Please ensure Javascript is enabled for purposes of website accessibility

Bankruptcy – Release of liability

By: Derek Hawkins//April 1, 2019//

Bankruptcy – Release of liability

By: Derek Hawkins//April 1, 2019//

Listen to this article

7th Circuit Court of Appeals

Case Name: Trinity 83 Development, LLC, v. ColFin Midwest Funding, LLC

Case No.: 18-2117

Officials: EASTERBROOK, BARRETT, and SCUDDER, Circuit Judges.

Focus: Bankruptcy – Release of liability

In 2006 Trinity 83 Development borrowed about $2 million from a bank, giving in return a note and a mortgage on certain real property. In 2011 the bank sold the note and mortgage to ColFin Midwest Funding. ColFin relied on Midland Loan Services to collect the payments. In 2013 Midland recorded a document (captioned “satisfaction”) stating that the loan had been paid and the mortgage released. But the loan was still outstanding, and Trinity continued paying. In 2015 ColFin realized Midland’s mistake and recorded a document cancelling the satisfaction. Soon afterward Trinity stopped paying, and ColFin filed a foreclosure action in state court.

Trinity maintains that the release erroneously filed in 2013 abrogated ColFin’s rights. If that’s so, then the proceeds from the sale must be distributed among Trinity’s other creditors. The bankruptcy judge and district judge concluded, however, that Trinity did not obtain rights from the 2013 filing, for it was unilateral and without consideration. It therefore was not a contract, and because no one (including Trinity) detrimentally relied on the release, ColFin could rescind it. Trinity relies on this clause in the mortgage: “Lender shall not be deemed to have waived any rights under this Mortgage unless such waiver is given in writing and signed by Lender.” Trinity treats this as if it read: “Lender shall be deemed to have irrevocably waived any rights under this mortgage whenever it or its agent signs a written document to that effect.” But that’s not what the clause provides.

According to Trinity, In re Motors Liquidation Co., 777 F.3d 100 (2d Cir. 2015), shows that a mistaken release cannot be undone. That may be true if, as in Motors Liquidation, the error comes to light only after bankruptcy. The Bankruptcy Code gives the Trustee or debtor in possession the rights of a hypothetical lien creditor. 11 U.S.C. §544(a)(1). Because a mistaken release in Illinois allows third parties to take effective security interests if they act before the release is rescinded, a mistake not caught before the date of the bankruptcy filing brings §544(a)(1) into play and prevents the secured creditor from regaining its original position. That’s what happened in the Second Circuit’s case, leaving the secured creditors to argue that the release (which all conceded to be mistaken) should be disregarded because it had been unauthorized. The Second Circuit concluded that the release had been authorized, so it counted—and §544(a)(1) did the remaining work. But ColFin caught the problem before Trinity filed its bankruptcy petition, so a hypothetical lien perfected on the date of the bankruptcy would have been junior to ColFin’s interest.

Affirmed

Full Text


Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.

Polls

Should Steven Avery be granted a new evidentiary hearing?

View Results

Loading ... Loading ...

Legal News

See All Legal News

WLJ People

Sea all WLJ People

Opinion Digests