NLG, LLC v. Horizon Hospitality Group, LLC (In re Hazan), ___ F.3d ___, 2021 WL 33907781 (11th Cir., Sept. 1, 2021)

The following is a case update written by Adam A. Lewis, Senior Counsel at Morrison & Foerster LLP, analyzing a recent decision of interest:

SUMMARY

In NLG, LLC v. Horizon Hospitality Group, LLC (In re Hazan), ___ F.3d ___, 2021 WL 33907781 (11th Cir., Sept. 1, 2021) (“Hazan”), the United States Court of Appeals for the Eleventh Circuit (the “Court”) held the Bankruptcy Court’s judgment sustaining the adversary proceeding claims of the debtor and an affiliated party that a mortgagee no longer held a lien on the debtor’s mortgaged property did not violate the federal Rooker-Feldman doctrine because the Bankruptcy Court’s judgment actually applied and enforced the rulings in those other cases rather than overturning them.

Hazan can be found by clicking here.

FACTS

The facts as recited in the opinion are convoluted and a bit obscure. These are the essentials. In 2006, NLG sold a Florida home to the Hazan (“the debtor”) for $5.1 million, taking back a note and mortgage to secure the purchase price. NLG sued the debtor on the note in 2007 in Florida state court (the “2007 Action”). The result was a default money judgment for NLG against the debtor for about $1.6 million (the “2007 Money Judgment”). In 2011, NLG sued the debtor again in Florida to foreclose on the mortgage, but in 2014 the Florida court found that by seeking a money judgment in the earlier action NLG had elected its monetary remedy instead of foreclosure and therefore was limited to enforcing the 2007 Money Judgment. NLG appealed the this latest ruling (the “Election Judgment”) to a Florida appellate court.

In the meantime, in 2012 a third party obtained an unrelated $5 million judgment in New York state court against NLG (the “Third Party Judgment”) Selective, also a stranger to the situation, acquired the Third Party Judgment and recorded it against NLG in a Florida state court action (the “Selective Action”). That Florida court issued an order (the “Assignment Order”) assigning the 2007 Judgment and all of NLG’s rights against the debtor to Selective in partial satisfaction of the Third Party Judgment. Subsequently, in the Selective Action against NLG, Selective recorded a satisfaction of NLG’s 2007 Money Judgment against the debtor as partial satisfaction of the $5 million Third Party Judgment against NLG it had acquired from the third party in New York.

Next, the Florida appeal court granted the NLG’s appeal of the Florida Election Judgment. On remand, the Florida court entered a foreclosure judgment (the “Foreclosure Judgment”) for NLG against the debtor even though NLG’s rights against the debtor had been assigned by the other Florida court to Selective by the Assignment Order in the Selective Action. The Foreclosure Judgment also found that NLG had a remaining claim against the debtor for $4.8 million, setting the underlying property for foreclosure sale on January 12, 2016 to satisfy the residual $4.8 million debt. Selective tried unsuccessfully to intervene in these proceedings.

On January 11, 2016, the day before the scheduled foreclosure sale, the debtor filed a Chapter 11 case (the “Bankruptcy Case”) in the Bankruptcy Court in Florida. After NLG filed a proof of claim (the “NLG Claim”) based on its 2007 Money Judgment and subsequent Foreclosure Judgment, Selective filed an adversary proceeding against NLG in the Bankruptcy Case contesting the NLG Claim (in which the debtor joined as a co-plaintiff) based upon the Assignment Order in the second Florida case. In its ruling in the adversary proceeding (the “Bankruptcy Judgment”) the Bankruptcy Court found the debtor had in effect exercised her right to redeem the property from foreclosure and that, as a result of the rulings in the Selective Action, Selective had applied NLG’s claims from the 2007 Action and the Foreclosure Action to the Third Party Judgment it had bought in New York, at one and the same satisfying NLG’s claims against the debtor, stripping NLG of any rights against the debtor.

