Bankruptcy Court Decision In Illinois Holds That Mortgage Can Be Avoided Because of Failure To Include Loan Terms In Mortgage Document
In In re Crane, the Bankruptcy Court for the Central District of Illinois recently held that a mortgage can be avoided in bankruptcy if it fails to include the maturity date and the interest rate of the underlying debt within the mortgage document. The court found that failing to include these loan terms on the face of the mortgage as recorded, violated the requirements of Illinois conveyancing statutes, and therefore did not provide the constructive notice to the trustee necessary for preventing the avoidance. The harsh result for the bank was the loss of its secured position in the bankruptcy proceeding.
The decision in Crane, however, is not likely the last word on the case, as an appeal has been filed, and state legislation may be enacted that reverses the court's ruling. The court's decision is certainly open to criticism because of its inconsistency with modern mortgage finance practices, and its harsh and unanticipated result for the lender. But until (and unless) the decision is overturned, mortgages secured by real estate in Illinois should include the interest rate and maturity date within the mortgage document to prevent against a possible avoidance of the mortgage in bankruptcy.
For a more detailed discussion of the Crane decision, see our recent Client Alert.