Court Allows Secured Creditor To Retain Mortgage Lien After Mistaken Release And Reinstatement Prior To Bankruptcy

The U.S. Court of Appeals for the Seventh Circuit allowed a secured creditor to retain its lien and therefore the proceeds from a sale, even after the secured creditor mistakenly released its mortgage lien. The case is Trinity 83 Development, LLC v. ColFin Midwest Funding, LLC (In re Trinity Development, LLC), slip. op. (7th Cir. March 1, 2019).

The borrower, Trinity 83 Development, LLC, borrowed about $2 million from a bank to build an office building. The note and mortgage was sold to ColFin. ColFin's loan servicer mistakenly recorded a document entitled a "satisfaction," which stated that the loan had been paid and released the mortgage lien. The loan was still outstanding, and Trinity 83 continued to make payments to ColFin. Trinity 83 eventually defaulted, and ColFin discovered the mortgage had been mistakenly released. ColFin then recorded a cancellation of the satisfaction, and commence mortgage foreclosure proceedings in state court. In response, Trinity 83 filed a Chapter 11 bankruptcy case.

Trinity 83 commenced an adversary proceeding against ColFin, contending that the "satisfaction" and release extinguished the debt and the mortgage lien, arguing it never consented to re-mortgage the property. ColFin moved for summary judgment against Trinity 83. Judge Deborah L. Thorne of the U.S. Bankruptcy Court for the Northern District of Illinois agreed with ColFin, and held that the unilateral release was done in error and could be corrected unilaterally. And since no one else recorded liens in between the recording of the release and the correction, ColFin's first priority mortgage lien remained perfected. Trinity 83 appealed, and the District Court affirmed Judge Thorne's ruling. The property was sold to a third...

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