U.S. District Court Reverses Decision Invalidating Illinois Mortgages in Crane

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Cases concerning the necessary requirements for Illinois mortgages have been a hot topic in Illinois courts this past year. The U.S. District Court has returned a decision in one of these appeals, The Gifford State Bank v. Richardson (In re Crane), previously discussed here, overturning the Bankruptcy Court’s decision allowing a bankruptcy trustee’s claim to invalidate a mortgage. [FN1]*

At issue is the text of Section 11 of the Illinois Conveyances Act, which the trustee argued creates certain mandatory requirements for Illinois mortgages, including the recitation of the interest rate and maturity date. [FN2] The trustee argued that the failure of a mortgage instrument to include these elements resulted in defective mortgages which could not provide constructive notice and were avoidable in bankruptcy.

The District Court found that the best interpretation of Section 11 was as a safe harbor for mortgages, not a mandatory checklist of requirements to be completed pro forma, in order to create a proper mortgage under Illinois law.

First, it distinguished the cases relied on by the trustee, finding the cases factually distinguishable from the issues in case before it. It found as a result the language in those cases discussing necessary mortgage identifiers to be dicta.

Second it agreed with another court’s recent decision in Klasi Properties, discussed here, and also found support for its conclusion that the mortgages were not avoidable under the doctrine of incorporation by reference.

The District Court noted that in Illinois, “[w]hen a note and the mortgage given it to secure it mutually refer to each other, they must also be construed together.” [FN3] It found that the documents in the appeal demonstrated that the mortgages and notes referred to each other by reference, and would meet the requirements of Section 11 even if the enumerated items were deemed to be mandatory.

It also noted the recent amendment to Section 11 by the Illinois legislature, [FN4] which provides:

(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 noting that the new legislation is not retroactive to the present litigation from its effective date of June 1, 2013, it found that the text clarifies the proper interpretation of Section 11.

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[FN1] The Gifford State Bank v. Richardson (In re Crane), 487 B.R. 906, No. 12-CV-2146 (C.D. Ill. February 28, 2013), aff’d 742 F.3d 702 (7th Cir. 12/23/13) (NO. 13-1277, 13-1518). 

*The Seventh Circuit further affirmed the District Court’s rationale in consolidated appeals on 12/23/13.

[FN2] 765 ILCS 5/11.

[FN3] Crane, supra FN1, citing Metro. Life Ins. Co. v. Kobbeman, 260 Ill. App. 508, 512 (Ill. App. Ct. 1931) and Matter of Bailey, 999 F.2d 237, 242 (7th Cir. 1993).

[FN4] 765 ILCS 5/11(b) (Public Act 97-1164 approving Senate Bill 0016, effective June 1, 2013).

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