The H o n o ra ble J am es B. Z agel, Un it ed Stat es D is tr ic t Court  f or the Northe rnDis t ri c tof Il l i noi s , Eas t er n Di vi s i on, s i t t i ng by des i gna t i on. 

## In the 

# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it

N o. 12

- 3079 P EO PL ES N ATI ONA L B ANK, N .A ., Plai nt i f f

-Appe l l ant, v . B ANT ERRA B ANK, C ORT J ONE SAN D L I S A J ONES, D efend a nts-A pp ellees

.
A pp eal from the United S t ates Di strictC our t fo r the S outhernDi stricto f Illino is. No . 3:1 2-cv-00 04 5-DRH

—David R. H ern don, Chief Ju dge
.
A RG UE D F EB RU AR Y 14, 2013

— D ECI DE D M AY 20, 2013

B efore K ANNE an d W I L L I A MS, C ircu i t Ju dg es, an d Z AGEL, D i s t r i ctJudg e .  Z AGEL, D is t r i ctJudg e . Tw o banks d isa gree ove r cr edi to r pr i o r i tyi n c o nne ct i o n wi tha mor tg ag e. Cort2 N o. 12

- 3079 and Lisa J ones , the debtors u nd er l yi ng thi s di spute (“D ebtors ”), un su rp rising ly take no p ositi on in th is m atter.

I . B AC KGR OUND On N ove m ber1, 20 04 Peopl es N ati onalBank ( “Peopl es” ) extended Debtor s a l oan f or$2 14, 044. 26 ( “Peopl es Loan 1”). Thi s l oan w as secur ed by cer tain re alpro perty i n a m or tga ge dated the sam e day and recor d ed on N ove m ber5, 20 04 ( “200 4 M or tga ge” ). In A ugust 2 008, D ebtors obtained anot he r l oan, this tim e f rom Ba nt erra Bank ( “B an ter ra ”)

. Thi s $ 296, 000 const ructi on l oan w as secur ed w i th a seco nd m or tga ge on the sa m e pr oper ty that se c u re d Peopl es Loan 1. Thi s m or tga ge w as dated A ugust 28, 20 08 ( “200 8 M or tga ge” ) and w as re cor ded on S eptem ber3, 200 8. Banterr a was aware ofthe fi rs t m or tga ge Debtor s gr anted to Peo ple s a nd does not dispute that Peopl es’ se curi ty i nter esti n the pr oper ty tak es pri or i ty ove r Banterr a’ s w i th re spect to Peopl es Loan 1. W hat Banter ra di d not kn ow was that on N ove m ber26 , 2007, Debto rs o btained a seco nd l oan fro m Peo ple s ( “P eo pl es Lo an2 ”). T hi s l o anwas f o r $ 40 0, 00 0. 00 a nd w as se c u re d by a d iffer en t p iec e o f rea l p ro p e rty in anothe r m or tg age r eco rded on Dece m ber14, 20 07 ( “2007 M o r tg ag e” )

. The 2 00 7 M o r tg ag e m ade no m e nt i o n o f the pr o pe r t y tha t s e c ur e d Pe o pl e s Lo an 1 or th e Ban te r r a l o an . Banterr a’ s di ffi cul ti es ar i se fro m a cro ss- col l ate ra l i zati o n c l au se pr es en t i n the Pe o pl es L oan1 mor tg ag e do cu-N o. 12

- 3079 3

m en t. The c l au se a ppea r ed o n the fir stpa g e o fthe do cumen ta nd s t a t e d: C ROS S - C OL L AT E RAL I Z AT I ON. In a ddi ti o n t o the N ote , thi s M or tga ge secur es al l o b l i gat i ons, debts and l i abi l i ti es, p lus i nter estther eon, o fGranto r to L en d er , or an y on e or m or e of th em , as w el l a s a ll c l a i ms b y Le nd e r a g a i ns tGr a nt o r o r a nyo ne o r m or e o fthem , wh ethernow exi sting o r here after arisi ng, w h eth er rel ated or un related to the p urpose ofthe N ote , wh ethervo l untaryo r othe rwis e, w he th er du e or not d ue , direct or ind irect, de term in ed orundeter m i ned, abs ol ute o r contingent, l i quidate d orunl i quidate d, w heth erGranto r m ay be l i abl e o r j oi ntl y with others , wh ethero bl i gat ed as guar antor, sur ety, acc om m odati on p ar ty oro ther w i se and w hetherr eco ver y upon su ch am ounts m ay be orher eafterm ay becom e b ar re d by a ny st atute o r l i m i tat i ons and w heth erthe obl i gat i on t o re pay such am ounts m ay beco m e o ther w i se unenfo rce abl e. The mor tg ag e al so c o nt aine d the f o l l o wi ngr el ev an t cl auses : MAXI MU M LI E N. A t no ti m e s hal l the pri nci pal am ount o fthe I nd ebte dn ess se cured by the M or tga ge, not i ncl ud i ng sum s a dvanced to prot ect the s ecu ri ty ofthe M or tga ge, exce ed $21 4, 044. 26. I nd ebte dn ess. T h e w or d “In d eb te d n es s” m ea n s a ll p rincipa l, i nt er es t, a nd o th era m o unt s co st s an d e xpen se s p ay ab l e unde r the Not e o r Re l at ed Doc um en ts, togeth er w ith allren ew als or ex ten sions of, m o d i fi c a t i o n s o f, c o n s o l i d a t i o n s o fa n d s u b s t i t u t i o ns4 N o. 12

