Court Opinion

ID: 770439
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:34:41+00
Date Added: 2024-06-11T17:55:50.467235
License: Public Domain

226 F.3d 917 (7th Cir. 2000)
IN RE ROBERT N. JONES and MARGARET N. JONES, Debtors,PHILIP F. BOBERSCHMIDT, TRUSTEE, Plaintiff-Appellee,v.SOCIETY NATIONAL BANK,  n/k/a KEY BANK, Defendant-Appellant.
No. 99-3247
In the  United States Court of Appeals  For the Seventh Circuit
Argued March 30, 2000Decided August 31, 2000

Appeal from the United States District Court  for the Southern District of Indiana, Indianapolis Division.  No. IP 98-789-C-B/S--Sarah Evans Barker, Chief Judge.
Before HARLINGTON WOOD, JR., EASTERBROOK, and KANNE,  Circuit Judges.
HARLINGTON WOOD, JR., Circuit Judge.

1
This appeal  arises out of an adversary proceeding filed by  Philip F. Boberschmidt (the "Trustee") against  Society National Bank, n/k/a Key Bank ("Key  Bank"), in connection with the bankruptcy case of  Robert N. Jones and Margaret N. Jones (the  "Debtors") seeking to recover the payment of  proceeds from the foreclosure sale of Debtors'  primary residence. The bankruptcy court granted  summary judgment in favor of the Trustee, and the  district court affirmed. Key Bank appeals,  arguing that the doctrine of issue preclusion  prevents the relitigation of the validity of the  mortgage at issue and, alternatively, that the  payment received was not a preferential transfer.

I.  BACKGROUND

2
On November 18, 1987, Debtors executed a Prime  Equity Line of Credit Agreement and Open-End  Mortgage (the "mortgage") in favor of Key Bank to  secure an indebtedness of $350,000. The mortgage,  which was recorded in Cuyahoga County, Ohio on  December 7, 1987, purports to secure Debtors'  obligation to Key Bank with a security interest  in Debtors' primary residence. Mr. Jones stated  in an affidavit that he and his wife signed the  mortgage "in [their] home, in the presence of no  witnesses, and then mailed" it to Key Bank.1  Along with the Jones' signatures, the recorded  mortgage has two signatures under the statement  "signed and acknowledged in the presence of" as  well as a signed acknowledgment accompanied by a  notary's seal.

3
A foreclosure action involving the residence  that was subject to the Key Bank mortgage was  filed in the Court of Common Pleas Cuyahoga  County, Ohio. On January 28, 1994, the Ohio court  issued a Partial Judgment Entry and Foreclosure  Decree, ordering the Cuyahoga County Sheriff to  sell the residence at a public sale. The  residence was sold at a sheriff's sale on March  28, 1994, and the Ohio court entered a  Confirmation of Sale Order on April 14, 1994. On  June 24, 1994, the Ohio court entered an Amended  Order of Distribution which provided in part:

4
The Court finds that there is due to Defendant  Society National Bank, $221,295.50 on the Line-  of-Credit Agreement . . . . The Court further  finds that in order to secure said indebtedness,  a certain Mortgage Deed was executed and  delivered by Defendants Robert N. Jones and  Margaret Jones, securing the premises designated  as "Parcel One" herein, which Mortgage was filed  for record on December 7, 1987, in volume 87-  7780, Page 48 of Cuyahoga County Records, which  thereby became and is a good, valid and  subsisting second lien on "Parcel One."

5
The court then supplemented its original order of  distribution, directing disbursement of the  foreclosure proceeds after three initial payments  were made, "To Society National Bank on its  second Mortgage, $221,295.50. [and then] To Bank  One, Akron, N.A., in partial payment of its third  Mortgage, the balance of the funds allocated for  the payment of the liens on 'Parcel One.'" After  receiving a copy of the court order, on June 24,  1994, the sheriff's office distributed  $221,295.50 of the foreclosure sale proceeds to  Key Bank.

