Dismissal Of Mortgagor’s Post-Foreclosure Federal Lawsuit: Usually, But Not Always
June 10, 2015
A mortgagor’s federal suit attacking a prior state court foreclosure almost always will be dismissed. At issue is the Rooker-Feldman doctrine, which I’ve discussed several times here. Unlike the other cases, the Seventh Circuit Court of Appeals overturned, in part, the district court’s dismissal in Iqbal v. Patel, 2015 U.S. App. LEXIS 3241 (7th Cir. 2015). Iqbal tells us that there may be unique situations where a mortgagor could survive dismissal for the purpose of pursuing a claim for money damages against a mortgagee.
Borrower’s theory. In Iqbal, the plaintiff bought a gas station and contracted with defendant S-Mart for gasoline. The plaintiff then hired Mr. Patel, another defendant, to operate the business. The plaintiff selected Mr. Patel on the recommendation of another defendant, Mr. Johnson, S-Mart’s president. Mr. Patel allegedly ran the business but did not pay for the gasoline. As a result, S-Mart obtained a judgment against the plaintiff, who guaranteed the contract. To settle, the plaintiff gave S-Mart a promissory note and a mortgage on the business premises. The plaintiff later defaulted on the note, resulting in a state court judgment and a foreclosure sale of the mortgaged property. The plaintiff filed the federal lawsuit claiming that Patel and Johnson “acted in cahoots to defraud him out of this business.”
Rooker-Feldman. The defendants moved to dismiss the plaintiff’s case based on the Rooker-Feldman doctrine. The Seventh Circuit stated that the doctrine will not bar a federal suit seeking damages for fraud that caused an adverse state court judgment. In other words, the law permits a claim for damages for alleged unlawful conduct that misled the state court into issuing the judgment in the first place. The doctrine will, however, bar the suit to the extent it seeks to set aside the judgment. Here is what the Seventh Circuit said in Iqbal:
If a plaintiff contends that out-of-court events have caused injury that the state judiciary failed to detect and repair, then a district court has jurisdiction – but only to the extent of dealing with that injury.
Distinction. Iqbal was not a standard borrower versus lender mortgage loan foreclosure. The case was a commercial dispute in which the plaintiff claimed the defendants conducted a racketeering enterprise that pre-dated the state court judgment. Distilled to its essence, the plaintiff’s case was that the defendants conspired to take over his business. The foreclosure was the plan all along. The Court held:
Because [the plaintiff] seeks damages for activity that (he alleges) predates the state litigation and caused injury independently of it, the Rooker-Feldman doctrine does not block this suit. It must be reinstated.
The plaintiff in Iqbal could not set aside the sheriff’s sale and get the mortgaged property back. Yet, he lived to fight another day on his damages claim, although the Court suggested that the plaintiff still may lose. Claim preclusion (res judicata) could lead the trial court to determine that the plaintiff was required to bring his theories as counterclaims in the original state court case instead of waiting to sue after the fact.