Knowledge Center

Friday, January 10, 2014

The United States Court of Appeals for the Seventh Circuit recently affirmed the judgments of the United States District Court for the Central District of Illinois and United States Bankruptcy Court for the Southern District of Illinois, holding that two mortgages complied with the Illinois Conveyance Act (the "Act") and thus were not avoidable by a trustee in bankruptcy. The opinion can be accessed here.

In Crane v. Richardson (In re Crane), 487 B.R. 906, 915-16 (C.D. Ill. 2013) and Bruegge v. Farmers State Bank of Hoffman (In re Klasi Properties, LLC), 2013 WL 211111 (Bankr. S.D. Ill. Jan. 18, 2013), the debtors borrowed money secured by a mortgage on real estate. In both cases, the mortgages were recorded by the lenders in to ensure the priority of their mortgage liens but did not state the maturity date of the secured debt nor the applicable interest rate. Those terms were included in the promissory notes which were fully incorporated by reference in the mortgages. The trustee in both cases filed an adversary complaint 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.

At the time the debtors filed their bankruptcy petitions, the Act provided that a mortgage "may be substantially in the following form: ...recite the nature and amount of indebtedness, showing when due and the rate of interest, and whether secured by note or otherwise...' 765 ILCS 5/11. Judges Cudahy, Ripple, and Hamilton found that "the statute's operative language is plainly permissive, not mandatory." Therefore, the court held that the mortgages in question, even though they did not state the maturity date of the secured debt or the applicable interest rate, contained the essential terms of a mortgage under Illinois law and were sufficient to satisfy the common law and the permissive terms of 765 ILCS 5/11. As a result, the bankruptcy trustees were unable to avoid the recorded mortgages.

Effective June 1, 2013, Illinois amended 765 ILCS 5/11 to reflect that the operative language is permissive and not mandatory.

In light of this decision and contrary to an earlier bankruptcy court decision (now reversed), it is no longer imperative that secured lenders include in mortgages either the interest rate or the maturity date. The omission of these terms will notaffect the validity or priority of a mortgage, nor will its recordation be ineffective for notice purposes regardless of when the mortgage was recorded.

To discuss specific recommendations regarding these issues, please feel free to contact the attorneys in the Real Estate Group at Horwood Marcus & Berk Chartered.

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