Summary
holding that exception allowing non-party to challenge void, but not voidable, assignments does not apply in context of nonjudicial foreclosure
Summary of this case from Colton v. U.S. Nat'l Bank Ass'nOpinion
Case No. A-12-CA-276-SS
05-15-2012
ALLAN L. KRAMER, Plaintiff, v. FEDERAL NATIONAL MORTGAGE ASSOCIATION a/k/a Fannie Mae; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. (MERS); COUNTRYWIDE KB HOME LOANS, a Countrywide Mortgage Ventures LLC; and JOHN W. LATHAM, Defendants.
ORDER
BE IT REMEMBERED on this day the Court reviewed the file in the above-styled cause, and specifically Defendants Federal National Mortgage Association (FNMA), Mortgage Electronic Registration Systems, Inc. (MERS), Countrywide KB Home Loans, and John W. Latham's Motion to Dismiss [#4], and Plaintiff Allan L. Kramer's response [#6] thereto; and Kramer's motion to remand [#8]. Having reviewed the documents, the relevant law, and the file as a whole, the Court now enters the following opinion and orders DENYING Kramer's motion to remand, and GRANTING Defendants' motion to dismiss.
Background
On January 20, 2012, Kramer filed this foreclosure case in the 368th Judicial District Court, Williamson County, Texas. In his petition, he brought claims against Defendants to quiet title, and for "fraudulent foreclosure," breach of contract, and violation of the Texas Civil Practice and Remedies Code.
The Court notes that the copy of Kramer's petition included in Defendants' notice of removal is difficult to read, and the exhibits attached to the petition are completely illegible. The Court therefore relies solely on Kramer's allegations, and the parties' arguments, in deciding these motions.
On March 30, 2012, Defendants removed to this Court on the basis of diversity. Although Defendants acknowledged that one named Defendant, John W. Latham, was a resident of Texas, thereby apparently precluding removal, they argued his citizenship should be disregarded for diversity purposes, because he was improperly joined to this suit. Kramer, apparently disagreeing with Defendants' assessment, filed a motion to remand on April 30, 2012. Meanwhile, on April 6, 2012, Defendants filed a motion to dismiss this case under Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim upon which relief can be granted. On April 20, 2012, Kramer filed his response.
For the following reasons, the Court denies Kramer's motion to remand, and grants Defendants' motion to dismiss.
Analysis
Because Kramer's motion to remand questions the Court's jurisdiction, and therefore its power to consider this case, the Court addresses it first.
I. Motion to Remand [#8]
Kramer argues this case should be remanded for three reasons. First, he claims Defendants waived their right of removal by seeking affirmative relief in the state court. However, the cases he cites in support of this argument are easily distinguishable, and are of no persuasive value in the present context. See Johnson v. Heublein, 227 F.3d 236, 244 (5th Cir. 2000) (finding waiver of right to removal where defendant failed to file a notice of removal within thirty days, and filed both a motion to dismiss and a motion for summary judgment in the state court); Brown v. Demco, Inc., 792 F.2d 478, 481 (5th Cir. 1986) (finding waiver where defendant "not only let the thirty-day period elapse, but also defended this action in state court for four years").
Second, Kramer argues removal was improper because Defendants failed to obtain the consent of Defendant John W. Latham. However, the federal removal statute only requires that "all defendants who have been properly joined and served must join in or consent to the removal of the action." 28 U.S.C. § 1446(b)(2)(A) (emphasis added). Thus, if Defendants are correct in their argument that Latham was improperly joined, his consent was not a necessary prerequisite to proper removal of this case.
Which brings the Court to the heart of the matter—was Latham improperly joined? The Fifth Circuit has described the fraudulent or improper joinder doctrine as follows. "The fraudulent joinder doctrine ensures that the presence of an improperly joined, non-diverse defendant does not defeat federal removal jurisdiction premised on diversity." Borden v. Allstate Ins. Co., 589 F.3d 168, 171 (5th Cir. 2009). "One way in which a diverse defendant may establish improper joinder is by showing the inability of the plaintiff to establish a cause of action against the non-diverse party in state court." Id. (quotation omitted).
