Court Opinion

ID: 2994574
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:15:27.503982+00
Date Added: 2024-06-11T12:11:17.559010
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-3247

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.

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.

Argued March 30, 2000--Decided August 31, 2000

  Before HARLINGTON WOOD, JR., EASTERBROOK, and KANNE,
Circuit Judges.

  HARLINGTON WOOD, JR., Circuit Judge. 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

  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.

  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:

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."

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.

  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

  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

  "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.

  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

  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."

  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.

  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.
  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

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

/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.