In re Crane (Fed)

Summary: Section 5/11 of the Conveyances Act, providing the form of a mortgage, is a safe harbor and its requirements are to be read permissively, not mandatorily. A mortgage not containing all elements from §5/11 may still be sufficient to provide constructive notice to third parties.


In re Crane, 487 B.R. 906, 2013 WL 772829 (C.D. Ill. Feb. 28, 2013).


Facts: In the Chapter 7 bankruptcy case, In Re Crane, the US Bankruptcy Court for the Central District of Illinois, allowed the borrowers’ Chapter 7 Trustee to avoid two mortgage liens held by The Gifford State Bank (“Gifford”) because the mortgages did not include the interest rate or the maturity date applicable to the secured indebtedness. The Bankruptcy Court concluded that the language of 765 ILCS 5/11 and the “elements” of a mortgage recited in the statute are mandatory (therefore required for a mortgage to be valid against third parties such as a bankruptcy trustee), rather than permissive. The elements are (i) the amount of the indebtedness, (ii) the interest rate and (iii) the maturity date. In Re Crane generated much trepidation amongst lenders and title insurers because Illinois mortgages on their face often lack the applicable rate of interest or the maturity date, or both, relying instead on a reference to the promissory note or credit agreement, neither of which is part of the recorded document. Gifford appealed the Bankruptcy Court’s ruling.


Holding: The District Court reviewed Gifford’s arguments and the amici curiae provided by the ILTA, ALTA, and the Illinois Bankers Association. Ultimately reversing the Bankruptcy Court’s decision, it found the mortgages unavoidable by the Trustee. The District Court focused heavily on statutory interpretation. First, the District Court agreed with Gifford that §5/11 of the Conveyances Act is permissive and operates as a safe harbor rather than a mandatory checklist. The District Court cited to both U.S. Supreme Court cases and Illinois bankruptcy cases for guidance on interpretation. Supporting the assertion that Gifford’s mortgages satisfied §5/11, the District Court found the term “may” to be permissive and the term “shall” to be mandatory, citing the U.S. Supreme Court in Lopez v. Davis. Lopez v. Davis, 531 U.S. 230, 241 (2001). The District Court impugned the Trustee’s interpretation by factually distinguishing the Illinois Supreme Court cases cited by the Trustee, and the language cited to mere dicta. The District Court also distinguished the two federal cases the Bankruptcy Court cited in its opinion, holding that even in dicta, those cases never stated that a mortgage failing to include all the elements listed in §5/11 failed to give constructive notice. Lastly, the court looked at recent cases in the jurisdiction to identify the legislative intent of §5/11. In particular, In Re Klasi Properties, a factually similar case decided in January, 2013, held that a mortgage which did not contain the interest rate or maturity date of the underlying indebtedness on its face was “sufficient to put the trustee on record notice of the mortgage, which was sufficient to impart constructive notice.” In Re Klasi Properties, LLC, 21-60013, 2013 WL 211111 (Bankr. S.D. Ill. Jan. 18, 2013). In light of all this, the District Court held the statute to be a safe harbor, and Gifford’s mortgages sufficient to provide constructive notice to hypothetical bona fide purchasers.

Second, the District court held that the mortgages incorporated by reference, all the necessary terms of §5/11. Under Illinois law, when “the language of the mortgage quite specifically incorporates by reference the terms of the note, subsequent purchasers would be put on inquiry as to the contents of the note so incorporated.” Provident Fed. Sav. & Loan Ass’n v. Realty Ctr., Ltd., 428 N.E.2d 170,173 (Ill.App.Ct. 1981). Both mortgages clearly stated on their faces that the terms of the promissory notes were incorporated, and in turn, both notes contained the interest rate and maturity date. In Illinois, when a note and mortgage mutually refer to each other, they must be construed together; thus, even if §5/11 is read mandatorily, the Trustee may not avoid the mortgages because all necessary terms were incorporated by reference.

Lastly, and perhaps most indicative of the Bankruptcy Court’s misinterpretation of §5/11, was the deference given by the District Court to the amended text of §5/11, which was approved by the Governor on February 8, 2013. Legislators added subsection (b) to the statute which states:

"The provisions of subsection (a) regarding the form of a mortgage are, and have always been, permissive and not mandatory. Accordingly, the failure of an otherwise lawfully executed and recorded mortgage to be in the form described in subsection (a) in one or more respects, including the failure to state the interest rate or the maturity date, or both, shall not affect the validity or priority of the mortgage, nor shall its recordation be ineffective for notice purposes regardless of when the mortgage was recorded."

765 ILCS 5/11(b)(effective June 1, 2013)(emphasis added). Although not intended to be retroactive, the text of the amendment clarifies, rather than alters §5/11, reinforcing the District Court’s reasoning for reversal.

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By: ATG Underwriting Department | Posted on: Wed, 03/13/2013 - 9:18am