- 3079 f o r th e No t e o r R e l a t e d Do c u me n t s a nd a ny am ounts expend ed or advanced by Lend er to d i scharg e Gra ntor ’ s obliga ti ons orexpenses i ncurr ed by Lend erto enf or ce G ra n tor ’ s obl i gat i ons und er th i s Mo r t g a g e , t o g e the r wi th i nt e r e s to n s uch am ounts as provi ded i n thi s M or tga ge. S peci fi cal l y, w ith ou t lim ita tio n , I n d eb te d n es s i n c lu d es all am ou n ts that m ay be ind i re ctl y s ecure d by the Cro ssCol l ate ra l i zati on pro vi si on o fthi s M or tga ge. N ot e. The wor d “ N o te ” m ea ns a no te i n the a m o unt o f$ 2 1 4 , 0 4 4
. 2 6 d a t e d No v e mb e r 1 , 2 0 0 4 , a n d a l l r e n e wa l s , mo di fi c a t i ons, a nd e xt e ns i o ns the r e o f

. NOT I CE TO GR ANTOR : T HE NOTE CO NTAI NS A V ARI ABLE I NTER ES T RAT E. On the f ace ofthe m or tga ge, the re ales tat e pr oper ty offer ed by Debtor s t o secur e Pe op les Loan 1 w as al so to s er ve a s co l l at er alfor a ll o th er“ o bl i g at i o ns , de bt s an d liab ilitie s, p lu s in te re st th er eo n, of G ra n to r to L e n d e r . . . w h ethernow exi sting o r here afterar i si ng, wh ether re lat ed or u n r e l a t ed to th e p u rp os e o f th e N ot e . . . . ” Peo pl e s Lo a n 2 a pp e a r s t o b e j us ts uc h a deb t
. T o be su re , th e m a x i m u m li e n c l a u s e s e r v e s t o lim it the a mou nt o f i nd e b t e dn e s s tha t the pr o pe r t y c a n secure. A nd the m axi m um i nd ebte dn ess per m i tte d by th e cl au se was e qua l t o the a m o untof t he i ni ti all o an . At the i nc ept i o n o fthe mor tgage a g r ee m en t, the n, ther e was no ro om under the cap forthe col l ate ra l to secur e an y s ubs eque ntde bt s th atmay ha ve a r i se n. The extent ofthatencum bra nce would i m m edi ate ly change,N o. 12

- 3079 5 h o we v e r, th e mo me n tth a tD e b to r s be g a n t o p a y d o wn the i ni t i a ll o a n. And tha ti s p r e c i s e l y wh a th a pp e ne d. O n D e c e m b e r 21, 2010 D ebtors fil ed a volunt ary C ha pte r 1 1 ba nk r upt cype ti ti o n. On th atda y, the balan ce d ue on Pe op les Loan 1 w as $115 , 044.26. D ebtors re c eiv ed p er m iss ion from th e B an kr u p tc y C ou rtto se ll the pr oper ty sec u rin g the l oan. The pro pertyso l d on M ay 31, 2011 f or $388 , 500. 00. Ou t of thes e p ro ceeds, Peopl es ass er ts that i t i s e nti tl ed to extr act the b al ance du e o n Peopl es Loan 1, as wellas , byvi rtue of t he cr oss col l ate ra l izati on cl ause, part i alpaym ent o fPeo ple s Lo a n 2 , u p t o the $ 2 1 4 , 0 4 4
. 2 6 c a p. Bante r r a c o nt e nd s th a t t h e c ro ss -c olla te ra liza tio n cla u se , in so far as it p urp ort s to s ec ur e Pe o pl es Lo an2 a he ad o fs ubs eque nt cre dit or s, i s inval i d and ineffecti ve. Peopl es fi l ed a co m pla i nt i n Bankruptcy Court re que st i ngtha t the Co ur t det er m i ne the pr i o r i tyo fthe p ar tie s’ lien s. In re Jon es , 2 0 1 1 W L 61406 86 (Ba nk r. S.D .Il l. D e c . 9, 201 1). T h e B an kr u p tc y C ou rtfou n d in f avo r ofPeo ple s. Banter ra ap p eale d to the Di str i ct Court, wh er e Banter ra pre vai l ed

. Peop l e s Nat i onal s Bank, N .A . v. Jones , 48 2 B. R. 257, 2 64 (S

. D. I l l

. 20 12)

. Peo ple s no w appe al s th e Di st r i ctCo ur t’ s dec i si o n.

