Herbert McFadden v. Federal National Mortgage Ass'n , 525 F. App'x 223 ( 2013 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1125
HERBERT A. MCFADDEN; ROSETTA E. MCFADDEN,
Plaintiffs - Appellants,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION; FLAGSTAR BANK, FSB;
SAMUEL I. WHITE, P.C.,
Defendants - Appellees.
Appeal from the United States District Court for the Western
District of Virginia, at Roanoke. James C. Turk, Senior
District Judge. (7:11-cv-00335-JCT)
Argued: January 30, 2013 Decided: May 20, 2013
Before WILKINSON, KEENAN, and WYNN, Circuit Judges.
Affirmed by unpublished opinion. Judge Keenan wrote the
majority opinion, in which Judge Wilkinson joined. Judge Wynn
wrote a dissenting opinion.
ARGUED: Thomas Dean Domonoske, Harrisonburg, Virginia, for
Appellants. Joseph Samuel Dowdy, NELSON MULLINS RILEY &
SCARBOROUGH, LLP, Raleigh, North Carolina; Ronald James Guillot,
Jr., SAMUEL I. WHITE, PC, Virginia Beach, Virginia, for
Appellees. ON BRIEF: George E. Kostel, NELSON MULLINS RILEY &
SCARBOROUGH, LLP, Washington, D.C., for Appellees Federal
National Mortgage Association and Flagstar Bank, FSB.
Unpublished opinions are not binding precedent in this circuit.
2
BARBARA MILANO KEENAN, Circuit Judge:
Herbert A. McFadden and Rosetta E. McFadden (the McFaddens)
filed a complaint in a Virginia state court against Flagstar
Bank, F.S.B. (Flagstar), Federal National Mortgage Association
(Fannie Mae), and Samuel I. White, P.C. (White, P.C.)
(collectively, the defendants), asserting various claims
relating to the foreclosure and sale of the McFaddens’ home.
After the defendants removed the action to the federal district
court, the McFaddens filed a motion to remand the case to the
state court on the ground that the district court lacked subject
matter jurisdiction. The district court summarily denied the
motion to remand. After a hearing, the court granted the
defendants’ motions to dismiss. Among other things, the court
held that the McFaddens failed to state a claim under Federal
Rule of Civil Procedure 12(b)(6). The McFaddens filed a timely
appeal to this Court.
Upon our review, we hold that the district court did not
err in denying the McFaddens’ motion to remand, because the
court had diversity jurisdiction over the McFaddens’ claims
pursuant to 28 U.S.C. § 1332. We further hold that the district
court did not err in dismissing under Rule 12(b)(6) their claim
to quiet title and their equitable claim to set aside the
foreclosure sale, because those claims lacked a sufficient
factual and legal basis.
3
I.
The McFaddens alleged in their complaint the following
facts, which we accept as true for purposes of this appeal. 1 In
July 2007, the McFaddens obtained a loan from Flagstar for
$116,500, which was secured by a deed of trust on the McFaddens’
home in Pulaski County, Virginia (the property). The terms of
the loan were set forth in a note, in which the McFaddens agreed
to make monthly payments of about $900 for 20 years.
The terms of the note established that Flagstar could
freely transfer the note to a third party without notice to the
McFaddens. The deed of trust similarly provided for the free
transfer of the note and stated that the agreements in the deed
of trust “shall bind . . . and benefit the successors and
assigns” of the lender. The deed of trust named Flagstar as the
lender, and named Mortgage Electronic Registration Systems, Inc.
(MERS) as the beneficiary and “nominee for Lender and Lender’s
successors and assigns.”
At some point before August 2009, Flagstar transferred the
note to Fannie Mae, but retained the obligation to receive the
loan payments and continued to function as the “servicer” on the
loan. After the McFaddens began having trouble making loan
1
We employ this standard because the case was decided on a
motion to dismiss under Rule 12(b)(6). Flood v. New Hanover
Cnty., 125 F.3d 249, 251 (4th Cir. 1997).
4
payments, Flagstar sent them a letter describing the Home
Affordable Modification Program (HAMP), a federal program
designed to help certain homeowners who are financially unable
to meet their current mortgage obligations. See U.S. Dep’t of
the Treasury, Home Affordable Modification Program Guidelines
(Mar. 4, 2009) 2; see also Loan Modification Group, Inc. v. Reed,
694 F.3d 145, 147 (1st Cir. 2012) (describing HAMP). The letter
stated that if the McFaddens qualified under HAMP and complied
with the terms of a “trial period plan,” their loan would be
modified, permitting them to avoid foreclosure.
In response to this letter, the McFaddens submitted
documentation to Flagstar seeking to qualify for a loan
modification, and the application process continued over a
period of many months. According to Flagstar, the process was
delayed due to the McFaddens’ failure to submit all the required
documents. The McFaddens alleged, however, that Flagstar lost
certain documents that they had submitted, and required them to
provide various duplicate items on several occasions. Before
receiving a final decision on their loan modification
application, the McFaddens were notified that because they
2
Available at http://www.treasury.gov/press-center/press-
releases/documents/modification_program_guidelines.pdf.
5
defaulted on the loan, their property would be sold at auction
on March 10, 2011 (the foreclosure sale).
