Opinion
C.A. No. 98L-12-023-RFS.
Submitted: January 28, 2001.
Decided: April 17, 2002.
Ellen J. Feinburg, Esquire, Law Office of Gregory Williams, Rehoboth Beach, DE.
Steven Kortanek, Esquire, Klehr, Harrison, Harvey, Branzburg Ellers, Wilmington, DE.
Dear Counsel:
This is the Court's post-trial decision on a mortgage foreclosure case. After consideration, judgment is entered against the defendant, Townsend Associates.
FACTUAL HISTORY
The facts of this case are largely undisputed. The plaintiff, Ronald W. Borders ("Borders") was a business associate of Wallace "Pete" Townsend, Jr. ("Pete Townsend"), the son of Wallace and June Townsend ("the Townsends"). The Townsends are the general partners of the defendant in this case, Townsend Associates ("the partnership"). The Townsends mortgaged two partnership lots in Kings Creek, Sussex County, Delaware in order to permit restructuring, purchasing Borders' business interest, and obtaining new bank financing for their son's business.
In this regard, on December 1, 1995, Pete Townsend executed and delivered a promissory note in the amount of $350,000 to Borders. A second note in the amount of $180,135.42 was signed on December 16, 1996. On December 17, 1996, the partnership mortgaged the Kings Creek Country Club properties to secure the 1996 note. The Townsends signed the mortgage before a notary public, Charlene Marienberg, and it was recorded on March 6, 1997.
Thereafter, the Townsends signed a first modification on February 3, 1998. The purpose of the modification was to secure the $350,000 obligation represented by the 1995 note. The combined amount of $530,135.42 was secured by the two notes. Wallace Townsend signed first, and he then had the modification delivered to June Townsend for her signature. Immediately thereafter, Charlene Marienberg, acknowledged the signatures outside their presence. Mr. Francis Gonzon, one of Pete Townsend's employees, circulated the modification, first to Wallace Townsend, then to June Townsend, and finally to Marienberg. This modification was recorded on December 11, 1998. Mr. Gonzon acted at the direction of Pete Townsend and Townsend Associates.
PROCEDURAL HISTORY
On August 14, 1998, Borders began confession of judgment proceedings on the 1995 and 1996 notes under Super.Ct.Civ.R. 58.1 and 10 Del. C. § 2306. On October 20, 1998, judgments were entered totaling $361,548.77 on the 1995 note and a $44,771.86 judgment on the 1996 note. In late 1998, Pete Townsend filed for bankruptcy and Borders brought this foreclosure action. The Townsends' failure to appear before the notary public was a defense to the foreclosure.
Borders sought the writ of scire facias sur mortgage and the execution writ of levari facias, entitling him to a liquidated sum of $406, 320.63. See Complaint dated December 21, 1998.
Concerning this point, the modification was not signed by the parties before Marienberg. The partnership filed a post-trial memorandum on December 28, 2002. Borders filed a post-trial memorandum on January 22, 2002. On January 28, 2002, the partnership filed a response to Borders' post-trial memorandum.
ARGUMENTS OF EACH PARTY
The partnership argues that the failure to appear before the notary voids the mortgage modification as it lacks an acknowledgment. It also contends that because a mortgage can be distinguished from a deed, certain deed cases validating defective acknowledgments are not relevant. The partnership further asserts that since, by statute, mortgages must be acknowledged, the Superior Court does not have subject matter jurisdiction.
The requirements of a valid mortgage and modification are assumed to be the same. Consequently, the word "mortgage" encompasses the modification in this discussion.
By contrast, Borders maintains that the mortgage modification is a legal instrument and that the Superior Court has jurisdiction. Borders also believes that a curative statute, 25 Del. C. § 132, remedies the defect of a lack of acknowledgment, and therefore the modification is valid. This statute provides, in pertinent part, as follows:
The record of all legal instruments which by law are directed to be recorded or are entitled to be recorded, and which have been duly executed by the proper party or parties, notwithstanding the instruments have not been acknowledged before an officer authorized by the laws of Delaware to take acknowledgments, or which have not been properly acknowledged, or the acknowledgments of which have not been taken and certified in conformity with the laws of this state . . . are severally made as valid and effective in law as if each instrument had been correctly acknowledged and the acknowledgment correctly certified."(emphasis added).
