Reusser v. Wachovia Bank, N.A.

• Decision Date: 08 May 2008
• Docket Number: No. 06-35850.,06-35850.
• Parties: Kenneth L. REUSSER; Gertrude Reusser, Plaintiffs-Appellants, v. WACHOVIA BANK, N.A.; Washington Mutual Bank, FA, Defendants-Appellees, and Georgianna K. Nakamoto; Steven C. Nakamoto, Defendants.
• Court: U.S. Court of Appeals — Ninth Circuit

525 F.3d 855

Kenneth L. REUSSER; Gertrude Reusser, Plaintiffs-Appellants, v. WACHOVIA BANK, N.A.; Washington Mutual Bank, FA, Defendants-Appellees, and Georgianna K. Nakamoto; Steven C. Nakamoto, Defendants.

No. 06-35850.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 6, 2007.

Filed May 8, 2008.

Charles R. Markley, Greene & Markley, P.C., Portland, OR, argued the cause for the plaintiffs-appellants and filed briefs.

Thomas R. Johnson, Perkins Coie LLP, Portland, OR, argued the cause for the defendants-appellees and filed a brief; Amber A. Hollister, Perkins Coie LLP, Portland, OR, was on the brief.

Appeal from the United States District Court for the District of Oregon; Ancer L. Haggerty, Chief District Judge, Presiding. D.C. No. CV-06-00112-HA.

Before: DIARMUID F. O'SCANNLAIN, SUSAN P. GRABER, and CONSUELO M. CALLAHAN, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

We must decide whether alleged fraud in a state court home foreclosure proceeding during the homeowners' bankruptcy can be re-visited in federal court.

I

A

In December 2001, Kenneth and Gertrude Reusser received an $860,000 loan from Long Beach Mortgage Company, placing as collateral a home that had been in Kenneth's family for more than 100 years. Five months after receiving the loan, the Reussers stopped making payments. In April 2003, Long Beach Mortgage Company assigned its interest to Wachovia Bank, which gave notice to the Reussers that it intended to foreclose on the property through Washington Mutual Bank, its loan servicing institution.

On August 27, 2003, the Reussers declared bankruptcy, which automatically stayed the foreclosure sale under 11 U.S.C. § 362(a)(3). However, Washington Mutual applied for and received a bankruptcy court order granting it relief from stay, thereby allowing the foreclosure sale to proceed. The bankruptcy court's order was worded, in relevant part, as follows:

It appears . . . that the stay should be lifted as to enforcement of the deed of trust that is the subject of Washington Mutual Bank, F.A.'s motion and further as to the [Reussers'] property . . .

IT IS THEREFORE ORDERED that, pursuant to 11 U.S.C. § 362(d), the automatic stay is terminated as to Washington Mutual Bank, F.A., its successors and assigns, so that it may pursue its state remedies to enforce its security interest in the Property and/or as to enforcement of the deed of trust that is the subject of [its] motion.¹

Wachovia was not a party to Washington Mutual's motion before the bankruptcy court, nor did Wachovia directly seek relief from the automatic stay.

Despite the bankruptcy court order, the Reussers remained on the property, prompting Wachovia to institute a Forcible Entry and Detainer (FED) proceeding in Oregon state court. The accompanying Residential Eviction Complaint stated that Wachovia was entitled to possession of the residence and that the Reussers were required to appear in court on March 1, 2004, or a default judgment would be granted to Wachovia. After receiving the summons and complaint, the Reussers wrote "Rejected for Cause Without Dishonor" across the front page and returned it to the state court by registered mail, along with a "First Amendment [sic] Petition for Abatement of Action" challenging the merits of the FED proceeding. Wachovia was served with a copy of the petition.

A parade of errors followed, leading to the present action. The Reussers failed to include a required $95 filing fee with their petition, and a state court clerk therefore attempted to return the petition by mailing it to the Reussers. However, the clerk mailed the rejected petition to the wrong address. The undelivered petition eventually was returned to the state court, which took no further action. Then, under the mistaken belief that their petition was filed and constituted an appearance, the Reussers did not show up to the scheduled FED hearing. At the hearing, Wachovia did not inform the state court that it had been served with the "First Amendment Petition" by the Reussers. Accordingly, the state court entered a default judgment in favor of Wachovia.

On May 7, 2005, the Reussers filed a motion in state court to vacate the default judgment, which was followed by a hearing. There, the Reussers argued that their failure to appear was excused by Wachovia's alleged failure to provide requisite notice that it would seek a default judgment, and by Wachovia's failure to inform the state court that it had been served with the Reussers' petition.² The state court denied the Reussers' motion without specifying the grounds for its holding, and the Reussers' appeal was dismissed as moot after the Reussers' property was sold in a subsequent foreclosure sale.

