First-to-Record Is Not Enough: Inquiry Notice, Equitable Mortgages, and Receivership Priorities in SEC v. Kevin Duff (Shatar Capital Partners Appeal)

First-to-Record Is Not Enough: Inquiry Notice, Equitable Mortgages, and Receivership Priorities in SEC v. Kevin Duff (Shatar Capital Partners Appeal)

I. Introduction

This Seventh Circuit decision addresses who gets paid first from the sale of two Chicago properties that were part of the notorious EquityBuild real-estate Ponzi scheme. The core conflict is between:

  • A group of individual investors who believed they held first-position security interests in two properties (7749 South Yates and 5450 South Indiana); and
  • Shatar Capital Partners, a private lender that recorded its mortgages on those same properties before the investors recorded theirs.

At first glance, Illinois’ “race–notice” recording statute would favor Shatar: it recorded first. But the Seventh Circuit holds that “first to record” is not enough where the later lender is on inquiry notice of prior interests. The opinion elaborates when a sophisticated lender’s awareness of a Ponzi-like “crowdfunding” model, and of unusual features at closing, triggers a duty to investigate—and therefore defeats bona fide purchaser status and mortgage priority.

The decision also:

  • Reaffirms the court’s prior ruling in SEC v. EquityBuild, Inc., 101 F.4th 526 (7th Cir. 2024) (“EquityBuild I”),
  • Clarifies that a mortgage servicer like Shatar may appeal on behalf of its lenders, and
  • Applies the collateral order doctrine to permit immediate appeal of a distribution order in an SEC receivership.

Ultimately, the court affirms the district court’s ruling that the individual investors have priority to the proceeds from both properties, and that Shatar takes nothing from those particular sale proceeds.

II. Summary of the Opinion

A. Factual Background in Brief

  • From 2010 to 2018, Jerome and Shaun Cohen ran a large-scale Ponzi scheme through EquityBuild, Inc. and EquityBuild Finance, LLC (“EBF”).
  • They raised money through:
    • High-yield promissory notes allegedly secured by specific Chicago properties; and
    • Later, pooled “fund” investments in real estate projects.
  • EquityBuild routinely:
    • Overstated property values,
    • Paid old investors with new investors’ money, and
    • Reused the same properties as “security” for multiple investor groups.
  • By 2018, the SEC sued, obtained an asset freeze, and a federal receiver (Kevin Duff) was appointed to marshal and distribute assets.

The receiver grouped properties into “tranches” to administer claims. This case concerns “Group 2,” specifically:

  • 7749 S. Yates (“Yates”), and
  • 5450 S. Indiana (“Indiana”).

Individual investors executed mortgages on both properties shortly after EquityBuild’s purchases but did not record until June 23, 2017. Shatar later loaned $1.8 million to EquityBuild, took mortgages on both properties, and recorded on April 4, 2017—months earlier than the investors.

B. The District Court’s Ruling

The district court found that:

  • The individual investors held:
    • a legal mortgage on Yates, and
    • an equitable mortgage (later perfected) on Indiana;
  • Shatar was on inquiry notice of those prior interests when it invested;
  • Therefore, even though Shatar recorded first, it could not claim bona fide purchaser (BFP) status or recording-priority under Illinois law;
  • The investors had priority on both properties, and could recover only:
    • their contributed principal,
    • minus any prior distributions,
    • without interest, fees, penalties, or costs.

C. Issues on Appeal

Shatar appealed, raising three principal issues:

  1. Appellate jurisdiction over an interlocutory distribution order in an ongoing receivership;
  2. Whether Shatar, as an agent/servicer for four underlying lenders, is a proper claimant and appellant; and
  3. Whether the district court erred in:
    • giving priority to the individual investors’ interests (legal and equitable) over Shatar’s earlier-recorded mortgages; and
    • adopting a pro rata principal-only distribution scheme.

