Successor Bank Has Standing to Enforce

Throughout the recent economic downturn and wave of foreclosure cases, “lack of standing” has been the most common, but not necessarily the most successful, defense asserted by borrowers in mortgage foreclosure cases.  The theory came into vogue with the 2007 Boyko opinion, about which I wrote six years ago.  Pichon v. American Heritage, 2013 Ind. App. LEXIS 10 (Ind. App. 2013) succinctly rejects the defense based upon the given facts.

Details.  Pichon is a very involved appellate opinion following a trial that dealt with at least nine separate issues, one of which was whether the plaintiff had standing to enforce a $650,000 promissory note.  The plaintiff, American Heritage Banco, Inc. (AHB), was the successor-in-interest to First National Bank of Fremont (FNBF).  AHB had acquired FNBF following a merger.  The note in question was payable to FNBF.  The defendant borrower alleged that AHB was not the real party in interest.  The trial court concluded that AHB had standing to enforce the note because it occupied the status of “holder” of the note.

Standing-related statutes.  The Indiana Court of Appeals agreed with the trial court.  There were two Indiana statutes relevant to the Pichon opinion.  First, I.C. § 26-1-3.1-301 states that a “person entitled to enforce instrument” means the “holder” of the instrument.  Second, I.C. § 26-1-1-201(20) defines “holder,” which includes one in possession of a negotiable instrument (a) if that instrument is payable to an identified person and (b) if the identified person is in possession. 

Ruling.  For purposes of the trial, the parties stipulated that FNBF was merged into AHB.  Pursuant to that merger, AHB was the successor to FNBF.  In Pichon, the subject note expressly stated that it was payable to FNBF or “its successors and assigns,” and AHB had possession of the note.  As such, the Court of Appeals affirmed the trial court’s conclusion that AHB had standing to enforce the note.

Related posts.  Here are links to some other posts that relate to the standing defense: 

• From the New York Times:  “Foreclosures Hit a Snag for Lenders”
• To Be Enforceable, Promissory Notes Must be Endorsed and Delivered
• Bankruptcy Proofs of Claim and Standing/Loan Assignment Issues
• Successor-in-Interest Banks as Plaintiffs in Foreclosure Actions
• Proving You’re the Holder of the Note

Happy Holidays everyone.

Rooker-Feldman Doctrine: Dismissing A Borrower’s Post-Foreclosure Federal Court Case

Having lost to a lender in a state court foreclosure action, a borrower might try to file a separate lawsuit against that lender in federal court.  In such instances, lenders and their counsel should be aware of the Rooker-Feldman doctrine, which the United States District Court for the Northern District of Indiana addressed in two separate opinions late last year:  Fogarty Street v. Mortgage Electronic Registration System, 2012 U.S. Dist. LEXIS 163804 (N.D. Ind. 2012) (.pdf) and Canen v. U.S. Bank, 2012 U.S. Dist. LEXIS 177992 (N.D. Ind. 2012) (.pdf).  Generally, a losing borrower in state court can only appeal.  Do-overs in federal court are not allowed.

The situation.  Fogarty and Canen followed mortgage loan defaults and state court actions to foreclose.  In both cases, the lender had already obtained a state court judgment and foreclosure decree.  Instead of appealing, the borrowers filed new lawsuits in federal court asserting a plethora of claims attacking the lenders’ actions in the prior foreclosure cases and/or the servicing of the underlying mortgage loans.  The question was whether the federal court cases should be dismissed.  Rule 12(b)(1) authorizes the dismissal of complaints “that bring no actionable claim within the subject matter jurisdiction of the federal courts.” 

The doctrine.  The Rooker-Feldman doctrine “deprives federal courts of subject matter jurisdiction where a party . . . sues in federal court seeking to set aside the state court judgment and requesting a remedy for an injury caused by that judgment.”  The law prevents lower federal courts from reviewing state court judgments.  Generally “a litigant dissatisfied with the decision of the state tribunal must appeal rather than file an independent suit in federal court.” 

Two instances.  The Rooker-Feldman doctrine bars federal claims in two instances.  The first is when a plaintiff requests the federal court to overturn an adverse state court judgment.  Those cases are easy to spot because plaintiff’s claims were “actually raised in the prior state court action.”  The second, and more challenging, instance involves claims that were not raised in state court and/or do not on their face require review of a state court’s decision.  Here, the test is whether the federal court claims “are inextricably intertwined with the state court determinations.” 

