Nat'l City Mortgage Co. v. Stephen

• Decision Date: 29 September 2011
• Docket Number: No. 09–1731.,09–1731.
• Citation: 647 F.3d 78
• Parties: NATIONAL CITY MORTGAGE COMPANY, Appellantv.Brian STEPHEN; Elaine K. STEPHEN.
• Court: U.S. Court of Appeals — Third Circuit

647 F.3d 78

NATIONAL CITY MORTGAGE COMPANY, Appellant

v.Brian STEPHEN; Elaine K. STEPHEN.

No. 09–1731.

United States Court of Appeals, Third Circuit.

Argued Jan. 5, 2011.Opinion Filed July 22, 2011.As Amended Sept. 29, 2011.

Sherri J. Braunstein, Esquire (Argued), Lorraine Gazzara Doyle, Esquire, Heidi R. Spivak, Esquire, Udren Law Offices, Cherry Hill, NJ, for Appellant.Brion W. Kelley, Esquire (Argued), Kingston, PA, for Appellee.Before: AMBRO and FISHER, Circuit Judges and SÁNCHEZ,^* District Judge.

OPINION OF THE COURT

AMBRO, Circuit Judge.

We have the once-unusual case of a mortgage foreclosure brought in federal court based on diversity jurisdiction. The District Court granted a default judgment in favor of Plaintiff–Appellant National City Mortgage (“NCM”), and ordered that the property securing NCM's loan to the defendants, homeowners Brian and Elaine Stephen, be sold at a foreclosure sale. Following that sale, the Court granted NCM's motion to set aside the sale after NCM had failed to notify The Chase Manhattan Bank as Indenture Trustee (“Chase”), a junior lien holder, of the impending sale, a notice required by state law. However, when Chase moved to vacate the set-aside order, the Court granted that motion, reasoning that the notice issue involved an independent question of state law and was not properly before it. We vacate and remand.

I. Background

In May 2000, NCM loaned the Stephens $143,460 secured by a mortgage on the Stephens' residential property. About one year later, Chase, c/o Residential Funding Corporation (“RFC”),¹ recorded a second mortgage on the property with the Monroe County, Pennsylvania, Recorder of Deeds, securing the principal sum of $51,000.

We fast forward to November 2007, when, following the Stephens' default on the NCM loan, NCM brought a foreclosure action in the United States District Court for the Middle District of Pennsylvania based on diversity of citizenship jurisdiction under 28 U.S.C. § 1332(a).²

Two months later, the District Court entered a final order of default judgment in the amount of $146,501.96 and ordered the property sold by marshal's sale to effect the judgment. NCM inadvertently failed to give notice to Chase. In March 2008, RFC, now known as GMAC–Rescap, assigned the servicing of the Chase loan to Dreambuilder Investments, LLC (“Dreambuilder”).³ No substitution of the servicer, nor its new address, was recorded with the Monroe County Recorder of Deeds. In May 2008, NCM was the successful bidder at the foreclosure sale of the Stephens' property.⁴

NCM had a problem, however. Pennsylvania Rule of Civil Procedure 3129.1 calls for the foreclosing plaintiff prior to the foreclosure sale of mortgaged real property to give notice of the sale to, among others, junior lien holders. As it had not given notice to Chase of the foreclosure sale, Chase retained its lien on the property. Cf. RTC Mortg. Trust 1994–N–2 v. Fry, 556 Pa. 603, 730 A.2d 476 (1999) (setting aside divestiture of junior mortgage lien because notice to that lienholder was insufficient). Thus, rather than the typical outcome of NCM purchasing the property free of liens, its ownership would be subject to Chase's lien. So, on June 13, 2008, NCM, in a display of chutzpah to cover its own omission, brought a Motion to Divest Lien asking the District Court to divest Chase of its lien. The Court dismissed the Motion, stating that it had closed the case after granting NCM the foreclosure remedy it sought and that NCM's attempt to “have the court determine its rights vis-a-vis another party claiming an interest in the property ... [concerned] an independent question of state law and [was] not properly before the court.”

Willing to be more practical, NCM next brought a motion to set aside the marshal's sale, arguing that this would allow it to give notice to Chase of the new sale (thus giving Chase the chance to bid at that sale if it desired), and permit NCM to “realize from the land the full amount of its judgment and the purpose of the foreclosure action.” The Court granted NCM's motion to set aside without writing an opinion.

