In Re: Simon Zarour

Background

Simon Zarour, proceeding without a lawyer, appealed a May 18, 2022 order of the United States Bankruptcy Court for the Southern District of New York. That order dismissed Zarour’s adversary proceeding against JPMorgan Chase Bank, N.A. Zarour alleged that Chase engaged in fraud while enforcing a mortgage on property at 32 Ocean Beach Avenue, Monmouth Beach, New Jersey, and that the alleged conduct led to an unlawful foreclosure and eviction and loss of rental income.

Zarour executed the mortgage and a $5 million adjustable-rate note in 2007. The mortgage and note were later transferred to Chase. Chase brought a foreclosure action in New Jersey state court, which entered a final foreclosure judgment on August 17, 2017. The New Jersey Appellate Division affirmed that judgment on September 24, 2019, finding that Chase had shown standing to foreclose and that the foreclosure was not barred by the statute of limitations. Chase had purchased the property at a sheriff’s sale in January 2019.

Zarour also filed a later bankruptcy case. During that case, the Bankruptcy Court granted Chase relief from the automatic stay, allowing Chase to continue enforcing its rights in the property. The bankruptcy case was later dismissed for cause. Zarour’s district-court lawsuit against Chase was referred to the Bankruptcy Court and became the adversary proceeding at issue here.

Bankruptcy Court Ruling and Appeal

Chase moved to dismiss under Bankruptcy Rule 7012, which incorporates the federal rules allowing dismissal for lack of subject-matter jurisdiction and failure to state a legally sufficient claim. Chase argued that the Bankruptcy Court lacked jurisdiction under the rule barring federal review of state-court judgments, and that Zarour’s claims were also barred by prior judgments and claim-preclusion principles.

The Bankruptcy Court rejected Chase’s jurisdictional arguments based on the earlier termination of the bankruptcy case and the rule barring federal review of state judgments. It nevertheless dismissed under the rule requiring a legally sufficient complaint, concluding that claim preclusion barred Zarour’s claims and that he had not plausibly alleged damages from Chase’s proof of claim. The Bankruptcy Court also concluded that Zarour was not entitled to relief from the dismissal under Federal Rule of Civil Procedure 60(b), because he had not sought that relief within a reasonable time.

On appeal, Zarour argued that the Bankruptcy Court improperly dismissed his claims based on claim preclusion and the lack of damages from the allegedly fraudulent proof of claim. He also challenged the denial of Rule 60(b) relief.

District Court’s Analysis

The district court did not decide whether dismissal under the failure-to-state-a-claim rule or the denial of Rule 60(b) relief was proper. Instead, it affirmed on other grounds supported by the record.

Rooker-Feldman doctrine. The court applied the Rooker-Feldman doctrine, which prevents federal courts from reviewing and rejecting state-court judgments. The doctrine applies when four conditions are met: the federal plaintiff lost in state court; the plaintiff complains of injuries caused by the state judgment; the plaintiff asks the federal court to review and reject that judgment; and the state judgment came before the federal case.

The court found all four conditions satisfied. Zarour had lost the New Jersey foreclosure action. He alleged injuries including loss of the property, eviction, and lost rental income. Although he described some claims as involving bankruptcy-stay violations and fraudulent submissions in the bankruptcy case, the court found that the core of his complaint was an allegedly unlawful foreclosure and sale. Those alleged injuries were therefore inseparably connected to the state foreclosure judgment.

The court also found that Zarour’s requested relief would require rejecting the New Jersey judgment. His complaint sought, among other things, to void the mortgage and assignment, vacate the foreclosure judgment and sale, and obtain damages based on the foreclosure. The court explained that granting that relief would require deciding that the New Jersey courts were wrong about Chase’s right to enforce the mortgage and foreclose.

The court further concluded that Zarour had not plausibly alleged an injury from Chase’s allegedly fraudulent proof of claim. The proof of claim would have affected distributions from the bankruptcy estate, but the bankruptcy case was dismissed and there were no such distributions. The court also concluded that the challenged assignment of the mortgage did not violate the automatic stay because transferring an interest or claim from one creditor to another is not, on the facts described, a stay violation.

The court therefore held that Zarour’s claims were barred by Rooker-Feldman and had to be dismissed for lack of subject-matter jurisdiction.

Alternative Ground for Dismissal

The court also affirmed dismissal of any claims that were not directly caused by the foreclosure judgment. Under Second Circuit precedent, an adversary proceeding ordinarily should be dismissed after the underlying bankruptcy case ends because the proceeding’s connection to the bankruptcy case has ended. A court may retain jurisdiction when doing so serves judicial economy, convenience, fairness, and respect for other courts.

Here, the 2018 bankruptcy case had been dismissed more than two years earlier and had been reopened only to address Zarour’s adversary proceedings. The court concluded that retaining jurisdiction would be inconsistent with those principles, particularly because Rooker-Feldman barred the central relief Zarour sought. It therefore affirmed dismissal of the adversary proceeding in its entirety for lack of subject-matter jurisdiction.

Disposition

The district court affirmed the Bankruptcy Court’s Dismissal Order and dismissed the appeal. It directed the Clerk to terminate the appeal and close the case. The court certified that any appeal would not be taken in good faith and denied fee-free appellate status. It did not reach the propriety of the Bankruptcy Court’s Rule 12(b)(6) ruling or its denial of Rule 60(b) relief.