John J. Pembroke Living Trust v. U.S. Bank National Association

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT April 27, 2018
_________________________________
Elisabeth A. Shumaker
Clerk of Court
JOHN J. PEMBROKE LIVING TRUST,
Plaintiff - Appellant,
v. No. 17-1244
(D.C. No. 1:16-CV-00020-CMA-MEH)
U.S. BANK NATIONAL ASSOCIATION, (D. Colo.)
as Trustee for WAMU Series 2006-AR11
Trust; SELECT PORTFOLIO
SERVICING, INC.; JP MORGAN CHASE
BANK, N.A.; HOLLAND & HART LLP;
CYNTHIA RILEY,
Defendants - Appellees.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before BRISCOE, HARTZ, and McHUGH, Circuit Judges.
_________________________________
The John J. Pembroke Living Trust defaulted on a $1,905,000 residential
mortgage loan for a home in Colorado after the loan changed hands several times.
Facing foreclosure, Pembroke Trust sued two banks and a loan servicer in state court.
It sought to enjoin foreclosure and to acquire the property by enforcing a
*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist in the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and collateral
estoppel. It may be cited, however, for its persuasive value consistent with
Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
right-of-first-refusal agreement it had made with the original lender. The state court
rejected Pembroke Trust’s arguments and found for the defendants on their
counterclaims for breach of the promissory note and judicial foreclosure.
Undeterred, Pembroke Trust tried to cancel the loan shortly after the state
court’s ruling by sending the loan servicer a notice of rescission under the Truth in
Lending Act (TILA), 15 U.S.C. § 1635. But the foreclosure process was well
underway and the rescission notice did not elicit a response, so Pembroke Trust
appealed the state-court judgment and filed this related action in federal court—this
time adding the law firm that assisted with the foreclosure process (Holland & Hart
LLP) and a former Washington Mutual Bank (WaMu) employee whose endorsement
appears on the note (Cynthia Riley) as defendants.
The federal lawsuit seeks an injunction to stop further debt-collection activity.
It also includes claims for violations of TILA, violations of the federal Fair Debt
Collection Practices Act (FDCPA) and a similar Colorado statute, common-law
fraud, and negligence. The district court dismissed the injunctive-relief claim under
the Younger abstention doctrine, derived from Younger v. Harris, 401 U.S. 37
(1971). It also held that the rescission notice was untimely, thereby rejecting those
claims under TILA and the FDCPA that were dependent on the validity of the
rescission notice. The remaining claims not based on the rescission notice (the
nonrescission claims) were stayed under the Colorado River abstention doctrine,
derived from Colorado River Water Conservation District v. United States, 424 U.S.
800, 817-19 (1976); but after the state appellate court issued its opinion affirming the
2
judgment rendered in the foreclosure proceeding, the district court dismissed the
stayed claims. We affirm.
I. Background
The facts and procedural history of this case are thoroughly recounted in the
Colorado Court of Appeals opinion that affirmed the state trial court’s dismissal
order and foreclosure decree, the federal magistrate judge’s report and
recommendation, and the district court’s order adopting that recommendation. We
repeat them only as needed to frame the issues on appeal.
On May 19, 2006, John Pembroke refinanced a residential mortgage loan and
signed a $1,905,000 promissory note in favor of WaMu. At the same time, he and his
wife Linda executed a deed of trust, acting as trustees for their respective living
trusts. The day before, Pembroke Trust had entered into a right-of-first-refusal
agreement with WaMu, which gave Pembroke Trust the option to purchase the
property in the event of a proposed transfer. (This side agreement’s failure to survive
successive transfers of the loan later became a focus of the state-court action.)
The Pembrokes made payments until they defaulted on the loan in 2011. Over
the years, the loan changed hands, as did the company that serviced it. WaMu sold it
to a loan pooling trust called the “WaMu Series 2006-AR11 Trust” (the Loan Trust)
in 2006, but retained servicing rights. When WaMu failed in 2008, the Federal
Deposit Insurance Corporation (FDIC) took over as receiver and sold the bulk of
WaMu’s assets—including the servicing rights to the note and the deed of trust—to
appellee JPMorgan Chase Bank, N.A. (Chase). Chase, in turn, transferred the
3
servicing rights to appellee Select Portfolio Servicing, Inc. (SPS) and the note and
deed of trust to appellee U.S. Bank National Association as trustee.