Similarly, 28 U.S.C. § 1441(b)(2) prevents removal only if one of the "properly joined" defendants is a citizen of the state in which the action is brought. Thus, an improper joinder makes this subsection inapplicable.
As relevant to this case, the test for fraudulent joinder is "whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state defendant, which stated differently means that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant." Smallwood v. Ill. Cent. R.R. Co., 385 F.3d 568, 573 (5th Cir. 2004). However, "the focus of the inquiry must be on the joinder, not the merits of the plaintiff's case," and the "party seeking removal bears a heavy burden of proving that the joinder of the in-state party was improper." Id. at 573, 574.
There is no reasonable basis for this Court to predict that Kramer might be able to recover against Latham. The allegations in Kramer's petition make clear he is complaining of Latham's conduct in his role as a substitute trustee under the deed of trust. However, Texas law specifically insulates trustees from liability for good faith errors made in reliance on information obtained by the mortgagor, mortgagee, or their agents. See TEX. PROP. CODE § 51.007(f). Further, a trustee may seek dismissal from a suit where there is a "reasonable belief that the trustee was named as a party solely in the capacity as a trustee under a deed of trust, contract lien, or security instrument." Id. § 51.007(a). Thus, even if Kramer's legal theories were correct (they are not), and Defendants' foreclosure was consequently rendered invalid, Kramer's allegations would not expose Latham to liability under Texas law. Most notably, Kramer makes no factual allegations tending to show that Latham knew the foreclosure sale was legally invalid, yet nevertheless proceeded with it. Rather, the only reasonable inference to be drawn from Kramer's allegations is that Latham was simply fulfilling his duties as a substitute trustee, at the behest of one or more of the other Defendants.
Accordingly, the Court finds there is no reasonable basis to predict that Kramer might be able to recover against Latham. Latham was, therefore, improperly joined to this lawsuit, and the Court will disregard his Texas citizenship when determining whether complete diversity exists between the parties. As it appears there is complete diversity between all the properly joined parties to this suit, the Court DENIES Kramer's motion to remand.
For the same reasons, the Court likewise dismisses Kramer's claims against Latham.
II. Motion to Dismiss [#4]
A. Legal Standard
Federal Rule of Civil Procedure 8(a)(2) requires a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief." FED. R. CIV. P. 8(a)(2). A motion under Federal Rule of Civil Procedure 12(b)(6) asks a court to dismiss a complaint for "failure to state a claim upon which relief can be granted." FED. R. CIV. P. 12(b)(6). In deciding a motion to dismiss under 12(b)(6), a court generally accepts as true all factual allegations contained within the complaint. Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993). However, a court is not bound to accept legal conclusions couched as factual allegations. Papasan v. Allain, 478 U.S. 265, 286 (1986). Although all reasonable inferences will be resolved in favor of the plaintiff, the plaintiff must plead "specific facts, not mere conclusory allegations." Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1067 (5th Cir. 1994). The plaintiff must plead sufficient facts to state a claim for relief that is facially plausible. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S. Ct. at 1949. Although a plaintiff's factual allegations need not establish that the defendant is probably liable, they must establish more than a "sheer possibility" that a defendant has acted unlawfully. Id. Determining plausibility is a "context-specific task," that must be performed in light of a court's "judicial experience and common sense." Id. at 1950. In deciding a motion to dismiss, courts may consider the complaint, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, such as documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).
The Federal Rules of Civil Procedure contain a heightened pleading requirement for allegations of fraud. Specifically, Rule 9(b) requires plaintiffs alleging fraud to "state with particularity the circumstances constituting fraud." FED. R. CIV. P. 9(b). The Fifth Circuit "interprets Rule 9(b) strictly, requiring the plaintiff to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir. 2009).
