Where the mortgage on a development company’s property was mistakenly recorded as satisfied, and then later corrected, the mistaken release did not extinguish the debt, and the contract was still effective.
Trinity 83 Development borrowed $2 million from a bank in return for a mortgage on real property and a note. Five years later, in 2011, the bank sold both the mortgage and the note to ColFin Midwest Funding, who relied on Midland Loan Services to collect the payments due. Two years later, Midland recorded a “satisfaction” document indicating that all debts associated with the note and mortgage had been paid. This recording was in error, as the loan was still outstanding. Unaware of the mistake, Trinity continued making payments on the loan.
In 2015, ColFin realized Midland’s mistake and recorded a document canceling the satisfaction. Later, after Trinity ceased making payments on the loan, ColFin filed a foreclosure action. That action was then stayed when Trinity began federal bankruptcy proceedings. In the bankruptcy action, Trinity filed an adversary action against ColFin, arguing that the satisfaction extinguished the debt and security interest. The bankruptcy court disagreed, holding that the release was a unilateral error, and ColFin retained its original security rights. Trinity then appealed.
The appellate panel began addressing the merits of the instant case. Citing Hale v. Morgan, the panel stated that Illinois treats a mistaken release of a mortgage as ineffective between the mortgagor and mortgagee. The panel noted, however, that a third party that relies upon a mistaken release can be given security given the apparent lack of a senior security interest. The panel then rejected Trinity’s reliance on In re Motors Liquidation Co. The panel stated that the Bankruptcy Code gives the Trustee or debtor in possession the rights of a hypothetical lien creditor, and that this, in combination with Illinois’ protection for unwitting third parties, would prevent the original creditor from regaining their senior position only if the mistakes were not caught until after the bankruptcy proceeding was closed. The panel, therefore, affirmed the decision of the district court.
You can view the decision here.
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