, Jr., Debtor Sheridan S. Jones, Jr., and Christine Shubert, Plaintiffs, v. The Money Store, Inc., Defendant.

Bankruptcy No. 01-10733.

Adversary No. 01-0074 KJC.

United States Bankruptcy Court, E.D. Pennsylvania.

September 27, 2002.

Sheridan S. Jones, Jr., Chester, PA, David A. Scholl, Newtown Square, PA, for Debtor.

Christine C. Shubert, Tabernacle, NJ, Trustee.

MEMORANDUM OPINION¹

KEVIN J. CAREY, Bankruptcy Judge.

On January 17, 2001, Sheridan S. Jones (the "Debtor") filed a voluntary chapter 7 bankruptcy petition in this Court. On February 7, 2001, the Debtor and Christine Shubert, (the "Trustee") filed a complaint against the defendant, The Money Store, Inc. ("The Money Store"), seeking to avoid a mortgage lien held by The Money Store against the Debtors' real property located at 1013 Elsinore Place, Chester, Pennsylvania (the "Property"). In the complaint, the plaintiffs alleged that the Collateral Mortgage, originally signed by the Debtor in favor of P. Angelo & Sons, Inc. and assigned to The Money Store, is avoidable under Bankruptcy Code § 544 because it was not properly notarized.

On March 13, 2001, The Money Store filed (i) an objection to the exemption claimed by the Debtor against the Property (the "Exemption Objection"), and (ii) a motion for relief from the automatic stay to continue its attempts to enforce the mortgage in state court (the "Stay Motion").

At the parties' request, an Order was entered on April 30, 2001 placing this adversary proceeding, the Exemption Objection and the Stay Motion on a parallel track so that the related matters could be considered together. The parties filed a Joint Pre-Trial Statement on August 22, 2001. A trial was held on January 4, 2002, at which a consolidated record was made for use in consideration of all three related matters.

For the reasons which follow, I conclude that the Collateral Mortgage cannot be avoided under § 544(a), that the Stay Motion should be granted, and that the Exemption Objection should be sustained.

FACTUAL BACKGROUND

In August 1995, as a result of a door-to-door solicitation by representatives of P. Angelo & Sons, Inc. (the "Contractor"), the Debtor signed various documents agreeing to pay the Contractor to perform certain home improvements on the Property. The Debtor admits to signing the following documents, all of which are dated August 4, 1995:(i) Credit Application for Property Improvement Loan (Exhibit M-1); (ii) Settlement Statement (Exhibit M-2); (iii) Home Improvement Installment Contract (Exhibit M-3); and (iv) Collateral Mortgage (Exhibit M-9).²

The Debtor testified that he recalled only one meeting with the Contractor, which took place in his home, and, at which time, the parties agreed to the scope of the home improvements to be performed on the Property, a price for the improvements, and the financing terms. (Tr. at pp. 8-9, 25-26). The Debtor testified that he signed documents at that initial meeting, although he was not aware that one of the documents was a mortgage. (Tr. at pp. 9-10, 26). The Debtor further testified that the documents were not notarized at that meeting. (Tr. at p. 10). The Debtor received copies of the documents that he signed after the meeting, but he misplaced those papers. (Tr. at pp. 23-24).

The Debtor also signed a Certificate of Completion dated September 11, 1995, although the Debtor testified that the Contractor never completed improvements to one of his windows. (Tr. at p. 25).

The Collateral Mortgage was accepted for filing with the Recorder of Deeds Office for Delaware County, Pennsylvania, where it was recorded in Mortgage Book vol. 1576, page 0535. The Collateral Mortgage was assigned by the Contractor to The Money Store by a document entitled Contractor's Assignment (Exhibit M-4) which was also recorded with the Recorder of Deeds Office for Delaware County in Mortgage Book vol. 1576, page 0540.

The Debtor made the payments required under the Home Improvement Installment Contract until approximately October 27, 1997. Thereafter, The Money Store commenced a mortgage foreclosure proceeding against the Debtor in the Court of Common Pleas, Delaware County, which was stayed by the filing of the Debtor's bankruptcy petition.

DISCUSSION

(1) Avoidance of the mortgage under § 544(a).

