The Honorable James B. Zagel, United States District Court 

for the Northern District of Illinois, Eastern Division, sitting

by designation.

In the

United States Court of Appeals

For the Seventh Circuit

No. 12-3079

PEOPLES NATIONAL BANK, N.A.,

Plaintiff-Appellant,

v.

BANTERRA BANK, CORT JONES AND LISA JONES,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Illinois.

No. 3:12-cv-00045-DRH—David R. Herndon, Chief Judge.

ARGUED FEBRUARY 14, 2013—DECIDED MAY 20, 2013

Before KANNE and WILLIAMS, Circuit Judges, and

ZAGEL, District Judge.



ZAGEL, District Judge. Two banks disagree over

creditor priority in connection with a mortgage. Cort
2 No. 12-3079

and Lisa Jones, the debtors underlying this dispute

(“Debtors”), unsurprisingly take no position in this matter.

I. BACKGROUND

On November 1, 2004 Peoples National Bank (“Peoples”)

extended Debtors a loan for $214,044.26 (“Peoples

Loan 1”). This loan was secured by certain real property

in a mortgage dated the same day and recorded on

November 5, 2004 (“2004 Mortgage”). In August 2008,

Debtors obtained another loan, this time from Banterra

Bank (“Banterra”). This $296,000 construction loan was

secured with a second mortgage on the same property

that secured Peoples Loan 1. This mortgage was dated

August 28, 2008 (“2008 Mortgage”) and was recorded

on September 3, 2008. Banterra was aware of the first

mortgage Debtors granted to Peoples and does not

dispute that Peoples’ security interest in the property

takes priority over Banterra’s with respect to Peoples

Loan 1.

What Banterra did not know was that on November 26,

2007, Debtors obtained a second loan from Peoples

(“Peoples Loan 2”). This loan was for $400,000.00 and

was secured by a different piece of real property in

another mortgage recorded on December 14, 2007

(“2007 Mortgage”). The 2007 Mortgage made no

mention of the property that secured Peoples Loan 1 or

the Banterra loan.

Banterra’s difficulties arise from a cross-collateralization clause present in the Peoples Loan 1 mortgage docu-
No. 12-3079 3

ment. The clause appeared on the first page of the document and stated:

CROSS-COLLATERALIZATION. In addition to the

Note, this Mortgage secures all obligations, debts

and liabilities, plus interest thereon, of Grantor to

Lender, or any one or more of them, as well as all

claims by Lender against Grantor or any one or

more of them, whether now existing or hereafter

arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise,

whether due or not due, direct or indirect, determined or undetermined, absolute or contingent,

liquidated or unliquidated, whether Grantor may

be liable or jointly with others, whether obligated as

guarantor, surety, accommodation party or otherwise

and whether recovery upon such amounts may be

or hereafter may become barred by any statute or

limitations and whether the obligation to repay

such amounts may become otherwise unenforceable.

The mortgage also contained the following relevant

clauses:

MAXIMUM LIEN. At no time shall the principal

amount of the Indebtedness secured by the Mortgage,

not including sums advanced to protect the security

of the Mortgage, exceed $214,044.26.

Indebtedness. The word “Indebtedness” means all

principal, interest, and other amounts costs and expenses payable under the Note or Related Documents, together with all renewals or extensions of,

modifications of, consolidations of and substitutions
4 No. 12-3079

for the Note or Related Documents and any

amounts expended or advanced by Lender to discharge Grantor’s obligations or expenses incurred

by Lender to enforce Grantor’s obligations under

this Mortgage, together with interest on such

amounts as provided in this Mortgage. Specifically,

without limitation, Indebtedness includes all

amounts that may be indirectly secured by the CrossCollateralization provision of this Mortgage.

Note. The word “Note” means a note in the amount

of $214,044.26 dated November 1, 2004, and all renewals, modifications, and extensions thereof. NOTICE

TO GRANTOR: THE NOTE CONTAINS A VARIABLE

INTEREST RATE.