II. Jurisdiction
The appellees contend as a threshold matter that we do not have subject-matter
jurisdiction over the nonrescission claims because Pembroke Trust did not comply
with the administrative-exhaustion requirements of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA). The district court did not reach
this jurisdictional issue because it abstained from adjudicating these claims on other
grounds. Nevertheless, we have “an independent obligation to determine whether
subject-matter jurisdiction exists,” 1mage Software, Inc. v. Reynolds & Reynolds Co.,
459 F.3d 1044, 1048 (10th Cir. 2006) (internal quotation marks omitted);
accordingly, we requested supplemental briefing on this issue.
FIRREA bars courts from exercising jurisdiction over claims based on the acts
or omissions of depository institutions that have been placed into receivership by the
FDIC until the claimant has exhausted its administrative remedies. See 12 U.S.C.
§ 1821(d)(13)(D)(ii) (limiting judicial review of claims “relating to any act or
omission” of a failed bank or of the FDIC as receiver); see also Resolution Tr. Corp.
v. Love, 36 F.3d 972, 975-76 (10th Cir. 1994) (“[FIRREA] establishes administrative
procedures for adjudicating claims asserted against [failed financial institutions]. . . .
Pursuant to § 1821(d)(13)(D) of the act, a court does not have jurisdiction over a
claim unless it has first been presented to the agency.”). Pembroke Trust does not
4
allege, and the record does not reflect, any pursuit of administrative remedies, much
less exhaustion of those remedies.
Whether FIRREA bars our jurisdiction turns on the timing of the appellees’
purported misconduct. Administrative exhaustion is required if a claim arises before
the depository institution enters receivership. See Homeland Stores, Inc. v.
Resolution Tr. Corp., 17 F.3d 1269, 1272-74 (10th Cir. 1994); Resolution Tr. Corp.
v. Mustang Partners, 946 F.2d 103, 106 (10th Cir. 1991) (per curiam) (mortgagor’s
right to continue pursuing counterclaims was “dependent upon its compliance with
FIRREA’s claims provisions,” where counterclaim against mortgagee was pending
when Resolution Trust Corporation was appointed as mortgagee’s receiver). As the
Seventh Circuit explained in another case involving Ms. Riley and WaMu, “Any of
Riley’s acts or omissions as an employee or agent of WAMU taken before the FDIC
receivership would be attributable to WAMU for purposes of liability, and FIRREA
bars a court from considering this claim against WAMU . . . in the absence of
administrative exhaustion.” Mains v. Citibank, N.A., 852 F.3d 669, 679 (7th Cir.)
(emphasis added), cert. denied, 138 S. Ct. 227 (2017).
The appellees characterize Pembroke Trust’s claims as “rely[ing] on the
pre-receivership conduct of Ms. Riley while she was an employee of WaMu,” Riley’s
Suppl. Answer Br. at 8, or on pre-receivership “misconduct by WaMu,” Aplees.
Suppl. Br. at 13. To the extent that Pembroke Trust is asking us to resolve
allegations of pre-receivership misconduct, the appellees are correct: we lack
jurisdiction.
5
But it is clear from Pembroke Trust’s complaint that the alleged misconduct
stretches years beyond WaMu’s failure and placement into receivership. The
complaint contends that someone altered the blank copy of the note—which had not
been endorsed back in 2006—to shore up title problems by fraudulently placing
Ms. Riley’s endorsement on it after she no longer had endorsement authority. This
event supposedly occurred sometime between 2012 and 2014—a time frame that is
indisputably post-receivership. The FIRREA exhaustion requirement does not apply
to post-receivership misconduct. See Homeland Stores, 17 F.3d at 1272-76.
Therefore, we have jurisdiction over these nonrescission claims.
