Tuesday, May 22, 2012
Bankruptcy Trustee Avoids Mortgages Missing Interest Rate,
Real Estate Group Bulletin sent on Tuesday, May 22, 2012.
The United States Bankruptcy Court
for the Central District of Illinois recently held that two
mortgages did not comply with the Illinois Conveyance Act (the
"Act") and thus were avoidable by a trustee in bankruptcy.
In the case of In re:
Crane, No. 11-9067, 2012 Bankr. LEXIS 776 (Bankr. C.D. Ill.
2012), the trustee filed an adversary complaint against the
defendant bank, claiming that two mortgages securing notes held by
the bank were defective and subject to avoidance. Pursuant to
Chapter 7 of the United States Bankruptcy Code, bankruptcy trustees
assume the hypothetical status, rights and powers of a bona fide
purchaser of real property and thus are able to avoid any transfer
for which there was no actual or constructive notice. The
bankruptcy trustee in In re: Crane claimed that he did not
have constructive notice of the two mortgages because although they
were recorded, they failed to comply with the requirements of the
The Act provides that a mortgage
may "...recite the nature and amount of indebtedness, showing when
due and the rate of interest, and whether secured by note or
otherwise..." 765 ILCS 5/11. Judge Schmetterer held in In re:
Berg, 387 B.R. 524 (Bankr. N.D. Ill. 2008) that the provisions
of 765 ILCS 5/11 are not permissive, but required in order for a
mortgage to provide constructive notice to a bona fide purchaser or
a trustee in bankruptcy.
The court in In re: Crane
agreed with the holding in In re: Berg that the two
mortgages at issue failed to provide constructive notice to the
bankruptcy trustee because they did not state either an interest
rate or a maturity date. As a result, the court held that the
mortgages were avoidable as to the trustee and, as such, ordered
both mortgages avoided.
In light of this decision, it is
important that secured lenders begin practicing strict compliance
with the requirements of the Act. An essential step toward full
adherence to the Act would be to update all form mortgages so that
they contain the nature and amount of indebtedness, the maturity
date, the interest rate and whether secured by note or otherwise.
Secured lenders would be well advised to implement this practice
for all new mortgages, renewals, extensions and amendments related
to Illinois real property, and should consider whether or not they
wish to amend their existing mortgages.
To discuss specific recommendations
regarding these issues, please feel free to contact the attorneys
in the Real Estate
Group at Horwood Marcus & Berk Chartered.