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In re Isaacs

United States Bankruptcy Appellate Panel of the Sixth Circuit

July 3, 2017

In re: Linda S. Isaacs, Debtor.
v.
DBI-ASG Coinvester Fund III, LLC, Defendant-Appellant. Linda S. Isaacs, Plaintiff-Appellee,

          Argued: February 7, 2017

         Appeal from the United States Bankruptcy Court for the Western District of Kentucky at Paducah. No. 14-50679; Adv. No. 14-05021-Thomas H. Fulton, Judge.

         ARGUED:

          Gregory A. Stout, REISENFELD & ASSOCIATES, LLC, LPA, Cincinnati, Ohio, for Appellant.

          Marcus H. Herbert, Paducah, Kentucky, for Appellee.

         ON BRIEF:

          Gregory A. Stout, REISENFELD & ASSOCIATES, LLC, LPA, Cincinnati, Ohio, for Appellant.

          Marcus H. Herbert, Paducah, Kentucky, for Appellee.

          Before: HUMPHREY, PRESTON and WISE, Bankruptcy Appellate Panel Judges.

          HUMPHREY, J., filed the opinion of the Bankruptcy Appellate Panel in which PRESTON, C.J., joined. WISE, J. (pp. 21-23), filed a separate opinion concurring in the result.

          OPINION

          GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge.

         The record below evidences that a stay violation occurred during a previous bankruptcy case, apparently without Appellee Debtor Linda Isaacs' knowledge, ten years prior to her current bankruptcy filing. Between the two bankruptcy cases, a state court adjudicated the scope of Isaacs' discharge, finding a mortgage lien valid and enforceable. The state court scheduled a foreclosure sale, prompting Isaacs to file a second bankruptcy case and a complaint against Appellant Creditor DBI-ASG Coinvester Fund III, LLC, seeking relief from the subject mortgage under 11 U.S.C. § 544(a)(1) and (a)(3).[1] The parties filed cross-motions for summary judgment. Construing the mortgage's language, the bankruptcy court held that the mortgage lien did not attach to Isaacs' real property because the initial mortgagee did not record its mortgage until after Isaacs and her husband filed their prior bankruptcy case and while the automatic stay was in effect. The bankruptcy court thus found that the debt associated with the mortgage was unsecured when the first petition was filed and was discharged in the prior case. As a result, the bankruptcy court held that Isaacs could avoid the mortgagee's lien in this proceeding. The bankruptcy court also declared void ab initio the state court foreclosure judgment finding the mortgage to be valid, concluding that it impermissibly modified the chapter 7 discharge order.

         For the reasons stated below, the Panel REVERSES the bankruptcy court's judgment and REMANDS this case to the bankruptcy court for dismissal. While the entire Panel agrees that the bankruptcy court's judgment should be reversed for a lack of subject matter jurisdiction on the basis of the Rooker-Feldman doctrine, the reasoning of the majority and the concurrence differ.

         The majority reasons that the Rooker-Feldman doctrine precluded the bankruptcy court from avoiding the state court foreclosure judgment because the mortgage was enforceable against the Isaacses' interests on the chapter 7 petition date. Since unavoided pre-petition liens pass through bankruptcy unaffected, the state court foreclosure judgment could not violate the chapter 7 discharge. The concurrence reasons that Rooker-Feldman should be applied without an analysis of the enforceability of the mortgage on the chapter 7 petition date because the foreclosure was solely an in rem action, and the discharge provided by § 524 only precludes in personam collection efforts.

         ISSUE ON APPEAL

         Although the mortgagee raised a number of issues on appeal, this opinion focuses on a single, and ultimately dispositive issue: whether the bankruptcy court lacked subject matter jurisdiction to consider the claims in Isaacs' complaint owing to the Rooker-Feldman doctrine.

         JURISDICTION AND STANDARD OF REVIEW

         The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. DBI-ASG Coinvester Fund III, LLC (the "Mortgagee") initially took this appeal to the United States District Court for the Western District of Kentucky. On October 4, 2016, in accordance with 28 U.S.C. § 158(b)(6), that court issued General Order No. 2016-05 to authorize this Panel to hear and determine appeals from the United States Bankruptcy Court for that district. The General Order also transferred all then-pending appeals from that district's bankruptcy court to this Panel. Upon transfer, no party filed a timely election to "opt out" and have the district court hear this appeal. 28 U.S.C. § 158(c)(1).

         Under 28 U.S.C. § 158(a)(1), this Panel has jurisdiction to hear appeals "from final judgments, orders, and decrees" issued by the bankruptcy court. An order is final for purposes of appeal if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497 (1989) (citation and quotation marks omitted). A bankruptcy court's grant of summary judgment resolving an adversary proceeding on its merits is a final, appealable order. Lyon v. Eiseman (In re Forbes), 372 B.R. 321, 325 (B.A.P. 6th Cir. 2007). The order before the Panel grants a summary judgment to Isaacs and fully disposes of the adversary proceeding, making it a final order. Geberegeorgis v. Gammarino (In re Geberegeorgis), 310 B.R. 61, 63 (B.A.P. 6th Cir. 2004) ("[A]n order that concludes a particular adversarial matter within the larger case should be deemed final and reviewable in a bankruptcy setting.") (citations omitted).

