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Pennsylvania Federal Court Holds That RESPA Claims for Captive Reinsurance Arrangement Are Time-Barred Banner Image

Pennsylvania Federal Court Holds That RESPA Claims for Captive Reinsurance Arrangement Are Time-Barred

Month: June 2017

Pennsylvania Federal Court Holds That RESPA Claims for Captive Reinsurance Arrangement Are Time-Barred

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The United States District Court for the Western District of Pennsylvania recently held that a claim that a lender’s captive reinsurance arrangement violated the anti-kickback provisions of the Real Estate Settlement Procedures Act (“RESPA”) was time-barred, and that each new mortgage payment did not constitute a new, separate RESPA violation.  See Menichino v. Citibank, N.A., 2017 WL 2455166 (W.D. Pa. June 6, 2017).  In the putative class action, plaintiffs closed on home mortgage loans and were required to purchase mortgage insurance.  Plaintiffs alleged that the lender selected mortgage insurers who would then reinsure the policies with the lenders, and filed a lawsuit alleging that this agreement violated RESPA’s prohibition against kickbacks.  See 12 USC 2607.  All of the closings in the case took place in 2007 and 2008, but the lawsuit was not filed until 2012.  After multiple motions to dismiss relating to RESPA’s one-year statute of limitations and a stay of the action, plaintiffs filed a motion to lift the stay and file a third amended complaint.  This new version of the complaint alleged that each mortgage payment constituted a separate RESPA violation and, accordingly, that claims arising out of payments from the year before plaintiffs filed the complaint were not time-barred.

The Court denied plaintiffs’ motion to amend their complaint, holding that the RESPA claims were futile because they were time-barred.  In support of its decision, the Court cited Cunningham v. M & T Bank Corp., 814 F.3d 156 (3d Cir. 2016), as amended (Feb. 24, 2016), in which the Third Circuit denied untimely RESPA claims and held that the alleged RESPA violation at issued occurred as of the date of the closing.  Although Cunningham specifically addressed a claim of equitable tolling, the Court held that the “core reasoning underlying that decision” applied here.  It further rejected plaintiffs’ argument that the Consumer Financial Protection Bureau’s In re PHH Corp., et al. decision supported its claims, holding that Cunningham was issued eight months after PHH, and the Third Circuit chose not to adopt that reasoning.  Finally, the Court acknowledged that it reached a different conclusion than the Eastern District of Pennsylvania did in White v. PNC Fin. Servs. Grp., Inc., 2017 WL 85378 (E.D. Pa. Jan. 10, 2017).

Click here for an analysis of the Cunningham decision.

Click here for an analysis of the White decision.

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

Post-Divorce Contributions to Post-Graduate Education Costs: Are You On the Hook?

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Contribution to the higher education costs of children is one of the most frequently litigated issues between divorced spouses in post-judgment matrimonial matters.  With skyrocketing tuition price tags, the stakes can be high (and even financially ruining) when litigating these issues if you are faced with unexpected education costs.  A recent unpublished Appellate Division decision, Lichter v. Lichter, highlights that the fight is not necessarily over when your child receives a college degree.  Can you be compelled to contribute to the post-graduate education expenses of your child? Maybe.

In Lichter, the parties were divorced in 1993 when their children were four and one, respectively.  Following the older child’s graduation from college in 2015, the father sought an order determining the daughter was emancipated, terminating child support for the daughter and reducing child support for the parties’ younger son.  At the time of the application, the daughter was 23 years old, working part-time and supporting herself.  The mother moved to deny the father’s application, in part, on the basis that their daughter would be attending Monmouth  University as a full-time, post-graduate student in the fall and would not be able to earn an income during that time.

The parties’ Marital Settlement Agreement (MSA) provided that they agreed to contribute to college expenses, but that the precise amount of each party’s share would “abide the event.”  The MSA did not address post-graduate education expenses.

The trial court granted the father’s motion, emancipating the daughter and terminating child support as to her. The mother filed an untimely motion for reconsideration, which was denied. Though the Lichter decision reviews the trial court’s decision on the motion for reconsideration as opposed to the underlying motion for emancipation, the decision provides a substantive overview of the relevant case law governing emancipation and its relation to the obligation to contribute to higher education costs.