II. A N A L Y S IS T h is act ion oc c u rre d in Illino is an d p er ta in s t o Il l i n ois p rop erty. T h e p arties agree tha t I ll inois l aw therefore ap p lies h er e. Se eal s o Unit e d S tat e s v. 19
. 86 Acre s of La nd6 N o. 12

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As the Bank ru p t c y Cour tno t ed, “the c ro s s - c ol l at er al i za t i on 1 cl ause was cons picuously plac ed on the fir stpage of that m or tga g e a n d e v en a cu rsor y rev iew of the d ocu m en t cou ld have revealed i ts ex is tenc e. ” In re Jones , 2011 W L 6140686, *8. in East St
. Louis, St. C lairCo unty, Ill

. , 14 1 F
. 2d 344, 34 6 (7t h C ir. 19 44 ). I t i s und i sputed that Banterr a did not h av e actual n ot ice or kn ow led ge of P eo p les L o a n 2 . It is s im ilar ly und i sputed t h at Banterr a di d have a ctualnot i ce and knowledge ofPeo ple s Loan 1, the m or tga ge secur i ng i t, and the c ro ss- col l ate ra l i zati on cl ause that i t co ns pi cuo us l y c o nt aine d. The di spu te i s o ve r the 1 l ega l si gni fi cance ofthes e tw o f acts
. The rele vant f acts ar e thus a gr ee d to; o ur r evi ew o fthe Bankruptcy and D i str i ct Cour ts’ co ncl usi ons ofl aw i s de novo

. Free l and v. Enodis Corp. , 54 0 F
. 3d 72 1, 72 9 ( 7th Ci r . 2008); In re R ivini us, Inc. , 977 F.2d 117 1, 1175 ( 7th Cir. 1992). Bant er ra has consi ste ntl y a rgued that, under 76 5 I LC S 5/ 11, the 2004 M or tga ge w as i nsuffi ci en t a s a m at te r o fl aw t o i m par t r ec o r d no ti ce of P eopl es Lo an2 on s ubsequent cr edi tor s o r pu rchas er s. Se cti on 1 1 does appear t o provi de so m ethi ng o fa checkl i st ofpi eces o fi nf o r m at i o n fori nc l us i o n in a v al i d m o r tg ag e. But i s t h e checkl i st sta tutor i l y r equi re d? Banterr a a sse rt s that i t is, and thata m or tga ge l acking anyo fthes e det ai l s do es no t i m par t r ec o r d no ti ce o n a s ubs eque nt bona fi de purchaser

. S ecti on 1 1 s tat es: M or tg ag es of lan d s m ay be su b st an tia lly in th e fo ll o win gf o r m:N o. 12

- 3079 7

W e not e that, s eve ra l m onths aft erth is a ppea l was fi l ed, the 2 I l l i nois legi s l atur e pro vi ded c l ar i fi c at i on on the que s t i on of whethe r the pr ovi s i ons of76 5 I LCS 5 /11 are pe rm i s s i ve or m and atory. Il li nois Pub li c A ct 97- 1164, w hich is the enact ed f orm o f Senate Bil l 16, becam e l aw on or about February 8, 20 13
. Sectio n 2 0(b ) of the A ct states: T he p rovi s i ons of[ 76 5 I LCS 5 / 11 ] r eg ar di ng the f or m of a m or t gage ar e, an d have al ways b een , per m i s s i ve and no t m an d ato ry . A c c o r d ing ly, the failu re o f an oth erw ise l awful l y e xecu t ed a nd r ec or ded m or t gage t o be i n the f orm described in [ 765 ILC S 5/ 11] in one o r m ore re s pec t s , i nc l udi ng the f ai l ur e t o s t at e the i nt er es t r ate or the m atu rity d ate, or b oth , sha l l n o t affect the v alid ity (c on tin u ed

... ) T he M ortgagor (here insert n am e or nam es), m or tga ges and w ar ra nts t o ( here i nser t na m e o r na m es o fmor tg ag ee o r mor tg ag ee s) , t o s ec ur e th e paym ent o f( here r eci te the nature and am ount o f i nd ebte dn ess , s h ow i ng wh en due and the r ate o f interest, and w he th e r s ecu red by note or oth erw ise), the foll ow ing d escribed real estat e (here i nser t desc ri pti on there of), si tuate d i n the County of

. . . , i n the St ate o fI l l i noi s. On the f ace ofi t, use o fthe w or d “m ay” sugg est s th at Pe op les ha s t h e better of i t, an d that the sta tu te’s provi si ons ar e a t m ostas pir ati onal. O n the othe r h an d , l on gs ta n d in g Illino is c as e la w se em s t o h old that a m or tga ge m u st a t l eas t incl ud e the am ount o f i nd ebte dn ess the m or tga ge i s m eant to secur e in or der to i m part re c or d noti ce. See B ullo ckv. B a ttenh a usen , 10 8 28 N o. 12

