Phillip Jackson v. Bank of America Corporation

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-3338
P HILLIP JACKSON and D EBORAH JACKSON,
Plaintiffs-Appellants,
v.
B ANK OF A MERICA C ORPORATION;
C OUNTRYWIDE F INANCIAL C ORPORATION;
C OUNTRYWIDE H OME L OANS, INC., doing business as
A MERICA’S W HOLESALE L ENDER; M ORTGAGE
E LECTRONIC R EGISTRATION S YSTEMS, INC.; and
F EDERAL N ATIONAL M ORTGAGE A SSOCIATION,
Defendants-Appellees.
Appeal from the United States District Court for the
Southern District District of Indiana, Indianapolis Division.
No. 12-CV-79—William T. Lawrence, Judge.
A RGUED F EBRUARY 14, 2013—D ECIDED MARCH 29, 2013
Before B AUER and K ANNE, Circuit Judges, and Z AGEL,
District Judge.Œ
Œ
The Honorable James B. Zagel of the United States District
Court for the Northern District of Illinois, sitting by designa-
(continued...)
2 No. 12-3338
K ANNE, Circuit Judge. In April 2003 Phillip and
Deborah Jackson applied for and obtained a $282,500
home mortgage refinancing loan with a 30-year fixed
interest rate of 5.875% from Countrywide Home Loans,
Inc. doing business as America’s Wholesale Lender
(“AWL”). (R. 27-2 at 75-87.) To secure the loan, the
Jacksons granted AWL a mortgage on their home,
which was duly recorded in Hamilton County, Indiana,
in May 2003. (R. 27-2 at 118); (R. 27-2 at 24.) The
Jacksons used a mortgage broker—Midwest Financial &
Mortgage Services, Inc. (“MFMS”)—to apply for the loan.
(R. 27-2 at 120.) The Jacksons allege that the remaining
defendant-appellees have been “involved with the mort-
gage process in various capacities.” (Appellant’s Br. at 8.)
The Jacksons were initially able to make timely pay-
ments on the loan but went into default in March 2010.
(R. 27-2 at 121.) Although there was no foreclosure
action taken by the banks at the time (nor has there been
in the intervening time period), the Jacksons initiated
an action to quiet title on the property in Hamilton
County Circuit Court in December 2011. They addi-
tionally claimed that some or all of the defendants negli-
gently evaluated the Jacksons’ ability to repay the loan
and that the loan contract was substantively and pro-
cedurally unconscionable. The defendants removed the
Œ
(...continued)
tion. Judge Zagel heard oral argument in this matter and
participated in the conference, but he did not participate in
the issuance of the panel’s opinion. The remaining two
panelists issue this opinion pursuant to 28 U.S.C. § 46(d).
No. 12-3338 3
case to the Southern District of Indiana in January 2012
and, the next month, filed a motion to dismiss under
Fed. R. Civ. P. 12(b)(6). The Jacksons amended their
complaint, but the district court granted the motion to
dismiss on all counts in September 2012. Jackson v. Bank
of Am. Corp., No. 12-cv-79, 2012 WL 4052285 (S.D. Ind.
Sept. 13, 2012).
The Jacksons timely filed this appeal, challenging the
district court’s dismissal of each of their three claims:
negligence, unconscionability, and quiet title. We
address each below and affirm the district court’s dis-
missal.
I. JURISDICTION
Before we address the merits, we must dispose of a
brief jurisdictional issue. In an order dated December 20,
2012, we noted that the Jacksons’ filings did not comply
with Circuit Rule 28(a)(1) because they failed to
establish diversity jurisdiction. (Dkt. 18.) We requested
that the parties clarify whether and why our jurisdiction
was appropriate. At issue was one defendant—MFMS—
whom the Jacksons identified as an Indiana citizen.1 As
1
The additional wrinkle here: it appears that MFMS was never
properly served and did not appear in the district court. MFMS
is not a party to this appeal. Consequently, it is not listed as
an appellee here. Because MFMS is not an Indiana citizen for
diversity purposes, and federal jurisdiction is appropriate in
any event, we need not follow this particular thread any further.
4 No. 12-3338
the Jacksons themselves are Indiana citizens, if MFMS
was also an Indiana citizen, then complete diversity
would be destroyed and federal jurisdiction would be
improper. See Schur v. L.A. Weight Loss Ctrs., Inc., 577
F.3d 752, 758 (7th Cir. 2009).
