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In re Isaacs

United States Court of Appeals, Sixth Circuit

July 18, 2018

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

          Argued: January 24, 2018

          Appeal from the Bankruptcy Appellate Panel of the Sixth Circuit. No. 16-8041-Guy R. Humphrey, C. Kathryn Preston, and Tracey N. Wise, Bankruptcy Appellate Panel Judges.

         United States Bankruptcy Court for the Western District of Kentucky at Paducah. Nos. 5:14-ap-5021; 5:14-bk-50679-Alan C. Stout, Judge.


          Marcus H. Herbert, MARCUS HERBERT LAW, Paducah, Kentucky, for Appellant.

          John R. Tarter, REISENFELD & ASSOCIATES, LLC, LPA, Cincinnati, Ohio, for Appellee.

         ON BRIEF:

          Marcus H. Herbert, MARCUS HERBERT LAW, Paducah, Kentucky, for Appellant.

          John R. Tarter, Gregory A. Stout, REISENFELD & ASSOCIATES, LLC, LPA, Cincinnati, Ohio, for Appellee.

          Tara Twomey, NATIONAL CONSUMER BANKRUPTCY RIGHTS CENTER, San Jose, California, for Amicus Curiae.

          Before: BATCHELDER, GILMAN, and ROGERS, Circuit Judges.



         Debtor Linda Isaacs filed for Chapter 13 bankruptcy and brought an adversary action seeking to invalidate a mortgage lien on her home, and to stop the sale of the home pursuant to a Kentucky state-court foreclosure judgment. The adversary complaint sought to avoid the mortgage-as unperfected because the mortgage was never validly recorded-under the strong-arm provision of the bankruptcy code. After an initial summary judgment motion was denied, debtor presented what she terms an "alternate argument" for relief, set forth in a "renewed" summary judgment motion, to the effect that the Kentucky state court which entered the foreclosure judgment erred in finding that the mortgage lien ever attached in the first place. This argument was based on nonstandard language in the mortgage contract apparently requiring that the mortgage be recorded in order for its lien to attach at all. The bankruptcy court ruled for debtor on this alternate theory. The Bankruptcy Appellate Panel reversed, however, holding that the bankruptcy court lacked jurisdiction under the Rooker-Feldman doctrine, which generally keeps appeals from state-court decisions out of the lower federal courts. Although we do not adopt all of the BAP majority's reasoning, the BAP was correct in overturning the bankruptcy court's judgment because ruling on the "alternate argument" indeed amounted to a federal court's ruling on an appeal from a state-court judgment, contrary to Rooker-Feldman. However, the debtor's primary underlying claim, seeking avoidance of the mortgage lien under the strong-arm provision based on the lien's lack of perfection, sought relief independent of the validity of the state-court judgment, and thus does not implicate Rooker-Feldman. A remand is accordingly appropriate to permit the court(s) below to rule on that claim in the first instance.


         On February 5, 2003, Linda Isaacs and her husband took out a home-equity loan, secured by a mortgage on their home in Princeton, Kentucky. The original mortgagee, GMAC Mortgage Corporation, did not immediately record the mortgage. On March 19, 2004, while the mortgage remained unrecorded, the Isaacs filed for Chapter 7 bankruptcy. GMAC finally recorded the mortgage on June 23, even though by this point the automatic stay from the bankruptcy was in effect, see 11 U.S.C. § 362, and GMAC had not obtained an order modifying or lifting the stay. Apparently, however, neither the Isaacs nor the Chapter 7 trustee realized that the mortgage had not been recorded before the bankruptcy began. The trustee therefore did not seek to avoid the mortgage, and the mortgage was listed as a secured claim on Schedule D of the bankruptcy petition. During the bankruptcy, the Isaacs reaffirmed several loan agreements, including an earlier mortgage on their property (also held by GMAC), but they did not reaffirm the mortgage at issue here. On July 12, 2004, the bankruptcy court entered a discharge order. On August 27, the trustee reported that there were no assets to administer, and the Chapter 7 case closed on August 30, 2004.

         A decade later, the new owner of the mortgage, RoundPoint Mortgage Servicing Corporation, sought to foreclose on the Isaacs's home in Kentucky state court. On August 22, 2014, the Lyon County circuit court found that the Isaacs owed $101, 958.82 on a promissory note secured by the mortgage, entered a default in rem judgment of foreclosure, and ordered a foreclosure sale. The foreclosure sale was scheduled for September 30, 2014, but, one day before the sale, Linda Isaacs filed a voluntary Chapter 13 petition in the U.S. Bankruptcy Court for the Western District of Kentucky.

