Summary
denying remand where plaintiffs alleged that defendants charged illegal loan origination and loan discount fees
Summary of this case from Garcia v. Greenpoint Mortgage Funding Inc.Opinion
Case No. 03-420-CV-W-GAF
September 17, 2003
ORDER
Presently before the Court are a host of motions filed by Defendant Guaranty National Bank ofTallahassee ("Guaranty"), Defendants GMAC — Residential Funding Corp, et al. (hereinafter known collectively as "RFC"), Defendant Household Finance Corp. HJ ("Household"), and Plaintiffs Alvin and Linda Phipps et al. (collectively "the Phipps"). The Phipps have filed a motion to remand their cause of action back to the Circuit Court of Clay County, Missouri, arguing that this Court does not have original jurisdiction over the case in that it is a dispute governed exclusively by state law. Defendants Guaranty, RFC, and Household all oppose the remand motion stating that the Phipps' state law claim is completely preempted by 12 U.S.C. § 85 and 86. RFC has filed a motion to stay this proceeding pending the outcome of a class action settlement in Pennsylvania, a class in which the Phipps' would be members. Guaranty and Household join in the motion to stay while the Phipps oppose it. Household has filed a motion seeking to be dismissed from the lawsuit because none of the current named plaintiffs has a case or controversy against it. The Phipps contend that Household should remain in the action because some of the as of yet unnamed plaintiffs may have a cause of action against Household and that such claims are juridically linked to the Phipps' claims. Finally, RFC and Guaranty have also filed motions to dismiss stating that the Phipps' state law claims are entirely preempted by federal law and that the Phipps' claims do not state a valid cause of action.
DISCUSSION
I. Facts Common to All Motions
The Phipps purport to represent a group of similarly situated individuals who took out second mortgage loans on their residences from Guaranty. The named plaintiffs include, in addition to the Phipps, John and Elizibeth St. Clair, and Shawn and Lorene Starkey. The Phipps claim that Guaranty charged them unlawful and excessive fees in conjunction with the second mortgage loans. They contend that these fees violate Missouri's Second Mortgage Loan Act ("SMLA"), Mo. Rev. Stat. § 480.231 et seq.
According to the Phipps' allegations, Guaranty extended second mortgage loans to the Phipps, and others, and charged them unlawful fees including a loan origination fee, a loan discount fee, an underwriting fee, an application fee, a closing fee, fees for title searches, abstracts and examinations, overnight shipping fees, document review fees, processing fees, and recording fees. The Phipps contend that these fees, particularly the origination fees and discount fees, were actually "finders fees" that were paid to a third party, Equity Guaranty LLC. A settlement statement with the Department of Housing and Urban Development ("HUD") indicates that the origination and discount fees were paid to Guaranty. The Phipps allege that all of these fees violate the SMLA which reads, in pertinent part;
1. No charge other than permitted by section 480.232 shall be directly or indirectly charged, contracted for or received in connection with any second mortgage loan, except as provided in this section:
(1) Fees and charges prescribed by law actually and necessarily paid to public officials for perfecting, releasing, or satisfying a security interest related to the second mortgage loan;
(2) Taxes;
(3) Bona fide closing costs paid to third parties, which shall include:
(a) Fees or premiums for title examination, title insurance, or similar purposes including survey;
(b) Fees for prepartion of a deed, settlement statement, or other documents;
(c) Fees for notarizing deeds and other documents;
(d) Appraisal fees; and
(e) Fees for credit reports;
(4) Charges for insurance as described in subsection 2 of this section;
(5) A nonrefundable origination fee not to exceed five percent of the principal which may be used by the lender to reduce the rate on a second mortgage loan[.]
The SMLA also states that "Sections 408.231 to 408.241 [the SMLA] shall not apply to any loans on which the rate of interest charged is lawful without regard to the rates permitted in subsection 1 of this section."
The Phipps filed their complaint against Guaranty and other entities allegedly holding the mortgages in the Circuit Court of Clay County, Missouri on April 3, 2003. The Complaint alleges that Guaranty established a scheme whereby broker entities would locate individuals wanting second mortgage loans and the that broker would direct them to Guaranty. The Phipps allege that this was done so that Guaranty could charge the individual excessive fees. Nowhere in the Complaint do the Phipps allege that Guaranty charged them an unlawful interest rate. According to the allegations in the Complaint, the Phipps were charged an interest rate of 16.99% for a fifteen year loan, the St. Clairs were charged a rate of 11.99% for a twenty-five year loan, and the Starkeys were charged a rate of 11.99% on a fifteen year loan. These rates are in excess of Missouri's usury law, which currently caps interest rates at 10%. Mo. Rev. Stat. § 408.030. However, the Phipps make no claim of illegal interest rates. In fact the Phipps go to great lengths to assert that the claims against Guaranty are based on the charging of unlawful fees, not unlawful interest rates.