D. The Seventh Circuit’s Holding

The Seventh Circuit (Judge Kolar, joined by Chief Judge Brennan and Judge Maldonado) holds that:

  1. Jurisdiction: Appellate jurisdiction exists under the collateral order doctrine, consistent with SEC v. Wealth Mgmt. LLC and EquityBuild I.
  2. Standing/Proper Party: Shatar, as a servicer with broad contractual authority and a right to share in payments, is a proper claimant and appellant under CWCapital Asset Mgmt., LLC v. Chicago Properties, LLC.
  3. Priority:
    • Under Illinois law, recording priority only protects a subsequent purchaser “without notice.”
    • Shatar had inquiry notice of the investors’ preexisting interests (legal mortgage on Yates, equitable mortgage on Indiana), based on multiple “red flags” about EquityBuild’s crowdfunding model and the specific transactions.
    • Thus, the individual investors retain first-priority claims to the proceeds of both properties.
  4. Distribution Methodology: Because the sale proceeds are insufficient to satisfy even the investors’ principal claims, Shatar will receive nothing from these specific accounts regardless of how the distribution is structured. Its challenge to the mode of distribution is therefore moot, and the court declines to reach it.

The judgment of the district court is affirmed in full.

III. Precedents and Authorities Cited

A. Federal Receivership and Appellate Jurisdiction

  • SEC v. Wealth Mgmt. LLC, 628 F.3d 323 (7th Cir. 2010)
    • Held that an order approving a receiver’s distribution plan can be reviewed under the collateral order doctrine.
    • This opinion leans on that holding, and expressly notes that any concerns raised in the EquityBuild I concurrence are overridden by Wealth Mgmt. as binding precedent.
  • SEC v. EquityBuild, Inc., 101 F.4th 526 (7th Cir. 2024) (“EquityBuild I”)
    • Earlier appeal from the same receivership concerning other properties (Group 1) and a different lender (BC57).
    • Confirmed that facially invalid releases cannot extinguish preexisting mortgages under Illinois law.
    • Also relied on the collateral order doctrine for jurisdiction; this opinion follows the same approach (see fn. 2).
  • Dexia Credit Local v. Rogan, 602 F.3d 879 (7th Cir. 2010)
    • Reiterated the appellate courts’ independent duty to confirm jurisdiction even if not challenged by the parties.
    • Cited here only for that basic jurisdictional principle.
  • Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541 (1949)
    • Foundational U.S. Supreme Court case defining the collateral order doctrine.
    • Quoted for the three-part test: conclusiveness, separateness from merits, and effective unreviewability after final judgment.

B. Scope of Receiver’s Authority and Applicable Law

  • Marshall v. New York, 254 U.S. 380 (1920)
    • Stands for the proposition that a federal receiver takes property “subject to all liens, priorities, or privileges existing or accruing under the laws of the state.”
    • Used here to confirm that the receiver and federal court must apply Illinois property and mortgage law in determining priority.

C. Mortgage Servicer Standing and Appeal Rights

  • CWCapital Asset Mgmt., LLC v. Chicago Properties, LLC, 610 F.3d 497 (7th Cir. 2010)
    • Recognized a mortgage servicer’s standing to bring claims on behalf of its lenders when the servicing agreement confers broad authority over administration and enforcement.
    • The court analogizes Shatar’s role to CWCapital’s: it possessed “full power and authority” to manage, hold original documents, and pursue “any further actions as they deem necessary,” plus a right to retain a share of payments.
    • Thus, Shatar is not a mere conduit; it has an equitable stake and can litigate and appeal.
  • Big Shoulders Cap. LLC v. San Luis & Rio Grande R.R., Inc., 13 F.4th 560 (7th Cir. 2021)
    • General principle: parties whose assets are affected by court rulings on disposition of assets typically have standing to appeal.
    • Cited to reinforce that Shatar’s financial interest supplies the “pocketbook injury” needed for appellate standing.

