Lead Opinion
¶ 1. The United States Court of Appeals for the Second Circuit has certified to this Court the following question: “Where a recorded mortgage was not witnessed, does the filing of a foreclosure complaint suffice under Vermont law to give subsequent purchasers constructive notice of that mortgage and thereby make it valid and binding on subsequent purchasers?” In re Potter,
¶ 2. The facts relevant to the certified question are undisputed. On December 10, 1998, Stanley and Susan Potter executed a mortgage deed to plaintiff Mortgage Lenders Network, USA (MLN). Although the mortgage deed was acknowledged, the Potters’ signatures were not witnessed as required by 27 V.S.A § 341(a) before the statute was amended in 2004. See 2003, No. 150 (Adj. Sess.), § 5. The defective deed was then recorded in the land records. On January 24, 2000, MLN initiated a foreclosure action against the Potters in superior court and recorded a copy of the foreclosure complaint in the Rutland City land records. The superior court issued a judgment order and decree of foreclosure in favor of MLN on March 31,2000.
¶3. On May 22, 2000, presumably before the statutory period of redemption established by 12 V.S.A. § 4528 had run,
¶ 4. Pursuant to the bankruptcy code’s strong-arm clause, the trustee, as a fictional bona fide purchaser, is deemed to have no actual knowledge of the debtor’s previous transactions. See McCannon v. Marston,
¶ 5. Section 4523(b) provides that the filing of a foreclosure complaint “shall be sufficient notice of the pendency of the action to all persons who acquire any interest or lien on the mortgaged premises between the dates of filing the copy of foreclosure and the recording of the final judgment in the proceedings.” The trustee argues, and the federal courts agreed, that this sentence merely provides notice of the pendency of a foreclosure action — i.e., notice that someone is claiming the existence of a valid mortgage — but does not serve as constructive notice that there is a valid mort gage on the property. We do not reach
Without further notice or service, those persons [who acquire any interest in the mortgaged premises between the time of the filing of the foreclosure complaint and the recording of the final judgment] shall be bound by the judgment entered in the cause and be foreclosed from all rights or equity in the premises as completely as though they had been parties in the original action.
In other words, once the foreclosure complaint is recorded, no further notice is required to make interested parties subject to any forthcoming decree. Rather, persons with an interest in the subject property are on inquiry notice as to what became of the complaint.
¶ 6. While one could argue that recording a foreclosure complaint gives no greater notice of the validity of the mortgage against third parties than recording the mortgage itself, one cannot reasonably argue, given the language of § 4523(b), that the issuance of an unappealed foreclosure decree based on a recorded foreclosure complaint provides no inquiry notice of the mortgage’s validity. The whole point of the decree is to determine the validity of the mortgage and to eliminate the interest in the property of third parties — like bona fide purchasers. We decline to hold, in essence, that a judicial final judgment as to the validity of a mortgage does not put a subsequent purchaser on inquiry notice concerning the mortgage’s validity.
¶ 7. Moreover, we reject the trustee’s apparent position that there was no final judgment in this case because the redemption period had not run. The foreclosure decree is a final judgment, even though it creates a right to redeem. See V.R.C.P. 80.1(g); Cattle Investors Mgmt. Corp. v. Poutre,
¶ 8. In this case, a reasonable investigation, such as a title search, would have revealed that MLN claimed an equitable mortgage on the property (via the foreclosure complaint), which, in turn, would have alerted any interested party to determine whether the superior court had confirmed the validity of MLN’s claim (via the foreclosure decree). Hence, any person acquiring an interest in the property subsequent to these recordings cannot be considered a bona fide purchaser without notice. As noted, § 4523(b)
¶ 9. Accordingly, our answer to the reformulated certified question is that when a mortgage deed is defectively witnessed under 27 V.S.A. §§ 341(a) and 342, the recording of a foreclosure complaint pursuant to § 4523(b) and the subsequent issuance of a foreclosure decree, without timely appeal, puts all subsequent purchasers on inquiry notice as to the mortgagee’s equitable interest in the subject property. Consequently, subsequent purchasers, including a bankruptcy trustee, cannot be considered bona fide purchasers without notice, and thus can acquire only the grantor’s interest “impeded with its attendant equity.” Hart v. Farmers’ & Mechs. Bank,
The reformulated certified question is answered in the affirmative.
Notes
It is not entirely clear from the record whether the redemption period was still open when the bankruptcy petition was filed. The normal redemption period established by 12 V.S.A § 4528 had not yet elapsed at the time the foreclosure decree issued. Section 4528, however, allows the court to set a shorter period of redemption. There are no facts indicating whether the court did so in this case. Generally, once the prescribed period has ended, the mortgagee takes “full and complete title.” Stowe Ctr., Inc. v. Burlington Sav. Bank,
Concurrence Opinion
¶ 10. concurring. I fully concur in the answer and the reasoning of the entry order in this ease, and write additionally only because it has significantly affected my approach to requests to certify questions of state law from the federal courts to this Court under Y.R.A.P. 14, the relatively new procedure we have adopted to allow such certifications. The procedure works well where the state law question is unconnected to any federal law question —• for example, where it arises in a diversity jurisdiction case or in a pendant state law claim — and where the record is adequate to address the questions framed by the certifying federal court. It works less well where federal and state law issues are intermixed and the correct answer may require a complicated meshing of both sources of law, particularly if we reformulate the question or find the factual record inadequate.
¶ 11. This case is an example of the latter situation. Because of the way this case came to us, we do not know if the period of redemption expired before the mortgagors filed their bankruptcy petition; if the period had expired, the trustee could' not prevail under any theory of the case. Moreover, the right of the trustee under 11 U.S.C. § 544 to set aside a mortgage foreclosure decree, after it had become final but before the period of redemption had expired, was largely unexplored by the parties and the federal courts because they did not focus on the decree. Based entirely on hindsight, I question whether we should have accepted the certification in this case.
¶ 12. Unfortunately, bankruptcy cases tend to fall in this latter category where certification works less well, and a majority of our certification requests have come from the bankruptcy court or from the other federal courts in bankruptcy cases. As a result of this case in part, I have become more reluctant to accept certifications in bankruptcy cases. Other members of the Court appear to be reacting similarly because we have recently refused to accept certifications in a number of bankruptcy eases. I am making this point so that our federal colleagues, and the lawyers who are requesting certification of cases to this Court, are informed of some of the considerations that are motivating us as we act on certification requests.
Note: Chief Justice Amestoy was present when the case was submitted on the briefs but did not participate in this decision.