In re Crane (Fed)

In re Crane, BR 11-90592, 2012 WL 1155738 (Bankr. C.D. Ill. Apr. 5, 2012); on appeal as, The Gifford State Bank v Richardson, 12-CV-21146 (C. D. Ill.).


Summary:  Mortgages are avoidable in bankruptcy if the recorded mortgage fails to include the total indebtedness, the interest rate, and the maturity date all on its face.


Facts:  Gary and Marsa Crane (“Cranes” or “debtors”) owned two properties in Champaign, Illinois, subject to two mortgage liens held by The Gifford State Bank. On March 31, 2011, the debtors filed for Chapter 7 bankruptcy and a bankruptcy trustee was appointed.

On February 29, 2012, the bankruptcy court entered an opinion and order, allowing the bankruptcy trustee’s Motion for Summary Judgment, avoiding the bank’s two mortgages, under Bankruptcy Code Section 544. Under this section, the two mortgage obligations may be avoided because they failed to give constructive notice of Gifford State Banks’ liens. 11 U.S.C. § 544. Subsection 544(a)(3) grants debtor’s trustee the hypothetical status of a bona fide purchaser (BFP); as such, the trustee argued the mortgages were avoidable because of their failure to comply with Section 11 of the Conveyances Act, and thus failed to provide constructive notice to BFPs. The bank filed a Motion to Alter or Amend Summary Judgment Order on March 14, 2012, arguing that the court’s opinion and order erred in that it: (a) incorrectly concluded that the mortgages failed to comply with the Illinois Conveyances Act; (b) the cited Berg and Shara Manning cases do not support avoidance under the facts of the instant case; and (c) avoidance would conflict with the widespread and well established standards for Illinois mortgages. The trustee filed a motion to strike certain of the bank’s exhibits from its motion.


Holding:  The court granted the trustee’s motion, stating that the exhibits and the arguments they supported should have been earlier presented. The court upheld its earlier order, avoiding the mortgages.

The language of Section 11 of the Conveyances Act states, “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 otherwise), the following described real estate (here insert description thereof), situated in the County of ..., in the State of Illinois.”

The bankruptcy court held that the mortgage statute mandatorily requires all the elements found in the text. To comply with the statute, the amount of the principal debt, the underlying interest rate, and the maturity date must all be present on the face of the mortgage. If all three elements are not present on the face of the recording, the mortgage is deemed defective. The bankruptcy judge held that both mortgages at issue failed to provide constructive notice to the trustee as a hypothetical BFP because the mortgages, even though recorded and containing the principal indebtedness, they omitted the interest rate and the maturity date on their face. The court held that the recorded mortgages were defective, and as such, they did not suffice for constructive notice to a BFP. The bank appealed this decision to the U.S. District Court for the Central District of Illinois.


Gifford State Bank’s Appeal in the U.S. District Court for the Central District of Illinois:

Gifford State Bank filed an appeal to the Central District Court of Illinois on April 5, 2012. The bank’s appeal contained three arguments.


  1. The first argument was that the bankruptcy court erred by affirmatively requiring an Illinois mortgage to include the interest rate and maturity date on its face. The bank argued that the language of Section 11, which states that mortgages “may be substantially in the following form” makes its provisions optional and not mandatory by the use of the verb “may,” rather than “shall.” This point was not thoroughly argued in earlier proceedings. The bank reinforced this argument by the fact that no cases hold that all the provisions of Section 11 are mandatorily required.

The outcome of the Crane case hinged upon the interpretation of 765 ILCS 5/11, which directly determined what constitutes constructive notice to a hypothetical BFP. Strong arguments exist favoring a permissive reading of Section 11 if the District Court applies appropriate canons of construction. Applicable to this case are the “plain and ordinary meaning rule” and the “mere surplus rule.”

The bankruptcy court seemed to disregard the “plain meaning rule,” which assumes that terms not statutorily defined are customarily given their ordinary meanings, often derived from the dictionary. In this statute, under the plain meaning rule, “shall,” and “may,” should mirror common usage. Ordinarily “shall” is mandatory and “may” is permissive. Applying the common meaning in this context would lead to an alternate outcome in this case.

“May” appears three times and “shall” is found eight times within the body of Section 11 and, when taken in whole, their meanings are distinguishable. Moreover, words should be construed consistently throughout a provision; this can only be done if “may” is construed permissively. The first use of “may” is found in the first line of the statute where the ambiguity exists, but the second and third occurrences of “may” are unambiguous and incapable of creating a mandatory requirement. Contrast this to “shall” in the statute which is used specifically for conduct or action that is mandatory.

