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Second Circuit Holds That National Banks Are Not Citizens of States in Which They Have Their Principal Places of Business for Diversity Purposes Banner Image

Second Circuit Holds That National Banks Are Not Citizens of States in Which They Have Their Principal Places of Business for Diversity Purposes

Month: November 2016

Second Circuit Holds That National Banks Are Not Citizens of States in Which They Have Their Principal Places of Business for Diversity Purposes

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The United States Court of Appeals for the Second Circuit recently held that, for purposes of diversity jurisdiction, a national bank is only a citizen of the state in which its main office is located per its articles of association.  See OneWest Bank, N.A. v. Melina, 2016 WL 3548346 (2d Cir. June 29, 2016).  There, a bank initiated a foreclosure action in the United States District Court for the Eastern District of New York.  The borrower, a New York resident, moved to dismiss the action for lack of subject matter jurisdiction, arguing that there was no diversity between the parties because the foreclosing lender’s parent company’s principal place of business was in New York as well.  The district court denied the borrower’s motion, and he filed an appeal to the Second Circuit.  On appeal, the Second Circuit focused on the issue of whether a national bank is only a citizen of the state in which its main office is located per its articles of association, or whether it is also a citizen of the state in which it has its principal place of business.  Although the borrower had made this argument based on the claim that the lender’s parent company had a principal place of business in New York, the court rejected using the parent company’s principal place of business for that of its subsidiary.  The court nonetheless addressed the issue of diversity.  

The court first discussed the Supreme Court’s 2006 decision in Wachovia Bank v. Schmidt.  546 U.S. 303 (2006).  In Schmidt, the United States Supreme Court held that a national bank is a citizen of the state designated in its articles of association as the location of its main office, and further held that it is not a citizen of every state in which it has a branch.  The Supreme Court did not directly address whether a national bank is also a citizen of the state in which it has its principal place of business because “in almost every case . . . the location of a national bank’s main office and of its principal place of business coincide.”  However, the Supreme Court did note that a corporation is a citizen of both the state “by which it has been incorporated” and the state “where it has its principal place of business” pursuant to 28 U.S.C. § 1332; whereas, the corresponding provision for national banks does not mention a principal place of business.  See 28 U.S.C. § 1348.  

The Second Circuit followed the Supreme Court’s dicta and expressly noted that Congress had not included “principal place of business” in the relevant national bank statute.  It likewise noted that Congress enacted a statute in 1958 stating that state-chartered banks are citizens of both their states of incorporation and their principal place of business, but did not change the corresponding statute for national banks.  This indicated that Congress did not intend to link the jurisdiction of national and state banks.  Therefore, the Second Circuit found that national banks are only citizens of the state designated by its articles of association as the location of its main office.  In doing so, the Second Circuit joined the Fifth, Seventh, Eighth and Ninth Circuits in this finding.  See Tu Nguyen v. Bank of Am., N.A., 516 Fed. Appx. 332 (5th Cir. 2013); Hicklin Eng’g, L.C. v. Bartell, 439 F.3d 346 (7th Cir. 2006); Wells Fargo Bank, N.A. v. WMR e–PIN, LLC, 653 F.3d 702 (8th Cir. 2011); Rouse v. Wachovia Mortg., FSB, 747 F.3d 707 (9th Cir. 2014).

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Pennsylvania Court Affirms That Title Insurer Did Not Have Duty to Defend Owner in Quiet Title Action

