Rooker-Feldman doctrine

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Too Little, Too Late in Motion to Reopen

The bankruptcy court did not abuse its discretion in declining to reopen the debtor’s case sixteen years after its closure to administer an asset the debtor did not own until after his bankruptcy case closed. Gamez v. Lopez (In re Lopez), No. 22-2379 (E.D.N.Y. March 9, 2023).

In the debtor’s chapter 7 bankruptcy, he did not list any real property on his schedules, nor did he list Mr. Gamez, the appellant in this appeal, as a creditor. In January, 2006, the debtor received his discharge and the case was closed with no distribution. In November, 2006, Mr. Gamez deeded real property to himself and to Lopez, each with 50% interest. Apparently, the debtor had been living in this property at the time of his petition. In 2010, the debtor initiated a partition action with respect to the property. That case settled in 2015. Litigation concerning the settlement agreement kept the case before the state court in the following years.

In 2021, Mr. Gamez moved to reopen the debtor’s bankruptcy case in order to allow him to seek a stay of all state court proceedings and to have the trustee administer the property. The bankruptcy court declined to reopen the case.

Section 350(b) permits a bankruptcy court, at its discretion, to reopen a bankruptcy case “for cause.” Factors the district court found relevant in this appeal included: 1) the length of time the case was closed; 2) whether a state court would be the appropriate forum; 3) the extent of the benefit to the debtor by reopening; 4) whether it was clear at the outset that no relief would be forthcoming to the debtor by granting the motion, and 5) “the availability of relief in another forum [and] whether the estate has been fully administered.”

Applying these factors, the district court found the bankruptcy court did not abuse its discretion in denying Mr. Gamez’s motion. The court noted that the motion came over sixteen years after the case was closed. More significantly, the court pointed out that, contrary to Mr. Gamez’s assertion, there was no evidence that, at the time the debtor filed for bankruptcy, he had any ownership interest in the property. “Inasmuch as Lopez’s ownership in the property occurred after his Chapter 7 bankruptcy case closed, and there has been ongoing litigation in the state courts concerning the subject property since 2010, the Bankruptcy Court properly determined that the New York state courts were the more appropriate forum.”

Mr. Gamez filed a notice of appeal to the Second Circuit on March 10. Case no. 23-326.

Lopez ED NY March 2023

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Tax Sale Survives Multiple Attacks

The bankruptcy court applied the proper standard for determining “reasonably equivalent value” in the tax sale of the debtor’s home where it used a hypothetical foreclosure sale as the comparator rather than the fair market value. The Rooker-Feldman doctrine prevented the bankruptcy court from nullifying the sale despite procedural irregularities. And even where the debtor won, she lost. The court limited her damages based on the tax buyer’s violation of state consumer protection laws to minor pecuniary loss where it found emotional distress damages are unavailable under state law. Marshall v. Abdoun (In re Marshall), No. 22-10 (E.D. Pa. March 20, 2023).

After the debtor and her husband split up, he agreed to pay taxes on their marital home but failed to do so. The property was sold to Yasir Abdoun for $29,000 in a tax sale without the hearing required by state law. The fair market value of the home was $76,400. In March, 2015, before the debtor knew her home had been sold, Mr. Abdoun and two police officers showed up at her house where only her minor son was home and demanded that they vacate the property. Thus began a nine-month period of threats, demands and public humiliation while the debtor tried to recover her home and Mr. Abdoun tried to evict her from it.

In December, 2015, the debtor filed for chapter 13 bankruptcy proposing to pay 100% of secured debt including that held by Mr. Abdoun. Mr. Abdoun filed a claim for $45,552.11 representing the $29,000 purchase price, $2,900 in interest, $11,200 of “rent,” $593 for homeowner’s insurance, $1,059.11 for real estate taxes, and $800 for water.

The debtor filed an adversary complaint against Mr. Abdoun seeking to avoid the transfer of property as constructively fraudulent under section 548(a)(1)(B)(i)-(ii)(I), and to recover the property pursuant to section 550(a)(1). In an amended complaint she claimed Mr. Abdoun’s deed for her property was invalid.

She also alleged that Mr. Abdoun violated Pennsylvania’s Fair Credit Extension Uniformity Act (the “FCEUA”), and the Unfair Trade Practices and Consumer Protection Law (the “UTPCPL”). The debtor asked the court to set a redemption amount of $19,000, categorize the claim as general unsecured. At trial, the debtor added a claim for violation of the automatic stay. At that time, Mr. Abdoun also reduced his claim to the $29,000 he paid for the property.

The bankruptcy court denied the debtor’s avoidance claim finding that she failed to show that the amount the property sold for was not what she would have received had the property been sold at foreclosure auction. The court found, however, that Mr. Abdoun’s conduct in trying to remove her from the property violated both the UTPCPL and the FCEUA, and that she was entitled to damages under the UTPCPL. The bankruptcy court found that the Rooker-Feldman doctrine precluded it from nullifying Mr. Abdoun’s deed.