6
Also on June 24, 1994, Debtors filed a  voluntary petition for Chapter 7 relief in the  United States Bankruptcy Court for the Southern  District of Indiana. On June 20, 1996, the  Trustee filed a complaint in an adversary  proceeding against Key Bank in the bankruptcy  court, seeking the return of the $221,295.50 paid  to Key Bank out of the foreclosure sale proceeds.  The Trustee asserted that the mortgage was  invalid against the Trustee and the payment  represented a preferential transfer under 11  U.S.C. sec. 547. The parties filed cross-motions  for summary judgment. After a hearing, the  bankruptcy judge granted summary judgment in  favor of the Trustee, rejecting Key Bank's claim  of issue preclusion and holding that the mortgage  was defective and the payment constituted a  preferential transfer which the Trustee could  avoid. Key Bank appealed. On May 28, 1999, the  district court affirmed the bankruptcy court's  ruling with respect to issue preclusion but  reversed its decision as to preferential transfer  and entered judgment in favor of Key Bank. The  Trustee filed a timely motion to reconsider,  which the district court granted. On July 29,  1999, the district court filed an order affirming  the bankruptcy court on all issues and granted  judgment in favor of the Trustee. Key Bank  appeals. We have jurisdiction pursuant to 28  U.S.C. sec. 158(d). See In re Sandy Ridge Oil  Co., Inc., 807 F.2d 1332, 1333-34 (7th Cir.  1986).

II.  ANALYSIS

7
Key Bank asserts that the doctrine of issue  preclusion prevents the relitigation of the  validity of the mortgage as the matter was  already decided in Key Bank's favor by the Ohio  court in the foreclosure action. Alternatively,  Key Bank contends that, even if the mortgage is  determined to be defective, the fact that  foreclosure proceedings had taken place and  distribution of the proceeds had been made  precludes the Trustee from avoiding the transfer  under 11 U.S.C. sec. 547(b). We review the  bankruptcy court's conclusions of law de novo and  will uphold its findings of fact unless clearly  erroneous. In re Lefkas Gen. Partners, 112 F.3d  896, 900 (7th Cir. 1997). The district court's  grant of summary judgment is a conclusion of law  subject to de novo review. Id.

A.  Issue Preclusion

8
"A federal court must give to a state-court  judgment the same preclusive effect as would be  given that judgment under the law of the State in  which the judgment was rendered." Migra v. Warren  City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81  (1984). Therefore, we apply the doctrine of issue  preclusion as interpreted by Ohio courts to  determine whether the Ohio foreclosure action  bars the Trustee's challenge to the validity of  the mortgage. See Cincinnati Cent. Credit Union  v. Benson, 721 N.E.2d 410, 413 (Ohio Ct. App.  1998); Bank One Dayton, N.A. v. Ellington, 663  N.E.2d 660, 662 (Ohio Ct. App. 1995) (applying  principles of res judicata to prevent  relitigation of validity of a mortgage following  a foreclosure action). Under Ohio law, the  doctrine of issue preclusion "precludes further  action on an identical issue that has been  actually litigated and determined by a valid and  final judgment as part of a prior action among  the same parties or those in privity with those  parties." State v. Williams, 667 N.E.2d 932, 935  (Ohio 1996). The dispute in the present case  turns on the issue of privity; the parties agree  that the other elements necessary for preclusion  are satisfied.

9
Under Ohio law, in order to determine "whether  there is privity of parties, 'a court must look  behind the nominal parties to the substance of  the cause to determine the real parties in interest.'"  Fort Frye Teachers Ass'n v. State Employment  Relations Bd., 692 N.E.2d 140, 144 (Ohio 1998)  (quoting Trautwein v. Sorgenfrei, 391 N.E.2d 326,  331 (Ohio 1979)). "[A] person is in privity with  another if he is so identified in interest with  such person that he represents the same legal  right." Deaton v. Burney, 669 N.E.2d 1, 5 (Ohio  Ct. App. 1995) (citing Fightmaster v. Tauber, 183  N.E. 116, 117 (Ohio Ct. App. 1932)). As we have  recognized, "[a] trustee in bankruptcy represents  the interests of creditors." In re Luster, 981  F.2d 277, 279 (7th Cir. 1992). Debtors' creditors  were not the real parties in interest in the  foreclosure action. Furthermore, while Ohio Rev.  Code Ann. sec. 5301.01 sets out certain  requirements which must be satisfied in order for  a mortgage to be valid against third parties, the  Ohio Supreme Court has held that, absent fraud,  an instrument which fails to satisfy sec. 5301.01  is nevertheless valid between the parties to the  instrument. See Basil v. Vincello, 553 N.E.2d  602, 606 (Ohio 1990). Therefore, the Debtors were  not so identified in interest with their  creditors that they could be said to represent  the same legal right in the Ohio foreclosure  action. The Trustee was not in privity with the  Debtors, and the foreclosure action does not  preclude the Trustee's challenge to the validity  of the mortgage.