The debtor then proceeded to confirm a plan of reorganization without objection or appeal by NLG. NLG chose instead to appeal the Bankruptcy Judgment to the District Court on the grounds that the Bankruptcy Court’s decision violated the federal Rooker-Feldman doctrine. The District Court disagreed, and NLG appealed to the Court. The Court also denied the appeal.

REASONING

The opinion addresses several issues. The most important is NLG’s Rooker-Feldman doctrine violation argument. The doctrine is named after D.C. Ct. of Appeals v. Feldman, 460 U.S. 462, 482 (1983) and Rooker v. Fidelity Tr. Co., 263 U.S. 413, 416 (1923). According to Rooker-Feldman, and their progeny, a federal court lacks subject matter jurisdiction to sit in the place of a state court of appeal reviewing facts or determinations made by state courts, particularly where there is a means of appeal expressly provided under state law. See Washington v. Wilmore, 407 F.3d 274, 285 n.3 (4th Cir. 2005). See also Hoblock v. Albany Cnty. Bd. of Elections, 422 F.3d 77 (2d Cir. N.Y. 2005); Reusser v. Wachovia Bank, N.A., 525 F.3d 855, 858 (9th Cir. 2008). Rooker-Feldman also may apply “over a suit that is a de facto appeal from a state court judgment” because in such circumstances, “the district court is in essence being called upon to review the state court decision.” Id., 525 F.3d at 858-859 (internal quotations omitted). In 2005, the United States Supreme Court squarely addressed the principles of the Rooker-Feldman doctrine for the first time since the Feldman decision. Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 287 (2005). The Exxon Mobil test for the application of the Rooker-Feldman doctrine can be divided into the following four elements: “[1] cases brought by state-court losers [2] complaining of injuries caused by state-court judgments [3] rendered before the district court proceedings commenced and [4] inviting district court review and rejection of those judgments.” Id.In Hazan NLG claimed that the Bankruptcy Court’s judgment conflicted with the Florida court’s decision in the Foreclosure Judgment.

The Court found that Bankruptcy Court did not purport to review the Florida Foreclosure Judgment. Neither of the two plaintiffs in the adversary proceeding, the debtor and Selective, asked the Bankruptcy Court to overturn the various state court decisions. Rather, the Bankruptcy Court sought to apply and harmonize those decisions, not reverse them. The Court emphasized that the debtor undercut NLG’s previously-determined rights by “exersiz[ing] her right to redeem the Property by satisfying the judgment before the foreclosure sale . . . ” NLG had in turn established that it was due sufficient credit to satisfy the Assignment Order. In short, the Bankruptcy Court’s judgment on its face did not even implicate a Rooker-Feldman issue. (The Court also found the appeal equitably moot because NLG failed to make any timely attempt to stay the Bankruptcy Judgment or the Bankruptcy Court’s plan confirmation order; hence too much water had passed under the bridge to equitably undo the status quo.)

Further, Rooker-Feldman applies standards reminiscent in some respects of (but not identical to) the criteria for application of claim preclusion. The Court thus also noted that this doctrine only applies if the parties to both proceedings are the same; but in this case Selective, having tried futilely to intervene, was not a party to the state court proceedings resulting in the Foreclosure Judgment. It also rejected NLG’s theory that Selective was a “de facto” party (a consideration similar to the privity issue in claim preclusion) because NLG provided no evidence that Selective was controlling the proceedings from behind the scenes.

AUTHOR’S COMMENT

The key ruling is that the Bankruptcy Judgment purportedly harmonized the various state court rulings. How that is so is a bit opaque. It simply is not clear how the Bankruptcy Court found that NLG’s full claim against the debtor had been satisfied so that the debtor had redeemed the Property. But if that assessment of the Bankruptcy Judgment is correct, Hazan is correct, as well. Also notable are portions of the opinion focusing on how NLG damaged its appeal by failing to appeal or try to get timely stays of the certain of the relevant judgments, particularly the confirmation order and Bankruptcy Judgment. Although even timely actions to avoid equitable mootness might have been rejected, it is even more clear that untimely ones were doomed from the start.

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.