April 4, 2013
by Teresa L. Bailey
Aldridge Connors LLP – USFN Member (Georgia)
The Georgia Supreme Court has ruled in favor of the bankruptcy trustee in the case Wells Fargo Bank N.A. v. Gordon, S12Q2067 (Feb. 18, 2013), which was discussed prior to the entry of the ruling in the article “Lien Avoidance Issues, with a Look to Colorado and Georgia,” published in the Winter 2013 USFN Report. This new case may have significant negative impact on lenders’ enforcement rights in certain circumstances in Georgia.
In order for a security deed to be in recordable form under Georgia law, it must either be attested by a notary and an unofficial witness, or acknowledged before a notary and before two witnesses. In Gordon, the trustee in bankruptcy court sought to avoid a Wells Fargo security deed because the attestation lacked the signature of an unofficial witness. Because of the missing signature, the trustee asserted that the security deed was not “duly recorded,” and did not provide constructive notice to subsequent bona fide purchasers, rendering the security deed avoidable. Wells Fargo argued that the security deed expressly incorporated the terms of a properly executed waiver of borrower’s rights attached to the security deed as a rider and, when read together, proper attestation could be derived and allowed the security deed to be in recordable form.
Summary judgment avoiding the security deed was granted to the trustee by the bankruptcy court and affirmed by the district court. Wells Fargo appealed to the Eleventh Circuit, which certified these questions to the Georgia Supreme Court: (1) whether a security deed that lacks the signature of an unofficial witness but incorporates the provisions of a rider that is properly executed and recorded together with the security deed should be considered “duly recorded,” putting a subsequent hypothetical bona fide purchaser on constructive notice; and, (2) if the answer to the first question is in the negative, whether it would nonetheless provide inquiry notice.
The Georgia Supreme Court answered both questions in the negative. As to the first question, the Supreme Court reasoned that the attestation of the rider cannot be substituted for the proper attestation of the security deed because such a construction would abrogate the purpose of attestation, namely for the witness to verify that the document in question has been executed by the signatories. In so finding, the court stated: “it costs nothing for lenders or their agents to review their paperwork to make sure the proper signatures are in place before submitting documents to the superior court clerk for recording.” As to the second question, the court ruled that since the rider itself did not contain a legal description, and since it only generally references a security deed, it was insufficient as a matter of law and would not place a bona fide purchaser on notice to make further inquiry.
The Gordon case emphasizes the importance of strict compliance with Georgia’s attestation laws. Proactive and prompt correction of execution defects may reduce the risk of loss should a borrower later file for bankruptcy. However, the Gordon case confirms that, once bankruptcy is filed, it is too late to correct errors in execution, and lenders will be left finding themselves in an unsecured position.
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