Kevin Murphy v. Aurora Loan Services

United States Court of Appeals
For the Eighth Circuit
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No. 12-1398
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Kevin M. Murphy and Kathleen K. Murphy,
James L. Lang, Charlene Ann Brady, Erika
R. Hogenson, Harold J. Thompson, III,
Julianne Thompson, Miriam E. Stone,
Jeffrey A. Kirschbaum, Tou A. Vang and
May K. Vang
lllllllllllllllllllll Plaintiffs - Appellants
v.
Aurora Loan Services, LLC, Aurora Bank FSB,
Mortgage Electronic Registration Systems, Inc.,
Merscorp, Inc., and Wilford & Geske, P.A.
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the District of Minnesota - Minneapolis
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Submitted: October 15, 2012
Filed: November 8, 2012
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Before RILEY, Chief Judge, ARNOLD and GRUENDER, Circuit Judges.
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GRUENDER, Circuit Judge.
The plaintiffs are all Minnesota homeowners (“Homeowners”) who borrowed
money for the purpose of purchasing a home. Each signed a promissory note,
promising to repay the loan. As security for the promise they executed a mortgage
on which Mortgage Electronic Registration Systems, Inc. (“MERS”)1 was the
nominal mortgagee. The various lenders holding the Homeowners’ promissory notes
then pooled, securitized, and sold them in the secondary market. MERS subsequently
assigned each mortgage to Aurora Loan Services, LLC and Aurora Bank FSB
(collectively “Aurora”). After the Homeowners defaulted on their repayment
obligations, Aurora retained the legal services of Wilford & Geske, P.A. (“W&G”)
to aid them in foreclosing on the properties pursuant to Minnesota’s foreclosure-by-
advertisement statute. The Homeowners do not contest the validity of their initial
mortgage agreements, nor do they contest their subsequent defaults. Rather, they
allege that neither Aurora nor MERS is entitled to foreclose on the properties and that
W&G knowingly made false representations regarding Aurora’s authority to
foreclose.
In their complaint initially filed in state court, the Homeowners set forth a host
of reasons why Aurora and MERS lacked the authority to foreclose and, among other
claims, brought suit to quiet title. After Aurora and MERS removed the action to
federal court based on the allegedly fraudulent joinder of W&G, the district court
denied the Homeowners’ motion to remand and dismissed all of their claims with
prejudice. The district court viewed the complaint as articulating nothing more than
repackaged versions of the “show-me-the-note” theory, which argues the holder of
legal title to a mortgage cannot foreclose if he is unable to produce the underlying
1
Homeowners also sued MERSCORP, Inc., the record custodian for the system.
“MERS” refers collectively to both entities. MERS involves an electronic
registration system wherein lenders can transfer interests in promissory notes to each
other, while MERS remains the mortgagee of record despite the assignment of the
debt. See Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 490-91
(Minn. 2009).
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promissory note. See Stein v. Chase Home Fin., LLC, 662 F.3d 976, 978-79 (8th Cir.
2011). The Minnesota Supreme Court definitively rejected the viability of this theory
in Jackson, as we recognized in Stein. See Stein, 662 F.3d at 979-80; Jackson, 770
N.W.2d at 500-01. On appeal, the Homeowners contest the district court’s exercise
of subject matter jurisdiction. They also insist their theories of recovery do not run
afoul of Jackson because their challenges to the authority of Aurora and MERS to
foreclose are not premised on a failure to produce their promissory notes. We affirm
the district court’s dismissal of W&G as fraudulently joined. We partially reverse as
to the dismissal of the quiet-title cause of action, but we affirm the dismissal with
prejudice of all of the Homeowners’ remaining claims.
I.
Although nominally the Homeowners lack complete diversity with W&G,
Aurora and MERS removed this suit to federal court based on the allegedly
fraudulent joinder of W&G. A party has been fraudulently joined if there is “no
reasonable basis in fact and law” for the claim brought against it. Filla v. Norfolk S.
Ry. Co., 336 F.3d 806, 810 (8th Cir. 2003) (quoting Wiles v. Capitol Indemnity Corp.,
280 F.3d 868, 871 (8th Cir. 2002)). The doctrine of fraudulent joinder allows a
district court to assume jurisdiction over a facially nondiverse case temporarily and,
if there is no reasonable basis for the imposition of liability under state law, dismiss
the nondiverse party from the case and retain subject matter jurisdiction over the
remaining claims. See, e.g., Block v. Toyota Motor Corp., 665 F.3d 944, 951 (8th Cir.
2011). The district court found that W&G was fraudulently joined, and the
Homeowners did not challenge this finding in their opening brief. While we
generally will not consider arguments raised for the first time in a reply brief, Barham
v. Reliance Standard Life Ins. Co., 441 F.3d 581, 584 (8th Cir. 2006), because this
challenge relates to our jurisdiction, we will consider the merits of the claim. We do
so under a de novo standard of review. Block, 665 F.3d at 947.