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(

. . . c o ntinu e d) orpr i or i t y ofthe m or t ga ge , n ors ha l l its rec or da t i onbe i ne ffec t i ve f or no ti c e purpo s es r eg ar dl es s ofwhenthe m or t ga ge wa s r e c or de d. Il l . 28, 37(18 83 ); Bergm an v. Bogda , 4 6 I l l

. App. 3 5 1 , 35 7 (1s t D ist . 189 2); Fl ext e rv. Woom er, 4 6 I l l

. A pp . 2d 456, 45 8- 59 ( 5th Di st. 196 4). On the f acts her e, however, we see no nee d to enterthi s fra y. Ci ti ng B ullock, Bergm an , a nd Flex ter, Banter ra as ser ts that, wh en a m or tga ge does not at l eas t l i st the pr eci se am ount of i nd ebte dn ess the col l ate ra l m eans to se cure, a s ubsequent cr edi torwitho ut actual not i c e of the m or tga ge w ill no t b e h eld to rec or d n ot ice . B u t e ve n if tr ue, thatpre cedent d oe s no t a dd re ss the di sposi ti ve que st i o n pr es en te d he r e. In e ac h o fthe cit ed ca se s, the Cou r ts f o und tha t th e su bs eque ntpur ch as er was wi th

out actualnot i ce o r knowle dge o fthe p riori nter estat iss u e, andthe r e was no i ndi ca ti on th atthe s ubs eque nt pu rchas erposs es se d any i nfo rm ati on that s houl d have pr o m pte d a n inv es ti gation l i k ely t o r es ul t i n the di sc o ve r y o ftha t i nt er es t. Given the f ac ts , no ne o fthe Courts had occas i on t o consi de r w h etherthe subsequent pur c haser s s houl d be hel d to i nquir y no ti ce. That i s no t s o here

. L ike r ecord notice, inq uiry notice is e s sen tially a f orm of c on st ru c tiv e n ot ice
. Se e Pel f r e s ne v. Vil l age of

Willi am Bay, 965 F .2 d 53 8, 54 2 (7 th C ir. 19 92 ); National Fam ily Ins . C o. v. E xc hang eN at
. Bank o f Chi cago , 474 F
. 2d 237, 24 1- 42 n. 1 ( 7th Ci r. 1 973) ; 11 2 Am

. J ur. Pro ofo fFa cts 3d 419N o. 12

- 3079 9 § 1 2 ( 2013 ) ( col l ecting c as es ) ; 1 P AT T ON A ND P AL OMAR O N L AND T IT LES § 12 ( 3d ed. 20 12 ) ( co l l ec tingcases). Re co r d no ti ce rules t r ea t a su bs eque ntc r edi to r wi thno actualkno w l edge o fa pri ori nter estas h av in g a ctual n ot ice if t h e p rior int er es t w as p ro p er ly re c or d ed . A su bs eque ntc r edi to r r ec ei ve s no qua r te r f o r ha ving f ai l ed to s ea r ch th e re l ev an t r ea l e st at e r ec o r ds, s o l o ng as the inter estwas proper l y r eco rded. Inquir y no ti ce oper ate s under a s i m i l arpri nci ple

. I nqui ry n o ti ce de sc r ibe s th e si tu at i o n whe r e th e t r a n s fe r e e h a s b e e n ma d e a wa r e o ff a c t s o r c i r c u mstan ces from w hich the ex istenc e or possibili ty of a pr i o r c l ai m mightr easonab l y b e i nfer r ed. I fs o , the pu rchas er then has a du ty to ver i fy ord ispel the infe re nce thro ugh furtheri nq u iry
. I fhe f ai l s t o m ake i nquir y, he i s no nethel ess char geabl e with kn ow led ge of fac ts th a t a d ilige n t in q u iry w ou ld have disc l ose d, the sam e as i f he had a c quir ed actualkno w l edge o ftho se f acts
. In re Shara M anning P roper ti es, Inc. , 4 7 5 B. R. 8 9 8 , 90 6 (B an kr

. C .D .Il l. 20 10 ); se e Sm ith v. G rubb , 40 2 I l l

. 45 1, 46 4- 65 (19 49 ); 112 A m . Jur . Pr oo f of Fa c ts 3d 41 9 § 1 2 (c ollecting case s). H ere , w e find that the B an krup tcy C ou rt corre ctl y i denti fi ed the dispos i ti ve questi on pre sente d by th ese f acts wh en i t a ske d “w hetheractual not i ce o f a cr oss - col l ate ra l i zati on cl ause i n a m or tga ge i m parts i nqui r y no ti ce a s to the e xi st en ce of o th ero bl i g at i o ns th at m ay be co ve r e d by th e s ec u rit y in st ru m en t.”10 N o. 12