III. Analysis
A. Nonrescission Claims
The state trial court made the following relevant findings in the “Judgment and
Decree of Foreclosure”:
 The Loan Trust, for which U.S. Bank became the trustee, acquired the
promissory note in August 2006 “in good faith, for value, and without
notice of the Pembrokes’ or the Pembroke Trusts’ claims and defenses.”
Aplt. App., Vol. 1 at 234.
 The promissory note “was not fabricated or falsified as suggested by the
Pembroke Trusts.” Id.
 “The Loan Trust is the holder in due course of the original Note indorsed in
blank. . . . .” Id.
The Colorado Court of Appeals affirmed these determinations after Pembroke Trust
filed this lawsuit. We review de novo whether this affirmance precludes Pembroke
Trust’s nonrescission claims. See Campbell v. City of Spencer, 777 F.3d 1073, 1077
6
(10th Cir. 2014) (a district court’s grant of a motion to dismiss on preclusion grounds
is reviewed de novo).
The essence of Pembroke Trust’s nonrescission claims is that the promissory
note is not valid or authentic and is thus unenforceable. The appellees argue that
issue and claim preclusion bar Pembroke Trust from relitigating enforceability. We
apply Colorado law to assess the state-court judgment’s preclusive effect.
See Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985) (the
full-faith-and-credit statute, 28 U.S.C. § 1738, directs federal courts “to refer to the
preclusion law of the State in which judgment was rendered”).
Issue preclusion bars a party from relitigating a discrete issue in a current
proceeding if (1) a prior proceeding resulted in a final judgment on the merits; (2) the
issue is identical to an issue actually adjudicated in the prior proceeding; (3) the party
against whom preclusion is asserted had a full and fair opportunity to litigate the
issue in the prior proceeding; and (4) the party against whom preclusion is asserted
was a party or is in privity with a party in the prior proceeding. See Foster v. Plock,
394 P.3d 1119, 1123 (Colo. 2017).
These four conditions were satisfied here. Pembroke Trust properly does not
challenge the first and fourth factors. The state-court judgment on the merits is now
final because the Colorado Court of Appeals upheld the trial court’s decision and
Pembroke Trust did not file a petition for writ of certiorari. And Pembroke Trust was
the plaintiff in both proceedings.
7
As for the second condition, Pembroke Trust’s defense to the state-court
foreclosure action and its nonrescission claims in federal court turn on the resolution
of an identical issue: Is the promissory note enforceable? The state court actually
adjudicated this question when it found that U.S. Bank holds the promissory note in
due course as the trustee for the Loan Trust. Under Colorado law a holder in due
course takes a note “free from all claims to [the note] and most defenses of any party
to [it].” La Junta State Bank v. Travis, 727 P.2d 48, 51 (Colo. 1986).
Finally, Pembroke Trust had a full and fair opportunity to litigate this issue. It
suggests that all it challenged before the state court was the authenticity of
Mr. Pembroke’s signature on the promissory note, and that it could not have
challenged the legitimacy of Ms. Riley’s endorsement there because it was not yet
aware of the problem. But the state-court record shows otherwise. Not only did
Pembroke Trust seek discovery relating to Ms. Riley’s endorsement, see Aplt. App.,
Vol. 1 at 241 (interrogatory no. 6 requesting Chase to “[e]xplain all the facts and
circumstances of how the endorsement signed by Cynthia Riley was placed on the
NOTE, including the date upon which the endorsement was placed upon the NOTE”),
but it also stated in opposing summary judgment that “there is a question of fact
whether [the Loan Trust] took the Note with notice of an unauthorized signature or
has been altered [sic],” id., Vol. 3 at 699. Then at trial Pembroke Trust challenged
the authenticity and timing of Ms. Riley’s endorsement, as well as her authority,
when it argued that the note was endorsed after the 2012 foreclosure. Having had a
full and fair opportunity to litigate this issue, Pembroke Trust cannot overcome the
8
preclusion bar by citing additional evidence that should have been presented before
entry of judgment in the prior case. See Jones v. United States, 466 F.2d 131, 136
(10th Cir. 1972) (where a party did not effectively present its case at the first trial,
“affording [that party] a second opportunity in which to litigate the matter, with the
benefit of hindsight, would contravene the very principles upon which collateral
estoppel is based and should not be allowed”).
