The Illinois legislature has passed and sent to the Governor an amendment to the Illinois Conveyances Act to address the decision in Crane v. The Gifford State Bank (2012 WL 669595 (Bkrtcy.C.D. Il). The Crane decision was rendered on February 29, 2012, and held that a mortgage could be avoided by a trustee in bankruptcy because it failed to include the interest rate and maturity date of the indebtedness secured by the mortgage.
The bankruptcy court's decision in the Crane case sent shock waves through the lending community in Illinois. The court upheld the claim of the bankruptcy trustee that it could avoid two mortgages given to the defendant bank as collateral for a loan because they failed to give constructive notice to subsequent bona fide purchasers. The court interpreted Section 11 of the Illinois Conveyances Act to require a mortgage to contain both an interest rate and maturity date in order to give constructive notice, despite the fact that on its face the language of the Conveyances Act is permissive. Since the mortgages in question did not contain that information, the court held that there was no constructive notice of the mortgages and they could therefore be avoided.
The court's decision resulted in an immediate reaction from lenders and attorneys handling financing transactions. SNR Denton partner Steve Davidson helped draft the legislation and engaged in what became a multi-party negotiation with a number of interested trade organizations to assure that the language in the bill would not be construed as changing existing law, since that might potentially call into question thousands of mortgages recorded before the effective date of the act. While it is not uncommon for Illinois mortgages to include a reference to a maturity date, it has not been customary practice to include the interest rate in the mortgage. The new legislation amends Section 11 of the Conveyances Act to label the existing provision as subsection (a) and add the following new section 11(B):
"(b) The provisions of subsection (a) regarding the form of a mortgage are, and have always been, permissive and not mandatory. Accordingly, the failure of an otherwise lawfully executed and recorded mortgage to be in the form described in subsection (a) in one or more respects, including the failure to state the interest rate or the maturity date, or both, shall not affect the validity or priority of the mortgage, nor shall its recordation be ineffective for notice purposes regardless of when the mortgage was recorded.
While the effective date of the new legislation is June 1, 2013, because the legislation is confirming existing law, rather than changing it, the delayed effective date (due to unrelated legislation in the same bill) should not be problematic.
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