The Lichter court acknowledged that emancipation is a fact-sensitive inquiry.  Though there is a rebuttable presumption that a child is emancipated at 18,  the test for emancipation is whether the fundamental dependent relationship between parent and child has concluded such that the child has moved beyond the sphere of influence of the parent.  In Lichter, the trial court found that the mother had not overcome the rebuttable presumption that the daughter had moved beyond the sphere of influence sufficient to declare her unemancipated at 23.  However, the Lichter court acknowledged that in some circumstances, there is a parental duty to assure children of a college, and even postgraduate, education.

Importantly, the Lichter decision reviewed a 2015 order in light of the specific parties’ MSA.  Statutory amendments to the laws governing termination of child support (which came into effect earlier this year) are relevant to the analysis going forward.  N.J.S.A. 2A:17-56.67 provides that the obligation to pay child support shall terminate by operation of law without a court order upon a child’s reaching of the age of 19, unless the custodial parent makes an application to extend child support beyond 19.  There are several grounds upon which the custodial parent can make such an application, including, the child’s full-time enrollment in a post-secondary education program.  In any event, child support terminates by operation of law upon the child’s reaching of the age of 23.

The amendments to the law strive to provide a more formulaic approach to termination of child support.  However, as pointed out in Lichter, an order emancipating a child does not necessarily bar a subsequent order requiring parental contribution to higher education.  Moreover, a parent may be required to contribute to a child’s higher education expenses even if the monthly child support obligation has ended.  It remains to be seen how courts will reconcile the statutory amendments with the existing case law regarding emancipation and higher education costs.

The interplay between an MSA and guiding law is also important. In Lichter, the parties had not addressed graduate school costs in their MSA.  At the time of divorce, parties can negotiate terms related to higher education costs, including post-graduate expenses, to leave less to interpretation when issues related to this kind of support come up as children of the marriage grow up and attend school.  The younger the children, the more difficult it can be to predict where they might attend school and what type of degrees they will be interested in pursuing.  However, acknowledging that these types of expenses may arise, and providing how they will be addressed in the MSA, promotes certainty in how to allocate these costs and reduces the likelihood of post-judgment litigation.

New Jersey Appellate Division Affirms Dismissal of Plaintiff’s Fraudulent Transfer Claim Against Title Agent and Title Insurance Company

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The Superior Court of New Jersey, Appellate Division, recently affirmed the trial court’s grant of summary judgment dismissing plaintiff’s complaint against multiple defendants, including the title agent and title insurance company, alleging fraudulent transfer of title to realty, holding that “one, who knows a deed transferring her ownership in property has been filed, but declines to repudiate that conduct and also acts to later approve the conduct and benefits from same, has ratified the conduct and loses the right to challenge the forgery.”  Thurber v. Thurber, 2017 WL 164480 (App. Div. 2017).  In the case, the property at issue was acquired in 1997 via a deed issued solely in plaintiff’s name.  In 2003, her defendant husband sought to refinance the property but learned he could not do so without plaintiff’s approval.  Accordingly, at the closing, he presented an unidentified woman posing as plaintiff, who offered an executed quitclaim deed.  Closing was completed and defendant received a loan of $241,077, and the bank was given a mortgage as security for this debt.  Plaintiff learned of this mortgage in August 2004, after which she filed a divorce complaint and a lis pendens.  She later dismissed both.  Defendant subsequently obtained two additional loans, in November 2004 and in March 2005, from Countrywide and Investor Commercial Capital, LLC (“ICC”), respectively, which paid off the first mortgage.  In October 2005, Countrywide attempted to foreclose on the second loan and, shortly thereafter, ICC also commenced foreclosure proceedings.  Plaintiff testified that she was aware of these proceedings and that she let defendant “handle those things.”  In November 2006, defendant negotiated a lease-purchase agreement for the property with a third party.  That transaction was financed by two mortgages, and defendant received $325,000 from the remaining proceeds, $295,000 of which he deposited into plaintiff’s bank account.  As a result of this transaction, the debts due to Countrywide and ICC were satisfied.

Plaintiff again filed for divorce in March 2008.  In March 2009, default judgment was entered.  Plaintiff filed the instant action on October 31, 2008, against, among other, her husband as well as the title agent and the title insurance company involved in the 2003 mortgage.  The title agent and title insurance company moved to dismiss plaintiff’s complaint.  The judge granted summary judgment on each motion on the ground plaintiff waived her rights.  Specifically, the judge held that plaintiff knew of the forgery and mortgages and did nothing, and “allow[ed] another mortgage, another mortgage, another mortgage, until we get up to where finally this guy [] buys the property. . . . She knew of it, she did nothing, and that she allowed it to go forward.”  In January 2012, a different judge granted default judgment against defendant and others after determining that plaintiff was the “sole fee simple absolute titleholder” of the Property.  Plaintiff was awarded $2,025,095.10 in damages.  Plaintiff then appealed from the grant of summary judgment to the title agent and title insurance company.

