This post was written by Daniel Slattery and Ann Pille.
The United States District Court for the Central District of Illinois has arguably driven the last nail into the coffin of In re Crane, the much criticized decision of the United States Bankruptcy Court for the Central District of Illinois. The coffin was already set in place after the Illinois legislature passed S.B.0016 late last year, which was signed into law by Gov. Pat Quinn February 8, 2013, as Public Act 97-1164, as reported previously on the Reed Smith Real Estate Legal Update. Much to the disbelief and dismay of mortgage lenders, on February 29, 2012, the bankruptcy court in In re Crane held that the bankruptcy trustee could avoid two mortgages because the mortgages did not expressly state the interest rate and the maturity date on their face, as the bankruptcy court ruled was required by the Illinois Conveyances Act.
In an opinion by U.S. District Judge Michael P. McCuskey, entered February 28, 2013, the federal district court reversed the bankruptcy court’s order, ruled in favor of the mortgage lender, and in the process rejected the bankruptcy court’s reasoning on all fronts. The district court pointed with favor to the recent decision of the Bankruptcy Court for the Southern District of Illinois in In re Klasi Properties (Bankr. S.D. Ill. Jan. 18, 2013), where the bankruptcy court found that an incorporation by reference of loan documents in the mortgage was sufficient as constructive notice to the bankruptcy trustee of the mortgage loan so as to prevent avoidance of the mortgage. The district court also found persuasive the recent enactment of Public Act 97-1164, and its acknowledgement that the failure of a mortgage to state the interest rate or the maturity date does not undermine the validity of the mortgage.
The district court in In re Crane concluded in holding that “[section 11 of the Illinois Conveyances Act] was intended to create a safe harbor, rather than a mandatory checklist of requirements to be completed pro forma. Since [section 11] advises lenders how best to provide sufficient detail so as to provide constructive notice to a third party purchaser, this court cannot permit the Trustee to avoid the mortgages in question because both were recorded, identified the Debtors, provided a description of the mortgaged property, set forth the amount and purpose of the indebtedness, and incorporated the interest rate and maturity date by reference to a promissory note.” So, almost one year to the day after the bankruptcy court ruling in In re Crane, the district court’s reversal in favor of the lender has finally eased the worried minds of mortgage lenders, and has validated the alignment of time honored mortgage-industry customs and practices with the dictates of the law. While the Trustee’s deadline to appeal the district court’s ruling has not yet expired, we do not anticipate the Trustee will appeal the ruling given the overwhelming rejection of the legal theory advanced by him by both the judiciary and the legislature.
We will continue to monitor any further developments as to the In re Crane decision, and post further updates as appropriate.