D. Illinois Recording, Notice, and Mortgage Priority

  • Illinois Recording Statute: 765 ILCS 5/30
    • Mortgages must be recorded to be effective “as to all creditors and subsequent purchasers, without notice.”
    • Creates a race–notice framework: a subsequent purchaser must both (1) record first and (2) lack notice of prior interests to obtain priority.
  • Reed v. Eastin, 379 Ill. 586 (1942)
    • Articulates the general Illinois rule: “first to record” prevails only if the party has no notice of prior interests.
    • Also provides the classic inquiry notice formulation: someone with notice of facts that would prompt a prudent person to investigate is charged with all facts that diligent inquiry would have revealed.
    • This opinion quotes Reed’s statement that “every unusual circumstance is a ground of suspicion and demands investigation.”
  • Almazan v. 7354 Corp., 2023 IL App (1st) 220794
    • Illinois appellate decision describing actual, constructive, and inquiry notice under state law.
    • Defines inquiry notice as constructive notice arising when available information would cause a prudent person “to think twice about completing the transaction.”
    • Confirms that a purchaser on inquiry notice is charged with what “he or she would have discovered by diligent inquiry.”
  • In re County Collector, 397 Ill. App. 3d 535 (1st Dist. 2009)
    • Provides the modern Illinois articulation of inquiry notice quoted in this opinion.

E. Equitable Mortgages Under Illinois Law

  • Wilkinson v. Johnson, 29 Ill. 2d 392 (1963)
    • Defines an equitable mortgage as arising when a party lends money in reliance on property as security, but the formalities of a legal mortgage are not met.
    • Requires that intent be shown by “clear, satisfactory and convincing” evidence.
  • Hibernian Banking Ass’n v. Davis, 295 Ill. 537 (1920)
    • Requires that a written agreement clearly show that property is to be held or transferred as security for an obligation in order to support an equitable mortgage.
  • US Bank Nat’l Ass’n v. Villasenor, 2012 IL App (1st) 120061
    • Addresses when a subsequent mortgagee is on inquiry notice of an earlier equitable mortgage, based on a “series of facts” that should trigger further investigation.
    • Provides the analytical template applied here: where red flags exist, the later lender is charged with what diligent inquiry would have revealed about the earlier equitable interest.

F. Other Doctrinal References

  • SEC v. Enterprise Trust Co., 559 F.3d 649 (7th Cir. 2009)
    • Confirms district courts’ broad equitable discretion in structuring receivership distributions and classifying claims.
  • Finch v. Treto, 82 F.4th 572 (7th Cir. 2023)
    • Clarifies that a clear error of fact or law constitutes an abuse of discretion.
    • Relevant because receivership decisions are reviewed for abuse of discretion, with embedded legal issues reviewed de novo.
  • United States v. Mikaitis, 33 F.4th 393 (7th Cir. 2022)
    • Criminal case on the “ostrich doctrine”: deliberate avoidance of knowledge is treated as equivalent to actual knowledge.
    • Invoked by analogy: a party who consciously avoids obvious red flags cannot later claim ignorance.
  • In re Aimster Copyright Litig., 334 F.3d 643 (7th Cir. 2003); Rozumalski v. W.F. Baird & Assocs., Ltd., 937 F.3d 919 (7th Cir. 2019); Domka v. Portage County, 523 F.3d 776 (7th Cir. 2008)
    • All cited for appellate waiver: arguments made only in vague or undeveloped form in the district court cannot be raised in new, specific form on appeal.
    • Used to reject Shatar’s newly-minted “futility of inquiry” argument.

IV. Legal Reasoning and Application

A. Jurisdiction and the Collateral Order Doctrine

The initial question—can the Seventh Circuit hear this appeal at all?—is nontrivial because the receivership is ongoing and the order approving the distribution plan for Group 2 properties is not a classic “final judgment” under 28 U.S.C. § 1291.

The court acknowledges that “a district court’s order affirming the receiver’s distribution plan is not a final order” under Wealth Mgmt. But it holds that such an order falls within the collateral order doctrine when:

  1. It conclusively determines the disputed rights in a discrete pool of assets (here, the proceeds from Yates and Indiana);
  2. It involves issues (priority among claimants) separable from the merits of the SEC’s enforcement action against EquityBuild; and
  3. It would be effectively unreviewable after final judgment because waiting might allow dissipation of funds or prevent reallocation among claimants once distributions are made.

The panel notes that in EquityBuild I, a concurrence questioned jurisdiction, but concludes that Wealth Mgmt. is controlling and squarely authorizes this type of interlocutory review. This solidifies, at least within the Seventh Circuit, the availability of collateral order appeals from discrete receivership distribution decisions.

B. Shatar as a Proper Claimant and Appellant

Although the individual investors argued that only the underlying lenders (for whom Shatar acted as servicer) could be claimants, the court rejects this narrow view.