The notice of foreclosure was signed by White, P.C., which
was listed as substitute trustee. Attached to that notice was a
document executed by Flagstar, stating that it was “the present
holder or the authorized agent of the holder of the note secured
by the deed of trust,” and that, as such entity, Flagstar had
appointed White, P.C. as substitute trustee.
Upon receiving the notice of foreclosure, the McFaddens
contacted Flagstar, and a Flagstar representative allegedly
informed them orally that “their loan modification was in
process, and that no foreclosure would occur.” However, the
foreclosure sale proceeded in accordance with the terms
contained in the notice. Flagstar was the highest bidder at the
sale, and purchased the property for $123,009.
Flagstar assigned its rights in the property to Fannie Mae,
after which White, P.C. executed and delivered a deed of trust
transferring the property to Fannie Mae (the foreclosure deed).
About one week after the foreclosure sale, the McFaddens
received written notice from Flagstar that their loan
modification application had been denied.
Fannie Mae filed an unlawful detainer action in Virginia
state court against the McFaddens, seeking to evict them and to
take possession of the property. In response, the McFaddens
6
filed the present action in Virginia state court against the
defendants asserting six claims, including the quiet title claim
and a claim for equitable relief to set aside the foreclosure
sale. The McFaddens also asserted violations of the Virginia
Consumer Protection Act (VCPA) against White, P.C. 3 The
defendants removed the case to the federal district court, on
the basis that the court had federal question jurisdiction under
28 U.S.C. § 1331. According to the defendants, the McFaddens’
claims were governed by the Home Owners Loan Act (HOLA), 12
U.S.C. §§ 1461-1470.
The McFaddens filed a motion to remand, contending that the
district court lacked subject matter jurisdiction because the
claims presented only questions of state law. In opposition to
the motion to remand, Flagstar and Fannie Mae argued that in
addition to federal question jurisdiction, the district court
had diversity jurisdiction over the action in accordance with 28
U.S.C. § 1332. Flagstar and Fannie Mae contended that even
though both the McFaddens and one defendant, White, P.C., were
citizens of Virginia, there was complete diversity of the
parties because the McFaddens lacked any possible cause of
action against White, P.C. and, therefore, under the doctrine of
3
The McFaddens also asserted claims of negligence against
Flagstar and fraudulent conduct against Flagstar and Fannie Mae.
7
fraudulent joinder, White, P.C.’s citizenship should not be
considered.
The district court summarily denied the McFaddens’ motion
to remand, and did not state on which basis the court was
exercising jurisdiction. The court proceeded to consider the
defendants’ motions to dismiss the case. After a hearing, the
district court granted the motions to dismiss, concluding that
HOLA preempted the McFaddens’ claims and, alternatively, that
the McFaddens’ complaint failed to state a claim under Rule
12(b)(6). The McFaddens timely filed the present appeal.
II.
A.
The McFaddens contend that the district court lacked
subject matter jurisdiction over their state law claims. We
review de novo questions of subject matter jurisdiction,
including questions related to the propriety of removal.
Moffitt v. Residential Funding Co., LLC, 604 F.3d 156, 159 (4th
Cir. 2010). Because of concerns involving principles of
federalism, this Court strictly construes a district court’s
jurisdiction when considering an issue of removal. Mulcahey v.
Columbia Organic Chems. Co., Inc., 29 F.3d 148, 151 (4th Cir.
1994).
8
Under 28 U.S.C. § 1441, “any civil action brought in a
State court of which the district courts of the United States
have original jurisdiction, may be removed by the defendant” to
the appropriate district court. 28 U.S.C. § 1441(a). The
defendants argue that the district court had both federal
question jurisdiction and diversity jurisdiction over the
McFaddens’ claims.
We first consider whether the district court had
jurisdiction over the removed action on the basis of diversity
of citizenship of the parties. To invoke the district court’s
diversity jurisdiction, the parties must be completely diverse,
meaning that none of the plaintiffs shares citizenship with any
of the defendants, and the amount in controversy must exceed the
jurisdictional threshold. 28 U.S.C. § 1332; Mayes v. Rapoport,
198 F.3d 457, 461 (4th Cir. 1999); Owens-Illinois, Inc. v.
Meade, 186 F.3d 435, 440 (4th Cir. 1999). In the present case,
the parties do not dispute that the required amount in
controversy is satisfied. Instead, they focus their arguments
on the question whether the parties are completely diverse,
given the fact that the McFaddens and White, P.C. are both
citizens of Virginia.
The McFaddens assert that because White, P.C. is a
defendant in their quiet title, equitable, and VCPA claims, the
parties to the lawsuit do not meet the requirement of complete
9
diversity. In response, the defendants contend that White, P.C.
was a fraudulently joined party, because the McFaddens lacked
any possible cause of action against White, P.C. Therefore, the
defendants submit that the citizenship of White, P.C. was not a
barrier to diversity jurisdiction in this case. See Hartley v.
CSX Transp. Inc., 187 F.3d 422, 424 (4th Cir. 1999) (explaining
that when a party is fraudulently joined, courts disregard that
party’s citizenship for jurisdictional purposes). We agree with
the defendants’ argument that the parties were completely
diverse.
The doctrine of fraudulent joinder permits a federal court
to “disregard, for jurisdictional purposes,” the citizenship of
non-diverse defendants. Mayes, 198 F.3d at 461. A defendant
alleging fraudulent joinder must show either that: (1) “there is
no possibility that the plaintiff would be able to establish a
cause of action” against the non-diverse party, or (2) there has
been “outright fraud in the plaintiff’s pleading of
jurisdictional facts.” Hartley, 187 F.3d at 424 (internal
quotations, emphasis, and citation omitted).
