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Senior Mortgagee Loses Priority Claim In Bankruptcy Court After Being Defaulted In State Court

Lesson.  The Rooker-Feldman doctrine can operate to defeat a lender’s post-foreclosure federal court claims, not just a borrower’s.  Don’t ignore state court actions.  Respond to complaints.  A junior mortgagee’s foreclosure action, which named the senior mortgagee as a defendant, resulted in the junior mortgagee leapfrogging into senior position due to the failure of the senior mortgagee to participate in the foreclosure. 

Case cite.  Chamberlin v. 1st Source Bank, 2015 Bankr. LEXIS 15393 (N.D. Ind. 2015) (.pdf).

Legal issue.  Whether the senior mortgagee held its senior priority secured claim even though an Indiana state court previously defaulted the senior mortgagee in a foreclosure proceeding that occurred before the bankruptcy case.  Does the Rooker-Feldman doctrine apply to lenders too?    

Vital facts.  Chase held a mortgage on the subject real estate that Chase recorded in 1999.  1st Source held a mortgage recorded in 2002.  Chase was senior in time.  In 2011, 1st Source filed a state court mortgage foreclosure action and named Chase as one of the defendants.  The state court defaulted Chase in the action and granted summary judgment to 1st Source declaring that 1st Source was the “first and prior” lien holder on the subject real estate.  Subsequently, Chase moved to set aside the trial court’s judgment but was unable to convince the state court to do so.  In 2014, the mortgagors filed a Chapter 13 bankruptcy case, and both 1st Source and Chase filed proofs of claim asserting senior priority.  The instant adversary proceeding followed. 

Procedural history.   Chamberlin was the bankruptcy court’s opinion arising out of the motion for summary judgment to determine lien priority matters between Chase and 1st Source.        

Key rules.  The Court discussed at length the Rooker-Feldman doctrine and its applicability here.  For more on these rules, click here, as I’ve discussed that doctrine many times.  In a nutshell, “state-court losers” cannot commence proceedings in federal court to review and reject state court judgments.  Under Indiana law, Chase’s failure to answer the state court complaint resulted in its lien being extinguished.      

Holding.  The Rooker-Feldman doctrine prevented relitigation of the 1st Source foreclosure action.  The bankruptcy court did not disturb the state court’s decision defaulting Chase and rendering the lien of 1st Source first and senior.  

Policy/rationale.  The Court reasoned:  “Chase had a full and fair opportunity to participate in the 1st Source state court foreclosure action.  Any adverse outcome from that litigation is of Chase’s own making.  [The bankruptcy court] is not the proper forum to review the determination of the state court.”

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