B. Application
Kramer has failed to state any claim upon which relief can be granted. The Court addresses each of Kramer's claims in turn.
1. Action to Quiet Title
Kramer's relevant allegations on this point are as follows: "Plaintiff alleges that he holds superior title to the property by means of his Special Warranty Deed with Vendor's Lien, and that Fannie Mae has not acquired good title, because no effective assignment of the Deed of Trust occurred, and the Substitute Trustee's sale was therefore void." Notice of Removal [#1-2] (Pet.) ¶ 16. Although Kramer acknowledges there was a purported assignment of the note and deed of trust from MERS to BAC on November 13, 2009, he claims it was "signed by notorious robo-signer Stephen C. Porter," and that "[n]owhere on the document does it indicate what party MERS is representing." Id. ¶ 12. Later, in his allegations supporting his "fraudulent foreclosure" claim, Kramer states that "[b]ecause Porter acted without authority, no conveyance was effected by his signature on the alleged 'Assignment of Note and Deed of Trust,' and all subsequent actions reliant on that transfer are void." Id. ¶ 20. Further, Kramer argues: "Even if Porter had been properly appointed, however, MERS has no power to transfer the note," because MERS did not own it. Id.
Defendants first argue that Kramer does not have standing to challenge MERS's assignment of the note and deed of trust. Numerous federal district courts in Texas have so held, see, e.g., Valdez v. Fed. Home Loan Mortg. Corp., No. 3:11-cv-1363, 2011 WL 7068386, at *2 (N.D. Tex. Nov. 28, 2011) ("As an initial matter, Ms. Valdez has no standing to contest the various assignments since she were not a party to these assignments."); DeFranceschi v. Wells Fargo Bank, N.A., No. 4:10-CV-455-Y, 2011 WL 3875338, at *5 (N.D. Tex. Aug. 31, 2011) ("Plaintiffs do not have standing to challenge the assignments because they were not a party to those assignments."), including those in the Western District of Texas, see, e.g., Eskridge v. Fed. Home Loan Mortg. Corp., No. W-10-CA-285, 2011 WL 2163989, at *5 (W.D. Tex. Feb. 24, 2011) ("Plaintiff has no standing to contest the various assignments as she was not a party to the assignments."), and this Court itself, see, e.g., Hazzard v. ABN AMRO Mortg. Grp., No. A-11-CA-1019-SS, at 5 (W.D. Tex. Feb. 23, 2012) ("[I]t is well-established that borrowers lack standing to challenge the chain of title of a loan.") (citation omitted) (unpublished).
In response, Kramer cites a case from the Southern District of California, Johnson v. HSBC Bank USA, National Association, No. 3:11-cv-2091-JM-WVG, 2012 WL 928433, at *2-3 (S.D. Cal. Mar. 19, 2012), in which the court first noted that "Ninth Circuit district courts have come to different conclusions when analyzing a plaintiff's right to challenge the securitization process," but ultimately concluded that the plaintiff was " not categorically excluded from making claims based on allegations surrounding the loan's securitization." Consequently, the court rejected the defendants' "standing" argument. Kramer contends the same result is required here.
The Court disagrees. First, being that it is a district court case from a different state and circuit, Johnson is neither binding on this Court, nor particularly persuasive regarding the legal and factual issues presented here. Second, and related, Johnson appears to have based its conclusion on a survey of California federal district court cases—as noted above, a similar survey of Texas federal district court opinions reveals substantial consensus that Kramer lacks standing to challenge an assignment to which he is not a party. Finally, the plaintiff in Johnson alleged that deficiencies in the securitization and assignment of his mortgage resulted in him making improperly high payments to the wrong entity, allegations that are absent here. Because it is legally and factually distinguishable, the Court declines to follow Johnson.