In the present case, the defendants maintain that the
citizenship of White, P.C. should be disregarded for
jurisdictional purposes because the McFaddens lacked any
possible cause of action against White, P.C., the non-diverse
party. Thus, as applied here, use of the term “fraudulent
10
joinder” effectively is a misnomer, because application of the
doctrine under the present facts “does not reflect on the
integrity” of the plaintiff, AIDS Counseling & Testing Ctrs. v.
Grp. W Television, Inc., 903 F.2d 1000, 1003 (4th Cir. 1990),
but merely addresses the adequacy of the plaintiffs’ pleadings.
As a preliminary matter, we consider the McFaddens’
contention that we should refrain from considering whether
White, P.C. was a fraudulently joined party, and instead should
permit the district court to consider that question in the first
instance. We decline this request because, as a court of
limited jurisdiction, we have an obligation to determine our own
jurisdiction, as well as the jurisdiction of the district court.
Stephens v. Cnty. of Albemarle, 524 F.3d 485, 490 (4th Cir.
2008) (citing Bender v. Williamsport Area Sch. Dist., 475 U.S.
534, 541 (1986)). Thus, we will consider directly the issue of
subject matter jurisdiction in this case. See Leimbach v.
Allen, 976 F.2d 912, 916 (4th Cir. 1992); see also In re
Kirkland, 600 F.3d 310, 314-15 (4th Cir. 2010) (“Subject matter
jurisdiction cannot be forfeited or waived” and can be raised
sua sponte by the court) (citation omitted).
Additionally, we observe that the argument regarding
fraudulent joinder was raised in the district court in the
pleading filed by Flagstar and Fannie Mae opposing remand to the
state court. The district court’s failure to address that
11
argument does not preclude this Court from considering it. Cf.
Eisenberg v. Wachovia Bank, N.A., 301 F.3d 220, 222 (4th Cir.
2002) (explaining that this Court can affirm a judgment on any
basis supported by the record). Moreover, on the present
record, further development of the facts would not aid our
analysis. Therefore, we proceed to consider the question
whether the fraudulent joinder doctrine is applicable, thereby
permitting the district court to exercise diversity jurisdiction
over the case. 4 In conducting this analysis, we resolve all
issues of law and fact in the plaintiff’s favor. Hartley, 187
F.3d at 424.
As noted above, in the McFaddens’ complaint, they asserted
claims against White, P.C. in three different counts, namely,
the quiet title claim, the claim for equitable relief to set
4
The dissenting opinion cites In re Blackwater Security
Consulting, LLC, 460 F.3d 576 (4th Cir. 2006) to support the
position that we should not consider the defendants’ diversity
jurisdiction and fraudulent joinder arguments. Post at 26.
However, the decision in Blackwater is inapposite. In contrast
to the present case, the district court in Blackwater remanded
the removed action to state court for want of jurisdiction. 460
F.3d at 582. On appeal, we held that 28 U.S.C. § 1447(d) barred
our review of the remand order. Id. at 595. In a footnote, we
explained our refusal to consider the appellant’s argument that
the court had jurisdiction because appellant was a federal
officer, stating that the argument had not been raised in the
district court. Id. at 590 n.8. Here, the issues of fraudulent
joinder and diversity jurisdiction were raised in the district
court, and the district court exercised its jurisdiction over
the removed action without articulating a basis for
jurisdiction.
12
aside the foreclosure sale, and the VCPA claim. 5 We address each
of these claims in turn.
An action to quiet title is “based on the premise that a
person with good title to certain real or personal property
should not be subjected to various future claims against that
title.” Maine v. Adams, 672 S.E.2d 862, 866 (Va. 2009). In
such an action, a plaintiff seeks to compel an “adverse claimant
to prove a competing ownership claim or forever be barred from
asserting it.” Id.In their quiet title claim, the McFaddens asserted that the
foreclosure sale was unlawful, because the deed of trust and the
appointment of White, P.C. as substitute trustee were invalid.
By seeking to void the foreclosure sale, the McFaddens impliedly
alleged that neither the purchaser of the property at auction,
Flagstar, nor its assignee, Fannie Mae, held good title to the
property. Accordingly, in this claim, the McFaddens contended
that they remained the true owners of the property.
The McFaddens have not alleged, nor could they, that White,
P.C. had any basis for asserting a competing ownership claim to
the property. Under Virginia law, a trustee executing a
5
Our determination whether there is any possibility that
the McFaddens would be able to establish a right to relief under
these state law claims against White, P.C. is informed by
Virginia law. See generally Erie R.R. Co. v. Tompkins, 304 U.S.
64 (1938).
13
foreclosure takes possession of the property in order to sell
it. Va. Code § 55-59(7). As trustee, White, P.C. was divested
of any interest in the property after the foreclosure sale when
White, P.C. delivered the foreclosure deed conveying the
property to Fannie Mae. See Sovran Bank, N.A. v. Creative
Indus., Inc., 425 S.E.2d 504, 505 n.2 (Va. 1993) (a “trustee
under a deed of trust retains legal title to the property until
the deed is delivered”). Thus, the McFaddens’ sole basis for
asserting their quiet title claim against White, P.C. rested on
their assertion that, under the deed of trust, White, P.C. could
not have taken legal possession of the property and transferred
it to the auction purchaser Flagstar, or to its assignee, Fannie
Mae.