On the face of the mortgage, the real estate property

offered by Debtors to secure Peoples Loan 1 was also

to serve as collateral for all other “obligations, debts and

liabilities, plus interest thereon, of Grantor to Lender . . .

whether now existing or hereafter arising, whether

related or unrelated to the purpose of the Note . . . .”

Peoples Loan 2 appears to be just such a debt. To be

sure, the maximum lien clause serves to limit

the amount of indebtedness that the property can secure. And the maximum indebtedness permitted by

the clause was equal to the amount of the initial loan.

At the inception of the mortgage agreement, then,

there was no room under the cap for the collateral to

secure any subsequent debts that may have arisen. The

extent of that encumbrance would immediately change,
No. 12-3079 5

however, the moment that Debtors began to pay down

the initial loan. And that is precisely what happened.

On December 21, 2010 Debtors filed a voluntary

Chapter 11 bankruptcy petition. On that day, the

balance due on Peoples Loan 1 was $115,044.26. Debtors

received permission from the Bankruptcy Court to sell

the property securing the loan. The property sold on

May 31, 2011 for $388,500.00. Out of these proceeds,

Peoples asserts that it is entitled to extract the balance

due on Peoples Loan 1, as well as, by virtue of the crosscollateralization clause, partial payment of Peoples

Loan 2, up to the $214,044.26 cap. Banterra contends

that the cross-collateralization clause, insofar as it

purports to secure Peoples Loan 2 ahead of subsequent

creditors, is invalid and ineffective.

Peoples filed a complaint in Bankruptcy Court requesting that the Court determine the priority of the

parties’ liens. In re Jones, 2011 WL 6140686 (Bankr.

S.D.Ill. Dec. 9, 2011). The Bankruptcy Court found in

favor of Peoples. Banterra appealed to the District

Court, where Banterra prevailed. Peoples Nationals Bank,

N.A. v. Jones, 482 B.R. 257, 264 (S.D. Ill. 2012). Peoples

now appeals the District Court’s decision.

II. ANALYSIS

This action occurred in Illinois and pertains to Illinois

property. The parties agree that Illinois law therefore

applies here. See also United States v. 19.86 Acres of Land
6 No. 12-3079

As the Bankruptcy Court noted, “the cross-collateralization 1

clause was conspicuously placed on the first page of that

mortgage and even a cursory review of the document could

have revealed its existence.” In re Jones, 2011 WL 6140686, *8.

in East St. Louis, St. Clair County, Ill., 141 F.2d 344, 346

(7th Cir. 1944). 

It is undisputed that Banterra did not have actual

notice or knowledge of Peoples Loan 2. It is similarly

undisputed that Banterra did have actual notice

and knowledge of Peoples Loan 1, the mortgage

securing it, and the cross-collateralization clause that

it conspicuously contained. The dispute is over the 1

legal significance of these two facts. The relevant facts

are thus agreed to; our review of the Bankruptcy

and District Courts’ conclusions of law is de novo.

Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th Cir. 2008);

In re Rivinius, Inc., 977 F.2d 1171, 1175 (7th Cir. 1992).

Banterra has consistently argued that, under 765

ILCS 5/11, the 2004 Mortgage was insufficient as a

matter of law to impart record notice of Peoples Loan 2

on subsequent creditors or purchasers. Section 11 does

appear to provide something of a checklist of pieces

of information for inclusion in a valid mortgage. But

is the checklist statutorily required? Banterra asserts

that it is, and that a mortgage lacking any of these

details does not impart record notice on a subsequent

bona fide purchaser. Section 11 states:

Mortgages of lands may be substantially in the following form:
No. 12-3079 7

We note that, several months after this appeal was filed, the 2

Illinois legislature provided clarification on the question of

whether the provisions of 765 ILCS 5/11 are permissive or

mandatory. Illinois Public Act 97-1164, which is the enacted

form of Senate Bill 16, became law on or about February 8,

2013. Section 20(b) of the Act states:

The provisions of [765 ILCS 5/11] regarding the form of

a mortgage are, and have always been, permissive and

not mandatory. Accordingly, the failure of an otherwise

lawfully executed and recorded mortgage to be in the

form described in [765 ILCS 5/11] in one or more

respects, including the failure to state the interest rate or

the maturity date, or both, shall not affect the validity

(continued...)

