Picking up where the Supreme Court left off, the Third Circuit limited the circumstances in which courts can properly apply the Rooker-Feldman doctrine.
Named for two Supreme Court decisions, Rooker-Feldman stands for the proposition that federal courts lack subject matter jurisdiction to review judgments by state courts. In simple language, it means that a plaintiff cannot appeal a state court judgment in federal court.
The issue arose in the bankruptcy of an ill-fated casino in Philadelphia. The debtor had paid the state $50 million for a gaming license. When the casino’s opening was years behind schedule, the state cancelled the license, essentially causing the debtor to forfeit the $50 million. The debtor unsuccessfully challenged license revocation in state trial and appellate courts.
Two years later, the debtor filed a chapter 11 petition and sued the state, alleging constructively fraudulent transfers under Section 548 and Pennsylvania’s version of the Uniform Fraudulent Transfer Act.
Citing Rooker-Feldman, the bankruptcy court dismissed the suit, reasoning, among other things, that finding a fraudulent transfer would necessarily overturn the state court judgment upholding license cancellation. The debtor was succeeded by a litigation trustee who took over the appeal.
After the district court upheld dismissal, the trustee appealed to the Third Circuit and won in a Jan. 11 opinion by Circuit Judge Morton I. Greenberg.
Judge Greenberg’s opinion builds on Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280 (2005), where the Supreme Court said that federal courts have been too quick to invoke Rooker-Feldman. Courts should dismiss for lack of subject matter jurisdiction under the doctrine only when the plaintiff seeks review of a state court judgment.
To avoid Rooker-Feldman problems, the trustee had not alleged that license revocation was illegal under state law nor a denial of due process. Similarly, the trustee was not seeking reinstatement of the license. Instead, the trustee wanted payment for the value of the license.
Focusing on the relief sought in the complaint, Judge Greenberg said that the trustee was not asking for appellate review of license revocation. “The bankruptcy court did not need to consider the bona fides of that decision,” he said. Instead, the proper Rooker-Feldman analysis is to begin from the proposition that the state court reached the correct result.
In essence, license revocation issues and fraudulent transfer claims are independent of one another. The bankruptcy court could have ruled on the elements of a constructively fraudulent transfer “without rejecting or even reviewing” the decisions in state court upholding revocation, Judge Greenberg said.
Judge Greenberg said that Rooker-Feldman did not apply because the bankruptcy court could have decided whether license revocation, “which occurred because of valid state proceedings, could nonetheless be avoided under the Bankruptcy Code.”
The next question, according to Judge Greenberg, involved the relief requested by the trustee.
The bankruptcy court had dismissed on Rooker-Feldman, saying that a judgment to pay the value of the license would be the “functional equivalent to invaliding the state court decision.”
Judge Greenberg disagreed. The fraudulent transfer claims are independent of the state law licensing issues and due process, he said, adding that “it does not matter for Rooker-Feldman doctrine purposes that the relief” sought by the trustee “would frustrate the Commonwealth Court’s order.”
Ordinarily, Judge Greenberg said, the final step in a Rooker-Feldman analysis would entail applying state law to determine the preclusive effect of the prior state court judgment. On appeal in the circuit, however, neither of the parties had raised the issue.
Therefore, Judge Greenberg remanded the case to the district court to decide (1) whether claim or issue preclusion would bar the fraudulent transfer claim, (2) whether the trustee had stated a fraudulent transfer claim, and (3) whether sovereign immunity under the Eleventh Amendment would bar the trustee’s claim.
Judge Greenberg gave the district court the option of remanding the case to the bankruptcy court to determine those issues.
On remand, the issue will be similar to the question of whether tax sales, otherwise valid under state law, can be set aside as fraudulent transfers or preferences. For ABI’s discussion of a recent decision on that issue, where the courts are divided, click here.