We conclude that there was no possibility that the
McFaddens could have prevailed on this claim against White, P.C.
The provision of the deed of trust permitting the appointment of
a substitute trustee conformed with the requirements of Virginia
Code Section 55-59(9). Under that statute, the party secured by
the deed of trust or the holder of more than fifty percent of
the obligations secured thereby has authority to appoint a
substitute trustee. Id.Flagstar was not prohibited from appointing a substitute
trustee simply because Flagstar had assigned the loan to Fannie
Mae. Such a transfer, which is permitted under the plain
14
language of the deed of trust and the note, did not impede
Flagstar’s ability to serve as the new lender’s agent. See
Horvath v. Bank of N.Y., N.A., 641 F.3d 617, 622 (4th Cir. 2011)
(explaining that entity other than lender had authority to
foreclose under Virginia law despite transfer of loan, based on
entity’s status as note holder). Therefore, White, P.C.
properly was appointed under the deed of trust, and had
authority to act as substitute trustee and to perform the
attendant duties authorized by Virginia law. See Va. Code § 55-
59(7), (9).
We next conclude that the McFaddens lacked any possibility
of prevailing on their claim for equitable relief to set aside
the foreclosure sale, which they alleged as an alternative to
the quiet title claim. In the allegations specifically
supporting this claim for equitable relief, the only defendant
referenced was Flagstar. The McFaddens asserted that Flagstar
made numerous misrepresentations regarding the loan modification
program and application process, including that the pending loan
modification application would prevent foreclosure of the
property. These allegations, which did not mention White, P.C.
or its role in the foreclosure sale, plainly did not state a
claim against White, P.C., nor can we discern any possible cause
of action against White, P.C. related to this claim.
15
Finally, we hold that the McFaddens lacked any possibility
of prevailing on their VCPA claim against White, P.C., which was
the sole defendant named in this claim. In the VCPA claim, the
McFaddens alleged that under Virginia Code Section 59.1-198,
White, P.C. was a “supplier,” and that the loan and related
foreclosure sale were “part” of a “consumer transaction.” 6
The McFaddens asserted two bases for their allegation that
White, P.C. violated the VCPA. First, they asserted that White,
P.C. misrepresented that it had been properly appointed as
substitute trustee, because Flagstar was not authorized to make
that appointment after it assigned the note to Fannie Mae.
Second, the McFaddens alleged that White, P.C. misrepresented
that it would serve as a fiduciary to the McFaddens, and that
White, P.C. breached its fiduciary duties. We address each
asserted VCPA violation in turn.
First, the VCPA is inapplicable to any “aspect of a
consumer transaction” that is “authorized” under Virginia law.
Va. Code § 59.1-199(A). As we already have stated in our above
discussion of the McFaddens’ quiet title claim, the appointment
6
The purpose of the VCPA is to “promote fair and ethical
standards of dealings between suppliers and the consuming
public.” Va. Code § 59.1-197. We assume without deciding, for
purposes of this appeal, that White, P.C. could qualify as a
“supplier” engaged in a “consumer transaction” by conducting the
foreclosure sale.
16
of substitute trustees and the process for such appointments is
set forth in Virginia Code Section 55-59(9), which authorizes
the party secured by the deed of trust or the holder of more
than fifty percent of the obligations secured thereby to appoint
a substitute trustee. Id. As we further explained above, the
appointment of White, P.C. as substitute trustee under the deed
of trust met the requirements of Virginia law. See id.
Therefore, because the appointment of White, P.C. as substitute
trustee was valid under Virginia law, the VCPA did not provide a
basis in law for this component of the McFaddens’ VCPA claim.
We next consider the second component of the McFaddens’
VCPA claim, namely, that White, P.C. misrepresented that it
would act as a fiduciary toward the McFaddens, and that White,
P.C. breached its fiduciary duties. However, under Virginia
law, the duties of a trustee appointed under a deed of trust are
limited and defined by the instrument under which the trustee
acts. Warner v. Clementson, 492 S.E.2d 655, 657 (Va. 1997).
The McFaddens have not alleged that White, P.C. owed them such
unspecified fiduciary duties under the terms of the deed of
trust, and the VCPA does not provide an independent basis for
maintaining a claim based on this vague, unsupported allegation
regarding White, P.C. Thus, we hold that the McFaddens lacked
any possibility of establishing their claim under the VCPA
against White, P.C., because they have presented neither a legal
17
nor a factual foundation that would give rise to any such right
of recovery.
Because we conclude that the McFaddens lacked any
possibility of prevailing on their three claims against White,
P.C., we hold that, under the fraudulent joinder doctrine, the
citizenship of White, P.C. should not be considered for
jurisdictional purposes. See Mayes, 198 F.3d at 461.
Therefore, we hold that the district court did not err in
denying the McFaddens’ motion to remand the action to state
court, because the remaining parties were completely diverse. 7
See 28 U.S.C. § 1332(a).
B.