On appeal, plaintiff argued that the judge failed to afford her all reasonable factual inferences and erroneously made factual findings.  The appellate court noted that plaintiff challenges only one single fact – the statement that she “did nothing after discovering in August 2004[,] the fraudulent transaction of August 2003.”  However, plaintiff offered no arguments to support her claim, and the appellate court considered the matter waived.  Plaintiff also argued that the judge incorrectly applied the law; specifically, that a forged deed cannot pass good title and therefore, she had no obligation to act and defendant’s use of a forgery is inoperative as a matter of law.  On this point, the appellate court noted that generally a forged deed is deemed void and a nullity, but “a person such as plaintiff wronged by a forgery may engage in a course of conduct that bars her from obtaining redress.”  The appellate court held that it is undisputed that plaintiff became aware of the forged deed and had full knowledge of defendant’s fraudulent conduct, but then waived her rights when she sought legal advice, initiated steps to enforce these rights but then withdrew her claims.  Therefore, the facts supported ratification and warrant granting summary judgment.

Finally, plaintiff argued that the title insurance company is liable to her because it created the appearance of apparent authority of its agents in conducting the closing, and placed its agents in a position to commit fraud by allowing them to control the closing funds.  The appellate court held that plaintiff’s proofs do not show that the individual closing agents’ conduct occurred as agents for the title insurance company.  Additionally, the appellate court declined to allow plaintiff, who was not the insured, recover against the title insurance company.  “There is no authority presented allowing a seller or non-party to the real estate transaction to recover against a buyer's title insurer, using theories of agency or apparent authority.”

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

Supreme Court Holds That Purchaser of Defaulted Debt Is Not “Debt Collector” Under FDCPA

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In a significant decision for banks and the lending industry as a whole, the United States Supreme Court recently clarified that purchasing and collecting defaulted debt does not make an entity a “debt collector” under the Fair Debt Collection Practices Act (“FDCPA”). See Henson v. Santander Consumer USA Inc., 2017 WL 2507342 (U.S. June 12, 2017). In the case, plaintiffs received and later defaulted on auto loans from CitiFinancial Auto. Santander bought the defaulted debt on these loans from CitiFinancial and attempted to collect for itself. Plaintiffs sued Santander alleging that its collection efforts violated the FDCPA, which defines a “debt collector” as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” See 15 U.S.C. § 1692a(6). Santander moved to dismiss on the grounds that it did not qualify as a debt collector pursuant to the FDCPA because it did not meet the definition of one who “regularly collects or attempts to collect . . . debts owed or due . . . another” because it was the owner of the debt. See 15 U.S.C. § 1692a(6). Thus, Santander argued, the FDCPA was inapplicable. The district court dismissed the case, finding that Santander was not a debt collector and the United States Court of Appeals for the Fourth Circuit affirmed.

In a unanimous opinion delivered by Justice Gorsuch, the Supreme Court affirmed the Fourth Circuit. The Court held that once Santander purchased the debt, it was collecting its own debt and, therefore, was not a debt collector as defined under the FDCPA. The Court focused on the language of the statute in determining that the key difference was whether the entity was collecting for one’s own account or for the account of “another.” Because it owned the debt outright, Santander was not collecting debts on behalf of “another” and did not fall into the definition of a “debt collector” under the FDCPA. Advancing public policy arguments, petitioners claimed that “[h]ad Congress known this new industry [of defaulted debt purchasers] would blossom . . . it surely would have judged defaulted debt purchasers more like . . . independent debt collectors.” The Court responded to these arguments by stating that it was “the proper role of the judiciary . . . to apply, not amend,” the statutes passed by Congress. As a result, the Court found that the FDCPA was inapplicable.

This decision clarified a circuit split that existed over the correct characterization of entities that purchased defaulted debts. Some courts, including the Third Circuit, had held that parties that purchased debt and attempted to collect it on their own behalf were “debt collectors” subject to the FDCPA. See FTC v. Check Investors, Inc., 502 F.3d 159 (3d Cir. 2007) (“one attempting to collect a debt is a ‘debt collector’ under the FDCPA if the debt in question was in default when acquired.”). The Supreme Court’s decision provides much needed clarity and added protection for lenders from the never-ending stream of FDCPA actions filed by the plaintiffs’ bar.

