IN RE: Dawn C. OHLSSON (2021)

ORDER

Dawn Ohlsson, the plaintiff in an adversary proceeding related to her underlying bankruptcy case, appeals an order from the bankruptcy court that granted Appellee U.S. Bank's motion to dismiss for lack of jurisdiction under the Rooker-Feldman doctrine. After reviewing the record, the parties’ briefs, and applicable law, the Court determines that the bankruptcy court did not err when it dismissed the adversary complaint under the Rooker-Feldman doctrine or when it found that U.S. Bank was not required to file a proof of claim. Nor did the bankruptcy court abuse its discretion when it held, in the alternative, that Ohlsson's adversary complaint should be dismissed under 11 U.S.C. § 1334(c)(1)’s permissive abstention. Therefore, the Court affirms.

I. BACKGROUND

On August 13, 2002, Dawn Ohlsson bought a residential property in Sarasota County, Florida. (Doc. 5-7 at 2, 5.) On December 12, 2005, Ohlsson took out a mortgage on the property for $168,000 from Aegis Lending Corporation. (Id. at 5.) By November 2, 2012, Aegis descended into bankruptcy and ceased to exist. (Id.) U.S. Bank claims to be the assignee and present beneficiary of Ohlsson's mortgage with Aegis. (Id. at 6.) But in Ohlsson's view, the assignments were invalid and fraudulent, (id. at 6–23), and U.S. Bank does not have any valid interest in the mortgage, (id. at 23). Nevertheless, U.S. Bank “is seeking to deprive [Ohlsson] of the possession of her real property.” (Id. at 2.)

On September 20, 2019, the Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County, Florida, entered a final judgment concerning the property. (Doc. 5-14 at 2–3.) With Ohlsson and U.S. Bank's agreement, the court determined that U.S. Bank held “a first mortgage lien for the total sum superior to all claims or estates of [Ohlsson]” on the property. (Id.) Ohlsson asserts that she “was tricked by U.S. Bank[’s] cunning deception into agreeing to sign the judgment.” (Doc. 11 at 13.) Ohlsson did not appeal the state-court judgment, and it remains in effect. (Doc. 6 at 3.)

Ohlsson then filed for Chapter 7 bankruptcy on February 4, 2020. (Doc. 11 at 12.) Ohlsson claimed the full amount of the property as exempt on her Schedule C. (Doc. 5-9 at 2.) The Chapter 7 Trustee filed a report of no distribution, advising that “there is no property available for distribution from the estate over and above that excepted by law.” (Doc. 5-6 at 4–5.) As such, Ohlsson's Chapter 7 was a “no asset” case. By April 10, 2020, U.S. Bank had not filed a proof of claim in the bankruptcy proceeding. (Doc. 11 at 12); 14 Collier on Bankruptcy § 5.11(16th ed. 2021) (defining a proof of claim as “a written statement that sets forth a creditor's claim”).

On June 18, 2020, Ohlsson filed an adversary complaint against U.S. Bank with the United States bankruptcy court under Bankruptcy Rule 7001(2). (Doc. 11 at 3.) Through the complaint, Ohlsson sought to “determine [U.S. Bank's] secured status” because “U.S. Bank never filed ․ the required proof of claim.” (Doc. 11 at 4.) U.S. Bank responded by moving to dismiss the complaint for lack of jurisdiction, citing the Rooker-Feldman doctrine and permissive abstention based on the prior state court determination of its security interest in the property. (Doc. 11 at 3.)

On October 26, 2020, the bankruptcy court held a hearing on U.S. Bank's motion to dismiss for lack of jurisdiction. (Doc. 11 at 3.) The bankruptcy judge granted the motion, ruling that Ohlsson's adversary complaint “was squarely in the purview of Rooker-Feldman.’’ (Doc. 6 at 3.) And even if Rooker-Feldman did not apply, the bankruptcy judge held that she would abstain under 11 U.S.C. § 1334(c)(1) and the factors articulated in Wood v. Ghuste (In re Wood), 216 B.R. 1010 (Bankr. M.D. Fla. 1998) (Corcoran, J.). (Doc. 6 at 8–10.) Finally, the bankruptcy judge determined that U.S. Bank was not required to file a proof of claim because of 11 U.S.C. § 506(d)(2)’s “ride-through” provision. (Doc. 6 at 5–6.) The bankruptcy court entered an order granting the motion to dismiss “for the reasons stated orally and recorded” at the October 26, 2020 hearing. (Doc. 5-2 at 2.) On November 10, 2020, Ohlsson filed a notice of appeal to this Court. (Doc. 11 at 3.) She alleges that the bankruptcy court “abused its discretion and or erred” when it granted U.S. Banks motion to dismiss. (Doc. 11 at 4.)