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It is u nd ispu ted tha t a na m e s e arc h o f the J efferso n C ou nty 3 land recor ds w ould hav e revealed the exi st ence ofPeoples L oa n 2. Bant er ra wonder s s ke pt i c al l y whethe r, unde r Pe opl es ’ theory, the i nvesti gati on requir ed of one pu t on in q u ir y notic e m i g h t e nta il search ing reco rd s, no t just in Illino is cou nties, but in eve ry c ounty i n n ei ghbor i ng s t at es as wel l

. Butthe law require s reas on a b le i nvesti gati on, not e nd le ss i nvesti gat i on, an d a pa rty a l l eg edly on i nqu i ry no t i c e c an re butthe ar gum en tby s howi ng thata rea sonabl e i nve s t i gat i on di d not y ie ld d isc o v er y o f th e r el ev a n t in fo rm a tio n . Je s k o v. Am e r i ca nF irstTi t l e & TrustC o. , 603 F. 2d 815, 818- 19 ( 10th Cir. 19 7 9 ); 1 1 2 A m . Jur . P ro o f of F a ct s 3 d 4 1 9 § 1 2 (20 1 3 ) (co lle ct in g ca se s); 1 P AT TO N A ND P A L O M A R O N L AN D T I TLES§ 12 ( 3d ed

. 2012) (co lle ct in g ca se s). Ult i m at e l y , wh e r e t o d r a w th a tl i n e wi l l b e a qu e s t i o n f or the t r i e r o ff a c t
. H ere, h owe ve r , the Ba nk r up t c y Co ur tf ou nd , (c on tin u ed

... ) In re Jon es , 2011 W L 6140 686, * 8 (M eyers, Ban kr. J
. ). On these f acts , we hol d that i t doe s. Ban te r r a co nc edes it s ac tu alno ti ce o fPe o pl es Lo an1 and the m or tga ge secur i ng i t. The cr oss - col l ate ra l i zati on cl ause i s co nspicuo usl y pl aced o n the fi rs t page o f the m or tga ge, di sco ver abl e with j ust a curs or y r evi ew ofthe docum ent. Id. T h e c lau se st at es ex p re ss ly th at, in ad d itio nt o P eo p les L oa n 1, th e c olla te ra l se c u re d all debts ofthe gr antorto the l ender “now exis ting or here

afterar i si ng. ” Ofthi s Banter ra was aware a nd “fro m [th is] t h e e x is t e n c e o r p os sib ility of a p rior cla im m i ght r eas onabl y b e infe rr ed. ” M oreo ver, i t i s cl earthat a re as on ab le i n ve st iga tio n w ou ld h av e d isc los ed th is p r i o r c l a i m. 3N o. 12

- 3079 11

(

. . . c o ntinu e d) and the par t i es do n otdi s put e, thatthe i nve s t i gat i on re qui red to have di s c ove re d Pe opl es Loan2 was withi n the b o u n d s o f re a so n a b le n es s. S ee In re Jones , 2011 W L 6140686, *9. B an te r r a n ev er arg u es th at P eo p les L oa n 2 w ou ld not have been disc ove re d up on r eas onabl e invest i gati o n. Ba nt er r a simpl y a ss er ts tha t, due t o “ i nhe r en t co ntr adic ti ons and am bi gui ti es, ” the m or tga ge and cro sscoll ateralization claus e d id n ot create a d ut y of inq uiry i n the fi r stplace. Al th o ug h the Di st r i ctCo ur t th o ug ht so, w e fai l to se e a ny i nconsi ste ncy o r am bi gui ty. T h e m or tg a g e i s n otsu sc ep tib le of t w o m ea n in gs . I t i denti fi es a p i ece ofr ealpro pertythatse rv es to se cur e a l o an fro m Pe o pl es t o De bt o r s i n the a m o unt of$2 14, 044. 26, as wellas any add i ti onall oans Peopl es an d D ebto rs m ay enteri nto, subj ect to a s peci fi ed m ax im um am ount o fi nd ebte dn ess . Th e mort g a g e e xp r e s s l y de fi ne d the t e r m “ i nd e b t e dness. ” Banterr a bel i eve d “ the ‘ I nd ebte dn ess ’ cla use defined the secured debt a s the ‘ N ote , ’ wh i ch w as defin ed to m ean ‘ a no te i n the am ount o f$2 14, 044. 26 dat ed N o ve m be r 1 , 2 00 4, a nd a l l r en ewa l s, modi fi ca ti o ns and extensi ons ther eo f.’ ” Peop l e s Nat i onal s Bank, 4 82 B. R. a t 2 6 4
. Wer e thi s the c o mpl e t e de fi ni t i o n o f“ I nd e b t e dness” under th e m or tga ge, Banter ra m i ght ha ve a be tte r ar gum ent that the m or tga ge w as inter nal l y inconsi ste nt

— i fthe i nd ebted n ess co ntem pla ted bythe m or tgag e co nsi ste d sol ely of the Note, o ne m i ght a sk, wh at12 N o. 12