The statute provides that if market rates exceed 10%, which they currently do not, a fluctuating "market rate" may be the standard.
Guaranty and the other defendants removed the action to this Court on May 13, 2003. The Phipps now seek to have the case remanded back to state court arguing that there is no basis for federal jurisdiction. Guaranty, RFC, and Household all stress that the Phipps' claims against Guarantyet al. are really in the nature of a usury claim against a national bank, which is completely preempted by federal law. Guaranty contends that the fees charged the individuals, specifically the loan origination and loan discount fees are "interest" within the broad definition of that term as set by the Office of the Comptroller of Currency ("OCC"). Because the Phipps' claims against Guaranty are really claims of usury despite the Phipps' protestations, Guaranty avers that federal law completely "occupies the field" of usury claims against national banks, thus preempting the Phipps' state law claim with federal law.
Assuming this Court to have jurisdiction, Defendants RFC and Guaranty argue that the Phipps's case should be dismissed under Federal Rule of Civil Procedure 12(b)(6) because the Complaint does not state a valid cause of action. In response to these motions, the Phipps argue that their claims are not preempted by federal law, which would mean that remand was proper. The motions to dismiss are, in truth, a rehashing of the remand arguments for it is impossible for the Court to retain jurisdiction but not dismiss the case. If the Phipps' case is completely preempted by federal law, the claims are anomalous and must be dismissed. If the Court declines jurisdiction, the Court lacks authority to rule on the motions to dismiss and they are thus moot.
Interestingly, in Guaranty's and RFC's Motions to Dismiss they make much of the issue of whether the Phipps have stated a valid SMLA claim. Guaranty and RFC argue that the SMLA only applies if the interest rates are unlawful, of which the Phipps make no such allegation. However, the Court can only decide the motions to dismiss if it decides that it has jurisdiction over the case. The only way the Court has jurisdiction is if federal law completely preempts and displaces state law. Thus, there is no way for the Court to decide the issue of whether the Phipps have stated a valid SMLA claim.
Defendant Household also moves to dismiss the claims against it, but on a different basis than preemption. Household contends that the named plaintiffs lack standing to sue Household because it does not hold any of the named plaintiffs' mortgages. The only basis upon which to sue Household is the claim that the plaintiffs represent the interests of unnamed individuals who may have gotten second mortgage loans from Guaranty, which loans were then later assigned to Household. As of the date of these motions, no such individual had been identified. Household contends that purporting to represent the claims of unnamed individuals adds nothing to the issue of standing and that it is an insufficient basis upon which to assert a claim against Household. The Phipps counter that the issue of class certification should be decided prior to deciding any issues of standing against individual defendants. In the alternative, the Phipps contend that the claims against Household, as holder of a putatively unlawful mortgage, would be juridically linked to the Phipps claims against Guaranty thus making standing appropriate.
Finally, Defendant RFC asserts, as an alternative to all the motions, that the case be stayed pending the resolution of a class action settlement in Pennsylvania. Household and Guaranty also join in the motion. According to RFC, the United States District Court for the Western District of Pennsylvania has, for settlement purposes, certified a class action against Guaranty. The Western District of Pennsylvania is currently in the process of finalizing the process by which class members may be allowed to opt in or out of the settlement and by which class members may make claims against Guaranty. Because the Phipps would be members of the class currently certified in Pennsylvania, RFC urges the Court to stay this proceeding until the Pennsylvania dispute is resolved. The Phipps oppose this motion arguing that the Court should not stay the proceeding because this case is first filed and more developed. The Phipps decry the Pennsylvania settlement as an attempt to buy off aggrieved individuals "on the cheap". Barring this, the Phipps contend that the Court should decide the remand issue before deciding whether to stay the action. II. Analysis A. Motion to Remand
A defendant may remove an action filed instate court to a court of federal jurisdiction, but only if such claim could have originally been brought in federal court. Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). In the instances of cases that could be brought under federal law (as opposed to diversity jurisdiction cases) the federal law under which the claim arises must be a direct and essential element of the plaintiffs case and cannot be based upon the anticipation of a defense of federal law. See Louisville Nashville R.R. v. Mottley, 211 U.S. 149 (1908). In cases of concurrent jurisdiction between the federal and state courts, litigants may avoid federal court by foregoing their federal remedy and pleading an exclusively state law driven cause of action. Caterpillar, 482 U.S. at 392. This avenue is, however, subject to the complete preemption doctrine.
