                            In the

United States Court of Appeals
               For the Seventh Circuit

No. 12-3079

P EOPLES N ATIONAL B ANK, N.A.,
                                             Plaintiff-Appellant,
                                v.

B ANTERRA B ANK, C ORT JONES AND L ISA 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.



     A RGUED F EBRUARY 14, 2013—D ECIDED M AY 20, 2013




  Before K ANNE and W ILLIAMS, Circuit Judges, and
Z AGEL, District Judge.
  Z AGEL, District Judge.   Two banks disagree over
creditor priority in connection with a mortgage. Cort




  The Honorable James B. Zagel, United States District Court
for the Northern District of Illinois, Eastern Division, sitting
by designation.
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-collateraliza-
tion clause present in the Peoples Loan 1 mortgage docu-
No. 12-3079                                            3

ment. The clause appeared on the first page of the docu-
ment 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 pur-
   pose of the Note, whether voluntary or otherwise,
   whether due or not due, direct or indirect, deter-
   mined 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 ex-
   penses payable under the Note or Related Docu-
   ments, 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 dis-
    charge 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 Cross-
    Collateralization provision of this Mortgage.
    Note. The word “Note” means a note in the amount
    of $214,044.26 dated November 1, 2004, and all renew-
    als, 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 se-
cure. 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 cross-
collateralization 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 re-
questing 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

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 conspicuously1 contained. The dispute is over the
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 fol-
    lowing form:


1
  As the Bankruptcy Court noted, “the cross-collateralization
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.
No. 12-3079                                                    7

    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 other-
    wise), 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.2 See Bullock v. Battenhausen, 108


2
   We note that, several months after this appeal was filed, the
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...)
8                                               No. 12-3079

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 mort-
gage 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 with-
out 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 subse-
quent 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



(...continued)
    or priority of the mortgage, nor shall its recordation be
    ineffective for notice purposes regardless of when the
    mortgage was recorded.
No. 12-3079                                                 9

§ 12 (2013) (collecting cases); 1 P ATTON AND P ALOMAR
ON L AND T ITLES § 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 circum-
    stances 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 (col-
lecting cases).
  Here, we find that the Bankruptcy Court cor-
rectly 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

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-collateraliza-
tion 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 here-
after 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



3
   It is undisputed that a name search of the Jefferson County
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 investiga-
tion, 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. American-
First 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 P ATTON AND P ALOMAR ON L AND T ITLES § 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...)
No. 12-3079                                                 11

  Banterra never argues that Peoples Loan 2 would
not have been discovered upon reasonable investiga-
tion. Banterra simply asserts that, due to “inherent con-
tradictions and ambiguities,” the mortgage and cross-
collateralization 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 maxi-
mum amount of indebtedness.
  The mortgage expressly defined the term “indebted-
ness.” 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 “Indebted-
ness” under the mortgage, Banterra might have a better
argument that the mortgage was internally inconsis-
tent—if the indebtedness contemplated by the mort-
gage consisted solely of the Note, one might ask, what




(...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.
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 Mort-
gage.” 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 maxi-
mum 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 con-
templates 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 con-
taining “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-collateraliza-
tion clause. The clause may well have been insufficient
to impart record notice of Peoples Loan 2 on a sub-
sequent 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 con-
flicting 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 pre-
cluded from imparting inquiry notice. For the principle
of inquiry notice to be applicable, however, the subse-
quent 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 subse-
quent 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 subse-
quent 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

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.4 Accord In re Shara
Manning Properties, 475 B.R. at 906 (“a subsequent trans-
feree 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 instru-
ment or the interest conveyed thereunder”); see also 14
Richard R. Powell, P OWELL O N R EAL P ROPERTY
§ 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 com-
merce, making it more difficult for third-party lenders
like Banterra to confidently approve loans secured by


4
  The District Court did ultimately conclude that the 2004
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.
No. 12-3079                                                17

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-collateral-
ized. But the more salient response to Banterra’s con-
cern 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 posi-
tion Banterra urges would reduce that value, shifting
it away from the initial grantee and to prospective sub-
sequent grantees.5 In either case, one lender’s incentive
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


5
  This point brings out in sharp relief the illusory nature of
Banterra’s assurance that, while the position it urges would
invalidate such cross-collateralization clauses as to third-
parties 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 im-
mediately drop.
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 Bank-
ruptcy Court is affirmed.




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