II. LEGAL STANDARD

A district court serves in an appellate role while reviewing a bankruptcy court's decisions. See Williams v. EMC Mortg. Corp. (In re Williams), 216 F.3d 1295, 1296 (11th Cir. 2000). Accordingly, a district court reviews the bankruptcy court's legal conclusions de novo. See Bush v. JLJ Inc. (In re JLJ Inc.), 988 F.2d 1112, 1116 (11th Cir. 1993); Lozman v. City of Riviera Beach, 713 F.3d 1066, 1069 (11th Cir. 2013) (noting that appellate review of Rooker-Feldman is de novo). A district court must accept a bankruptcy court's factual findings unless they are clearly erroneous. Coady v. D.A.N. Joint Venture III (In re Coady), 588 F.3d 1312, 1315 (11th Cir. 2009). Meanwhile, a district court reviews equitable determinations, like abstention, under an abuse of discretion standard. See Robertson v. Robertson (In re Robertson), 140 F. Supp. 2d 1274, 1277 (M.D. Ala. 2001); For Your Eyes Alone, Inc. v. City of Columbus, 281 F.3d 1209 (11th Cir. 2002) (reviewing abstention for abuse of discretion).

III. ANALYSIS

Ohlsson raises two issues on appeal. First, she argues that the bankruptcy court erred when it dismissed for lack of jurisdiction under Rooker-Feldman. Second, she argues that the bankruptcy court erred when it found that U.S. Bank was not required to file a proof of claim in her bankruptcy proceeding. While not raised by Ohlsson on appeal, this Court also considers whether the bankruptcy court abused its discretion by ruling in the alternative that it would abstain if the Rooker-Feldman bar did not apply because it is an independent ground that is sufficient to uphold the decision.

A. Rooker-Feldman Bars Ohlsson's Adversary Complaint

The Rooker-Feldman doctrine recognizes that lower federal courts do not have jurisdiction to “review state court final judgments because that task is reserved for state appellate courts or, as a last resort, the United States Supreme Court.” Casale v. Tillman, 558 F.3d 1258, 1260 (11th Cir. 2009). As the Eleventh Circuit recently reminded district courts, the doctrine “will almost never apply.” Behr v. Campbell, 8 F.4th 1206, 1213 (11th Cir. 2021). But almost never is not never. The doctrine applies to “cases 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.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005). In contrast, when “the plaintiff presents ‘some independent claim,’ ” it is not barred merely because it “denies a legal conclusion that a state court has reached.’ ” Behr, 8 F.4th at 1212 (quotation omitted). But Rooker-Feldman “does not prioritize form over substance. It bars all appeals of state court judgments—whether the plaintiff admits to filing a direct appeal of the judgment or tries to call the appeal something else.” Id. at 1211. As such, this Court has “a simple inquiry—whether [Ohlsson's] claim directly challenge[es] a state court loss.” Id. at 1211. This Court concludes that it does.

As noted above, a truly “independent claim” it is not barred merely because it “denies a legal conclusion that a state court has reached.’ ” Id. at 1212 (quotation omitted). Ohlsson tries to squeeze her complaint into this rule, but the shoe does not fit. In her response to the motion to dismiss, Ohlsson argues that her bankruptcy proceeding is “an independent federal action” that does not implicate the state court judgment. (Doc. 5-10 at 9, 12.) She reasons that, since Bankruptcy Rule 3002 requires U.S. Bank to file a proof of claim, its failure to do so gives the bankruptcy court cause to invalidate U.S. Bank's interest “regardless of whatever [state-court] judgment it claims to have[ obtained].” (Doc. 5-10 at 9.)

There are three problems with this argument. First, it appears nowhere in her complaint. Ohlsson presents this “federal claim” for the first time in her response to the motion to dismiss. The complaint filed to initiate the adversary proceeding does not rely on bankruptcy law at all. Instead, Ohlsson alleges that fraud, property law, and secured transactions principles require the bankruptcy court to set aside U.S. Bank's mortgage. (Doc. 5-7 at 24, 27–28.) Of course, that relief would directly undo the state court judgment. Second, and as explained below, it rests on an incorrect statement of bankruptcy law. U.S. Bank was not required to file a proof of claim in the Chapter 7 proceeding. See 11 U.S.C. § 501(a) (“A creditor or an indentured trustee may file a proof of claim.” (emphasis added)). Third, even if U.S. Bank was required to file proof of its claim, its failure to do so does not provide an independent action to invalidate its security interest. See 11 U.S.C. § 506(d) (providing that a claim is not void or voidable simply due to “the failure ․ to file a proof of such claim”). So, Ohlsson has no separate federal claim. “Although narrow in its application, a state court loser cannot avoid Rooker-Feldman's bar by cleverly cloaking her pleadings in the cloth of a different claim. Pretext is not tolerated.” May v. Morgan Cnty., 878 F.3d 1001, 1005 (11th Cir. 2017).