The story does not end there, however. Chase—through RFC and “its assignee Dreambuilder”—then moved to vacate the set-aside order, and the Court granted that motion.⁵ In doing so, it characterized NCM's set-aside motion as “another attempt to address problems with the title created by the plaintiff's actions in prosecuting the case,” and noted that these were issues of state law in which “a federal court has no interest.” It noted that it had closed the case after providing NCM the remedy it sought, and restated that determining another party's rights vis-à-vis the property “is an independent question of state law and not properly before the court.”

Following the District Court's denial of NCM's Federal Rule of Civil Procedure 60(b) motion for reconsideration, NCM appealed to us.⁶

II. DiscussionA. Abstention doctrines do not support the District Court's ruling

The District Court did not explicitly state that it was refusing to exercise its jurisdiction over NCM's motion to set aside the marshal's sale, but in vacating its set-aside order without ruling on the merits and reasoning that the issue concerned “an independent question of state law” not properly before it, the Court effectively abstained from exercising its jurisdiction. This put NCM out of court. See Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 713, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) (abstention by district court “puts litigants effectively out of court” (quotation marks omitted)). “We employ a two-step process when reviewing a district court's decision to abstain from exercising its jurisdiction,” reviewing the underlying legal questions de novo but the court's decision to abstain for abuse of discretion. Matusow v. Trans–Cnty. Title Agency, 545 F.3d 241, 247 (3d Cir.2008) (quoting Chiropractic Am. v. Lavecchia, 180 F.3d 99, 103 (3d Cir.1999)).

Although foreclosure actions are more common in state court, the District Court had diversity jurisdiction. See 28 U.S.C. § 1332(a) (“The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—(1) citizens of different States....”). The homeowner defendants, the Stephens, resided in Pennsylvania. NCM's principal place of business is Ohio. The amount in controversy was over $140,000. While the able District Court focused on the fact that the notice issue before it involved state law, that is not dispositive. A district court with a case under its diversity jurisdiction almost always decides questions of state law, as it applies the substantive law of the state where the district court is located. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Liberty Mut. Ins. Co. v. Treesdale, Inc., 419 F.3d 216, 228 (3d Cir.2005). The question, rather, is whether the District Court's jurisdiction here extends to resolving issues that arise from an error committed during the pendency of its jurisdiction over a marshal's sale that it ordered. We conclude that it does.

A federal court has a “virtually unflagging obligation” to exercise its jurisdiction. Matusow, 545 F.3d at 248 (quoting Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976)). It may abstain from exercising jurisdiction only when the “clearest of justifications ... warrant [s] [it].” Colorado River, 424 U.S. at 819, 96 S.Ct. 1236. Put another way, abstention is “an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it,” and may be used “only in the exceptional circumstances where the order to the parties to repair to the state court would clearly serve an important countervailing interest,” and not “merely because a State court could entertain it.” Id. at 813, 96 S.Ct. 1236 (quotation marks omitted); see also Nationwide Mut. Fire Ins. Co. v. George V. Hamilton, Inc., 571 F.3d 299, 307 (3d Cir.2009) (same).

Typical comity-based grounds for abstention are the following:

Pullman abstention, an outgrowth of Railroad Comm'n of Texas v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941), which is proper when a state court determination of a question of state law might moot or change a federal constitutional issue presented in a federal court case; Burford abstention, an outgrowth of Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), which is proper when questions of state law in which the state has expressed a desire to establish a coherent policy with respect to a matter of substantial public concern are presented; and Younger abstention, an outgrowth of Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), which is proper when federal jurisdiction has been invoked for the purpose of restraining certain state proceedings.

Trent v. Dial Med., Inc., 33 F.3d 217, 223 n. 5 (3d Cir.1994), superseded by statute on other grounds (citing Colorado River, 424 U.S. at 814–16, 96 S.Ct. 1236). The first and third exceptions do not apply here. There are no constitutional issues, and federal jurisdiction has not been invoked to halt state proceedings.

Burford abstention comes into play only when there are “difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar,” or where “the exercise of federal review of the question ... would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.” Colorado River, 424 U.S. at 814, 96 S.Ct. 1236. For example, in Burford federal abstention was appropriate where Texas had established an “elaborate review system for dealing with the geological complexities of oil and gas fields,” and where federal review...