Key features of the servicing letters:

  • They authorized Shatar to:
    • retain and maintain all original transaction documents,
    • receive monthly payments and distribute funds,
    • “manage [the lenders’] interest in the subject property and any further actions as they deem necessary,” and
    • act as “authorized agent” for “any further actions as deemed necessary.”
  • They entitled Shatar to “retain a split on payments made” on the EquityBuild notes.

Drawing on CWCapital, the court characterizes these rights as effectively delegating equitable ownership of the claim to the servicer, subject to ultimate distribution to investors. Combined with its own economic interest (the “split”), this makes Shatar a real party in interest with standing both to pursue claims against the receivership estate and to appeal adverse decisions.

C. Framework for Priority: Illinois Race–Notice + Notice Doctrines

Because the properties are in Chicago, Illinois law governs mortgage priority. The starting point is straightforward:

  • Under 765 ILCS 5/30, a properly recorded mortgage is enforceable against subsequent purchasers and creditors without notice of that mortgage.
  • As a rule, the first to record a mortgage has priority over later-recording mortgagees (Reed v. Eastin).

However, that rule only protects a subsequent mortgagee who qualifies as a bona fide purchaser (BFP) without notice. Illinois recognizes multiple forms of notice:

  • Actual notice: knowledge actually possessed by the purchaser at the time of the transaction.
  • Constructive notice: knowledge the law imputes to the purchaser as if known, even if not actually known; this includes:
    • Record notice: what appears in public land records; and
    • Inquiry notice: what a prudent person would discover from investigating red flags apparent from known facts.

A subsequent mortgagee who has any form of notice—actual, record, or inquiry—of a prior interest is bound by that prior interest, even if it records first. The central question is thus whether Shatar had inquiry notice of the individual investors’ interests when it loaned and recorded its mortgages.

D. Inquiry Notice and the Yates Property

1. The Red Flags

The court identifies at least four “red flags” that would have put a prudent lender on notice that earlier investors held or might hold priority interests in the Yates property.

  1. Knowledge of EquityBuild’s crowdfunding business model In November 2016, an EquityBuild representative described the model to Shatar:
    • EquityBuild pooled funds from “crowdfunding investors” to finance specific properties.
    • Those investors received “first lien” positions as a standard feature of EquityBuild notes.
    That meant any later lender should expect that properties might already be encumbered by earlier crowdfunding investors, and should take steps to confirm its own first-lien status.
  2. Express concern about refinancing “already closed deals” In December 2016, Shatar’s principal, Ezri Namvar, wrote:
    “Since we have become aware of your business structure, assuming your previous deals have been closed with cro[w]dfunding investors, we need to make sure your re[f]inancing of already closed deals are allowed and kosher[.]”
    This email shows that:
    • Namvar understood EquityBuild frequently refinanced properties after initial crowdfunding deals closed, and
    • He was specifically worried about how that refinancing would interact with prior investors’ rights and lien positions.
    That understanding is precisely the type of background knowledge that creates inquiry notice risk.
  3. Failure to review EquityBuild’s transaction templates In response to Namvar’s concern, EquityBuild sent:
    • Sample rollover forms,
    • Template promissory note, mortgage, servicing agreement, and wire instructions.
    Namvar testified he never reviewed these documents. Had he done so, they would have shown how EquityBuild typically structured its crowd-funded notes and security interests, and would naturally have prompted follow-up questions about whether similar documents already existed for Yates.
  4. Knowledge that Yates had already closed before Shatar’s loan Before issuing its loan, Shatar learned from EquityBuild’s counsel that the purchase of Yates had closed on March 14, 2017. That closing occurred:
    • Before Shatar made its March 28 loan; and
    • Before EquityBuild executed the March 30 mortgage to Shatar on Yates and Indiana.
    If the property was already acquired, then:
    • It must have been financed somehow—either by cash, another lender, or equity from prior investors; and
    • A prudent lender would question whether its funds were truly “purchase money” or instead part of a refinancing of earlier capital.

