Page 18 - John Hundley 2013

Noting that a name search of Jefferson County land records would have
revealed the existence of Peoples’ second loan and that Banterra offered no
evidence that that loan could not have been discovered upon reasonable
investigation, the court rejected arguments that that siding with Peoples
would impose a duty of endless investigation stretching to the land records of
other states. “[T]he law requires reasonable investigation, not endless
investigation,” the court said. “[W]here to draw that line will be a question
of fact for the trier of fact” in cases where allegedly reasonable inquiry has been made.

The court also rejected arguments that Peoples’ mortgage (a form LaserPro document) had
“inherent contradictions and ambiguities” which did not create a duty of inquiry in the first place, an
argument which had led the District Court to award judgment to Banterra. Peoples Nationals [sic]
Bank, N.A. v. Jones, 482 B.R. 257 (S.D. Ill. 2012). In that regard, the Seventh Circuit specifically
ruled that a maximum lien clause equal in amount to the original note did not create an implication
that only the original note was covered by the mortgage. “The mortgage is not susceptible of two
meanings,” it said in reversing the District Court judgment.

By relying on the doctrine of inquiry notice, the court avoided deciding whether Peoples’
mortgage was insufficient to impart record notice of the second loan under § 11 of the Illinois
Conveyances Act (765 ILCS 5/11). The District Court had ruled that because Peoples’ mortgage
had failed to state the maturity date, interest rate and other terms of the cross-collateralized loan, it
was insufficient to give record notice to third parties under that act. Noting that several Illinois courts
have appeared to rule that the elements set forth in § 11 are mandatory for record notice purposes,
but that the text of § 11 and a recent statutory amendment (P.A. 97-1164 § 20) suggest § 11 is only
permissive, the court said it saw “no need to enter this fray.”

In so ruling, the panel likely was cognizant that two other appeals on the
Seventh Circuit’s docket more directly raised the § 11 issue and had been
stayed pending resolution of Peoples v. Banterra. See Richardson v. Gifford State
Bank, No. 13-1518, and Bruegge v. Farmers State Bank of Hoffman, No. 13-1277.
In both, lower courts have held that the language of § 11 is permissive. See In re
Crane, 487 B.R. 906 (C.D. Ill. 2013); In re Klasi Properties, LLC, 2013 WL 211111
(Bankr. S.D. Ill. 2013). See also Sharp Thinking No. 87 (April 2013); In re HIE
Effingham, LLC, __ B.R. __, 2013 WL 1334282 (Bankr. S.D. Ill. 2013) (similar;
appeal pending before the U.S. District Court for the Southern District of Illinois
(WBCMT 2007 C-33 Mid-America Lodging v. Bruegge, No. 13-cv-00439-WDS)).

Two other observations also might be offered concerning Peoples v. Banterra.

First, the ruling is of doubtful precedent in non-commercial cases – but cross-collateralization
clauses are rare in consumer mortgages anyway.

Second, the court enforced the cross-collateralization clause notwithstanding a provision that the
cross-collateralized debt need not be related to the purpose of the original note. Whether the court
rejected cases which have said the original and cross-collateralized debts must be similar in purpose,
or whether the court accepted Peoples’ arguments that in the instant case they were, is unclear.

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