Without the cover of a separate federal claim, Ohlsson's complaint bears the distinctive mark of Rooker-Feldman: a plaintiff—directly or indirectly—invites “review and rejection” of a state court judgment. Behr, 8 F.4th at 1212. On September 20, 2019, a state court entered a judgment ruling that U.S. Bank held a mortgage on the property superior to all claims of Ohlsson. (Doc. 5-14 at 1–2.) On June 18, 2020, Ohlsson filed an adversary complaint in the bankruptcy court, alleging that U.S. Bank procured that mortgage by fraud. (Doc. 5-7 at 2.); see Nicholson v. Shafe, 558 F.3d 1266, 1274 (11th Cir. 2009) (“[The] state court must have rendered judgment before the [federal court] proceedings commenced.”) Ohlsson proclaims at the outset that her suit is “not for the purpose to overturn the state court foreclosure,” (Doc. 5-7 at 5 (emphasis omitted)), but her requests reveal a different purpose. She asks the bankruptcy court to “determine the validity, priority, and extent [of U.S. Bank's interest],” (Doc. 5-7 at 24), and for a “judicial declaration that the mortgage is void,” (Doc. 5-7 at 26). The state court decided this exact question. It determined that U.S. Bank held “a first mortgage lien for the total sum superior to all claims or estates of Defendant(s) on” the property at issue. (Doc. 5-14 at 2.)

But Ohlsson is not only asking to relitigate the “same dispute on the same facts that led to the state judgment,” (Doc. 11 at 8), or for a contradictory result to the sole holding of that court. She also asks that U.S. Bank be “forever enjoined from asserting any estate, right, title or interest in the Subject Property.” (Doc. 5-7 at 27.) She protests that she is not asking for the bankruptcy court to “overturn the state court's final judgment, or declare it ‘null and void.’ ” (Doc. 5-7 at 9.) But it could hardly be clearer that this is precisely the relief she seeks. How else could the bankruptcy court prevent U.S. Bank from enforcing the judgment it received from the state court? Ohlsson's tactic of scrupulously avoiding reference to the state court judgment in her adversary complaint displays not only her knowledge that Rooker-Feldman is an obstacle, but that she wants the bankruptcy court to adopt a similar approach, nullifying the state court decision as if it never existed. (Doc. 5-7 at 26 (“[T]he mortgage is a legal nullity, requiring striking, removal, recission or expungement from the Official Records of the Sarasota Recorder's Office․”).)

Put simply, Ohlsson's requests invite “review and rejection” of a state court judgment, Behr, 8 F.4th at 1212, and “amount to a direct attack on the underlying state court decision,” Behr, 8 F.4th at 1212. But lower federal courts “lack[ ] jurisdiction ‘to entertain a proceeding to reverse or modify’ a state court judgment, even if said judgment was wrong.” Nicholson, 558 F.3d at 1271 (quotation omitted). After de novo review, this Court agrees with the bankruptcy court that it properly dismissed for lack of jurisdiction.

B. Bankruptcy Court Properly Dismissed Under Abstention Doctrine

But even if dismissal was not warranted under Rooker-Feldman, this Court may still affirm the bankruptcy court's holding if the bankruptcy court acted within its discretion to abstain from deciding the merits of Ohlsson's complaint. Not only does this Court agree with the bankruptcy court's decision to abstain, but Ohlsson has also waived ¹ any objection because she does not contest the bankruptcy court's alternative abstention holding.²

Ordinarily, “federal courts have a ‘virtually unflagging obligation’ to exercise their jurisdiction.” Deakins v. Monaghan, 484 U.S. 193, 203, 108 S.Ct. 523, 98 L.Ed.2d 529 (1988) (quotation omitted). Yet, in 28 U.S.C. § 1334(c)(1), Congress “provides that bankruptcy courts may abstain from hearing any proceeding, including core matters, ‘in the interest of comity with State courts or respect for State law.’ ” Stern v. Marshall, 564 U.S. 462, 502, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (quoting § 1334(c)(1)). Section 1334(c)(1) provides bankruptcy courts with “broad discretion to abstain from hearing state law” issues. E.S. Bankest, LLC v. United Beverage Fla., LLC (In re United Container LLC), 284 B.R. 162, 176 (Bankr. S.D. Fla. 2002). “Courts look to a host of non-dispositive factors in deciding whether to abstain” and “enjoy substantial ‘discretion to determine the relative weight afforded each factor.’ ” Southstar Cap. Grp., I, LLC v. 1662 Multifamily LLC, No. 618-cv-1453-Orl-40DCI, 2019 WL 3752892, at *4 (M.D. Fla. Aug. 8, 2019) (Byron, J.) (quoting Welt v. EfloorTrade, LLC (In re Phoenix Diversified Inv. Cor.), 439 B.R. 231, 246 (Bankr. S.D. Fla. 2010)).