In response, the Jacksons restated their “knowledge
and belief” that MFMS is “incorporated in Indiana and
its principal place of business is in Indiana.” (Dkt. 22 at 2.)
Thus, the Jacksons offered that it would be appropriate
for this court to remand the case to the district court
with instructions to send the case back to the Hamilton
County Circuit Court, where it was initially filed. (Id.)
The defendants filed a docketing statement that
attached records searches from both the Kentucky and
Indiana Secretaries of State that show MFMS to be a
Kentucky corporation with its principal place of
business in Ohio. (Dkt. 14-2.) On this basis, we are con-
fident that the requirements for diversity jurisdiction are
satisfied. See 28 U.S.C. § 1332(c)(1); see also Wachovia
Bank, N.A. v. Schmidt, 546 U.S. 303, 306 (2006).
II. A NALYSIS
Our review of a district court’s dismissal of a com-
plaint for failure to state a claim is de novo. Alexander v.
McKinney, 692 F.3d 553, 555 (7th Cir. 2012). When
“[e]valuating the sufficiency of the complaint, we
construe it in the light most favorable to the nonmoving
party, accept well-[pled] facts as true, and draw all in-
ferences in her favor.” Reynolds v. CB Sports Bar, Inc., 623
No. 12-3338 5
F.3d 1143, 1146 (7th Cir. 2010) (internal brackets omitted).
The “complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is
plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 570 (2007)).
Because this is a diversity case, state substantive
law applies. Blood v. VH-1 Music First, 668 F.3d 543, 546
(7th Cir. 2012). Here, the case was removed to district
court in Indiana and neither party argued choice of law;
therefore, Indiana law controls. Ryerson Inc. v. Fed. Ins.
Co., 676 F.3d 610, 611-12 (7th Cir. 2012). Our job in
applying Indiana law is to “use our own best judgment
to estimate how the [Indiana] Supreme Court would
rule.” Blood, 668 F.3d at 546. Where the Indiana
Supreme Court has not spoken directly to an issue, we
may give “proper regard” to Indiana’s lower courts.
Comm’r v. Estate of Bosch, 387 U.S. 456, 465 (1967); Blood,
668 F.3d at 546.
A. Negligence
The Jacksons’ first claim is that the various finan-
cial institutions they sued negligently evaluated the
Jacksons’ ability to repay the loan; specifically, the in-
stitutions used the Jacksons’ gross income rather than
net income to determine the likelihood of repayment.
The elements of a negligence claim in Indiana would
be familiar to most first-year law students: “ ‘(1) a duty
owed to plaintiff by defendant, (2) breach of duty by
6 No. 12-3338
allowing conduct to fall below the applicable standard
of care, and (3) a compensable injury proximately
caused by defendant’s breach of duty.’ ” Pisciotta v. Old
Nat’l Bancorp, 499 F.3d 629, 635 (7th Cir. 2007) (internal
emphasis removed) (quoting Bader v. Johnson, 732 N.E.2d
1212, 1216-17 (Ind. 2000)). The Jacksons cannot advance
beyond the first element. They cannot show that the
defendant-appellee institutions actually owed them a
duty; without a duty, there is no cognizable negligence
claim. See Bader, 732 N.E.2d at 1216-17. Accordingly, the
district court’s dismissal of the claim was appropriate.
The Jacksons argue that the financial institutions
owed them a “fiduciary duty.” (Appellants’ Br. at 10.)
The Jacksons, however, have not cited any law (of
Indiana, or any other jurisdiction) for this proposition;
they have argued only that they “disagree[d]” with the
appellees and “respectfully” disagreed with the district
court’s conclusion that no such duty exists. (Id.) How-
ever, it is clear under Indiana law that a fiduciary
duty does not arise “between a lender and a borrower
unless certain facts exist which establish a relationship
of trust and confidence between the two.” Block v. Lake
Mortg. Co., 601 N.E.2d 449, 452 (Ind. Ct. App. 1992);
see also Am. Heritage Banco, Inc. v. Cranston, 928 N.E.2d
239, 246 (Ind. Ct. App. 2010) (“the mere existence of a
relationship between parties of bank and customer or
depositor does not create a special relationship of trust
and confidence.”); Huntington Mortg. Co. v. DeBrota, 703
N.E.2d 160, 167 (Ind. Ct. App. 1998) (“Mortgages do
not transform a traditional debtor-creditor relationship
into a fiduciary relationship absent an intent by the
No. 12-3338 7
parties to do so.”). “Although the existence of a confiden-
tial relationship depends upon the facts of each case, it
can be generally stated that a confidential relationship
exists whenever confidence is reposed by one party in
another with resulting superiority and influence exer-
cised by the other.” DeBrota, 703 N.E.2d at 167. Here,
the Jacksons have not alleged anything more than the
typical mortgagor-mortgagee relationship. But, a mortgage
contract does not, on its own, create a confidential rela-
tionship between a creditor and a debtor. Catalan v.