Although such a scenario would not necessarily change the legal principles articulated above, equitable considerations could warrant relief where, for instance, a plaintiff plausibly alleges that more than one entity is claiming payment on a note, and the plaintiff is therefore facing a substantial risk of incurring additional liability by paying the wrong claimant.
However, a careful review of Texas law persuades this Court that it is not completely accurate to say that one can never challenge assignments to which one is not a party. The primary exception to this general rule is where an assignee of a claim sues the obligor for performance: under those circumstances,
The law is settled that the obligors of a claim may defend the suit brought thereon on any ground which renders the assignment void, but may not defend on any ground which renders the assignment voidable only, because the only interest or right which
an obligor of a claim has in the instrument of assignment is to insure himself that he will not have to pay the same claim twice.Tri-Cities Constr., Inc. v. Am. Nat'l Ins. Co., 523 S.W.2d 426, 430 (Tex. Civ. App.—Houston [1st Dist.] 1975, no writ).
Likewise, under very limited circumstances, Texas law allows a defendant sued on a negotiable instrument to assert defenses and claims held by others:
[I]n an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment, or claim to the instrument . . . of another person, but the other person's claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument.TEX. BUS. & COM. CODE § 3.305(c).
However, this case does not fall within these exceptions to the general rule. Defendants did not sue Kramer at all, and, as explained further below, even if they had, their suit would have been on the deed of trust, not the associated promissory note. Finally, and importantly, there is no suggestion Kramer is being put in a position where he will have to pay the same claim twice. Instead, it appears Kramer was asked to live up to his loan obligations, and, upon failing to do so, suffered the consequences to which he agreed. The Court thus concludes that, if an error was indeed committed, and the wrong entity received the foreclosure sale proceeds, that is a matter properly resolved between the various parties who have a legitimate claim to the property; and that Kramer, whose legal interest in the property was forfeited when he defaulted on his loan obligations and failed to make timely cure, cannot challenge those transactions here.
Even if Kramer could make such a challenge, it would not change the outcome of this case. There is substantial authority for the principle that, just as transfer of a promissory note operates to transfer the associated deed of trust, a transfer of the deed of trust likewise transfers the note. See, e.g., DeFranceschi, 2011 WL 3875338, at *4 ("[A] transfer of an obligation secured by a note also transfers the note because the deed of trust and note are read together to evaluate their provisions."); Cannon v. JPMorgan Chase Bank, N.A., No. 4:11-CV-458, 2011 WL 6838615, at *5 (E.D. Tex. Nov. 16, 2011) (quoting DeFranceschi). This view is reflected in the Restatement of Property:
(a) A transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise.RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES § 5.4 (2011).
(b) Except as otherwise required by the Uniform Commercial Code, a transfer of a mortgage also transfers the obligation the mortgage secures unless the parties to the transfer agree otherwise.
Alternatively, it is irrelevant, under the circumstances of this case, whether BAC ever owned the promissory note. Indeed, many federal district courts in Texas have held that, "[u]nder Texas law, a mortgage servicer can foreclose under a deed of trust, regardless of whether it is a holder [of the promissory note]." Wells v. BAC Home Loans Servicing, No. W-10-CA-00350, 2011 WL 2163987, at *3 (W.D. Tex. Apr. 26, 2011); see also, e.g., Reardon v. CitiMortgage, Inc., No. A-11-CA-420-SS, 2011 WL 3268307, at *4 (W.D. Tex. July 25, 2011) (same). Further, "the Texas Property Code contemplates that the mortgage servicer will often represent the mortgagee, who may or may not possess the note itself." Wells, 2011 WL 2163987, at *3.
Here, the deed of trust granted broad authority to MERS, including, but not limited to, the authority to conduct a foreclosure sale on behalf of the lender. Kramer's allegations show that MERS subsequently assigned its rights in the deed of trust to BAC. Thus, BAC, standing in the shoes of MERS, was likewise authorized to conduct a foreclosure sale. Whether BAC acted as a mortgage servicer under Texas law, or as a simple agent of the lender, or exercised its assigned contractual authority under the deed of trust, is immaterial—the net result is that it was fully empowered to foreclose, regardless of its relationship (or lack thereof) to the associated promissory note.
