Sixth Circuit : Rooker-Feldman Doctrine Did Not Support Bankruptcy Court’s Dismissal of Debtor’s Claim
December 27, 2021, Sixth Circuit – The facts of the case as stated in the opinion are : Debtor Hakeem Lowry owned a home in Southfield, Michigan and failed to pay his property taxes for several years. The Oakland County Treasurer foreclosed on Lowry’s home in 2017. The City of Southfield exercised its statutory right of first refusal and bought the property for the amount of outstanding taxes due, which was substantially below the alleged fair market value of the property. The City of Southfield also executed a quit-claim deed to convey the property to the Southfield Neighborhood Revitalization Initiative (“SNRI”) for one dollar. On September 29, 2017, SNRI sent Lowry a notice to quit the property by October 29, 2017. After Lowry failed to vacate the property, SNRI filed a complaint in the 46th Judicial District Court of Michigan. The court granted SNRI’s motion for summary disposition and the Oakland County Circuit Court dismissed Lowry’s appeal as untimely.
Lowry filed for Chapter 13 bankruptcy in 2018 and brought an adversary proceeding against the Oakland County Treasurer and SNRI in the U.S. Bankruptcy Court for the Eastern District of Michigan. Lowry argued that the county’s foreclosure process denied him due process in violation of the state and federal constitutions. Lowry also asserted that the fraudulent transfer provision of the Bankruptcy Code Section 548 permitted the court to avoid the tax foreclosure.
The bankruptcy court orally granted SNRI’s motion for summary judgment. The court determined that the Rooker-Feldman doctrine mandated dismissal because Lowry was attempting to relitigate the foreclosure proceedings from state court. The court also concluded that the rule in BFP v. Resolution Trust Corp., should extend to tax foreclosures in Michigan. The Supreme Court had held in BFP that if the foreclosing authority followed state law in a mortgage foreclosure sale, the sale price was the “reasonably equivalent value” of the property for purposes of § 548. The court determined that Lowry could not use § 548 to avoid the transfer, because “at the very least the expiration of the redemption period following the judgment of foreclosure cuts off” Lowry’s ability to challenge the tax foreclosure. Lowry appealed the bankruptcy court’s judgment to the district court, arguing that the Rooker-Feldman doctrine did not bar jurisdiction, that the rule in BFP should not be extended to Michigan tax foreclosures, and that § 548 could still apply even though the redemption period had expired. The district court on appeal decided only the Rooker-Feldman issue and affirmed the judgment of the bankruptcy court on that basis. The court held that Rooker-Feldman barred review because Lowry’s appeal would require the court to revisit a fully-litigated state court decision. The court concluded that Lowry’s arguments were “nothing more than an attempt to gain review of the state court’s ruling.” The court denied Lowry’s motion for a rehearing, and Lowry filed a notice of appeal.
The Circuit Court held that the Rooker-Feldman doctrine did not support the bankruptcy court’s dismissal of the Debtor’s claim that the tax foreclosure could have been avoided as a constructive fraudulent transfer under 11 U.S.C.S. § 548 because the federal § 548 claim was independent of the state-court judgment, and the appeal did not involve a review of the merits of a state court judgment. The Court further held that the amount paid on foreclosure bore no relation at all to the value of the property, thus precluding defendants’ alternative argument that that the sale was for a reasonably equivalent value under the rule of BFP v. Resolution Trust Corp., 511 U.S. 531, 544-45, 114 S. Ct. 1757, 128 L. Ed. 2d 556 (1994).
Accordingly, the Sixth Circuit reversed the judgment of the district court and remanded to the court for proceedings consistent with its opinion for consideration of further arguments not fully developed.
Lowry v. Southfiled Neighborhood Revitalization Initiative (In re Lowry) , No. 20-1712, 2021 U.S. App. LEXIS 38533 (6th Cir. Dec. 27, 2021)