Lynch v. Bank of N.Y. Mellon, CIVIL 17-00195 LEK-RLP

• Decision Date: 15 August 2017
• Docket Number: CIVIL 17-00195 LEK-RLP
• Parties: ROBERT JOHN LYNCH III and JENNIFER ANN LYNCH, Plaintiffs, v. BANK OF NEW YORK MELLON; NETTLETON S. PAYNE III; DIANE ELIZABETH PAYNE; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., and DOE DEFENDANTS 1-50, Defendants.
• Court: U.S. District Court — District of Hawaii

ROBERT JOHN LYNCH III and JENNIFER ANN LYNCH, Plaintiffs, v. BANK OF NEW YORK MELLON; NETTLETON S. PAYNE III;DIANE ELIZABETH PAYNE; MORTGAGE ELECTRONIC REGISTRATIONSYSTEMS, INC., and DOE DEFENDANTS 1-50, Defendants.

CIVIL 17-00195 LEK-RLP

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII

August 15, 2017

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS NETTLETON S. PAYNE III AND DIANE ELIZABETH PAYNE'S MOTION TO DISMISS

Defendants Nettleton S. Payne III and Diane Elizabeth Payne's ("the Paynes") "FRCP Rule 12(B)(6) Motion to Dismiss Plaintiffs Robert John Lynch and Jennifer Ann Lynch's First Amended Complaint Filed on July 22, 2016" ("Motion") was filed on May 15, 2017. [Dkt. no. 10.] Plaintiffs Robert John Lynch and Jennifer Ann Lynch ("Plaintiffs"), filed their memorandum in opposition on May 26, 2017, and the Paynes filed their reply on June 5, 2017. [Dkt. nos. 17, 18.] This matter came on for hearing on June 19, and the Paynes' Motion is hereby granted in part and denied in part for the reasons set forth below.

BACKGROUND

This action arises out of the foreclosure of Plaintiffs' fee simple condominium unit in Kamuela, Hawai`i (the "Property"), which was purchased in 2001. [Notice of Removal, Decl. of Summer H. Kaiawe ("Kaiawe Decl."), Exh. 3 (First Amended Complaint) at ¶ 16.] In 2005, Plaintiffs obtained a loan in the amount of $2,000,000, secured by a mortgage on the Property (the "Mortgage"). [Id. at ¶ 17.] By virtue of an assignment of the Mortgage, recorded on August 27, 2009, Defendant Bank of New York Mellon ("BONY") became the mortgagee and commenced foreclosure proceedings against Plaintiffs. [Id. at ¶¶ 19-21.] The version of Haw. Rev. Stat. § 667-5 (part of the state's foreclosure statute) in effect at the time of the foreclosure required that the foreclosing mortgagee act through a licensed Hawai`i attorney, and that the attorney comply with the mortgage's provisions governing the mortgagee's power of sale. Plaintiffs' Mortgage contained a provision requiring a mortgagee exercising the power of sale to sell the Property at a time and place set forth in a published notice ("Published Sale Provision"). [Id. at ¶ 21.]

BONY recorded a Notice of Mortgagee's Intention to Foreclose Under Power of Sale ("Notice of Sale") in the State of Hawai`i Bureau of Conveyances ("BOC") on August 27, 2009. [Kaiawe Decl., Exh. 6 (Mortgagee's Affidavit of Foreclosure Under Power of Sale ("Foreclosure Affidavit")), Exh. H (Notice of Sale).<sup>1</sup>] BONY published the Notice of Sale on August 4, 11, and 18, 2009, in the West Hawaii Today, a newspaper of general circulation in the county where the Property is located. [Foreclosure Affidavit at 2.] The Notice of Sale stated that the auction of the Property would take place on September 18, 2009, at the Third Circuit Court Building, but the auction did not take place on that date. [Notice of Sale at 1; First Amended Complaint at ¶ 23.] No other notice of an auction date was ever published. Plaintiffs allege that BONY had no right to foreclose until it published proper notice of the new auction date, and failed to use a Hawai`i attorney for the foreclosure process. [First Amended Complaint at ¶ 27, ¶14.b.] BONY held the foreclosure sale by public auction on October 23, 2009, and BONY was the sole bidder. [Foreclosure Affidavit at 2.]

On May 14, 2010, BONY executed a quitclaim deed conveying the Property to itself, and recorded that deed on June 1, 2010. [Id. at ¶ 28.] BONY sold the Property to the Paynes and recorded a limited warranty deed on November 5, 2010. [Id. at ¶ 32.] Plaintiffs allege that, because BONY failed to satisfy all of the conditions required for lawful foreclosure under the Mortgage and Haw. Rev. Stat. Chapter 667, Part I (2009), the transfer of the Property to BONY was void. Therefore, BONY had no title to convey to the Paynes. [Id. at¶¶ 42-44.] Plaintiffs argue that the Paynes: had "record notice" that BONY had not complied with the provisions in the Mortgage governing the mortgagee's exercise of its power of sale ("Power of Sale Provisions") nor the provisions of Chapter 667, Part I; and were aware that BONY made no warranty of title. [Id. at ¶ 43.]

