Summary
explaining how Texas law differentiates between enforcement of a promissory note and foreclosure
Summary of this case from Lall v. Bank of N.Y. MellonOpinion
Case No. A-11-CA-420-SS
07-24-2011
FRANK REARDEAN, Plaintiff, v. CITIMORTGAGE, INC.; FEDERAL HOME LOAN MORTGAGE CORP.; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS; NORTHLAND FUNDING GROUP L.P. d/b/a Capital Mortgage Services; and GEORGE M. SHANKS, JR., Defendants.
ORDER
BE IT REMEMBERED on this day the Court reviewed the file in the above-styled cause, and specifically Defendants' Motions to Dismiss [#7, #8] and Plaintiff Frank Reardean's response [#9] thereto, and Defendants' reply [#11]. Having reviewed the aforementioned documents, the case file as a whole, and the relevant law, the Court enters the following opinion and orders GRANTING Defendants' motions and DISMISSING Reardean's complaint.
Background
In June 2005, Frank Reardean and his wife bought a home located at 12124 Barrel Bend in Austin, Texas. Pl.'s Compl. [#1] at ¶ 10. The Reardeans executed a promissory note secured by a deed of trust on the property. Id. CitiMortgage claimed Reardean defaulted on the loan and the property was sold at foreclosure in September 2010. CitiMortgage's Mot. to Dismiss [#7] at 2.
Reardean's complaint was attached as Exhibit b to Defendants' Notice of Removal [#1].
Reardean filed suit in Texas state court, alleging CitiMortgage and/or Freddie Mac wrongfully foreclosed on Reardean's property and seeking to enjoin enforcement of the foreclosure sale. Pl.'s Compl. [#1] at ¶¶ 16, 26. In his original petition, Reardean argued because the deed of trust and original promissory note were "bifurcated," neither CitiMortgage nor Freddie Mac had a valid and enforceable interest in the property, and MERS did not have the legal ability to transfer, assign, or sell the mortgage to the property. Id. at ¶¶ 14, 22. Reardean seeks damages, declaratory relief, and to quiet title in his favor. Id. at ¶¶ 26-28. Defendants removed the case under 28 U.S.C. § 1441 and invoked diversity jurisdiction under U.S.C. § 1332(a). Defendants then moved to dismiss for failure to state a claim upon which relief can be granted. See FED. R. CIV. P. 12(b)(6). Reardean filed his response, to which Defendants filed their reply.
Analysis
I. Rule 12(b)(6) - Legal Standard
A motion to dismiss for failure to state a claim tests the sufficiency of the complaint under Federal Rule of Civil Procedure 8. According to Rule 8, a pleading stating a claim for relief must contain: (1) a short and plain statement of the grounds for the court's jurisdiction, unless the court already has jurisdiction and the claim needs no new jurisdictional support; (2) a short and plain statement of the claim showing the pleader is entitled to relief; and (3) a demand for the relief sought, which may include relief in the alternative or different types of relief. FED. R. CIV. P. 8(a). The complaint in this case fails to comply with Rule 8(a)(2).
The primary purpose of Rule 8(a)(2) is to "give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47 (1957). In furtherance of the "fair notice" principle, the Supreme Court issued opinions in 2007 and 2009, announcing and clarifying the standard for what a complaint must contain to survive a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). For a complaint to meet the pleading requirements of Rule 8(a)(2) and to survive a Rule 12(b)(6) motion to dismiss, the following conditions must be met: (1) every element of each cause of action must be supported by specific factual allegations; and (2) the complaint must state a plausible claim for relief.
A. Conclusory Legal Assertions are Insufficient
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 Rule 12(b)(6), a court generally accepts as true all factual allegations contained within the complaint. Leatherman v. Tarrant Cnty. Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 164 (1993) (citing United States v. Gaubert, 499 U.S. 315, 327 (1991)). 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, "a plaintiff must plead specific facts, not mere conclusory allegations," Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1067 (5th Cir. 1994) (internal citations omitted). The plaintiff must establish a cause of action and demonstrate the damages sought are appropriate. United States v. Stanley, 483 U.S. 669, 691 n.7 (1987) (O'Connor, J., concurring). A plaintiff's obligation to provide the grounds of his or her entitlement to relief must contain "more than labels and conclusions," and a "formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555.
B. Complaint Must State a Plausible Claim for Relief
Conclusory assertions set aside, and considering only well-pleaded factual allegations, a complaint will only survive a motion for dismissal if the plaintiff pleads sufficient facts to state a claim for relief that is facially plausible. Iqbal, 129 S. Ct. at 1949; Twombly, 550 U.S. at 570. "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 the defendant is probably liable, they must establish more than a "sheer possibility" 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.
Furthermore, factual allegations must be placed in a context plausibly suggesting (not merely consistent with) each required element of the claim against each defendant. See Twombly, 550 U.S. at 557 (parallel conduct by seven telephone companies that could just as well be independent action did not plausibly suggest conspiracy or agreement among the companies, a required element for a claim under the Sherman Act). Similarly, in Iqbal the Supreme Court held a complaint must include factual allegations plausibly establishing all elements required for the particular legal theory. See Iqbal, 129 S. Ct. at 1952 (taking all factual allegations as true, plaintiff's claim did not "show, or even intimate" defendants purposely discriminated).
