In re Ryan, Bankruptcy No. 4-82-835G

• Decision Date: 27 February 1987
• Docket Number: Adv. No. 4-83-305.,Bankruptcy No. 4-82-835G
• Citation: 70 BR 509
• Court: U.S. Bankruptcy Court — District of Massachusetts
• Parties: In re Thomas Edward RYAN, Debtor. Peter M. STERN, Trustee, Plaintiff, v. CONTINENTAL ASSURANCE COMPANY, Defendant.

70 B.R. 509 (1987)

In re Thomas Edward RYAN, Debtor Peter M. STERN, Trustee, Plaintiff, v. CONTINENTAL ASSURANCE COMPANY, Defendant.

Bankruptcy No. 4-82-835G, Adv. No. 4-83-305.

United States Bankruptcy Court, D. Massachusetts.

February 27, 1987.

Peter Stern, trustee, pro se.

Bradford R. Martin, Jr., Ryan & White, Springfield, Mass., for CNA Ins.

OPINION AND ORDER

JAMES F. QUEENAN, Jr., Bankruptcy Judge.

This case presents novel questions concerning whether a trustee in bankruptcy is subject to inquiry notice in his alternative capacities as hypothetical judicial lien creditor, holder of an execution returned unsatisfied, and bona fide purchaser of real property. Also involved is the question of whether the recording of an improperly witnessed mortgage constitutes constructive notice of the mortgage under applicable state law.

Peter Stern, the trustee in bankruptcy (the "Trustee") of Thomas Edward Ryan (the "Debtor"), brings this adversary proceeding against Continental Assurance Company (the "Bank") to set aside the Bank's real estate mortgage pursuant to the so-called "strong arm" clause contained in 11 U.S.C. § 544(a).¹ The facts are undisputed. On November 11, 1975, the Debtor purchased from Quechee Lakes Corporation a condominium unit located in Hartford, Vermont. Title was placed in the Debtor's name, and on the same day the Debtor gave the seller a mortgage on the property in order to secure a loan used to finance the purchase. On November 17, 1975, Quechee Lakes Corporation assigned the mortgage to the Bank. The deed, mortgage and assignment of mortgage were all recorded in the town's records. The present problem arises because the mortgage was witnessed by only one witness rather than by two witnesses as required by Vermont statute.² The deed and mortgage assignment both had the necessary two subscribing witnesses. The Trustee, claiming under § 544(a) the alternative rights of a judicial lien creditor, the holder of an execution returned unsatisfied, and a bona fide purchaser of real property (other than fixtures), seeks to have the mortgage declared void by reason of the missing witness. By stipulation of the parties, the property has been sold and the mortgage debt paid to the Bank. The Bank has agreed to repay the Trustee if the Court invalidates the mortgage. For the reasons set forth in this opinion, we hold that the mortgage is valid against the Trustee.

I. CONSTRUCTIVE NOTICE

Although § 544(a) gives a trustee rights "without regard to any knowledge of the trustee or of any creditor," the knowledge to be disregarded is only the personal knowledge of a trustee or creditor. Maine National Bank v. Morse (In re Morse), 30 B.R. 52, 54 (Bankr. 1st Cir. 1983). The trustee's rights, in any capacity under § 544(a), are nevertheless subject to the effect of any constructive notice which state law deems is given by public recordings or by the possession of one who holds no interest of record. Any other interpretation would clothe the trustee with powers that no purchaser could have under the state law, a result that Congress could not have intended. McCannon v. Marston, 679 F.2d 13 (3rd Cir.1982); Saghi v. Walsh (In re Gurs), 27 B.R. 163 (Bankr. 9th Cir. 1983); Ellsworth v. Fitzpatrick (In re Fitzpatrick), 29 B.R. 701 (Bankr.W.D.Wis. 1983).

The Vermont statute requiring two witnesses does not state the effect of noncompliance. It merely provides that the instrument "shall be" signed by the grantor and two witnesses, and acknowledged and recorded. Vermont has a curative statute³, as do many states, providing that defects such as improper witnessing do not invalidate a recorded instrument after 15 years. Because 15 years have not lapsed since the filing of the Bank's mortgage, the curative statute does not remedy the defect. It is, however, clear from the curative statute that its provisions were not intended to affect rights which may have been acquired under any instrument. Nor do we receive guidance on the Bank's rights from the principal Vermont recording statute,⁴ which purports to deal only with the effect of failure to acknowledge and record.

