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The Foreclosure Crisis: The Maryland Court of Appeals Speaks in SBRC v. Cateania Matthews

The Foreclosure Crisis: The Maryland Court of Appeals Speaks in SBRC v. Cateania Matthews

The Maryland Court of Appeals weighs in on a small aspect of the defective deed debacle. This appeal was taken as certified question of law from the United States Bankruptcy Court of Maryland. Since the Maryland Court of Appeals is better situated to determine the meaning and impact of Maryland Law, the Bankruptcy Court employs this process when asked by a proponent and certifies the question at issue in the underlying Bankruptcy Case to the Maryland Court of Appeals.

At issue in this case is the following: When a piece of real property is transferred from a corporation to another entity, and there exists a forgery underlying the corporate documents of that owner/corporation, does this defect render the later transfer of the deed which is not forged and otherwise legal to a person that is unaware of such a defect in the corporate documents as a void or voidable transfer?

The Maryland Court of Appeals said no. Even though the underlying corporate documents were forged, because the person signing the deed that was to be transferred had authority to act on behalf of SBRC, then the person purchasing the property took the property free and clear of that defect. Specifically the Court said: The use of a deed that is neither a forged document nor signed with a forged signature, but which derives its "transactional vitality" from forged corporate articles of amendment, does not render a conveyance of land void ab initio (from the beginning); rather, good title is transferred to the bona fide purchaser for value without notice. A bona fide purchaser for value is a unique and protected class of buyer under the law. A bona fide purchaser is commonly referred to as a BFP in legal and banking circles. A BFP is a person who has purchased an asset for the stated value, with a honest belief that the seller had the rights to make such a sale. A BFP is unaware of any fact which would cause a reasonable person to doubt the right of the seller to have sold property in good faith. This is relevant in the situation of a seller without good title to an item who sells the item to a BFP and the true owner later shows up to claim title. In this situation, the BFP will be able to keep the asset, and the real owner will have to look to the fraudulent seller for reimbursement.

Quite frankly, the Court of Appeals refused to find that the later deed was void ab initio. The Court was interested in preserving stability and predictability in the real estate market. The Court refused to adopt a rule which would recognize written misrepresentations that form part of the inducement for entering into a real estate transfer to have the effect of rendering the conveyance void at the onset, the rule would have to be restricted to fraudulent inducements that are the proximate, or real causes of the transaction. Adopting such a rule would inject uncertainty into the law of conveyancing, beyond that already existing under the present rule under which a forged deed is voidab initio. Such a rule would present a jury question whether fraud in the inducement voided a deed at the onset and destabilize the predictability of the result for bona fide purchasers for value.

The Court determined that predictability was the key and that a property owner's title should not be placed at risk that a grantor in the chain of title decides to forge corporate documents, then decides that the act of granting the real property was induced by a written misrepresentation, even if the misrepresentation includes a forged signature.

This case is interesting as it is the first reported opinion of the Maryland Court of Appeals that delves into the underworld of title defects, deed transfers, and void and voidable deeds that are inevitably the product of the greed that drove the mortgage market during the Great Recession. Most importantly, however, the BFP doctrine in Maryland is still alive and well. Stay tuned as the Court of Appeals still has yet to tackle a plethora of issues involving defective attestation affidavits, bogus affidavits, and illegal assignments and transfers.