The nonrescission claims are barred by issue preclusion. We therefore need
not address claim preclusion.
B. Rescission Claims
The rescission claims fare no better. We review de novo the district court’s
dismissal of these claims under Rule 12(b)(6) on the ground that the notice of
rescission was untimely. See Braxton v. Zavaras, 614 F.3d 1156, 1159 (10th Cir.
2010) (“We review de novo the dismissal of an action under Rule 12(b)(6) based on
the statute of limitations.”). A consumer’s unconditional right to rescind under TILA
expires three business days after consummation of the loan or after delivery of the
required disclosures and rescission forms, whichever is later. See 15 U.S.C.
§ 1635(a). A consumer also has a conditional right to rescind: “[W]hen a creditor
fails to deliver the material disclosures and information and rescission forms required
by TILA, a borrower retains the right to rescind until the creditor delivers those
required documents.” Pohl v. U.S. Bank, 859 F.3d 1226, 1228 (10th Cir. 2017).
But “even if the creditor never delivers the required documents, the conditional right
9
to rescind lasts no longer than three years after the consummation of the transaction.”
Id. (citing § 1635(f)).
Pembroke Trust does not argue that the appellees failed to provide the required
disclosures and rescission forms. Accordingly, the loan’s consummation begins the
three-year period to rescind. Pembroke Trust tries to characterize the consummation
date as a factual issue. But TILA’s implementing regulation, Regulation Z, defines
“[c]onsummation” to mean “the time that a consumer becomes contractually
obligated on a credit transaction.” 12 C.F.R. § 226.2(a)(13). When a consumer
becomes contractually obligated is determined by state law. See id. § 226.2(b)(3).
Under Colorado law an enforceable contract is formed when there is “mutual assent
to an exchange, between competent parties, with regard to a certain subject matter,
for legal consideration.” FDIC v. Fisher, 292 P.3d 934, 937 n.2 (Colo. 2013)
(internal quotation marks omitted). Here, the parties entered into an enforceable
contract on the closing date for the mortgage loan; at that time, Mr. Pembroke
executed the promissory note and the deed of trust in exchange for a $1,905,000
residential mortgage loan from WaMu.
The closing date—and thus the consummation date—was May 19, 2006. Yet
Pembroke Trust waited until May 2015 to send a notice of rescission to the loan
servicer, SPS. Pembroke Trust’s rescission notice thus came many years too late. It
contends there are no time limitations on the right to rescind because a “rescission
notice is effective upon mailing by operation of law” under Jesinoski v. Countrywide
Home Loans, Inc., 135 S. Ct. 790 (2015). Aplt. Reply Br. at 4. But this contention
10
misreads Jesinoski. The Supreme Court’s focus was on “how the right to rescind is
to be exercised,” and it concluded that § 1635 requires only a notice of rescission, not
a suit for rescission. See Jesinoski, 135 S. Ct. at 792 (emphasis added). Regarding
the time for rescission, the Court made clear that the right to rescind “does not last
forever” and “‘shall expire three years after the date of consummation of the
transaction or upon the sale of the property, whichever comes first.’” Id. (quoting
§ 1635(f)). It did not allow for perpetual rescission. The district court was correct in
dismissing the TILA claims as untimely.
Our conclusion that the rescission notice was untimely also disposes of
Pembroke Trust’s remaining argument that the district court improperly dismissed its
request for injunctive relief under the Younger doctrine. Pembroke Trust asked the
district court to “invoke its equitable powers and enjoin [the defendants’] ongoing
debt collection activity.” Aplt. App., Vol. 1 at 32 (third claim for relief in First
Amended Complaint). Later, it characterized this claim as “a request to effectuate its
rights under [TILA] for a rescission issued under the act” through a notice sent on
May 21, 2015. Id., Vol. 3 at 762 (objections to Magistrate Judge’s Report and
Recommendation). The request for injunctive relief clearly depends on a viable
TILA claim, which does not exist.
11
IV. Conclusion
We affirm the district court’s dismissal of Pembroke Trust’s claims.
Entered for the Court
Harris L Hartz
Circuit Judge
12