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28 June 2000

JUSTICE GEIGER delivered the opinion of the court:

This appeal arises from a dispute concerning lien priority ina mortgage foreclosure proceeding. The issue is whether anassignee of a priority mortgage may maintain that priority positionover a judgment creditor without recording the assignment ofmortgage.

On July 24, 1994, Dale Kuiper and Beverly Kuiper executed anote and mortgage for the sum of $100,000 in favor of MedallionMortgage Company (Medallion). The note and mortgage were filedwith the Kane County recorder's office on August 1, 1994. Pursuantto their terms, the note and mortgage were assignable to thirdparties. On August 3, 1994, Medallion assigned the note andmortgage to the counterdefendant, Federal National MortgageAssociation (FNMA).

On July 26, 1996, the counterplaintiff, Lisa Fortney, had obtained a judgment against the Kuipers in the amount of $650,000. Fortney recorded a memoranda of judgment with the Kane Countyrecorder's office on June 25, 1997.

On September 8, 1998, FNMA filed this foreclosure action afterthe Kuipers defaulted on the note. In its foreclosure complaint,FNMA alleged that Fortney's judgment lien was inferior andsubordinate to FNMA's first mortgage lien. On October 2, 1998,FNMA recorded the assignment it had received from Medallion.

Fortney filed a counterclaim in the foreclosure, alleging thather judgment lien was recorded prior to the FNMA lien and,therefore, had priority. Both Fortney and FNMA filed motions forsummary judgment as to lien priority. The trial court entered anorder denying Fortney's motion and granting FNMA's motion, rulingthat FNMA had first lien priority.

On appeal, Fortney argues that, because her judgment lien wasrecorded prior to the FNMA assignment, her lien takes priority. Fortney argues that the transfer of the note and mortgageextinguished all of Medallion's interest and that FNMA did notstand in the shoes of Medallion with regard to lien priority. According to Fortney, section 30 of the Conveyances Act (765 ILCS5/30 (West 1996)) required FNMA to record the assignment in orderto maintain priority as to any bona fide purchasers or creditorswho filed liens against the property.

FNMA responds that the lien filed by Medallion has never beenreleased and that the assignment did not operate to extinguish thelien. Thus, FNMA reasons, it was not necessary for it to recordthe assignment in order to maintain first lien priority, as theoriginal lien provided sufficient notice to third parties of theexistence of the first mortgage. FNMA further argues that, afterthe assignment, it stood in the shoes of Medallion.

We review the trial court's summary judgment order de novo. Wiseman-Hughes Enterprises, Inc. v. Reger, 248 Ill. App. 3d 854,857 (1993). A lien is a hold or claim that one party has on theproperty of another for a debt. Podvinec v. Popov, 266 Ill. App.3d 72, 77 (1994), rev'd on other grounds, 168 Ill. 2d 130 (1995). A lien that is first in time generally has priority and is entitledto prior satisfaction of the property it binds. Cole Taylor Bankv. Cole Taylor Bank, 224 Ill. App. 3d 696, 704 (1992).

A mortgage is a type of consensual lien on real property. See735 ILCS 5/15-1207 (West 1996). Specifically, it is an interest inland created by written instrument providing security in realestate to secure the payment of a debt. Resolution Trust Corp. v.Holtzman, 248 Ill. App. 3d 105, 111 (1993). Under the IllinoisMortgage Foreclosure Law (735 ILCS 5/15--1101 et seq. (West 1996)),a mortgage lien is created upon the recording of the mortgage withthe recorder of deeds. See 735 ILCS 5/15-1301 (West 1996); seealso Firstmark Standard Life Insurance Co. v. Superior Bank FSB,271 Ill. App. 3d 435, 439 (1995).

The perfection of mortgage liens is governed also by theConveyances Act (765 ILCS 5/1 et seq. (West 1996)). Section 28 ofthe Conveyances Act provides that deeds, mortgages, and otherinstruments relating to or affecting the title to real estate shallbe recorded in the county in which such real estate is situated. 765 ILCS 5/28 (West 1996). The purpose of this section is to givethird parties the opportunity to ascertain the status of title tothe property. Lubershane v. Village of Glencoe, 63 Ill. App. 3d874, 879 (1978). The purchaser of real estate may rely on thepublic record of conveyances and instruments affecting title unlesshe has notice or is chargeable with notice of a claim or interestthat is inconsistent with the record. Bullard v. Turner, 357 Ill.279, 283 (1934).

