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7th Circuit: amendment applies to all mortgages

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A 2007 amendment allowing recorded mortgages with certain technical defects to provide constructive notice, as if the mortgages were properly recorded and acknowledged, applies to all mortgages regardless of when they were recorded, the 7th Circuit Court of Appeals ruled Friday.

In what Circuit Judge Richard Cudahy described as "a puzzle of statutory interpretation," the 7th Circuit Court of Appeals affirmed the U.S. District Court's reversal of the bankruptcy court ruling that held a 2007 amendment to Indiana's recording statute only applied to mortgages recorded after the amendment's effective date of July 1, 2007. A 2008 amendment added language that Indiana Code Section 32-21-4-1(c) applied regardless of when a mortgage was recorded, language that was missing in the 2007 amendment.

In dispute in the instant case is a mortgage provided by LaSalle Bank National Association's predecessor that was recorded in May 2001 but had a technical defect because it didn't identify the people who appeared before the notary and executed the mortgage document. After the debtors filed a voluntary petition for relief under Chapter 13 in March 2008, trustee Debra Miller brought an adversary proceeding to avoid LaSalle's mortgage lien.

At issue in Debra L. Miller, trustee v. LaSalle Bank National Association, No. 09-3013, is whether before the 2008 amendment took effect, the 2007 amendment applied to purchasers of properties encumbered by certain technically deficient mortgages recorded prior to July 1, 2007.

The 7th Circuit Court of Appeals examined Indiana law on statutory interpretation and the language of the statute, and found the 2007 amendment to be ambiguous and not have a retroactive effect. It did agree with LaSalle that the relevant "retroactivity event" in this case is the attachment of the bona fide purchaser's rights.

"We do not agree with the Trustee that debtors had vested rights to the effect of technical defects at the time the mortgage was recorded. The rights of the bank and the debtors (here represented by the Trustee) vis-a-vis other creditors were determined at the time the Trustee's strong-arm powers arose," wrote Judge Cudahy. "The 2007 Amendment does change the rights of (bona fide purchasers) for purchases made after July 2007 - but that effect is clearly prospective."

Given the obvious ambiguity in the 2007 amendment and the apparent activity of the bankruptcy trustees in aggressively seeking to avoid mortgages on technical grounds even after that amendment, the 2008 amendment merely clarified the legislature's intent in 2007 that it was supposed to apply to all mortgages, whenever filed, the Circuit Court concluded.

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