The Bankruptcy Court’s conversion of Section 11 of the Illinois Conveyance Act from a safe harbor provision to a mandatory checklist that must be satisfied to survive avoidance challenges has been reversed (Crane Bankruptcy – D Ct decision). The Central District of Illinois holds compliance with the statute is permissive. While the statute provides that mortgages containing the enumerated terms, including the interest rate and maturity date of the underlying debt, are valid and binding, the inverse is not necessarily true. See 765 ILCS 5/11. The Court highlights that the statue is silent regarding mortgages that do not contain all of the enumerated terms. Thus, it is possible that a mortgage with missing terms can nevertheless provide constructive notice.
Here, notably, the subject mortgages incorporated by reference promissory notes that supplied the interest rate and maturity date of the underlying debt and thus satisfied the terms of the statue securing its protection. “[R]eading the mortgage instrument and note in tandem, even if § 5/11 itself can be read to require an interest rate and maturity date, the Trustee may not avoid the mortgage because all the necessary terms were incorporated by reference to the promissory notes.”
Meanwhile, the Illinois legislature acted quickly to address the Bankruptcy Court’s flawed holding. Public Act 97-1164, enacted on February 8, 2013 and effective June 1, 2013, added 765 ILCS5/11(b) that clarifies the operation of the statute as a safe harbor:
(b) 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.
Both Illinois courts and legislature have restored normal mortgage industry practice. Now, one year after Bankruptcy Court’s decision, mortgage lenders can return to their normal practice and no longer feel compelled to strictly comply with Section 11 of the Illinois Conveyance Act in order to avoid challenges for minor non-compliance.