- 3079 fur th eri nde bt edn es s co uld be s ec ur ed byv i r tu e o fthe cro ss- col l ate ra l i zati on cl ause? Bu t thi s r eadi ng o f“Ind ebte dn ess ” i s inaccurat e

— th e m o r tg ag e i ts el fde fi ne d “ I nde bt edn es s” t o meanthe N ote and“a l l am oun ts thatm ay be ind i re ctl y s ecure d by the Cro ss- Col l atera lizat i on pro vi si on o fthi s M or tga ge .” A c c or d in gly , in st at in g t h a t “ [a]t n o t im e s h all the pr i nci p al a m ount o fthe I nd ebte dn ess se cured by the M or tga ge . . . exce ed $21 4, 044. 26, ” the m or tga ge cl ear l y c onte m pla ted i nd ebte dn ess ar i si ng fro m bo th th e o r i g i na l Not e an d a ny i nde bt edn es s secur ed bythe c ro ss -c olla te ra liza tio n cla u se . Th e c lau se s a re en t ire ly com ple m entar y. B anter ra m ake s m uch ofthe f act that the m or tga ge setthe m axi m um am ount of i nd ebte dn ess at $214, 044. 26

— the s a me a mou nta s the i ni t i a l l o a n. Atthe i ncepti on of the agreem en t betw een Peop les and De btors, Ban terra obs er ves, the am ount due o n the i ni ti all oan w as equal to the m axi m um i nd ebte dn ess al l owed bythe m or tga ge, and the m or tga ge thus co uld s ecure no furtherdebt. Ban te r r a ’ s o b s e r v a t i o n i s o fn o i mpo r ti n th e c o n t e xt of t h is c as e. T h a t t h e in itia l loan w as eq u al t o th e m ax im um i nd ebte dn ess al l owed bythe m or tgage does not al l ow the i nfe re nce that the m or tga ge coul d never secur e a ny o therdebt eve n w hen the i ni ti all oan has been re du ced by paym ents. The c r o ss - co l l at er al i za ti o n c l au se e xpr es sly c o ntem p lates d ebts ari sing in the fut ure , w h e n De btors m aywel l ha ve pa i d do wn so m e o f th e i ni ti all o an, cre ating r oo m under the ca p. N othi ng i n the caseN o. 12

- 3079 13

ex p lain s w h y t h is e n tir ely p lau sib le s c en ar i o (in d ee d , i t i s pre ci sel y what happened ) sho uld be o utsi de th e set o fpo ss ibl e o ut com es co ns i der ed bya ny o ne r ea di ngthe docum ent. Because i t i s s el f

- evi dent tha t th e par ti es i nt en ded th atthe a m o unto fi nde bt edn es s underthe i ni ti all oan w oul d be pai d dow n b y D ebtor s o verti m e, w e c an n ot agr ee that set ti ng the m axi m um am ount o f i nd ebte dn ess equalto the am ount o fthe i ni ti all oan “evid en ce[s] an inten t tha t the m ortg a g e n ot secu re any o therdebt. ” Peop l e s Nat i onal s Bank, 48 2 B. R. at26 4. Ban te r r a ar g ue s th atl o ng - he l d I l l i no i s ca se l aw weighs i n thei r favor, ar gui ng tha t i fthi s Courtsi des with P eo p les , Bul lock, Bergm an , a nd Flex terar e a l l “de f acto ov er ru led .” W e d o n otag re e. N on e o f th e fa c ts in thos e pr ecedents o ccasi oned thei r re specti ve Cour ts to co ns i deri nqui r y no ti ce . The Appel l at e Cou r t i n B ullock, th e s em in al c as e o f th e t h re e, w as ex p l i c it: “T h e ru le th at w ha t is su ffici en t t o p ut a pu rch aser u p on inq uiry i s no ti ce o fwh ate verthe inquir y would have di scl ose d has no appli cati on. ” B atte nhau se n v. Bu ll ock, 11 I l l

. App. 665, 671 (1st Dist. 1882). I n B ullock, the i ss ue was whethe r a t r us t d ee d c o ntaini ng “ n o sta tem ent o fthe am ount o fthe i nd ebte dn ess th er eb y s o ug htt o b e se cur ed” was le g al l y s uffi ci en t to i m part re cor d noti ce o n a s ubsequent purchase r. S ee id

. a t 66 8. Inq uiry no ti ce ha d no a ppl i ca ti o n in B ullock because the subsequent pu rchas erwas f ound to ha ve n o a c tu al k n ow led ge or n ot ice of th e t ru st d ee d

. See id

. at 671 ( “[ i nquir y no ti ce] ap p lies to ac tualand not to const ructi ve noti ce”)

