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

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...