DISCUSSION OF LEGAL ISSUES A. The Superior Court Has Jurisdiction Over This Matter
The first question this Court must address is whether this issue is properly before it or whether it should be transferred to the Court of Chancery. The Superior Court may foreclose mortgages at law by a writ of scire facias sur mortgage pursuant to 10 Del. C. § 5061 et seq. Of course, jurisdictional limits exist. In Delaware, the existence of separate courts of law and equity means that the mortgage would be treated differently in each court. "Delaware has long permitted foreclosure by either a bill in equity, filed in the Court of Chancery, or at law by scire facias sur mortgage." Monroe Park v. Metropolitan Life Ins. Co., 457 A.2d 734, 735 (Del. 1983). "The equitable and legal foreclosure remedies are concurrent, but the mortgagee must elect whether to seek relief at law or equity." Id.Here, the mortgagee elected Superior Court with the scire facias action, which is a common law remedy. Id. at 738. The principal difference between the courts is that equity regards substance over form, and regards what "ought to be done as done" to enforce the expectations of the parties. Id. at 737 (internal citations omitted). If a mortgage is legally insufficient, this Court cannot proceed absent a curative statute that rectifies the deficiency.
If transferred, the Chancery Court would not have to exercise its unique power because § 132 is self-executing. By analogy: "A self-executing (Constitutional) provision does not require any legislation to render it operative, and the legislature may neither abridge, extend, or otherwise alter such a provision." Crescenzo v. New Castle County, Del. Super., C.A. No. 86C-SE-49, (Mem. Op.), Martin, J. (June 7, 1988) (citations omitted) at 6. In other words, the curative statute automatically applies when a finding is made that the parties duly executed a legal instrument.
The partnership first argues that the curative statute, 25 Del. C. § 132, applies only to deeds. The partnership cites cases which held that a defective acknowledgment is not a bar to validity, but claims that these cases are distinguishable because they concern deeds, not mortgages. See Defendant's Post-Trial Memorandum at 2; Subt v. Subt, Del. Ch., C.A. No. 1233, Chandler, V.C. (February 16, 1990); see also Hamilton v. Faline, Del. Ch., C.A. No. 853, Seitz, C. (October 27, 1961).
The partnership believes the location of § 132 in the Property Subchapter entitled Deeds is significant. It also feels that the absence of the word "mortgages" from § 132 has significance. This section uses the phrase "legal instruments" when discussing the validity of documents with defective acknowledgments. Id.
Concerning this matter, the statute immediately proceeding § 132 validates certain unsealed or uncommonly worded instruments or deeds. See 25 Del. C. § 131. The legislature did not, however, direct that § 132 was solely limited to deeds. In actuality, the General Assembly chose the language "the record of all legal instruments which by law are directed to be recorded or are entitled to be recorded." No authority is required for the proposition that a mortgage is entitled to be required.
Regarding the meaning of a "legal instrument," an instrument is defined as "a written legal document that defines rights, duties, entitlements, or liabilities." Black's Law Dictionary 801 (7th Ed. 1999). Case law has defined an instrument as the "writing which gives formal expression to a legal act or agreement, for the purpose of creating, securing, modifying, or terminating a right." Moore v. Diamond Dry Goods Co., 54 P.2d 553, 554 (Ariz. 1936). The definition of instrument "includes bills, bonds, conveyances, leases, mortgages, promissory notes, and wills." Id. "Legal" means "of or relating to law; falling within the providence of law." Black's Law Dictionary 902 (7th Ed. 1999). In fact, a perfect instrument is defined as "an instrument (such as a deed or mortgage) that is executed and filed with a public registry." Black's Law Dictionary 802 (7th Ed. 1999). See also City Loan and Savings v. Morrow, 122 N.E.2 635 (Ohio App. 1954), Hope v. Johnson, 9 So. 830, 832 (Fla. 1891).
