Peoples Nat'l Bank, N.A. v. Banterra Bank

• Decision Date: 20 May 2013
• Docket Number: No. 12–3079.,12–3079.
• Citation: 719 F.3d 608
• Parties: PEOPLES NATIONAL BANK, N.A., Plaintiff–Appellant, v. BANTERRA BANK, Cort Jones and Lisa Jones, Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

719 F.3d 608

PEOPLES NATIONAL BANK, N.A., Plaintiff–Appellant,

v.BANTERRA BANK, Cort Jones and Lisa Jones, Defendants–Appellees.

No. 12–3079.

United States Court of Appeals,Seventh Circuit.

Argued Feb. 14, 2013.

Decided May 20, 2013.

Terrell L. Sharp (argued), and John T. Hundley, Sharp Law Firm, Mount Vernon, IL, for Plaintiff–Appellant.

James L. Van Winkle (argued), Attorney, Van Winkle & Van Winkle, McLeansboro, IL, Michael E. Reed, Law Office of Michael E. Reed, Centralia, IL, Micheal L. Weissman, Attorney, Levin & Ginsburg, Chicago, IL, for Defendants–Appellees.

Steven M. Wallace, Attorney, Kunin Law Offices, Collinsville, IL, for Amicus Curiae.

Before KANNE and WILLIAMS, Circuit Judges, and ZAGEL, District Judge. ^*

ZAGEL, District Judge.

Two banks disagree over creditor priority in connection with a mortgage. Cort and Lisa Jones, the debtors underlying this dispute (“Debtors”), unsurprisingly take no position in this matter.

I. BACKGROUND

On November 1, 2004 Peoples National Bank (“Peoples”) extended Debtors a loan for $214,044.26 (“Peoples Loan 1”). This loan was secured by certain real property in a mortgage dated the same day and recorded on November 5, 2004 (“2004 Mortgage”). In August 2008, Debtors obtained another loan, this time from Banterra Bank (“Banterra”). This $296,000 construction loan was secured with a second mortgage on the same property that secured Peoples Loan 1. This mortgage was dated August 28, 2008 (“2008 Mortgage”) and was recorded on September 3, 2008. Banterra was aware of the first mortgage Debtors granted to Peoples and does not dispute that Peoples' security interest in the property takes priority over Banterra's with respect to Peoples Loan 1.

What Banterra did not know was that on November 26, 2007, Debtors obtained a second loan from Peoples (“Peoples Loan 2”). This loan was for $400,000.00 and was secured by a different piece of real property in another mortgage recorded on December 14, 2007 (“2007 Mortgage”). The 2007 Mortgage made no mention of the property that secured Peoples Loan 1 or the Banterra loan.

Banterra's difficulties arise from a cross-collateralization clause present in the PeoplesLoan 1 mortgage document. The clause appeared on the first page of the document and stated:

CROSS–COLLATERALIZATION. In addition to the Note, this Mortgage secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise and whether recovery upon such amounts may be or hereafter may become barred by any statute or limitations and whether the obligation to repay such amounts may become otherwise unenforceable.

The mortgage also contained the following relevant clauses:

MAXIMUM LIEN. At no time shall the principal amount of the Indebtedness secured by the Mortgage, not including sums advanced to protect the security of the Mortgage, exceed $214,044.26.

Indebtedness. The word “Indebtedness” means all principal, interest, and other amounts costs and expenses payable under the Note or Related Documents, together with all renewals or extensions of, modifications of, consolidations of and substitutions for the Note or Related Documents and any amounts expended or advanced by Lender to discharge Grantor's obligations or expenses incurred by Lender to enforce Grantor's obligations under this Mortgage, together with interest on such amounts as provided in this Mortgage. Specifically, without limitation, Indebtedness includes all amounts that may be indirectly secured by the Cross–Collateralization provision of this Mortgage.

Note. The word “Note” means a note in the amount of $214,044.26 dated November 1, 2004, and all renewals, modifications, and extensions thereof. NOTICE TO GRANTOR: THE NOTE CONTAINS A VARIABLE INTEREST RATE.

On the face of the mortgage, the real estate property offered by Debtors to secure Peoples Loan 1 was also to serve as collateral for all other “obligations, debts and liabilities, plus interest thereon, of Grantor to Lender ... whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note....” Peoples Loan 2 appears to be just such a debt. To be sure, the maximum lien clause serves to limit the amount of indebtedness that the property can secure. And the maximum indebtedness permitted by the clause was equal to the amount of the initial loan. At the inception of the mortgage agreement, then, there was no room under the cap for the collateral to secure any subsequent debts that may have arisen. The extent of that encumbrance would immediately change, however, the moment that Debtors began to pay down the initial loan. And that is precisely what happened.

