Murphy v. Aurora Loan Servs., LLC

• Decision Date: 19 December 2012
• Docket Number: No. 12–1398.,12–1398.
• Court: U.S. Court of Appeals — Eighth Circuit
• Parties: 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, Plaintiffs–Appellants v. AURORA LOAN SERVICES, LLC, Aurora Bank FSB, Mortgage Electronic Registration Systems, Inc., Merscorp, Inc., and Wilford & Geske, P.A., Defendants–Appellees.

699 F.3d 1027

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, Plaintiffs–Appellants

v.AURORA LOAN SERVICES, LLC, Aurora Bank FSB, Mortgage Electronic Registration Systems, Inc., Merscorp, Inc., and Wilford & Geske, P.A., Defendants–Appellees.

No. 12–1398.

United States Court of Appeals, Eighth Circuit.

Submitted: Oct. 15, 2012.

Filed: Nov. 8, 2012.

As Corrected Nov. 28, 2012.

Rehearing and Rehearing En Banc Denied Dec. 19, 2012.^*

James L. Gunn, Woodbury, MN, for appellants Kevin M. Murphy and Kathleen K. Murphy.

William Bernard Butler, Minneapolis, MN, for appellants James L. Lang, Charlene Ann Brady, Erika R. Hogenson, Harold J. Thompson, III, Julianne Thompson, Mirriam E. Stone, Jeffrey A. Kirschbaum, Tou A. Tang, and May K. Vang.

J. Matthew Goodin, Hugh S. Balsam, Julie C. Webb, Chicago, IL, for appellees Aurora Loan Services, LLC, Aurora Bank FSB, Mortgage Electronic Registration Systems, Inc., and MERSCORP, Inc.

Eric D. Cook, Michael R. Sauer, Woodbury, MN, for appellees Aurora Loan Services, LLC, Aurora Bank FSB, Mortgage Electronic Registration Systems, Inc., MERSCORP, Inc., and Wilford & Geske, P.A.

Before RILEY, Chief Judge, ARNOLD and GRUENDER, Circuit Judges.

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 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.

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, 289 Minn. 35, 182 N.W.2d 437, 440 (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. SeeMinn. R. Civ. P. 9.02. To pierce W & G's professional immunity by adequately pleading fraud, Homeowners must plead the circumstances of fraud “with particularity.” Great Plains Trust Co. v. Union Pac. R.R. Co., 492 F.3d 986, 995 (8th Cir. 2007) (quoting Fed. R. Civ. P. 9(b)).

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

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 Rule 9(b). 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., 276 Minn. 116, 149 N.W.2d 37, 38–39 (1967) (defining the elements of fraud); Kelly v. First State Bank of Rothsay, 145 Minn. 331, 177 N.W. 347, 347 (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 state with particularity 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, 126 S.Ct. 1735, 164 L.Ed.2d 480 (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, 198 (8th Cir.1992). The district court properly found that it had subject matter jurisdiction.

II.

The Homeowners argue their quiet-title action ³ 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-...