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The district court was correct in determining that all of the Homeowners’
claims against W&G lacked a reasonable basis in fact and law, and therefore W&G
was properly dismissed as fraudulently joined. Where attorneys act within the scope
of their employment, Minnesota law provides protection from liability to third parties.
McDonald v. Stewart, 182 N.W.2d 437, 440 (Minn. 1970). Absent knowing
participation in fraud, none of the work performed by W&G as foreclosing attorney
for Aurora can give rise to an actionable claim. See id. Minnesota court rules, like
the Federal Rules of Civil Procedure, require fraud to be pled with particularity. See
Minn. R. Civ. P. 9.02. To pierce W&G’s professional immunity by adequately
pleading fraud, Homeowners must plead the “ultimate facts” of the fraud, which are
the “facts underlying each element of the fraud claim.” Hardin Cnty. Sav. Bank v.
Hous. & Redevelopment Auth. of Brainerd, No. A10-1854, 2012 WL 4094350, at *6
(Minn. Sept. 19, 2012).
The Homeowners brought six claims against W&G. Count X pleads negligent
misrepresentation, which is “an unintentional tort that does not contemplate an intent
to deceive on the part of the person making the misrepresentation.” L&H Airco, Inc.
v. Rapistan Corp., 446 N.W.2d 372, 378 (Minn. 1989). The very nature of this claim,
then, fails to implicate any knowing participation in fraud. Three additional
counts—Count V Conversion, Count VII Civil Conspiracy, and Count XII Equitable
Estoppel—run into the insurmountable obstacle of stating only “show-me-the-note”
claims that have been rejected by Jackson.2
2
Count V alleges W&G abetted acts of conversion by Aurora and MERS
because these entities “were not entitled to enforce the Original Notes.” Count VII
claims W&G engaged in a civil conspiracy to misrepresent the status of Aurora and
MERS as “holders in due course of the Original Notes entitling them to foreclose on
Plaintiffs’ homes.” Count XII claims W&G represented that Aurora and MERS held
“valid title to Plaintiffs’ Original notes,” thereby inducing some of the plaintiffs to
forego challenging the legal standing of Aurora and MERS to execute foreclosures.
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To the extent the remaining two counts against W&G avoid relying on “show-
me-the-note” by alleging defects in the assignment of legal title to the Homeowners’
mortgages, these claims nonetheless fail to generate an actionable basis for liability
because they do not meet the heightened pleading standard in Minn. R. Civ. P. 9.02.
Count IV alleges W&G committed slander of title and Count XI asserts a claim for
fraud. Both of these causes of action contain an element requiring the plaintiff to
have suffered damages as a result of the defendant’s actions. Davis v. Re-Trac Mfg.
Corp., 149 N.W.2d 37, 38-39 (Minn. 1967) (defining the elements of fraud); Kelly
v. First State Bank of Rothsay, 177 N.W. 347, 347 (Minn. 1920) (defining the
elements of slander of title). The Homeowners have failed to plead with any
specificity the facts underlying these claims. Nothing in the complaint indicates how
the Homeowners would have suffered a different fate if the supposed genuine record
holder of the mortgage executed the foreclosure in place of Aurora. There is no
allegation explaining how W&G’s legal services to Aurora could possibly have
caused the Homeowners any damage. In short, the Homeowners failed to plead the
“ultimate facts” of any fraud-based cause of action and thus failed to assert a claim
against W&G under which state law might impose liability. W&G was properly
dismissed as fraudulently joined.
The Homeowners also argue the doctrine of prior exclusive jurisdiction bars
the district court from exercising subject matter jurisdiction over any of their claims
against Aurora, MERS, and W&G. See Marshall v. Marshall, 547 U.S. 293, 311
(2006) (citing “the general principle that, when one court is exercising in rem
jurisdiction over a res, a second court will not assume in rem jurisdiction over the
same res”). “We review the question of subject matter jurisdiction de novo.” Myers
v. Richland Cnty., 429 F.3d 740, 745 (8th Cir. 2005). Leaving aside the question of
whether any of the Homeowners’ claims can be characterized as in rem or quasi in
rem, the doctrine does not apply to removal actions because the state court loses
jurisdiction over a removed suit. See Ward v. Resolution Trust Corp., 972 F.2d 196,
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198 (8th Cir. 1992). The district court properly found that it had subject matter
jurisdiction.
II.
The Homeowners argue their quiet-title action3 remains viable post-Jackson,
and they contest the dismissal of this claim against Aurora and MERS.4 A district
court’s dismissal of a claim under Federal Rule of Civil Procedure 12(b)(6) is subject
to de novo review. Levy v. Ohl, 477 F.3d 988, 991 (8th Cir. 2007). As part of this
review we assume all factual allegations in the pleadings are true and interpret them
“in the light most favorable to the nonmoving party.” Cmty. Fin. Grp., Inc. v.
