U.S. Bank, N.A. v. Desmond (In re Mbazira)

• Decision Date: 01 October 2021
• Docket Number: No. 16-1465,16-1465
• Citation: 15 F.4th 106
• Parties: IN RE: Safina N. MBAZIRA, Debtor. U.S. Bank, N.A., as Trustee of the J.P. Morgan Mortgage Acquisition Corp. 2005-FRE1 Asset Backed Pass-through Certificates, Series 2005-FRE1, Appellant, Ocwen Loan Servicing, LLC, Defendant, v. John O. Desmond, Chapter 11 Trustee of the Estate of Safina N. Mbazira, Appellee.
• Court: U.S. Court of Appeals — First Circuit

15 F.4th 106

IN RE: Safina N. MBAZIRA, Debtor.U.S. Bank, N.A., as Trustee of the J.P. Morgan Mortgage Acquisition Corp. 2005-FRE1 Asset Backed Pass-through Certificates, Series 2005-FRE1, Appellant,Ocwen Loan Servicing, LLC, Defendant,

v.John O. Desmond, Chapter 11 Trustee of the Estate of Safina N. Mbazira,^* Appellee.

No. 16-1465

United States Court of Appeals, First Circuit.

October 1, 2021

Jason A. Manekas, with whom Bernkopf Goodman LLP was on brief, for appellant.

David G. Baker for appellee.

Before Howard, Chief Judge, Thompson and Kayatta, Circuit Judges.

HOWARD, Chief Judge.

This appeal arises out of an adversary action filed in a Chapter 11 proceeding in the Bankruptcy Court for the District of Massachusetts. The subject of the action is a mortgage granted by the debtor, Safina Mbazira, and held by U.S. Bank, N.A. Under the so-called "strong arm" provision of the Bankruptcy Code, 11 U.S.C. § 544, the bankruptcy court allowed Mbazira to void the mortgage because the certificate of acknowledgement accompanying it failed to state that Mbazira signed the mortgage as her free act and deed. After the district court affirmed, U.S. Bank timely appealed. For the following reasons, on de novo review, we affirm the judgment of the bankruptcy court.

I.

A.

The facts are undisputed. Mbazira purchased a home in Waltham, Massachusetts in July 2005, which she financed through two mortgages. This matter only concerns the first, which had an initial principal of $528,000. Under Massachusetts law, a mortgage must include a "certificate of acknowledgment," signed before a notary public or similar official, that the grantor has voluntarily signed the mortgage instrument. See McOuatt v. McOuatt, 320 Mass. 410, 69 N.E.2d 806, 809-10 (1946) ; Mass. Gen. Laws ch. 183, § 30. Although a notarized certificate of acknowledgment accompanied Mbazira's mortgage, the space for her name was left blank. Mbazira's handwritten initials, however, do appear on the bottom of the page.¹

The original mortgagee -- Mortgage Electronic Registration Systems -- assigned its interest to U.S. Bank in 2008. Both mortgagees registered their interests with Massachusetts' Land Court.² In September 2013, U.S. Bank initiated pre-foreclosure proceedings against Mbazira and obtained an "Order of Notice" from the Land Court, which was registered the following month. The original interest in the mortgage, U.S. Bank's current interest, and the pre-foreclosure Order of Notice each appear on the Certificate of Title in the Land Court registration.

B.

Two months after U.S. Bank initiated the pre-foreclosure proceedings, Mbazira filed for Chapter 11 bankruptcy. The petition identified the mortgage at issue here as "unliquidated" and "disputed" with a claim amount of $564,700. Mbazira then commenced an adversary proceeding against U.S. Bank, seeking to "avoid" the mortgage because her name is missing from the certificate of acknowledgment. See 11 U.S.C. §§ 506, 544, 551. Under the Bankruptcy Code, a mortgage may be avoided if a hypothetical bona fide purchaser of the mortgaged properly would not be charged with constructive notice of the mortgage. In re Daylight Dairy Products, Inc., 125 B.R. 1, 3 (Bank. D. Mass. 1991) (citing 11 U.S.C. § 544(a) ). The effect of avoidance is to render the debt unsecured, leaving the creditor to stand at the end of the line with other unsecured creditors in sharing unencumbered assets of the debtor.

U.S. Bank sought to dismiss the adversary proceeding. It advanced two arguments: The recording of a mortgage with such a defect was effective to provide constructive notice of the mortgage; and, in any event, registration of the mortgage provided sufficient notice to subsequent bona fide purchasers. In the alternative, U.S. Bank asked the bankruptcy court to certify to Massachusetts' highest court the questions concerning the effect of the missing name.

The bankruptcy court denied both U.S. Bank's motion to dismiss and its request to certify any questions to the Massachusetts Supreme Judicial Court ("SJC"). In re Mbazira, 518 B.R. 11, 23–24 (Bankr. D. Mass. 2014). It held that the incomplete certificate of acknowledgment was materially defective under Massachusetts law and that, therefore, third parties do not have constructive notice of the encumbrance on the property. Id. at 22. The court then invited Mbazira to file a motion for judgment on the pleadings, which became a motion for summary judgment once additional documents were appended. Following its prior ruling, the court granted the Mbazira's motion and allowed her to avoid the mortgage. In re Mbazira, No. 13-16586-WCH, 2015 WL 1543908, at *1 (Bankr. D. Mass. Mar. 31, 2015).

