In re Smith

• Decision Date: 10 April 2023
• Docket Number: 17-34862
• Parties: In re Lynn Z. Smith
• Court: U.S. Bankruptcy Court — District of New Jersey

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In re Lynn Z. Smith

No. 17-34862

United States Bankruptcy Court, D. New Jersey

April 10, 2023

Counsel for Debtor Lynn Z. Smith, Self-Represented Debtor

Andrea Dobin, Esq. McManimon, Scotland & Baumann, LLC, Chapter 7 Trustee

Hon Michael B. Kaplan Chief Judge,

Dear Mrs. Smith and Counsel, Presently before the Court is Debtor's Motion for Reconsideration (the "Motion," ECF No. 547) of an Order Modifying the New Jersey Bureau of Securities' claim (the "Modification Order," ECF No. 543). At its core Debtor's Motion is not a challenge to the modification or reclassification of the Bureau's claim.^[1] Rather, it is a request that this Court reevaluate the validity of the claim altogether. As the Chapter 7 Trustee points out, the relief sought by Debtor cannot be achieved via a Motion for Reconsideration of the Modification Order. Moreover throughout this bankruptcy case, the Debtor has made-and this Court has addressed-similar requests. The Court denied those requests based on the Rooker-Feldman doctrine. The Court stands by its prior rulings and takes this opportunity to provide further clarification.

In her initial Reply pleading (ECF No. 551), Debtor-as she has done in the past- challenges the applicability of the Rooker-Feldman doctrine. This doctrine-whose name is derived from two Supreme Court cases-precludes lower federal courts from exercising appellate jurisdiction over final state-court judgments. See D.C. Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983); Rooker v. Fid. Tr. Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923). The Supreme Court has clarified that the doctrine applies in only a narrow set of "cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments." Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005). The Third Circuit has adopted a four-part test for determining whether a claim is subject to dismissal under the Rooker-Feldman doctrine:

(1) the federal plaintiff lost in state court;

(2) the federal plaintiff complains of injuries caused by the state-court judgments;

(3) those judgments were rendered before the federal suit was filed; and,

(4) the federal plaintiff is inviting the federal court to review and reject the state-court judgments.

Great Western Mining & Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 166 (3d Cir. 2010); see also In re Knapper, 407 F.3d 573, 580 (3d Cir. 2005) (explaining that Rooker-Feldman applies where "the federal claim is inextricably intertwined with the state adjudication, meaning that federal relief can only be predicated upon a conviction that the state court was wrong").

By way of the instant motion-and various motions in the past-Debtor purports to challenge the N.J. Bureau of Securities' proof of claim in her bankruptcy case. The arguments raised in her claim objections, however, attack the validity of the underlying state court judgment. Specifically, she disputes the judgment against her and asks for information from the State to explain the basis for its position in the state court action, as well as evidence regarding the precise transactions and calculations underlying the amount awarded to the Bureau in the state court action. However, it is enough in the context of this bankruptcy for the Bureau to base its proof of claim on the underlying state court judgment-the merits of which were extensively litigated in the state court prior to Debtor's bankruptcy filing. As reported by the Bureau, "[t]he Final Judgment was obtained following a ten-day trial that occurred over twelve years ago, where thirteen witnesses testified, and more than 100 documents were admitted into evidence on behalf of the Bureau. Debtor participated in the trial and was represented by counsel."

Given these circumstances, this Court determines that the factors required for application of the Rooker-Feldman doctrine are all present. Prior to the initiation of this bankruptcy proceeding, the parties went to trial and-after hearing evidence-the state court ruled on the merits of the claims, calculated damages, and issued a judgment against the Debtor based on its findings. The Debtor's pleadings in this bankruptcy case challenge the Bureau's proof of claim, which is premised on that state court judgment. Thus, any ruling in the Debtor's favor that reduces or eliminates the proof of claim would necessarily entail a determination that the state court was wrong and/or would undercut the state court judgment, including its determination of liability and calculation of damages. Accordingly, the Rooker-Feldman doctrine applies and precludes relitigation of the state court action in this bankruptcy proceeding. See, e.g. Schmidt v. SN Servicing Corp., No. 22-CV-01313 (SDW), 2023 WL 1860593, at *5 (D.N.J. Feb. 9, 2023) (affirming bankruptcy court's dismissal of debtor's claims challenging the validity of the state court foreclosure proceeding and the subsequent foreclosure judgment).