2. What Diligent Inquiry Would Have Revealed

Under Illinois law, once a party is on inquiry notice, it is charged with knowledge of all facts that diligent investigation would have uncovered. The court identifies several straightforward steps that a reasonably careful lender like Shatar could—and should—have taken, given the red flags:

  • Inquire about the use of proceeds and prior encumbrances. Knowing the purchase had already closed, a prudent lender would ask:
    • How did EquityBuild finance that closing?
    • Were any other investors or lenders granted security interests in Yates?
    • Was this a refinancing, and if so, what steps would extinguish earlier liens?
  • Request transaction-specific rollover or note documents. Especially after receiving but not reviewing template documents, Shatar could have insisted on seeing:
    • Any closing documents for earlier investors on Yates, or
    • Rollover forms indicating that crowdfunding investors had moved their funds into or out of Yates.
  • Consult another known investor, Kermanian. Shatar knew that its intermediary, Doron Kermanian, had invested on his own account with EquityBuild and had wired funds to EquityBuild for Yates on March 17, 2017. A simple conversation likely would have revealed that:
    • Kermanian and others were already investors in Yates,
    • They believed they held or would hold first-lien rights, and
    • Their investments predated Shatar’s loan.
  • Check the public record and react to its silence. Since the purchase of Yates had closed, public records would show EquityBuild as the owner but no recorded mortgage securing that purchase. The absence of a recorded purchase-money mortgage, combined with knowledge of EquityBuild’s crowdfunding model, is itself “an unusual circumstance” that “demands investigation” under Reed.

The court makes clear that it is not penalizing Shatar for failing to detect the entire Ponzi scheme. Rather, it is holding that:

When presented with evidence suggesting its priority interest could be in jeopardy, Illinois law required Shatar to follow up.

By choosing not to investigate further, Shatar effectively engaged in “ostrich-like” behavior. Citing Mikaitis, the court analogizes this to deliberate avoidance of knowledge, which is treated as equivalent to actual knowledge—though the court carefully stays within the inquiry notice framework (it imputes only what diligent inquiry would have revealed).

3. Rejection of the Futility Argument

On appeal, Shatar argued that any further inquiry would have been futile because EquityBuild—being fraudulent—would simply have lied about prior encumbrances.

The court rejects this argument on two levels:

  1. Waiver.
    • In the district court, Shatar argued only broadly that it was not on inquiry notice; it did not specifically contend that inquiry would be futile because of EquityBuild’s dishonesty.
    • Under cases like Aimster, Rozumalski, and Domka, such an undeveloped argument is waived and cannot be recast in a more specific form on appeal.
  2. Merits (even if not waived).
    • The record shows that, up to the time of this transaction, EquityBuild had responded truthfully to some of Shatar’s questions.
    • Moreover, not all inquiries had to be directed to EquityBuild; Shatar could have spoken to Kermanian or others, or evaluated documentary evidence.
    • EquityBuild’s evasions, if they had occurred, would themselves be “red flags” suggesting a problem with priority.

The court thus concludes that the district court did not err in finding that Shatar was on inquiry notice of the individual investors’ preexisting mortgage on Yates and is therefore bound by their priority.

E. Equitable Mortgage and Inquiry Notice on the Indiana Property

1. Existence of an Equitable Mortgage in Favor of Investors

The Indiana property requires a slightly different analysis. It is undisputed that:

  • EquityBuild purchased Indiana on March 30, 2017;
  • On March 30, 2017, EquityBuild executed mortgages to Shatar on Yates and Indiana;
  • On March 31, 2017, EquityBuild executed a mortgage to the individual investors on Indiana; and
  • Shatar’s mortgage was executed before the investors’ legal mortgage on Indiana, and recorded earlier.

However, the district court found—and the Seventh Circuit affirms—that the investors in Indiana held an equitable mortgage that attached before Shatar’s loan.

Under Illinois law, an equitable mortgage arises when:

  • Money is loaned in reliance on specific property as security;
  • The parties intend that the property secure the obligation; but
  • The formal requirements of a legal mortgage are not yet satisfied (e.g., the mortgage is unsigned or unrecorded).