Courts commonly consider twelve to fourteen factors relevant to whether it is “in the interest of comity with State courts or respect for State law” to abstain. § 1334(c)(1). The most factors relevant here are (1) efficient administration of the bankruptcy estate, (2) predominance of state law over bankruptcy law, (3) related proceedings in state court, (4) remoteness of the issue from the main bankruptcy case, (5) feasibility of severing the claim, (6) “the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties,” and (7) comity. Welt, 439 B.R. at 245–46; see also Wood, 216 B.R. at 1014–15 (listing similar factors).

These factors support the bankruptcy court's decision to abstain. First, since Ohlsson's estate has no assets and thus will distribute none, the validity of U.S. Banks mortgage does not impact distribution in the Chapter 7 case or otherwise disrupt the efficient administration of the bankruptcy estate. See 4 Collier on Bankruptcy ¶ 501.01[3][b] (“In no-asset chapter 7 liquidation cases ․, there will be no distribution from the estate in which to participate.”). Second, the only issue Ohlsson presents in her complaint is the validity of U.S. Banks mortgage, which is a matter of state property law already determined by a state court. As such, there has been a prior state court proceeding and state law issues predominate over any bankruptcy issues. Third, since the adversary complaint centers around the legitimacy of U.S. Bank's security interest, the dispute is remote from the main bankruptcy case. It is thus possible to sever the claim for state court adjudication. Fourth, since Ohlsson decided not to appeal the judgment in state court, there is a strong “likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties.” Welt, 439 B.R. at 245. Finally, Ohlsson's complaint implicates substantial comity concerns. Ohlsson asks the bankruptcy court to declare that she is “rightful holder of title to the property and that [U.S. Bank has] no estate, title or interest.” (Doc. 5-7 at 27.) Of necessity, such a declaration would conflict with the state court judgment that U.S. Bank “holds a first mortgage lien” that is “superior to all claims or estates of [Ohlsson].” (Doc. 5-14 at 2.) But Ohlsson does not stop there. She also asks that U.S. Bank be “forever enjoined from asserting any estate, right, title or interest in the Subject Property.” (Doc. 5-7 at 27.) The bankruptcy court could only achieve that if it had the power to “undo a state court judgment.” Behr, 8 F.4th at 1213.

Realizing that Ohlsson—whatever her claims—intended for the bankruptcy court to reject and nullify a mortgage recognized by a state court, the bankruptcy court properly abstained. Id. at 1213 (directing courts to consider abstention doctrines when Rooker-Feldman is not applicable). Accordingly, this Court finds no abuse of discretion in the bankruptcy court's decision to abstain.

C. Bankruptcy Law Does Not Require U.S. Bank to File a Proof of Claim 3

While U.S. Bank admits that it did not file a proof of claim in Ohlsson's Chapter 7 proceeding, (Doc. 14 at 11), the bankruptcy court ruled that U.S. Bank was not required to file one, (Doc. 6 at 6). Ohlsson disagrees. She argues that a creditor must file a proof of claim within 70 days of the commencement of the bankruptcy proceeding and that U.S. Bank's failure to do so requires the bankruptcy court to “examine all elements of U.S. Bank's non-claim and lack thereof and specifically if and how it holds a security interest in the real property at issue.” (Doc. 5-10 at 11.) In essence, Ohlsson's position is that U.S. Bank's procedural failure to file a proof of claim allows or requires the bankruptcy court to assess the merits of U.S. Bank's claim to the property. She is mistaken.

Bankruptcy Rule 3002(a) provides that a creditor “must file a proof of claim or interest for the claim or interest to be allowed.” See also 11 U.S.C. § 501(a) (“A creditor or an indentured trustee may file a proof of claim.”). When a claim is allowed, it “permits the claimant to participate in the distribution of the bankruptcy estate.” Ziino v. Baker (In re Ziino), 613 F.3d 1326, 1328 (11th Cir. 2010); see 11 U.S.C. § 507 (providing priority rules for allowed claims). The Rule clarifies that a “lien that secures a claim against the debtor is not void due only to the failure of any entity to file a proof of claim.” Bankr. R. 3002(a). Similarly, 11 U.S.C. § 506(d) provides that a claim is not void or voidable simply due to “the failure ․ to file a proof of such claim.”