GMAC Mortg. Corp., 629 F.3d 676, 693 (7th Cir. 2011).
Without a relevant duty, there is no tort. The district
court properly dismissed the Jacksons’ negligence claim.
B. Unconscionability
The Jacksons’ second claim is that the mortgage
contract they entered into was unconscionable and
should be set aside. In Indiana, an unconscionable
contract is one that “no sensible man not under delu-
sion, duress or in distress would make, and [that] no
honest and fair man would accept.” Weaver v. Am. Oil
Co., 276 N.E.2d 144, 146 (Ind. 1971). Although Indiana
recognizes unconscionability, courts do not regularly
accept it as an argument; we have previously described
Indiana as “unfriendly” to unconscionability generally.
Amoco Oil Co. v. Ashcraft, 791 F.2d 519, 522-23 (7th
Cir. 1986) (collecting cases). Under Indiana law, a con-
tract may be substantively unconscionable, procedurally
unconscionable, or both. DiMizio v. Romo, 756 N.E.2d
8 No. 12-3338
1018, 1023 (Ind. Ct. App. 2001). The Jacksons, how-
ever, failed to allege facts that would support any
unconscionability determination in Indiana. Accordingly,
the district court also properly dismissed this claim.
“Substantive unconscionability refers to oppressively
one-sided and harsh terms of a contract.” Id. This is
particularly likely where the consumer “is not in a posi-
tion to shop around for better terms.” Terry v. Ind. State
Univ., 666 N.E.2d 87, 93 (Ind. Ct. App. 1996). The
Jacksons alleged neither any particularly unfair terms,
nor that they were unable to shop around. The terms of
their loan were manifestly conventional: a 30-year fixed
rate loan at 5.875% interest. The Jacksons also used a
mortgage broker—an individual who sorts through
multiple loan options from various lenders. The
Jacksons even paid their mortgage for seven years
before their circumstances changed, which suggests that
the terms were not unconscionably oppressive. Thus,
nothing in their alleged facts supports a claim of substan-
tive unconscionability.
Nor does the complaint state a claim for procedural
unconscionability. “Procedural unconscionability issues
arise from irregularities in the bargaining process or
from characteristics peculiar to one of the parties.”
DiMizio, 756 N.E.2d at 1024. “[P]hysical or mental inca-
pacity” that prevents a party “from appreciating
the significance” of the agreement is one example of a
characteristic that might give rise to an unconscionable
process. Ashcraft, 791 F.2d at 522. Unequal bargaining
power does not by itself, however, make a contract
process unconscionable. Id.No. 12-3338 9
Here, the Jacksons attempt to conjure an uncon-
scionability claim out of circumstances they describe as
fraud.2 The Jacksons claim they lacked the “specialized
knowledge required to evaluate whether the loan was
in their best interest.” (Appellants’ Br. at 14.) As the
district court described this argument, the Jacksons
essentially contend “that they were unable to understand
that the consequences of borrowing more than they
could afford could be the loss of their home.” Jackson,
2012 WL 4052285, at *3.
Again, we agree with the district court that nothing
in this argument “rise[s] above a speculative level.” Id.“Under Indiana law, a person is presumed to under-
stand and assent to the terms of the contracts he signs.”
Guideone Ins. Co. v. U.S. Water Sys., Inc., 950 N.E.2d 1236,
1247 (Ind. Ct. App. 2011). There is nothing in the record
to indicate that the Jacksons did not understand the
terms of their loan, or that the mortgage process
itself was somehow irregular. The contention that the
Jacksons did not understand the potential consequences
of defaulting on their loan is similarly unsupported. The
mortgage process was not procedurally unconscionable.
