A Memorandum of Decision recently entered in In re 56 Walker, LLC, Case No. 13-11571 (ALG), Bankr. S.D.N.Y. (Mar. 25, 2014), provides clear guidance as to the effect of a state court decision granting summary judgment in favor of a secured lender in a foreclosure action prior to the Debtor’s bankruptcy filing.  The collateral estoppel, res judicata and Rooker-Feldman doctrines each separately served as grounds for the Bankruptcy Court’s finding that it was unable to review the prior state court decision.

In 56 Walker, the Debtor’s sole asset was a six-story mixed-use building in New York, New York. The property was pledged as security for a mortgage loan with Broadway Bank. The Debtor defaulted, and Broadway Bank commenced a foreclosure action against the Debtor in the Supreme Court of New York, New York County. After a first chapter 11 case was dismissed, MB Financial Bank, N.A. (having acquired the loan via a purchase and assumption agreement with the FDIC, as receiver of Broadway Bank), filed a motion for summary judgment in the State Court. The Debtor opposed MB’s motion and filed a cross-motion for summary judgment seeking dismissal of MB’s complaint on the grounds that MB had not provided adequate proof that it was the assignee of the debt, and that MB was liable on certain lender liability claims. The State Court issued a Decision and Order granting MB’s motion for summary judgment of foreclosure on the property and denying the Debtor’s cross-motion. However, before the State Court entered MB’s proposed judgment of foreclosure, the Debtor filed a second chapter 11 petition.

The property was sold as part of the bankruptcy case, and competing claims to the proceeds were filed. MB claimed all of the proceeds, and the Debtor objected to this claim, with six creditors joining in the objection. MB argued in response that the doctrines of res judicata and collateral estoppel applied to the State Court’s decision granting MB summary judgment of foreclosure on the property. The Bankruptcy Court agreed, finding that the State Court decision was entitled to collateral estoppel effect because the Debtor litigated in the State Court the same issues it had raised in the bankruptcy case, it had a full and fair opportunity to litigate those issues, and it received a determination from the State Court. In addition, even though they were not parties to the State Court action, the Bankruptcy Court found that the other creditors were bound by the decision because they were in privity with the Debtor.

In any event, the Bankruptcy Court held, it did not have the authority to review state court decisions, whether on behalf of a debtor or its creditors, because the Rooker-Feldman doctrine deprives the bankruptcy court of subject-matter jurisdiction to review a state court decision and precludes federal jurisdiction if the relief requested in federal court would reverse or void a state court decision.

Lastly, the Bankruptcy Court found that the doctrine of res judicata would also preclude it from revisiting the State Court decision. Although the Debtor had argued that res judicata could not apply because the State Court decision was not incorporated into a foreclosure judgment before the Debtor filed for bankruptcy, the Bankruptcy Court noted that in the case of decisions that have not ripened into a judgment because of a bankruptcy filing, courts have held that a judgment is not always a condition to the application of res judicata.

Secured lenders should take comfort in this decision, wherein one of the more respected U.S. bankruptcy courts has acknowledged that a debtor should not be allowed to relitigate its entire foreclosure case merely because it has filed for bankruptcy before a final judgment of foreclosure by the state court.