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The Superior Court of Pennsylvania recently affirmed a decision granting a title insurer summary judgment on the issue of whether it was obligated to defend and indemnify its insured owners in a quiet title action.  See Stewart Title Guar. Co. v. McClain, 2016 WL 1436613 (Pa. Super. Ct. Apr. 12, 2016).  In the case, the insureds purchased a property that previously had been consolidated from two lots into one.  The legal description in the title commitment, policy, deed and mortgage, however, only described one of the previous lots.  The insureds later defaulted on their mortgage and, during the foreclosure action, both the lender and the insureds realized the mistake in the legal description.  The foreclosing lender then filed a quiet title action seeking a reformation of the deed and mortgage, and consolidated it with the foreclosure action.  The insureds then sought coverage under their title insurance policy.  The title insurer denied the claim and instituted an action seeking a declaratory judgment that it was not obligated to defend or indemnify the insureds in the quiet title action.  The parties cross-moved for summary judgment, and the lower court granted the insurer’s motion.  On appeal, the Superior Court affirmed.  It held that the quiet title action sought to increase the size of the insured’s property to comport with their expectations when they purchased it, which is not “a claim adverse to the title or interest as insured.”  Therefore, because there was no adverse claim to title, the insurer had no obligation to defend and indemnify under the policy.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

New York Federal Court Dismisses RESPA Claim Because Alleged Fees Were Not Split

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The United States District Court for the Southern District of New York recently dismissed a complaint filed against a lender alleging that the lender violated the Real Estate Settlement Procedures Act (“RESPA”) by splitting a fee, holding that RESPA only proscribes the splitting of fees “between two or more persons” but does not provide a remedy for unearned fees that are not split.  See Arace v. Quicken Loans, Inc., 2016 WL 390088 (S.D.N.Y. Feb. 1, 2016).  In the putative class action, the plaintiff alleged that she was charged an unearned “tax service fee” that the lender then split with two other settlement service providers.  Although the plaintiff acknowledged that such a fee could be legitimately charged for services such as setting up tax escrow account and ensuring timely tax payments, she argued that the services were not performed because the real property she purchased was part of a cooperative that handles all tax payments itself.  Therefore, she claimed the lender had violated the provision of RESPA prohibiting the giving or accepting of “any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”  See 12 USC 2607(b).  The lender filed a motion to dismiss, arguing that the HUD-1 produced from the closing indicated that this fee was paid directly to the settlement service providers, and therefore it was not “split” between the lender and the providers in violation of RESPA.  The court agreed and dismissed the action.  In support of its holding, it cited the United States Supreme Court decision of Freeman v. Quicken Loans, Inc., which held that these types of claims “were not cognizable under § 2607(b) because the allegedly unearned fees were not split with another party.”  132 S. Ct. 2034 (2012).

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Seventh Circuit Finds Insured Owners Suffered No Loss Under Title Insurance Policy After Insurer Settled With Lender

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The United States Court of Appeals for the Seventh Circuit recently affirmed a district court’s grant of summary judgment to a title insurer denying the insured owners’ claim for coverage under a title insurance policy, finding that the insureds suffered no loss because the insurer reached a settlement with the lender and the insureds no longer owed any money on their loan.  See Marchetti v. Chicago Title Ins. Co., 2016 WL 3732081 (7th Cir. July 12, 2016).  In the case, the insureds nominally purchased a property from a fraudster who did not have title to the property.  A lender, who also had a title insurance policy from the insurer, lent the entire $180,000 purchase price, plus an additional $155,000 for construction.  When the actual owner filed a quiet title suit, the title insurer and the lender agreed to settle the issue for the appraised value of the property, $110,000.  The title insurer was subrogated to the insured owners’ claim and was able to obtain $37,500 in restitution from the fraudster.  The insured owners then conducted their own appraisal and determined the property was worth $202,000.  They then sued the title insurance company, claiming that the insurer owed them: (i) $88,000, which was the difference between the $198,000 maximum value of the policy and the amount paid to the lender; and (ii) the $37,500 in restitution.  Among their other claims, the insureds argued that they suffered a loss because they were entitled to the full market value of the property as well as the lost profits they would have received when they rented the property.  The United States District Court for the Northern District of Illinois granted the title insurer summary judgment.  On appeal, the Seventh Circuit affirmed, finding that the policy only covers “actual monetary loss or damage sustained or incurred by the Insured Claimant” and not the full market value of the property or consequential damages, like anticipated profits.  Because the owners had not paid any money for the property and, after the settlement, did not owe any money, they lost nothing and did not have a claim.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

