United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 05-6003EA
In re: *
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Rick’s Auto Outlet of Monticello, LLC, *
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Debtor. *
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* Appeal from the United States
Renee Williams, * Bankruptcy Court for the
* Western District of Arkansas
Plaintiff - Appellant. *
*
v. *
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Wells Fargo Financial Mississippi 2, *
Inc. and Joseph Pieroni, *
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Defendants - Appellees. *
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Submitted: July 7, 2005
Filed: July 21, 2005
Before SCHERMER, FEDERMAN, and MAHONEY, Bankruptcy Judges.
MAHONEY, Bankruptcy Judge.
This is an appeal from an order of the bankruptcy court of February 9, 2005,
denying the Chapter 7 trustee’s complaint to avoid a lien on real property. For the
reasons stated below, we reverse.
Background
The debtor, Rick’s Auto Outlet of Monticello, ARkansas (the LLC), owned real
property in Monticello, Arkansas. A married couple, who were members of the LLC,
subsequently executed a deed of trust on property they owned as individuals and on
the property owned by the LLC. The deed of trust was signed by them individually,
and the acknowledgment identified them individually but not as members of the LLC,
and in fact contained no mention of the LLC.
The trustee argued that the acknowledgment on the deed of trust was improper
under Arkansas law and the deed was therefore avoidable. The bankruptcy court,
applying an Arkansas statute which provides that any instrument acknowledged
outside the state of Arkansas is valid if the acknowledgment complies with the laws
of the state in which it was executed, found that Mississippi law applied to the issue
because the acknowledgment was executed in Mississippi.
The form of the acknowledgment does not comply on its face with the
Mississippi statute governing acknowledgments. However, the bankruptcy court read
Mississippi caselaw to hold that strict compliance with the acknowledgment statute
is not required. Instead, the acknowledgment must simply convey the fact that the
person executing the deed did so of his or her own free will. The court held that the
body of the deed of trust at issue contained all the necessary information to find that
the owners voluntarily mortgaged the land and signed the deeds of trust on their own
behalf and on behalf of the debtor LLC.
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The trustee agrees that Mississippi law governs the validity of the
acknowledgment, but argues on appeal that Arkansas law governs whether the deed
of trust provides notice sufficiently to withstand challenge by the trustee under 11
U.S.C. § 544(a)(3).
Standard of Review
The bankruptcy court’s factual findings are reviewed for clear error and its
legal conclusions are reviewed de novo. Apex Oil Co. v. Sparks (In re Apex Oil Co.),
406 F.3d 538, 541 (8th Cir. 2005). The appellant challenges the bankruptcy court’s
holding that the deed of trust constitutes constructive notice.
Discussion
Mississippi has a statute describing the appropriate form of acknowledgment
for limited liability companies, Miss. Code Ann. § 89-3-7, but that acknowledgment
form was not used on this deed of trust.
The trustee relies on the case of White v. Delta Foundation, Inc., 481 So. 2d
329 (Miss. 1985), for the proposition that a corporate acknowledgment has to make
clear that a corporation is executing the document by and through an authorized
officer or agent. The White case dealt with a foreclosure after the lender had
appointed a successor trustee. The body of the document was not clear as to whether
the original lienholder or a successor entity was making the change in trustees, and
the acknowledgment named only the successor trustee individually, not in his
corporate capacity. The court ruled that the deed was patently defective because the
acknowledgment was improper for a corporate party.
The White court, however, noted that "[a] liberal interpretation of
acknowledgments encompasses examination of the body of the instrument itself, and
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an acknowledgment will not necessarily be deemed fatal for an omission which can
be supplied from the body of the instrument itself." 481 So. 2d at 333-34.
Nevertheless, since the body of the deed was ambiguous, the court could not rely on
it for clarification of the acknowledgment.
As the bankruptcy court noted, a subsequent case, Estate of Dykes v. Estate of
Williams, 864 So. 2d 926 (Miss. 2003), also ruled that a defective acknowledgment
will not be held fatal for an omission that can be filled in from the body of the deed
itself.
The federal district court in Mississippi followed the same rule in Morton v.
Resolution Trust Corp., 918 F. Supp. 985 (S.D. Miss. 1995). In Morton, the Mortons’
property was sold at foreclosure, twice. The trust deed holder, through a corporate
officer, had previously appointed a substitute trustee who conducted the first
foreclosure sale. Thereafter, the same corporate officer appointed another substitute
trustee who conducted a second sale. The parties disputed the validity of the first sale
because of an allegedly defective substitution-of-trustee document. The defendant
argued that the acknowledgment in that document was flawed because it did not
identify the person who signed it (the space for the name was left blank). This
argument relied on the statement in the White case that the acknowledgment’s failure
to identify the person who executed the instrument was fatal to the document.
The district court disagreed with that argument, noting that the corporate
officer’s name appeared in the body of the substitution document as the person
authorized on behalf of the corporation to execute the document, and he signed it. In
light of Mississippi caselaw mandating “liberal interpretation of acknowledgments,”
the district court found that the bank officer’s name was readily ascertainable from
the document as a whole. The district court did, however, take pains to point out that
the document it was reviewing was executed prior to the statutory amendment
requiring a specific form of acknowledgment for corporate entities. That statutory
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amendment, section 89-3-7 of the Mississippi Code, and its subsections regarding
appropriate forms of acknowledgment in various representational capacities, require
identification of the signer, his or her capacity to sign on behalf of another entity, and
authorization by the entity to execute the document. The acknowledgment at issue
here contains none of those elements on behalf of the LLC. While the “grantor”
section of the deed of trust identifies the individuals as members of the LLC, nothing
in the signature block or acknowledgment would put a third party on notice that they
were executing it on behalf of the LLC. The debtor is not referenced in the signature
block or the acknowledgment; there is no signature on the debtor’s behalf; and there
is no indication whatsoever in any part of the document that the individuals were
authorized to act on the debtor’s behalf.
Even with a liberal interpretation, this deed and acknowledgment does not
provide notice that the individuals who signed it were acting on behalf of the LLC.
An instrument that has not been properly acknowledged does not constitute notice to
creditors or subsequent purchasers. Miss. Code Ann. § 89-3-1. This statute applies
to all instruments which affect title to real property. White, 481 So.2d at 335. When
an instrument is defective and the defect is apparent, either by reference to the
acknowledgment alone or to the instrument as a whole, the instrument does not
provide constructive notice to third parties under Arkansas law. Hawkins v. First
Nat’l Bank (In re Bearhouse, Inc.), 99 B.R. 926, 928 (Bankr. W.D. Ark. 1989).
Because this instrument does not provide constructive notice of Wells Fargo
Financial Mississippi 2, Inc.’s and Joseph Pieroni’s interest in the LLC’s property,
the Chapter 7 trustee may avoid it.
Conclusion
The trustee’s complaint to avoid lien should have been granted. The order of
the bankruptcy court is reversed.
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