Trinity 83 Development LLC v. Colfin Midwest Funding LLC

Case Type:
Case Status:
18-2117 (7th Circuit, Mar 01,2019) Published
Overruling In re River West Plaza--Chicago, LLC, 664 F.3d 668 (7th Cir. 2011), and part III of In re Sax, 796 F.2d 994 (7th Cir. 1986), (1) section 363(m) of the Bankruptcy Code does not make any dispute moot or prevent a bankruptcy court from deciding what to do with the proceeds of a sale or lease, (2) section 363(m) creates a defense for purchasers and lessees in attempts to upset a sale or lease, and (3) under Illinois law, a mortgage that had been mistakenly marked satisfied, but is corrected before the mortgagor's bankruptcy, is enforceable in the debtor's bankruptcy case.
Procedural context:
The holder of a mortgage note sued the debtor in state court after the debtor ceased paying. The debtor then filed bankruptcy. The debtor commenced an adversary proceeding against the mortgagee, contending that a mistaken release that had been reversed before bankruptcy nonetheless extinguished the debt and mortgage lien. The bankruptcy court and district court disagreed with the debtor, leading to the appeal. Before the appeal was filed, the real property was sold pursuant to section 363.
In 2006 Trinity 83 Development, LLC (Trinity) borrowed about $2MM from a bank and granted the bank a mortgage as security for the loan obligation. The bank sold the debt to ColFin MidWest Funding, LLC (ColFin). ColFin relied on Midland Loan Services to service the mortgage loan. In 2013 Midland mistakenly filed a satisfaction of the mortgage. Trinity continued to pay on the mortgage. In 2015 ColFin realized Midland's mistake and recorded a document reversing the satisfaction. No creditor had filed an intervening lien or security interest. Trinity soon stopped paying on the mortgage loan, and ColFin filed a foreclosure action in state court. Trinity responded by filing a bankruptcy petition. The mortgaged property was sold during the bankruptcy. ColFin, the mortgagee, argued that the sale mooted Trinity's appeal.
Easterbrook, Barrett, and Scudder

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