Ignoring the plain meaning upsets another rule of thumb that judges apply. The mere surplus rule is a principle of statutory interpretation by which courts give effect, if possible, to every clause and word of a statute. The purpose is to avoid a construction that implies that the legislature was ignorant of the meaning of the language it employed. Finding that actions or conduct are consistently mandatory when prefaced by the word “shall” and purely permissible or optional when prefaced by “may” serves to avoid violating the mere surplus rule. To interpret otherwise frustrates the purpose of other language in the statute.

Another instance of this issue in Section 11 relates to the word “substantial” as it appears in the first sentence of Section 5/11: “Mortgages of lands may be substantially in the following form” (emphasis added).  The bankruptcy court’s interpretation effectively deprives the word “substantially” of any meaning or purpose in the context of the statute. “Substantially,” meaning “largely but not wholly that which is specified,” implies that only a large number of the enumerated characteristics are necessary to validate a mortgage. The Central District Court could very well conclude the legislators did not require all the specifications to be required for validity. Interpreting Section 11 strictly acts to contradict the mere surplus rule and presumes that legislators give purpose to each and every word.


  1. The bank secondly argued it was erroneous for the court to find that the mortgages did not include an interest rate or maturity date, because the mortgage incorporated the terms of the underlying promissory note by reference, and the interest rate could be found on the note.

In its opinion, the bankruptcy court cited only three cases, but all are distinguishable from the facts of Crane. A brief examination of these cases highlights the potential flaws in the opinion which may be cleared up in the appeal.

 In re Pak Builders, 284 B.R. 650 (Bankr. C.D. Ill. 2002).

This case concerns the avoidance of mortgages where the debtor’s name (a business entity) was incorrect on the mortgage. Pak Builders was a partnership, but the mortgage listed the mortgagor as Pak Builders, Inc., which did not exist. Similar scenarios have occurred where courts have held that such a mortgage may be avoided because it is outside the chain of title. Interestingly enough, this case did not allow for avoidance because the court held that the parties would be placed inquiry notice, and a diligent inquiry would have identified the mistake and interchangeable use of the company name. The case has no mention of the elements in question in Crane, but does hold that inquiry notice is sufficient notice to eliminate the veil of a BFP.

In re Berg, 387 B.R. 524 (Bankr. N.D. Ill. 2008).

Berg was cited in the opinion because that judge held that Section 11 contains mandatory elements. Berg is distinguishable from Crane, however, because the mortgage at issue in that case failed to contain the principal indebtedness on the face of the instrument. The court opinion even suggested that the principal indebtedness is the only strict requirement, stating that some flexibility exists in the reading of the Section 11. The Berg court said that principal indebtedness may be unnecessary where the mortgage lists the interest rate, periodic interest payments, and date of maturity so that one could calculate the principal amount. As a result, where the indebtedness was ascertainable, a BFP was considered to have notice and the mortgage is unavoidable. This case could very well be used to support the opposite holding from bankruptcy court’s in Crane.

In re Shara Manning Properties, (Bankr. C.D. Ill. 2010).

This case Section 11’s requirements as mandatory, but the case is distinguishable from Crane because again the defect at issue was the omission of principal indebtedness. The mortgages in Crane both contained the principal indebtedness so this case not directly on point and fails to affirm that all the elements in the statute are required.

Overall, the cases collectively hold that the principal amount owed is required for the mortgage to provide notice. As far as the other elements go, it remains unclear because Crane is the first case presenting the issue. In each case cited above, the point of recording the mortgage is to help ascertain the certainty of title. It seems that if a BFP sees a mortgage on record containing a principal indebtedness, the buyer is on inquiry notice, under the cases above. On that line of reasoning, the mortgages at issue would not be avoidable. 


  1. The third and final issue the bank has raised in the bank’s notice of appeal is that it was an error as a matter of law to find a lack of constructive notice to a hypothetical bona fide purchaser when, first, the mortgage contained all the permitted provisions of Section 11 in (light of a permissive interpretation); and second, it follows the form of a mortgage described in the leading treatise on Illinois mortgages. (Though not specifically stated in the notice of appeal, research suggests this may refer to the Illinois Law and Practice treatise).

The outcome of the appeal will determine if attorneys, title companies, and lenders should dispose of the current industry practice for mortgages, and operate with much stricter adherence to the listed mortgage components of Section 11 of the Conveyances Act, to eliminate risk to the mortgage lien in the event of the borrower’s bankruptcy filing. Because most lenders and borrowers prefer to keep the interest rates on their mortgages private, this change would be a significant cultural shift for those making and taking out mortgage loans. Also, neither the Fannie Mae nor the Freddie Mac form mortgage for residential purposes now contains an interest rate on its face. Lenders will face a conflict between the need to show the interest rate to eliminate the risk of an avoidance in bankruptcy of the mortgage lien, and the need to provide the secondary mortgage market with a standard product. It is possible that the use of an interest rate rider can abrogate the difference between those two demands.

Opinion Year: 
By: ATG Underwriting Department | Posted on: Fri, 07/13/2012 - 12:00am