II. Rule 12(b)(6) - Reardean's claims
Judged by the standard described above, Reardean's claims are not plausible on their face. His factual allegations are inadequate, and, more importantly, his legal theories are untenable.
A. The "bifurcation" claim
The majority of Reardean's claims rely on the same premise—the "bifurcation" of the note and deed created an invalid and unenforceable lien. Similarly, Reardean argues Freddie Mac must prove it possessed the original promissory note.
This is not the first time the Western District has been presented with these issues. See Wells v. BAC Home Loans Serv., L.P., No. W-10-CA-00350, 2011 WL 2163987 (W.D. Tex. Apr. 26, 2011). As the court in Wells noted, these two related claims—colloquially called the "show me the note" theory—began circulating in courts across the country in 2009. See Stein v. Chase Home Fin., LLC, Civ. No. 99-1995, 2010 WL 4736828, at *3 (D. Minn. Aug. 13, 2010) (collecting cases). "Advocates of this theory believe 'that only the holder of the original wet-ink signature note has the lawful power to initiate a non-judicial foreclosure.'" Id. (quoting Sundell-Bahrd v. Tiffany & Bosco, P.A., No. CV 10-9096-PCT-MHM, 2010 WL 2595083, at *1 (D. Ariz. June 24, 2010)). The courts, however, have roundly rejected this theory and dismissed the claims, because foreclosure statutes simply do not require possession or production of the original note. See id.; Mansour v. Cal-Western Reconveyance Corp., 618 F. Supp. 2d 1178, 1181 (D. Ariz. 2009). The "show me the note" theory fares no better under Texas law.
Texas law differentiates between enforcement of a promissory note and foreclosure. Foreclosure enforces the deed of trust, not the underlying note. See Slaughter v. Quails, 139 Tex. 340, 346 (1942) (a trustee's power to sell a debtor's property derives solely from the deed of trust); Aguero v. Ramirez, 70 S.W.3d 372, 375 (Tex. App.—Corpus Christi 2002, pet denied) (applying different statutes of limitations to actions seeking to enforce a lien or deed of trust or to foreclose on property used as security, and to actions seeking to enforce a promissory note). Foreclosure is an independent action against the collateral and may be conducted without judicial supervision. See TEX. PROP. CODE ANN. § 51.002 (West Supp. 2007); Tierra Sol Joint Venture v. City of El Paso, 311 S.W.3d 492, 499 (Tex. App.—El Paso 2009, pet. denied) (noting foreclosure is an in rem proceeding). Enforcement of the note, on the other hand, is a personal action against the signatory and requires a judicial proceeding. See TEX. BUS. AND COM. CODE § 3.401(a); TrueStar Petroleum Corp. v. Eagle Oil & Gas Corp., 323 S.W.3d 316, 319 (Tex. App.—Dallas 2010, no pet.). Furthermore, Texas courts have refused to conflate foreclosure with enforcement of a promissory note. For instance, the court in Aguero stated, "Where there is a debt secured by a note, which is, in turn, secured by a lien, the lien and the note constitute separate obligations." Aguero, 70 S.W.3d at 374 (emphasis added). The right to recover on the note and the right to foreclose are severable and may be enforced separately. See Carter v. Gray, 125 Tex. 219, 221 (1935).
Furthermore, while a suit to recover a promissory note typically requires possession, foreclosures do not. Under Texas law, a mortgage servicer can foreclose under a deed of trust, regardless of whether it is a holder. A mortgage servicer is "the last person to whom the mortgagor has been instructed by the current mortgagee to send payment for the debt secured by a security instrument." See TEX. PROP. CODE ANN. § 51.0001(3) (West Supp. 2007). A mortgagee can be its own mortgage servicer. See id. Moreover, to administer the foreclosure process, the mortgage servicer need only receive written authorization from the mortgagee and disclose that fact to the mortgagors. See id. § 51.0025. Nothing requires the mortgage servicer to possess the original promissory note. See Broyles v. Chase Home Fin., No. 3:10-CV-2256-G, 2011 WL 1428904, at *3 (N.D. Tex. Apr. 13, 2011); Griffin v. BAC Home Loans Servicing, L.P., No. H-09-03842, 2011 WL 675285, at *2 (S.D. Tex. Feb. 26, 2011); Sawyer v. Mortg. Elec. Registration Sys., Inc., No. 3:09- CV-2303-K, 2010 WL 996768, at *3 (N.D. Tex. Feb 1, 2010), adopted, 2010 WL 996917 (N.D. Tex. Mar. 17, 2010). Indeed, the Texas Property Code contemplates the mortgage servicer will often represent the mortgagee, who may or may not possess the note itself. See TEX. PROP. CODE § 51.0001(4) (West Supp. 2007) (a mortgagee may be the "holder of a security instrument" or a "book entry system").
