The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgagee could unilaterally cancel an erroneously recorded satisfaction of the loan where the borrower had not yet detrimentally relied on the erroneous satisfaction.
A copy of the opinion in Trinity 83 Development, LLC v. ColFin Midwest Funding, LLC is available at: Link to Opinion.
A company took out a loan from a bank secured by a mortgage. The bank sold the loan to a debt buyer. The debt buyer used a debt collector to collect payments. The debt collector inadvertently recorded a satisfaction of the debt releasing the mortgage before the company paid off the loan. The debt buyer realized the mistake and recorded a document cancelling the satisfaction before the company relied on it to its detriment.
After the debt buyer recorded the document cancelling the satisfaction, the company defaulted on the loan and the debt buyer commenced a foreclosure action in Illinois state court. The company then filed for bankruptcy in federal court which stayed the foreclosure action.
The company filed an adversary proceeding against the debt buyer alleging that the release and satisfaction of the mortgage extinguished both the loan and the mortgage. The bankruptcy court rejected this argument, finding that the debt buyer could unilaterally correct a unilateral error.
The trial court agreed with the bankruptcy court, and this appeal followed.
The Seventh Circuit initially addressed whether the appeal was moot because the bankruptcy court oversaw the sale of the property before it heard the appeal.
The debt buyer argued that 11 U.S.C. 363(m) and In re River West Plaza Chicago, LLC, 664 F.3d 668 (7th Cir. 2011), which holds that section 363(m) precludes ordering the recipient to turn over a sale’s proceeds to the bankruptcy estate, moots this appeal.
As you may recall, section 363(m) provides that reversal or modification on appeal under this section “does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.”
The Seventh Circuit disagreed with the debt buyer and disapproved of any decision to the contrary holding that section 363(m) does not make any dispute moot or prevent a bankruptcy court from deciding what shall be done with the proceeds of a sale or lease. The Seventh Circuit so held because “a defense to payments concerns the merits, not mootness.” Thus, section 363(m) does not concern mootness and a live controversy remained over who should get the money generated by the sale.
The Seventh Circuit then turned to the merits of the appeal. The Seventh Circuit began by noting that the company obtained no rights from the mistaken satisfaction because it was “unilateral and without consideration.” Thus, “it was not a contract.”
Because the company did not rely upon the satisfaction to its detriment, the company could unilaterally rescind it under Illinois law which treats “a mistaken release of a mortgage as ineffective between the mortgagor and mortgagee.”
The company argued that the mortgage supports its position that the debt buyer irrevocably waived its rights under the mortgage by recording the signed satisfaction. To make this argument the company relied on the mortgage clause stating that the “Lender shall not be deemed to have waived any rights under this Mortgage unless such waiver is given in writing and signed by Lender.”
The Seventh Circuit had little trouble rejecting this reading of the mortgage because to say “only A can accomplish B” does not say that “every A accomplishes B.” Instead, the “no-waiver clause negates oral waivers and waivers implied from conduct.”
For example, the Appellate Court noted, when the lender accepts a late payment, it does not waive the payment deadline. As such, the mortgage “language does not mean that mistaken unilateral writings are beyond recall.”
The Seventh Circuit therefore affirmed the lower court’s ruling.