Sunday, May 17, 2020

FYI: 9th Cir Rules in Favor of Mortgagee Defendants in Nevada HOA Case

The U.S. Court of Appeals for the Ninth Circuit recently ruled in favor of the Federal Housing Finance Agency (FHFA), Fannie Mae, and the mortgage loan servicer in a title dispute arising from a home owner's association (HOA) lien foreclosure.


The Ninth Circuit confirmed that the so-called Federal Foreclosure Bar applies where the federal entity is not the record beneficiary on the deed of trust but can prove its property interest through admissible evidence, and acknowledged that the Nevada Supreme Court ruled that a HOA foreclosure extinguish the rights of the holder of a preexisting mortgage.


In addition, on an issue of first impression, the Court held that neither a deceased borrower nor her un-established "estate" could be sued, and because the borrower had no legal existence when the case was removed to federal court, her state of residency before death was irrelevant to diversity jurisdiction, which existed between the remaining parties.


A copy of the opinion is available at:  Link to Opinion


In March of 2003, the borrower obtained a mortgage loan to purchase a home in Las Vegas, Nevada. Shortly thereafter, Fannie Mae purchased the loan.


In July of 2008, "Congress passed the Housing and Economic Recovery Act of 2008 (HERA), establishing the Federal Housing Finance Agency (FHFA). HERA contained a provision, often called the Federal Foreclosure bar, which mandates that '[n]o property of the agency shall be subject to … foreclosure… without the consent of the Agency.'" A few months later, "[a]s authorized by HERA, the FHFA took Fannie Mae into conservatorship … where it remains to this day."


The borrower died in October of 2009. In 2011, a homeowners' association filed a foreclosure action and the property was sold at the foreclosure sale to a management company (the "purchaser").


"Nevada law allows a homeowners' association to foreclose on a property that is more than a certain number of months in arrears, notwithstanding the interest of the holder of any lien that might otherwise have priority, such as a mortgage."


The purchaser filed a quiet-title action in Nevada state court in 2013, naming the deceased borrower and the loan servicer, which "had become the record beneficiary of the deed of trust as Fannie Mae's loan servicer."


The servicer "removed the case to federal court on the basis of diversity, arguing that [the dead borrower] was fraudulently joined."


The servicer then filed a Suggestion of Death, attaching the borrower's death certificate, and moved to substitute the dead borrowers "Estate" as the defendant. The motion mentioned that no probate case had been filed for the dead borrower, who was believed to be survived by a daughter.


The trial court ruled that the deceased borrower was fraudulently joined, denied the purchaser's motion to remand the case to state court, and granted the servicer's motion to dismiss, reasoning that "the joinder was fraudulent because the foreclosure had extinguished any possible right [the borrower] might have to the property."  It also denied the motion to substitute the dead borrower's Estate for the same reason.


The trial court dismissed the action for failure to state a claim under then-current federal court precedent that an HOA foreclosure under Nevada's law did not extinguish the rights of the holder of the first mortgage. The purchaser appealed.


During the pendency of the appeal, "the Nevada Supreme Court ruled … that a HOA foreclosure did indeed extinguish the rights of the holder of a preexisting mortgage." The purchaser and servicer "jointly requested that the appeal be dismissed, following which the trial court … vacated the dismissal that it had previously entered."


Fannie Mae and FHFA then were granted leave to intervene as parties, and moved for summary judgment on the basis of the Federal Foreclosure Bar.  "The trial court denied this motion …, ruling that the fact that Fannie Mae did not appear as the record beneficiary of the deed of trust 'create[d] a genuine issue of material fact as to whether the FHFA or Fannie Mae owned the note and deed of trust at the time of [the HOA] sale.'"


The purchaser filed a second motion to substitute the estate of the dead borrower, which "still did not identify a representative of the estate." Instead, it represented that the borrower's daughter, a resident of Nevada, could be served as "a beneficiary of the estate of the deceased [borrower]."


In 2018, the trial court entered summary judgment again, this time ruling that because the dead borrower's legal representative had not been joined as a party, "complete diversity existed." The court also denied the purchaser's motion to substitute the dead borrower's Estate because "[s]he died before the action was filed, and no legal representative ever appeared."  In addition, the trial court held that the borrower's unestablished "estate is not a juridical entity that can sue or be sued except through a representative, and [the purchaser] identifies none."


Turning to the merits, the trial court then granted the servicer's motion to dismiss on the grounds of then-prevailing precedent, which held that Nevada's HOA foreclosure statute was unconstitutional for lack of due process. The purchaser appealed and FHFA ad Fannie Mae cross-appealed "the trial court's denial of their motion for summary judgment on the basis of the Federal Foreclosure Bar and its denial as moot of their quiet-title and declaratory-judgment counterclaims."