The Debtor asserts that no notary was present at the time he signed the Collateral Mortgage, making the mortgage's acknowledgment defective. Therefore, he contends, the Collateral Mortgage was not properly recorded and can be avoided by the Trustee pursuant to Bankruptcy Code § 544(a).³

The property rights of the mortgagor and mortgagee are created and defined by state law and must be reviewed in light thereof. Schwab v. Home Loan and Investment Bank, FSB (In re Messinger), 281 B.R. 568, 572 (Bankr.M.D.Pa.2002)(Thomas, J.) citing Commerce Bank v. Mountain View Village, Inc., 5 F.3d 34, 36 (3d Cir.1993), in turn, citing Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136, 140 (1979). In Messinger, the trustee also attempted to avoid a number of mortgage liens under § 544(a), claiming that the acknowledgments were defective because the mortgages had not been executed in the presence of the notary. After reviewing the language of the Uniform Acknowledgment Act,⁴ Pennsylvania case law, and the history of acknowledgments, Judge Thomas concluded that "the presence of the parties is required, with limited exception, for a proper certificate of acknowledgment in Pennsylvania." Messinger, 281 B.R. at 574.

Under Pennsylvania law, the acknowledgment does not affect the validity of the mortgage and is not part of the document. Messinger, 281 B.R. at 574. The acknowledgment is required for the recording and perfection of a mortgage lien. Messinger, 281 B.R. at 573 citing Abraham v. Mihalich, 330 Pa.Super. 378, 381, 479 A.2d 601, 603 (1984) and 21 P.S. § 42. The purpose of the acknowledgment is to verify the executing party's identity and voluntary intention to be bound by the terms of the document. Messinger, 281 B.R. at 574. Absent an allegation of fraud or forgery, a recorded acknowledgment that is complete and proper on its face is prima facie evidence of the due execution of the mortgage. Id.

In Messinger, the Court concluded that the trustee could not avoid the challenged mortgages under § 544(a) because there were no allegations of fraud or forgery. Messinger, 281 B.R. at 575. None of the debtors involved in the adversary proceedings that were decided together in Messinger denied signing the mortgages at issue. Even assuming that the notary did not personally see the debtors sign the mortgages, this latent defect did not appear on the face of the mortgages. Id. Therefore, the Court concluded that, in the absence of any allegation of fraud or forgery, the latent defect did not warrant "interference with the presumptive validity of acknowledged and recorded mortgages, facially complete and regular." Id. at 575. In support of this conclusion, the Court wrote:

The official certificate of the notary, in regular form, is (in the absence of fraud or forgery) conclusive in favor of those who in good faith rely upon it. "Any other rule would work incalculable mischief. It would open wide the door to fraud and perjury, and make recorded acknowledgments a snare to a person dealing with land on the faith and credit of the public records." Popovitch v. Kasperlik, 70 F.Supp. 376, 384 (W.D.Pa.1947). Allowing a challenge where there is an allegation of fraud or forgery would restore the protections that may have been lost by an improper fulfillment of notarial duties. Where the grantors concede that they have signed the deed, and the deed had been delivered, "even a defective acknowledgment would not be a basis for invalidating the recordation." Abraham v. Mihalich, 330 Pa.Super. at 382, 479 A.2d at 603.

Messinger, 281 B.R. at 574-75.

The Debtor relies on the case Phelan v. Fleet Consumer Discount Co. (In re Rice), 133 B.R. 722 (Bankr.E.D.Pa.1991), in which the Court avoided a mortgage under § 544(a), finding that the acknowledgment was defective because the debtor had not signed the mortgage in the presence of the notary. Rice, 133 B.R. at 728. The Rice Court considered the defendant's argument that 21 P.S. § 281.1, entitled "Defective acknowledgments prior to 1988," cured any defect in the acknowledgment, and concluded that the statute cures errors made by the notary or official witnessing the signature, but does not cure "an entirely bogus acknowledgment" that was never actually made before the notary or other official. Id. at 727. The Rice Court concluded that such a defect was too serious to fall within the curative effects of 21 P.S. § 281.1 because "[t]he formality of appearance before an authorized official serves the practical purpose of `bringing home' to the mortgagor the fact that a mortgage is being executed." Id.

I find far more persuasive the rationale supporting the court's decision in Messinger: the purpose of the acknowledgment is to verify the executing party's identity and to assure that such signing is his voluntary act, all for the benefit of those who rely on the faith and credit of the public records. Messinger, 281 B.R. at 574.⁵ Based upon the foregoing, I conclude that Pennsylvania law requires proof of fraud or forgery to void the perfection of a recorded mortgage containing an acknowledgment that is complete and proper on its face. As stated in both Messinger and Rice, the acknowledgment does not affect the validity of the mortgage, only the ability to record it. See also Abraham, 330 Pa.Super. at 382, 479 A.2d at 603.

Next, I turn to the facts of the matter before me. The parties agreed that the Collateral Mortgage was filed with the Recorder of Deeds Office for Delaware County, Pennsylvania, and the acknowledgment appears to be complete and proper on its face. (Exhibit M-9). The Debtor, as a moving party, has the burden...