February 25, 2020, Eastern District of Pennsylvania–Debtor Anthony R. Petitio brought a complaint against the Defendant Deutsche Bank Nat’l Trust Co to avoid the bank’s security interest in the Debtor’s home as fraudulent transfer under Bankruptcy Code § 544 and as preferential transfer under § 547.
Earlier in 2005, the Debtor had obtained a loan from the Bank in an amount of $250,000 for home repairs. The Defendant Bank held the mortgage on the Debtor’s home. Somewhere in 2008, the Bank filed a mortgage foreclosure complaint in the state court, alleging that in the foreclosure proceeding, the Debtor refinanced the existing loan and obtained a new loan in the amount of $800,000 from Mortgage Lenders Network (MLN). The Defendant alleged that despite what was alleged in the foreclosure complaint, the Debtor never “executed any documents to refinance or otherwise create an obligation to MLN at any time”, and, therefore, the document memorializing the loan was a forgery. The Defendant added that the loan documents were also illegally notarized without his consent and the forged fraudulent and illegal notarized mortgage was subsequently assigned to the Defendant. The Bank obtained a judgment in mortgage foreclosure in October 2019.
Six weeks later, the Debtor filed for bankruptcy and two weeks after that, the Debtor brought a complaint against the Bank to clawback the alleged transfers. The Bank filed a motion to dismiss the Debtor’s complaint, arguing that Counts I through IV were barred by considerations of federalism based on the Rooker-Feldman doctrine as well as by procedural rules of preclusion. The Bank further challenged the Debtor’s claims on the basis that they lacked legal viability.
The Court held that the Rooker-Feldman doctrine did not bar the Debtor to avoid the Bank’s security interest in his home because the Debtor was not seeking review of the merits of a foreclosure judgment. The Court highlighted that there is no risk of retrying the same action since the complaint sought avoidance of a transfer under the Bankruptcy Code and the state court case was based on Pennsylvania foreclosure law. The Court added that the elements of the adversary proceeding differed from those in the foreclosure case.
Next, the Bank maintained that the Debtor would not be able to prove the fifth element of Sec. 547 (b). It required proof that the alleged transfers enabled the Bank to receive more than it would have had its claim been treated in a hypothetical Chapter 7 proceeding. The Bank argued that the courts have consistently ruled that the purchase of real property at a non-collusive Sheriff’s Sale conducted under the auspices of state law cannot be avoided as a preference and dismissal of such claims is “routine”. The Court found the Bank’s reliance on the decisional authority to be misplaced. The Court reasoned that the premise of those decisions is not relevant because they involved a mortgage holder who foreclosed and then purchased the property at a regularly conducted, non-collusive sheriff’s sale. It was not plead here. In the case at bar, all that was plead was that the Bank obtained a judgment in a mortgage foreclosure. Thereafter, bankruptcy intervened before the property could go to sale.
The Court next found that the Debtor’s complaint was based on the avoidance law, but he failed to allege a transfer that was the subject of avoidance under either 11 U.S.C.S. §§ 544 or 547. Further, the complaint also alleged that the mortgage documents were forged and Pennsylvania law provides that title does not pass on a forged document. Thus, the Court concluded that no transfer occurred and the Plaintiff cannot state a cause of action under either §§ 544 or 547. The Court ruled that the Debtor’s complaint should be dismissed without prejudice.