Plaintiffs filed their First Amended Complaint on July 22, 2016, in state court, and the action was removed to federal court based on diversity jurisdiction. [Notice of Removal, filed 4/28/17 (dkt. no. 1), at ¶¶ 11-12.]

The First Amended Complaint alleges a wrongful foreclosure claim against BONY ("Count I"); and a quiet title claim against the Paynes ("Count II"). As against the Paynes, Plaintiffs seek return of title and possession of the Property. [Id. at ¶¶ 48-49.]

The Paynes seek to dismiss the quiet title claim against them with prejudice, and argue that this claim accrued at the October 23, 2009 foreclosure sale, and the six-year limitations period under Haw. Rev. Stat. § 657-1(4) applies to the quiet title claim.² Because Plaintiffs did not bring this action until May 13, 2016, the Paynes submit that Plaintiffs' quiet title claim is time-barred. [Mem. in Supp. of Motion at18.] However, the date as to when the quiet title claim accrued cannot be ascertained from the parties' submissions. Therefore, whether the quiet title claim is time-barred cannot be determined based on the current record.

Nevertheless, the Motion must be granted because Plaintiffs fail to allege plausible facts that the Paynes were not bona fide purchasers and therefore the First Amended Complaint fails to state a claim against the Paynes. For this reason, whether the quiet title claim is time-barred need not be addressed.

DISCUSSION

I. Consideration of Exhibits

"[G]enerally the scope of review on a motion to dismiss for failure to state a claim is limited to the Complaint." See Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010). "[A] court may consider evidence on which the complaint necessarily relies if: (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion." Id. (citations and internal quotation marks omitted). Ordinarily, consideration of other materials requires the district court to convert a motion to dismiss into a motion for summary judgment. Yamalov v. Bank of Am. Corp., CV. No. 10-00590 DAE-BMK, 2011 WL 1875901, at *7 n.7 (D. Hawai`i May 16, 2011) (citing Parrino v. FHP, Inc., 146 F.3d 699, 706 n.4 (9th Cir. 1998)).³

The Paynes submitted a copy of the Foreclosure Affidavit as an exhibit to the Notice of Removal. [Kaiawe Decl., Exh. 6.] The Note of Sale was Exhibit H to the Foreclosure Affidavit. Exhibit 6 and Exhibit H meet all of the requirements stated in Daniels-Hall. Further, the First Amended Complaint refers to the Notice of Sale and the Foreclosure Affidavit, [First Amended Complaint at ¶¶ 22-24 (Notice of Sale); id. at ¶ ₌31 (Foreclosure Affidavit),] and these documents are central to Plaintiffs' theory that the Paynes are not bona fide purchasers. No party questions the authenticity of either Exhibit 6 or Exhibit H. The Foreclosure Affidavit and the Notice of Sale can be considered therefore without converting the instant Motion into a motion for summary judgment.

II. Bona Fide Purchaser

Return of title and possession of the Property from the Paynes is sought based upon the transfer of title after an allegedly defective foreclosure sale. However, the Hawai`i Supreme Court has held that,

"[w]here it is determined that the nonjudicial foreclosure of a property is wrongful, the sale of the property is invalid and voidable at the election of the mortgagor, who shall then regain title to and possession of the property." [Santiago v. Tanaka,] 137 Hawai`i [137,] 158, 366 P.3d [612,] 633 [(2016)]. We also held that wherethe property has passed into the hands of an innocent purchaser for value, rendering the voiding of a foreclosure sale impracticable, an action at law for damages is generally the appropriate remedy.Id.

Mount v. Apao, 139 Hawai`i 167, 180, 384 P.3d 1268, 1281 (2016) (emphasis added). Thus, in order for Plaintiffs to regain title to the Property after it was purchases by the Paynes, Plaintiffs must prove that the Paynes were not innocent purchasers for value, i.e., bona fide purchasers.

In order to state a plausible quiet title claim against the Paynes, sufficient factual allegations must be pled to allow reasonable inference that the Paynes are not bona fide purchasers. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ("To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955 (2007))). The First Amended Complaint is woefully incomplete to maintain such a claim.

Plaintiffs assert that the Published Sale Provision required BONY to sell the Property at the time and place specified in the Notice of Sale. [First Amended Complaint at ¶ 25 (quoting Mortgage at ¶ 22).] Plaintiffs claim that BONY's recording of the Notice of Sale with the BOC provided the Paynes with "record notice," i.e. constructive notice, that the non-judicial foreclosure sale and transfer of the Property from BONY to BONY was void. [Id. at ¶¶ 43-44.] Plaintiffs' theory is that BONY's Notice of Sale provided constructive notice to the Paynes that BONY did not comply with the Power of Sale Provision because the date published in the Notice of Sale was not the date of the auction. Additionally, Haw. Rev. Stat. § 667-5 (2009) required that BONY act through a Hawai`i licensed attorney, and that BONY abide by the requirements of the Power of Sale Provisions. Plaintiffs allege that, since the Notice of Sale provided constructive notice that BONY did not comply with the Power of Sale Provisions, the Notice of Sale also provided constructive notice that BONY did not comply with § 667-5 (2009). [Id. at ¶ 43.] These...