The Mortgagor (here insert name or names),

mortgages and warrants to (here insert name or

names of mortgagee or mortgagees), to secure the

payment of (here recite the nature and amount of

indebtedness, showing when due and the rate of

interest, and whether secured by note or otherwise), the following described real estate (here

insert description thereof), situated in the County

of . . ., in the State of Illinois.

On the face of it, use of the word “may” suggests

that Peoples has the better of it, and that the statute’s

provisions are at most aspirational. On the other

hand, longstanding Illinois case law seems to hold

that a mortgage must at least include the amount of

indebtedness the mortgage is meant to secure in order

to impart record notice. See Bullock v. Battenhausen, 108

2
8 No. 12-3079

(...continued)

or priority of the mortgage, nor shall its recordation be

ineffective for notice purposes regardless of when the

mortgage was recorded.

Ill. 28, 37 (1883); Bergman v. Bogda, 46 Ill.App. 351, 357

(1st Dist. 1892); Flexter v. Woomer, 46 Ill.App.2d 456, 458-

59 (5th Dist. 1964). On the facts here, however, we see

no need to enter this fray.

Citing Bullock, Bergman, and Flexter, Banterra asserts

that, when a mortgage does not at least list the precise

amount of indebtedness the collateral means to secure,

a subsequent creditor without actual notice of the mortgage will not be held to record notice. But even if

true, that precedent does not address the dispositive

question presented here. In each of the cited cases, the

Courts found that the subsequent purchaser was without actual notice or knowledge of the prior interest at

issue, and there was no indication that the subsequent

purchaser possessed any information that should have

prompted an investigation likely to result in the

discovery of that interest. Given the facts, none of the

Courts had occasion to consider whether the subsequent purchasers should be held to inquiry notice.

That is not so here.

Like record notice, inquiry notice is essentially a form

of constructive notice. See Pelfresne v. Village of William

Bay, 965 F.2d 538, 542 (7th Cir. 1992); National Family

Ins. Co. v. Exchange Nat. Bank of Chicago, 474 F.2d 237, 241-

42 n.1 (7th Cir. 1973); 112 Am. Jur. Proof of Facts 3d 419
No. 12-3079 9

§ 12 (2013) (collecting cases); 1 PATTON AND PALOMAR

ON LAND TITLES § 12 (3d ed. 2012) (collecting cases).

Record notice rules treat a subsequent creditor with no

actual knowledge of a prior interest as having actual

notice if the prior interest was properly recorded. A

subsequent creditor receives no quarter for having

failed to search the relevant real estate records, so long

as the interest was properly recorded. Inquiry notice

operates under a similar principle.

Inquiry notice describes the situation where the

transferee has been made aware of facts or circumstances from which the existence or possibility of a

prior claim might reasonably be inferred. If so, the

purchaser then has a duty to verify or dispel

the inference through further inquiry. If he fails to

make inquiry, he is nonetheless chargeable with

knowledge of facts that a diligent inquiry would

have disclosed, the same as if he had acquired

actual knowledge of those facts.

In re Shara Manning Properties, Inc., 475 B.R. 898, 906

(Bankr. C.D.Ill. 2010); see Smith v. Grubb, 402 Ill. 451, 464-

65 (1949); 112 Am. Jur. Proof of Facts 3d 419 § 12 (collecting cases).