New Jersey Court Bars Foreclosure Action Initiated More Than Six Years after Maturity Date

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The Superior Court of New Jersey, Chancery Division, recently held that a foreclosure action commenced more than six years after the maturity date of the note and mortgage was barred by the applicable statute of limitations.  See Anim Investment Co. v. Shaloub, F-30508-18 (Ch. Div. June 30, 2016).  In the case, the defendants had executed a note and mortgage in 1990 and missed their first monthly payment that same year.  The maturity date was October 1, 1995, and the plaintiff initiated its foreclosure action in September 2015.  The parties filed cross-motions, disputing whether the action was time-barred.  Under N.J.S.A. 2A:50-56.1, which was enacted in 2009, an action to foreclose a residential mortgage shall not be commenced following the earliest of: (i) six years from the maturity date of the note or mortgage; (ii) 36 years from the date of the recording; or (iii) 20 years from the date of default.  Although the parties initially agreed that the 20-year limitations period applied but disagreed on when that period began, the court directed additional briefing and argument on whether (i) the statute applies retroactively; and (ii) the six-year period applied instead.  After argument, the court held that the action was barred.  First, the court found that the statute applied retroactively because it was meant to be curative and provide guidance on a previously-unaddressed issue.  If it was not applied retroactively, there would be no limitations period on any pre-2009 mortgage.  Second, the court found that the six-year limitations period applied.  Unpersuaded by the plaintiff’s unsupported argument that the six-year period only applied to actions on the note, it found that the six-year period began running in 1995 and expired in 2001.  Therefore, the action was dismissed.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Georgia Appellate Court Holds Lender’s Diminution-In-Value Loss Required to Be Calculated as of the Date Of Foreclosure under Title Policy

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The Court of Appeals of Georgia recently held that a trial court erred in calculating a lender’s loss under a title insurance policy as of the date the lender’s predecessor-in-interest closed on the loan, rather than the date of foreclosure.  See Old Republic Nat'l Title Ins. Co. v. RM Kids, LLC, 2016 WL 3563732 (Ga. Ct. App. June 29, 2016).  In the case, the lender issued a loan in the amount of $11,400,000 for the purchase of the insured property, which was to be used for residential development.  A previous grantor’s deed to the property included an exhibit stating there were “petroleum contamination” issues with the property and, therefore, that a number of limitations for the use of the property existed.  The title insurance policy did not mention either the environmental issue or the limitations on the property.  After the insured discovered the issues, it filed a claim with the insurer.  When the insurer did not respond, the insured sued the title insurer for coverage and, while the litigation was ongoing, purchased the property at a foreclosure sale for $750,000.  Before trial, the trial court ruled that the date of the insured’s loss for the purpose of measuring damages was the closing date of the loan and not the date of the foreclosure sale.  At trial, a verdict was entered in favor of the insured.  On appeal, the insurer challenged, among other things, the date of the loss.  The appellate court, citing to “the majority view” of other jurisdictions, agreed and held that the insured did not actually suffer a loss until the date of the foreclosure and that the loss should not be measured until then.  Based on this holding, it reversed the lower court’s decision and ordered a new trial.  This decision is contrary to that of the Supreme Court of Arizona from two weeks earlier in First Am. Title Ins. Co. v. Johnson Bank, 2016 WL 3247545 (Ariz. June 13, 2016).  