Section 30 of the Conveyances Act provides as follows:

"All deeds, mortgages and other instruments ofwriting which are authorized to be recorded, shall takeeffect and be in force from and after the time of filingthe same for record, and not before, as to all creditorsand subsequent purchasers, without notice; and all suchdeeds and title papers shall be adjudged void as to allsuch creditors and subsequent purchasers, without notice,until the same shall be filed for record." 765 ILCS 5/30(West 1996).

The purpose of this section is to protect subsequentpurchasers against unrecorded prior instruments. Farmers StateBank v. Neese, 281 Ill. App. 3d 98, 106 (1996). A presumptionexists that the first mortgage recorded has priority. Firstmark,271 Ill. App. 3d at 439. An unrecorded interest in land is noteffective as to a bona fide purchaser without notice. SchaumburgState Bank v. Bank of Wheaton, 197 Ill. App. 3d 713, 720 (1990). However, where a party has constructive notice of a prior interestin real estate, the failure to record is not necessarily fatal tothe rights of the prior interest holder. See Dana PointCondominium Ass'n, Inc. v. Keystone Service Co., 141 Ill. App. 3d916, 922 (1986).

When a mortgage debt is satisfied, the mortgagee or itsassignee must file a release of the mortgage lien. See 765 ILCS905/2 (West 1996). Section 2 of the Mortgage Act provides that amortgage may be released only pursuant to this method. 765 ILCS905/2 (West 1996). Until such release is filed, the mortgage lienremains in effect.

The assignment of a mortgage note carries with it an equitableassignment of the mortgage by which it was secured. Inland RealEstate Corp. v. Oak Park Trust & Savings Bank, 127 Ill. App. 3d535, 542 (1983); see also Moore v. Lewis, 51 Ill. App. 3d 388, 391-92 (1977) (a mortgage, which is a mere incident to a debt, is notassignable at law, and the transfer of the debt carries with it themortgage security). The assignee stands in the shoes of theassignor-mortgagee with regard to the rights and interests underthe note and mortgage. Community Bank v. Carter, 283 Ill. App. 3d505, 508 (1996).

Fortney argues that Farmers State Bank v. Neese, 281 Ill. App.3d 98 (1996), directly controls the outcome of this case. For thereasons that follow, we believe that Neese does not squarelyaddress the issue of whether the assignee stands in the assignor-mortgagee's shoes with regard to rights under the mortgage lien.

In Neese, the defendants had entered into an installmentcontract for the sale of real estate in July 1989. In November1989, they obtained a loan from the plaintiff and assigned theirinterest in the contract as part of the security for the loan. InJuly 1991, the Internal Revenue Service (IRS) filed a notice of taxlien against the defendants with the recorder of deeds. In June1992, the plaintiff recorded the assignment and the contract withthe recorder of deeds.

In July 1994, the plaintiff instituted foreclosureproceedings. In November 1994, the plaintiff paid the balance dueunder the July 1989 installment contract due to the defendants'default. Following the foreclosure sale, the trial court firstallocated to the plaintiff the amounts it paid to satisfy the July1989 installment contract. The trial court ruled that, with regardto the remaining proceeds, the IRS lien would take priority overthe lien created when the plaintiff recorded in June 1992 theassignment of rights under the installment contract.

On appeal, the plaintiff argued that, because its loanpredated the notice of tax lien, it took priority over the IRS. The plaintiff reasoned that neither the contract for deed nor theassignment was required to be recorded because they did not fallwithin the ambit of the Conveyances Act. The court disagreed andheld that the taking of an assignment of a contract for deed is aconveyance of a property interest and had to be recorded in orderto provide notice to third parties. Therefore, the court heldthat, even though the plaintiff had extended the loan in November1989, the IRS lien recorded in July 1991 took priority. Neese, 281Ill. App. 3d at 104.

Neese is inapposite to the present case because in Neese itwas not alleged that a lien on the property was perfected when theinstallment contract was executed in July 1989. When the plaintifftook the assignment from the defendants in November 1989, it wasnot taking lien rights established under section 15--1301 of theIllinois Mortgage Foreclosure Law or the Conveyances Act, becausethe defendants had not perfected any lien rights pursuant to eitherstatute. When the defendants transferred their interests under thecontract in November 1989, they were transferring a propertyinterest that was enforceable solely against the original seller. At that point, it was up to the plaintiff to record the contractand the assignment to perfect the lien, which would have providednotice to third parties of the rights created under thosedocuments. We disagree with Fortney's assertion that Neese standsfor the proposition that an assignment of a mortgage must berecorded in order to preserve a mortgage lien that has already beenperfected and its corresponding priority position.