The Jacksons have not shown how this contract,
which is so similar to untold numbers of other mortgage
2
The Jacksons did not include a claim of fraud in their com-
plaint but used the language of fraud in their brief to this
court when describing their unconscionability claim. To the
extent they now argue fraud as an independent claim, that
argument has been forfeited. See Puffer v. Allstate Ins. Co.,
675 F.3d 709, 719-20 (7th Cir. 2012).
10 No. 12-3338
refinancing contracts, could possibly be one that “no
sensible man not under delusion, duress or in distress
would make, and [that] no honest and fair man would
accept.” Weaver, 276 N.E.2d at 146. Without facts
that would support either substantive or procedural
unconscionability, dismissal of this claim was also proper.
C. Action to Quiet Title
The Jacksons’ third and final claim is an action to quiet
title. This claim is one that the Jacksons’ counsel forth-
rightly described during oral argument as an attempt to
“cut new turf” in Indiana quiet title law. The Jacksons’
arguments are indeed novel, but we are unconvinced
that they constitute a valid quiet title action under
Indiana law.
In Indiana, “[i]n a suit to quiet title, the plaintiff is
bound to prove that he was the owner of the land in
controversy at the commencement of the action.” Ritz v.
Ind. & Ohio R.R., Inc., 632 N.E.2d 769, 772 (Ind. Ct. App.
1994). “The evidence must show title in the plaintiff; it
is not sufficient that it shows that the adverse claimant
is without title.” Kozanjieff v. Petroff, 19 N.E.2d 563, 565
(Ind. 1939). If the plaintiff is successful, “an action to
quiet title . . . cuts off all claims of the unsuccessful
party.” Cent. Fed. Sav. & Loan Ass’n v. Cummings, 25
N.E.2d 638, 639 (Ind. 1940).
Although there is no pending foreclosure, the Jacksons
attempt to construct a quiet title action out of two
legal theories that have been used with limited success
in other jurisdictions to forestall immediate foreclosure
No. 12-3338 11
(but have not yet been raised, so far as we can tell,
in Indiana under these precise circumstances): (1) that
the bifurcation of the mortgage and the note (in order to
package the latter into larger securities) prevents any
party from claiming strong enough title to foreclose, see
Horvath v. Bank of N.Y., N.A., 641 F.3d 617, 622 (4th
Cir. 2011); Cervantes v. Countrywide Home Loans, Inc.,
656 F.3d 1034, 1044 (9th Cir. 2011); and (2) that no
party could produce the original note, which should be
required to properly foreclose, see e.g., In re Marron, 485
B.R. 485, 491 (D. Mass. 2012). To the extent that these
theories have legs (a question very much in dispute),
they might protect a debtor from foreclosure by a par-
ticular party at a particular time. See Cervantes, 656 F.3d
at 1044 (describing plaintiffs’ theory of wrongful fore-
closure). They do not, however, ”prove that [the plain-
tiff] was the owner of the land in controversy.” Ritz,
632 N.E.2d at 772. As such, these theories are not
sufficient to support a quiet title action in Indiana. See
Weathersby v. JPMorgan Chase Bank, N.A., 906 N.E.2d 904,
908-09 (Ind. Ct. App. 2009); Otterman v. Hollingsworth,
214 N.E.2d 189, 192 (Ind. Ct. App. 1966); see also Ind.
Code § 32-30-2-15.
The Jacksons have not alleged facts that “raise a right
to relief above the speculative level.” Twombly, 550 U.S.
at 555. They have referred to a relevant Indiana statute:
Ind. Code § 32-30-2-20. They have recited what they
describe as factual allegations that are pertinent to a
quiet title action in Indiana: that they possess the
property, and that they own the property in fee simple.
(R. 27-2 at 122-23.) However, “a plaintiff’s obligation to
12 No. 12-3338
provide the grounds of his entitlement to relief
requires more than labels and conclusions.” Twombly,
550 U.S. at 555 (internal brackets and quotation marks
omitted). “[C]ourts are not bound to accept as true a
legal conclusion couched as a factual allegation.” Id.(internal quotation marks omitted). Therefore, we need
not credit the Jacksons’ conclusory assertions for
purposes of a motion to dismiss. Iqbal, 556 U.S. at 678-79.
Moreover, we do not think it is the place of the federal
courts to “cut new turf” for Indiana with regard to such
a venerable cause of action. Dismissal of this claim by
the district court was appropriate.
III. C ONCLUSION
For the foregoing reasons, we A FFIRM the judgment of
the district court.
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