This Court notes that Debtor makes various allegations of corruption, criminality, and fraud. A district court discussed the "fraud exception" to the Rooker-Feldman doctrine:

Under the fraud exception, which has been embraced by the Courts of Appeal for the Sixth and Ninth Circuits, Rooker-Feldman does not apply when the plaintiff asserts that the 'state court judgments were procured by . . . [the defendants through fraud, misrepresentation, or other improper means,' because such claims are "independent" of the claims brought in state court." Campbell v. Tabas, No. 16-6513, 2017 WL 3142118, at *3 (E.D. Pa. July 25, 2017) (quoting McCormick v. Braverman, 451 F.3d 382, 392-93 (6th Cir. 2006) and citing Kougasian v. TMSL, Inc., 359 F.3d 1136 (9th Cir. 2004)). Yet, "the Second, Fifth, Seventh, Eighth, Tenth, and Eleventh Circuits have rejected the exception, as have district courts from the Fourth Circuit." Id. (citing appropriate cases from each of these circuits). "The Court of Appeals for the Third Circuit has not definitively weighed in on this debate, though it has discussed the exception in dicta and in nonprecedential opinions.'" Id. (explaining that the Third Circuit discussed the exception "favorably" in Great W. Mining & Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159 (3d Cir. 2010) and applied it "inconsistently" in several unpublished opinions thereafter). Therefore, it is unclear whether this exception exists within the Third Circuit.

Davis v. Fein Such Kahn & Shepard PC, No. CV 18-8560, 2019 WL 1789471, at *5 (D.N.J. Apr. 24, 2019).

However, the Davis court found that-even assuming the fraud exception to the Rooker-Feldman doctrine applies in the Third Circuit-it would "not protect a plaintiff's 'attempt[ ] to overturn a state-court foreclosure judgment by cloaking his objections to the [state-court] decision in a veneer of fraud.'" Davis, 2019 WL 1789471, at *6 (quoting Kajla v. Cleary, No. 18-15449, 2019 WL 77067, at *3 (D.N.J. Jan. 2, 2019)). Likewise, this Court finds that-to the extent such an exception exists in the Third Circuit-the Rooker-Feldman fraud exception does not protect a debtor's attempt to reduce or eliminate a prima facia valid proof of claim where, as here, the debtor's objections and requests for information are attempts to overturn the state-court judgment cloaked in a veneer of fraud. Debtor in this case simply does not raise any arguments that were not, or could not have been, raised during the state court proceedings. See Davis 2019 WL 1789471, at *6 (citing Kajla, 2019 WL 77067) ("Moreover, courts are reluctant to recognize the fraud exception when a plaintiff already raised the fraud argument in the state court action and the state court rejected it."); Kemp v. Select Portfolio, Inc., No. CV 18-17215, 2019 WL 3369692, at *4 (D.N.J. July 26, 2019) (assuming the exception's viability in the Third Circuit and nevertheless determining that a plaintiff's objections did not fall within the fraud exception).

Further to the extent the fraud exception exists in the Third Circuit, case law indicates that it should be narrowly applied. See, e.g., Siano v. M&T Bank, Civil Action No. 20-12827, 2021 WL 2682637, at *4 (D.N.J. June 30, 2021), reconsideration denied, Civil Action No. 20-12827, 2022 WL 37419 (D.N.J. Jan. 4, 2022), dismissed, No. 22-1205, 2022 WL 3096021 (3d Cir. Mar. 11, 2022) (citing Farzan v. Bayview Loan Servicing, LLC, No. 20-cv-03330, 2021 WL 613843 (D.N.J. Feb. 17, 2021), aff'd sub nom. In re Farzan, No. 21-1334, 2021 WL 4075750 (3d Cir. Sept. 8, 2021). Here, Debtor's objections to the Bureau's proof of claim do not fall within the narrow fraud exception to the Rooker-Feldman doctrine. In her Motion, Debtor states that she did not agree with "reclassification" of the claim because she disputes the size of the claim based on "mistake," which she explains is "official corruption." Motion 4, ECF No. 547. In support of her corruption argument, Debtor attaches portions of a transcript and other documents which she states are "ultimate evidence of official corruption and criminality." Id. As an initial matter, these excerpts and documents pertain entirely to Mr. Brian Smith, Debtor's husband, who is not the Debtor in this case. Additionally, they are taken out of context and do not conclusively establish any sort of mistake, corruption, or criminality-or otherwise form a basis to disregard the Rooker-Feldman doctrine. This Court has reviewed Debtor's exhibits and is familiar with Debtor's prior submissions, which similarly do not establish mistake, corruption, or criminality. Simply put, Debtor's disagreement with the...