Ordinarily, federal jurisdiction exists only where the federal claim is present on the face of the complaint. Magee v. Exxon Corp., 135 F.3d 599, 601 (8th Cir. 1998). However, if the preemptive force of federal law is "extraordinary," an entirely state law claim may be transmuted into a claim stating a federal cause of action. Krispin v. May Dep't Stores Co., 218 F.3d 919, 922 (8th Cir. 2000). "Once an area of state law has been completely pre-empted [by federal law], any claim purportedly based on that pre-empted state law is considered, from its inception, a federal claim, and therefore arises under federal law." Caterpillar, 482 U.S. at 393. The onus is on the defendant to demonstrate that removal is proper. McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 189 (1936). As such, the burden is the defendant's to show that an area of state law has been completely pre-empted by federal law in order to establish proper removal jurisdiction.
Defendants Guaranty, RFC, and Household argue that removal is proper, and that remand should be denied, based on a recent United States Supreme Court, Beneficial National Bank v. Anderson, ___ U.S. ___, 123 S.Ct. 2058 (2003). In Beneficial, the Supreme Court found that the statutes governing the creation and operations of national banks were of such force that they created an exclusive cause of action against national banks for usury. 123 S.Ct. 2058, 2064. The Court found that sections 85 and 86 of the National Bank Act ("NBA") created the sole law and remedy as to claims of unlawful interest rates against national banks. Id. As such, the Court stated that there was "no such thing as a state-law claim of usury against a national bank[,]" and held that sections 85 and 86 "supersede[d] both the substantive and remedial provisions of state usury laws[.]" Id. Accordingly, a claim of usury against a national bank, even a claim purporting to be grounded on state law, is in reality a federal claim.
The issue of whether to remand the case (as well as many other issues) comes down to a determination of whether the Phipps are really bringing a claim of unlawful interest against Guaranty and the other defendants. Section 85 of the NBA states that a national bank may charge a rate of interest on a loan consistent with the maximum allowable rate as designated by the state in which the bank is located. The Office of the Comptroller of Currency ("OCC") has issued a regulation defining "interest" as it is used in § 85. According to the OCC, the term "interest" includes "any payment compensating a creditor or prospective creditor for an extension of credit[.]" 12 C.F.R. § 7.4001. The regulation then provides anon-exhaustive list of fees which may be included under the term "interest". The regulation also exempts certain fees as not being interest, such as appraisal fees, finders' fees, or document preparation fees. Id.
Guaranty argues that what the Phipps claim are unlawful fees, are really "interest" under the OCC's definition. According to Guaranty, the loan origination fees and loan discount fees are payments compensating Guaranty for making the loan. This assertion is supported by the HUD settlement statements which show that the origination and discount fees were paid to Guaranty. As such, says Guaranty, these fees are "interest," hence the Phipps are making an unlawful interest claim against it, which is preempted by § 85.
The Phipps counter that the origination and discount fees are in actuality finder's fees, which were paid to Equity Guaranty LLC. The OCC's definition of "interest" specifically excludes finders fees. The Phipps also cite to an decision, from this District, ordering remand of a similar lawsuit because the state law claim was not preempted by § 85. According to the Phipps, because this case is not without dispute a usury case remand should be granted. See Pl. Sugg, in Support, at 13 and Pl. Reply at 14 (citing Adkison v. FirstPlus Bank, et al., Case No. 00-622 (W.D.Mo. Jan. 22, 2001)). The Phipps' argument regarding the "without dispute" requirement is based on a misreading of Eighth Circuit precedent.
The Phipps' argument that the cause of action must be undisputedly one of usury is based on an Eighth Circuit decision, M. Nahas Co., Inc. v. First National Bank of Hot Springs, 930 F.2d 608 (8th Cir. 1991). In that decision, the Court found that removal of a complaint against a national bank was proper based on the complete preemption of state law by § 85. The Phipps argue, citing the Adkison order, that this decision holds that a claim must be without dispute a claim of unlawful interest for § 85 to completely preempt state law. Pl. Reply at 14. Because the Phipps do not claim unlawful interest, or because there is at least a dispute as to the true nature of the challenged fees, the Phipps assert that the claim is not undisputedly one of usury and should be remanded.