B

Following their failed attempt to vacate the default judgment in Oregon state court, the Reussers filed a complaint against Wachovia and Washington Mutual in the United States District Court for the District of Oregon, alleging two federal claims. First, the Reussers brought a claim under 42 U.S.C. § 1983, arguing that Wachovia "acted jointly with Washington County officers, clerks, judges and sheriffs under color of law" wrongfully to evict the Reussers in violation of their right to property. Second, the Reussers alleged that Wachovia foreclosed on their property in violation of § 362, arguing that the bankruptcy court's order granted relief from the stay only to Washington Mutual and therefore did not apply to Wachovia. The Reussers also brought three state-law claims against Wachovia, alleging that Wachovia committed trespass, trespass to chattels, and false imprisonment.

Wachovia and Washington Mutual moved to dismiss the Reussers' action under Federal Rule of Civil Procedure 12(b)(1) and (b)(6), asserting that the Rooker-Feldman doctrine deprived the district court of jurisdiction over the case, and that the bankruptcy court's order empowered Wachovia to foreclose on the property under § 362(d). The district court granted the motions and dismissed the Reussers' action with prejudice. The district court held, among other things, that it lacked jurisdiction to consider the § 1983 claims under Rooker-Feldman, because such claims constituted a de facto appeal from the state courts' refusal to vacate its default judgment against the Reussers. Also, the district court dismissed the § 362 claim on the ground that the Reussers were collaterally estopped from challenging Wachovia's reliance on the bankruptcy court's order lifting the automatic stay.³ The Reussers then brought the present appeal, and we consider the district court's grounds for dismissal in turn.⁴

II

A

The Reussers first argue that the Rooker-Feldman doctrine does not bar their § 1983 claims. The Rooker-Feldman doctrine is a well-established jurisdictional rule prohibiting federal courts from exercising appellate review over final state court judgments. See Henrichs v. Valley View Dev., 474 F.3d 609, 613 (9th Cir. 2007); see also D.C. Court of Appeals v. Feldman, 460 U.S. 462, 482-86, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983); Rooker v. Fidelity Trust Co., 263 U.S. 413, 415-16, 44 S.Ct. 149, 68 L.Ed. 362 (1923). We have recognized that "[t]he clearest case for dismissal based on the Rooker-Feldman doctrine occurs when a federal plaintiff asserts as a legal wrong an allegedly erroneous decision by a state court, and seeks relief from a state court judgment based on that decision." Henrichs, 474 F.3d at 613. (internal quotation marks omitted).

However, Rooker-Feldman may also apply where the parties do not directly contest the merits of a state court decision, as the doctrine "prohibits a federal district court from exercising subject matter jurisdiction over a suit that is a de facto appeal from a state court judgment." Kougasian v. TMSL, Inc., 359 F.3d 1136, 1139 (9th Cir.2004) (citing Bianchi v. Rylaarsdam, 334 F.3d 895, 898 (9th Cir.2003)). A federal action constitutes such a de facto appeal where "claims raised in the federal court action are' inextricably intertwined' with the state court's decision such that the adjudication of the federal claims would undercut the state ruling or require the district court to interpret the application of state laws or procedural rules." Bianchi, 334 F.3d at 898. In such circumstances, "the district court is in essence being called upon to review the state court decision." Feldman, 460 U.S. at 483 n. 16, 103 S.Ct. 1303. Accordingly, we must determine whether the Reussers' § 1983 claims constitute a de facto appeal of the Oregon court's denial of their motion to vacate the default judgment entered against them, in which case the district court properly dismissed such claims for lack of subject matter jurisdiction.

B

The Reussers urge that their action does not collaterally attack the merits of the state court decision; rather, they contend that their complaint properly alleges that Wachovia engaged in "extrinsic fraud" in bringing about the default judgment against them. The Reussers rely on our holding in Kougasian, in which we held that Rooker-Feldman does not bar a federal plaintiff from asserting as a legal wrong that an adverse party engaged in "conduct which prevent[ed] a [federal plaintiff] from presenting his claim in court." 359 F.3d at 1140 (quoting Wood v. McEwen, 644 F.2d 797, 801 (9th Cir.1981) (per curiam)). The focus of such claim is not on whether a state court committed legal error, but rather on "a wrongful act by the adverse party." Id. at 1141; see also Maldonado v. Harris, 370 F.3d 945, 950 (9th Cir.2004) ("The legal wrong that [the plaintiff] asserts in this action is not an erroneous decision by the state court . . . [The plaintiff] asserts as a legal wrong `an allegedly illegal act . . . by an adverse party.'") (quoting Noel v. Hall, 341 F.3d 1148, 1164 (9th Cir.2003)).

Here, the Reussers allege that Wachovia engaged in two acts of extrinsic fraud. First, they allege that Wachovia failed to provide sufficient notice of its...