As applied here, neither Rule 3002(a) nor § 506 require U.S. Bank to file a proof of claim. As Rule 3002(a) states, a proof of claim is required only for a claim to be deemed “allowed” for purposes of distribution of a Chapter 7 bankruptcy proceeding. Here, the Trustee determined that Ohlsson has no assets to distribute, (Doc. 5-6 at 4–5), so “the filing of a proof of claim serves no practical purpose since there will be no distribution from the estate in which to participate.” 4 Collier on Bankruptcy ¶ 5.01.01[3][b]. Since U.S. Bank had no interest in participating in the distribution, it had no reason to file a proof of claim.

Further, U.S. Bank's failure to file a proof of claim does not undermine its interest or allow the bankruptcy court to question its lien on the property. Both Rule 3002 and § 506(d)(2) clarify that the failure to file a proof of claim does not void the underlying interest. See 4 Collier on Bankruptcy ¶ 506.06[4][b] (“[Section] 506(d) was changed pursuant to the 1984 amendments to make clear that a lien would survive notwithstanding the failure of the holder to file a proof of claim for the related claim.”). As such, “filing the proof of claim is not necessary and the lien will ordinarily ride through the bankruptcy case.” Id. ¶ 501.01[3][a]; (Doc. 6 at 6 (explaining § 506(d)(2) as the “ride-through” provision)). Stated differently, a claim may be disallowed for purposes of the bankruptcy proceeding based on “the failure to file a proof of claim, [but] the lien continues unaffected.” 4 Collier on Bankruptcy ¶ 506.06.

As such, U.S. Bank's interest does not become a “non-claim,” (Doc. 11 at 12), because it did not file a proof of it in the bankruptcy proceeding. Nor does it give a special bankruptcy ground for the bankruptcy court to “determine the validity, priority, and extent of the lien and other interest claims by U.S. Bank.” (Doc. 5-7 at 24.) U.S. Bank's failure to file a proof of claim in Ohlsson's Chapter 7 proceeding has no effect whatever on whether U.S. Bank has a valid mortgage on the property. Instead, whether U.S. Bank has a valid interest is a question of property law. And it is a question that the state court has answered. Ohlsson may not clothe her quest to overturn the state court decision in the garb of a bankruptcy action. If Ohlsson disagrees with the state court decision she must challenge it there. Accordingly, upon de novo review, U.S. Bank need not have filed a proof of claim on the property and its failure to do so did not create a claim for relief by which Ohlsson could attack the validity of its underlying interest in the property.

IV. CONCLUSION

For the reasons given above, the bankruptcy court did not err when it dismissed Ohlsson's adversary complaint for lack of jurisdiction under the Rooker-Feldman doctrine. But even if it did, the bankruptcy court did not abuse its discretion when it decided to abstain under 11 U.S.C. § 1334(c)(1). Finally, the bankruptcy court did not err when it concluded that U.S. Bank was not required to file a proof of claim in Ohlsson's Chapter 7 proceeding to preserve its security interest. Finding no error, this Court AFFIRMS the bankruptcy court's November 5, 2020 order dismissing Ohlsson's adversary complaint. (Doc. 5-2.)

ORDERED in Tampa, Florida, on October 6, 2021.

FOOTNOTES

1.   While pro se litigants are afforded some leniency, procedural default and waiver doctrines still apply. See Brown v. United States, 720 F.3d 1316, 1332 (11th Cir. 2013). A litigant must “clearly and unambiguously” raise an issue for a court to properly consider it.” Id. Here, even “affording [Ohlsson] every benefit, we cannot fairly say that [she] sufficiently raised this claim” when she failed to make even “passing references” to it. Id.; see United States v. Jernigan, 341 F.3d 1273, 1283 n.8 (11th Cir. 2003) (“[A] party seeking to raise a claim or issue on appeal must plainly and prominently so indicate.”).

2.   Despite Ohlsson's waiver, the Court scrutinizes the bankruptcy court's abstention holding because permissive abstention under § 1334(c)(1) is not reviewable on appeal to the Eleventh Circuit. See § 1334(d) (“Any decision to abstain or not to abstain made under subsection (c) ․, is not reviewable by appeal or otherwise to the court of appeals ․ or by the Supreme Court of the United States ․”).

Kathryn Kimball Mizelle, United States District Judge