. That is , the subsequent pu rchas er14 N o. 12

- 3079 had no actual kno w l edge o r noti ce o fthe pie ce o f r ec o r ded i nf o r m at i o n whi ch, whi l e perha ps i ns uffic i en t as a m at te r o flaw to im p ar t re c or d n ot ice , cou ld w ell have i m parte d i nquir y no ti ce. Thati s n o ts o h e r e , wh e r e the c r o s s - c o l l a t e r a l i z a ti on cl ause i s the anal og to the trustdeed. In thi s ca se, Banterr a had actual kno w l edge o fthe cro ss- col l ate ra l i zati o n c l au se . The c l au se may wel l ha ve b ee n ins uffi ci en t to i m part re cor d noti ce o fPeo ple s L oa n 2 o n a s ubsequent c re dit or wh o did nothave actual kno w l edge o f that l oan

— that i s B ullock

. But i t i s cl earthatthe cl ause does i m part inqu iry not i ce o n a s ubsequent cr edi tor w ho has actual kno w l edge o fthe c l a use

— a point not re ached by B ullock

. T he sam e is tru e of Flex tera nd Bergm an . In Flex ter, the a nal og to our cross - col l ate ra l i zati on cl ause w as a m or tg ag e in its en tir et y. See Flex t er, 46 I l l

. A pp . 2d at 457. The Appel l at e Cou r t ac k no wl edg ed th atthe re was c o nfl i ct i ng ev i den ce at tr i al as to whethe r the s ubs eque nt pur ch as erha d a ctua l kno wl edg e o fthe m ortga g e, b ut ult i m a t e l y c o nc l ud e d tha tthe r e wa s n o r e a s o n to di sturb th e tr i alj udg e’ s fi ndi ngtha t h e d id no t. The m or tg ag e d id n otrec ite th e a m ou n t o f ind eb te d n es s it w as m eant to secur e, and, f ollow i ng B ullock, the C ou rt co nc l ude d th atthe mor tg ag e was l eg al l y i ns uffi ci en t to i m part re cor d noti ce. This i s not to say that, had the subsequent p u rc h ase r been f ound to ha ve had som e knowle dge o fthe pri or i nt er es t, he co uld nothave bee n hel d to i nquir y no ti ce.N o. 12

- 3079 15 N either Flex ternor Bul l ockh el d that a docum ent that i s l ega l l y insuffi ci ent t o i m p ar t recor d noti ce i s a l so prec lu d ed from im p ar tin g in q u iry n ot ice . For t h e p rin c ip le ofi nquir y no ti ce t o be a pp l i cable, ho w eve r, the subsequent purchaserm ust in f act have actualkno w l edge ofso m e r el evantpi ece orpi eces o fi nfo rm ati on that w ou ld p u t h im or h er on inq u iry
. See B a ttenh a usen , 11 I l l

. App. a t 67 1. In Flex ter, a s i n B u llock, the subsequent purchaserwas fou n d t o have no s uch knowledge , so the Co ur t di d no t r ea chthe que st i o n. I n Bergm an , t o o , the Co ur t f o un d tha t a mor t g age that did not i ncl ud e the am ount of i nd ebte dn ess it w as m ean t to secu re w as legall y i ns uffici en t to i m p art re c ord n ot ice
. Bergm an , 46 I ll

. A p p . at 357. A gain, h ow ever, w h ether the subse quent purchaserm i ght s ti l l have bee n ch ar g ed wi thi nqui r y no ti ce was no t addr essed b y the Cou rt . The s ubsequent purchase r w as f ound to ha ve ha d no ac tu al k no wl edg e o f th e m o r tg ag e, nor any further i nfo rm ati on that m i ght have pu t hi m on in quir y. As i n B ullocka nd Flex ter, inq uiry no ti ce s i m plywas not at i ssue. B an te rra ’s m isa p p re h en sio n of th is lin e o f ca se s is su ccin ctly cap tu red i n its br ief at pa ge 33, w he re Ban te r r a st at es “

. . . when B ullock, Bergm an , a nd Flex ter w er e deci ded , ea ch co u rt h el d that a m or tga ge w hi ch did notdescr ibe the speci fi c am ou n t of debt s ecure d w as not re cor d noti ce, and hence, di d n ot pla ce s ubseque nt m o r tg ag ee s o n n o ti ce o r i nqui r y a s to the e xt en t orval i dit y o fsuch defecti ve m or tga ges . ” The fi rs t cl ause ha s i t qui te r i g ht