Here, we find that the Bankruptcy Court correctly identified the dispositive question presented

by these facts when it asked “whether actual notice of

a cross-collateralization clause in a mortgage imparts

inquiry notice as to the existence of other obligations

that may be covered by the security instrument.”
10 No. 12-3079

It is undisputed that a name search of the Jefferson County 3

land records would have revealed the existence of Peoples

Loan 2. Banterra wonders skeptically whether, under Peoples’

theory, the investigation required of one put on inquiry notice

might entail searching records, not just in Illinois counties,

but in every county in neighboring states as well. But the

law requires reasonable investigation, not endless investigation, and a party allegedly on inquiry notice can rebut the

argument by showing that a reasonable investigation did not

yield discovery of the relevant information. Jesko v. AmericanFirst Title & Trust Co., 603 F.2d 815, 818-19 (10th Cir. 1979);

112 Am. Jur. Proof of Facts 3d 419 § 12 (2013) (collecting cases);

1 PATTON AND PALOMAR ON LAND TITLES § 12 (3d ed. 2012)

(collecting cases).

Ultimately, where to draw that line will be a question for

the trier of fact. Here, however, the Bankruptcy Court found,

(continued...)

In re Jones, 2011 WL 6140686, *8 (Meyers, Bankr. J.).

On these facts, we hold that it does.

Banterra concedes its actual notice of Peoples Loan 1

and the mortgage securing it. The cross-collateralization clause is conspicuously placed on the first page of

the mortgage, discoverable with just a cursory review

of the document. Id. The clause states expressly that, in

addition to Peoples Loan 1, the collateral secured all

debts of the grantor to the lender “now existing or hereafter arising.” Of this Banterra was aware and “from

[this] the existence or possibility of a prior claim

might reasonably be inferred.” Moreover, it is clear that

a reasonable investigation would have disclosed this

prior claim.3
No. 12-3079 11

(...continued)

and the parties do not dispute, that the investigation

required to have discovered Peoples Loan 2 was within the

bounds of reasonableness. See In re Jones, 2011 WL 6140686, *9.

Banterra never argues that Peoples Loan 2 would

not have been discovered upon reasonable investigation. Banterra simply asserts that, due to “inherent contradictions and ambiguities,” the mortgage and crosscollateralization clause did not create a duty of inquiry

in the first place. Although the District Court thought

so, we fail to see any inconsistency or ambiguity.

The mortgage is not susceptible of two meanings. It

identifies a piece of real property that serves to

secure a loan from Peoples to Debtors in the amount

of $214,044.26, as well as any additional loans Peoples

and Debtors may enter into, subject to a specified maximum amount of indebtedness.

The mortgage expressly defined the term “indebtedness.” Banterra believed “the ‘Indebtedness’ clause

defined the secured debt as the ‘Note,’ which was

defined to mean ‘a note in the amount of $214,044.26

dated November 1, 2004, and all renewals, modifications

and extensions thereof.’ ” Peoples Nationals Bank, 482 B.R.

at 264. Were this the complete definition of “Indebtedness” under the mortgage, Banterra might have a better

argument that the mortgage was internally inconsistent—if the indebtedness contemplated by the mortgage consisted solely of the Note, one might ask, what
12 No. 12-3079

further indebtedness could be secured by virtue of the

cross-collateralization clause?

But this reading of “Indebtedness” is inaccurate—the

mortgage itself defined “Indebtedness” to mean the

Note and “all amounts that may be indirectly secured

by the Cross-Collateralization provision of this Mortgage.” Accordingly, in stating that “[a]t no time shall

the principal amount of the Indebtedness secured by

the Mortgage . . . exceed $214,044.26,” the mortgage

clearly contemplated indebtedness arising from both

the original Note and any indebtedness secured by the

cross-collateralization clause. The clauses are entirely

complementary.