Certainly, Delaware courts have described mortgages as "legal" documents and treat them as instruments. Although there is no definitive statute, the "undisputed historical fact" is "that there are two types of mortgages, legal and equitable." Handler Const. v. CoreStates Bank, N.A., 633 A.2d 356, 363 (Del. 1993). Both can be recorded. Id. The phrase "legal instruments" is broader than deeds and includes mortgages and modifications that are entitled to be recorded.
B. Is The Lack Of Acknowledgment Cured By Statute?
The partnership maintains that a lack of a valid acknowledgment is more than a technical defect. It argues that the defect is substantive and therefore renders the mortgage void. Borders believes that this Court should differentiate between a total lack of acknowledgment and an imperfect acknowledgment which can be cured.
Why is an acknowledgment required? The main purpose of an acknowledgment is to authenticate signatures on a document. Here, there is no authenticity problem. The Townsends admittedly signed the modification. Generally, an acknowledgment is not a substantive part of an instrument. Ordinarily, the acknowledgment is not even part of the legal instrument; it may be on a separate sheet of paper.
"Since the act of acknowledging instruments is wholly statutory, the only instruments that need to be acknowledged are those that are required by statute to be acknowledged. Although some statutes require acknowledgment as a condition to the validity of the acknowledgment instrument, others prescribe acknowledgment merely for the purposes of proof; to provide assurance that a document is authentic, and to provide a record for future reliance." 1 Am. Jur. 2d Acknowledgments § 5 (1994).
An acknowledgment with regard to instruments is defined as "A formal declaration made in the presence of an authorized officer, such as a notary public, by someone who signs a document and confirms that the signature is authentic." Black's Law Dictionary 23 (7th Ed. 1999). See also 29 Del. C. § 4322(a).
"Since an acknowledgment does not affect the substance of the instrument being acknowledged . . ." Eliason v. Englehart, 733 A.2d 944, 947 (Del. 1999). Further, "the acknowledgment ordinarily forms no part of the substance of the instrument." Id. (quoting Howell v. Connecticut Fire Ins. Co., 257 S.W. 178, 181 (Mo.App. 1924)).
The Supreme Court made a passing reference to the lack of an acknowledgment in footnote six of the Handler decision. It states: "It is true that some substantive defects may render a document entirely unenforceable as a mortgage (e.g. failure to state any amount of debt, grossly inadequate description of the premises, or of lack of acknowledgment). See generally 9 Thompson, Commentaries on the Modern Law of Real Property §§ 4662, 4664, 4669." Handler, 633 A.2d at 363, n. 6. However, the Supreme Court found that a seal was not in this category and an unsealed document could be enforced in equity. If an imperfect acknowledgment is a substantive defect beyond the reach of the curative statute then the mortgage modification would be "entirely unenforceable" both in law and equity. Concerning the lack of acknowledgment, a review of § 4669 finds this language: "Where a party executes or attempts to execute a mortgage, and it is proved to be defective, the instrument is at least evidence of an agreement to convey and it will be enforced by a court of equity. In most instances today, acknowledgment runs solely to the question of recordation of the instrument, not to its validity as between the mortgagor and mortgagee." Id. at 72. Without the curative statute and absent estoppel, the foreclosure would be transferred to the Court of Chancery. Nevertheless, the defendant argues in its brief that the modification was "void ab initio, constituting a nullity." See Defendant's Response to Plaintiff's Post-Trial Motion at 2. From this viewpoint, the modification would not even be an IOU.
On substantive issues, the Supreme Court has considered whether scire facias relief is appropriate where the mortgage is unsealed. Monroe Park, 457 A.2d at 735. The Court held that "it is well-settled that unless the seal requirement is abolished by statute, a mortgage must be under seal to be enforced. If the mortgage is not sealed, and the jurisdiction requires a seal, it is enforceable only in equity." Id. at 736. Unlike the situation in Monroe Park, a curative statute exists in this case.