Kramer disagrees with this proposition, citing McCarthy v. Bank of America, National Association, No. 4:11-CV-356-A, 2011 WL 6754064, at *3 (N.D. Tex. Dec. 22, 2011), in which Judge McBryde stated: "If the holder of the deed of trust does not own or hold the note, the deed of trust serves no purpose, is impotent, and cannot be a vehicle for depriving the grantor of the deed of trust of ownership of the property described in the deed of trust." Although Judge McBryde acknowledged that an owner or holder of a note could "arrange for an agent or nominee, acting on its behalf, to conduct a foreclosure for the benefit of the owner or holder of the note," he rejected the notions that "the holder of the deed of trust who does not own or hold the note has the power to transfer the note from the original note holder to another and that an entity that does not own or hold the note can conduct a foreclosure under the deed of trust." Id. Kramer argues the Court should reject the opinions of the other federal district courts, and this Court's own precedent, and adopt the reasoning of McCarthy. The Court declines to do so.
First, McCarthy is, again, not binding on this Court. And second, with all due respect to Judge McBryde, the Court disagrees with his reasoning, at least insofar as he concluded that an entity must own or hold a promissory note in order to conduct a foreclosure under the associated deed of trust.
Most notably, this contention flies in the face of the Texas statutes governing foreclosure under a deed of trust: Texas law allows a mortgage servicer to administer the foreclosure of property on behalf of a mortgagee—a term that is, with one exception, defined solely in terms of ownership of, or a beneficial interest in, a deed of trust. See TEX. PROP. CODE §§ 51.0001(4), 51.0025. The single exception is that "a book entry system," such as MERS, is also a mortgagee under Texas law. See id. § 51.0001(4)(B). However, even this is not truly an exception, as "book entry system" is itself defined as "a national book entry system for registering a beneficial interest in a security instrument that acts as a nominee for the grantee, beneficiary, owner, or holder of the security instrument and its successors and assigns." Id. § 51.0001(1). Notably absent in these repeated references to security instruments is any mention of an associated promissory note.
Nor is it surprising that the authority to conduct a foreclosure under Texas law is governed by an entity's relationship to the deed of trust, rather than the associated note: as a Texas court recently noted, "Where there is a debt secured by a note, which is, in turn, secured by a lien, the note and lien constitute separate obligations." Aguero v. Ramirez, 70 S.W.3d 372, 374 (Tex. App.—Corpus Christi 2002, no pet.). As a different Texas court noted, less recently but more powerfully, "It is so well settled as not to be controverted that the right to recover a personal judgment for a debt secured by a lien on land and the right to have a foreclosure of lien are severable . . . ." Carter v. Gray, 81 S.W.2d 647, 648 (Tex. 1935). The promissory note, of course, evidences the debt, while, in Texas, the deed of trust secures that debt with a lien on property.
Nor does Carpenter v. Longan, 83 U.S. (16 Wall.) 271, 274 (1872), on which both Kramer and McCarthy rely, require a different result. The relevant passage from Carpenter, oft-quoted with reverence by those wishing to challenge the validity of their mortgages, is as follows: "The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity." 83 U.S. at 274.
Despite its talismanic repetition by countless plaintiffs, this quotation does not control the outcome of this case. Although the first half of the second sentence, dealing with assignment of the note, may have been relevant to the Court's holding, the latter half, concerning assignment of a mortgage, was pure dicta. As the Court said, "The question presented for our determination is, whether an assignee, under the circumstances of this case, takes the mortgage as he takes the note, free from the objections to which it was liable in the hands of the mortgagee. We hold the affirmative." Id. at 273. Because the Court was not presented with the converse question, and its statement regarding assignment of mortgages was not essential to its holding, the statement is not binding.