On December 21, 2010 Debtors filed a voluntary Chapter 11 bankruptcy petition. On that day, the balance due on Peoples Loan 1 was $115,044.26. Debtors received permission from the Bankruptcy Court to sell the property securing the loan. The property sold on May 31, 2011 for $388,500.00. Out of these proceeds, Peoples asserts that it is entitled to extract the balance due on Peoples Loan 1, as well as, by virtue of the cross-collateralization clause, partial payment of Peoples Loan 2, up to the $214,044.26 cap. Banterra contends that the cross-collateralization clause, insofar as it purports to secure Peoples Loan 2 ahead of subsequent creditors, is invalid and ineffective.

Peoples filed a complaint in Bankruptcy Court requesting that the Court determine the priority of the parties' liens. In re Jones, 2011 WL 6140686 (Bankr.S.D.Ill. Dec. 9, 2011). The Bankruptcy Court found in favor of Peoples. Banterra appealed to the District Court, where Banterra prevailed. Peoples Nationals Bank, N.A. v. Jones, 482 B.R. 257, 264 (S.D.Ill.2012). Peoples now appeals the District Court's decision.

II. ANALYSIS

This action occurred in Illinois and pertains to Illinois property. The parties agree that Illinois law therefore applies here. See also United States v. 19.86 Acres of Land in East St. Louis, St. Clair County, Ill., 141 F.2d 344, 346 (7th Cir.1944).

It is undisputed that Banterra did not have actual notice or knowledge of Peoples Loan 2. It is similarly undisputed that Banterra did have actual notice and knowledge of Peoples Loan 1, the mortgage securing it, and the cross-collateralization clause that it conspicuously ¹ contained. The dispute is over the legal significance of these two facts. The relevant facts are thus agreed to; our review of the Bankruptcy and District Courts' conclusions of law is de novo. Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th Cir.2008); In re Rivinius, Inc., 977 F.2d 1171, 1175 (7th Cir.1992).

Banterra has consistently argued that, under 765 ILCS 5/11, the 2004 Mortgage was insufficient as a matter of law to impart record notice of Peoples Loan 2 on subsequent creditors or purchasers. Section 11 does appear to provide something of a checklist of pieces of information for inclusion in a valid mortgage. But is the checklist statutorily required? Banterra asserts that it is, and that a mortgage lacking any of these details does not impart record notice on a subsequent bona fide purchaser. Section 11 states:

Mortgages of lands may be substantially in the following form:

The Mortgagor (here insert name or names), mortgages and warrants to (here insert name or names of mortgagee or mortgagees), to secure the payment of (here recite the nature and amount of indebtedness, showing when due and the rate of interest, and whether secured by note or otherwise), the following described real estate (here insert description thereof), situated in the County of ..., in the State of Illinois.

On the face of it, use of the word “may” suggests that Peoples has the better of it, and that the statute's provisions are at most aspirational. On the other hand, longstanding Illinois case law seems to hold that a mortgage must at least include the amount of indebtedness the mortgage is meant to secure in order to impart record notice.²See Bullock v. Battenhousen, 108 Ill. 28, 37 (1883); Bergman v. Bogda, 46 Ill.App. 351, 357 (1st Dist.1892); Flexter v. Woomer, 46 Ill.App.2d 456, 458–59, 197 N.E.2d 161 (5th Dist.1964). On the facts here, however, we see no need to enter this fray.

Citing Bullock, Bergman, and Flexter, Banterra asserts that, when a mortgage does not at least list the precise amount of indebtedness the collateral means to secure, a subsequent creditor without actual notice of the mortgage will not be held to record notice. But even if true, that precedent does not address the dispositive question presented here. In each of the cited cases, the Courts found that the subsequent purchaser was without actual notice or knowledge of the prior interest at issue, and there was no indication that the subsequent purchaser possessed any information that should have prompted an investigation likely to result in the discovery of that interest. Given the facts, none of the Courts had occasion to consider whether the subsequent purchasers should be held to inquiry notice. That is not so here.

Like record notice, inquiry notice is essentially a form of constructive notice. See Pelfresne v. Village of Williams Bay, 965 F.2d 538, 542 (7th Cir.1992); National Family Ins. Co. v. Exchange Nat. Bank of Chicago, 474 F.2d 237, 241–42 n. 1 (7th Cir.1973); 112 Am.Jur. Proof of Facts 3d 419 § 12 (2013) (collecting cases); 1 Patton and Palomar on Land Titles § 12 (3d ed. 2012) (collecting cases). Record notice rules treat a subsequent creditor with no actual knowledge of...