Isaacs v. DBI-ASG Coinvestor Fund, III, LLC

Case Type:
Case Status:
Affirmed in part and Reversed in part
Case No. 17-5815; File No. 18a0145p.06 (6th Circuit, Jul 18,2018) Published
Sixth Circuit ruled that the Rooker-Feldman doctrine applies on a claim-by-claim basis and, if the source of the injury is the state court decision, then the court is barred from asserting jurisdiction. If the source of injury is not from the state court decision then there is an independent claim. The bankruptcy court cannot vacate a state court judgment. in this case, the Bankruptcy Appellate Panel's decision is affirmed as to one argument of the debtor on a mortgage avoidance claim and the case is remanded as to the other claim which was not ruled upon below.
Procedural context:
A residential mortgage was executed but not recorded. One year later the mortgagor filed a Chapter 7 bankruptcy. The mortgagee recorded the mortgage during the bankruptcy but the trustee and debtor were unaware of the recording. The Chapter 7 case closed. Ten years later the holder of the mortgage filed an in rem foreclosure and was granted a default judgement. Prior to the state court sale the mortgagor filed a Chapter 13 bankruptcy. The debtor filed an adversary proceeding seeking to avoid the mortgage under Section 544. The bankruptcy court ruled in favor of the debtor on the ground that the wording of the mortgage meant the lien of the mortgage attached on recording. The BAP reversed finding the lien of the mortgage attached on execution and the attack on the mortgage violated Rooker-Feldman as an impermissible appeal of the state court judgment. he Sixth Circuit accpeted the BAP's decision on Rooker-Feldman as to the attachment issue but remanded for further consideration of the Section 544 issues.
The Sixth Circuit reasoned that the Kentucky state court judgment necessarily determined that the mortgage attached on execution and the bankruptcy court could not invalidate that determination. However, the state court judgment did not determine perfection of the mortgage as the mortgage was effective as between the parties. An attack in the bankruptcy court under Section 544 seeking to avoid the mortgage as either recorded in violation of the stay or never recorded before the original Chapter 7 case does not attack the underlying state court judgment. Neither the bankruptcy court nor the BAP ruled on the underlying Section 544 claim. The Sixth Circuit discussed the invalidity of a lien filed in violation of the automatic stay. The Sixth Circuit also denied the mortgagee's attack on the debtor's derivative standing.
Batchelder, Gilman and Rogers, Circuit Court Judges

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