The Ninth Circuit began its legal analysis by noting that "changes in or clarifications of the law have cause each party to abandon positions taken at the trial court. The Nevada Supreme Court, in response to a certified question …, clarified in 2018 that the HOA statute was subject to certain procedural protections of Nevada law … and thus complied with constitutional due process requirements." Thus, the servicer and "the federal financial bodies conced[ed] … that the theory on which the trial court found in their favor at summary judgment was flawed."


On the other hand, the purchaser had to concede that "[s]ince the trial court issued its 2015 ruling denying the federal defendants' motion for summary judgment on the grounds of the Federal Foreclosure Bar, [the Ninth Circuit has] clarified that the Federal Foreclosure Bar does indeed apply … where the federal entity is not the record beneficiary on the deed of trust but can prove its property interest through admissible evidence." The Court found this admission to be "fatal to [the purchaser's] case on the merits.


However, the Court had to address two arguments raised by the purchaser "as to why we lack subject-matter jurisdiction and thus that this case must be remanded to state court."


First, the purchaser argued that the trial court never had diversity jurisdiction because it had tried to join the deceased borrower "and the trial court's 2013 order finding this to be fraudulent rested on an erroneous, since-discarded precedent." Second, the purchaser argued that it had twice tried to have the dead borrower's "estate joined, which the trial court denied each time."


Addressing the first argument, the Ninth Circuit explained that "we held in another HOA-foreclosure case that attempts to join the former homeowner do not constitute fraudulent joinder." However, that case "concerned the joinder of a living owner." But the borrower in the case at bar "was dead at the time joinder was attempted." Accordingly, the Court "turn[ed] squarely to address the question: can you sue a dead person?"


The Court explained that it had "never had to explicitly rule before that a dead person, qua a dead person (as opposed to the dead person's estate …) cannot sue, be sued, or be joined to a lawsuit."


However, "at least three of our sister circuits and several trial courts, in this circuit and elsewhere, have had to address this issue. Because "a litigant's citizenship for diversity purposes is a question of federal common law, rather than state law," the Court reviewed "those cases to inform our judgment[,]" concluding that "the consensus of our sister courts is unanimous: you cannot sue a dead person."


The Ninth Circuit joined its "sister circuits in holding that a party cannot maintain a suit on behalf of, or against, or join, a dead person, or in any other way make a dead person (in that person's own right, and not through a properly-represented estate or successor) party to a federal lawsuit. And by extension, when a dead person is named as a party, the dead person's prior citizenship is irrelevant when determining whether the controversy 'is between … citizens of different States.' 28 U.S.C. § 1332(a)."


Thus, the Court held that the trial court had diversity jurisdiction when the case was removed because the quiet title action was against the servicer and deceased borrower, who, "being dead, had no legal existence and therefore was not a 'citizen[]' of any state. Whether or not substitution ought to be allowed, notwithstanding that the party had been dead ab initio, is—as we have seen—a trickier question. Luckily, it is not one we have to resolve today, nor do we."


Turning to the purchaser's second argument, that the trial court erred in denying its two motions to substitute the dead borrower's estate, the Ninth Circuit explained that it reviews "the decision to allow substitution under Rule 25 for an abuse of discretion." The Court reasoned that it did not have to decide today whether to adopt the [Fifth Circuit's] Mizukami rule (disallowing substitution for a dead person no matter how good the cause, because rule 25 speaks only of substituting for claims that had previously existed and thus does not apply), or a more lenient and flexible rule based on something like the Tenth Circuit's logic in Esposito. … Even if a trial court could order substitution for a party dead ab initio, under Rule 25(a), [the purchaser] cannot show that this trial court abused its discretion in declining to do so."


Although the purchaser sought to substitute the estate of the dead borrower, "'[a]n estate is not a person or a legal entity and cannot sue or be sued; an estate can only act by and through a personal representative and therefore any action must be brought by or against the executor or representative of the estate.'"


The Ninth Circuit noted that this requires the filing of a probate case, issuance of letters testamentary and appointment of a personal representative or administrator under Nevada law. Because this was never done despite the purchaser knowing it had not been done since 2013, "the request to add an unknown, and perhaps nonexistent, executor (if the motion were to be so construed) is clearly improper."


Because it was still not clear from the record that the dead borrower's alleged daughter was the correct legal representative of the borrower's estate, that the purchaser had made any effort to have one appointed, or that the purchaser "had sought to sue her in her personal capacity as a potential heir to the property[,]" the Court concluded that the trial court did not abuse its discretion "by denying a motion to substitute, made in this form and with such deficiencies after so much litigation. Thus diversity jurisdiction continues to exist."


Accordingly, the Ninth Circuit vacated the judgment of the trial court, held that the Federal Foreclosure Bar applies, and remanded the case for further proceedings.




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