SEC v. BC57, LLC

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 23-1870

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff-Appellee,

and

KEVIN B. DUFF, Receiver, et al.,

Appellees,

v.

EQUITYBUILD, INC., et al.,

Defendants,

APPEAL OF: BC57, LLC.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 18-cv-5587 — Manish S. Shah, Judge.

____________________

ARGUED JANUARY 22, 2024 — DECIDED MAY 6, 2024

____________________

Before EASTERBROOK, ST. EVE, and JACKSON-AKIWUMI, Cir-

cuit Judges.

2 No. 23-1870

ST. EVE, Circuit Judge. After the collapse of a real estate

Ponzi scheme, investors filed claims in hopes of getting their

money back. This appeal concerns the proceeds from the liq-

uidation of five properties over which individual investor-

claimants and a private lender, BC57, both claim priority. Fol-

lowing the court-appointed receiver’s recommendation, the

district court awarded priority to the individual investors be-

cause their security interests were first in time and were never

extinguished. BC57 now appeals that decision, and we affirm.

I. Background

A. The Scheme

Jerome and Shaun Cohen ran a Ponzi scheme through

their real estate companies EquityBuild, Inc. and EquityBuild

Finance, LLC (“EBF”) from at least 2010 to 2018. The scheme

began with the Cohens, through EquityBuild, selling promis-

sory notes to investors, each note representing a fractional in-

terest in a specific real estate property. They promised interest

rates ranging from 12% to 20%. A mortgage on the respective

properties, mostly located in underdeveloped areas of Chi-

cago, secured each of the notes.

As part of their transactions with investors, the Cohens

drafted, and the investors executed, a Collateral Agent and

Servicing Agreement (“CAS”). The CAS granted certain

rights and powers to EBF, which was to act as a “collateral

agent” and service the loans. Thus, the mortgages were struc-

tured as between EquityBuild (the borrower) and the individ-

ual investors (the lenders), “care of” EBF—an entity distinct

from EquityBuild despite the similar names.

The CAS authorized EBF to issue monthly statements and

payoff demands, and to demand, receive, and collect loan

No. 23-1870 3

payments. It also limited EBF’s powers, including by requir-

ing written instructions from the individual investors prior to

foreclosure, amendment or termination of the mortgage, or

other actions.

In addition to a CAS, many of the investors also signed an

untitled document listing the investor’s name, amount in-

vested, percent ownership of the total loan, and monthly in-

terest payment the investor would receive. Beneath the

lender’s signature line appeared a statement that purported

to provide EBF with the authority to receive payment on be-

half of the investor and issue and execute a release of the

mortgage.

By overvaluing the properties involved in the scheme, the

Cohens generated money that they pocketed as undisclosed

fees and used to pay earlier investments. The overvaluation

also meant that, contrary to representations, the investments

were not fully secured.

As it became more difficult for the Cohens to sustain mak-

ing interest payments to investors, they found ways to put off

those payments and continue their scheme. That mischief re-

sulted in a new business model in 2017. Instead of offering

investors promissory notes, the Cohens began offering oppor-

tunities to invest in real estate funds. As before, they told in-

vestors that EquityBuild would pool investments to buy and

renovate properties at exceptional rates of return. The Cohens

apparently used much of these later investments to make pay-

ments to earlier investors.

At that stage, BC57, LLC, a private lender and investor,

lent roughly $5.3 million to EquityBuild, allegedly in ex-

change for a first mortgage on the five properties at issue, all

4 No. 23-1870

on the south side of Chicago. Those five properties were al-

ready owned by EquityBuild and were subject to preexisting

liens from the individual investors here. To deal with the

problem of competing security interests, EBF provided false

payoff letters to BC57 at closing purporting to pay the existing

loans secured by existing liens on the five properties with

BC57’s investment. BC57’s settlement agent, Near North Na-

tional Title Company, received the payoff letters as escrowee.