As to damages, the court found that the debtor was entitled to recover only her pecuniary loss of $200 plus $100 statutory enhancement. It set the redemption price at $28,700 representing the amount Mr. Abdoun paid minus the damages to the debtor. The court denied the debtor’s motion for reconsideration and she filed an appeal to the district court.

On appeal, the district court began with the application of the Rooker-Feldman doctrine to the debtor’s claim that the sale was invalid due to failure to follow state hearing procedures. That doctrine bars review of a state judgment by a federal court if “(1) the federal plaintiff lost in state court; (2) the plaintiff complain[s] of injuries caused by [the] state-court judgments; (3) those judgments were rendered before the federal suit was filed; and (4) the plaintiff is inviting the district court to review and reject the state judgments.”

Here, the debtor relied on James v. Draper (In re James), 940 F.2d 46 (3d Cir. 1991), which established a void ab initio exception to the Rooker-Feldman doctrine. The debtor argued that the court entering judgment of the sale to Mr. Abdoun lacked subject-matter jurisdiction because the sale took place without a hearing in accordance with state-required procedures, and therefore the void ab initio exception applied.

The district court found, however, that post-James cases, such as Todd v. United States Bank National Association, 685 F. App’x 103 (3d Cir. 2017), questioned that exception to the Rooker-Feldman doctrine, and in fact, concluded that no such exception existed.

The court also declined to adopt the alternative theory offered by the debtor based on dictum from In re Razzi, 533 B.R. 469 (Bankr. E.D. Pa. 2015), to the effect that Rooker-Feldman is inapplicable when the case involves a bankruptcy debtor objecting to a claim, rather than challenging a state court judgment. The judge in Razzi opined that such a circumstance could be “conceptualized” as the debtor taking a defensive posture rather than one like the one arising in Rooker-Feldman where the “state-court losers complain[ed] of injuries caused by state-court judgments rendered before the district court proceedings commenced and invit[ed] district court review and rejection of those judgments.” The court here found that, “[i]n the absence of any persuasive caselaw adopting or applying Judge Frank’s posited ‘theory’ with respect to the first requisite of the Rooker-Feldman doctrine, this Court declines to adopt and apply it here.”

The court turned next to the debtor’s assertion that the transfer of the deed to Mr. Abdoun was avoidable as constructively fraudulent under section 548(a)(1)(B)(i)(I). The issue turned on whether the property was sold for its reasonably equivalent value. The bankruptcy court relying on BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), compared what Mr. Abdoun bought the property for with what it would likely have brought in a foreclosure sale. The debtor argued that the proper comparison was with the fair market value of the property.

The court was unpersuaded. BFP held that “reasonably equivalent value” in the context of a forced foreclosure sale, is the actual sales price rather than the fair market value of the property, so long as state foreclosure procedures were followed. Where, as here, the state procedures for the sale were not properly followed, the Supreme Court said that such irregularity could result in invalidation of the sale, but that, in that case, the reasonably equivalent value would be what the property would have garnered in a hypothetical foreclosure sale that followed state procedures. Based on this, the court here found that the bankruptcy court applied the correct comparison for section 548(a)(1)(B)(i)(I) purposes. Where the debtor failed to present evidence that a properly held foreclosure sale would have brought in more than Mr. Abdoun paid for the property, the court found no error in the bankruptcy court’s order.

The court next addressed the debtor’s appeal of the bankruptcy court’s finding that she was not entitled to emotional distress damages under the enforcement provision in the UTPCPL. That statute provides that a successful litigant may recover actual damages or $100, whichever is greater. The court has discretion to award up to three times actual damages and “may provide such additional relief as it deems necessary or proper.” Though this language suggests that a court may award damages for emotional distress, courts have uniformly held that no such damages are recoverable under the statute. Therefore, the district court upheld the bankruptcy court’s denial of those damages.

The debtor next argued that even though her complaint did not allege intentional infliction of emotional distress under state common law, the bankruptcy court had the power under Rules 7054 and 7015 to award damages for that cause of action when the facts at trial support it. But Rule 7054 and its counterpart FRCP 54, have been limited by due process principles to theories of recovery that were squarely brought out and litigated at trial. For issues not raised in the pleadings, Rule 7015 and FRCP 15, provide that unpled causes of action must be addressed at trial by implied or express consent of the parties. But consent will not be implied when the evidence going to the unpled cause of action also supports a cause of action that was pled.

Here, the debtor did not raise intentional infliction of emotional distress as a cause of action until after the Bankruptcy court entered judgment against her and the evidence supporting it at trial was the same as that supporting her emotional distress claim under the UTPCPL. Therefore the court no implied consent and affirmed the bankruptcy court’s denial of those damages under the state common-law theory.

The court thus affirmed the bankruptcy court’s order and opinions.

Marshall ED Pa Mar 2023