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

Florida District Court Dismisses Plaintiff’s Complaint Alleging Violations of RESPA Due To Lack Of Article III Standing In Light Of Plaintiff’s Failure To Allege Actual Damages

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The United States District Court, Middle District of Florida, recently granted defendant loan servicer’s motion to dismiss plaintiff’s complaint alleging violations of the Real Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq. (“RESPA”), on the ground that plaintiff failed to allege any concrete injury.  Chadee v. Ocwen Loan Servicing, LLC, 2017 WL 1050386 (M.D. Fla. 2017).  In the three-count complaint, plaintiff alleged that defendant violated RESPA and its implementing regulation, 12 C.F.R. 1024 et seq. (“Regulation X”), because defendant failed to acknowledge receipt of plaintiff’s written Request for Information (“RFI”) within the five-day time period set forth in the regulations (count one); that defendant failed to provide the contact information for the owner of plaintiff’s mortgage loan within the ten-day time period set forth in the regulations (count two); and that defendant failed to respond adequately to plaintiff’s RFI in violation of the statute (count three).  Plaintiff sought less than $100 in actual damages, plus attorneys’ fees and statutory damages pursuant to 12 U.S.C. 2605(f) for what he alleged to be defendant’s “pattern of disregard to the requirements imposed upon [it] by Federal Reserve Regulation X.”  The damages included plaintiff’s counsel’s costs of having to file Notices of Error (“NOE”), in which counsel wrote to defendant and claimed it had not received any response to the RFI.  Defendant moved to dismiss the complaint, arguing that plaintiff failed to allege actual damages.

In reviewing defendant’s motion, the court first addressed the third count and found that defendant provided documents relating to the loan servicing, and was not required to respond to items that did not relate to the servicing of plaintiff’s loan.  The court found that plaintiff “failed entirely to respond to this argument for dismissal or, indeed, to explain how the response was in any way inadequate[,]” and further held that, although plaintiff made conclusory allegations that defendant’s response was inadequate, the exhibits attached to the complaint suggest the opposite.  The court then addressed counts one and two regarding timeliness and found that plaintiff failed to state any factual basis for actual damages incurred as a result of defendant’s conduct.  Although plaintiff argued that “damages borne of having to file a subsequent NOE is sufficient to articulate a damages pleading,” the court found that plaintiff had not established there was ever a need to file the NOEs, all of which were prepared and dispatched months after plaintiff’s counsel already received defendant’s substantive response to the RFI.  Therefore, “the expenses incurred in preparing and sending the NOEs were not causally linked to [defendant’s] conduct.”  The court further cited Spokeo and determined that plaintiff failed to allege any concrete injury to establish Article III standing, thereby dismissing counts one and two.

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

New Jersey Appellate Division Holds Foreclosing Lender Who Simply Winterized and Secured a Condominium Is Not a Mortgagee in Possession and Not Responsible for Condominium Association Fees

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In a noteworthy decision for New Jersey lenders approved for publication, the New Jersey Appellate Division recently held that a lender who simply winterizes and secures an abandoned property in foreclosure is not deemed a mortgagee in possession subject to condominium association fees. See Woodlands Cmty. Ass’n, Inc. v. Mitchell, 2017 WL 2437036 (N.J. Super. Ct. App. Div. June 6, 2017). In Mitchell, the borrower defaulted on his loan with the lender and abandoned his condominium. The lender commenced a foreclosure action and then winterized the property and changed the locks. The condominium association then sued the borrower for unpaid association fees and later amended its complaint to include a claim against the lender, arguing that the lender was a mortgagee in possession of the property who therefore was responsible for the property’s fees. Both the lender and the association moved for summary judgment, and the trial court granted the association’s motion, holding that the lender was a mortgagee in possession because it “[held] the keys, and no one else can gain possession of the property without [the lender’s] consent. This constitutes exclusive control, which indicates the status of mortgagee in possession.”

On appeal, the Appellate Division reversed the lower court’s decision. Although the court agreed that a mortgagee in possession is liable for condominium charges that accrue for services rendered during the mortgagee’s possession and control of the property, it held that the lender here was not a mortgagee in possession because it did not “exercise[] the necessary level of control and management over the property.” Specifically, the lender took only the “minimal efforts” to secure its interest in the property. The Appellate Division further noted that the lender was not benefiting from its actions, but was simply protecting its rights to its collateral. Finally, the Court rejected the association’s unjust enrichment claim, holding that the association could not have expected remuneration from the lender because the lender was never a member of the association.