The court finds “clear, satisfactory and convincing” evidence of such intent based on the combination of:

  • Promissory Note (February 6, 2017):
    • States that the investors’ loans will be secured by a mortgage on 5450 S. Indiana.
    • Lists the property address and aggregate loan amount.
    • Includes an Exhibit A signed by each investor, detailing principal and expected monthly interest.
  • Unsigned Mortgage:
    • Identifies the Indiana property and the aggregate loan amount.
    • Contains a final page signed by each investor, specifying each investor’s percentage share and monthly interest.
  • Collateral Agency and Servicing Agreement (December 27, 2016):
    • Identifies EquityBuild and each investor as parties.
    • Expressly references the February 6 note.
    • Defines “Mortgage” by reference to the note and defines “Collateral” by reference to the mortgage.

Taken together, these written instruments evince a clear intent that the Indiana property serve as security for the investors’ loans as of early 2017—before Shatar’s March 28 loan. That suffices to create an equitable mortgage under Wilkinson and Hibernian Banking.

2. Shatar’s Inquiry Notice as to Indiana

As with Yates, the question is whether Shatar was on inquiry notice of this equitable mortgage. The court says yes, for two reasons:

  1. One loan secured by both Yates and Indiana, against the backdrop of the known business model.
    • Shatar provided a single $1.8 million loan secured by both properties.
    • It already had the same knowledge of EquityBuild’s crowdfunding structure and refinancing practices discussed above.
    • Thus, what put Shatar on inquiry notice for Yates also contributed to inquiry notice for Indiana: the risk of preexisting investor interests had to be considered across both properties.
  2. EquityBuild receiving net cash “back” at the Indiana closing.
    • At the Indiana closing, a title company employee emailed that EquityBuild would receive approximately $86,000 (later nearly $110,000) in cash from the closing.
    • Namvar reacted with disbelief: “What??? I thought the borrowers are putting over 1.5 mil in to close the purchases[.] Can someone explain this 2 me?”
    • This is exactly the type of “unusual circumstance” that, under Reed, should “excite attention” and prompt investigation.

A prudent lender, seeing the borrower emerge from a supposed acquisition closing with cash in hand rather than out-of-pocket cash contributed, would suspect that:

  • Other funds had already financed the purchase; or
  • The property was being significantly overleveraged relative to the actual purchase price and prior contributions.

Moreover, had Shatar requested the underlying investor documents (note, unsigned mortgage, servicing agreement), they would have plainly revealed the investors’ equitable mortgage on Indiana. Because Shatar did not pursue these inquiries, Illinois law imputes that knowledge to it via inquiry notice. Thus, as to Indiana as well, the investors’ equitable mortgage has priority over Shatar’s later legal mortgage.

F. Standard of Review and Deference to the Receiver’s Plan

The court repeatedly emphasizes that receivership administration is an equitable function, reviewed for abuse of discretion:

  • The district court has “broad” equitable power to classify claims and approve distribution plans.
  • The appellate court reviews:
    • Factual findings for clear error, and
    • Embedded legal determinations (e.g., the existence of inquiry notice; the legal standard for equitable mortgages) de novo.

Here, the Seventh Circuit finds no clear error in the district court’s fact-finding about what Shatar knew and when, or about the contents of the investor documents. It also finds the district court correctly stated and applied Illinois law on inquiry notice and equitable mortgages.

G. Mootness of the Challenge to Distribution Methodology

Finally, Shatar argued that, even if it were subordinate to the investors, the district court’s distribution plan was unfair because it:

  • Limited all claimants’ recoveries to principal only; and
  • Excluded interest, fees, penalties, and costs.

The court declines to reach this issue on the ground of mootness. The math is dispositive:

  • Yates sale proceeds: $564,284.59; investors’ secured claim: $2,689,293.00.
  • Indiana sale proceeds: $1,789,813.98; investors’ secured claim: $2,782,692.60.

In other words, the investors’ principal claims exceed the available funds for each property. Regardless of whether:

  • Interest is allowed or disallowed;
  • Fees and penalties are included or not; or
  • Some alternative allocation scheme is adopted,

there will be nothing left in these specific accounts for a subordinate claimant such as Shatar. Because no possible ruling on distribution methodology could provide effective relief to Shatar from these sale proceeds, that part of its appeal is moot.

V. Impact and Significance

A. For Lenders and Investors in Real Estate Finance

The most consequential doctrinal development in this opinion is the court’s rigorous application of inquiry notice to a sophisticated lender interacting with a crowdfunding-based real estate platform.