The Supreme Court implied that a statute eliminating the effect of a seal could permit Superior Court enforcement of an unsealed mortgage. Monroe Park, 457 A.2d at 736.
In Monroe Park, the seal was substantive largely because it is referenced under 25 Del. C. § 2101(a). Id. On the other hand, this section does not equate an acknowledgment with a formal mortgage element. Subsection (b) of § 2101 does state that a mortgage "in the above form duly executed, acknowledged, and recorded" shall be a valid mortgage lien for foreclosure. The reference to "acknowledged" is technical rather than substantive; it is the path to recording rather than a sina qua non of a "valid" mortgage. Section 2101(b) can also be read in para materia with § 132, i.e., "acknowledged" includes those instruments that are validated by it. Further, subsection (c) also notes that "Nothing herein contained shall invalidate a mortgage not made in the above form, but a mortgage made in the form heretofore in common use within this State shall be valid and effectual." From this perspective, an acknowledgment is not substantive.
In 1989, the United States Bankruptcy Court held that even the absence of a seal is not a death knell of a mortgage, although the mortgage will only be enforceable in equity. Wilmington Sav. Fund Soc'y v. 1025 Assocs., 106 B.R. 805, 810 (Bankr.D.Del. 1989).
Regardless, 25 Del. C. § 132 cures an imperfect acknowledgment. Under § 132, where documents are duly executed, they are "severally made as valid and effective in law as if each instrument had been correctly acknowledged and the acknowledgment correctly certified."(emphasis added). Id. This wide exercise of legislative power corrects "substantive" defects. Furthermore, "[t]he record of each such instrument . . . shall be admitted as evidence in all courts of the State and shall be as valid and conclusive evidence as if such instrument had been in all respects acknowledged and the acknowledgment certified in accordance with the then existing law." Id. Of course, the basis of Border's foreclosure action is on the mortgage record securing the note obligations.
Traditionally, Delaware has broadly applied laws such as § 132. One illustrative case dealt with an earlier version of a curative statute. "It seems well-settled that a certificate of acknowledgment will not be considered defective if there has been a substantial compliance with the law." Krichevsky v. Hirschout, 92 A. 242, 243 (Del. 1914). "These statutes do not validate defective titles, but cure defects in the records of deeds by validating such records when the acknowledgment to the deeds are defective in certain particulars." Id.
The statute in that case was similar. It provided that the "record of any deed . . . which was duly signed and sealed by the parties therein named as grantors, notwithstanding said deed had not been properly acknowledged . . . had not been taken and certified in conformity with the requirements of the laws of this state . . . shall be and the same is hereby made valid and effectual in law as if said deed had been correctly acknowledged and certified." Krischevsky, 92 A. at 242.
To avoid the reach of § 132, the partnership argues that the statute was retroactive and therefore ineffective on the modification date of December 3, 1998. This position has already been rejected. "The section [ 25 Del. C. § 132] does not limit its curative effect to any particular date." DiSabatino v. Wawaset Park Maintenance Corp., Del. Ch., C.A. No. 6563, Hartnett, V.C., (May 3, 1983) at 4. "The obvious purpose of 25 Del. C. § 132, which was adopted as a positive law, was to obviate the need to enact a new curative statute at every session of the General Assembly." Id.
Moreover, no time limitation is suggested by the law. The parties signed the first modification after § 132 was enacted, and legislation always applies prospectively. See General Motors Corps. v. Wolhar, 686 A.2d 170, 172 (Del. 1996). Under the circumstances of this litigation, the record of the mortgage modification, as recorded, signed and sealed, is all that is required to commence the foreclosure. The acknowledgment, while imperfect, was cured under § 132. To paraphrase then Vice Chancellor Hartnett, a perfect acknowledgment is not required for the enforcement of this legal instrument. DiSabatino, supra, at 3.