The analysis of the Johnson Bank decision can be found here.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Supreme Court of Arizona Holds Lender’s Diminution-in-Value Loss Required to Be Calculated as of the Date the Policy Was Issued Rather Than Date of Foreclosure

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In a significant decision for both the title and banking industries, the Arizona Supreme Court recently held that the diminution-in-value loss under a lender’s title insurance policy could be calculated by the date that the policy was issued, rather than the date of foreclosure, if the court determines the title defect caused the borrower to default.  See First Am. Title Ins. Co. v. Johnson Bank, 2016 WL 3247545 (Ariz. June 13, 2016).  In the case, the plaintiff, First American, issued two title insurance policies to the defendant, Johnson Bank, for two properties which secured the bank’s loans in the total amount of $2,050,000.  Certain covenants, conditions, and restrictions (“CC&R”) that prohibited commercial development on either parcel were not listed on the policies.  In 2010, after the borrowers defaulted, the properties were sold at a trustee’s sale and purchased by Johnson Bank.  Johnson Bank subsequently notified First American of claims under its title insurance policies, asserting that the CC&R’s prevented both properties from being developed for commercial purposes and that the CC&R’s were not listed exceptions to coverage under the policies.  Johnson Bank argued that the date of the policies should be used to calculate damages, while First American argued that damages should be based on the value of the properties at the time of foreclosure.

Both parties sought declaratory relief in superior court, with the court granting judgment in favor of First American, holding that the parcels should be valued as of the foreclosure date.  On appeal, the Arizona Court of Appeals reversed, holding that, “in the absence of a specified date of comparative valuation identified in the policies, the date to measure any diminution in property value is the date of the loan.”  First Am. Title Ins. Co. v. Johnson Bank, 237 Ariz. 490 (Ct. App. 2015).  The Arizona Supreme Court granted review on the issue of “how to calculate damages under a lender’s title insurance policy that failed to disclose encumbrances substantially affecting the value of the property and thwarting its intended use.”  

The Court first looked at legislative goals, social policy, and the transaction as a whole, and found that “[s]ocial policies and fundamental aspects of the parties’ transaction support using the date of the policy as the valuation date.”  The Court further stated here that using the foreclosure date as the damage-valuation date would allow the insurer to profit from a depreciating market even when the title defect caused the borrower to default.  Moreover, it found that a case-by-case approach was warranted to value the insured’s loss because defaulting to the foreclosure date as the valuation date would render courts and the parties involved unable to evaluate the insured’s actual loss in a particular case.  Most importantly, the Court explained that the “majority view,” which would measure the loss as of the foreclosure date, involved situations in which the title defect was an undisclosed senior lien and thus was not applicable here.  The Court held that the “minority view,” adopted by the Court of Appeals and which measures the loss using the date of the loan, was applicable because it involved situations where, as here, the title defect caused the borrower to default.  The Court therefore remanded the case to determine if Johnson Bank could prove the title defect caused the borrowers’ default and subsequent foreclosure, which would justify using the date of the policies as the valuation date.  Otherwise, the proper valuation date would be the foreclosure date. 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Maryland Federal Court Dismisses State Law Claim Against Title Agency for Alleged Kickback Scheme

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The United States District Court for the District of Maryland recently dismissed a state law claim against a title agency, among others, based on a claim that the agency was involved in a kickback scheme.  See Fangman v. Genuine Title, LLC, 2016 WL 3027525 (D. Md. May 27, 2016).  In the putative class action, the plaintiffs alleged that the defendants exchanged kickbacks relating to real estate settlement services in violation of both the Real Estate Settlement Procedures Act (“RESPA”) and state law.  See 12 USC 2607; Md. Code Ann., Real Prop. § 14-127.  The defendants filed motions to dismiss on the state law claim, arguing that the statute is criminal in nature and does not contain a private right of action.  The plaintiffs acknowledged that no case law supported their allegation, but argued that a private right of action was implied.  The District Court certified the question to the Maryland Court of Appeals, which found that the statute “does not contain an express or implied private right of action as neither [the statute’s] plain language, legislative history, nor legislative purpose demonstrates any intent on the General Assembly’s part to create a private right of action.”  The District Court therefore dismissed the cause of action arising under Maryland law, although the RESPA claims remain.  Notably, Genuine Title, the named defendant, had previously entered into a Consent Order with the Consumer Financial Protection Bureau relating to kickbacks.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Fifth Circuit Rejects TILA Claims for Loans Obtained in Exchange for Tax Lien Transfers

