819 F.3d 981
7th Cir.2016Background
- In 2010 the Blanchards sold property to the Hoffmans under a land contract: Hoffmans paid $30,000 down, would pay remainder later, and the Blanchards retained legal title as vendors until paid in full. The land contract was not recorded.
- The Blanchards obtained a mortgage from Intercity State Bank (≈ $142,000) that described broad real‑estate collateral including “rents, leases, issues and profits.” The bank recorded the mortgage in the county land records but did not obtain an assignment of the land contract.
- The Blanchards later filed bankruptcy; the trustee (Liebzeit) brought an adversary proceeding asserting § 544 strong‑arm powers to avoid the bank’s lien and claim the vendor’s interest for unsecured creditors.
- The trustee argued a mortgage can only attach to real property, the Blanchards’ vendor interest was personal property, and the mortgage therefore attached to nothing; he also argued the bank should have perfected under UCC Article 9 rather than by county recording.
- The bankruptcy court granted summary judgment for the bank, treating the vendor’s interest as subject to the mortgage; the district court affirmed but on different reasoning (it reformed the mortgage to secure a personal‑property interest). The trustee appealed.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Bank) | Held |
|---|---|---|---|
| Whether a mortgage can attach to a vendor’s interest in a land contract | Vendor interest is personal property; a real‑estate mortgage cannot attach to it, so bank’s mortgage attached to nothing | Wisconsin law allows mortgaging vendor’s interest; mortgage language is broad enough to cover rents/payments | Mortgage validly attached to the Blanchards’ vendor interest; mortgagee has a lien on contract payments |
| Whether county recording sufficed to perfect the bank’s lien (vs. UCC filing) | Revised UCC Article 9 may require UCC filing to perfect vendor‑interest; county recording insufficient | Wis. land‑recording statute remains broadly applicable; recording in county records effectively perfected the lien | Recording in county land records was effective to perfect the lien; UCC filing might also suffice but does not preclude county recording |
| Whether trustee’s § 544 strong‑arm powers can avoid the recorded mortgage | Trustee as hypothetical bona fide purchaser/judicial lien creditor can take priority over an unperfected or non‑existent lien | Bank’s recorded mortgage gave prior constructive notice; trustee cannot defeat it under § 544 | Trustee cannot avoid the bank’s prior recorded mortgage; bank’s lien prevails |
| Whether the mortgage could be reformed (or needed reformation) to include personalty | Reformation to include omitted collateral cannot be used to defeat trustee under precedents (e.g., Duckworth) | No reformation required because Wisconsin recognizes mortgages on vendor interests; mortgage already covered those rights | Reformation unnecessary; Duckworth not applicable because the mortgage legitimately covered vendor’s interest |
Key Cases Cited
- First Nat’l Bank of Stevens Point v. Chafee, 73 N.W. 318 (Wis. 1897) (recognizing mortgagee can have priority over unrecorded assignments of vendor’s interest)
- In re Duckworth, 776 F.3d 453 (7th Cir. 2014) (trustee may rely on the face of a security agreement; parol evidence cannot be used to alter priority against trustee)
- City of Milwaukee v. Greenberg, 471 N.W.2d 33 (Wis. 1991) (discussing equitable conversion and treating vendor/vendee interests for statutory purposes)
- South Milwaukee Sav. Bank v. Barrett, 611 N.W.2d 448 (Wis. 2000) (Wisconsin is a race‑notice state for real estate priority disputes)
- Mueller v. Novelty Dye Works, 78 N.W.2d 881 (Wis. 1956) (historical treatment of vendor interests in land‑contract contexts)
- In re Martin Grinding & Machine Works, Inc., 793 F.2d 592 (7th Cir. 1986) (parol evidence cannot be used against trustee to reform security agreement)