Contrary to the Phipps' argument, the Nahas decision does not stand for the principal that only undisputed usury cases are completely preempted by § 85. Rather, the holding of Nahas is that usury claims against national banks are preempted by § 85 and § 86. Id. at 612. The Nahas opinion says nothing about requiring the case to be "without dispute" a usury claim. This Court sees no reason to read such a heightened requirement into these types of claims. Rather, it is more logical simply to look to the nature of the allegations in the complaint, rather than the parties' designations thereof, and determine whether the claim is of a type completely preempted by federal banking law. Any other approach would allow litigants to avoid federal jurisdiction by artful schemes and artifices designed to create disputes as to the nature of the claim. This type of behavior cannot be sanctioned using the Nahas decision as supporting authority, especially in light of the Eighth Circuit's expressed eschewal of such practices. See Nahas, 930 F.2d at 612 (stating that usury claims against national banks are federal claims regardless of a plaintiff's artful attempts to couch its complaint in state law terms).
The Court can understand, to a certain degree, the Phipps' reticence to have their claim preempted by federal law. The Phipps are attempting to navigate between the Scylla of §§ 85 and 86, which would completely preempt their state law claims, and between the Charybdis of Mo. Rev. Stat. § 408.231.4, which says that an interestrate mustbe unlawful in order for SMLA to apply. A difficult position to be sure; for if the Phipps allege that the interest rate charged by Guaranty was unlawful, in order to satisfy § 408.231.4, the Phipps will have clearly stated a claim of usury against a national bank. Such a claim is undeniably preempted by § 85. On the other hand, if the Phipps protest that their claim is not for unlawful interest, which course they have apparently opted to take, their state law claim is entirely groundless, because of the requirements of § 408.231.4 stating that in order for the SMLA to apply, the interest rate charged must be unlawful. Either tack seems to be fatal to the Phipps' case.
Regardless of the Phipps' classification of Guaranty's fees as "finder's fees" the Court must look beyond such labels and determine if the Phipps have truly made a claim of unlawful interest. The critical inquiry is whether the fees are charged in consideration for the advancement of credit or a loan. The loan origination fees and the loan discount fees appear to fit that bill. The OCC has previously opined that fees charged for opening an account with a bank are "interest" under 12 C.F.R. § 7.4001. See OCC Interpretive Letter No. 803,1998 WL320183. According to the OCC, the account opening fees were used as an alternative to higher monthly percentage finance charges and were a way for the bank to adjust for risks and costs associated with establishing and maintaining the account. Id. at 1998 WL 320183, *4. Like the account opening fees addressed by the OCC in its interpretive letter, the loan origination fees and loan discount fees help the bank in dealing with the costs and considerable risks associated with making second mortgage loans. Additionally, the loan origination fees and the loan discount fees are not like the other types of fees excluded from the definition of "interest".
The OCC specifically excludes from the definition of "interest" fees such as appraisal fees, and fees for obtaining credit reports. These are the types of costs that are incurred regardless of whether the loan is advanced or not. As such they are not necessarily connected to the extension of credit. Loan origination fees and loan discount fees are generally not collected unless a loan is actually made. They are designed to eliminate, from the lender's perspective, potential risks that might make an individual an unattractive credit risk. In this regard, the origination and discount fees are more like fees associated with the extension of credit, such as annual fees, cash advances fees, and membership fees. Because these origination and discount fees help offset risk and are only levied in the event a loan is extended, as opposed to appraisal or credit report fees, the fees fit within the OCC's definition of "interest". It thus appears on the face of the complaint that the Phipps are claiming that Guaranty charged them unlawful "interest" as defined by the OCC.
The Phipps argue that these fees are not interest because they allege that Guaranty turned around and paid all or a portion of the fees to Equity Guaranty as a finder's fee. Whether a portion or all of these fees were paid out to a third party is not dispositive of the issue. The test is whether the fees were connected to extending or making available credit. Fees may be paid out by the lender to a third party, but that does not mean the fees were not collected in consideration for the extension of credit.
Given the true nature of the Phipps' claim, that of unlawful interest within the OCC's definition, any state law claims are completely preempted and the Phipps are subject to federal jurisdiction. As such, removal is proper and the Phipps' motion to remand is DENIED.
