Ninth Circuit Holds That Loan Servicer Did Not Establish Diversity Jurisdiction in Borrowers’ Action to Temporarily Enjoin Foreclosure Because Amount in Controversy Did Not Exceed $75,000

The United States Court of Appeals for the Ninth Circuit recently reversed a district court’s decision and held that the amount in controversy in a borrowers’ action to temporarily stay a foreclosure during the pendency of the borrowers’ loan modification application did not exceed $75,000 and accordingly, that diversity jurisdiction did not exist.  See Corral v. Select Portfolio Servicing, Inc., 878 F.3d 770 (9th Cir. 2017).  In the action, the borrowers defaulted on their loan and the loan servicer sent a notice of default and a notice of trustee sale.  The borrowers, who had a loan modification application pending, then filed an action against the servicer and obtained a temporary restraining order of the trustee sale.  The parties subsequently settled that action, with the servicer agreeing to give the borrowers 30 days to submit another application for a loan modification.  Two months later, the servicer scheduled another trustee sale for the property, and the borrowers brought this action seeking another temporary restraining order enjoining the sale of the property.  The state court granted the temporary restraining order but later denied the borrowers’ motion for a preliminary injunction.  The servicer removed the action to federal court, alleging that the parties were citizens of different states and that the amount in controversy exceeded $75,000 because the property secured a $680,000 note on which over $800,000 was due and owing.  The district court denied the borrowers’ motion to remand, concluding diversity jurisdiction existed.

On appeal, the Ninth Circuit reversed.  The Court first noted that the servicer had the burden to prove, by a preponderance of the evidence, that the benefit to the borrowers or the cost to the servicer would exceed $75,000 for this action.  In this case, the Court held that the only cost to the servicer would be the cost of reviewing the application and of delaying the foreclosure during its review, which “would be primarily in [the servicer’s] control[.]”  Further, the only benefit to the borrowers from the stay “would be derived from temporarily retaining possession of the Property” during the review.  The Court distinguished this matter from others in which borrowers sought to enjoin foreclosures indefinitely as part of a quiet title action or otherwise rescind their loan documents, because in those cases the amount in controversy would be the amount of indebtedness or value of the property.  The Court also added that other lenders or servicers could establish diversity in similar situations if the amount in controversy requirement is satisfied using other measures, “such as the transactional costs to the lender of delaying foreclosure or a fair rental value of the property during the pendency of the injunction.”  Nonetheless, the Court held that the servicer in this matter did not establish that its costs or the borrowers’ benefits from the temporary delay would exceed $75,000.  Finally, one justice dissented from this opinion, holding that the “long-established general rule” is that the matter in controversy is the value of the property because the ultimate goal of the servicer in such a case is obtaining title.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com or Clarissa Gomez at cgomez@riker.com.