Third Circuit Clarifies Rooker-Feldman vs. Preclusion in Bankruptcy: In re Adams

Intro

The United States Court of Appeals for the Third Circuit (the Third Circuit) recently affirmed a bankruptcy court decision in a chapter 13 case which granted relief from the automatic stay to a mortgage holder, allowing it to complete a foreclosure on the Debtor’s home.  In the intermediate appeal from the bankruptcy court ruling, the district court had also affirmed, but then had dismissed the appeal for lack of jurisdiction under the Rooker-Feldman doctrine.  The Third Circuit held that the application of the Rooker-Feldman doctrine was improper in this circumstance, but that the Debtor lost because of the application of claim preclusion.  The Third Circuit published to clarify the difference between the two doctrines, particularly as used in bankruptcy proceedings.  In re Adams, ___ F. 4th ___, 2025 WL 2525854 (3rd Cir. September 3, 2025).

To view the opinion, click here:
https://www2.ca3.uscourts.gov/opinarch/241212p.pdf

Facts

Debtor Eileen Adams (the Debtor) and her husband owned a house in New Jersey which was previously owned by her father.  Her father had encumbered the house by a first mortgage in favor of Mortgage Electronic Registration Systems (MERS) as nominee for AmTrust Bank.  After her father died, the Debtor owned the house subject to the AmTrust mortgage. AmTrust failed and eventually MERS assigned the mortgage to EverBank, which serviced the mortgage for Nationstar Mortgage. Prior to the pertinent chapter 13 bankruptcy, the Debtor had litigated whether EverBank was the proper holder of the mortgage in state court.  The New Jersey Appellate Division eventually affirmed a trial court ruling that EverBank held the note and could foreclose the mortgage.  The New Jersey Supreme Court denied discretionary review of that decision, making it final.

Interspersed with that ultimate state-court judgment were multiple bankruptcy proceedings by the Debtor and her husband, at least one chapter 7 and three different chapter 13 petitions, all with the apparent purpose of forestalling the foreclosure on their home.  In the Debtor’s final chapter 13, EverBank filed a motion for in rem relief from the automatic stay (based on the multiple prior cases), which the bankruptcy court granted over the Debtor’s assertions that neither EverBank nor Nationstar was the proper holder of the note and mortgage.  The Debtor appealed to the district court which affirmed, then dismissed the appeal for lack of jurisdiction under Rooker-Feldman, reasoning that the Debtor was asking the federal courts to void a final state-court judgment.  The Debtor appealed to the Third Circuit, resulting in this published opinion.

Reasoning

The Rooker-Feldman doctrine arose from two Supreme Court rulings, one in 1923 and the other sixty years later, which collectively dealt with federal court jurisdiction when a party sought to use the district court to review state court decisions.  When the holdings of those cases resulted in confusion among district courts, causing them to overutilize Rooker-Feldman, the Supreme Court issued a third opinion, Exxon-Mobil Corp. v. Saudi Basic Indus., 544 U.S. 280 (2005), which addressed the use of preclusion law rather than Rooker-Feldman in federal proceedings which either began after or ran parallel to actions in state court on the same or similar issues.  Exxon “issued a forceful reminder” that Rooker-Feldman is useful only in a limited number of cases, those “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.”  In more simple terms, Rooker-Feldman applies  where the state-court loser asks the federal court to exercise appellate review of the state-court judgment.  Federal district courts (and therefore also bankruptcy courts) lack jurisdiction over that review.

In contrast, claim and issue preclusion can prevent a federal court from ruling on the same claim or the same issue between the parties when a state court has rendered a final judgment on the same issue.  It is not a jurisdictional question, but rather a comity question.  Under the doctrine of claim preclusion a prior final judgment forecloses successive litigation of the very same claim between parties or those in privity.  Issue preclusion will bar successive litigation of an issue that was actually litigated and resolved in a valid court ruling and was essential to a prior judgment between the same parties, even if that issue arose in a different claim.  Bankruptcy courts frequently are asked to apply preclusion law where appropriate to final judgments rendered by a state court before a bankruptcy proceeding is filed. The use of such preclusion principles in federal court is founded on the principle of full faith and credit, as codified at 28 U.S.C. § 1738.  The federal court exercises jurisdiction but may give preclusive effect to a prior court decision.

The Third Circuit recognized the confusion between the doctrines in bankruptcy because many bankruptcy decisions are not based on the plaintiff/defendant relationship which seems to be a bright line in Rooker-Feldman.  Therefore, it added two additional conditions before Rooker-Feldman is met: (1) procedurally, the claim is alleged as part of an adversary proceeding, with a complaint, plaintiff and defendant; and (2) the federal bankruptcy plaintiff’s claim is not independent of the state court claim, i.e. it does not arise purely under a bankruptcy statute or rule or only in the context of a bankruptcy case.

In this case, the Debtor was not the plaintiff or even the moving party; that was EverBank, requesting in rem termination of the automatic stay.  Moreover, there was no adversary proceeding.  Rooker-Feldman did not remove the matter from federal jurisdiction.  However, the issue of who held the note and mortgage had been finally decided by the New Jersey state court in favor of EverBank.  The Debtor was precluded from using that ground to oppose the relief from stay motion.  The bankruptcy court was affirmed for that reason.

Author’s Comments

Several other federal appellate cases have addressed the use – and often misuse – of the Rooker-Feldman doctrine in bankruptcy matters.  That is not really surprising, since bankruptcy courts are often tasked with deciding how to apply, or not, rulings that state courts have made between a debtor and its creditors before a bankruptcy was filed.  The Third Circuit may have decided to address the difference between the two doctrines in this published opinion because in the Exxon case, the Supreme Court reversed the Third Circuit in a case arising in a bankruptcy context. This time it wanted to get it right and, if anything, to simplify the times Rooker-Feldman  was applicable.  Preclusion law has been discussed at length in prior case reviews here and the short descriptions articulated above from the Third Circuit’s opinion are good shortcut answers.  The unique twist for practitioners here is the two part test for application of Rooker-Feldman:  there must be an adversary proceeding and the claim must not be unique to bankruptcy.  If those criteria are not met, then do not rely on Rooker-Feldman.  If the issues or claims were previously decided by state courts, further litigation may be precluded but the bankruptcy court will have jurisdiction to rule.