The McFaddens also appeal the district court’s order
dismissing two of their state law claims discussed above,
namely, their quiet title claim and their claim for equitable
relief to set aside the foreclosure sale. 8 The McFaddens contend
that the district court erred in concluding that these claims
were preempted by HOLA, and, alternatively, in concluding that
these claims failed to state a claim under Rule 12(b)(6). We
7
Based on this conclusion, we need not consider the
defendants’ additional argument that the district court had
federal question jurisdiction over the action.
8
The McFaddens do not challenge the dismissal of their
remaining claims asserted in the complaint.
18
focus our analysis on the court’s dismissal of the claims under
Rule 12(b)(6).
We review de novo the district court’s dismissal of a
complaint for failure to state a claim. Walters v. McMahen, 684
F.3d 435, 439 (4th Cir. 2012). To survive a motion to dismiss
under Rule 12(b)(6), a plaintiff must state a plausible claim
for relief and allege sufficient facts to establish the elements
of the claim. Id. (citations omitted).
As set forth above, in the McFaddens’ quiet title claim,
they challenged the validity of the deed of trust and of the
appointment of White, P.C. as substitute trustee. They first
alleged that the deed of trust improperly named MERS as the
beneficiary, when the true beneficiary of the deed of trust was
the lender. This contention is without merit, however, because
the plain language of the deed of trust sets forth that MERS, as
beneficiary, is “acting solely as a nominee for Lender and
Lender’s successors and assigns.” As we explained in our
decision in Horvath, naming MERS as the beneficiary was valid
and served merely to establish a consistent beneficiary that
enhanced “the ease with which the deed of trust could be
transferred.” 641 F.3d at 620.
The McFaddens additionally alleged in their quiet title
claim that the deed of trust, and the appointment of White, P.C.
as substitute trustee, were invalid. As we explained above,
19
however, those claims are groundless because the deed of trust
providing for the appointment of a substitute trustee, and the
appointment of White, P.C. in that capacity, conformed with the
requirements of Virginia law. See Va. Code § 55-59(9).
Because of their inability to demonstrate that the deed of
trust and the document appointing White, P.C. as the substitute
trustee were invalid instruments, the McFaddens have failed to
state a valid claim of ownership in the property. See Adams,
672 S.E.2d at 866. Therefore, we conclude that the district
court properly dismissed their quiet title claim under Rule
12(b)(6).
In the McFaddens’ claim for equitable relief to set aside
the foreclosure sale, they alleged that Flagstar made the
following misrepresentations: (1) that Flagstar would provide
them with a loan modification if they met certain criteria; (2)
that the McFaddens’ loan application materials were incomplete;
and (3) that the McFaddens should disregard the notice of
foreclosure due to their pending loan modification request. In
essence, the McFaddens asserted that they relied on oral
promises by Flagstar that it would modify the terms of the loan
and that the foreclosure and sale of the property, of which the
McFaddens were notified in writing, would not take place.
While any such promises certainly would have been improper,
such alleged oral promises cannot serve as a basis to set aside
20
a foreclosure sale of real property. Under the statute of
frauds, as provided under Virginia law, oral promises and
contracts affecting real property are not enforceable. Va. Code
§ 11-2.
Moreover, the McFaddens do not dispute the fact that they
defaulted on their loan. The terms of the deed of trust
remained in effect and authorized the foreclosure and sale of
the property. Therefore, we conclude that the McFaddens failed
to state a claim for equitable relief to set aside the
foreclosure sale, and that the district court did not err in
dismissing this claim under Rule 12(b)(6). 9
III.
In sum, based on our conclusion that the district court had
diversity jurisdiction over the removed action, and that the
court correctly determined that the quiet title claim and the
claim for equitable relief to set aside the foreclosure sale
were subject to dismissal under Rule 12(b)(6), we affirm the
district court’s judgment.
AFFIRMED
9
Based on this conclusion, we need not consider the
district court’s alternative basis for dismissal of these
claims, relating to preemption under HOLA.
21
WYNN, Circuit Judge, dissenting:
Plaintiffs Herbert and Rosetta McFadden filed state-law
claims in a state court. Only one of the three named
defendants, Flagstar Bank, FSB, took action to remove the case
from state court to federal court. And it did so on only one
ground: purported federal question jurisdiction.
On appeal, Defendant Samuel I. White, P.C. (“White”)
argued, for the first time ever, that even in the absence of
federal question jurisdiction, it was fraudulently joined as a
defendant and thus diversity jurisdiction also exists. Neither
Flagstar Bank nor Federal National Mortgage Association (“Fannie
Mae”) advanced this argument in their jointly-filed brief.
Nevertheless, on appeal, this Court ignores the stated
ground for removal—federal question jurisdiction—and “hold[s]
that the district court did not err in denying the McFaddens’
motion to remand, because the court had diversity jurisdiction
over the McFaddens’ claims . . . .” In short, the majority
bases federal jurisdiction on a ground that Defendants failed to
properly preserve. With this, I cannot agree. Because I
believe that the McFaddens’ state-law claims should be sent back
to state court, I respectfully dissent.
22
I.
Herbert and Rosetta McFadden went to state court, with
state-law claims against Fannie Mae, Flagstar Bank, and White.
The McFaddens alleged that they applied for a loan modification
for their home mortgage, but that Flagstar Bank repeatedly lost
their modification materials, stymying the process. The
McFaddens alleged that they received a foreclosure notice but
that Flagstar Bank affirmatively told them “not to worry,” that
their loan modification was “in process,” and that “no
foreclosure would occur” while that process was ongoing. J.A.
10. Instead, however, the McFaddens’ home was foreclosed upon,
allegedly improperly by White, with Flagstar Bank itself the
high bidder at the foreclosure sale. The McFaddens, in turn,
brought claims to quiet title, to set aside foreclosure, and for
fraud, breach of contract, negligence, and violation of
Virginia’s Consumer Protection Act in the Circuit Court for the
County of Pulaski.
The sole party to file a notice of removal was Flagstar
Bank. 1 Its lone reason: federal question jurisdiction. Flagstar
Bank claimed that the McFaddens’ state-law claims were
1
Neither Fannie Mae nor White joined the notice of removal
or filed its own removal papers. Flagstar Bank’s notice of
removal simply alleges, “upon information and belief, [that]
both . . . consent to the removal of this action.”
23
completely preempted or, alternatively, presented a substantial
federal question such that they were removable to federal court.
Nowhere in its notice of removal did Flagstar Bank even suggest
that the McFaddens’ complaint was removable on diversity grounds
due to alleged fraudulent joinder. The only place Flagstar
Bank, then along with Fannie Mae, suggested that the McFaddens
had fraudulently joined White was in the final two paragraphs of
the 15-page brief in opposition to the McFaddens’ motion to
remand the matter to state court. Perhaps realizing that their
belated and cursory treatment of this issue below was
insufficient to preserve it, Flagstar Bank and Fannie Mae made
not a single mention of this purported basis for removal in
their appellee brief. Indeed, as this panel noted at oral
argument, Flagstar Bank’s and Fannie Mae’s appellee brief failed
to meaningfully argue anything beyond complete preemption as a
basis for federal jurisdiction.
Meanwhile, White, the allegedly fraudulently joined
defendant, never so much as hinted at this argument until the
case reached this Court. Indeed, at oral argument, White
plainly admitted that it should have raised the fraudulent
joinder issue earlier yet inexplicably failed to do so.
24
II.
It is axiomatic that federal courts are courts of limited
jurisdiction. Kokkonen v. Guardian Life Ins. Co. of Am., 511
U.S. 375, 377 (1994). Accordingly, “[w]e presume that a cause
lies outside this limited jurisdiction, . . . and the burden of
establishing the contrary rests upon the party asserting
jurisdiction.” Barbour v. Int’l Union, 640 F.3d 599, 605 (4th
Cir. 2011) (en banc) (quotation marks omitted).
“Removal statutes, in particular, must be strictly
construed, inasmuch as the removal of cases from state to
federal court raises significant federalism concerns.” Id. See
also Lontz v. Tharp, 413 F.3d 435, 440 (4th Cir. 2005)
(Wilkinson, J.) (“not[ing] our obligation ‘to construe removal
jurisdiction strictly because of the ‘significant federalism
concerns’ implicated’ by it”). In turn, any doubts about the
propriety of removal should be resolved against the federal
forum and in favor of remanding to state court. Dixon v. Coburg
Dairy, Inc., 369 F.3d 811, 816 (4th Cir. 2004) (en banc).
Against this backdrop, the statute governing removal explicitly
requires that defendants file and serve a notice containing “a
short and plain statement of the grounds for removal” within
thirty days of a complaint’s service. 28 U.S.C. § 1446(a).
While a defendant may amend freely during the 30-day period in
which notice of removal must be filed and may be allowed to
25
correct defective allegations thereafter, a defendant may “not
[] add a new basis for removal jurisdiction.” 16 Moore’s
Federal Practice § 107.30[2][b] (3d ed. 2012). Put differently,
“defendants may not add completely new grounds for removal or
furnish missing allegations, even if the court rejects the
first-proffered basis of removal, and the court will not, on its
own motion, retain jurisdiction on the basis of a ground that is
present but that defendants have not relied upon.” 14C Wright &
Miller Federal Practice & Procedure, Jurisdiction & Related
Matters § 3733 (4th ed. 2012).
Accordingly, in In re Blackwater Security Consulting, LLC,
this Court refused to deem a notice of removal amended to add a
basis for federal jurisdiction not pled below. 460 F.3d 576,
590 n.8 (4th Cir. 2006). District courts throughout this
Circuit have similarly forbidden defendants from “attempt[ing]
to amend [their] Notice[s] of Removal” via memoranda in
opposition to motions to remand, holding that “[a] defendant may
not use a memorandum to attempt to amend his notice of removal
to add a basis for removal[,]” and making plain that new bases
not timely asserted in the removal notice will be rejected.
UMLIC Consolidated, Inc. v. Spectrum Fin. Servs. Corp., 665 F.
Supp. 2d 528, 533 (W.D.N.C. 2009) (ordering remand to state
court, holding that diversity jurisdiction was lacking, and
rejecting defendant’s attempt to amend its removal notice after
26
expiration of the 30-day removal period with arguments in remand
opposition brief that a named party was not a real party in
interest and that its citizenship should be disregarded). See
also, e.g., Phillips v. BJ’s Wholesale Club, Inc., 591 F. Supp.
2d 822 (E.D. Va. 2008) (remanding to state court for lack of
diversity jurisdiction, holding that diversity jurisdiction did
not exist where removal notice alleged nothing about fraudulent
joinder, and failure to timely raise the issue, asserted for the
first time in response to a motion to remand, was not a mere
technical defect that warranted leave to amend removal notice
beyond the 30-day time limit); Tincher v. Ins. Co. of Penn., 268
F. Supp. 2d 666 (E.D. Va. 2003) (remanding and denying motion to
amend removal notice to allege fraudulent joinder where no
allegation of fraudulent joinder was made in notice and
defendant did not raise the issue until its response to
plaintiff’s motion to remand); Castle v. Laurel Creek Co., Inc.,
848 F. Supp. 62, 64 (S.D. W.Va. 1994) (remanding to state court
and denying belated attempt to add fraudulent joinder allegation
to notice of removal); Barnhill v. Ins. Co. of N. Am., 130
F.R.D. 46, 51 (D.S.C. 1990) (Hamilton, J.) (remanding to state
court and noting that “the overwhelming majority of courts allow
amendment after expiration of the statutory period for removal
only for the purpose of setting forth more specifically each
ground for removal which had been imperfectly set forth in the
27
original petition” but “deny leave to amend to supply missing
allegations or to supply new allegations”).
As then-District Court Judge Hamilton underscored in
Barnhill, “a number of compelling policy considerations . . .
require this court to apply a very restrictive view of
amendment-at least after the statutory period for removal . . .
has expired.” 130 F.R.D. at 50. Those considerations include:
“preventing federal court infringement upon rightful
independence and sovereignty of state courts[;]” “reducing
uncertainty as to the court’s jurisdiction in the marginal
cases, which a more liberal construction of the removal statute
would promote[;]” “allowing amendment of the notice of removal .
. . after the thirty day time limit for removal specified . . .
would ‘substantially eviscerate’ the specific time provision
enacted by Congress[;]” and “conceding that the traditional
justification for diversity jurisdiction-state court hostility
toward nonresident defendants-has been significantly reduced
since the time diversity jurisdiction was created[.]” Id. at
50-51.
Turning to the case at hand, it is clear that not one of
the three named defendants raised fraudulent joinder as a basis
for federal jurisdiction in the requisite removal papers. Nor
did any of the three named defendants at any time move to amend
the notice of removal to add any such allegations. Instead,
28
White, the only defendant to argue diversity in its brief to
this Court, plainly admitted that in doing so, it was, for the
first time ever, raising fraudulent joinder and diversity
jurisdiction. Flagstar Bank and Fannie Mae raised fraudulent
joinder and diversity jurisdiction below only as a fleeting
alternative argument in their opposition to the McFaddens’
motion to remand. And before this Court, they argued fraudulent
joinder and diversity jurisdiction not once in their brief, and
only half-heartedly in oral argument, when prompted to do so by
this panel.
As noted during oral argument, where substantial effort has
been expended, courts may view removal defects through a
different lens. Indeed, the Supreme Court instructed us to do
so in Caterpillar Inc. v. Lewis, 519 U.S. 61 (1996), holding
that a district court’s failure to remand a case improperly
removed on diversity grounds was not fatal to the ensuing
adjudication if federal jurisdictional requirements were met
when trial occurred and judgment was entered. Notably, however,
the Supreme Court emphasized that “[o]nce a diversity case has
been tried in federal court, with rules of decision supplied by
state law . . ., considerations of finality, efficiency, and
economy become overwhelming.” Id. at 75 (emphasis added).
29
In Aqualon Co. v. Mac Equipment, Inc., this Court extended
the Caterpillar rationale to dispositive motions such as summary
judgment, stating:
Where a matter has proceeded to judgment on the merits
and principles of federal jurisdiction and fairness to
parties remain uncompromised, to disturb the judgment
on the basis of a defect in the initial removal would
be a waste of judicial resources. Although the
interest in judicial economy is most pressing where an
action has proceeded to trial, we feel that the same
considerations are applicable to summary judgment.
149 F.3d 262, 264-65 (4th Cir. 1998).
No such compelling judicial economy or efficiency arguments
exist here. This case was pending before the district court for
less than a half year prior to its dismissal, Defendants had not
even answered Plaintiffs’ complaint, and no discovery had been
undertaken, nor anything else of substance accomplished beyond
summarily denying remand in an order devoid of any analysis and
granting Defendants’ motions to dismiss. On this record, there
are very serious federalism implications of wresting this state-
law complaint from state court, overlooking the clear pleadings
failures of well-represented defendants, and ruling for the
first time on appeal on the unpreserved fraudulent joinder and
diversity issues.
30
Nor have Defendants presented any other convincing basis
for maintaining this case in federal court. 2 Flagstar Bank and
Fannie Mae concededly put their eggs in the complete preemption
basket. Complete preemption is an exception to the well-pleaded
complaint rule dictating that the basis for a federal district
court’s removal jurisdiction must appear on the face of a
plaintiff’s complaint. The Supreme Court has read complete
preemption into statutory schemes in only three contexts:
Section 301 of the Labor and Management Relations Act (29 U.S.C.
§ 185); Section 502 of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. § 1132); and Sections 85 and 86 of the
National Bank Act (12 U.S.C. §§ 85, 86). Beneficial Nat’l Bank
v. Anderson, 539 U.S. 1, 6-11 (2003). I cannot imagine that it
would find a fourth in the circumstances of this case.
While neither the Supreme Court nor this Court has
addressed whether HOLA completely preempts state law such that
it coverts exclusively state-law claims into a federal
complaint, a number of district courts have held that it does
not. For example, in McKenzie v. Ocwen Federal Bank, 306 F.
