On August 26, 2008, the United States Court of Appeals for the Sixth Circuit held that a state-court judgment that modifies a discharge order is void ab initio.

The case involved an appeal by Defendant-Appellant Alicia Hamilton Herr ("Herr") of a district-court order that reversed a bankruptcy court’s dismissal of Plaintiff-Appellee James Stewart Hamilton’s (the "Debtor’s") complaint seeking to enjoin Herr from enforcing a Kentucky judgment lien against the Debtor. Full text of the Hamilton v. Herr opinion

Facts

During the Debtor's bankruptcy case, the bankruptcy court discharged all of the Debtor’s "dischargeable debts." The discharge order enjoined "[a]ll creditors whose debts are discharged by this order and all creditors whose judgments are declared null and void by [the paragraph] above . . . from instituting or continuing any action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor."

After this discharge and in connection with a third-party complaint filed by Herr for indemnification on against the Debtor, a Kentucky state court entered judgment in favor of Herr and against the Debtor in the amount of $38,329.70 and interest.

On October 3, 2005, the Debtor filed a complaint in the bankruptcy court seeking to prevent Herr and her attorneys from taking any further actions to attempt to collect on any judgments or debts allegedly owing from the Debtor to Herr. In response, Herr asked the district court to apply the Rooker-Feldman doctrine and abstain because "the Bankruptcy Court lacks jurisdiction to collaterally attack the Kentucky court's decision."

On February 2, 2006, the bankruptcy court concluded that "[i]t is clear that the injury alleged by the [Debtor] herein resulted from the state court Judgment and thus Rooker-Feldman directs that the lower Federal Courts lack jurisdiction." Based on this conclusion, the bankruptcy court dismissed the Debtor’s complaint.

On appeal, the Eastern District of Kentucky court reversed the bankruptcy court’s application of the Rooker-Feldman doctrine, holding that the state-court judgment was a modification of the discharge order, something that 11 U.S.C. § 524(a) barred state courts from doing.

Discussion

In analyzing Rooker-Feldman, the Sixth Court recognized that the doctrine does not prohibit all federal cases that are somehow related to a prior state-court decision. Rather, the Court clarified that the Rooker-Feldman doctrine primarily bars claims that seek relief from injury ‘caused by’ the state court judgment. Thus, the Court found that the Rooker-Feldman doctrine provides no escape from claims that seek relief from other injuries, such as those caused by third parties, or in areas where Congress has explicitly endowed federal courts with jurisdiction.

As such, the relevant inquiry became a question of jurisdiction and the interplay between 11 U.S.C. § 524(a) and 28 U.S.C. § 1334(b).

Generally, section 524(a) declares that any judgment on a discharged debt in any forum other than the bankruptcy court is null and void as it affects the personal liability of the debtor. Accordingly, if a creditor brings a collection suit after discharge and obtains a judgment against the debtor, the judgment is rendered null and void by section 524(a).

However, courts have interpreted 28 U.S.C. § 1334(b) as granting concurrent jurisdiction to state courts to determine the nondischargeability of debts and have recognized limited authority for state courts to construe a bankruptcy court’s discharge order. In addition, the Rooker-Feldman doctrine represents the important goal of preserving the proper respect for state-court decisions.

As such, the Sixth Circuit recognized a tension between 28 U.S.C. § 1334(b) and the Rooker-Feldman doctrine’s aim to preserve state-court authority, and 11 U.S.C. § 524(a)’s aim to preserve the bankruptcy court’s authority.

In resolving this tension, the court held that a state court has authority to interpret a bankruptcy court’s discharge order only to the extent that the state court’s interpretation is correct. To the extent a state court incorrectly interprets a bankruptcy court’s discharge order, the state court is effectively modifying the discharge order. In those cases, the state-court judgment should be considered void ab initio and the Rooker-Feldman doctrine would not apply.

Based on this holding, the court vacated the lower court decision and remanded the case to the bankruptcy court to determine whether the debt at issue was discharged. If the debt was discharged, then the state-court judgment was a modification of the discharge order and is void ab initio. If the debt was not discharged pursuant to the bankruptcy court’s discharge order, then the state-court judgment was not a modification of the discharge order and the Rooker-Feldman doctrine would bar federal-court jurisdiction.