B.  Preferential Transfer

10
Key Bank does not dispute the finding that it  held an unperfected security interest based on  the fact that the mortgage was defective under  Ohio Rev. Code Ann. sec. 5301.01, nor does it contend  that the foreclosure proceedings served to  perfect its interest. However, Key Bank asserts  that the Trustee fails to establish how, under  Ohio law, anyone could have avoided the transfer  of the foreclosure sale proceeds because "[a]t  the time the Debtors' petition was filed, the  real estate had been sold; the Debtors' right of  redemption had expired; an Order was entered that  Key Bank [was] entitled to the foreclosure  proceeds; and the proceeds had been paid to Key  Bank."

11
Section 547(b) of the Bankruptcy Code, 11  U.S.C. sec. 547(b), allows a trustee to avoid  certain preferential transfers. We, therefore,  must determine whether the transfer of the  proceeds of the foreclosure action constituted a  preferential transfer under sec. 547(b). If so,  the Trustee may avoid the transfer and recover  the payment. A transfer of an interest of a  debtor in property satisfies sec. 547(b) if it  (1) was made to or for the benefit of a creditor,  (2) was on account of an antecedent debt, (3) was  made while the debtor was insolvent, (4) was made  on or within 90 days before the date of the  filing of the petition, and (5) allowed the  creditor to receive more than it would have under  Chapter 7 of the Bankruptcy Code. Id. The Trustee  bears the burden of proving the elements of sec.  547(b). In re Badger Lines, Inc., 140 F.3d 691,  698 (7th Cir. 1998). Key Bank contends that the  Trustee failed to establish, first, that any  interest of the Debtors was transferred to Key  Bank and, secondly, that the payment enabled Key  Bank to receive more than it would have received  under Chapter 7.

12
Under the Bankruptcy Code, "'transfer' means  every mode, direct or indirect, absolute or  conditional, voluntary or involuntary, of  disposing of or parting with property or with an  interest in property, including retention of  title as a security interest and foreclosure of  the debtor's equity of redemption." 11 U.S.C.  sec. 101(54). Therefore, the fact that the  transfer was made pursuant to a state court  judgment rather than voluntarily does not alter  our analysis. Furthermore, while the Bankruptcy  Code does not define "an interest of the debtor  in property," this court has noted that, in  general, "property belongs to the debtor for  purposes of sec. 547 if its transfer will deprive  the bankruptcy estate of something which could  otherwise be used to satisfy the claims of  creditors." In re Merchants Grain, Inc., 93 F.3d  1347, 1352 (7th Cir. 1996) (internal quotations  and citations omitted). In the present case, the  sale of the Debtors' home, the confirmation of  sale, the order of distribution, and the  distribution of the proceeds all occurred within  the preference period. Taken together, these  events clearly constitute a transfer of the  Debtors' interest in property.

13
Key Bank's argument with respect to the fifth  element, whether it received more than it would  have under Chapter 7, is based completely on the  assertion that Key Bank as a secured creditor was  entitled to the proceeds from the foreclosure  sale. This argument is unpersuasive, given our  conclusion that the Trustee is not precluded from  relitigating the validity of the mortgage  together with Key Bank's concession that its  security interest was unperfected. A security  interest that has not been perfected prior to the  filing of a bankruptcy is unenforceable against  the trustee. In re Vitreous Steel Products Co.,  911 F.2d 1223, 1235 (7th Cir. 1990).2 In a  Chapter 7 liquidation, Key Bank would be entitled  to recover only its proportionate share of the  proceeds along with the other creditors. The  payment of the proceeds of the foreclosure sale  constitutes a preferential transfer which the  Trustee may avoid under sec. 547(b).

III.  CONCLUSION

14
The district court's grant of summary judgment  in favor of the Trustee is AFFIRMED.

Notes:

1
 Ohio Rev. Code Ann. sec. 5301.01 requires that a  signature on a mortgage be acknowledged in the  presence of two witnesses who must attest the  signing and acknowledged before "a judge or clerk  of a court of record in this state, or a county  auditor, county engineer, notary public, or  mayor."

2
 The parties debate the applicability of 11 U.S.C.  sec. 544 following the Ohio court foreclosure and  distribution order. However, because Key Bank is  not a secured creditor, this debate is  irrelevant. The Trustee does not need to invoke  his sec. 544 strong-arm powers to render Key Bank  unsecured because Key Bank never possessed a  valid security interest.