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The United States Court of Appeals for the Fifth Circuit recently held that money lent in exchange for the transfer of tax liens does not constitute an extension of credit covered by the Truth in Lending Act (“TILA”).  See Billings v. Propel Fin. Servs., L.L.C., 2016 WL 1729421 (5th Cir. Apr. 29, 2016).  Under Texas law, property taxes are secured by tax liens that automatically attach to the property.  Tex. Tax Code Ann. § 32.01.  If a property owner fails to pay the taxes, the owner may authorize someone else to pay and the lien transfers to the payor.  Tex. Tax Code Ann. § 32.06.  The payor and the property owner must then record any repayment contract in the county deed records.  Tex. Tax Code Ann. § 32.065. 

In four separate actions, plaintiffs alleged that the terms of their tax loans with these payors violated TILA.  All defendants moved to dismiss, arguing that tax lien transfers are not “consumer credit transactions” covered by TILA because a tax lien is not a “debt” under the Regulation Z.  12 CFR 1026.  The plaintiffs countered that, although TILA might not apply to the tax lien itself, it would apply to the new contract between the payor and the property owner.  One district court agreed with the defendants and dismissed the action, but the other three denied the motions.  On appeal, the Fifth Circuit held that TILA did not apply to tax lien transfers and that all actions should be dismissed.  In doing so, it found that the existing tax liens were simply transferred from one entity to another and were not extinguished, and therefore that there was no “debt” under TILA because the underlying obligation remained a tax lien exempt from the statute.  This decision follows a Third Circuit opinion that held that tax liens transferred to property tax lenders are not covered under TILA, but added that loans made directly to borrowers who then use the money to pay taxes would be covered.  See Pollice v. Nat’l Tax Funding, L.P., 225 F.3d 379 (3d Cir. 2000).

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Pennsylvania Appellate Court Affirms Dismissal of Claim Against Title Insurer

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The Superior Court of Pennsylvania recently affirmed a trial court’s grant of summary judgment for a title insurance company and found that there was no coverage under the policy because the alleged title defect did not affect the insured property.  See Krajewski v. Fid. Nat. Title Ins. Co., 2016 WL 2754435 (Pa. Super. Ct. May 11, 2016).  In 1960, the owners of two properties executed a subdivision agreement stating that their properties “shall hereinafter be joined . . . and shall never be severed[.]”  In 1961, the owners of the second lot sold it to the owners of the first lot.  Although the legal description only described the metes and bounds of the second lot, the deed nonetheless reiterated that the two lots “are hereby joined and shall never be severed.”  One week later, the owners of the first lot conveyed the first lot to themselves and created a tenancy in the entirety.  This second deed did not reference the subdivision agreement or the other property.  In 1989, the first lot was sold through a foreclosure, and the purchaser at the foreclosure sale then sold it to the insureds.  In the legal description on both the deed and the title policy, there was no mention of the second lot.  Shortly thereafter, the second lot, which was not part of the foreclosure, was sold to a third party.  The insureds then filed a claim with the title insurer, claiming that the language of the 1961 deed conveying the second lot ensured that the properties had been joined as one and that the third parties’ purchase of the second lot was a title defect insured by their policy.  The insurer rejected the claim, and the insureds sued.  They claimed that the 1961 deed ensured that the properties should not be separated, and that the 1960 subdivision agreement created a restrictive covenant that prohibited this separation.  The trial court granted summary judgment for the insurer.  It found that the legal description of the policy controlled and that it only insured the first lot, and not the second lot, from title defects.  On appeal, the appellate court affirmed.  In addition to upholding the plain language of the policy, it noted that, even if the original property owners had created a restrictive covenant, it was abandoned when the owners conveyed them separately and treated them as separate properties.  Therefore, the properties were separate and the insureds were only entitled to coverage for title defects on the first lot.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

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