U.S. District Court Reverses U.S. Bankruptcy Court Decision Allowing Illinois Mortgage to Be Avoided for Failure to State Interest Rate and Maturity Date

March 1, 2013

In a ruling on February 28, 2013, the U.S. District Court for the Central District of Illinois reversed the February 29, 2012 order of the U.S. Bankruptcy Court for the Central District of Illinois allowing a bankruptcy trustee to avoid an Illinois mortgage as to unsecured creditors for lack of “constructive notice” because the mortgage did not expressly state the maturity date of and interest rate on the underlying debt (In Re Crane, Case 12-2146, U.S. Dist. Ct., C.D. IL, February 28, 2013). The Court held that the provisions of Section 11 of the Illinois Conveyances Act (the “Act”) (765 ILCS 5/11) created a safe harbor, rather than mandatory requirements with which a lender must comply in order to provide such “constructive notice” to a bankruptcy trustee or a third party purchaser. Validating the widely accepted views of real estate professionals, the Court confirmed (i) the Act simply advises lenders on one method to provide the detail necessary for “constructive notice” and (ii) the elements of a mortgage described in 765 ILCS 5/11 are permissive.

Acknowledging the evolving statutory law on the matter, the Court noted Public Act 97-1164 (which adds 765 ILCS 5/11(b) effective June 1, 2013) as being persuasive. The provisions of 765 ILCS 5/11(b) confirm the permissive nature of 765 ILCS 5/11(a) and reiterate that an otherwise lawfully executed and recorded mortgage lacking the specific provisions in 765 ILCS 5/11(a) neither affects the validity or priority of the mortgage nor renders the recording of the mortgage invalid for notice purposes.

While each lender should evaluate the effect of the Court’s holding in Crane and the new legislation, it seems likely that most lenders will return to the common practice of incorporating certain terms of the loan, such as the interest rate, into a mortgage by reference to the promissory note, as the failure to expressly state such terms will not per se result in a mortgage’s invalidity for failure to provide “constructive notice” to a bankruptcy trustee or a third party purchaser.

Please contact Michael Kurtzon at 312-627-5674, Michael Rothstein at 312-627-2280, or Matthew Raczkowski at 312-627-2594 if you have any questions. 

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