With Mbazira's debt to U.S. Bank rendered unsecured and its priority wiped away, U.S. Bank appealed to the district court, which concurred with the bankruptcy court. We review the bankruptcy court's decision directly, despite the intermediate district-court decision. In re Sheedy, 801 F.3d 12, 18 (1st Cir. 2015). We assess the bankruptcy court's factual findings for clear error and its legal conclusions de novo. Id.

II.

Section 544 of the Bankruptcy Code -- known as the "strong arm" clause -- permits a trustee³ to "avoid ... any obligation incurred by the debtor that is voidable by" a real or hypothetical bona fide purchaser, regardless of any actual knowledge of the obligation by the trustee. 11 U.S.C. § 544(a)(3). Thus, the trustee can only void a mortgage obligation if it did not have constructive notice of the encumbrance. Under Massachusetts law there are two methods for giving constructive notice to the world of a mortgage on real property: One can either properly record the mortgage in the registry of deeds, Mass. Gen. Laws ch. 183, § 4,⁴ or one can register the mortgage with the Land Court, which provides the same notice to third parties as if it were recorded, Mass. Gen. Laws ch. 185, § 58.⁵ U.S. Bank argues that the mortgage here was properly recorded, and, if not, it was nevertheless registered with the Land Court, which alone provides the required notice. We take each contention in turn.

A.

As mentioned, a properly recorded mortgage provides notice of a security interest, but a recording is not effective - indeed is literally barred under Massachusetts law -- unless there is a certificate of acknowledgment or proof of its due execution attached, Mass. Gen. Laws ch. 183, § 29.⁶ As explained by the SJC, Massachusetts law requires the grantor to "acknowledge that [he or she] has executed the instrument as [his or her] free act and deed," and the statute requires that "a certificate reciting that the grantor appeared before the officer making the certificate and made such acknowledgment ... be attached to the instrument in order to entitle it to be recorded." Bank of Am., N.A. v. Casey, 474 Mass. 556, 52 N.E.3d 1030, 1035 (2016) (quoting McOuatt, 69 N.E.2d at 809 ); see also Mass. Gen. Laws ch. 183, § 30 (specifying the requirements for a certificate of acknowledgment).

Here, there is no certificate "reciting that [Mbazira] appeared before the officer ... and made such acknowledgement." Bank of Am., 52 N.E.3d at 1035. There is, in fact, no certificate reciting that anyone made any such acknowledgement because the name was left blank. As the bankruptcy court observed, the plain language of Massachusetts law, therefore, seems to render any recording of this mortgage ineffective because it does not contain a proper certification of acknowledgement. See In re Mbazira, 518 B.R. at 22.

U.S. Bank nevertheless contends that the omitted name does not preclude recording from giving constructive notice of the mortgage. It is true that Massachusetts law does not definitively deem such a defect material.⁷ But the weight of precedent leans decidedly in favor of strictly construing the statutory requirement for certificates of acknowledgment. The bankruptcy courts applying Massachusetts law have adhered to an interpretation that requires strict formality in the execution of mortgage acknowledgments. See, e.g. In re Reznikov, 548 B.R. 606, 616 (Bankr. D. Mass. 2016) (holding that a certificate of acknowledgment that merely stated that the debtor "duly acknowledged" that she executed the mortgage but did not indicate that the execution was voluntary or her "free act and deed" was materially defective under state law), aff'd, 567 B.R. 239 (D. Mass. 2017) ; see also In re Shubert, 535 B.R. 488, 500 (Bankr. D. Mass. 2015) (same, but acknowledgment lacked even the "duly acknowledged" language). And the bankruptcy courts have specifically viewed certificates missing the debtor's name to be materially defective under Massachusetts law. See In re Giroux, No. 08-14708-JNF, 2009 WL 1458173, at *8 (Bankr. D. Mass. May 21, 2009) (not reported) (predicting "that the Massachusetts Supreme Judicial Court would view the omission of the Debtor's name from the acknowledgment as a material defect in the acknowledgment of the Debtor's signature on the mortgage document"), aff'd sub nom. Mortg. Elec. Registration Sys., Inc. v. Agin, No. 09-CV-10988-PBS, 2009 WL 3834002 (D. Mass. Nov. 17, 2009) ; see also In re Bower, No. 10-10993-WCH, 2010 WL 4023396, at *5 (Bankr. D. Mass. Oct. 13, 2010) (adopting Giroux's reasoning and noting that "[m]ortgage acknowledgments must be strictly executed in the manner proscribed by Massachusetts law or they are invalid."). Indeed, the SJC itself has twice declined an opportunity to question the presumed ineffectiveness of a missing name on a certificate of acknowledgment. See Bank of Am., 52 N.E. 3d at 1039 ; McOuatt, 69 N.E.2d at 809.

This is not to say that the case law requires any specific magic words. As the Massachusetts Supreme Judicial Court explained, "[n]o particular words are necessary as long as they amount to an admission that [the grantor] has voluntarily and freely executed the instrument." McOuatt, 69 N.E.2d at 810 ; see also In re Demore, 844 F.3d 292, 298-99 (1st Cir. 2016).⁸ Here though no...