As a lender, does the following situation sound all too familiar to you? A customer approaches you for a $500,000 loan to be secured by a mortgage on real estate that he owns with his partner or his spouse. The credit is approved and the loan documents are prepared, including a mortgage to be signed and notarized by your customer and his partner or spouse. However, his partner or spouse couldn't make it to the loan closing because of some other important matter he or she had to attend to (which indicates where on the scale of importance your mortgage loan rates), and he asks if he can bring the documents home to be signed and returned the next morning.
Naturally, when he returns with the documents fully signed, his partner or spouse failed to have his or her signature notarized, so he asks if you can help him out and have someone at the bank notarize the mortgage. You bring the documents to someone else in the bank who is a notary and your customer swears to the notary that the signature that purports to be that of his partner or spouse is actually his or her signature and that he saw him or her sign it. Your colleague notarizes the mortgage, which is then sent for recording. Your customer goes home happy and you're happy because you have a secured mortgage loan with a lien on valuable real estate. Everything is swell so far.
Another variation of this loan transaction scenario is where the customer and his partner or spouse actually sign the mortgage in your presence, but then you bring it to another bank officer who is a notary. You tell your colleague that you were present when the borrower signed, and your colleague gladly notarizes the mortgage, which is then sent for recording, and once again, everyone goes home happy. But, something does happen, which portends trouble. Your customer files for bankruptcy and he retains a lawyer who reads the New Jersey Recording Statutes.
Failing to Properly Acknowledge a Deed Consequences
The attorney comes upon a provision whereby "to properly acknowledge a deed or other instrument, such as a mortgage, the maker of such instrument must appear before an officer specified by the statute as permitted to take acknowledgments. See N.J.S.A. 46:14-2.1(a). Since your customer did not actually "appear before" the notary when the acknowledgment was taken on the mortgage, his attorney challenges your secured lien position on the real estate (which makes up the entire assets of your customer's estate) claiming that the defective acknowledgment should have precluded the mortgage from being recorded by the registrar's office. Therefore, since the mortgage should never have been recorded, the lender failed to perfect its security interest in the real estate and should no longer be deemed a secured party.
Sounds incredible? Such contentions could not possibly be upheld by a court? This could never happen to a lender who is only trying to help his customer in a time of need and surely the customer would never try to hurt his lender? Wrong! Chalk another one up to the old maxim, "No good deed shall go unpunished." In the bankruptcy case of In re David Buchholz, 224 B.R. 13 (Bankr. D.N.J. 1998), the debtor in a Chapter 12 case challenged the mortgage of the secured creditor, as the debtor alleged procedural and substantive deficiencies surrounding the transaction. Id. at 16. The debtor did not deny that his signature was valid, but specifically charged that the mortgage was not acknowledged in the presence of a notary public and thus was in violation of the New Jersey Recording Statutes. Id. at 19.
Judge Gindin analyzed the New Jersey Recording Statutes, finding first that if an instrument is not properly acknowledged, it may not be recorded with the relevant county recording office unless the defect is cured. Id. at 21.
Signatory Must Personally Appear
Judge Gindin reviewed the requirement that the maker personally appear before the acknowledging officer. Citing the case of Smiley v. Hanna, 94 N.J. Eq. 573, 120 A. 793 (Ch. 1923), the test of validity of an acknowledgment is the familiarity the acknowledging officer has with the party signing the document. Buchholz, 224 B.R. at 21. Usually, the acknowledging officer will meet the maker of the instrument and have knowledge of the identity, but the acknowledgment may be met if the officer is sufficiently familiar with the maker's signature. Id. (citing Hanna, 94 N.J. Eq. at 582).
Hanna does not appear to show, as Judge Gindin asserts, that the officer may merely be familiar with the maker's signature. Instead, Hanna says that the officer taking the acknowledgment must be satisfied in his conscience that the party making it is the identical person named in, and who executed, the instrument. Hanna, 94 N.J. Eq. at 582. While the officer may be able to know without formally examining a person's identification that a person has been correctly identified, short of actually witnessing the signature, the officer may not know whether the signature is a forgery.
Deed Statute to be Strictly Construed
The case of N.J. Bank v. Azco Realty Co., 148 N.J. Super. 159 (App. Div. 1977), provided the basis for the central holding of Judge Gindinms opinion that the New Jersey Recording Statutes are to be strictly construed. Buchholz, 224 B.R. at 21-22. Azco involved a mortgage, in which the name of the mortgagee was incorrectly placed where the name of the mortgagor should have been in three separate places. Azco, 148 N.J. Super. at 164. The court found that if the notary had read the same document, the notary would not have been satisfied that the parties were those identified. Id. The court found that a defective acknowledgment was not constructive notice to a subsequent purchaser. Id.
Based upon his review of the law, Judge Gindin found that the maker in Buchholz did sign the document, but that he was outside the presence of the notary, who was unfamiliar with him. Buchholz, 224 B.R. at 22. The New Jersey curative statute, which cures all defects in deeds and other instruments that have been recorded for six years or more, did not apply. Id. at 22-23; N.J.S.A.§46:21-2.
A Defective Deed Acknowledgement Cannot be Cured by Statute
Judge Gindin found that because the acknowledgment was defective and the curative statute was inapplicable, the debt was unsecured under state law and the secured claim of the creditor would be disallowed pursuant to 11 U.S.C. §502(b)(1). The reasoning being that to perfect a security interest in real estate under state law, a creditor must record the mortgage. But, where the mortgage is not proved (properly acknowledged), it is not recordable according to law and is not entitled to be recorded. As a result, the mortgage is not constructive notice to a third party, and the rights of competing interests are unaffected by the conveyance. Id. at 21.
Although it may appear to be nonsensical that a faulty acknowledgment (which essentially provides proof to others that a signature was properly made) could defeat evidence that the signature was in fact valid, the law as it is written appears to be in accord with Judge Gindin's ruling. This could be a particularly harsh result in the context of the Bankruptcy Code, in which "unperfected" liens may be avoided altogether (even though an acknowledgment is not essential to the validity of an instrument as between the parties to it).
It is an all too common and improper practice for acknowledgments to be made outside the presence of the signing party. As can be seen in Buchholz, the potential exists for an extremely harsh result. In the realm of state law, a party who submits a document for recording with a defective acknowledgment may face problems relating to the priority of the lien. If a court were to rule that an instrument should not have been recorded because of an acknowledgment defect, subsequent parties to record may have superior liens.
Regardless of whether other courts would find a similarly harsh result in cases similar to Buchholz, and despite the fact that such a case might be difficult to prove, the safest course of action to take when acknowledging a signature is to do it in the presence of the acknowledging party. Be sure that a notary or an attorney is present at the time of execution, and any potential problems can be avoided. In addition, notaries and attorneys should take the time to be sure they know the identity of the signatory so that they will be able to help defeat any attacks as to the validity of the acknowledgment, and the lender can then more readily rely on the mortgage instrument to provide a valid lien on the real estate that he expected when the mortgage loan closed.