Sunday, January 12, 2014

FYI: 8th Cir Rules Against Arkansas County Clerk in MERS Recording Fee Case

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a county circuit clerk's putative class action against MERS and various originators and servicers of loans for recovery of assignment recording fees.  The Eighth Circuit concluded that (i) the district court had jurisdiction under the federal Class Action Fairness Act to rule on the clerk's illegal-exaction claim, (ii) the district court did not err in exercising supplemental jurisdiction over the clerk's state law claims, and (iii) the district court did not err in refusing to abstain from hearing the clerk's claims.   


A copy of the Court's opinion is available at:


A Circuit Clerk in Arkansas filed a class action suit in state court against MERS and various lenders and servicers of loans (Lenders), alleging the use of the registration system violated the Arkansas Deceptive Trade Practices Act (ADTPA), unjustly enriched the Lenders, and constituted an illegal exaction under the Arkansas Constitution.  The basis of the plaintiff's suit was that the use of the registration system made it possible for mortgagees to avoid paying recording fees for subsequent assignments of the mortgage, thus depriving all county clerks of revenue. 


The Lenders removed the matter to federal court under the federal Class Action Fairness Act (CAFA).  The plaintiff circuit clerk filed a first Motion to Remand, contending that the federal court did not have jurisdiction under CAFA.  The district court denied the first Motion to Remand, holding that the requirements of CAFA were met because: (1) the class contained at least 100 members because the Arkansas Supreme Court has defined an illegal-exaction suit as a class action, (2) the parties were minimally diverse, and (3) the jurisdictional damage amount was satisfied.


The plaintiff circuit clerk then filed a second Motion to Remand, in which the plaintiff requested the court to abstain from hearing the illegal-exaction claim, exercise comity by refusing to hear the claim, or allow the plaintiff to dismiss the claim without prejudice.  The district court denied the second Motion to Remand, finding the abstention doctrine articulated in Burford v. Sun Oil Co., 319 U.S. 315 (1943) did not apply because the illegal-exaction claim did not involve the complex regulatory schemed required for abstention.  The district court also concluded that comity did not apply because that doctrine normally applied to injunctions sought to prevent the enforcement of a tax, whereas the plaintiff was seeking to enforce a recording fee.  Finally, the court refused to allow the plaintiff circuit clerk to withdraw the illegal-exaction claim because the motive to do so was "forum-driven."


The district court then dismissed the plaintiff's entire complaint pursuant to Fed. R. Civ. Pro. 12(B)(6).  In doing so, the district court made two distinct findings.  First, it held that the plaintiff circuit clerk did not state an illegal-exaction claim because she brought the claim as a tax receiver against a private entity, and a proper illegal-exaction claim is brought by a taxpayer to protect against the government's enforcement of an illegal exaction.  The second finding of the district court was that the state law ADTPA and unjust enrichment claims failed because there was no duty to record mortgage assignments in Arkansas. 


The plaintiff filed a Motion to Alter or Amend the ruling, in which she asked the district court to alter its judgment because the court did not have jurisdiction to rule on the state law claims after dismissing the illegal-exaction claim. The district court denied the Motion to Alter, finding that the state law claims were not so novel or complex to divest the district court of its jurisdiction.


The Plaintiff appealed the dismissal and raised three jurisdictional arguments on appeal: (1) the district court did not have jurisdiction under CAFA because it misconstrued the type of illegal-exaction claim pled, (2) even if the court had jurisdiction under CAFA, it erred in exercising supplemental jurisdiction over the unjust enrichment and ADTPA claims, and (3) the court erred in not abstaining from hearing the claims. 


The Eighth Circuit thoroughly addressed each issue raised on appeal. 


First, Court held that the requirements of CAFA were satisfied.  CAFA confers federal jurisdiction over class action where (1) there is minimal diversity, (2) the proposed class contains at least 100 members and (3) the amount in controversy is at least $5 million in the aggregate.  Further, CAFA's removal provisions apply only to "class action" cases, which are defined by the statute as "any civil action filed under rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action."  28 U.S.C. § 1332(d)(1)(B).  The amount in controversy was not an issue on appeal.


