When The Borrower Sues The Lender In Federal Court

Too many of our alerts are constrained to begin with observations about how treacherous the pursuit of foreclosures in New York have become.  In these difficult times, borrowers (already abetted by new laws and cases which delay foreclosures to their advantage) will sometimes use an action in federal court to assault the lender when ultimately the defenses have failed in state court.

Why generally that approach is barred is the message of this review.  Of course, that borrowers many times should not be pursuing claims against lenders in federal court does not stop them from doing so – all at the cost of money and time to lender and servicer.

There is a specific doctrine which addresses this point:  the Rooker – Feldman doctrine.  In lay terms, it provides that when a party loses a case in state court (we are concentrating upon a mortgage borrower in that position) lower federal courts have no jurisdiction to sit in judgment on a case already decided in state court.  In other words, the federal court cannot hear the case and change what happened. [There is nuance to this and more to explore; for a further discussion  see 1 Bergman On New York Mortgage Foreclosures §2.23, LexisNexis Matthew Bender (rev. 2011)]

Practical case examples will make the concept more vivid.

In Kesten v. Eastern Sav. Bank, 2009 WL 303327 (E.D.N.Y.), after a foreclosure sale, but before delivery of the deed, the defaulting mortgagor deeded the property to Kesten.  In the state trial court, it was ruled that Kesten had no title, no claim.   His grantor, the mortgagor had nothing to sell.  When the property was struck down at the foreclosure auction, the mortgagor lost his title – case closed — but Kesten did not accept that.  Undaunted, he sued the foreclosing bank in the United States District Court alleging that the bank wrongfully refused to discharge the mortgage on the property he purchased.  He also sought damages of $1,000,000.00.

Wrong, said the court.  The suit is barred by Rooker – Feldman.  Lower federal courts cannot review state court decisions.  There is simply no jurisdiction.  The borrower’s grantee loses.

In Mercado v. Playa Realty Corporation, 2005 WL 1594306 (E.D.N.Y.), the borrower lost her house in a state court foreclosure.  She too was undeterred and sued the bank in federal court alleging that the bank’s supposed predatory lending practices caused the loan default so that the loss of the house was an injury suffered because of the predatory lending.  Wrong again ruled the court.  This is exactly the type of action which is barred by Rooker – Feldman:  the state court loser sues the winner in that case claiming injury visited upon her by the state court judgment.  It doesn’t work.

The tenacity and persistence of defaulting borrowers in assaulting the foreclosure process can often be remarkable.  But one tactic which does not work is trying to retry the case in federal court.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.