719 F.3d 608
7th Cir.2013Background
- Peoples loan 1 secured by 2004 mortgage on the Debtors' property; max indebtedness under the mortgage set at $214,044.26.
- Banterra made a separate construction loan (Peoples loan 2) in 2008 secured by a second mortgage on the same property; Banterra knew of the 2004 mortgage but not of Peoples loan 2.
- Peoples also extended Peoples Loan 2 in 2007 secured by a different property via the 2007 Mortgage, which did not reference the 2004 or Banterra loans.
- The 2004 mortgage contains a conspicuous cross-collateralization clause stating the mortgage secures all debts of the Grantor to the Lender now or hereafter arising, subject to the maximum indebtedness cap.
- The Indebtedness definition includes all amounts secured by the cross-collateralization clause, not only the original note; the clause contemplates future indebtedness beyond the initial loan.
- Debtors filed Chapter 11; proceeds from sale of the secured property were distributed; the Bankruptcy Court ruled for Peoples, the District Court reversed in favor of Banterra, and Peoples appeals.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the cross-collateralization clause creates inquiry notice to third parties | Peoples argues Banterra’s actual notice of the clause imparted inquiry notice | Banterra argues lack of mandatory record notice and no duty to investigate beyond the face of the 2004 mortgage | Yes; cross-collateralization with actual notice creates inquiry notice. |
| Whether the 2004 Mortgage’s maximum indebtedness cap forecloses securing Peoples Loan 2 | Clause allows future indebtedness up to cap, so collateral can cover additional loans | Cap should limit collateral to initial debt; no room for new debt | No; cap contemplates future indebtedness via cross-collateralization. |
Key Cases Cited
- Bullock v. Battenhausen, 108 Ill. 28 (1883) (record notice requires at least some facts to prompt inquiry)
- Bergman v. Bogda, 46 Ill.App.2d 351 (1892) (indebtedness form may be permissive; forms do not control notice)
- Flexter v. Woomer, 46 Ill.App.2d 456 (1964) (debate over description of indebtedness; inquiry notice discussed)
- In re Shara Manning Properties, Inc., 475 B.R. 898 (Bankr. C.D. Ill. 2010) (discusses inquiry notice in bankruptcy context)
- Battenhausen v. Bullock, 11 Ill.App. 665 (1882) (inquiry notice applicable where purchaser has knowledge that invites investigation)