Banterra makes much of the fact that the mortgage

set the maximum amount of indebtedness at $214,044.26—

the same amount as the initial loan. At the inception

of the agreement between Peoples and Debtors, Banterra

observes, the amount due on the initial loan was equal

to the maximum indebtedness allowed by the mortgage,

and the mortgage thus could secure no further debt.

Banterra’s observation is of no import in the context

of this case. That the initial loan was equal to the maximum indebtedness allowed by the mortgage does not

allow the inference that the mortgage could never

secure any other debt even when the initial loan has

been reduced by payments.

The cross-collateralization clause expressly contemplates debts arising in the future, when Debtors

may well have paid down some of the initial loan,

creating room under the cap. Nothing in the case
No. 12-3079 13

explains why this entirely plausible scenario (indeed, it

is precisely what happened) should be outside the set

of possible outcomes considered by anyone reading the

document. Because it is self-evident that the parties

intended that the amount of indebtedness under the

initial loan would be paid down by Debtors over time,

we cannot agree that setting the maximum amount of

indebtedness equal to the amount of the initial loan

“evidence[s] an intent that the mortgage not secure

any other debt.” Peoples Nationals Bank, 482 B.R. at 264.

Banterra argues that long-held Illinois case law weighs

in their favor, arguing that if this Court sides with

Peoples, Bullock, Bergman, and Flexter are all “de facto

overruled.” We do not agree. None of the facts in

those precedents occasioned their respective Courts to

consider inquiry notice. The Appellate Court in Bullock,

the seminal case of the three, was explicit: “The rule

that what is sufficient to put a purchaser upon inquiry

is notice of whatever the inquiry would have disclosed

has no application.” Battenhausen v. Bullock, 11 Ill.App.

665, 671 (1st Dist. 1882).

In Bullock, the issue was whether a trust deed containing “no statement of the amount of the indebtedness

thereby sought to be secured” was legally sufficient

to impart record notice on a subsequent purchaser. See

id. at 668. Inquiry notice had no application in Bullock

because the subsequent purchaser was found to have

no actual knowledge or notice of the trust deed. See id.

at 671 (“[inquiry notice] applies to actual and not to

constructive notice”). That is, the subsequent purchaser
14 No. 12-3079

had no actual knowledge or notice of the piece of

recorded information which, while perhaps insufficient

as a matter of law to impart record notice, could well

have imparted inquiry notice.

That is not so here, where the cross-collateralization

clause is the analog to the trust deed. In this case,

Banterra had actual knowledge of the cross-collateralization clause. The clause may well have been insufficient

to impart record notice of Peoples Loan 2 on a subsequent creditor who did not have actual knowledge of

that loan—that is Bullock. But it is clear that the clause

does impart inquiry notice on a subsequent creditor

who has actual knowledge of the clause—a point not

reached by Bullock.

The same is true of Flexter and Bergman. In Flexter,

the analog to our cross-collateralization clause was a

mortgage in its entirety. See Flexter, 46 Ill.App.2d at 457.

The Appellate Court acknowledged that there was conflicting evidence at trial as to whether the subsequent

purchaser had actual knowledge of the mortgage, but

ultimately concluded that there was no reason to

disturb the trial judge’s finding that he did not. The

mortgage did not recite the amount of indebtedness it

was meant to secure, and, following Bullock, the Court

concluded that the mortgage was legally insufficient

to impart record notice.

This is not to say that, had the subsequent purchaser

been found to have had some knowledge of the prior

interest, he could not have been held to inquiry notice.
No. 12-3079 15

Neither Flexter nor Bullock held that a document that

is legally insufficient to impart record notice is also precluded from imparting inquiry notice. For the principle

of inquiry notice to be applicable, however, the subsequent purchaser must in fact have actual knowledge

of some relevant piece or pieces of information that

would put him or her on inquiry. See Battenhausen,

11 Ill.App. at 671. In Flexter, as in Bullock, the subsequent purchaser was found to have no such knowledge,

so the Court did not reach the question.

