Since the In re Crane decision was handed down by the Bankruptcy Court for the Central District of Illinois in April 2012, all eyes in the mortgage banking industry have been focused on the appeal of the decision pending in the U.S. District Court, in the hopes that the widely criticized ruling of the Bankruptcy Court would be overruled.
As reported in the Reed Smith Real Estate Legal Update, in Crane, the Bankruptcy Court for the Central District of Illinois held that a mortgage in Illinois must comply strictly with the form of mortgage contained in the Illinois conveyancing statutes, and that a mortgage that fails to include the maturity date and the interest rate of the underlying debt can be avoided in bankruptcy because it does not provide constructive notice to the bankruptcy trustee. The harsh and certainly unexpected result to the mortgage lender in Crane was a loss of its secured position, and the avoidance of the mortgage in bankruptcy.
An appeal to the District Court was filed by the lender, and amicus briefs by industry groups were filed in support of the lender’s position on appeal. Although the briefs presented a compelling case for overruling Crane, until the District Court issued its decision, lenders with loans secured by Illinois real estate were in a waiting mode.
The slow-moving court appeals process, however, has been overtaken by legislative action. On December 5, 2012, the Illinois legislature took action to effectively overrule the Crane decision legislatively, by passing a bill that clarifies the meaning of the law in a manner directly contrary to the Crane ruling.
Senate Bill 16, passed by both houses of the Illinois legislature December 5, 2012, and sent to Governor Quinn for signature December 11, 2012, includes an amendment to section 11 of the Conveyances Act, which states that:
[t]he provisions [of Section 11 of the Conveyances Act] . . . 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 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.
The simple legislative action, consisting of two sentences, appears to have undone the basis of the Crane decision by the Bankruptcy Court. With the legislature specifying that the form of the mortgage is permissive and not mandatory, there is little doubt that the Crane court’s interpretation of the Illinois mortgage requirements will not be repeated.
Given that it passed both houses of the legislature by overwhelming majorities, the bill is anticipated to be signed into law by the governor. Although the legislation states that it is effective June 1, 2013, because it expressly states that the form of the mortgage has “always” been permissive, the law should in practical effect put an end to the position taken by the court in the Crane case.
We will continue to monitor any further developments in the Crane decision and post further updates as appropriate.