Olsen v. Heaver (In re Heaver)

• Decision Date: 13 June 2012
• Docket Number: Adversary No. 10–A–96094.,Bankruptcy No. 09–B–73096.
• Citation: 473 B.R. 734
• Parties: In re Jeannine Victoria HEAVER, Debtor. Joseph D. Olsen, Trustee, Plaintiff v. Jeannine V. Heaver, First Centennial Mortgage Corporation, and Branch Banking & Trust Company, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

473 B.R. 734

In re Jeannine Victoria HEAVER, Debtor.

Joseph D. Olsen, Trustee, Plaintiff

v.Jeannine V. Heaver, First Centennial Mortgage Corporation, and Branch Banking & Trust Company, Defendants.

Bankruptcy No. 09–B–73096.

Adversary No. 10–A–96094.

United States Bankruptcy Court,

N.D. Illinois,

Western Division.

June 13, 2012.

Amy A. Aronson, Aronson & Walsh, P.C., and Kim M. Casey, Holmstrom & Kennedy, Rockford, IL, for Branch Banking & Trust Co.

Joseph D. Olsen, Esq., Rockford, IL, for Trustee.

MEMORANDUM OPINION

MANUEL BARBOSA, Bankruptcy Judge.

The sole issue in this adversary proceeding is whether a mortgage from the Debtor to Branch Banking & Trust Company (as successor in interest to First CentennialMortgage Corporation) recorded 7 days before the deed that conveyed the interest in land to the Debtor was recorded may be avoided by the Chapter 7 Bankruptcy Trustee. Because such mortgage was recorded outside the chain of title and did not provide constructive notice to a hypothetical bona fide purchaser, the Trustee may avoid the mortgage.

JURISDICTION AND PROCEDURE

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K).

FACTS AND BACKGROUND

The basic facts are undisputed. The Debtor, Jeannine V. Heaver, obtained an interest in certain real estate in Hebron, Illinois (the “Property”) by means of a warranty deed from Stephen and Katherine Kapsalis dated September 30, 2008. The Debtor signed a promissory note and a mortgage in the Property in favor of First Centennial Mortgage Corp. on the same day, September 30, 2008. The mortgage was recorded with the McHenry County Recorder's Office on October 24, 2008, but the warranty deed was not recorded with the McHenry County Recorder of Deeds until October 31, 2008. Ms. Heaver filed for protection under Chapter 7 of the Bankruptcy Code with this Court on July 27, 2009. The promissory note was transferred from First Centennial to defendant Branch Banking & Trust Co. (“Branch Banking”) sometime subsequent to the events in question but before the filing of Ms. Heaver's bankruptcy petition.

The Chapter 7 Trustee filed this Adversary Complaint to determine the validity of Branch Banking's mortgage, arguing that because the mortgage was recorded before the deed, it was recorded outside the chain of title and is avoidable. Branch Banking argues that, because both the deed and the mortgage were recorded before the bankruptcy petition, the Trustee cannot avoid the mortgage. Because the facts were undisputed, Branch Banking filed a motion for summary judgment.

DISCUSSION

Section 544(a)(3) of the Bankruptcy Code, sometimes called the “strong arm clause,” gives a bankruptcy trustee the power “to avoid any transfer of property of the debtor, or obligation incurred by the debtor, that would be voidable by a bona fide purchaser of the property.” Sandy Ridge Oil Co. v. Centerre Bank Nat'l Assoc. (In re Sandy Ridge Oil Co.), 807 F.2d 1332, 1334 (7th Cir.1986). The express language of Section 544(a) directs bankruptcy courts to ignore any knowledge of the trustee or of any creditor, and therefore “actual knowledge of a transfer of property or encumbrance on property [is] irrelevant, regardless of state law.” Sandy Ridge, 807 F.2d at 1336. In contrast, “the state law of constructive notice remains applicable in the context of § 544(a)(3).” Id.

Under Illinois law, a “prospective purchaser of real estate or of an interest in real estate is chargeable with knowledge of what appears in the grantor-grantee index, the legal record required to be maintained by the Recorder.” Landis v. Miles Homes Inc., 1 Ill.App.3d 331, 273 N.E.2d 153, 155 (1971). Such a purchaser “is not chargeable with notice of that which appears in other records which may be kept as a convenience, such as a tract index.” Id. However, it is not enough that a mortgage be recorded in the grantor-grantee index. To constitute constructive notice, a recorded mortgage “must be in the chain of title.” Landis, 273 N.E.2d at 155;see also Krueger v. Oberto, 309 Ill.App.3d 358, 243 Ill.Dec. 712, 724 N.E.2d 21, 29 (1999) (An “encumbrance will be in the chain of title only when it is recorded in the grantor-grantee index of the county in which the property lies.”); Hillblom v. Ivancsits, 76 Ill.App.3d 306, 32 Ill.Dec. 172, 395 N.E.2d 119 (1979) (because recorded notice of purchaser's lien listed only beneficiary rather than the title-holding trustee of land trust, notice was “an instrument recorded outside the chain of title [and] did not constitute constructive notice”). Chain of title has been described as “the successive conveyances commencing with the patent from the government or some other source and including the conveyance to the one claiming title.” Capper v. Poulsen, 321 Ill. 480, 152 N.E. 587 (1926).