Key takeaways for lenders:

  • “First to record” is not safe harbor. A lender cannot rely solely on speed of recording; if its pre-closing knowledge would put a prudent investor on notice of prior or parallel funding sources, it must investigate or risk losing priority.
  • Understanding the borrower’s business model matters. Knowledge that a borrower:
    • uses crowdfunding investors,
    • refinances “already closed deals,” and
    • offers “first lien” to earlier investors
    can itself trigger a duty of deeper due diligence.
  • Unusual closing mechanics are red flags, not curiosities. Situations where:
    • the borrower gets cash back at closing,
    • a property is already closed before the lender’s supposed “purchase-money” loan, or
    • public records show ownership but no obvious purchase-money mortgage,
    must be probed; ignoring them risks imputed notice.
  • Templates and rollovers are not mere paperwork. When a lender is sent template rollover forms, notes, and mortgages, failing to review them may later be used as evidence that the lender consciously avoided learning how the platform actually operates.
  • Talking to intermediaries and other investors can be required. Especially where an intermediary is known to have invested personally, a prudent lender may need to inquire whether that intermediary holds or expects to hold a secured interest in the same property.

Collectively, the opinion signals that sophisticated lenders dealing with high-yield, multi-investor real estate vehicles cannot treat them like ordinary one-on-one commercial mortgages. The burden of diligence is significantly higher, and failure to meet that burden may forfeit BFP protection even if documents are in perfect order and recorded promptly.

B. For Federal Receiverships and Ponzi Scheme Litigation

Within the EquityBuild receivership, this decision pairs with EquityBuild I as a comprehensive endorsement of the district court’s strategy:

  • Identify the true economic expectations and security arrangements for early investors;
  • Scrutinize subsequent lenders’ diligence and knowledge; and
  • Where warranted by notice principles, prioritize victim-investors’ claims over later-entering commercial lenders.

By affirming the use of state-law priority rules in a federal receivership (per Marshall) and backing the receiver’s approach twice in consecutive EquityBuild appeals, the Seventh Circuit reinforces:

  • The legitimacy of principal-only, pro rata distributions among similarly situated fraud victims; and
  • The propriety of subjecting sophisticated lenders to strict inquiry-notice analysis rather than automatically prioritizing them as “secured.”

More broadly, the case illustrates how federal equity receiverships can harmonize federal investor-protection enforcement (the SEC action) with state property law rules on priority.

C. For Illinois Real Property and Secured Transactions Law

On the state-law side, this decision is notable for:

  • Robust application of inquiry notice. It reaffirms Illinois’ traditional doctrine, but applies it to a modern, complex Ponzi scheme in which the “red flags” relate to business structure and transaction patterns, not just record irregularities.
  • Practical use of equitable mortgages. The court gives a clear example of when investors’ pre-closing documents form an equitable mortgage, even before a fully executed and recorded legal mortgage exists. This has implications for:
    • pre-closing investor commitments,
    • unsigned mortgage forms with signed signature pages, and
    • servicing agreements referencing notes and mortgages.
  • Priority of equitable mortgages over later legal mortgages. When the subsequent mortgagee is on inquiry notice, earlier equitable mortgages are fully enforceable as priority interests, despite later timing of legal formalities and recording.

Illinois practitioners in real estate finance, title insurance, and foreclosure litigation can expect to see SEC v. Kevin Duff cited wherever inquiry notice and equitable mortgages are at issue, particularly in multi-investor or syndicated financing structures.

D. For Appellate Practice

The opinion also has procedural implications:

  • Collateral order appeals remain available in SEC receiverships. Despite skepticism in some academic and judicial quarters, the Seventh Circuit treats Wealth Mgmt. as binding and reaffirms that certain distribution orders are immediately appealable.
  • Agent/servicer appellants are recognized. Servicers with broad authority and a share in recoveries can litigate and appeal on behalf of investors without requiring all beneficial owners to appear individually.
  • Waiver doctrine is enforced strictly. Parties must articulate specific arguments (such as “inquiry would have been futile”) in the district court, not merely generic assertions that they lacked notice or acted reasonably.
  • Mootness policing. Where the economic facts make it impossible for an appellant to obtain any relief from a particular fund, appellate courts will decline to decide abstract issues about distribution methodology.