B. Motion to Dismiss — Defendants RFC Guaranty
Having concluded that the Court has jurisdiction over the Phipps' claims, it will now consider RFC and Guaranty's Motions to Dismiss. Under Federal Rule of Civil Procedure 12(b), a case may be dismissed if the complaint fails to state a valid cause of action. FRCP 12(b)(6). Dismissal under the rule is "inappropriate unless it appears beyond a reasonable doubt that the plaintiff can prove no setoffacts in support of his claim which would entitle him to relief." McCormack v. Citibank, N.A., 979 F.2d 643, 646 (8th Cir. 1992). When considering a motion to dismiss, an assumption must be made that all factual allegations are true and a dismissal may be granted "only if it is clear that no relief can be granted under any set of facts that could be proved consistent with the allegations. Alexander v. Peffer, 993 F.2d 1348, 1349 (8th Cir. 1993).
Having found that the Phipps are asserting a claim of unlawful interest against Guaranty, and having further found that the United States Supreme Court has stated there is no such thing as a state law claim of usury against a national bank, it is a short step to conclude that the Phipps' complaint should be dismissed. The Phipps' complaint attempts to state what does not exist, to wit: a usurious claim against a national bank premised on Missouri law. This is not a claim for which relief may be granted. Accordingly, Defendant RFC and Defendant Guaranty's Motions to Dismiss are GRANTED.
The Court notes that even if the Phipps had attempted to couch their case in terms of § 85, as they should have from the beginning, their claim would have been on unstable legal ground. National banks are allowed to export the interest rates of the state in which they are located to other foreign states. Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299, 318-19 (1978). Hence, under § 85, if a national bank located in Florida charges an interest rate to a Missouri debtor that is legal in Florida, it is legal in Missouri. The Phipps make no argument, as would have been proper, that Guaranty charged them an interest rate that was unlawful in Florida, or under any applicable federal law. Additionally, it appears that the interest rates charged to the Phipps et al., were below Florida's usury level of 18%, thus negating a claim under § 85. See Fla. Stat. Ann. § 687.03(1) (stating that it shall be unlawful for any person to charge a rate of interest greater than the equivalent of 18 percent per annum).
The parties devoted much paper to the issue of whether the Phipps had stated a valid cause of action under the SMLA. That however was not an issue the Court could address. Because the Court concluded that the Phipps' state law claim was completely preempted by federal law, there was no way for the Court to apply state law. However, in the opinion of the Court, the following bears mentioning. If the Phipps truly believe that their claim is for unlawful fees and not for unlawful interest, they have no SMLA claim. By its express terms, the SMLA, including the portion of the SMLA that removes the cap on interest rates for second mortgages, does not apply unless the interest rate charged on the second mortgage is unlawful. Mo. Rev. Stat. § 408.232.4. For example, if an interest rate charged by a Missouri bank, on a loan taken out by a Missouri citizen, exceeds 10%, the SMLA applies and certain fee restrictions must be taken into account. If the interest rate is lawful, or below 10% in Missouri, the SMLA does not apply. As discussed above, there is every indication that the interest rate Guaranty charged the Phipps was valid under Florida law. Missouri recognizes that national banks may export the usury laws of its home state into Missouri. Avila v. Cmty Bank of Va., 2003 WL 22002779 (Mo.Ct.App. Aug. 26, 2003). Because the interest rate charged the Phipps was most likely lawful, the SMLA would not apply and the Phipps would have no state law SMLA claim.
C. Motion to Dismiss — Defendant Household
Based on the above two rulings of this Court, that remand was not proper and that the Phipps' state law claims were completely preempted, there is no need to rule on Household's separate motion to dismiss as it is rendered moot. Any claim against Household would have been derivative of a claim against Guaranty by virtue of the fact Household is an assignee of some of the mortgages in question. Having ruled that the Phipps failed to make a claim against Guaranty, it logically follows that they have no claim against Household, regardless of whether there is a juridical link between the claims against Guaranty and the claims against Household. For this reason, the Court finds that Household's Motion to Dismiss should be GRANTED, but not for the reasons stated in Household's Suggestions in Support. D. Motion to Stay
Having ruled that the Phipps' case should be dismissed, Defendant RFC's Motion to Stay the proceedings is rendered moot and is therefore DENIED.
CONCLUSION
For the above and foregoing reasons, it is hereby ORDERED as follows:
1. Plaintiff Alvin Linda Phipps et al.'s Motion to Remand is DENIED
2. Defendants Guaranty National Bank of Tallahassee, GMAC — Residential Funding Corp. et al.'s Motions to Dismiss are GRANTED.
3. Defendant Household Finance Corp. Ill's Motion to Dismiss is DENIED as moot.
4. Defendant GMAC — Residential Funding Corp. et al.,'s Motion to Stay Proceedings is DENIED as moot.
IT IS SO ORDERED.