The analysis of jurisdiction under CAFA focused on whether the Plaintiff's purported class met the statutory definition of "class action" and whether there were a sufficient amount of members in the class.  In analyzing whether the plaintiff's complaint satisfied the statutory definition of a class action, the Eighth Circuit focused on the illegal-exaction claim, Rule 23 of the Arkansas Rules of Civil Procedure and instruction from the Arkansas Supreme Court.  "The Arkansas Supreme Court has prescribed a judicially-created procedure to bring an illegal-exaction claim in Arkansas.  This procedure, which was promulgated prior to Rule 23 of the Arkansas Rules of Civil Procedure, provides a mechanism for plaintiffs to pursue a class action to collectively resist illegal taxation.  In bringing an illegal-exaction claim, the Arkansas Supreme Court instructs courts to use Arkansas Rule 23 as a procedural guide."  Based on these holdings, the Eighth Circuit concluded that Arkansas had a "rule of judicial procedure" to satisfy the requirement of 28 U.S.C. § 1332(d)(1)(B) for purposes of establishing a "class action." 


The Eighth Circuit then addressed whether the district court erred in concluding that the class contained at least 100 members.  This was a simple issue for the Court – the plaintiff's complaint alleged, and in seeking class certification the plaintiff reiterated, that the illegal-exaction claim was a class action composed of Arkansas citizen-taxpayers.  Because the court's jurisdiction is measured at the time matter is removed, and because the complaint on its face was purportedly brought on behalf of all of the taxpayers in the State of Arkansas, the proposed class easily contained at least 100 members.  The Court also disposed of the plaintiff's argument that the Court misinterpreted the type of illegal-exaction case the plaintiff circuit clerk brought.  The plaintiff argued that the Court interpreted her claim as an illegal-tax case instead of a public-fund case.  The Court, however, said the argument did not alter the analysis because public-fund cases have proceeded on a class theory that includes all Arkansas taxpayers. 


In addressing the second issue raised on appeal – whether the district court erred in exercising supplemental jurisdiction over the state law claims – the Eighth Circuit ruled that such a decision is reviewed for abuse of discretion.  The district court's discretion to exercise supplemental jurisdiction should consider factors such as judicial economy, convenience, fairness and comity.  The Eighth Circuit concluded that "it would have been a waste of judicial resources to remand the case" and that it was fair to the parties and a proper allocation of comity for the district court to decide the issue because the state law claims were not novel and they involved well-understood and settled principles of Arkansas law.  Thus, the district court did not err in exercising supplemental jurisdiction. 


The final issue raised on appeal was whether the district court should have abstained from ruling on the matter because the action should have been filed and heard in state court.  The Court characterized the plaintiff's argument as one of subject-matter jurisdiction to which Burford abstention was irrelevant and inapplicable.  Burford abstention applies when a state has established a complex regulatory scheme supervised by state courts and serving important state interests that requires specialized knowledge and the application of complicated state laws.  The Eighth Circuit concluded that the plaintiff's complaint involved a standard enforcement proceeding requiring the federal court to apply Arkansas state law in a way that had already been interpreted by Arkansas courts.


Even though not raised as an issue on appeal, the Eighth Circuit proceeded to address the merits of the plaintiff's complaint and concluded that dismissal under Rule 12(B)(6) was appropriate. 


The Court held that, because Arkansas law does not impose a duty on assignees of mortgages to record their assignments, the state law claims of unjust enrichment and ADTPA both failed.  Additionally, the Court held that, because there is no duty to record the assignment, the Lenders did not retain anything of value and there is nothing they could be required to restore to the counties, thus the Lenders were not unjustly enriched.  Further, the Court held, under ADTPA, an unconscionable, false or deceptive act is required. In the absence of a duty to record the assignment, the Eighth Circuit concluded that failing to record is not "false" or "unconscionable."  


Accordingly, the Eighth Circuit affirmed the district court's dismissal of the plaintiff circuit clerk's complaint with prejudice.  







Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


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          McGinnis Wutscher Beiramee LLP





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