This case is good news for lenders who are often required by statute to maintain abandoned properties in foreclosure. Under N.J.S.A. § 40:48-2.12s, “[t]he governing body of any municipality may adopt ordinances to regulate the care, maintenance, security, and upkeep of the exterior of vacant and abandoned residential properties on which a summons and complaint in an action to foreclose has been filed.” Likewise, N.J.S.A. § 46:10B-51(b) holds that a lender foreclosing on an abandoned property in which there is an exterior nuisance or code violation “shall have the responsibility to abate the nuisance or correct the violation in the same manner and to the same extent as the title owner of the property, to such standard or specification as may be required by State law or municipal ordinance.” Thus, this decision allows a lender to protect its collateral and comply with these statutes without being assessed association fees.

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

Michigan District Court Dismisses Plaintiff’s Wrongful Foreclosure Action for Failure to State a Claim

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The United States District Court for the Eastern District of Michigan recently dismissed plaintiff debtor’s complaint seeking to have the foreclosure and sheriff’s sale set aside, on the grounds that plaintiff failed to state a wrongful foreclosure claim based on only allegations of 12 C.F.R. 1024.41(g) (“Regulation X”) violations, and holding that “to find that Plaintiff has made out a state-law wrongful foreclosure case using only allegations of Regulation X violations would amount to the creation of a hybrid remedy where neither state law nor federal law has provided for one.”  Wilson v. Deutsche Bank Nat’l Tr. Co., 2017 WL 1054491 (E.D. Mich. March 20, 2017).  In the case, defendant bank was the assignee of a mortgage and note executed by plaintiff which secured plaintiff’s home.  Plaintiff alleged that over the course of 2014 and 2015, he made numerous inquiries with defendant loan servicer in an attempt to modify the mortgage loan, and that he sent two applications for a modification of the mortgage loan but received no formal decision from either defendant loan servicer or defendant bank.  Subsequently, in January 2016, after plaintiff defaulted on the loan, foreclosure by advertisement proceedings were commenced and plaintiff’s home was sold at a sheriff’s sale to defendant bank.  Plaintiff then filed this action, asserting a sole count of wrongful foreclosure and alleging that defendants’ actions violated Regulation X and seeking, among other things, to enjoin any eviction or transfer of the property pending a trial on the merits and a judgment setting aside the sheriff’s sale.  Defendant bank filed a motion to dismiss.

The court first addressed defendant’s argument that plaintiff lacks standing to challenge the foreclosure because he failed to redeem the property within the statutorily prescribed period following the sale.  The court held that where a borrower has failed to redeem the property within the redemption period, he must show fraud or irregularity to have the foreclosure set aside.  In this case, however, the court determined that if the complaint does allege any irregularities, they were in the loan modification process and not the foreclosure process.  Therefore, plaintiff failed to allege the fraud or irregularity necessary to justify setting aside the foreclosure sale after the expiration of the statutory redemption period.  The court then addressed defendant’s argument that plaintiff’s reliance on Regulation X as a basis for his claim is legally unsupported and that he has otherwise failed to state a claim under Regulation X.  The court noted ambiguity in whether plaintiff is making a wrongful foreclosure claim under state law or a claim for damages under Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. 2605.  Despite this ambiguity, the court held that even if construed as alleging RESPA violations only, the complaint is deficient because plaintiff has not alleged actual damages.  The court acknowledged that RESPA grants plaintiffs a cause of action for money damages in some circumstances, while the Michigan statutory framework governing wrongful foreclosure claims provides an equitable remedy in others; however, “[i]f every violation of Regulation X were per se sufficient to set aside a Michigan foreclosure, many of the state-created restrictions on plaintiffs seeking that form of equitable relief would be rendered superfluous.”  Therefore, plaintiff failed to plead any cause of action.

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

What’s the Point in Dividing Points?: A Less Conventional Asset to Consider

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I recently read an article by The Points Guy about protecting your points before getting married. Points, most commonly acquired by credit card usage or travel, are often an overlooked asset when drafting a prenuptial agreement in anticipation of marriage or crafting a settlement agreement in anticipation of divorce. Because points can translate to substantial value in cash or in kind expenditures, they should be addressed in any prenuptial agreement you execute with your future spouse and should not be forgotten when identifying assets for purposes of equitable distribution.