Near North also received executed releases for each property,

with Shaun Cohen signing off as EBF manager on all five re-

leases. 1 The releases stated:

Know all men by these presents, that

EQUITYBUILD, INC. for and in consideration of

TEN DOLLARS ($10.00) and for other good and val-

uable considerations, the receipt of which is hereby

confessed, does hereby remise, convey, release, and

quit-claims unto EQUITYBUILD FINANCE, LLC of

the County of COLLIN, State of TEXAS, all rights, ti-

tle, interest, claim or demand whatsoever he/she

may have acquired in, through or by a certain Mort-

gage bearing the date of [2/21/2014 or 12/30/2014].

Each release included the address and a description of the re-

leased property. Each was notarized and recorded. Individual

investors did not sign any of the releases, however, nor did

they receive any money from BC57’s payment.

1 The mortgage for one of the properties, 7752 S. Muskegon Ave, listed

the lender as the individual investors “c/o Hard Money Company, LLC,”

not EBF. Yet Cohen signed this release on behalf of EBF, not Hard Money

Company.

No. 23-1870 5

The scheme collapsed in 2018 after the Cohens admitted

that EquityBuild had funded investor interest payments with

later investments. The Securities and Exchange Commission

(“SEC”) filed suit shortly thereafter against the Cohens, Equi-

tyBuild, and EBF, alleging violations of various sections of the

Securities Exchange Act of 1934 and Securities Act of 1933.

B. Procedural Background

The SEC obtained a temporary restraining order against

the Cohens, and the district court appointed a receiver to de-

velop a plan for the recovery and liquidation of all remaining,

recoverable receivership assets. The receiver later filed a liq-

uidation plan identifying the properties owned by Equi-

tyBuild. Among them are the five properties at issue in this

appeal. With approval from the district court, the receiver

sold the five properties and now holds the proceeds, over $3

million, pending the resolution of the claims process at issue

here.

The individual investors whose loans BC57’s investment

purportedly paid off claim priority to those proceeds, arguing

that they never received payment or released their interests,

despite the releases signed by Shaun Cohen. BC57 disagrees

and asserts that it has priority. The district court ultimately

awarded priority to the individual investors, finding that the

mortgage releases were facially defective and that EBF lacked

the authority to execute them. The court also found that

BC57’s payment in full did not, on its own, extinguish the in-

dividual investors’ mortgage liens. After entering the final

distribution plan, the district court stayed distribution of the

proceeds pending the outcome of this appeal.

6 No. 23-1870

II. Analysis

Appealing the interlocutory order, BC57 argues the dis-

trict court erred by concluding that EBF’s receipt of payment

did not extinguish prior mortgage liens and by finding the re-

leases of those mortgage liens facially defective and invalid. 2

We take each issue in turn.

A. BC57’s Payment

BC57 claims that its $5.3 million payment in exchange for

a mortgage with first priority extinguished the existing liens

on the properties, regardless of the validity of the releases

signed by Shaun Cohen. Whether BC57 is correct—and is

therefore the creditor with first priority over the proceeds

from the sale of those properties—depends in part on whether

the Illinois Mortgage Act, 765 ILCS 905/2, abrogated the Illi-

nois common law rule that payment of a debt underlying a

mortgage automatically extinguishes that security interest.

Generally, we review questions of law de novo. See Tsareff

v. ManWeb Servs., Inc., 794 F.3d 841, 848 (7th Cir. 2015). Alt-

hough we have not explicitly applied that standard of review

to a district court’s application of law in receivership proceed-

ings, we have done so implicitly. See Wealth Mgmt., 628 F.3d

at 334–35. Several of our sister circuits similarly apply de novo

review to legal questions in receivership proceedings. See, e.g.,

United States v. Acorn Tech. Fund, L.P., 429 F.3d 438, 442 (3d

2 We have jurisdiction to consider an interlocutory appeal of a district

court’s distribution plan under the collateral order doctrine. See SEC v.