Republic of Kenya, 663 F.3d 977, 980 (8th Cir. 2011). The Homeowners’ complaint
sought to quiet title based on seven potential defects in Aurora or MERS’s ability to
foreclose on the mortgages. The district court interpreted each alleged impairment
as precluded by Jackson’s rejection of the “show-me-the-note” theory and
3
Minnesota provides a statutory cause of action for determining “adverse
claims” with respect to land: “Any person in possession of real property personally
or through the person’s tenant, or any other person having or claiming title to vacant
or unoccupied real property, may bring an action against another who claims an estate
or interest therein, or a lien thereon, adverse to the person bringing the action, for the
purpose of determining such adverse claim and the rights of the parties, respectively.”
Minn. Stat. § 559.01 (2012).
4
The complaint included additional claims against Aurora and MERS, but the
Homeowners have abandoned them. See Cormack v. Settle-Beshears, 474 F.3d 528,
531 (8th Cir. 2007) (noting that a party is considered to have abandoned an issue if
he fails to raise a claim on appeal). One group of plaintiffs, the Murphys, obtained
new counsel for this appeal and did challenge dismissal of the claims entitled
“Defendants Are Not Real Parties in Interest” and “Defendants Do Not Have Legal
Standing to Foreclose Mortgages.” However, their objections are based on arguments
not raised in the district court. We generally do not consider arguments raised for the
first time on appeal, and we decline to do so here. See Orr v. Wal-Mart Stores, Inc.,
297 F.3d 720, 725 (8th Cir. 2002).
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correspondingly dismissed the quiet-title action. Many of the theories underlying the
quiet-title claim are indeed regurgitations of the “show-me-the-note” theory. As such,
we agree with the district court that these portions of the quiet-title action were
properly dismissed. See Butler v. Bank of America, N.A., 690 F.3d 959, 962 (8th Cir.
2012).
However, because two of the quiet-title theories do not rely on the failure of
the foreclosing party to produce the note, see Compl. ¶ 57(f), (g), we conclude that
the district court erred in its wholesale dismissal of the quiet-title claim pursuant to
Jackson. Under these two theories, assignments from MERS to Aurora of legal title
to the mortgages either were unrecorded or executed by individuals lacking the legal
authority to do so. The resulting defect in the chain of title of the mortgages,
according to Homeowners, deprives Aurora of the authority to foreclose on their
properties. In contrast to the complaint in Butler, these theories do not rely on the
discredited “show-me-the-note” theory.5 Neither party provided briefing specific to
the two remaining quiet-title theories. For instance, it is not clear whether the
Homeowners still have any interest in the properties. Minnesota’s foreclosure-by-
advertisement statute explains that once a sale is recorded and the time period for
redemption has passed, “all the right, title, and interest of the mortgagor in and to the
premises” is conveyed to the purchaser. Minn. Stat. § 580.12 (2012); see also Herber
v. Christopherson, 15 N.W. 676, 677 (Minn. 1883). Furthermore, no party has
discussed whether the Homeowners’ interest is “adverse” to the interest held by
MERS or Aurora for purposes of the quiet-title statute, as Aurora claims essentially
a security interest in the properties and the Homeowners’ complaint concedes that
valid security interests in the properties were created and transferred out of the
5
The Butler plaintiffs sought to quiet title and compel the defendants to prove
their “valid and clear legal title to Plaintiffs’ original promissory note.” Complaint
at 5, Butler, 690 F.3d 959 (No. 11-2653). In contrast, the Homeowners’ quiet-title
claim does not challenge the validity of the mortgages held by Aurora solely by
attacking Aurora’s interest in the underlying promissory note.
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Homeowners’ bundle of property rights. Although we may affirm a dismissal on
grounds not relied upon by the district court, where the parties did not adequately
develop an issue, remanding to allow the district court to address the matter in the
first instance is appropriate. See Reeder v. Kan. City Bd. of Police Com’rs, 733 F.2d
543, 548 (8th Cir. 1984). We leave these and any other issues surrounding the two
remaining quiet-title theories for the district court to address.
III.
The Homeowners request that we alter the dismissal of their remaining claims
to be without prejudice. “A district court does not abuse its discretion in failing to
invite an amended complaint when plaintiff has not moved to amend . . . .” Carlson
v. Hyundai Motor Co., 164 F.3d 1160, 1162 (8th Cir. 1999). Following the dismissal
of their claims, the Homeowners never sought leave to file an amended complaint or
otherwise indicated how they would make the complaint viable. Dismissal with
prejudice is appropriate where a party never “submitted a proposed amended
complaint or clarified what one might have contained.” Pet Quarters, Inc. v.
Depository Trust & Clearing Corp., 559 F.3d 772, 782 (8th Cir. 2009). We find no
basis to conclude an opportunity to amend would be anything but futile.
For the foregoing reasons, we partially reverse the district court’s dismissal of
the quiet-title cause of action, affirm the dismissal of the remaining counts, and
remand for proceedings consistent with this opinion.
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