C. The Partnership Cannot Gain The Benefit Of Injustice
Even without a curative statute, the partnership is estopped from successfully advancing its argument. The doctrine of estoppel "was originally applied to . . . formal documents and was applied to conduct in a very limited circumstance (estoppel in pais). Equitable estoppel is an expansion of legal estoppel in pais." Carter v. Bureau of Child Support Enforcement, 444 A.2d 271, 276 (Del.Super. 1982). In order to establish estoppel, "it must be shown that the party claiming estoppel lacked knowledge or the means of obtaining knowledge of the truth of the facts in question; relied on the conduct of the party against whom estoppel is claimed; and suffered a prejudicial change of position as a result of his reliance." Waggoner v. Laster, 581 A.2d 1127, 1136 (Del. 1990). Borders did not know the modification was imperfectly acknowledged and relied upon the modification to his detriment.
"Generally, estoppels are said to be of three kinds: (1) by record, (2) by deed, and (3) by matter in pais." 28 Am. Jur. 2d Estoppel and Waiver § 2 (2000). The type of estoppel applicable to this case is estoppel in pais. It would "be difficult to prescribe a rule of universal application in regard to what are called estoppels in pais, depending as they do on the particular circumstances of the case." Id. (citing Maitland v. University of Minnesota, 43 F.3d 357 (8th Cir. 1994)). In a particular case, there may be circumstances "as to estop the mortgagor from asserting the invalidity of any mortgage." 54A Am. Jur. 2d Mortgages § 4 (1996).
Equitable estoppel is defined as "the effect of the voluntary conduct of a party whereby he is absolutely precluded, both at law and in equity, from asserting rights which might perhaps have otherwise existed . . . against another person, who has in good faith relied upon such conduct, and has been led thereby to change his position for the worse." Carter, 444 A.2d at 274. Estoppel is available in the Superior Court as "[e]stoppels are readily and fully recognized in courts of law as in courts of equity." 28 Am. Jur. 2d Estoppel and Waiver § 3 (2000).
In addition, Mr. Gonzon, was an agent of Pete Townsend as his employee. Mr. Gonzon circulated the document at his direction. The partnership instructed him to present it to June Townsend. Agency is "a legal relationship which depends upon the existence of required factual elements or situations." In re Wilson v. Pepper, Del. Super., C.A. No. 90C-05-016, Ridgley, P.J.,(August 21, 1995) (internal citations omitted) at 6. "An essential element of agency is that the agent has the power to act on behalf of the principal with third persons." Id.
The Court disagrees with defendant's contrary assertion about Gonzon's status.
The Townsends signed the original mortgage before a notary public and realized its significance. They realized that the modification was not signed in the same manner. The Townsends knew the mortgage was regular on its face and that Borders relied upon it. Their son benefitted from this transaction. The partnership cannot gain an unfair advantage from an irregularity of its own creation. Delaware courts are charged with doing justice and will not aid injustice.
In the bankruptcy context, the recording of a mortgage regular on its face is sufficient to provide constructive notice to third parties and to prevent a set aside. This perspective is from the viewpoint of an ideal lien creditor or a bona fide purchaser for value to permit the avoidance of prepetition liens that were not perfected. This interest is not involved here. See Bearhouse, Inc. v. First National Bank, 99 B.R. 926 (Bankr.W.D.Ark. 1989). Pennsylvania reached a contrary conclusion, however. There, the state statute required an acknowledgment in fact to remedy minor errors. The Delaware statute has different, broader and plain language that cures imperfect acknowledgments. See In re Rice, 126 B.R. 189 (Bankr.E.D.Pa 1991); Rice v. Fleet Consumer Discount Co., 133 B.R. 722 (Bankr.E.D.Pa. 1991).
CONCLUSION
Considering the foregoing, judgment is entered for the plaintiff, Ronald W. Borders and against the defendant Townsend Associates. A sales writ of levari facias shall issue on application of plaintiff.
IT IS SO ORDERED.