United States: Missing Mortgage Details: At The End Of The Day These Mortgages Survived

Last Updated: June 19 2014
Article by Vicki R. Harding

In re Crane, 742 F.3d 702 (7th Cir. 2013)

Chapter 7 trustees sought to avoid mortgages in two separate cases using their strong-arm powers. They argued that failure to include the loan maturity date and interest rate in the mortgage meant that it did not provide constructive notice to a bona fide purchaser under Illinois law, and thus could be avoided. On appeal the 7th Circuit rejected this argument and affirmed summary judgments in favor of the mortgagees.

Under Section 544(a)(3) of the Bankruptcy Code a trustee may avoid a mortgage that is voidable by a hypothetical bona fide purchaser of real property. Typically state law provides that a bona fide purchaser can acquire property free of adverse interests unless it has actual or constructive knowledge of the interests. Section 544(a) provides that the strong arm powers can be exercised without regard to the knowledge of the trustee or any creditor. However, that leaves constructive notice – which more often than not means record notice (i.e. deemed notice of property recorded documents).

In this case, state law provided that constructive notice could be either (1) inquiry notice – i.e. facts sufficient to put someone on notice that they should inquire further, or (2) record notice – which "imputes to a purchaser knowledge that could be gained from an examination of the grantor-grantee index in the office of the Recorder of Deeds, as well as the probate, circuit and county court records for the county in which the land is situated."

Prior to a clarifying 2013 amendment, a state statute provided (emphasis added):

Mortgages of land may be substantially in the following form: The Mortgagor (here insert name or names), mortgages and warrants to (here insert name or names of mortgagee or mortgagees), to secure the payment of (here recite the nature and amount of indebtedness, showing when due and the rate of interest, and whether secured by a note or otherwise), the following described real estate (here insert description thereof), situated in the county of ..., in the state of Illinois.

Pursuant to the statute, a mortgage in this form "shall be deemed and held a good and sufficient mortgage in fee to secure the payment of the monies therein specified."

There was quite an uproar a few years ago when a couple of bankruptcy cases interpreted this language to mandate that a mortgage must include all of the identified pieces of information. Accordingly, if anything was missing, the argument was that the mortgage was not sufficient and did not provide constructive notice. If it did not provide constructive notice to a bona fide purchaser, it could be avoided by a trustee under Section 544.

The state legislature responded by amending the statute effective June 1, 2013 to state that the provisions in the form "are, and have always been, permissive and not mandatory." However, there are still pending cases – including the cases addressed in this opinion – that were decided under the statute in effect prior to the amendment.

In each of these cases the trustee argued that the failure to include the interest rate and maturity date of the debt in the mortgage was fatal. The court signaled its direction when it introduced its discussion of the issue by stating "We find it hard to imagine that any prospective buyers or mortgage lenders for these properties would, upon discovering the recorded mortgages in the chain of title in the county land records, conclude that the mortgages could not be enforced because the maturity dates and interest rates were missing, and go forward with the purchase or new loan without ensuring that the existing mortgages would be paid off as part of the transaction."

So, it is not surprising that the court concluded that the "better view" is that the form set forth in the statute has always been a permissive safe harbor. As long as a mortgage includes required elements under common law, then the recorded mortgage is sufficient to give constructive record notice so that it cannot be avoided using the trustee's strong-arm powers.

Given its holding, the court did not need to address an argument that incorporating the note by reference caused the mortgage to include the relevant terms of maturity date and interest rate.

Illinois is not the only state where a bankruptcy court has decided that what appears to be a permissive statutory safe harbor form should be interpreted as a mandatory form. This can pose difficulties in drafting and giving opinions since there are often reasons to omit some of the details included in these forms.

A couple of other interesting points:

  • In finding that it was not necessary to state the maturity date, the court noted a state statute that provides that "the lien of every mortgage ... in which no due date is stated upon the face ... shall cease by limitation after the expiration of 30 years from the date of the instrument creating the loan ..."

    Thirty years is a long time. However, it might come as a surprise to a mortgagee that a mortgage could become ineffective with the passage of time. (And note that other states have similar provisions with shorter time limits.)
  • Although the court concluded that a mortgage is not required to state the interest rate or maturity date, it noted other elements have been deemed essential.

    For example, it appears that if a mortgage does not set forth the amount of the underlying debt (or at least includes information so that it can be easily ascertained), the mortgage may be insufficient to provide constructive notice.
  • Although the focus is on documents recorded in the real estate records, apparently in Illinois constructive notice includes information in local probate, circuit and county court records.

It is always wise to remember that there can be many nuances in real estate law that vary by jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Vicki R. Harding
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