483 B.R. 515
Bankr. N.D. Ill.2012Background
- Bank of America’s unrecorded mortgage on debtors’ principal residence (Illinois real property) creates a dispute over whether the Bank holds a claim secured only by a security interest in real property under §1322(b)(2).
- Illinois law requires recording for a lien to arise or be effective against creditors and subsequent purchasers; unrecorded mortgage is ineffective against creditors without notice.
- Debtors amended schedules and plan to treat the Bank’s claim as unsecured, reducing the home value and curing the secured treatment; the Bank filed a secured proof of claim despite not recording.
- Bank sought to have its mortgage recorded and asserted its lien should be respected as secured; Debtors argued lack of recording defeats secured status and thus the claim is unsecured.
- Court must reconcile Bankruptcy Code provisions with Illinois recording statutes to determine if the Bank’s unrecorded mortgage can be a non-modifiable secured claim in a Chapter 13 plan.
- Court also addressed whether the Bank’s failure to file an unsecured claim bars its unsecured claim or whether amendment relates back to original filing for unsecured treatment (ultimately allowed as unsecured).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an unrecorded Illinois mortgage can be a secured claim under §1322(b)(2). | Arnold (Debtors) | Bank | No; unrecorded mortgage cannot be a secured claim under §1322(b)(2) because Illinois law requires recording for a lien to arise. |
| If not secured, whether the Bank’s claim is allowed as unsecured and whether amendment relates back. | Arnolds | Bank | Bank’s claim is allowed unsecured; amendment relates back to original filing, so unsecured amount is $200,318.65. |
Key Cases Cited
- Haas v. Sternbach, 156 Ill. 44 (Ill. 1894) (mortgage recording not necessary for validity against mortgagor; recording affects only notice to creditors; unrecorded mortgage ineffective against subsequent creditors without notice)
- Field v. Ridgely, 116 Ill. 424 (Ill. 1886) (recording serves notice; priority concerns hinge on notice and recording)
- Haas v. Sternbach (cited for priority and notice concepts), - (-) (see Haas discussion above)
- Farmers State Bank v. Neese, 281 Ill.App.3d 98 (Ill.App.3d. 1996) (lien arises only upon recording; unrecorded mortgage cannot have priority over later liens)
- In re Outboard Marine Corp., 304 B.R. 844 (Bankr.N.D. Ill. 2004) (state-law validity/priority of liens in bankruptcy; application to Illinois liens)
- Nobleman v. American Savings Bank, 508 U.S. 324 (1993) (lien bifurcation under 11 U.S.C. §506(a); context differs where enforceability against creditors is in question)
- Firstmark Standard Life Ins. Co. v. Superior Bank FSB, 271 Ill.App.3d 435 (Ill. App. 1995) (mortgage recorded; lien arises upon recording; unrecorded mortgage lacks notice)
- In re Lifchitz, 131 B.R. 827 (Bankr.N.D. Ill. 1991) (state-law validity of liens in bankruptcy context)