We agree with FNMA's argument that the reasoning in Carter ismore applicable to the present case. In Carter, Community Bank hadobtained a judgment of foreclosure against the defendant-mortgagorin September 1993 and, in November 1993, assigned the note andmortgage at issue in the foreclosure to Imperial Fund. In January1994, the property at issue was damaged in a fire. The propertywas covered by an insurance policy that named Community Bank as themortgagee. In March 1994, Imperial Fund assigned the note andmortgage to T. Miller, Inc. (Miller). At issue on appeal waswhether the defendant-mortgagor or Miller was entitled to theinsurance proceeds.

Miller argued on appeal that the assignment of the mortgagedebt resulted in an assignment of the right to the insuranceproceeds. The defendant-mortgagor countered that, once CommunityBank sold the note and mortgage, it no longer had an insurableinterest in the property and, therefore, neither Imperial norMiller had a right to the insurance proceeds. The court firstnoted that Miller stood "in the shoes of Imperial Fund, which stoodin the shoes of the original mortgagee, Community Bank, and wouldhave all of the rights, titles and interests of the originalmortgagee." Carter, 283 Ill. App. 3d at 508. The court then heldthat the assignments of the mortgage did not extinguish themortgage debt and, therefore, the assignees acquired the samerights and interests as the original mortgagee, including the rightto collect under the insurance policy. Carter, 283 Ill. App. 3d at510.

Just as the court in Carter held that, along with theassignment of the debt, the original mortgagee transferred to theassignee its rights under the insurance policy, we believe that, inthis case, Medallion transferred to FNMA its right to enforce themortgage lien. The mortgage lien was created by agreement betweenMedallion and the Kuipers, and perfected on August 1, 1994, byrecording with the Kane County recorder of deeds. The mortgagelien acted to secure payment of the mortgage debt. Moreover, themortgage specifically provided that it was assignable.

Henceforward from August 1, 1994, third parties examiningchain of title to the real estate were put on notice of theexistence of the debt and of the lien on the real estate. Becauseno release of lien had been filed, pursuant to section 2 of theMortgage Act, there was no indication to third parties that thelien was ever extinguished. See 765 ILCS 905/2 (West 1996).

That lien was still in effect when Medallion assigned the noteand mortgage to FNMA on August 3, 1994. Contrary to Fortney'ssuggestion, that assignment did not result in the creation ofeither a new lien that required recording or a new priorityposition. Rather, the original lien and priority positionremained, and FNMA received the right to enforce the lien via theassignment. Fortney complains that FNMA cannot stand in the shoesof Medallion and that the assignment conveyed solely the right tocollect the payments. It is well settled, however, that theassignee of the mortgagee stands in the shoes of the mortgagee. See Carter, 283 Ill. App. 3d at 508. That basic proposition,coupled with the fact that a perfected mortgage lien remains ineffect unless released pursuant to the Mortgage Act, leads us tothe conclusion that a perfected mortgage lien and priority positionsurvive the assignment of a note and mortgage. The eradication ofthe ability of a mortgagee to transfer its rights to enforce amortgage lien would result in undesirable consequences to themortgage consumer and would not reflect the intent and agreement ofthe parties at the time the mortgage lien was created.

We are unpersuaded by Fortney's argument that section 30 ofthe Conveyances Act mandates that the assignment must be recordedto preserve the lien and priority position. Section 30 merelyprovides that, as to third parties who did not have notice of themortgage, the effective date of the mortgage lien is the date ofrecording. 765 ILCS 5/30 (West 1996). The effective date of themortgage lien in this case was August 1, 1994, and there is nothingin section 30 that suggests that the subsequent assignment had tobe recorded in order for the mortgage lien or priority position tosurvive. Indeed, such a reading of section 30 would directlycontravene section 2 of the Mortgage Act as it relates to releasesof mortgage liens. The purpose of section 30 is to provide noticeto third parties who otherwise do not have notice of the mortgageinterest, and Fortney's interpretation of section 30 does notreflect that purpose (See Neese, 281 Ill. App. 3d at 106). Moreover, to deem the failure to record an assignment as somehowaffecting the perfection or the validity of the lien or thepriority position would not be in accordance with the cleardefinition of a mortgage lien or the purpose behind the recordingrequirement.

