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Borrower’s Federal Court Claims, Following State Court Foreclosure, Dismissed

This will supplement my December 19, 2013 post:  Rooker-Feldman Doctrine:  Dismissing A Borrower’s Post-Foreclosure Federal Court CaseLucas v. JPMorgan Chase Bank, 2013 U.S. Dist. LEXIS 33672 (N.D. Ind. 2013) (.pdf) is another case applying the Rooker-Feldman doctrine.  As with the cases addressed in my prior post, the Court in Lucas also dismissed Borrower’s federal court case. 

Timetable.  Here is what happened in Lucas: 

8/9/10  Lender filed state court mortgage foreclosure action

9/9/11  Borrower filed separate lawsuit in state court against Lender

10/11  Lender filed motion to dismiss Borrower’s state court suit

12/06/11  State court entered default judgment against Borrower in original foreclosure action

2/12  State court dismissed Borrower’s state court suit

8/31/12  Borrower filed federal court lawsuit against Lender

Lender’s motion to dismiss.  Borrower’s federal court action basically claimed that Lender wrongfully attempted to enforce the subject promissory note.  Lender filed a motion to dismiss “because to award relief in [Borrower’s] favor the Court would have to review and reverse the two underlying [state court] judgments.” 

Rules/policies.  The Court in Lucas utilized the same legal principles addressed in my prior post.  Essentially, lower federal courts lack jurisdiction to review the decisions of state courts in civil cases.  One of the policies behind the Rooker-Feldman doctrine is to prevent “a state-court loser from brining suit in federal court in order effectively to set aside the state-court judgment.”  The Lucas opinion, like my prior post, delved into the “inextricably intertwined” test that may, in certain instances, apply to a court’s analysis of the doctrine. 

Conclusion.  The Lucas Court found that Borrower’s complaint ran afoul of the doctrine.  Borrower filed the federal case after two state courts ruled against her.  “She now requests this Court to review – and, in effect, undo – these two judgments from Indiana state courts.”  The Court concluded it had no jurisdiction to do so. 

Reasoning.  The Court said that the Rooker-Feldman doctrine divested it of jurisdiction to hear the claim in Borrower’s complaint.  Here were the Court’s reasons:

Because the [state court] in the first action implicitly determined that the [Lender] was able to enforce the promissary note at issue, the Complaint appears to be a direct challenge to the [state court’s] Default Judgment and Decree of Foreclosure.  Further, the [state court] in the second action dismissed the [Borrower’s] claim for wrongful foreclosure, suggesting that the Complaint is also a direct challenge to the state court decision in that action.  The [Borrower] does not actually request this Court to overturn either [state court] decision.  However, the Court finds that her Complaint is inextricably intertwined with the previous state court judgments because it is ‘in essence’ a request that this Court ‘review the state-court decision[s].’  Moreover, the Court finds that the [Borrower] had opportunity to bring the claims in her Complaint as part of the foreclosure action or as part of her second state court filing. 

As previously stated here, a losing borrower in state court generally can only appeal.  Borrowers cannot get second bites at the apple in federal court. 


Fair Debt Collection Practices Act Claim Survives Motion To Dismiss

The Stender case discussed in my post last week also dealt with the defendant’s motion for judgment on the pleadings as to the borrowers’ Fair Debt Collection Practices Act (“FDCPA”) claim.  Please review last week’s post for the Stender context. 

Borrower’s theory.  Borrowers alleged that defendant refused to honor a loan modification contract and, as a result, attempted collection in violation of the FDCPA.  Importantly, at issue was a consumer debt, not a commercial one, meaning that the FDCPA potentially applied.  For more on the scope of the FDCPA, please review my posts dated 11/16/06 and 12/18/09.  The FDCPA generally does not apply to commercial foreclosures. 

Creditor/debt collector.  The defendant first argued its mortgage servicer was a “creditor” not a “debt collector” under the FDCPA and thus was exempt from the statute’s provisions.  The Stender opinion explains in detail the distinction between debt collectors and creditors.  Creditors generally are not covered by the FDCPA, while debt collectors are.  The plaintiffs’ response was that the current servicer did not originate the loan and thus as an assignee was not a “creditor” under the FDCPA. 

Timing of loan assignment.  The legal significance of the loan assignment was in the spotlight.  The important facts, according to the Court, were when the plaintiff’s mortgages went into default and when the assignments of the mortgages to the defendants occurred.  See, 15 U.S.C. § 1692a

(6)  The term “debt collector” means any person who . . . regularly collects or attempts to collect, directly or indirectly, debt owed or due or asserted to be owed or due another . . ..  The term does not include-  

    (F)  any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . (iii) concerns a debt which was not in default at the time it was obtained by such person.

In other words, if borrowers were in default at the time defendant was assigned the loan, then defendant would be considered a “debt collector” subject to the FDCPA.  If, on the other hand, borrowers were not in default at the time of the assignment, defendant would be a “creditor” exempt from the FDCPA. 

