Ch. 7 Trustee Avoids Maine Mortgage Due to Incomplete Acknowledgment

Chapter 7 trustees’ success in avoiding mortgages with defective certificates of acknowledgement occurs with some regularity in Massachusetts.  See e.g. In re Giroux, 2009 WL 1458173 (D. Ma. Bankr. Jul. 27, 2011).  But it has not been that common in Maine.  Last month, however, a Chapter 7 trustee successfully avoided a Maine mortgage because of a defective acknowledgment and obtained the right to sell the property.  In re Bishop, No. 15-10554 (D. Me. Bankr. Jul. 28, 2016).  The Debtor’s mortgage included a certificate of acknowledgment which failed to state the location of the notary (Aroostook County, Maine) when he acknowledged the mortgage.

Pursuant to the Chapter 7 trustee’s strong-arm powers, 11 U.S.C. § 544(a)(3), the trustee argued that he could avoid the mortgage as a hypothetical bona fide purchaser for value.  As in other defective acknowledgment cases, the trustee argued that a defective mortgage or a mortgage which fails to meet recording requirements under applicable state law does not provide constructive notice, at least with respect to attaching lien creditors.  The Court rejected the bank’s argument that the acknowledgment was sufficient because it was clear the property and notary were located in Maine.  The Court noted that it is critical for an acknowledgement to state the location of the notary at the time of execution.  Without that statement, one cannot determine whether the notary had the authority required by the statute to acknowledge the mortgage.

Maine practitioners facing a certificate of acknowledgment issue should closely review 33 M.R.S. § 352, which governs defective acknowledgments.  § 352 offers protection to mortgagees against defects like this for mortgages made prior to January 1, 2013, and with respect to bankruptcies filed on or after October 15, 2015.

Debtors’ Lien-Stripping Attempt Likely Would Have Succeeded in New Hampshire

A North Carolina bankruptcy court recently denied a Debtors’ attempt to “strip off” a junior lien on their primary residence by rejecting the argument that the property should be valued near the time of plan confirmation.  In re Cooper, No. 11-02804-8 (Bankr. E.D. N.C. Jun. 8, 2016). § 506(a) provides that for purposes of determining the secured status of a creditor “value should be determined in light of the purpose of the valuation and of the proposed distribution or use of such property…or use or on a plan affecting such creditor’s interest.”   

The question before the Court was whether the home should be assigned a value as of the petition date or a date closer to plan confirmation for purposes of § 506(a).  In 2011, Debtors filed a Chapter 13 petition reporting two liens on their home a first lien of $90,000 and a second lien of $160,000.  If the Court used the value as of the petition date there would be enough equity to protect the second lien through plan confirmation.  If the Court used the value as of the confirmation date (less than $90,000), then the Debtors would succeed in stripping the second and wholly unsecured lien.  The North Carolina court invoked the majority rule which applies the petition date for valuing collateral, and therefore ruled that the second mortgage lien could not be “stripped” and remained in place, at least to the extent of the property’s value as of the petition date.

A Massachusetts bankruptcy court would have reached the same result.  In re Landry, 479 B.R. 1 (D. Mass. 2011).  But in New Hampshire bankruptcy court, the outcome would have been more favorable for the debtors, and the lien would have been stripped.  In 2013, Chief Judge Harwood adopted the “flexible approach” and ordered a valuation date for residential property near confirmation in the context of an individual Chapter 11.  In re Cahill, 503 B.R. 535 (Bankr. D. N.H. 2013).  Judge Harwood explained using the petition date for valuation fails to take into account the language in § 506(a) that value should be determined in conjunction with the purposes of the plan and the attendant valuation. 

Had the Debtors resided in New Hampshire they most likely would have succeeded in stripping the second lien.  At some point, the First Circuit Court of Appeals and/or the Bankruptcy Appellate Court will have to determine which approach should be the prevailing rule.  We think Judge Harwood has it right.     

Ex Parte Attachment, and Priority, Reinstated to First in Time Creditor

In Estate of Summers v. Nisbet, the Maine Supreme Judicial Court reinforced the first in time, first in right nature of attachment and trustee process under Maine law.  Attachment and trustee process are powerful enforcement tools with which a plaintiff can place a lien on a defendant’s real or personal property while the case is pending, so that the defendant cannot transfer or abscond with property while being sued.
 
After a tragic fire at an apartment building in Portland, Maine that resulted in five deaths, the probate estate of Steven Summers, one of the victims, obtained a December 2014 ex parte attachment against the property of the building owner.  The probate estates of several other victims subsequently obtained attachments in February 2015 and asked the Superior Court to have the Summers ex parte attachment dissolved, asserting that the Summers estate had failed to demonstrate the “exigent circumstances” necessary for the grant of an attachment without hearing.
 
The Superior Court granted that motion, and dissolved the Summers estate’s original ex parte attachment and reinstated it as of February 2015.  As a consequence of the Court’s ruling, all five of the victims’ probate estates were left with attachments that were deemed to have been granted simultaneously.

The Summers estate appealed.  The Law Court vacated the trial court’s dissolution of the Summer ex parte attachment, ruling that the trial court had erred because no one had asserted or established that the Summers estate had failed to make the basic showing required for an attachment, and ordered the Summers attachment reinstated as of the date it was ordered, in first place.  In doing so the Court confirmed that under Maine attachment law, first in time is first in right, and that creditors in Maine must act expeditiously to protect their rights.