More to the point, however, even if the quoted passage was an accurate description of Colorado Territorial law, or federal common law, at the time Carpenter was decided, it is not the law of Texas today. As described above, promissory notes and deeds of trust are viewed and treated as distinct obligations under modern Texas law. Nor does the Supreme Court of the United States have the authority to interpret or narrow otherwise constitutional Texas laws. See Grayned v. City of Rockford, 408 U.S. 104, 110 (1972) ("[I]t is not within our power to construe and narrow state laws."). Carpenter is, therefore, inapposite under these facts.
This Court therefore concludes that, regardless of its relationship to the promissory note, MERS, and later BAC, had the authority to foreclose under the associated deed of trust. Because "[t]he plaintiff in a suit to quiet title must allege right, title, or ownership in himself or herself with sufficient certainty to enable the court to see he or she has a right of ownership that will warrant judicial interference," and because the allegations and documents in this case demonstrate that Kramer has no such title or ownership interest in the foreclosed property, the Court dismisses his action to quiet title.
B. Fraudulent Foreclosure
In his petition, Kramer states: "A fraudulent foreclosure exists when the party allegedly foreclosing lacks the power to do so." Pet. ¶ 19. Because the Court has already concluded the foreclosure sale was made with proper authority, the Court dismisses this claim.
C. Breach of Contract
With respect to this cause of action, Kramer alleges: "Defendants breached [the deed of trust] by violating the substitute trustee provision, improperly attempting to 'assign' said note, issuing an unauthorized notice of trustee sale, and attempting to conduct said sale." Id. ¶ 21. For the foregoing reasons, the Court concludes Kramer has failed to plausibly allege a breach of the deed of trust by any Defendant. Accordingly, this claim is dismissed.
D. Texas Civil Practice & Remedies Code § 12.002
Kramer claims Defendants are liable to him under Texas Civil Practice and Remedies Code § 12.002, which states, in relevant part:
(a) A person may not make, present, or use a document or other record with:
(1) knowledge that the document or other record is a fraudulent court record or a fraudulent lien or claim against real or personal property or an interest in real or personal property;
(2) intent that the document or other record be given the same legal effect as a court record or document of a court created by or established under the constitution or laws of this state or the United States or another entity listed in Section 37.01, Penal Code, evidencing a valid lien or claim against real or personal property or an interest in real or personal property; and
(3) intent to cause another person to suffer:
(A) physical injury;
(B) financial injury; or
(C) mental anguish or emotional distress.
For the reasons above, the Court concludes Kramer has failed to show that any Defendant made, presented, or used a fraudulent document or record. Further, even assuming for the sake of argument that there was such a document or record, Kramer has failed to plausibly allege that any Defendant made, used, or presented it with knowledge of its falsity. This claim is therefore dismissed.
Conclusion
Despite Kramer's indignant allegations, this does not appear to be case in which a defect in the handling of his mortgage has exposed him to additional liability, or a consequence to which he would not otherwise be subject. Instead, it seems to be the case of a man who willingly entered into a mortgage, failed to make the required payments thereunder, and then, pursuant to the terms of his agreement, was forced to relinquish possession of the property for which he had not paid. Absent some unfair prejudice to Kramer, this Court would be loath to relieve him of his obligations under his mortgage, unless compelled to do so by Texas law. However, as explained above, Texas law does not require the Court to grant Kramer a windfall in this case. For the foregoing reasons, his claims are dismissed.
Accordingly,
IT IS ORDERED that Plaintiff Allan L. Kramer's Motion to Remand [#8] is DENIED;
IT IS FURTHER ORDERED that Defendants' Motion to Dismiss [#4] is GRANTED;
IT IS FINALLY ORDERED that the above-styled cause is DISMISSED WITHOUT PREJUDICE.
SIGNED this the 15th day of May 2012.
/s/_________
SAM SPARKS
UNITED STATES DISTRICT JUDGE