Nor does the statutory procedure for a deed of trust foreclosure require mortgage servicers to produce the original promissory note. The mortgage servicer need only provide notice of default, with an opportunity to cure, and notice of the actual foreclosure sale. See TEX. PROP. CODE § 51.002(b), (d) (West Supp. 2007). Production of the original promissory note is not necessary. Crear v. JP Morgan Chase Bank, N.A., No. 10-10875, 2011 WL 1129574, at *1 n.1 (5th Cir. Mar. 28, 2011) (per curiam).
The only mildly relevant case law Reardean invokes for support of his claims is an 1892 Supreme Court case that says: "the note and mortgage are inseparable . . . . An Assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity." Carpenter v. Longan, 83 U.S. 271, 274 (1872). While Reardean might find this language appealing, it is unconvincing when studied in context: the loan at issue in Carpenter had not yet matured and was not a home mortgage in default as in the present case. More specifically—and the Court wants to emphasize the inapplicability of Carpenter because it seems to be the only leg of Reardean's incredibly shaky case and needs to be disposed of without reservation—Carpenter was written almost 120 years ago and has no relevance regarding whether, in this modern day and age, sending a deed of trust to an electronic title-holding company for storage and transfer renders a mortgage invalid and unenforceable. As just discussed, Texas law does not recognize this theory, and it is telling the only case Reardean could find on the issue is a century old and not on point. Mortgages are incredibly common and engender a lot of litigation; if Reardean's claim were remotely viable, he should be able to find more support for it than one sentence from one nineteenth-century case.
In this case, Reardean's claims for wrongful foreclosure and violations of the Texas Property Code, the Texas Business and Commerce Code, the Texas Debt Collection Act, and the Deceptive Trade Practices Act, as well as his request for declaratory judgment and relief, rest on the invalid bifurcation or "show me the note" theory. Accordingly, his allegations fail to state a claim for relief that is plausible on its face and must be dismissed. See Iqbal, 129 S. Ct. at 1949 (2009).
B. Breach of duty of good faith claim
Reardean also asserts a claim for breach of duty of good faith. Pl.'s Compl. [#1] at ¶¶ 23-24. His claim for breach of duty of good faith fails because no such duty exists between CitiMortgage and Reardean, nor between Freddie Mac and Reardean. "[T]he relationship of mortgagor and mortgagee ordinarily does not involve a duty of good faith." See FDIC v. Coleman, 795 S.W.2d 706, 709 (Tex. 1990). Accordingly, his breach of duty of good faith claim is dismissed.
C. Request to quiet title
Reardean also seeks to quiet title to the property in his favor. Pl.'s Compl. [#1] at ¶ 27. He alleges Freddie Mac's claim to ownership and possession of the property is improper.
A suit to quiet title is an equitable action in which the plaintiff seeks to recover possession of property wrongfully withheld. See Porretto v. Patterson, 251 S.W.3d 701, 708 (Tex. App.—Houston [1st Dist.] 2007, no pet.) (citing Katz v. Rodriguez, 563 S.W.2d 627, 629 (Tex. Civ. App.—Corpus Christi 1977, writ ref'd n.r.e.)). The suit "enables the holder of feeblest equity to remove from his way to legal title any unlawful hindrance having the appearance of better right." Thomson v. Locke, 66 Tex. 383, 389 (1886). To quiet title in his favor, the plaintiff "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." Wright v. Matthews, 26 S.W.3d 575, 578 (Tex. App.—Beaumont 2000, pet. denied). In other words, the plaintiff must recover on the strength of his or her title, not the weakness of his adversary's. Fricks v. Hancock, 45 S.W.3d 322, 327 (Tex. App.—Corpus Christi 2001, no pet.).
In this case, Reardean has failed to plead a viable claim to quiet title. His complaint contains no factual allegations whatsoever regarding the strength of his title to the property. It focuses entirely on the weaknesses of any adversary's title. Therefore, because of the dearth of factual allegations, Reardean has failed to state a claim to quiet title. Accord Disanti v. Mortg. Elec. Registration Sys., Inc., No. 4:10-CV-00103, 2010 WL 3338633, at *3 (E.D. Tex. Aug. 24, 2010) ("Because Plaintiff has failed to allege that he owns superior title to the Property, his claim to quiet title should be dismissed.").
Conclusion
Federal Rule of Civil Procedure 8 sets out a liberal pleading standard. See Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per curiam). The plaintiff need only allege facts that, if true, would support recovery under a valid legal theory. Iqbal, 129 S. Ct. at 1952. Reardean's complaint, however, fails to cross this low threshold because his legal theories are unavailing and his factual allegations are inadequate.
Accordingly,
IT IS ORDERED that Defendants' Motions to Dismiss [#7, #8] are GRANTED;
IT IS FINALLY ORDERED that Plaintiff's Complaint is DISMISSED.
SIGNED this the 24th day of July 2011.
/s/_________
SAM SPARKS
UNITED STATES DISTRICT JUDGE