Can kicked.  Given the procedural context of the case (a motion for judgment on the pleadings), the Court deferred that factual determination for summary judgment or trial holding:

[P]laintiffs allege in their complaint that they sought loan modifications in 2009 and 2010.  It is entirely consistent with these allegations for plaintiffs to suggest that they had done so because by that point they had defaulted on their mortgages.  This would have occurred before 2011, when [defendant suggests] the Lowell property was assigned to them.  If plaintiffs’ hypothesis proves correct, and they were in default before the mortgages were assigned to [defendant], then [defendant] would qualify as a “debt collector.”  Put simply, at this time, a set of facts consistent with the plausible allegations of the complaint could establish that [defendant was a] “debt collector” under the FDCPA, so the court cannot dismiss plaintiffs’ FDCPA claim based on [defendant’s] argument. 

Items subject to collection.  The borrowers’ also alleged in Stender that defendant attempted to collect late fees and interest above and beyond what was allowed under the alleged loan modification agreement.  The Court found that the allegations were “sufficient to put defendants on notice of a plausible claim.”  15 U.S.C. § 1692f prohibits “the collection of any amount (including interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

In Stender, which dealt with residential mortgages, the borrowers’ FDCPA claims survived the defendant’s motion for judgment on the pleadings, a relatively easy burden to overcome.  Whether the claims would survive summary judgment was not addressed. 


Borrowers Sue Lender Over Alleged Wrongs From Loan Modification Agreement

Stender v. BAC Home Loans, 2013 U.S. Dist. LEXIS 30353 (N.D. Ind. 2013) (.pdf) provides a nice summary of how an Indiana federal court dealt with a lender’s efforts to promptly dismiss an assortment of causes of action brought by borrowers in connection with an alleged loan modification agreement. 

Specifics.  The plaintiff borrowers were mortgagors on two separate properties, and the defendant lender was an assignee of the loans.  The plaintiffs had defaulted on the mortgages but claimed that the defendant had agreed to a loan modification agreement.  The gravamen of the plaintiffs’ complaint was that the defendant refused to honor the modification agreement.  The plaintiffs sought damages for breach of contract, negligence, intentional infliction of emotional distress. 

Procedural maneuver.  The procedural context in Stender was important.  The defendant answered the complaint but promptly filed a motion for judgment on the pleadings under Fed. R. Civ. P. 12(c).  A motion for judgment on the pleadings essentially is an effort to get the court to dismiss the case at the outset.  A motion for judgment on the pleadings should not be confused with a motion for summary judgment, which as explained here deals with evidence, as opposed to mere allegations.  In Stender, the defendant moving party relied solely upon the allegations outlined in the complaint and any exhibits attached thereto.  Prevailing on such a motion normally is quite difficult because courts accept the factual allegations as true and look for “facial plausibility” of an alleged claim.  On summary judgment or, certainly, a trial, courts dig much deeper into actual evidence (testimony and exhibits).  In short, prevailing on Rule 12 motions is rare.   

Breach of contract, statute of frauds.  The defendant first asserted that the breach of contract count should be dismissed based upon Indiana’s statute of frauds, a subject I have discussed here previously.  The statute of frauds basically provides that the party against whom the action is brought (the defendant) must sign the alleged agreement that has been breached.  See, Ind. Code §  32-21-1-1(b).  In Stender, the defendant did not sign the loan modification agreement but did sign a cover letter, which plaintiffs contended satisfied the signature requirement.  The question was whether “the signature requirement of the statute of frauds must be satisfied with a pen-and-ink signature at the end of a contract.”  If so, then defendant would be correct that the lack of such signature on the loan modification documents was fatal to plaintiffs’ contract claim.  “But if the signature requirement can be satisfied in other ways, then the defendant’s argument fails.”  The Court denied the defendant’s motion because the defendant failed to demonstrate that the signature requirement had not been satisfied.  In other words, the Court wanted to see the evidence pertaining to the defense. 

Negligence, economic loss doctrine.  The defense associated with the negligence claim surrounded Indiana’s economic loss doctrine, which precludes liability based on certain theories, such as negligence, that seek purely economic loss (any pecuniary loss unaccompanied by any property damage or personal injury).  The Court granted the defendant’s motion and rejected the plaintiff’s argument that intangible alleged harms, such as injuries to credit scores and reputations, could be remedied with a claim for negligence.  The plaintiffs’ claims were purely economic in nature and, as such, Indiana law barred them. 

Intentional infliction of emotional distress.  The Court also dismissed the plaintiffs’ distress claims for similar reasons, namely that Indiana courts generally do not permit such claims based upon contractual or economic harm.  Although the plaintiffs’ allegations that the defendant lured them into signing loan modification agreement suggested that perhaps defendant was dishonest or acted with selfish economic motivation, “plaintiffs’ allegations do not permit any plausible inference that defendant’s intention was to harm plaintiffs emotionally.” 

In the end, the Court negated plaintiffs’ common law tort claims for negligence and emotional distress, which really have no place in a contract action such as Stender.  As to the statute of frauds defense to the breach of contract claim, however, the Court felt it was premature to rule.