Trinity 83 Development LLC v. Colfin Midwest Funding LLC, 917 F.3d 599

Background

Trinity 83 Development borrowed about $2 million in 2006, giving a promissory note and mortgage; the note and mortgage were sold to ColFin in 2011.
Midland Loan Services, ColFin’s servicer, erroneously recorded a “satisfaction” document in 2013 purporting to release the mortgage, though the loan remained unpaid and Trinity continued making payments.
In 2015 ColFin recorded a cancellation of the satisfaction after discovering Midland’s mistake; Trinity then stopped paying and ColFin commenced foreclosure in state court.
Trinity filed for bankruptcy and brought an adversary proceeding claiming the 2013 recorded satisfaction extinguished ColFin’s debt and security interest; bankruptcy and district courts sided with ColFin.
Meanwhile the property was sold in the bankruptcy case; ColFin argued that 11 U.S.C. §363(m) rendered Trinity’s appeal moot by protecting the sale and proceeds recipient.
The Seventh Circuit affirmed on the merits and clarified that §363(m) does not make disputes about disposition of sale proceeds moot or strip the bankruptcy court of authority to order turnover.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Does 11 U.S.C. §363(m) render Trinity’s appeal moot and bar any relief regarding sale proceeds?	§363(m) protects the sale and thus moots any appeal or relief affecting proceeds.	§363(m) is a defense to upsetting a sale, but does not deprive courts of jurisdiction to decide entitlement to proceeds; mootness not implicated.	§363(m) does not make the controversy moot; it provides a defense but does not prevent judicial orders about proceeds.
Does §363(m) prevent a court from ordering turnover of sale proceeds to the estate?	Yes — River West reading forbids courts from ordering proceeds turned over.	No — §363(m) speaks only to validity of sale to a good-faith purchaser; disposition of proceeds remains within bankruptcy-court control.	§363(m) does not preclude courts from deciding disposition of proceeds; River West is overruled.
Did the 2013 recorded “satisfaction” document extinguish ColFin’s mortgage/security interest?	The recorded satisfaction operated to release the mortgage and extinguish ColFin’s rights.	The satisfaction was a unilateral, mistaken act by ColFin’s agent and not a valid contract or waiver; it can be rescinded.	The satisfaction was ineffective to extinguish ColFin’s rights as between mortgagor and mortgagee and could be rescinded.
Could ColFin rescind the mistaken satisfaction under Illinois law and given the timing of bankruptcy?	Trinity points to contrary authorities suggesting mistaken releases may be irrevocable when bankruptcy intervenes.	ColFin argues Illinois law allows rescission absent detrimental third-party reliance; because ColFin rescinded before Trinity’s bankruptcy filing, its priority remained intact.	Rescission was permissible; because ColFin corrected the mistake before Trinity’s bankruptcy filing, the hypothetical lien creditor rule (§544) did not defeat ColFin’s interest.

Key Cases Cited

Chaﬁn v. Chaﬁn, 568 U.S. 165 (2013) (mootness requires absence of any effectual relief)
Bell v. Hood, 327 U.S. 678 (1946) (defense on the merits does not defeat jurisdiction)
Burlington N. R.R. v. Brotherhood of Maintenance of Way Employees, 481 U.S. 429 (1987) (statutory entitlement to prevail is not mootness)
In re River West Plaza—Chicago, LLC, 664 F.3d 668 (7th Cir. 2011) (prior panel held §363(m) bars certain relief; overruled here)
In re UNR Indus., Inc., 20 F.3d 766 (7th Cir. 1994) (§363(m) does not implicate mootness)
In re Lloyd, 37 F.3d 271 (7th Cir. 1994) (bankruptcy-court control over disposition of sale proceeds)
In re Edwards, 962 F.2d 641 (7th Cir. 1992) (court retains power regarding proceeds despite §363(m))
In re Sax, 796 F.2d 994 (7th Cir. 1986) (limited to challenges to the sale itself; not controlling here)
In re Motors Liquidation Co., 777 F.3d 100 (2d Cir. 2015) (distinguishable; there the mistake was discovered after bankruptcy, implicating §544)