We hold that, absent the recording of a release of lien inaccordance with section 2 of the Mortgage Act, the assignee of amortgage is entitled to any priority position established by theoriginal mortgagee, up to the principal amount that the mortgagesecured at the time of perfection. While an assignee that fails torecord an assignment may find itself in the unenviable situation ofhaving its lien extinguished as an "unknown owner and nonrecordclaimant" in a mortgage foreclosure, the mere failure to record theassignment does not, by itself, extinguish the mortgage lien ornegate the priority position. In addition, nothing in our holdingmodifies in any way the ability to extinguish the original mortgagelien. Thus, absent the application of subrogation, the mortgagelien clearly will be extinguished if an assignor files a release oflien prior to the recording of an assignment.

We note that our holding is consistent with case lawconcerning priority positions of renewal notes and mortgages. Arenewal note and mortgage do not ordinarily operate as payment andin discharge of an original note for purposes of determiningwhether the renewal note maintained priority position. State Bankv. Winnetka Bank, 245 Ill. App. 3d 984, 991 (1993). In cases of adispute concerning priority when the original note and mortgage arerenewed, the court looks to the intent of the parties indetermining whether the renewal extinguishes the original mortgagelien. Winnetka Bank, 245 Ill. App. 3d at 991. In Winnetka Bank,the court was persuaded that the mortgage lien survived the renewalof the original mortgage and the tender of an additional loanbecause there was no evidence that the original mortgage was evercanceled or released. See Winnetka Bank, 245 Ill. App. 3d at 991.

Our holding is also supported by case law from otherjurisdictions. We note that the court in United States v. Eklund,369 F. Supp. 1052 (S.D. Ill. 1974), addressed precisely the samequestions as in the present case. At issue in Eklund was whetherintervening mechanics liens would receive priority over a mortgagelien held by the Small Business Administration, which had taken anassignment from a mortgagee bank after the mechanics liens had beenrecorded. The court held that the recordation by the originalmortgagee bank was sufficient to provide notice of the mortgagelien and rejected the argument that the government's lien did notattach until the date on which the bank assigned the mortgage. Eklund, 369 F. Supp. at 1054-55.

Other jurisdictions have held under their respective statelaws that an assignment of a mortgage does not affect its priority. See Progressive Consumers Federal Credit Union v. United States, 79F.3d 1228, 1238 (1st Cir. 1996) (noting that it is "hornbook law"that a mortgage assignee succeeds to all of the assignor's rights,power, and equities and holding that, consistent with Massachusettscase law, the assignee could assert any equitable rights anddefenses that the original mortgagor could have asserted before itassigned the mortgage); see also Bank Western v. Henderson, 255Kan. 343, 348, 874 P.2d 632, 636 (1994).

The United States Bankruptcy Court for the District ofMassachusetts noted in In re Ivy Properties, Inc., 109 B.R. 10, 14(D. Mass. 1989), that under Massachusetts law, the assignment of adebt carries with it the underlying mortgage. Therefore, aseparate mortgage assignment was not necessary to assign themortgage interest. In holding that the recording of mortgageassignments was unnecessary, the court succinctly explained, "[t]heraison d'etre of a security interest is the obligation which it isintended to secure. The security interest is meaningless unlessheld by the party also holding the obligation. Thus the securitymust necessarily be held for the benefit of the assignee of thedebt." Ivy Properties, 109 B.R. at 14.

We believe the very same reasoning applies to the presentcase. As in Massachusetts, in Illinois, the assignment of themortgage note is sufficient to transfer the underlying mortgage. See Inland, 127 Ill. App. 3d at 542. Because the assignment of thedebt, with nothing more, is sufficient to preserve the mortgagelien, it cannot follow that the lien is somehow extinguished forthe failure to record the assignment. Therefore, we are persuadedthat the mortgage lien and priority position inure to the benefitof the assignee and that recording the assignment is unnecessary topreserve the security for the debt.

For the foregoing reasons, the judgment of the circuit courtof Kane County is affirmed.

Affirmed.

COLWELL and RAPP, JJ., concur.