The U.S. Court of Appeals for the Eighth Circuit recently upheld the dismissals of two borrowers' complaints for failure to state quiet title and slander of title claims against mortgagees.
The Court further rejected the "show-me-the-note" theory, confirmed that mortgagors lacked standing to challenge foreclosures based on trust agreements governing mortgage-backed securities trusts, and ruled that borrowers failed to plead "sufficient factual matter" to raise plausible questions as to parties' mortgage-acceleration rights. Copies of the opinions are attached.
In two cases dealing with the rights of mortgagees under Minnesota law, a group of plaintiffs-borrowers ("Borrowers") filed lawsuits against various defendants (collectively, "Defendants"), including federal financial institution regulators, a number of financial institutions, and Mortgage Electronic Registration System, Inc. ("MERS"). The Borrowers essentially asserted that under Minnesota law the Defendants either lacked standing to foreclose on their properties or improperly foreclosed on them, thereby creating a cloud on the title to their property.
As you may recall, the Minnesota quiet title statute provides that "[a]ny person in possession of real property . . . or any other person having or claiming title to vacant or unoccupied real property, may bring an action against another who claims . . . a lien thereon, adverse to the person bringing the action, for the purpose of determining such adverse claim and the rights of the parties, respectively." Minn. Stat. § 559.01 ('Section 559.01").
In one case, relying on recent precedent, the Eighth Circuit easily rejected Borrowers' assertion that they had stated a slander-of-title action. See Butler v. Bank of America, 690 F.3d 959, 962 n.3 (8th Cir. 2012); Cox v. Mortgage Electronic Registration System, Inc., 685 F3d. 663, 668 (8th Cir. 2012). Turning next to Borrowers quiet title claim under Section 559.01, the Court ruled that Borrowers failed to sufficiently plead a quiet title action in that they failed to plead that they were in possession of the properties or that they had or claimed to have title to vacant land.
In the second case, the Borrowers filed suit in Minnesota state court, alleging that, due to faulty assignments of their mortgages, the ensuing foreclosures of their property were improper. Defendants removed to federal court. The Borrowers then attempted to have the case remanded back to state court by joining a non-diverse defendant, filed claims to quiet title under Section 559.01 and for slander of title, and sought declaratory judgments as to whether (1) Defendants had a "true interest in or right to foreclose" and (2) their notes were properly accelerated by the correct party. Defendants moved to dismiss for failure to state a claim.
Concluding that joinder of the non-diverse defendant was fraudulent, the lower court granted Defendants' motion to dismiss. Arguing for remand, Borrowers appealed, contending that the lower court erroneously relied on a court decision that rejected the so-called "show-me-the-note" theory under which a foreclosing entity must present the original promissory note. See Jackson v. Mortgage Electronic Registration System, Inc., 770 N.W.2d 487, 500-01 (Minn. 2009)("Jackson").
Ruling that there was "no reasonable basis in fact and law supporting a claim against the resident defendant" under Minnesota law, the Eighth Circuit concluded that joinder of the resident defendant was indeed fraudulent, and accordingly affirmed the lower court's denial of remand and dismissal of claims against that particular defendant.
Turning to Borrowers' slander-of-title claim, and noting that the claim was simply an attempt to invalidate the foreclosures based on the discredited "show-me-the-note" theory, the Eighth Circuit relied on precedent in which it upheld the dismissal of a virtually identical claim, and dismissed this claim. See, e.g., Butler v. Bank of America, N.A., 690 F.3d 959, 961, 962-63, 962 n.3 (8th Cir. 2012); Murphy v. Aurora Loan Servs., LLC, 699 F.3d 1027, 1031-32 (8th Cir. 2012) ("Murphy").
As to Borrowers' request for a declaratory judgment to determine whether Defendants had standing to foreclose, the Eighth Circuit noted that Borrowers' request was based on allegations that their promissory notes and mortgages were transferred into trusts underlying mortgage-backed securities, and that their foreclosures violated the terms of the trust agreements. The Court adopted the reasoning employed by other courts in holding that mortgagors lacked standing to challenge foreclosures based on those trust agreements, because the mortgagors were neither parties to nor beneficiaries of such agreements.
With regard to Borrowers' request for a declaratory judgment determining whether their promissory notes were accelerated by the correct party, the Eighth Circuit noted that Borrowers' pleadings were merely conclusory and thus failed to plead sufficient fact to "raise plausible questions as to the rights of parties to accelerate the mortgages." See Fed. R. Civ. P. 8(a); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009; Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Finally, in addressing the Borrowers' quiet title claim in the second case, the Court rejected Borrowers' assertions that the "[m]ortgages [were] not properly perfected," and that Defendants were not "Note Holders as defined in the Original Notes" as merely the "show-me-the-note" theory in a different guise. The Eighth Circuit thus concluded that the quiet title claims was similarly barred by Jackson.
While noting, however, that certain quiet title theories relating to potentially invalid mortgage assignments and to Defendants' entitlement to receive payments on Borrowers' notes were not precluded under Jackson or Murphy, the Eighth Circuit nevertheless affirmed the dismissal of the quiet title action, because Borrowers failed to sufficiently plead them.
Citing federal pleading standards, the Court pointed out that although Borrowers may have satisfied the state pleading rules by referring to their actual possession of their land and an adverse claim by Defendants, they were "not state substantive standards that govern the success of a quiet title claim." Accordingly, due to Borrowers' failure to provide factual support for their claim that Defendants' adverse claims were invalid based on speculation as to the propriety of assignments of their loans, the Eighth Circuit affirmed the dismissal of Borrowers' quiet title claim, even though such dismissal was based on theories not precluded by Jackson.
Ralph T. Wutscher
McGinnis Wutscher LLP
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