Wealth Mgmt. LLC, 628 F.3d 323, 330–31 (7th Cir. 2010) (holding that a dis-

trict court order approving a receiver’s distribution plan satisfies all re-

quirements for interlocutory review under Cohen v. Beneficial Indus. Loan

Corp., 337 U.S. 541 (1949), and its progeny).

No. 23-1870 7

Cir. 2005); FTC v. Assail, Inc., 410 F.3d 256, 262 (5th Cir. 2005);

SEC v. Wells Fargo Bank, N.A., 848 F.3d 1339, 1343 (11th Cir.

2017); Slattery v. Roth, 710 F.3d 1336 (Fed. Cir. 2013). We agree.

Under Illinois common law, the payment of a debt under-

lying a mortgage automatically extinguishes the security in-

terest belonging to the holder of that debt. See, e.g., Bradley v.

Lightcap, 66 N.E. 546, 548 (Ill. 1903) (“[T]he title conveyed to

the mortgagee is a mere incident of the mortgage debt, … and

when the debt is paid, discharged, released, or barred by lim-

itation, the mortgagee’s title is extinguished by operation of

law.”). BC57 contends that under this common law rule, its

payment of the debt alone, regardless of the validity of the

releases, extinguished those interests. This common law rule

remains in full effect, BC57 argues, because Section 2 of the

Illinois Mortgage Act (“the Act”), passed in 1961, did not ab-

rogate the rule.

The first step Illinois courts take when considering

whether a statute has abrogated a common law rule is to ask

whether the statute contains a “plainly and clearly stated” ex-

pression of abrogation. Rush Univ. Med. Ctr. v. Sessions, 980

N.E.2d 45, 50 (Ill. 2012). We therefore first turn to the text of

the statute. Section 2 of the Illinois Mortgage Act provides:

Every mortgagee of real property, his or her assignee

of record, or other legal representative, having re-

ceived full satisfaction and payment of all such sum

or sums of money as are really due to him or her

from the mortgagor… shall, at the request of the

mortgagor, … in case such mortgage or trust deed

has been recorded or registered, make, execute and

deliver to the mortgagor or grantor in a deed of trust

in the nature of a mortgage, … an instrument in

8 No. 23-1870

writing executed in conformity with the provisions

of this Section releasing such mortgage or deed of

trust in the nature of a mortgage, which release shall

be entitled to be recorded or registered and the re-

corder or registrar upon receipt of such a release and

the payment of the recording fee therefor shall rec-

ord or register the same.

Mortgages of real property and deeds of trust in the

nature of a mortgage shall be released of record only

in the manner provided herein or as provided in the

Mortgage Certificate of Release Act.

765 ILCS 905/2. While the Act obligates a mortgagee to issue

a release of the mortgage upon full satisfaction of the debt un-

derlying the lien, it does not expressly abrogate the common

law rule that payment automatically extinguishes the lien. It

does not even mention the common law rule, let alone pro-

vide a “plain and clear statement” rejecting automatic extin-

guishment of a security interest upon payment of a debt un-

derlying a mortgage.

But the absence of an express statement does not end the

inquiry. The Act nevertheless abrogates the common law rule

if there is “an ‘irreconcilable repugnancy’ between the statute

and the common law right such that both cannot be carried

into effect.” Rush, 980 N.E.2d at 51 (quoting People ex rel. Nel-

son v. W. Englewood Tr. & Sav. Bank, 187 N.E. 525, 529 (1933)).

Although the Illinois Supreme Court has not spoken on

this issue, we are not writing on a blank slate. See Nationwide

Agribusiness Ins. Co. v. Dugan, 810 F.3d 446, 450 (7th Cir. 2015)

(noting that when we exercise diversity jurisdiction, we apply

Illinois state law as the Illinois Supreme Court has interpreted

No. 23-1870 9

it). Without guidance from the state’s highest court, “deci-

sions of the Illinois Appellate Courts control, unless there are

persuasive indications that the Illinois Supreme Court would

decide the issue differently.” Id.

