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Bankruptcy Proofs Of Claim Following A State Court Judgment: Debt Locked In

Lesson.  If a lender obtains a judgment in a foreclosure case, the borrower generally cannot re-litigate the amount of the debt in a subsequent bankruptcy action.  

Case cite.  Harris v. Deutsche Bank, 2016 U.S. Dist. LEXIS 14838 (S.D. Ind. 2016) (.pdf).  Our law firm successfully handled this appeal for one of my servicer clients.  My partner Matt Millis took the lead with the briefing.   

Legal issue.  Whether a bankruptcy court is barred from recalculating a debt amount previously determined by a state court. 

Vital facts.  Lender held a senior mortgage on real estate owned by Debtor, who defaulted on the subject promissory note and mortgage.  Lender, in state court, filed a foreclosure action and obtained a summary judgment after Debtor unsuccessfully argued that Lender improperly calculated the amount due.  One of Debtor’s points was that Lender failed to account for payments the Chapter 13 Trustee made in Debtor’s prior bankruptcy.  Debtor did not appeal the state court’s summary judgment.  Debtor later filed the instant Chapter 13 case, and Lender filed a Proof of Claim based upon debt figures in the state court’s summary judgment order.  Debtor objected to the Proof of Claim and once again argued, among other things, that Lender failed to credit payments made during the prior Chapter 13 action. 

Procedural history.  Debtor appealed the bankruptcy court’s denial of her objection to Lender’s Proof of Claim.   

Key rules. 

The federal Full Faith and Credit Act at 28 U.S.C. 1738 “requires federal courts to give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State….”  In Harris, the doctrine of collateral estoppel (aka issue preclusion) applied. 

In Indiana, when used as a defense, the doctrine has five elements:  (1) a final judgment on the merits, (2) identity of the issues, (3) the party to be estopped was a party or in privity of a party in the prior case, (4) the party to be estopped had a full and fair opportunity to litigate the issue and (5) whether it would be otherwise unfair under the circumstances to permit the use of collateral estoppel. 

Holding.  The district court affirmed the bankruptcy court’s decision.  All of the elements of collateral estoppel had been met.

Policy/rationale.  The state court conclusively decided the amount owed by Debtor to Lender in the prior foreclosure action – after the parties litigated the matter.  There was an identity of the issues between the two cases.  Debtor had a full and fair opportunity to litigate the debt amount in state court.  Permitting the use of collateral estoppel was not unfair under these circumstances.  “If [Debtor] felt that the [state court] erred by disregarding her arguments or miscalculating an amount, she could have sought review by the Indiana Court of Appeals.  For whatever reason, she chose not to do that.”  As such, the law precluded Debtor from re-litigating that issue in the subsequent federal bankruptcy proceedings.   

Related posts. 

I represent judgment creditors and lenders, as well as mortgage loan servicers, in bankruptcy-related litigation.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com.  Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.