Bankruptcy Court Voids State Court Order Confirming Inapplicability of the Automatic Stay

On September 20, 2024, the United States Bankruptcy Court for the District of New Mexico (the “Bankruptcy Court”) ruled that the Rooker-Feldman doctrine does not prevent a bankruptcy court from determining whether the automatic stay applies to pending state court litigation in In re Shook, Case No. 24-10724-t7 (Bankr. N.M. Sept. 20, 2024) [ECF No.  54.

The Rooker-Feldman doctrine holds that lower federal courts should not review state court decisions unless Congress has specifically authorized such review. See Rooker v. Fid. Trust Co., 263 U.S. 413 (1923) and D.C. Ct. App. v. Feldman, 460 U.S. 462 (1983). The doctrine is based on the notion that litigants should not be able to challenge state court orders in federal courts to relitigate matters already decided by a state court. The Rooker-Feldman doctrine applies to Bankruptcy Courts. See, e.g., In re Wilson, 116 F.3d 87, 90 (9thCir. 2000)

In In re Shook, CNB Bank’s (“CNB”) moved to reconsider the Bankruptcy Court’s July 24, 2024, order ruling that two orders entered in a state court action violated the automatic stay and were void. CNB argued:

  • that the Court’s order ran afoul of the Rooker-Feldman doctrine and should be set aside;
  • that it did not violate the automatic stay because the assets addressed in the state court orders were not property of the bankruptcy estate; and
  • that the Court’s order should not apply to one of the individual defendants in the state court action because she did not file for bankruptcy protection.

The Bankruptcy Court rejected each of the arguments. In denying the motion, the Bankruptcy Court stated: 

While the court respects and follows the Rooker-Feldman doctrine, it does not apply here. It is universally acknowledged that Rooker-Feldman does not prevent a bankruptcy court from determining whether the automatic stay applies to pending state court litigation.

* * *

Thus, while state courts may determine their jurisdiction by deciding whether the automatic stay applies to an action before them, if the state court errs in finding that the automatic stay does not apply, the bankruptcy court is not bound by the error.

Citing an opinion from In re Hall, 2024 WL 1023129, *4 (Bankr. D. Kan.) (footnotes omitted), the Bankruptcy Court stated:

The bankruptcy court and state court have concurrent jurisdiction to determine whether the automatic stay applies, but the bankruptcy court has the final word. If a state court erroneously determines that the automatic stay does not apply in a case, it is in effect an improper modification of the automatic stay and renders the action in the nonbankruptcy proceeding void ab initio. The bankruptcy court has exclusive jurisdiction to grant stay relief and to enforce the automatic stay.

A minority of federal courts have applied the Rooker–Feldman doctrine and found no exceptions for the Bankruptcy Court to review a state court’s determination of the applicability of the automatic stay. See, e.g., In re Singleton, 230 B.R. 533 (6th Cir. BAP 1999); In re Siskin, 258 B.R. 554 (Bankr.E.D.N.Y.2001); In re Glass, 240 B.R. 782 (Bankr.M.D.Fla.1999).

Leave a Reply

Your email address will not be published. Required fields are marked *