Illinois Appellate Courts have applied the Act to mean

that “a perfected mortgage lien remains in effect unless released

pursuant to the Mortgage Act.” Fed. Nat’l Mortg. Ass’n v. Kuipers,

732 N.E.2d 723, 728 (Ill. App. Ct. 2000) (emphasis added); see

also N. Shore Cmty. Bank & Tr. Co. v. Sheffield Wellington LLC,

20 N.E.3d 104, 117–19 (Ill. App. Ct. 2014). In Kuipers, the court

found that the assignment of a mortgage does not extinguish

the original lien, reasoning that under Section 2 of the Mort-

gage Act, a mortgage lien remains in effect until it is released.

732 N.E.2d at 727. Without a properly executed and delivered

release, the lien persists. Id. at 728.

North Shore similarly held that a mortgage lien is only ex-

tinguished upon the delivery of a written release. 20 N.E.3d at

118 (citing 765 ILCS 905/2). It reasoned that, “[w]hile the plain

language of section 2 [of the Act] does indicate that full pay-

ment is a necessary condition before a mortgagee is obligated

to release a mortgage, it does not suggest that full payment,

by itself, is a sufficient condition to release a mortgage.” Id. The

court concluded:

[The] challenge to the Bank’s standing rests entirely

on the theory that the Bank released its mortgage by

receiving full payment. However, even if there was

full payment, the plain language of the Mortgage

Act indicates that delivery is necessary before a

mortgage is released. Since it is undisputed that

there was no delivery, the mortgage has not been re-

leased.

10 No. 23-1870

Id. at 118–19. In other words, payment alone is not enough.

Due to the deference we owe Illinois Appellate Courts on

matters of Illinois state law, we interpret Kuipers and North

Shore to mean that the Act abrogated the common law rule:

there must be payment and delivery of the release to extin-

guish a mortgage lien.

Rockford Life Insurance Co. v. Rios, cited by BC57, is not to

the contrary. See 261 N.E.2d 530 (Ill. App. Ct. 1970). In Rock-

ford, the Illinois Appellate Court ordered the release of a mort-

gage after it determined that the note securing the mortgage

had been properly paid to the mortgagee’s authorized agent.

Id. at 531–32. At no point did the court find that payment alone

extinguished any security interest; indeed, the order to release

the mortgage suggests that only upon release is that interest

extinguished. In fact, BC57 cannot identify a single decision

by an Illinois court applying the common law rule to a trans-

action occurring after the passage of the Mortgage Act, nor

could we find one ourselves.

Finding that under the Illinois Mortgage Act, payment

alone does not extinguish any pre-existing interest absent a

valid release, we consider whether the release purportedly ex-

ecuted by EBF was valid.

B. EBF’s Release

The district court found that discrepancies in the releases

granted by EBF when BC57 closed the loan rendered those re-

leases facially invalid. It specifically found that those discrep-

ancies were not mere scrivener’s errors. BC57 argues this de-

cision was erroneous, claiming that any discrepancies do not

No. 23-1870 11

invalidate the releases because they fall under the doctrine of

mutual mistake. 3

In Illinois, the party arguing mutual mistake has the bur-

den of proving by “clear and convincing evidence” that the

parties to a transaction committed a mutual mistake in their

written agreement. Fisher v. State Bank of Annawan, 643 N.E.2d

811, 814 (Ill. 1994); see also Wheeler-Dealer, Ltd. v. Christ, 885

N.E.2d 350, 355 (Ill. App. Ct. 2008). Whether that party has

met its burden “is a question of fact” to be resolved by the

lower court, whose “decision in the matter will not be dis-

turbed on review unless it is against the manifest weight of

the evidence.” Wheeler-Dealer, 885 N.E.2d at 355.

No party disputes that the releases contain fundamental

errors that give rise to uncertainty over who granted them.

