Mortgagor Claims: There is A Limit to the Ability to Invoke the Assistance of Federal Courts

Zapotocky v. CIT Bank, N.A., 587 B.R. 589 (S.D.N.Y. 2018) –

A former debtor sued a mortgagee in federal district court claiming a breach of contract by the lender and challenging a foreclosure judgment entered in state court. This is one of several different proceedings used by the debtor as a forum to avoid a foreclosure sale. The lender moved to dismiss the case on various grounds.

The debtor obtained a reverse mortgage secured by his house in 2006. In 2008 he received a notice that he was required to obtain flood insurance. The debtor claimed that flood insurance was so prohibitively expensive that it was “impossible for [him] to pay the required taxes on [his] mortgaged house and property.” Subsequently:

  • November 2015: The debtor filed a chapter 7 bankruptcy and received a discharge in February 2016. (Note that this would discharge the debtor’s personal liability, but not the mortgage lien or the right to foreclose.) The debtor did not disclose any of his claims against the mortgagee.
  • May 2016: The mortgagee commenced a foreclosure action in state court.
  • December 2016: The state court entered a judgment of foreclosure and set a sale date.
  • January 2017: The state court granted the debtor’s motion to open the foreclosure judgment and extend the sale date.
  • April 2017: The debtor filed a new chapter 13 bankruptcy petition without disclosing his prior bankruptcy. The court dismissed the petition because of the prior discharge.
  • August 2017: The debtor filed another motion in state court to open the foreclosure judgment and to further extend the foreclosure sale date.
  • August 2017: The debtor filed this case in federal district court seeking relief from the flood insurance requirement and the foreclosure proceedings.
  • September 2017: The state court granted the debtor’s motion to open the foreclosure judgment and to further delay the sale date.
  • September 2017: This court allowed the debtor to proceed pro se. It also dismissed on the grounds that the claims were time-barred, but allowed the debtor an opportunity to amend his complaint.
  • December 2017: The debtor’s property was sold in a foreclosure sale.
  • December 2017: The debtor filed a “Motion to Stop Foreclosure Action” in state court based on the pending federal case. The state court ordered the debtor to file a copy of the federal complaint.
  • March 2017: the state court denied the debtor’s motion since he failed to file a copy of the federal complaint. The debtor then filed a state court appeal which was still pending at the time of this decision.

The court first addressed the mortgagee’s arguments that the debtor lacked standing and the court lacked subject matter jurisdiction.

The standing issue arose from the 2015 chapter 7 bankruptcy filing. A debtor is required to submit a disclosure schedule listing all assets, including any causes of action. Unscheduled claims become part of the bankruptcy estate. In a chapter 7 debtors do not have standing to pursue claims that remain part of the estate.

The court found that the debtor had entered into the reverse mortgage and was aware of the flood insurance requirement prior to filing the 2015 bankruptcy. This meant that the causes of action raised in this case existed prior to the bankruptcy. Since the debtor failed to disclose the claims in the bankruptcy, he did not have standing to pursue the claims before this court. Accordingly, the court determined that the claims must be dismissed without prejudice based on lack of standing.

With respect to jurisdiction, the mortgagee argued that under the Rooker-Feldman doctrine the court lacked subject matter jurisdiction. Under this doctrine “a federal district court lacks subject matter jurisdiction over a case that seeks to reverse or modify a state court decision, or a case in which the federal claims presented are ‘inextricably intertwined’ with the merits of the state court judgment.” Only the Supreme Court may review a state court judgment.

The court outlined the requirements for application of the doctrine as follows: (1) the federal plaintiff lost in state court, (2) the plaintiff complains of injuries caused by the state court judgment, (3) the plaintiff invites the district court to review and reject the state court judgment, and (4) the state court judgment was rendered before the district court proceedings commenced. Since all of these elements were met in this case, the court found that it was barred from exercising jurisdiction under the Rooker Feldman doctrine. This also required that the claims be dismissed without prejudice.

Although these findings were dispositive, the court proceeded to discuss the arguments that the claims were barred by res judicata and that the debtor failed to state a claim for relief. The court agreed that the claims would be barred by res judicata since the state court action was between the same parties, addressed the same subject matter and gave the debtor adequate opportunity to raise all of his objections.

With respect to a failure to state a claim, the debtor’s principal allegation was that he was required to purchase flood insurance even though he was not informed about the requirement at the time he signed the mortgage. However, the mortgage explicitly required the borrower to obtain flood insurance. Consequently, the complaint did not support a breach of the mortgage by the lender, fraudulent inducement or any tort related to the flood insurance requirement. Similarly, there was no claim under the Truth in Lending Act since the flood insurance requirement was disclosed in the mortgage.

Accordingly, the court dismissed the case without prejudice.

It is a fact of life that many if not most individual borrowers do not read their mortgage documents. So, it is almost certainly true that the debtor was not aware that he might be required to purchase flood insurance at the time he signed the mortgage. However, it is also true that the mortgagee was within its rights to require the insurance under the terms of the mortgage. Notwithstanding the mortgage terms or the fact that the debtor was required to purchase flood insurance 7 or 8 years before the foreclosure action commenced, it appears that he was able to raise a surprising number of hurdles with fairly minimal effort based on this issue. (For example, his only responses in this case were a couple of letters.)

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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