SGK Props., L.L.C. v. U.S. Bank Nat'l Ass'n

• Decision Date: 09 February 2018
• Docket Number: No. 17-20130,17-20130
• Citation: 881 F.3d 933
• Parties: SGK PROPERTIES, L.L.C.; Gary P. Katz, Plaintiffs–Appellants v. U.S. BANK NATIONAL ASSOCIATION, as Trustee FOR LEHMAN BROTHERS SMALL BALANCE COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2007-3, Defendant-Counter Plaintiff–Appellee Ocwen Loan Servicing, L.L.C., Defendant–Appellee v. Steven Weinreb, Counter Defendant–Appellant SGK Properties, L.L.C.; Gary Katz, Plaintiffs–Appellants v. Ocwen Loan Servicing, L.L.C.; U.S. Bank National Association, Defendants–Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

881 F.3d 933

SGK PROPERTIES, L.L.C.; Gary P. Katz, Plaintiffs–Appellants

v.U.S. BANK NATIONAL ASSOCIATION, as Trustee FOR LEHMAN BROTHERS SMALL BALANCE COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2007-3, Defendant-Counter Plaintiff–Appellee

Ocwen Loan Servicing, L.L.C., Defendant–Appellee

v.Steven Weinreb, Counter Defendant–Appellant

SGK Properties, L.L.C.; Gary Katz, Plaintiffs–Appellants

v.Ocwen Loan Servicing, L.L.C.; U.S. Bank National Association, Defendants–Appellees

No. 17-20130

United States Court of Appeals, Fifth Circuit.

FILED February 9, 2018

Gary P. Katz, Katz Law Group, L.L.C., Houston, TX, for Plaintiffs–Appellants.

Erin E. Clark, McGuireWoods, L.L.P., Dallas, TX, Kari Lynn Robinson, Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., Houston, TX, Brian David Schmalzbach, McGuireWoods, L.L.P., Richmond, VA, for Defendant–Counter Plaintiff–Appellee, Defendant–Appellee.

Gary Robin Maze, Maze IP Law, P.C., Houston, TX, for Counter Defendant–Appellant.

Before STEWART, Chief Judge, and CLEMENT and SOUTHWICK, Circuit Judges.

CARL E. STEWART, Chief Judge:

SGK Properties, LLC ("SGK"),¹ Gary Katz ("Katz"), and Steven Weinreb ("Weinreb") (collectively "Appellants") appeal the district court’s dismissal of their respective claims against U.S. Bank National Association, as Trustee for Lehman Brothers Small Balance Commercial Mortgage Pass-Through Certificates, Series 2007-3 ("U.S. Bank") and Ocwen Loan Servicing, L.L.C. ("Ocwen") (collectively "Appellees"). Weinreb also appeals the district court’s denial of his motion to dismiss U.S. Bank for lack of standing, and SGK and Katz appeal several of the district court’s other rulings, including its orders denying their motion to remand and motion to amend their complaint, as well as its order striking causes of action asserted in a responsive pleading. For the following reasons, we affirm.

I. Factual Background and Procedural History

On April 18, 2007, SGK received a loan from Greenpoint Mortgage Funding, Inc. ("Greenpoint") for the purchase of commercial real estate in the amount of $1,725,000, which was secured by a lien on the property. The transaction and resulting obligation was memorialized by two documents. First, SGK executed a promissory note ("the Note") in the principal amount of the loan, with an interest rate of 7.5% per annum. Katz and Weinreb, who were SGK’s sole members at the time, personally guaranteed repayment of the loan. SGK also executed a Deed of Trust, by which SGK conveyed the property to Greenpoint as consideration for and to secure payment of the Note.

U.S. Bank came to possess the Note and Deed of Trust through a series of assignments of endorsements. Specifically, on April 26, 2007, Greenpoint allegedly assigned the Deed to "Aurora Bank, FSB f/k/a Lehman Brothers Bank, FSB," which thereafter assigned the Deed to "U.S. Bank National Association, as Trustee for Lehman Brothers Small Balance Commercial Mortgage Pass-Through Certificates, Series 2007-3," with an effective date of November 19, 2007.² Likewise, on a date unknown, Greenpoint endorsed the Note to "Aurora Bank, FSB f/k/a Lehman Brothers Bank, FSB," and Aurora endorsed the Note to U.S. Bank on April 18, 2007.

SGK raised concerns about the identity and existence of the true holder and owner of the Note and Deed and ceased making payments on the Note around October 2010. Specifically, SGK and Katz became skeptical of the endorsements and assignments in favor of Aurora and U.S. Bank, primarily because, at the time the purported endorsements and assignments were made to and from Aurora, Aurora did not exist as an entity.³ After several delinquency notices, U.S. Bank authorized Ocwen, as its loan servicer, to administer a non-judicial foreclosure sale of the property, which was scheduled for December 2013. SGK and Katz made several attempts to cancel the foreclosure but to no avail. SGK and Katz then sought and received a temporary restraining order in Texas state court on the grounds that the foreclosure was wrongful.

On January 9, 2014, U.S. Bank and Ocwen removed the case to federal court. SGK and Katz filed their First Amended Complaint, which included claims for trespass to try title, quiet title, breach of contract, tortious interference with an existing contract, violations of the Texas Deceptive Trade Practices Act, violations of the Texas Debt Collection Act, and statutory fraud. The factual allegations in their complaint essentially challenged U.S. Bank’s status as a valid holder of the Note and its incidental right to foreclose on the property in light of SGK and Katz’s concerns about the validity of the assignments of the Deed. The complaint also questioned the district court’s jurisdiction over the case, alleging that U.S. Bank, which SGK and Katz asserted was an unincorporated association, failed to demonstrate complete diversity of citizenship between the plaintiffs and U.S. Bank’s members and shareholders. The district court sua sponte dismissed SGK and Katz’s jurisdictional challenge. SGK and Katz thereafter filed a motion to remand for lack of diversity jurisdiction, offering the same arguments about U.S. