Ouch v. FNMA , 799 F.3d 62 ( 2015 )

United States Court of Appeals
For the First Circuit
No. 13-1209
HEANG OUCH, et al.,
Plaintiffs, Appellants,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
a/k/a FNMA, a/k/a Fannie Mae, et al.,
Defendants-Appellees.
No. 13-1651
MORCOS H. HANNA, et al.,
Plaintiffs, Appellants,
v.
BAC HOME LOANS SERVICING, LP, et al.,
Defendants-Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Howard, Chief Judge,
Kayatta, Circuit Judge,
and McCafferty,* District Judge.
Keven A. McKenna, with whom Todd S. Dion was on brief, for
appellants.
Lawrence M. Kraus, with whom Geoffrey M. Raux and Foley &
Lardner LLP, were on brief, for Federal National Mortgage
Association, appellee.
Michael S. Kraut, Jeffrey W. Moss, and Morgan Lewis & Bockius
LLP, on brief for U.S. Bank Home Mortgage, U.S. Bank National
Association, and Deutsche Bank National Trust Company, appellees.
David B. Bergman, Elliott C. Mogul, and Arnold & Porter LLP,
on brief for Barclays Capital Real Estate, Inc., appellee.
Maria R. Durant, Collora LLP, J. Kevin Snyder, James M.
Golden, and Dykema, on brief for OneWest Bank, FSB, appellee.
Marissa I. Delinks, Maura K. McKelvey, and Hinshaw &
Culbertson LLP, on brief for Homeward Residential, Inc. f/k/a
American Home Mortgage Servicing, Inc., and Wells Fargo Bank, N.A.,
appellees.
Peter Obstler, and Arnold & Porter LLP, on brief for JPMorgan
Chase Bank, N.A., appellee.
James W. McGarry, Thomas H. Good, and Goodwin Procter LLP, on
brief for Countywide Financial Corporation, Countrywide Home
Loans, Inc., Bank of America, N.A., in its own capacity and as
successor by merger to BAC Home Loans Servicing, LP, and Wells
Fargo Bank, N.A., appellees.
Morgan T. Nickerson, Jeffrey S. Patterson and Nelson Mullins
Riley & Scarborough LLP, on brief for Wells Fargo Bank, N.A.,
America's Servicing Company, and Wachovia Mortgage Federal
National Mortgage Association, appellees.
Bryan A. Fratkin, Jeffrey D. McMahan, Jr., and McGuire Woods
LLP, on brief for Capital One, N.A., appellee.
Debra Bogo-Ernst, Mayer Brown LLP, Amy C. Mariani, and
Fitzhugh & Mariani LLP, on brief for CitiMortgage, Inc., appellee.
Jeremy R. Bombard and Houser & Allison, APC, was on brief for
Ocwen Loan Servicing, LLC, appellee.
August 24, 2015
* Of the District of New Hampshire, sitting by designation.
HOWARD, Chief Judge. The appellants in these
consolidated appeals, Heang Ouch and Morcos Hanna, seek to
represent a putative class of borrowers who have not kept up with
their mortgage loan payments. Because of this delinquency, their
loan servicers made a number of contractually-mandated advances of
funds to the holders of the notes. The borrowers now argue that,
despite their own non-payment, the servicers' actions constituted
payments on the borrowers' debts. Accordingly, the borrowers
insist that their mortgages were not in default and that the
mortgage-holders lacked the power to foreclose. We ultimately
agree with the district court that the servicers' payments were
not made "on behalf of" the borrowers. This conclusion leads us
to affirm the district court's rulings denying an amendment to
Ouch's complaint and dismissing Hanna's complaint with prejudice.
I.
We briefly sketch the facts as drawn from plaintiff
Ouch's proposed third amended complaint, plaintiff Hanna's
complaint, and the documents incorporated therein. See Lister v.
Bank of Am., 790 F.3d 20, 22 (1st Cir. 2015).
In order to obtain loans to purchase property, the
borrowers signed notes and mortgages providing the mortgagees
(i.e., the mortgage-holders) with the power to pursue non-judicial
foreclosure in the event of a default. See Mass. Gen. Laws ch.
244, § 14. To facilitate securitization of the mortgages, a number
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of financial institutions pooled the mortgages together and
transferred them to a variety of trusts. In turn, investors
purchased interests in these trusts in the form of mortgage-backed
securities.
The trustees also entered into contractual agreements
with a range of loan servicers. The servicers operated as the
interface between the borrowers and the trustees. For instance,
the borrowers paid the servicers, who then conveyed that money to
the appropriate trustee. In the event of a borrower's non-payment,
the servicers also agreed to make certain disbursements (dubbed
"delinquency advances") to the trustees.1
Over time, the borrowers failed to make their mortgage
payments. Accordingly, the servicers paid these delinquency
advances to the trustees. The loan servicers also, as agents of
the trustees (i.e., the holders of the mortgages and the associated
notes), initiated foreclosure proceedings against the borrowers.
On behalf of a putative class of similarly situated
borrowers, Ouch brought suit in the District of Massachusetts
against the servicers, the trustees, the financial institutions
1 The mechanics of these advances varied somewhat depending
on whether the Federal National Mortgage Association ("FNMA" or
"Fannie Mae") was involved. In those instances in which Fannie
Mae played a role, a FNMA Trust Agreement applied. In other
instances, a non-FNMA agreement governed. Moreover, where Fannie
Mae was involved, the payments were referred to as "guaranty
payments." As it has no substantive impact in this case, we simply
refer to all of these payments as "delinquency advances."
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involved in the mortgage-backed securities market, and the law
firms representing those institutions that initiated the
foreclosures. Invoking the Massachusetts Uniform Commercial Code
("UCC"), Ouch alleged that the servicers' delinquency advances
constituted a payment of his loan, that he was therefore not in
default, and, accordingly, that the defendants negligently
foreclosed on his property. After twice amending his complaint,
Ouch conceded that his pleadings were still legally deficient. He
therefore sought leave to file a third amended complaint.2 While
that motion was pending, Hanna filed an analogous suit. The court
stayed Hanna's case pending its decision on Ouch's motion.
The district court ultimately dismissed Ouch's second
amended complaint and then denied the motion for leave to file the
third amended complaint. The court reasoned that the proposed
amendments failed to state a valid claim and thus the changes would
have been futile. See Fed. R. Civ. P. 15(a)(2); Abraham v. Woods
Hole Oceanographic Inst., 553 F.3d 114, 117 (1st Cir. 2009). After
that decision, Hanna moved to voluntarily dismiss his complaint
without prejudice. The court, drawing on the reasoning in the
2 The borrowers do not focus on the other counts (or issues)
presented in the proposed third amended complaint. We therefore
bypass any discussion of them.
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Ouch order, dismissed Hanna's complaint with prejudice. See Fed.
R. Civ. P. 41(a)(2).
Ouch timely appealed from the judgment, challenging the
denial of the motion for leave to amend the complaint. Hanna
appealed the dismissal with prejudice. We consolidated the cases
for briefing and argument.
II.
We typically review a district court's decision to deny
a motion to amend a complaint for abuse of discretion. See Smith
v. Jenkins, 732 F.3d 51, 75 (1st Cir. 2013). Here, however, the
district court's decision was grounded on a pure question of law:
whether the amended complaint stated a claim upon which relief
could be granted. See Fed. R. Civ. P. 12(b)(6). We review that
question de novo, see Glassman v. Computervision Corp., 90 F.3d
617, 623 (1st Cir. 1996), and undertake the analysis as guided by
Massachusetts law, see, e.g., Culhane v. Aurora Loan Servs. of
Neb., 708 F.3d 282, 291 (1st Cir. 2013).3
The borrowers' primary contention is that the
delinquency advances constituted payments on their debts such that
3 As noted, the borrowers also challenge the district court's
dismissal of the Hanna case. They do not, however, provide any
independent argument as to why that dismissal with prejudice was
inappropriate. Instead, they entirely tether the claim to their
arguments respecting the denial of Ouch's motion. Our own review
of the Hanna materials does not show a meaningful, substantive
distinction between the two complaints. Our reasoning with respect
to the Ouch case therefore applies with full force to Hanna.
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their mortgages were not in default. Consequently, the borrowers
claim that the trustees (or the servicers as agents of the
trustees) lacked the ability to foreclose on the borrowers' homes.
Nor, according to the borrowers, could the servicers foreclose in
their own right, since they held neither the mortgages nor the
notes. See Eaton v. Fed. Nat'l Mortg. Ass'n, 969 N.E.2d 1118,
1121 (Mass. 2012). Accordingly, the argument runs, the servicers
negligently initiated foreclosure proceedings.
This crafty contention hinges on whether the money that
the servicers paid constituted "payment" on the borrowers'
outstanding debts. The Massachusetts UCC informs that the answer
would be yes if the payments were "made (i) by or on behalf of a
party obliged to pay the instrument, and (ii) to a person entitled
to enforce the instrument [i.e., the mortgagee]." Mass. Gen. Laws
ch. 106, § 3-602 (emphasis added). Whether the servicers paid "on
behalf of" the borrowers, in turn, depends on whether the servicers
acted "with the intention to satisfy the debt." United States v.
Isthmian Steamship Co., 359 U.S. 314, 318-19 (1959); accord 6A
David Frisch, Lawrence Anderson on the Uniform Commercial Code, §
3-603:89 (3d ed.) ("Money received cannot be regarded as payment
in discharge of a note unless the payment was made and received by
the parties with the purpose of constituting payment of the
note."); 60 Am. Jur. 2d Payment § 1 ("Payment requires delivery by
the debtor and acceptance by the creditor, both with common
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purpose."). Indeed, although the borrowers attempt to downplay
the significance of the servicers' intent in making the payments,
the Supreme Court observed long ago that "[w]hether the transfer
of money or other thing shall operate as a payment, is ordinarily
a matter which is determined by the intention of the parties to
the transaction." Luckenbach v. W.J. McCahan Sugar Refining Co.,
248 U.S. 139, 148 (1918) (rejecting the argument that an insurance
company's "loan" to an insured operated as a payment).