Branch Banking first argues that, in this context, chain of title is based on execution and delivery of a deed, not recording. In other words, Branch Banking argues that, because the deed was executed on September 30, 2008, the Debtor owned the land at both the time the mortgage was signed and at the time it was recorded, and therefore the mortgage was both granted and recorded within the ‘actual’ chain of title. Branch Banking emphasizes that under Illinois law even an unrecorded deed is effective and enforceable as between the parties, and cites to two Illinois cases that seem to use the deed execution date rather than the deed recording date as the relevant date in determining whether a mortgage was recorded outside the chain of title, Glen Ellyn Sav. & Loan Ass'n, 65 Ill.App.3d 916, 22 Ill.Dec. 569, 382 N.E.2d 1267 (1978), and Leeser v. Kibort, 243 Ill.App. 258 (Ill.App.Ct.1927). However, as discussed in more detail below, the facts in Glen Ellyn and Leeser are distinguishable, and the statements Branch Banking points to in those opinions were dicta unsupported by Illinois law, while a more recent case, Skidmore, Owings & Merrill v. Pathway Financial, 173 Ill.App.3d 512, 123 Ill.Dec. 395, 527 N.E.2d 1033 (1988), is directly on point and clearly held that the date the deed is recorded is the relevant date.

While an unrecorded deed may be effective to transfer property as between the parties, it must be recorded to be enforceable against third parties. Farmers State Bank v. Neese, 281 Ill.App.3d 98, 216 Ill.Dec. 474, 665 N.E.2d 534, 538 (1996). The Illinois Conveyance Act states clearly that unrecorded deeds are of no effect and are void as to third parties without notice:

All deeds, mortgages and other instruments of writing which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record.

765 Ill. Comp. Stat. 5/30 (emphasis added). The purpose of the recording provision of the Conveyance Act “generally is to protect subsequent purchasers against unrecorded prior instruments, allowing reliance on the land records.” Farmers State Bank, 216 Ill.Dec. 474, 665 N.E.2d at 539. As has been stated by the Illinois appellate court “[r]ecords need not be searched for deeds, mortgages or other conveyances made by a vendor before he became vested in title and his vendee is not chargeable with constructive notice of matters shown by records not in the chain of title.” Glen Ellyn, 65 Ill.App.3d 916, 22 Ill.Dec. 569, 382 N.E.2d 1267, 1273 (1978); see also Leeser v. Kibort, 243 Ill.App. 258, 262–63 (Ill.App.Ct.1927) (holding that “a purchaserneed not prosecute a search for deeds or mortgages made by his own vendor, farther back than the time at which the title is shown by the records to have been vested in such vendor; or in other words, a purchaser is not bound by the registry of deeds or mortgages from his vendor made prior to that time”). Because a purchaser is entitled to disregard purported grants of mortgages by parties who did not own the relevant land at the relevant time, both the deed and the mortgage must be of record and show that the grantor owned the land at the time the mortgage was granted. Thus, Illinois courts have emphasized that the relevant time for establishing whether a record of a mortgage is in the chain of title is the date of “record title,” not the date a deed is signed. See, e.g., Landis v. Miles Homes Inc., 1 Ill.App.3d 331, 273 N.E.2d 153, 155 (1971)(“[R]ecord of a mortgage given prior to the time of the acquisition of record title by the mortgagor is not in the chain of title and is not constructive notice to third persons.”)(emphasis added) (citing Leeser, 243 Ill.App. at 261;Capper v. Poulsen, 321 Ill. 480, 482, 152 N.E. 587 (Ill.1926)); Cunningham v. Thornton, 28 Ill.App. 58, 66 (Ill.App.Ct.1888) ( “The law, we think, is well settled that such conveyances of record as are in the apparent chain of title are alone required to be noticed by subsequent purchasers and incumbrancers.”) (emphasis added).

For purposes of determining whether a recorded instrument conveys constructive notice in Illinois, chain of title is based on recorded instruments and is based on the dates of recording. The Illinois Supreme Court has held that “[i]f there be delay in recording [a] deed and mortgage, and the vendee executes another mortgage of the same property to a stranger, and this is recorded before the deed to the vendee and his mortgage for the purchase money are recorded, the recording of the mortgage to such third person is not notice to the vendor, because at the time the deed to the vendee had not been recorded.” Cont'l Inv. & Loan Soc'y v. Wood, 168 Ill. 421, 48 N.E. 221, 221–222 (1897). More recently, in...