- No. 13-1518
- In a case applying Illinois law, the Seventh Circuit determined that Section 544(a)(3) strong-arm powers do not enable a Trustee to avoid a recorded mortgage merely because the mortgage does not state on its face either a maturity date or an interest rate. The Illinois recording statute does not mandate the inclusion of either of these terms to make the mortgage effective against a hypothetical bona fide purchaser. The provision of the Illinois recording statute that the Trustee focused on is permissive, not mandatory; that provision merely provides a "safe harbor" for mortgages that contain certain terms. Under Illinois law, a mortgage provides constructive notice if it demonstrates "the existence of a debt and the intention to secure its payment." In this regard, it should be noted that the amount of the debt must be stated on the face of the mortgage. Other than these elements, nothing more is required to provide constructive notice to a hypothetical bona fide purchaser. Since the mortgages at issue contained the required elements, they could not be avoided by the Trustee.
- Procedural context:
- Appeal from the United States Bankruptcy Court for the Southern District of Illinois. Two consolidated cases: Nos. 12-60013 and 12-6028.
- Consolidated appeal. Gary and Marsa Crane, and Klasi Properties, LLC, borrowed money secured by mortgages on real estate. The mortgages were recorded by the Lenders. In both cases, the recorded mortgages did not state the maturity date of the secured debt or the applicable interest rate. (The Court noted that those terms were included in the promissory notes, however, and the notes were fully incorporated by reference in the mortgages.) After the filing of chapter 7 cases for both the individuals and the entity, the Trustees filed adversary complaints under 11 U.S.C. § 544(a)(3) seeking to avoid the mortgages because they did not state the maturity dates or interest rates for the secured debts. In the individual debtors' case, the bankruptcy court granted summary judgment in favor of the Trustee, Crane v. Richardson (In re Crane), 2012 WL 669595, at *2 (Bankr. C.D. Ill. Feb. 29, 2012), but the district court reversed and granted judgment for the mortgage lender. Crane v. Richardson (In re Crane), 487 B.R. 906, 915–16 (C.D. Ill. 2013). In the Klasi Properties case, the bankruptcy court granted summary judgment in favor of the mortgage lender. Bruegge v. Farmers State Bank of Hoffman (In re Klasi Properties, LLC), 2013 WL 211111, at *8 (Bankr. S.D. Ill. Jan. 18, 2013). In light of the Crane case and other conflicting decisions among bankruptcy courts in Illinois, the Seventh Circuit accepted the Trustees' request for direct review under 28 U.S.C. §158(d)(2)(B).
- Cudahy, Ripple, and Hamilton
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