         A bankruptcy court's legal conclusions are reviewed de novo. Grant, Konvalinka & Harrison, PC v. Banks (In re McKenzie), 716 F.3d 404, 411 (6th Cir. 2013). "De novo means that the appellate court determines the law independently of the trial court's determination." Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (B.A.P. 6th Cir. 2001) (citation omitted). Appellate courts review challenges to subject matter jurisdiction based on the Rooker-Feldman doctrine de novo. McCormick v. Braverman, 451 F.3d 382, 389 (6th Cir. 2006). Contract interpretation is a matter of law, which is reviewed de novo. Bender v. Newell Window Furnishings, Inc., 681 F.3d 253, 259 (6th Cir. 2012).

         FACTS AND PROCEDURAL HISTORY

         The facts of this case, though not in dispute, are unusual. Linda Isaacs ("Isaacs") and her spouse, Michael Isaacs, (collectively the "Isaacses") executed a Home Equity Line of Credit Agreement in February 2003. The parties stipulated that "[t]he agreement, or note, was secured by a second mortgage to GMAC Mortgage Corporation encumbering the property commonly described at 494 Hwy 819, Princeton, KY within Lyon County." (the "Property") (Stipulation of Facts at 1, ECF No. 68.)[2] The second mortgage states: "The lien of this Mortgage will attach on the date this Mortgage is recorded." (Stipulation of Facts, Exhibit C ("Mortgage"), ECF No. 68-3.)

         The Isaacses filed a joint chapter 7 bankruptcy petition in March 2004; their petition listed their debt owed to GMAC related to the Mortgage as secured debt. Apparently unknown to the Isaacses, however, GMAC did not record the Mortgage until June 2004, three months after they filed bankruptcy and while the chapter 7 case was pending. At no time did GMAC seek an order to modify, lift or annul the automatic stay. Nor did any party seek to avoid the Mortgage during the pendency of the chapter 7 case. Subsequently, the Isaacses obtained a discharge, and the chapter 7 case was closed in August 2004.

         In August 2005, the Isaacses moved to reopen their chapter 7 case to avoid two judicial liens on the Property, alleging that its value was less than the total of the mortgages on the Property (including the Mortgage). The bankruptcy court reopened the case, avoided the two judgment liens, and closed the case again in January 2006.

         GMAC transferred its interest in the Mortgage to RoundPoint Mortgaging Service Corporation ("RoundPoint") after the chapter 7 case closed. More than ten years after Isaacses' first bankruptcy filing, RoundPoint filed a foreclosure proceeding in April 2014 against the Isaacses in the Lyon County (Kentucky) Circuit Court and, by default, obtained a Judgment and Order of Sale, and then an Amended Judgment and Order of Sale, in August 2014 (the "Judgment"). The Judgment recites that the state court "finds that plaintiff's promissory note is secured by a certain mortgage of which the plaintiff is the holder, which mortgage constitutes a valid second mortgage upon the real estate owned by the defendants . . . ." (Stipulation of Facts, Exhibit I at 2, ECF No. 68-11.)

         No party appealed the Judgment. Instead, in September 2014, immediately prior to the scheduled sale date, Isaacs (without her husband) filed a chapter 13 petition. Isaacs' chapter 13 plan filed with her petition states that the lien at issue "shall be avoided pursuant to 11 U.S.C. § 522(f), or other applicable sections of the Bankruptcy Code, " but does not specify whether she or the chapter 13 Trustee would pursue the lien avoidance. (Chapter 13 Plan at 3, Case No. 14-50679, ECF No. 2.) In early October 2014, Isaacs filed a complaint to initiate this adversary proceeding and requested relief under § 544(a)(1) and (a)(3), alleging that she had "derivative standing" to pursue the claims. (Compl. to Avoid Unperfected Mortgage Lien Pursuant to 11 U.S.C. § § 544(a)(1) and (a)(3) ("Complaint") at 3, ECF No. 1.)[3]

         On cross-motions for summary judgment, the bankruptcy court found that GMAC was an unsecured creditor in the first chapter 7 case. Construing the Mortgage, the bankruptcy court concluded that certain language in that instrument provided that the mortgagee's lien would not be effective until the Mortgage was recorded. As a result, the court found that GMAC did not obtain a security interest in the Property before the Isaacses filed their chapter 7 petition as GMAC did not record its mortgage by then. The bankruptcy court therefore agreed with Isaacs that the chapter 7 discharge order discharged the Mortgagee's debt related to the Mortgage, and stated: "[t]he fact that [the Mortgagee's predecessor-in-interest] was able to obtain the Circuit Court default judgment against Isaacs has no bearing on the validity of the discharge order." (Mem.-Op. at 15-16, ECF No. 77).

         In sum, the bankruptcy court held:

[T]he debt in question was unsecured by virtue of GMAC's failure to record the Second Mortgage prior to [Isaacs]'s petition and [] it was discharged at the time [Isaacs] concluded her 2004 Chapter 7 case. The Circuit Court judgment served as an improper modification of this Court's discharge order, and, as a result, the Rooker-Feldman doctrine does not apply. This Court, therefore, grants summary judgment in favor of [Isaacs] and finds the Circuit Court judgment void ab initio as it relates to the debt in question.

(Id. at 2.)

         DISCUSSION

         A. ...


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