Well, MT was right and I was wrong. Dang you and your correct hypotheses!
I bound a normal, non-masterwork Battleaxe and it charged me maximum shards as if it were a ml:20 item.(Standard): Stone of Change success with Ritual of Binding! Consumed: 400 Khyber Dragonshard Fragments. Created: Battleaxe. Battleaxe becomes Battleaxe.Off to bug report.
*Be prepared to pay 400 Khyber Dragonshard Fragments to bind no min level items.*