The releases, purportedly granted by EBF (and signed by

Shaun Cohen acting as EBF manager), list EquityBuild as the

party issuing the release, even though EquityBuild was the

borrower, not the lender or the lender’s agent. The signature

line, in contrast, lists EBF as the party issuing the release.

Contrary to BC57’s arguments, while documents may

show that EBF was the correct issuer of the releases, BC57 does

not present clear and convincing evidence that both parties

intended for EBF to be the issuer. Nor does BC57 demonstrate

that the discrepancies in the releases were merely mutual mis-

takes. The district court concluded the opposite, a conclusion

that is not against the manifest weight of the evidence. We

3 On appeal, the investors argue that BC57 waived any argument as to

mutual mistake by not raising it below. But Illinois courts treat mutual

mistake as a type of scrivener’s error, which BC57 did argue to the district

court. See Roots v. Uppole, 400 N.E.2d 1003, 1006 (Ill. App. Ct. 1980).

12 No. 23-1870

find it particularly difficult to fault that determination when

the Cohens’ entire business model operated to purposefully

obfuscate responsibility and ownership. In fact, some of the

evidence indicates that EquityBuild, not EBF, exercised con-

trol over the releases by directing their contents. An Equi-

tyBuild employee set the dollar amounts for payoff quotes.

And when the original releases directed BC57 to send pay-

ment directly to EquityBuild, that same employee explained

that payment should go to EBF instead, not because it was au-

thorized to receive payment on behalf of the individual inves-

tors, but because “the optics aren’t good.” This evidence sup-

ports that the release named EquityBuild because it directed

the process, not due to a mutual mistake.

The conclusion that the releases were facially invalid is not

against the manifest weight of the evidence, so we need not

decide whether EBF had the authority to release the mort-

gages. The releases had no effect, and the individual investors

maintain their interests in these five properties.

III. Conclusion

Because payment alone cannot extinguish a preexisting se-

curity interest without a valid release under the Illinois Mort-

gage Act, and because no valid release occurred, we AFFIRM.

No. 23-1870 13

EASTERBROOK, Circuit Judge, concurring. I question the ex-

istence of appellate jurisdiction. The district court allowed the

receiver to sell five properties and distribute the proceeds to

a set of investors; it denied BC57’s claim to priority. This order

ends the litigation for these investors and BC57. But it does

not wrap up the suit. Although all properties in the receiver-

ship estate have been sold, other investors’ competing claims

to the undistributed funds must be resolved. Normally an ap-

peal under 28 U.S.C. §1291 awaits the final decision—i.e., res-

olution of all claims by and against all parties. Interlocutory

appeals from some orders in receiverships are authorized by

28 U.S.C. §1292(a)(2), but no one contends that the district

court’s order in this case qualifies.

The court today says that the collateral-order doctrine

supports an immediate appeal. Slip op. 6 n.2. This reflects a

holding of SEC v. Wealth Management LLC, 628 F.3d 323, 330–

31 (7th Cir. 2010), so I do not dissent. But I doubt that Wealth

Management is correctly decided.

Appealable collateral orders are orders “that are conclu-

sive, that resolve important questions separate from the mer-

its, and that are effectively unreviewable on appeal from the

final judgment in the underlying action.” Swint v. Chambers

County Commission, 514 U.S. 35, 42 (1995). The Court has

stressed that this doctrine must not be allowed to displace the

norm that appeal under §1291 is not proper until the district

court has finished with the case. See, e.g., Mohawk Industries,

Inc. v. Carpenter, 558 U.S. 100 (2009).

Did the district court in this case resolve questions “sepa-

rate from the merits”? Far from being “collateral” to the mer-

its, a decision about who receives how much of the proceeds

from a sale is the merits. The goal of a receivership is to

14 No. 23-1870

marshal and distribute assets. A distribution order such as the

one at issue here is the end of the process for the claimants

involved, rather than collateral to something else.