2The federal question basis set forth in the notice of
removal presents a thorny issue. By reaching beyond Defendants’
preserved basis for removal to get to diversity jurisdiction,
this Court avoids the first-impression issue of whether HOLA
completely preempts state law such that it coverts exclusively
state-law claims into a federal complaint.
31
Supp. 2d 543 (D. Md. 2004), the district court held that HOLA
did not completely preempt the borrowers’ state-law claims
against the defendant national bank for charging inspection fees
prohibited by state law, and thus did not justify removal of the
case to federal court. The court noted that the HOLA provisions
on which the defendant’s complete preemption argument was based
do not provide an exclusive cause of action. Id. at 546.
Further, the court ruled that no substantial federal question
existed and that that issue boiled down to a preemption defense—
which could not serve as a basis for removal. Id. at 547. The
court therefore remanded.
It seems self-evident that HOLA does not completely preempt
all state-law claims, including claims grounded in fraud, such
as the McFaddens’. This is because the HOLA preemption
regulation includes a savings clause expressly exempting certain
state-law claims from HOLA’s preemptive scope. 12 C.F.R. §
560.2(c). This Court’s recent opinion in McCauley v. Home Loan
Investment Bank, FSB, underscores the limited nature of HOLA
preemption:
OTS “does not intend to preempt state laws that
establish the basic norms that undergird commercial
transactions,” and “[a]ccordingly, in § 560.2(c), the
OTS has identified certain categories of state law
that are not preempted.” OTS Op. Letter, Preemption
of State Laws Applicable to Credit Card Transactions,
1996 WL 767462, at *5 (Dec. 24, 1996). Tort law is
one of these categories. See 12 C.F.R. § 560.2(c);
see also Lending & Investment, 61 Fed. Reg. at 50966
32
(“OTS wants to make clear that it does not intend to
preempt basic state laws such as state uniform
commercial codes and state laws governing real
property, contracts, torts, and crimes.”).
Determining that the tort of fraud falls within the
scope of § 560.2 would preclude fundamental state
regulation of deceptive practices in which
unscrupulous savings and loan associations might
engage. Such an interpretation would contravene the
intent of OTS, whose “assertion of plenary regulatory
authority does not deprive persons harmed by the
wrongful acts of savings and loan associations of
their basic state common-law-type remedies.” Ocwen,
491 F.3d at 643.
__ F.3d __, 2013 WL 1189292, at *5 (4th Cir. 2013).
At the very least, because “we must construe removal
strictly [and] reasonable doubts must be resolved against the
complete preemption basis for it,” Lontz, 413 F.3d at 441(Wilkinson, J.), Defendants should not be allowed to force the
McFaddens to litigate their state claims in federal court on the
basis of purported complete preemption.
Finally, at the end of their removal discussion in their
brief, Defendants touched on the substantial federal question
doctrine. “Under the substantial federal question doctrine, a
defendant seeking to remove a case in which state law creates
the plaintiff’s cause of action must establish two elements: (1)
that the plaintiff’s right to relief necessarily depends on a
question of federal law, and (2) that the question of federal
law is substantial. If the defendant fails to establish either
of these elements, the claim does not arise under federal law
33
pursuant to the substantial federal question doctrine, and
removal cannot be justified under this doctrine.” Pinney v.
Nokia, Inc., 402 F.3d 430, 442 (4th Cir. 2005) (quotation marks
and citation omitted). See also Grable & Sons Metal Prods.,
Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) (instructing
courts to analyze whether the federal issue is necessary,
disputed, and substantial, and whether the federal court’s
accepting jurisdiction would disrupt the balance between state
and federal judicial responsibilities).
Here, Flagstar Bank and Fannie Mae have failed to meet
their burden. Flagstar Bank and Fannie Mae assert, for example,
that “the McFaddens’ fraud and other state claims require an
analysis of whether Flagstar complied” with federal law.
Appellees’ Br. at 25. Yet this Court’s recent McCauley opinion
belies that assertion. Similarly, Flagstar Bank and Fannie Mae
sweepingly claim that “[b]ecause the McFaddens allege that
Flagstar fraudulently handled their loan modification, the
alleged misrepresentation was made in connection with the
servicing of a loan. Loan servicing falls within the express
preemption provision of § 560.2(b)(10), thus the district court
possessed subject matter jurisdiction . . . .” Appellees’ Br.
at 27. It clearly cannot be that any act occurring “in
connection with” a loan is preempted by HOLA. And we recently
34
made plain in McCauley that any assertion to the contrary flies
in the face of the law of this Circuit.
In sum, Defendants’ generalized assertions and
(mis)characterizations of the McFaddens’ claims fail to
demonstrate that those state-law claims necessarily depend on
questions of federal law so disputed and so substantial that
they warrant wresting the state-law complaint from the state
court in which it was filed. Further, because Defendants fail
to meet their burden as to complete preemption and substantial
question jurisdiction, and because they failed to allege
diversity jurisdiction based on fraudulent joinder in their
notice of removal and the circumstances here do not warrant
looking the other way, they should not have been allowed to
remove this case to federal court. Accordingly, the district
court and this Court should have remanded this matter back to
state court—a more than adequate forum in which Defendants would
be free to assert their preemption and other defenses. For
these reasons, I respectfully dissent.
35