— thos e co urts di d i nd eed hol d that16 N o. 12

- 3079

The D is tr ic t Court did ulti m atel y con clud e that the 2004 4 M ortgage w as ins uffic ie nt as a m att er of law t o im p art inquir y notic e that it se cu red any deb t other than the No te. Pe o pl e s Nat i o na l s Ban k, 48 2 B .R. at 26 5. Th e C ou rt’ s a n a lysis, howeve r, appe ar s t o a ddre s s on l y the l eg al s uffi c i en c y of the m or tga g e to im p art record n o tic e. Id. at 263- 65. m or tga ges thatdo notd escribe the speci fi c am ount o f debt s ecure d do not i m part re cor d noti ce. T h e a ssertion m ad e in the sec ond clause, how ever, ove rr eaches and does not f ol l ow fr om the fi rs t. A gain, not on e o f th os e C ou r ts fou n d th at be c au se a m or tg ag e is i nsuffi ci ent to i m part re cor d no ti ce, i t i s necess ar i ly a l so i nsuffi cien t to i m part i nquir y no ti ce. A cco rd In re Sh a ra 4 M a nn ing P rop erties , 475 B. R. at 9 06 (“a subse quent tr ansfer ee w ho a tta cks a pri ori nstru m en t as i neffecti ve to acco rd const ructi ve noti ce m ay sti l l l ose a p rior i ty ba tt l e i fhe ha d a ctua l o r i nqui r y n oti ce o fthe i ns trum en t o r th e in te re s t c o n ve ye d th er eu n d er ”); see also 14 Ric hard R. Pow ell, P OW ELL O N R EAL P RO P ER TY § 8 2
. 0 2 [ 1 ] [ d] [ i ] ( Le xi s Ne xi s Rel eas e 9 1 2 0 0 0 )

. Ind e e d, none o fthe su b se quent purchaser s were f ound to ha ve ha d a ctua l kno wl edg e o fthe i nf o r m at i o n tha t m i g ht have pu t them o n i nquir y no ti ce. A s di scusse d above , ther e was thus no r eas on f orthe cour ts eve n to address th e que st i o n. Fi nal l y, as a m att ero fpol i cy B anter ra l am ents that th e p o s i t i o n w e a d o ptto d a y w i l l c h i l l l e n d i n ga n d c o mm erce, m aking it m ore diffi cu lt for thir d -p arty lend ers l i k e Ba nt e r r a t o c o nfi de nt l y a pp r o v e l o a ns s e c ur e d b yN o. 12

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Thi s poi ntbr i ngs outi n s har p r el i efthe i l l us or y na t ur e of 5 B an terra ’ s assur an ce tha t, w hile th e p osi t i o n it urg es w ou ld i nv a l i da t e s uc h c r os s - c ol l a t e r a l i z a t i on cl a us e s a s t o thi r dp arties w itho u t actu al no tice, the clau se w o u l d rem ain effect ive as between the i nit ial l ender and borrow er. To that exten t, B an terra ’ s theo ry m ay w e ll leav e the secu rity intere st Lend e r ha s i n De bt or ’ s pr op e r t y i nt a c t
. But the va l ue ofthat int eres t to L en der w ould chang e dram ati cal ly. W hat i s m ore, the reck on ing occa sion ed b y this cha ng e in v a l u e is n ot a m er e pot en t i al i t y r ea l i ze d onl y upona bank rup tcy w he n a c re di t or pr i or i t y di s put e en s ues . On the c ont ra ry , the v al u e o f ev ery com p an y in p ossession of secur ity in terests b o l s t e r e d by s u c h c r o s s - c o l l a t e r a l i z a t i o n c l a u s e s w o u l d i mm e di a t e l y dr op . proper ty that has be en cr oss - col l ate ra l i zed . A s a ge nera l m at te r, w e s h ou ld th in k t h at p ru d en t le n d er s w ou ld do wel l t o e xe r ci se c au ti o n b efo r e ac ce ptinga s ec o nd m or tg ag e o n rea l p ro p er ty th at h as be en cr os s-c olla te ra li ze d. Butthe mor e sa l i en t r es po ns e to Ba nt er r a’ s co nce r n i s th ata do ptingi ts p ositi o n wi l l no t i n a ny eve nt dispel the chi l l i ng effe ct

— i t wil l m er el y t ra nsfer i t be tw een the par ti es. A c r o s s - c o l l a t e r a l i z a t i o n c l a us e ma k e s a g i ven se c u rit y in te re st m or e v alu ab le t o th e g ra n te e. T h e p os iti o n Ba nt er r a ur g es woul d r edu ce tha t value, s hi fting i t a w ay fro m the i ni ti algr antee and to pro spectiv e s ubsequent g ra ntees
. In ei thercas e, o ne l ender’ s incenti ve 5 t o l e nd i s i nc r e a s e d, wh i l e the o the r ’ s i s r e du c e d. Betwee n the t wo, ho wev er, o nl y o ne ou tcome ha s th e vi rtue o fbeing co nsi ste nt with the pl ai n contractual18 N o. 12

- 3079 lan gu ag e t h at th e p ar tie s a g r ee d u p on , an d w e t h in k it mor e s e ns ib l e t o a l l o w s o ph i s t i c a t e d p a r t i e s t o c o nt ra ct as the y wi sh

. I fc r o ss - co l l atera l i za ti o n c l au se s ar e i n the e n d t o o c o s t l y t o b o r r o we r s , th e y n e e d n o ta g r e e t o th e m.

I I I . C ONC L US I ON Forthe f or ego i ng r ea sons, the j ud gm ent o fthe Dist ri ct Court i s re ver sed, and the j ud gm ent of th e B ankr up t c y Co ur ti s a ffi r med

.

5- 20- 13