Liberty Mutual Insurance Co. v. Wetzel, 424 U.S. 737 (1976),

tells us that a disposition that resolves both liability and dam-

ages equals a decision on the merits. In this litigation, liability

for this Ponzi scheme was established years ago, and the

court’s decision about who gets what supplies the remedy (or,

for BC57, sends it away without a remedy). There’s nothing

more to do in the district court with respect to any of these

claimants, and a terminal order can’t be “collateral” to the

merits.

How about whether the order is “effectively unreviewable

on appeal from the final judgment in the underlying action”?

That requirement, too, is not satisfied. Once the district court

has specified the final distribution, BC57 could present on ap-

peal the same arguments that we resolve today.

BC57 would be unable to enjoy the fruits of an appellate

victory if the investors who receive the funds dissipated them

in the interim. But that potential problem has multiple solu-

tions. (1) The district court could order the receiver to retain

the funds, investing them while the case continues. (2) Distri-

bution to the investors could be conditioned on the posting of

security so that the money remains available if a competing

claimant prevails on appeal from the final decision. (3) The

district court could enter a partial final judgment under Fed.

R. Civ. P. 54(b).

The third of these is the most common. Once a district

court has resolved all claims by or against a particular litigant,

it may enter a partial judgment to facilitate an immediate

No. 23-1870 15

appeal. That could have been done here, but apparently no

one asked the district judge. Instead BC57 appealed, assert-

edly as of right, preventing the district judge from exercising

discretion to manage the litigation. See Curtiss-Wright Corp. v.

General Electric Co., 446 U.S. 1, 7–8 (1980) (discussing district

judges’ discretion under Rule 54(b)).

Wealth Management did not address any of this. The panel

took as given that a distribution order in a receivership is col-

lateral to the merits. It did not explain why. Instead it fol-

lowed SEC v. Forex Asset Management LLC, 242 F.3d 325, 330–

31 (5th Cir. 2001), and SEC v. Basic Energy & Affiliated Re-

sources, Inc., 273 F.3d 657, 666–67 (6th Cir. 2001). Forex is the

first in a line of decisions that includes Basic Energy and SEC

v. Torchia, 922 F.3d 1307, 1315–16 (11th Cir. 2019), as well as a

handful of nonprecedential decisions. Forex did not justify

treating a distribution order as “collateral” when it is the final

decision on the merits with respect to particular litigants. Nor

did it discuss the relation between this supposedly “collat-

eral” order and Rule 54(b). Wealth Management and some other

circuits followed Forex without much elaboration.

All but one. SEC v. Capital Consultants LLC, 453 F.3d 1166,

1171–72 (9th Cir. 2006), disagrees with Forex and Basic Energy.

Capital Consultants explains why a distribution order of the

kind under review today is a decision on the merits. The panel

in Wealth Management did not cite Capital Consultants and ap-

parently did not recognize that it was choosing sides in a con-

flict among the circuits. (Wealth Management did cite an earlier

decision in the Capital Consultants litigation, but not the deci-

sion that discusses the collateral-order doctrine. That earlier

appeal reviewed a partial final judgment entered under Rule

54(b). SEC v. Capital Consultants, LLC, 397 F.3d 733, 737 n.4

16 No. 23-1870

(9th Cir. 2005). The fact that review was possible under Rule

54(b) excludes calling the order “collateral”.)

Appellate courts should not use the collateral-order doc-

trine to nullify the discretion that district judges possess un-

der Rule 54(b) and override the limitations on receivership ap-

peals under §1292(a)(2). Still, there is an established conflict

among the circuits, and it is rarely prudent to move from one

side of a conflict to the other. The Supreme Court or the Judi-

cial Conference (through its power under 28 U.S.C. §2072(c)

to define final decisions) could resolve the conflict. We cannot.

I therefore join my colleagues’ opinion, which accurately re-

solves the substance of the litigants’ dispute.