The dispositive question then is whether Ouch's proposed
amended complaint, coupled with its incorporated documents,
plausibly suggests that the servicers intended that their "default
advances" relieve the borrowers' debts. Cf. Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 556 (2007). Ouch's proposed amended
complaint includes no allegations supporting such an intent. In
fact, the documents submitted with Ouch's proposed complaint --
most notably, the FNMA Trust Agreement and the GreenPoint Mortgage
Funding Trust 2006-AR3 (an example of a non-FNMA agreement) --
belie any plausible inference that the payments were done with an
intent to pay the borrowers' debt. See Farmers Ins. Exch. v. RNK,
Inc., 632 F.3d 777, 784 (1st Cir. 2011) (noting that under
Massachusetts law the plain language of an agreement "is presumed
to express the intent of the parties").
For example, the FNMA Trust Agreement could not be
clearer on this score. It explicitly states that "[n]othing in
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the Trust documents or the related Servicing Contract will cause
any Holder or Borrower to become a third-party beneficiary of that
Servicing Contract." Indeed, the agreement acknowledges (over a
dozen times) that a borrower's failure to pay the debt constitutes
a "default" on the mortgage. Such plain statements would alone
seem to serve as a death knell for the borrowers' claims. See
Farmers Ins. Exch., 632 F.3d at 784.
But, there is more. The FNMA Trust Agreement also
provides remedies for the borrowers' non-payment. These include:
"having the Direct Servicers . . . pursu[e] a preforeclosure sale
of the related Mortgaged Property or a deed-in-lieu of
foreclosure," or "pursu[e] foreclosure." Affording these remedies
would be curious (perhaps outright bizarre) if the servicers'
payments were intended to eradicate the borrowers' unpaid debt.
In short, nothing that we have found in the FNMA Trust Agreement
supports the borrowers' theory.
The non-FNMA Trust Agreement paints the same picture.
That agreement, too, expressly considers a borrower's non-payment
on the mortgage loan to constitute a default. Moreover, like the
FNMA agreement, the non-FNMA contract provides for a number of
remedies (including foreclosure) to address a borrower's non-
payment. Again, nothing in the non-FNMA document suggests that
the delinquency advances were somehow designed to pay off the
borrowers' debt.
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Given the plain language of these agreements -- coupled
with the absence of any competing factual allegations -- the
parties to the delinquency advances (the loan servicers and the
trustees) unquestionably viewed them as temporary, stop-gap
measures to keep principal and interest flowing to the trustees
and the investors. Indeed, this is the only reading of these
agreements that makes sense, given the realities of the mortgage-
backed securities market and the mortgagees' concomitant need to
keep ancillary fees on the property current. As to Ouch's proposed
amended complaint (and, for the same reasons, as to Hanna's
complaint), it is simply not plausible that the payments were
intended to satisfy the underlying debt. The district court
therefore did not err in concluding that the payments were not
made "on behalf of" the borrowers.4
Given that result, the rest of the borrowers' argument
falls like a house of cards. If the payments were not made on
4 Although their argument is somewhat opaque, the borrowers
also seem to believe that they can succeed under Mass. Gen. Laws
ch. 106 § 3-603, in that the servicers purportedly had "an
obligation" to pay the mortgage notes such that "the effect of
tender" constituted payment on the debt. See id. (setting forth
that "[i]f tender of payment of an obligation to pay an instrument
is made to a person entitled to enforce the instrument, the effect
of tender is governed by principles of law applicable to tender of
payment under a simple contract"). This theory, too, ultimately
turns on whether the servicers entered into a legally-enforceable
arrangement with the intent to pay off the mortgages. As
discussed, no factual allegations in the complaint suggest that
the servicers entered into such an agreement or that they did so
with the requisite intent.
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their behalf, then they were in default. And, with default, comes
the ability for the mortgagees (or their agents) to foreclose on
the borrowers' property.5
III.
Finding the borrowers' arguments to be without merit, we
affirm the district court's denial of the motion to amend the
complaint in Ouch, and we affirm the district court's decision to
dismiss Hanna with prejudice.
5 The borrowers, for the first time on appeal, argue that
the servicers acted as "guarantors" and that the "doctrines of
surety, guaranty, and subrogation control[] over the issues."
Since the borrowers did not present this theory below, it is
waived. See U.S. ex rel. Ge v. Takeda Pharm. Co., 737 F.3d 116,
126 (1st Cir. 2013). It may, in fact, be doubly waived as the
appellants at oral argument came perilously close to affirmatively
abandoning the theory entirely. See, e.g., Fryar v. Curtis, 485
F.3d 179, 183 (1st Cir. 2007).
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