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Fraud, Bankruptcy Courts and the Rooker-Feldman/Res Judicata doctrines

A very interesting judgment was recently handed down by the United States Bankruptcy Court for the Southern district of New York. This judgment examined and pronounced upon the effects (in Federal Court) of fraud on the application of Res Judicata/Rooker-Feldman Doctrine.

Brief Background

In this case, the debtor Frank Petrelli approached the Court to challenge as well as determine JP Morgan Chase’s (“Chase”) status as a secured creditor.

Mr. Petrelli’s Counsel argued that Chase’s proof of claim was not a copy of an original note and that it differed from a version which was produced in State Court by Chase at a foreclosure action which preceded the bankruptcy case. Mr. Petrelli’s Counsel also sought for the Court to discountenance Chase’s Affidavit of lost note by declaring that it could not be relied upon to establish ownership of the note and mortgage.

Mr. Petrelli’s Counsel carefully pointed out the material differences between the note produced in State Court during the foreclosure proceedings and the copy produced during subsequent bankruptcy proceedings in Federal Court.

Flowing from the above; several reliefs including the following were sought by Counsel on behalf of Mr. Petrelli;

  • Expunging and striking out from the Court’s records of Chase’s first mortgage claim against Mr. Petrelli’s home in Montgomery, New York.
  • Voiding of any lien claims over Mr. Petrelli’s home by Chase.
  • Alternatively, a reduction of mortgage arrears to the minimum allowed by law.
  • Awarding of actual, statutory as well as punitive damages against Chase by the Court.
  • Reimbursement for all legal and attorney fees as well as all other related expenses incurred by Mr. Petrelli in the prosecution of this suit.

An interesting twist to this intriguing case was that Chase chose to ignore the serious allegations that had been leveled against it – that it was attempting to use two different notes to prove its Mortgage debt and therefore committing fraud. Rather than address these serious allegations, Chase filed a motion to dismiss the suit, arguing (relying on the Rooker-Feldman and Res Judicata doctrines) that the Court must (emphasis ours) abstain from hearing these allegations as they had been decided upon in the State Court (in the earlier foreclosure Proceedings) and that if the Court were to proceed with hearing the allegations, it would amount to sitting on appeal over a decision handed down by the State Court – a direct violation of the Rooker – Feldman and Res Judicata doctrines. Chase also alleged that the debtor, Mr. Petrelli was deploying stall tactics to delay the foreclosure sale.

Counsel for Mr. Petrelli opposed Chase’s motion to dismiss arguing that from several indications, there was clear evidence that Chase was attempting to commit fraud.

In delivering a decision (ultimately in favor of Mr. Petrelli) on the motion to dismiss, the Court made clarifications on several issues such as:

  • In order to defeat a motion to dismiss (as filed by Chase); a Complaint (as filed by Mr. Petrelli) MUST contain sufficient factual matter which must be accepted as true. Merely pleading or alleging that Chase had committed fraud would not suffice, Mr. Petrelli was expected to provide sufficient evidence of the alleged fraud – in this case, Chase’s attempt to pass off two different documents as evidence of its mortgage claim over Mr. Petrelli’s home. The Court drew on its judicial experience as well as common sense in determining what could be regarded as sufficient factual evidence. The Court took cognizance of the fact that it was required to look into the factual content of the Plaintiff’s (Mr. Petrelli in this instance) complaint over and above every other consideration.

Following the decision in Sira v. Morton, 380 F.3d 57 (2d Cir. 2004), the Court declared that;

“a complaint is deemed to include any written instrument attached to it s an exhibit, material incorporated in it by reference and all other documents which though not incorporated into the complaint by reference, are integral to the complaint”

  • The Res Judicata and Rooker – Feldman doctrines do not and can never apply to the facts (fraud) as alleged by Mr. Petrelli especially as the allegations of fraud against Chase by Mr. Petrelli arise largely due to the fact that the proof of claim which was filed by chase did not exist (and could not have been decided upon) at the earlier foreclosure proceedings in State Court and could therefore not be deemed as falling under the Res Judicata and Rooker – Feldman doctrines.

Additionally, the State Court (foreclosure proceedings) could NEVER have ruled on the validity or otherwise of a Proof of Claim as that lay within the exclusive jurisdiction of the Bankruptcy Court by virtue of being a purely bankruptcy matter. This sound reasoning is backed up by Judicial Precedent (earlier binding decisions) as laid down in Kelleran v. Andrijevic, 825 F.2d 692,698 as well as Re Knapper, 407 F.3d 573,583 in these cases the principles that;

“the Bankruptcy Court in the allowance or rejection and ordering of claims shall not be bound by any broad or rigid rules of Res Judicata”


“A state Court judgment does not have res judicata effect because the Bankruptcy Judge is the only authority that can decide if a claim is allowable”

Were laid down and were correctly followed by the Court in Mr. Petrelli’s case against Chase.

The Court also followed the well established rule that regardless of the Res Judicata and Rooker – Feldman doctrines,  State Court judgment which is entered in a case that falls within the Federal Court’s exclusive jurisdiction (e.g. Bankruptcy) is subject to “attack” (i.e. review) in the Federal Courts.

  • Regardless of the Rooker – Feldman doctrine which prohibits Federal Courts from sitting on appeal over judgments emanating from a State Court, allegations of fraud are deemed as operating as exceptions to the doctrine as the applicability of the doctrine is based not on the similarity between a party’s State Court and Federal Court claims, but rather on the causal relationship between the State Court judgment and the injury of which the party complains in Federal Court.

Several previous judgments also support the principle that regardless of the doctrine of Res Judicata, procurement of a judgment by fraudulent means will not preclude a Federal Court from jurisdiction over a {New York} State Court’s judgment a few of such cases are:

Kelleran v. Andrijevic, 825 F.2d 692,694 (2d Cir. 1987); Re Slater, 200 B.R 491,495 (EDNY 1996); County of Suffolk v. Long Island Lighting Co., 710 F.Supp. 1387, 1393 (EDNY 1989).

The above cases are also indicative of the fact that New York State Law permits attacks on State Court Judgments (in Federal Court) which are obtained by extrinsic (as opposed to intrinsic) fraud.


The Court denied Chase’s motion to dismiss on the grounds of the foregoing while additionally granting Mr. Petrelli permission to amend his complaint to include a breach of contract.