Arkansas’s high court says an affidavit of lost mortgage is notice of nothing

You can ignore an affidavit of lost mortgage in Arkansas. Is this news you can use?

Maybe not, but there’s still a lesson in Wetzel v. Mortgage Elec. Registration Sys., Inc., a May 20, 2010 decision of the Arkansas Supreme Court.

The lesson is that documents (called “instruments”) affecting real estate must be recorded to give notice to others of the rights they create. Otherwise, a “bona fide purchaser for value without notice” is not bound by the effect of the unrecorded instrument, which might be a deed conveying real estate, an easement, an option, a right of refusal, or a security agreement, such as a mortgage or deed of trust. Under a mortgage or deed of trust, the lender has a right to foreclose after the default of the borrower. The foreclosure is a forced sale of the property put up by the owner as security for the loan.

During the real estate boom of a few years ago, escrow companies and mortgage lenders were somewhat overwhelmed by the volume of transactions. They were often working with Mortgage Electronic Registration Systems, Inc., or MERS, a company created to keep track of mortgages and deeds of trust, which are frequently bought and sold. Inevitably, a few mortgages didn’t make it to the county office, called the recorder of deeds or register of deeds, where real estate instruments are recorded. For some reason, real estate documents are called instruments.

Most instruments to be recorded are required to be signed in the presence of a notary public, who puts a certificate of acknowledgment on the instrument, with the notary’s seal or stamp.

The recording process involves putting a date stamp on the instrument and making an image of it, usually by taking a digital scan. The stamped instrument is returned to the party presenting it for recording, and the recorder keeps the image and indexes the instrument by the date and names of the parties.

Each state legislature has enacted recording statutes. These statutes have several similar provisions, with some variations. The recording statutes tell the recorder what to do, such as how to index the instrument. The statutes also state that the act of recording an instrument gives notice to the world of the contents of the instrument.

The notice that recording gives is called constructive notice, which means that every person is treated by courts as having knowledge of the recorded instrument, whether they are actually aware of it. The purpose of the recording statutes is to provide a reliable record for purchasers, lenders and others of the ownership of real estate and the claims to real estate by non-owners, such as lenders, utility companies and other holding easement rights, and tax collectors.

Getting back to the recent Arkansas case, MERS wanted to foreclose on a mortgage given by Fox, who had filed a Chapter 7 bankruptcy. But Wertzel, the trustee for the creditors in the Fox bankruptcy, argued that the interest of the bankruptcy trustee in the Fox property was superior to the MERS mortgage, because Wertzel was a bona fide purchaser (BFP), having no notice of the MERS mortgage. Thus Wertzel could sell the property and use the proceeds to pay Wertzel’s expenses and divide the remainder among Fox’s unsecured creditors.

MERS had to admit that the actual mortgage signed by Fox had not been recorded, but that MERS had recorded an affidavit attaching a copy of the Fox mortgage, the original of which had been lost.

The Arkansas Supreme Court examined Arkansas’s recording statute, which states that every “deed, bond or instrument of writing affecting title” which is required by law to be acknowledged and recorded “shall be constructive notice to all persons from the time” of recording in the proper office in the proper county. An affidavit, the court held, is an instrument of writing, but it does not affect title. Moreover, the affidavit did not bear Fox’s acknowledgment, but only a jurat (“subscribed and sworn or affirmed”) following the signature of the lender’s representative.

Wetzel was ruled to BFP, having no constructive notice of the lost mortgage, a photocopy of which was attached to the affidavit.