         Isaacs then filed an adversary complaint within the Chapter 13 case, seeking to avoid the mortgage through the so-called "strong-arm" power conferred by 11 U.S.C. § 544(a). Section 544(a)'s strong-arm power permits the bankruptcy trustee to "avoid transfers of property that would be avoidable by certain hypothetical parties." Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1023 (6th Cir. 2001). Here, Isaacs specifically sought to use § 544(a)(1) and (a)(3). Under § 544(a)(1), the trustee can step into the shoes of a hypothetical creditor who "at the time of the commencement of the [bankruptcy] case, . . . obtains . . . a judicial lien" on the debtor's property in question. Section 544(a)(3) permits the trustee to assume the status of a hypothetical "bona fide purchaser of real property . . . from the debtor . . ., that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the [bankruptcy] case." Section 544(a) then allows the trustee to avoid any lien that is inferior to the interest held by either of those hypothetical parties, as determined by the relevant state law governing priorities. Sovereign Bank v. Hepner (In re Roser), 613 F.3d 1240, 1243 (10th Cir. 2010). In this case, Isaacs's adversary complaint sought to use the strong-arm power to avoid the mortgage on the ground that it was never properly perfected. (Arguably, the mortgage was unperfected because it was recorded in violation of the automatic stay, and actions taken to perfect a lien are "invalid" if they violate the automatic stay. See Easley v. Pettibone Mich. Corp., 990 F.2d 905, 909 (6th Cir. 1993)). Thus, Isaacs's adversary complaint argued, the unperfected mortgage would lose under state priority law to either of the hypothetical parties contemplated by § 544(a)(1) and (a)(3), and it could therefore be avoided under the strong-arm power. That adversary complaint is the subject of this appeal.

         By this point, the mortgage had been acquired by its present owner, appellee DBI-ASG Coinvestor Fund ("DBI"). The parties filed cross-motions for summary judgment in the bankruptcy court, which were initially denied. In a Renewed Motion for Summary Judgment, Isaacs presented an "alternate argument," distinct from her claim under the strong-arm power: she now argued that the mortgage lien had never attached in the first place, and thus that DBI had no valid lien to enforce. In support of this new argument, Isaacs noted that the mortgage agreement contained conflicting language about when its lien would attach to the collateral. In a section entitled "Description of Security," the mortgage agreement provided: "By signing this Mortgage, we hereby mortgage, grant and convey [the collateral]." This sentence might be understood to mean that the mortgage lien attached once the Isaacs signed the mortgage. But in another section entitled "Priority of Advances," the mortgage agreement stated: "The lien of this Mortgage will attach on the date this mortgage is recorded." Based on this latter provision, Isaacs now argued that the mortgage's lien did not attach until it was recorded. Thus, she claimed, it did not attach before the Chapter 7 petition was filed (because at that time the mortgage had yet to be recorded), and so the mortgage debt was unsecured at the start of the Chapter 7 bankruptcy. Moreover, because actions to perfect a lien are "without legal force or effect" when taken in violation of the automatic stay, Easley, 990 F.2d at 909, Isaacs contended that the eventual recording in violation of the automatic stay was invalid and accordingly ineffective to attach the lien. Therefore, the mortgage remained unattached and the debt remained unsecured throughout the Chapter 7 case, and the unsecured debt was discharged when the bankruptcy court issued its discharge order on July 12, 2004.

         In response, DBI argued that the correct interpretation of the mortgage agreement was that the lien attached when the Isaacs signed it. Thus, the lien attached before the Chapter 7 bankruptcy began, meaning that it passed through the bankruptcy intact because, as the Supreme Court has held, "a creditor's right to foreclose on [a] mortgage survives or passes through [a] bankruptcy." See Johnson v. Home State Bank, 501 U.S. 78, 83 (1991). DBI also contended that the bankruptcy court lacked subject-matter jurisdiction under the Rooker-Feldman doctrine (which generally prohibits the lower federal courts from engaging in appellate review of state-court judgments), because Isaacs was effectively asking the bankruptcy court to sit as an appellate court over the state court's final foreclosure judgment.

         The bankruptcy court granted summary judgment in favor of Isaacs, concluding that the mortgage agreement unambiguously provided that its lien did not attach until it was recorded. Thus, in the bankruptcy court's view, the lien did not attach before the Chapter 7 petition was filed, and the debt was ...

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