As a general rule, the fundamental principles of equitable distribution apply to credit card points, airline miles, and other similarly accrued benefits. Any points acquired prior to marriage will be deemed separate property and any points accumulated during the marriage will be considered marital property and therefore subject to distribution upon divorce. In the case of airline miles, this may be true regardless of whether the benefits were accrued for family vacations or one spouse’s business trips. In the case of credit card points, the usage of the credit card, i.e., for marital expenditures or otherwise, may also be irrelevant.

Logistically, dividing points can become tricky if they are not acquired in a joint account. Some credit card companies and airlines do not allow for the transfer of points between parties. Moreover, the cash value may be pennies to the point, making the benefits difficult to value if they can’t be cashed out, but must be used by the points owner in exchange for goods and services. Because these policies vary by company, it is important to educate yourself on these issues for each specific company with whom you hold an account before it is time to divide your points.

Whether in the context of a prenuptial or settlement agreement, practical problems associated with dividing points can be overcome by allowing one party to retain the points as a trade-off for some other asset in equitable distribution. However, regardless of the arrangement you ultimately come to with your spouse, it is important not to overlook this type of asset, as doing so could result in leaving significant value on the table. And who doesn’t enjoy paying for travel with points and miles?

Environmental Group Ranked in Band One in Chambers USA 2017 Rankings

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Riker Danzig’s Environmental Practice has again been honored with a Band 1 ranking in the Chambers USA Guide this year.  Our group has been consistently ranked in the top tiers of Chambers USA since the publication’s inception and in “Band 1” since 2010.  Many of our environmental attorneys are also recognized individually in the Guide.  Chambers continues to be one of the most well-respected attorney ranking guides, due to its in-depth research and the unbiased and independent nature of its reporting.

Dennis Krumholz (Band 1) 

Samuel Moulthrop (Band 2)  

Steve Senior (Band 2) 

Jeff Wagenbach (Band 3)

Marilynn Greenberg (Band 3)  

Alexa Richman-La Londe (Band 3) 

Jaan Haus (Associates to watch)  

Many of Riker Danzig’s other practice areas and attorneys have also been ranked in the prestigious guide. Full rankings, commentary, and methodology are available at Chambers.

See Awards and Honors Methodology. 

No aspect of this communication has been approved by the Supreme Court of New Jersey.

New York Federal Court Dismisses Mortgagee’s Complaint and Holds Citizenship of Nominal Defendant MERS Cannot Be Controlling for Diversity Jurisdiction Purposes

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In an action filed by plaintiff mortgagee in federal court purportedly under diversity jurisdiction, the United States District Court for the Northern District of New York denied plaintiff’s motion for default judgment and, instead, sua sponte dismissed the complaint for lack of subject matter jurisdiction.  Nationstar Mortg. LLC v. Mohr, 2017 WL 1373888 (N.D.N.Y. April 13, 2017).  In the case, plaintiff sought unpaid amounts due by defendant debtor under a home mortgage and for foreclosure and sale of the property to satisfy this debt.  The complaint alleged that plaintiff is a citizen of Delaware, that defendant debtor is a citizen of Indiana, and that Mortgage Electronic Registration Systems, Inc. (“MERS”), named as a defendant due to its holding a subordinate mortgage on the property at issue, is a citizen of Rhode Island.  The debtor and MERS failed to appear in the action and the clerk entered default.  Plaintiff then filed a motion for default judgment.  However, in addressing plaintiff’s motion, the court first addressed the jurisdictional issue, namely, whether there is subject matter jurisdiction over the action.  The court noted that the complaint appears to meet the “complete diversity” requirement at first glance.  However, the complaint stated that MERS was “named solely as a nominee” for a third party and further alleged that “[a]ll substantive interest in the mortgage remains in the hand of [the third party].”  Therefore, the court held that the third party, not MERS, is the real party in interest, and the citizenship of MERS is not controlling for diversity purposes.  The court further noted that at least one other court has found that MERS is not the real party in interest for diversity purposes in cases concerning mortgages it holds as nominee. See Hien Pham v. Bank of N.Y., 856 F. Supp. 2d 804 (E.D. Va. 2012).  Accordingly, the court dismissed plaintiff’s complaint, without prejudice, and ordered that it had 30 days to amend its complaint and properly alleged the third party’s citizenship.

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

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