Bankruptcy Court In Illinois Holds That A Mortgage Is Avoidable In Bankruptcy If The Mortgage As Recorded Does Not State The Maturity Date And Interest Rate Of The Underlying Debt

In a decision that potentially has serious implications for mortgage financing transactions in Illinois, the Bankruptcy Court for the Central District of Illinois recently held that a mortgage is avoidable in bankruptcy if it fails to include the maturity date and the interest rate of the underlying debt within the mortgage document as recorded. In re Crane, Case No. 11-90592, U.S. Dist. Ct. C.D. Ill., February 29, 2012; Supplemental Opinion and Order, April 5, 2012. The court found that the failure to include the maturity date and the interest rate in the mortgage violated the express requirements of Illinois conveyancing statutes, and thus did not provide the constructive notice to the trustee necessary to prevent the avoidance.

The facts of the case are simple and undisputed. The Debtors, Gary and Marsa Crane, filed for relief under chapter 7 of the Bankruptcy Code, and a trustee was appointed. The Gifford State Bank claimed a mortgage lien on various parcels of real estate owned by the Debtors. In an adversary proceeding, the trustee claimed that the mortgages were defective and subject to avoidance pursuant to 11 U.S.C. § 544, because both mortgages failed to state the interest rate and the maturity date thereof, in violation of the Illinois conveyancing statutes, specifically 765 ILCS Sec. 5/11. This failure to comply with Illinois statutes, argued the trustee, meant that the mortgages did not give constructive notice to subsequent bona fide purchasers, and that the trustee had the power to avoid the mortgages per 11 U.S.C. § 544(a)(3).

In a succinct opinion and order, United States Bankruptcy Judge Gerald D. Fines ruled in favor of the trustee, and ordered that the mortgage lien of the Gifford State Bank was avoided as to the subject real estate. The court relied on an interpretation of section 11 of the Illinois Conveyances Act (as set out in relevant part below), which dictates strict conformity with the statutory form for the mortgage to have the effect of providing constructive notice to bona fide third-party purchasers (and trustees in bankruptcy). The relevant statutes states:

"Sec. 11. Mortgages of lands 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 note or...