If the court determines that a claim is inextricably intertwined, [the court] must then inquire whether the plaintiff did or did not have a reasonable opportunity to raise the issue in state court proceedings.  If the plaintiff could have raised the issue in state court, the claim is barred under Rooker-Feldman.

Inextricably intertwined.  The Fogarty and the Canen cases provide illustrations of the “inextricably intertwined” concept.  In Fogarty, the borrower’s claims of “fraud based robo-signing, voidable transfers of mortgage notes based on lack of authority, and lack of authority due to a lender no longer being in business . . . could and should have been raised in the state court foreclosure proceedings.”  In Canen, the borrower asserted a variety of theories why the Court should rescind the underlying loan.  But, “the precise issue decided in the foreclosure action was that one or more of the Defendants had a valid security interest in the house and could take possession of it upon [the borrower’s] nonpayment . . ..  [R]escinding the loan effectively required [the Court] to vacate the state court foreclosure judgment, which is exactly the sort of action the Rooker-Feldman doctrine forbids.” 

Exception.  Courts recognize very limited occasions for defendants to sue plaintiffs after the entry of a state court judgment.  The Canen opinion shed some light on what might be excluded from the applicability of the Rooker-Feldman doctrine, such as when borrowers allege wrongdoing independent of the prior state court foreclosure action.  The doctrine does not apply when plaintiffs are not attacking a state court judgment or when federal claims do “not depend on a determination that the state court erred in deciding the previous action.”  But, such a claim cannot attack or otherwise seek to set aside the state court decree.  The federal court case truly needs to be an entirely separate and distinct matter.  Without doing more research, I honestly can’t envision such a case in the context of a lender/borrower relationship or a foreclosure. 

Out-Of-State Defendants Must Appear In Indiana For Post-Judgment Asset Examinations

In Gagan v. SBC Cablevision, 2012 U.S. Dist. LEXIS 167815 (N.D. Ind. 2012) (.pdf), an Indiana federal court held that an Arizona resident must appear in person to answer questions regarding assets available to satisfy a fifteen-year-old, $1.71MM judgment against him.  (Incidentally, the collection efforts were not time barred because judgments can be pursued in Indiana for twenty years.)

Defendant’s objection.  The defendant/judgment debtor objected to the plaintiff/judgment creditor’s motion for proceedings supplemental on the basis that he did not reside in Indiana.  His objection appeared to be valid based upon Ind. Code § 34-55-8-2(a)(1), which governs proceedings supplemental and suggests that the judgment debtor must be “residing in the territorial jurisdiction of the court . . . to appear.” 

Trial rule trumps statute.  The judgment creditor pointed to Ind. Trial Rule 69(E)(3) that, like I.C. § 34-55-8-2, deals with proceedings supplemental.  Unlike the statute, however, the trial rule contains no “territorial jurisdiction” qualification to a judgment debtor exam.  The Court in Gagan ultimately relied upon the trial rule, which was adopted after the statute. 

Explanation.  The Court’s conclusion made sense.  Proceedings supplemental may only be filed in the trial court that issued the underlying judgment.  Indiana regards the process as a continuation of the trial court’s jurisdiction.  Also, the Indiana Civil Code Study Commission’s comments stated that Rule 69(E) “retains the basic statutes upon [proceedings supplemental] but introduces simpler pleadings and procedure” intended to ease the burden on judgment creditors.  Gagan provided:  “the commentary explained that Rule 69(E) intended to broaden the proper venue beyond that of the judgment debtor’s county of residence and to permit proceedings supplemental to be filed in the court where the judgment was entered.”  Because the Court in Gagan already had jurisdiction, and because proceedings supplemental are an outgrowth of the original proceedings, the Court did not need to re-establish jurisdiction over the judgment debtor. 

Teeth?  The Court overruled the judgment debtor’s objections to the motion for proceedings supplemental and the request for a debtor examination.  The Court retained jurisdiction under Rule 69(E) “to carry out the proceedings to determine what non-exempt assets [defendant] has available that may partially satisfy the judgment.”  While the Gagan holding is creditor friendly, the victory may have been a hollow one.  (I’m speculating.)  If the Arizona judgment debtor refused to hop on a plane and come to court in Indiana, what recourse would the judgment creditor have?  While the defendant may be subject to contempt-related sanctions for refusing to appear, I’m not sure that would matter much to someone already saddled with a $1.71MM judgment.  Having said that, at least one practical benefit to the Court’s decision was to enable the judgment creditor to compel the judgment debtor to be deposed in Arizona, without the need for domesticating the judgment and initiating proceedings supplemental there.