Defective Documents/Constructive Notice/Public Records

What effect has the recording of a document which was not entitled to be recorded?



The Georgia Supreme Court tackled this issue recently in Leeds Building Products v. Sears Mortgage Corp. (1996) 267 Ga. 300, 477 S.E.2d 565.



Peach Communities was a residential builder, purchasing construction supplies on credit from Leeds Building Products--and giving Leeds security deeds (the Georgia equivalent to a deed of trust--also known as a "deed to secure debt") on each Peach project.



Under Georgia statutes, a deed or security deed must be attested or acknowledged before an "officer" (which, I take it, is the same as a notary), and also attested by an "unofficial" witness (anyone'll do), to be eligible for recording.



A problem was that the security deeds given to Leeds were defective because the "unofficial" witness did not in fact observe them being signed--so the witness attestations were false.



Another problem was that when the Peach homes were sold, and title transferred to new owners and lenders, the Leeds security deeds were missed in numerous title searches--in at least one case because they were not yet indexed in the county clerk's office.



After Peach filed BK, and Leeds threatened foreclosures, Leeds wound up in court against several new homeowners and their lender, Sears Mortgage Corp.



The trial court decided cross motions for summary judgment in favor of Leeds, and the homeowners and lender appealed. The Court of Appeals affirmed in part and reversed in part--most importantly ruling that the Leeds security deeds were not properly attested or acknowledged and, therefore, they did not provide constructive notice and were not entitled to priority over the homeowners' and new lender's interests.



The Supreme Court affirmed in part and reversed in part--mainly deciding to follow the rule recognized by a majority of jurisdictions. The Court said:



"A majority of jurisdictions have recognized that a defect in the acknowledgment of an instrument required for recordation, which is not apparent on the face of the instrument, does not prevent the recordation from providing constructive notice to subsequent bona fide purchasers. See Anno.: Record Notice--Acknowledgment, 59 ALR2d 1316, section 25. This rule comports with Georgia's statutory recording scheme, the purpose of which is to protect third parties acting in good faith and without notice who have acquired an interest in the same property. (Citation omitted.) The majority rule is also consistent with and better serves modern commercial practice. Thus, we conclude that in the absence of fraud, a deed which, on its face, complies with all statutory requirements is entitled to be recorded, and once accepted and filed with the clerk of court for record, provides constructive notice to the world of its existence."



The Court also held that one homeowner was in no better position because his transaction closed before the Leeds security deed was indexed--so it couldn't be found in a title search. Quoting a 1929 GA Supreme Court decision, the Court said



"`(A) deed takes effect, as against the interests of third persons without notice, from the time it is filed for record in the clerk's office;...' All that is required of the grantee and all that he can do is to file his deed for record.'"



Although this decision doesn't get into the distinction between void and voidable instruments, I assume there'd be a different result if the witness attestation was forged--or if the grantor's signature was forged. As this Court says, "in the absence of fraud...."



California has a statute which treats this issue somewhat differently than the "majority of jurisdictions." In CA, a defective document which is recorded will not impart constructive notice for one year after its recording date--but thereafter it imparts constructive notice of its contents. But, then, we have a statute for just about everything.



By Bert Rush------------------------