The U.S. Court of Appeals for the Fifth Circuit recently held that a stay of a non-judicial foreclosure due to the filing of a lawsuit by the borrower did not support an "amount in controversy" in excess of $75,000 for federal diversity jurisdiction purposes.
Because the plaintiff borrower stipulated that he would only seek damages up to $74,500, the Fifth Circuit ruled that the trial court lacked subject matter jurisdiction, and reversed all of the trial court's rulings in the case, including its final judgment in favor of the defendant.
A copy of the opinion is available at: Link to Opinion
The appeal arose from a lawsuit brought by a debtor ("Debtor") against a mortgagee ("Mortgagee") alleging supposed violations of the Texas Debt Collection Act ("TDCA") and breach of the common law duty of cooperation, fraud and negligent misrepresentation. Debtor included a stipulation that the damages sought did not exceed $74,500.
Creditor removed the case to federal court. In support of its removal, Mortgagee argued that Debtor's lawsuit stayed Mortgagee's non-judicial foreclosure sale and therefore put the value of the home, which exceeded $75,000, in dispute.
Debtor moved to remand the lawsuit back to state court arguing the amount in controversy could not exceed the stipulated amount. The federal trial court denied the motion for remand, concluding that Debtor's statement that the damages sought were less than $74,500 was insufficient. The federal trial court ruled that it had to measure the amount in controversy "by the value of the object of the litigation," and not what "the complaint states th[e] damages are 'not to exceed.''
The case moved forward, eventually resulting in judgment in favor of Mortgagee. Debtor appealed, challenging the denial of his motion to remand.
As you may recall, under 28 U.S.C. § 1332(a), federal courts "shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs and is between…citizens of different States."
Section 1332 does not elaborate on how to determine the amount in controversy. However, section 1446(c) sets a general rule that the amount in controversy is "the sum demanded in good faith in the initial pleading". 28 U.S.C. § 1446(c)(2). The statute then provides two exceptions to this general rule: (1) if nonmonetary relief is requested in the initial pleading; or (2) the initial pleading seeks a money judgment and that state either does not permit a demand for a specific sum or allows for recovery of a sum greater than that demanded. 28 U.S.C. § 1446(c)(2)(A).
When either exception is shown, then "the defendant's [plausible] amount-in-controversy allegation should be accepted when not contested by the plaintiff or questioned by the court." Dart Cherokee Basin Operating Co., LLC v. Owens, 574 U.S. 81, 87 (2014). If the allegation is questioned, "both sides submit proof and the court decides, by the preponderance of the evidence, whether the amount-in-controversy requirement has been satisfied." Id. at 88.
In the instant matter, the Fifth Circuit found that the amount in controversy did not exceed $75,000 for two reasons. First, Mortgagee did not establish by a preponderance of the evidence that the amount exceeded $75,000. Although Mortgagee submitted evidence that the property value exceeded the jurisdictional threshold, the Fifth Circuit noted that it failed to show that the foreclosure stay put the value of the house in controversy.
In explanation, the Fifth Circuit noted that the amount in controversy is measured by the value of the object of the litigation. See, e.g., 14AA Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3702.5 (4th ed.) [hereinafter Wright & Miller]. In the instant matter, Debtor sought damages up to $74,500 for the alleged violations of his rights under the TDCA, and not any additional relief. Thus, the Appellate Court held, the object of the litigation was money damages, and those were below the jurisdictional minimum.
However, Mortgagee argued that because the lawsuit triggered an automatic stay of the foreclosure, the value of the house was put in dispute, thus making the house the real object of the litigation. However, the Fifth Circuit noted that it has been well settled that neither the collateral effect of a suit or judgment can be counted toward the amount in controversy. See, e.g., New England Mortg. Sec. Co. v. Gay, 145 U.S. 123, 130 (1892).
The Fifth Circuit found that the automatic stay of the foreclosure was collateral for three reasons. First, the automatic stay of the foreclosure was triggered by the filing of Debtor's suit itself; it was detached from the suit's outcome. The Court reasoned that just as a collateral effect of a judgment cannot count toward the amount in controversy, see New England Mortg., 145 U.S. at 130, neither can the collateral effect of filing a suit.
The second reason provided by the Fifth Circuit was that the stay was temporary regardless of the outcome of the suit and did not determine ownership of the property. The Court distinguished this from injunctions, declaratory relief, and other forms of specific relief that definitively resolve parties' rights and are permanent. As the automatic stay did not permanently alter anyone's rights, the house was not the suit's direct object.
In addition, the Fifth Circuit noted that Mortgagee exposed itself to the automatic stay when it opted to foreclose via non-judicial foreclosure rather than judicial foreclosure, which would not be subject to the automatic stay.
Based on this reasoning, the Court found that Mortgagee failed to establish the amount in controversy exceed $75,000.
The Fifth Circuit then ruled that the amount in controversy did not exceed $75,000 because Debtor stipulated prior to removal that the amount was below the jurisdictional limit.
The Court noted "[c]onsent of parties cannot give the courts of the United States jurisdiction, but the parties may admit the existence of facts which show jurisdiction, and the courts may act judicially upon such an admission." Ry. Co. v. Ramsey, 89 U.S. (22 Wall.) 322, 327 (1874). In addition, the Court noted that it and many of its sister circuits have concluded that facts that bear on jurisdiction may be stipulated to by the parties. See, e.g., Hogar Agua y Vida en el Desierto, Inc. v. Suarez-Medina, 36 F.3d 177, 182 n.4 (1st Cir. 1994); Meyer v. Berkshire Life Ins. Co., 372 F.3d 261, 265 (4th Cir. 2004).
The Fifth Circuit ruled that the amount in controversy requirement was no exception to this rule and cited the Supreme Court of the United States holding that "[i]f [the plaintiff] does not desire to try his case in the federal court[,] he may resort to the expedient of suing for less than the jurisdictional amount, and though he would be justly entitled to more, the defendant cannot remove." St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 294 (1938). This principle was reaffirmed when the Supreme Court held "federal courts permit individual plaintiffs, who are the masters of their complaints, to avoid removal to federal court, and to obtain a remand to state court, by stipulating to amounts at issue that fall below the federal jurisdictional requirement." Standard Fire Co. v. Knowles, 568 U.S. at 588, 595 (2013).
In addition, the Fifth Circuit held that stipulations as to the amount in controversy can be binding even when they are disputed by the defendant because the plaintiff is stating a fact that it is not seeking nor will it accept more than a particular amount, and as a legal consequence the court cannot order more than that amount. As the amount in controversy turns only on the plaintiff's demand and the court's ability to limit the plaintiff to that demand, the binding nature of the plaintiff's statement does not depend on the defendant.
The Fifth Circuit ruled that Debtor's stipulation was legally binding as his two statements could best be read as Debtor stating he was seeking and would accept no more than $74,500. Mortgagee argued the stipulation was insufficient, but the Court disagreed finding support in both Texas law and the preclusion doctrine.
Thus, the Fifth Circuit concluded that Mortgagee failed to establish that the amount in controversy exceeded the jurisdictional floor of $75,000, and that the trial court therefore erred in denying Debtor's motion for remand, and that the trial court lacked subject matter jurisdiction when it entered final judgment in favor of Mortgagee.
Accordingly, the Appellate Court reversed the trial court's rulings and remanded with instruction to remand the action back to state court.
Ralph T. Wutscher
Maurice Wutscher LLP
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