Wednesday, November 21, 2012

FYI: 8th Cir Upholds Dismissal of "Show-Me-the-Note" Allegations, Holds Borrower Plaintiffs Fraudulently Joined Foreclosure Firm as Defendant

The U.S. Court of Appeals for the Eighth Circuit recently upheld the dismissal of numerous "show-me-the-note" allegations, but spared certain quiet title allegations relating to alleged defects in the assignments of mortgage that the parties had not addressed in their briefs.  The Court also held that diversity jurisdiction was proper, as the plaintiff borrowers fraudulently joined the local foreclosure firm as a defendant with the servicer and MERS.  A copy of the opinion is attached.


The Minnesota borrower plaintiffs each signed a promissory note and a mortgage on  which Mortgage Electronic Registration Systems, Inc. ("MERS") was the nominal  mortgagee.  MERS subsequently assigned each mortgage to the mortgage loan servicer ("Servicer"). 


After the plaintiffs defaulted on their repayment obligations, Servicer retained the legal services of a foreclosure law firm ("Foreclosure Firm") to aid them in foreclosing on the properties pursuant to Minnesota's foreclosure-by-advertisement statute.


The plaintiffs filed this action, alleging that neither Servicer nor MERS was entitled to foreclose on the properties, and that Foreclosure Firm knowingly made false representations regarding Servicer's authority to foreclose.  The plaintiff borrowers did not contest the validity of their initial mortgage agreements, nor did they contest their subsequent defaults.


Servicer and MERS removed the action to federal court based on the allegedly fraudulent joinder of Foreclosure Firm.  The federal district court denied the Homeowners' motion to remand and dismissed all of their claims with prejudice.


The district court viewed the complaint as articulating nothing more than repackaged versions of the "show-me-the-note" theory, which was previously rejected by both the Supreme Court of Minnesota and the U.S. Court of Appeals for the Eighth Circuit. See Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 490-91 (Minn. 2009); Stein v. Chase Home Fin., LLC, 662 F.3d 976, 978-79 (8th Cir. 2011).


On appeal, the plaintiffs contested the district court's exercise of subject matter jurisdiction, and insisted their theories of recovery were not premised on a failure to produce their promissory notes.  The Eighth Circuit affirmed the district court's dismissal of the Foreclosure Firm as fraudulently joined, and affirmed the dismissal with prejudice of the majority of the plaintiffs' claims, but partially reversed as to the dismissal of the quiet-title cause of action.


As you may recall, although it may facially appear that all of the defendants are not diverse from all of the plaintiffs, removal on grounds of diversity may still be proper if a non-diverse party has been fraudulently joined.   A party is fraudulently joined for purposes of diversity jurisdiction if there is "no reasonable basis in fact and law" for the claim brought against it.  Filla v. Norfolk S. Ry. Co., 336 F.3d 806, 810 (8th Cir. 2003).


The Eighth Circuit upheld the district court's ruling that all of the plaintiffs' claims against the Foreclosure Firm lacked a reasonable basis in fact and law.  Where attorneys act within the scope of their employment, Minnesota law provides protection from liability to third parties.  McDonald v. Stewart, 182 N.W.2d 437, 440 (Minn. 1970). The Court held that, absent knowing participation in fraud, none of the work performed by the Foreclosure Firm as foreclosing attorney could give rise to an actionable claim.


Examining the six misrepresentation claims asserted against the Foreclosure Firm, the Eighth Circuit held that the claims failed to allege any knowing participation by the Foreclosure Firm in the alleged fraud, and failed to plead with any specificity the facts and underlying the claims, as required.  Accordingly, the Court held that the Foreclosure Firm was properly dismissed as fraudulently joined.


The plaintiffs also argued that the doctrine of prior exclusive jurisdiction, which provides that when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res, bars the district court from exercising subject matter jurisdiction over any of their claims, barred the district court from accepting jurisdiction.  However, the Appellate Court held that the doctrine does not apply to removal actions because the state court loses jurisdiction over a removed suit.


As to their allegations against the Servicer and MERS, the plaintiffs argued that their quiet-title action was not a "show-me-the-note" claim.  The complaint sought to quiet title based on seven potential defects in the Servicer or MERS's ability to foreclose on the mortgages.  Although the Appellate Court agreed with the lower court that many of the theories underlying the quiet-title claim were regurgitations of the "show-me-the note" theory, two of the quiet-title theories do not rely on the failure of the foreclosing party to produce the note.


Under these two theories, the assignments of mortgage from MERS to the Servicer of legal title to the mortgages either were unrecorded or executed by individuals lacking the legal authority to do so.  The plaintiffs argued that the resulting alleged defect in the chain of title of the mortgages deprived Servicer of the authority to foreclose on their properties.


The Court noted that the parties did not provide briefing specific to these two remaining quiet-title theories.  For instance, the Court questioned whether the plaintiffs still had any interest in the properties following the foreclosures, and whether the plaintiffs' interest is "adverse" to the mere security interest held by MERS or the Servicer for purposes of the quiet-title statute, as the borrowers conceded that valid security interests in the properties were created.


The Eighth Circuit also refused to alter the dismissal of their remaining claims to be without prejudice. "A district court does not abuse its discretion in failing to invite an amended complaint when plaintiff has not moved to amend . . . ." Carlson v. Hyundai Motor Co., 164 F.3d 1160, 1162 (8th Cir. 1999).  Dismissal with prejudice is appropriate where a party never "submitted a proposed amended complaint or clarified what one might have contained." Pet Quarters, Inc. v. Depository Trust & Clearing Corp., 559 F.3d 772, 782 (8th Cir. 2009).  Following the dismissal of their claims, the Court noted that the plaintiffs never sought leave to file an amended complaint or otherwise indicated how they would make the complaint viable.


Thus, the Eighth Circuit partially reversed the district court's dismissal of the quiet-title cause of action, affirmed the dismissal of the remaining counts, and remanded for proceedings consistent with its opinion.

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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