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Bulgarea v Natl City Mortgage Company, 2010 WL 3614278 (Bkrtcy ND Ill).

Facts:As of July 31, 2008, Bulgarea owned property located in McHenry County, Illinois, which he bought in 2003 from the Hedberg Trust. IVC Mortgage Group assigned a promissory note and purchase money mortgage for $244,000 to National City Mortgage Company (National City). National City recorded the mortgage at the Lake County Recorder of deeds, not in McHenry County. However, as of July 31, 2008, the deed conveying the property to Bulgarea also had been recorded in Lake County and not McHenry County. In April 2005, Bulgarea obtained a $75,000 line of credit from LaSalle Bank, N.A. (LaSalle) by executing a mortgage on the property, which LaSalle recorded in McHenry County in May 2005.

On July 31, 2008, Bulgarea filed for Chapter 7 bankruptcy. Goldstein was appointed trustee of the bankruptcy estate and filed a claim to avoid National City's mortgage and a complaint against LaSalle to prove up the amount of its lien claim against the property. Goldstein moved for summary judgment on her claim against National City.

Holding:Motion for summary judgment on claim against National City was granted. The claim against LaSalle was dismissed for lack of jurisdiction. Under Illinois law, a mortgage is ineffective against a purchaser or creditor who lacks actual or constructive notice of it. The bankruptcy code rules out actual notice, because Section 544 confers rights without regard to any knowledge of the trustee (Goldstein).

Constructive notice can be either record or inquiry notice. Goldstein lacked record notice of National City's mortgage because the mortgage was not recorded in McHenry County, the location of the property. The bankruptcy court also found that Goldstein lacked inquiry notice because the record in McHenry County gave no indication of any mortgage to the property besides LaSalle's. National City contended that because the deed was also missing from the record a reasonable person would have inquired by what right Bulgarea owned the property, and this would have led to the discovery of the mortgage in Lake County. The court disagreed because a record deed is not needed to establish ownership and Bulgarea could have simply showed her unrecorded deed to anyone inquiring, which meant the inquirer would not have reason to search for mortgages recorded in other counties. Therefore, as nothing would have put a judicial lien creditor or bona fide purchaser on notice of National City's mortgage, Goldstein's interest is superior pursuant to Sections 544(a)(1) and (3) of the Code and her motion was granted.

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[Last update: 4-22-11]