In Day v. Adams, 42 Vt. 510 (1869), the Supreme Court of Vermont held that the recording of a prior deed signed by just one witness was not constructive notice affecting the rights of a subsequent purchaser. The court dismissed the claim of the subsequent purchaser who sought damages for breach of covenants of title in his deed. The court based its holding on two grounds: (1) lack of constructive notice; and (2) the ineffectiveness of the prior deed to convey superior title because of homestead rights held by one who was not a grantor in the prior deed. There is no indication in the decision as to whether the plaintiff had acquired actual knowledge of the prior deed. Presumably he did not because otherwise the decision would likely have been based on this ground; however, it is hard to understand how a buyer could fail to acquire such knowledge. Nor is there any discussion by the court concerning inquiry notice. Day v. Adams has not been overruled by the Supreme Court of Vermont. It appears to represent the weight of authority elsewhere. See 4 American Law of Property § 17.31 (1952); 6A R. Powell & P. Rohan, Powell on Real Property § 9044 (1986). The statutes of some states, but not Vermont, provide that the recording of instruments lacking statutory prerequisites does give constructive notice. 4 American Law of Property § 17.27 (1952).

The Bank seeks to take advantage of the fact that its mortgage was assigned by an instrument of assignment which was properly signed, witnessed, acknowledged and recorded. It argues that the assignment gives constructive notice of the mortgage, citing Tindale v. Bove, 97 Vt. 465, 124 A. 585 (1924). The court in Tindale held that a properly signed, witnessed, acknowledged, and recorded deed gave constructive notice of an improperly witnessed, recorded mortgage because the deed mentioned the mortgage. In that case, however, the properly executed instrument was within the chain of title. Here it is not. If we accept the principle of law that the mortgage itself gives no constructive notice, it would be inconsistent to rule that the assignment does give such notice, in view of the fact that a title search would not disclose the assignment without tracing it from the mortgage. There is no constructive notice of transfers which are outside the chain of title. 4 American Law of Property § 17.17 (1952).

If we apply existing precedents, therefore, we arrive at the conclusion that the Bank's recorded mortgage does not give constructive notice. We do not, however, believe that the Supreme Court of Vermont would be inclined to follow Day v. Adams today. The case was decided in an age when formal and technical compliance with the law was regarded as sacrosanct. The court believed that failure to do so would lead to the erosion of all statutory requirements, stating: "But if one of two witnesses may be dispensed with, both may, and on the same principle all the statutory requirements may be disregarded." Day v. Adams, supra, at 515. This reasoning represents neither compelling logic nor the attitude of courts today toward statutory requirements as to form.

Although the approach in Day v. Adams seems to represent a majority view when one scans property law authorities such as Powell and the American Law of Property, this "majority" consists largely of turn-of-the-century cases in which courts slavishly observed rigorous technical requirements. See 4 American Law of Property § 17.31 n. 16 (1952) (cases cited in footnote); compare Torgeson v. Connelly, 348 P.2d 63 (Wyo.1959) (no constructive notice provided) with Leighton v. Leonard, 22 Wash.App. 136, 589 P.2d 278 (1978), as corrected (1979) (constructive notice provided despite lack of acknowledgement). Courts in the present day are more willing to disregard a minor error in form if ignoring the error will not prejudice other parties' rights.

Perhaps the best illustration of the modern viewpoint placing substance over form is in an analagous area of law: the Uniform Commercial Code. Section 9-402(8) of the Uniform Commercial Code adds a common sense limitation to the formal requirements for financing statements. It provides: "A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading." U.C.C. § 9-402(8). The Official Comment to this subsection states that it "is designed to discourage the fanatical and impossibly refined readings of such statutory requirements in which courts have occasionally indulged themselves." U.C.C. § 9-402(8) comment 9. The comment cites as an example of such formalism General Motors Acceptance Corp. v. Haley, 329 Mass. 559, 109 N.E.2d 143 (1952), where a filing made against a debtor under the name "E.R. Millen Company" rather than its correct name of "E.R. Millen Co., Inc." was held not to give constructive notice.

We believe that the Supreme Court of Vermont would likely approach the problem today by first distinguishing among three topics: (1) the effect of the Bank's mortgage between the original parties as an agreement to mortgage, as opposed to a present mortgage; (2) whether the mortgage was properly accepted for recording; and (3) its effect as constructive notice of the rights of the Bank. The Court would probably resolve the latter question by requiring that the mortgage not be seriously misleading, taking its cue from the Uniform Commercial Code, and rule that the essential requirement of execution is that the instrument be signed, or perhaps both signed and acknowledged. It seems highly unlikely that the court would require a three-fold guaranty of authenticity in execution consisting of acknowledgment before a notary public and two additional witnesses. This approach would be formalism to an extreme.

Our conclusion that the...