VI. Complex Concepts Simplified

1. Ponzi Scheme

A Ponzi scheme is a fraud where:

  • Early investors are paid returns not from legitimate profits, but from the contributions of later investors;
  • This creates the illusion of a successful investment strategy; and
  • The scheme eventually collapses when new contributions are insufficient to cover promised payments.

2. Federal Equity Receivership

When the SEC sues an alleged fraudster, a federal court may appoint a receiver:

  • The receiver takes control of the defendant’s assets;
  • Liquidates them (e.g., sells properties); and
  • Proposes a plan to distribute proceeds fairly among victims and creditors.

This is an “equitable” process, meaning the court has flexibility to fashion fair remedies, subject to underlying property and priority rules.

3. Recording Statute (Race–Notice)

In Illinois, to protect a mortgage against later purchasers and creditors, you must:

  • Record it with the county recorder or registrar; and
  • Ensure that at the time you took your interest you did not have notice of any earlier, unrecorded interests.

If you record first and had no notice of prior claims, you are typically “first in line” for payment from that property.

4. Actual, Constructive, and Inquiry Notice

  • Actual notice: You actually know about the prior interest.
  • Constructive notice: The law treats you as if you know, regardless of whether you actually know. Forms include:
    • Record notice: Information in public land records, which you are deemed to have checked.
    • Inquiry notice: When you know facts that would cause a reasonable person to investigate further. You are treated as if you know whatever a proper investigation would have uncovered.

5. Equitable Mortgage

An equitable mortgage arises when:

  • Someone loans money relying on real estate as security;
  • The parties intend the real estate to serve as collateral; but
  • The legal mortgage is not yet formally executed or recorded.

Courts may still treat this as a valid mortgage “in equity,” especially where written documents clearly show the parties’ intent to create a security interest.

6. Collateral Order Doctrine

Normally, appeals may only be taken from “final” decisions that resolve an entire case. The collateral order doctrine is a narrow exception allowing immediate appeals from orders that:

  • Finally decide an important issue;
  • Are separate from the core merits; and
  • Would be effectively unreviewable if appeal waited until the end of the entire case.

In SEC receiverships, orders approving how a receiver distributes a particular pot of money often qualify, because once funds are paid out, reallocating them may be impossible.

7. Mootness

An issue is moot if a court’s decision can no longer have any practical effect. In this case, because the available funds are insufficient even to pay the investors’ principal claims, no ruling on the distribution formula could result in any payment to Shatar from these proceeds. Therefore, that part of the case is moot.

VII. Conclusion

This opinion in SEC v. Kevin Duff (Shatar Capital Partners appeal) firmly establishes that, under Illinois law, a lender’s early recording does not guarantee priority when the lender ignores obvious signs that others may already hold interests in the property.

The Seventh Circuit:

  • Applies the collateral order doctrine to entertain an interlocutory appeal in a complex SEC receivership;
  • Confirms that a mortgage servicer with broad delegated authority and an economic stake is a proper appellant;
  • Recognizes and enforces preexisting legal and equitable mortgages in favor of individual investors;
  • Holds that a sophisticated lender was on inquiry notice of those prior interests, based on:
    • Its knowledge of EquityBuild’s crowdfunding and refinancing model,
    • Its own explicit concerns about “already closed” deals,
    • Evidence that one property had already closed before its loan,
    • Unusual cash flows at closing, and
    • Failure to review or request key documents and to consult a known co-investor.
  • Affirms that where prior investors’ claims exceed sale proceeds, challenges by junior claimants to the distribution formula are moot.

In the broader legal landscape, the case is an important reminder that state-law concepts like inquiry notice and equitable mortgages remain powerful tools for reconciling the rights of various victims and lenders in the wake of complex financial frauds. For market participants in syndicated and crowdfunded real estate, it is a clear warning: diligence cannot be superficial, and “first to record” is no substitute for “first to ask the hard questions.”

Case Details

Year: 2025
Court: Court of Appeals for the Seventh Circuit

Judge(s)

Kolar

Comments