Magazine article The RMA Journal

Tales of WHOA!: Failure to Monitor Compliance Leads to Preferential Transfer Challenge

Magazine article The RMA Journal

Tales of WHOA!: Failure to Monitor Compliance Leads to Preferential Transfer Challenge

Article excerpt

In re Jones 226 F.3d 917 (7th Cir. 2000) (decided under Ohio law), the question before the court was whether a trustee in bankruptcy could challenge the validity of a prepetition mortgage foreclosure decided in favor of the mortgagee.

Robert and Margaret Jones executed a mortgage in favor of Key Bank in November 1987 to secure a $500,000 note. The mortgage was recorded in Cuyahoga County, Ohio, on December 7, 1987. The mortgage did not satisfy the statutory requirements of Ohio law in order to be valid against third parties. Ohio law called for the execution of a mortgage to be acknowledged before two witnesses, who were to attest to the signature of the mortgagor and, thereafter, to be acknowledged by the mortgagor before a judge, clerk of court, county auditor, county engineer, notary public, or mayor. The mortgagors in this case did not sign the mortgage in the presence of two witnesses.

In January 1994 a mortgage foreclosure proceeding was initiated that resulted in the sale of the property An order was entered in June 1994 confirming the sale and directing distribution of the proceeds. Key Bank received $221,295.50.

The debtors went into bankruptcy in June 1994, and two years later, the trustee in bankruptcy of their estates filed an adversary proceeding against Key Bank. The suit contended that the estate was entitled to the $221,295.50 paid to Key Bank from the proceeds of the sale. The trustee asserted that the mortgage was invalid under Ohio law and that consequently the payment to Key Bank was a preferential transfer.

Key Bank responded that issue preclusion prevented the bankruptcy trustee from attacking the mortgage because the validity of the mortgage had already been decided in Key Bank's favor in the Ohio state court foreclosure case. (Issue preclusion means that the same issue has previously been litigated and determined by a final judgment that involved the same parties or other persons in close association with them. …

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