Mortgage Liens Declared Invalid in Central Illinois Bankruptcy Court

by Andy Miofsky, Esq.

August 17, 2012

A Central Illinois Bankruptcy Court Judge ruled the trustee who oversees administration of a bankruptcy case can avoid mortgage liens that do not comply with an Illinois law that requires the mortgage contain notice of the interest rate, loan amount and maturity due date.  See In re Crane [Crane vs. Richardson, CDIL 11-09067], on appeal to US District Court.

Perfection of a security interest occurs when a secured creditor takes all steps necessary to protect its lien on property against other potential buyers of the property.  Perfection renders the lien senior to any liens that arise after the date another lien is perfected.  A mortgage is perfected in Illinois by recording it with the county recorder pursuant to the Illinois Conveyances Act.  While an non-perfected lien remains valid between the debtor and the lien holder, the US Bankruptcy Code gives the trustee power to avoid that lien for the bankruptcy estate.

The Bankruptcy Court Judge in the Crane case found that two mortgages at issue failed to provide constructive notice of the interest rate, loan amount, and maturity date to the trustee, who assumed the role of a hypothetical bona fide purchaser pursuant to the provisions of 11 U.S.C. 544(a)(3).

When a lien is avoided the trustee stands in the position of the former lien holder and has superior right to the property in question than does the debtor and the former lien holder.  The creditor is left holding an unsecured claim that carries no special advantage over other unsecured creditors.  The debtor is considered to have waived any right to exempt the property in bankruptcy by virtue of having giving a lien to the lender previously, even though that lien has now been avoided.

Therefore, the trustee takes the property free of all avoided liens and waived exemptions and the trustee can sell the property for the benefit of all bankruptcy estate creditors.

In short, the bankruptcy trustee acquires the power to avoid any obligation incurred by the debtor that is voidable by a bona fide purchaser of real property from the debtor.  In the Crane case, the Court that the case should be decided in favor of the trustee as a matter of law by summary judgment without the necessity of a full trial because the facts were overwhelmingly in favor of avoiding the mortgage liens and that there was not a genuine dispute as to any material fact.

Meanwhile, the Illinois Legislature sprang into action with a new bill that would overrule the Bankruptcy Court decision in Crane and retroactively protect banks by declaring that the requirements of the Illinois Conveyances Act were merely permissive and not mandatory.  The bill, House Committee Amendment 1 to Senate Bill 3522, passed the House and is pending further action.

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Andy Miofsky, Esq.

Andy Miofsky is an Illinois consumer rights lawyer with offices in Granite City Illinois and Mount Vernon. Andy represents people with bankruptcy and student loan debt problems throughout the Central and the Southern District of Illinois since 1979.

Last modified: August 28, 2012