In Bergman, too, the Court found that a mortgage that

did not include the amount of indebtedness it was

meant to secure was legally insufficient to impart record

notice. Bergman, 46 Ill.App. at 357. Again, however,

whether the subsequent purchaser might still have been

charged with inquiry notice was not addressed by the

Court. The subsequent purchaser was found to have

had no actual knowledge of the mortgage, nor any

further information that might have put him on inquiry.

As in Bullock and Flexter, inquiry notice simply was not

at issue.

Banterra’s misapprehension of this line of cases is

succinctly captured in its brief at page 33, where

Banterra states “. . . when Bullock, Bergman, and Flexter

were decided, each court held that a mortgage which

did not describe the specific amount of debt secured

was not record notice, and hence, did not place subsequent mortgagees on notice or inquiry as to the extent

or validity of such defective mortgages.” The first clause

has it quite right—those courts did indeed hold that
16 No. 12-3079

The District Court did ultimately conclude that the 2004 4

Mortgage was insufficient as a matter of law to impart

inquiry notice that it secured any debt other than the Note.

Peoples Nationals Bank, 482 B.R. at 265. The Court’s analysis,

however, appears to address only the legal sufficiency of

the mortgage to impart record notice. Id. at 263-65.

mortgages that do not describe the specific amount of

debt secured do not impart record notice.

The assertion made in the second clause, however,

overreaches and does not follow from the first. Again, not

one of those Courts found that because a mortgage is

insufficient to impart record notice, it is necessarily also

insufficient to impart inquiry notice. Accord In re Shara 4

Manning Properties, 475 B.R. at 906 (“a subsequent transferee who attacks a prior instrument as ineffective to

accord constructive notice may still lose a priority

battle if he had actual or inquiry notice of the instrument or the interest conveyed thereunder”); see also 14

Richard R. Powell, POWELL ON REAL PROPERTY

§ 82.02[1][d][i] (LexisNexis Release 91 2000). Indeed,

none of the subsequent purchasers were found to have

had actual knowledge of the information that might

have put them on inquiry notice. As discussed above,

there was thus no reason for the courts even to address

the question.

Finally, as a matter of policy Banterra laments that

the position we adopt today will chill lending and commerce, making it more difficult for third-party lenders

like Banterra to confidently approve loans secured by
No. 12-3079 17

This point brings out in sharp relief the illusory nature of 5

Banterra’s assurance that, while the position it urges would

invalidate such cross-collateralization clauses as to thirdparties without actual notice, the clause would remain

effective as between the initial lender and borrower. To that

extent, Banterra’s theory may well leave the security interest

Lender has in Debtor’s property intact. But the value of that

interest to Lender would change dramatically. What is more,

the reckoning occasioned by this change in value is not a

mere potentiality realized only upon a bankruptcy when a

creditor priority dispute ensues. On the contrary, the

value of every company in possession of security interests

bolstered by such cross-collateralization clauses would immediately drop.

property that has been cross-collateralized. As a general

matter, we should think that prudent lenders would

do well to exercise caution before accepting a second

mortgage on real property that has been cross-collateralized. But the more salient response to Banterra’s concern is that adopting its position will not in any

event dispel the chilling effect—it will merely transfer

it between the parties.

A cross-collateralization clause makes a given

security interest more valuable to the grantee. The position Banterra urges would reduce that value, shifting

it away from the initial grantee and to prospective subsequent grantees. In either case, one lender’s incentive 5

to lend is increased, while the other’s is reduced.

Between the two, however, only one outcome has the

virtue of being consistent with the plain contractual
18 No. 12-3079

language that the parties agreed upon, and we think it

more sensible to allow sophisticated parties to contract

as they wish. If cross-collateralization clauses are in the

end too costly to borrowers, they need not agree to them.

III. CONCLUSION

For the foregoing reasons, the judgment of the District

Court is reversed, and the judgment of the Bankruptcy Court is affirmed.

5-20-13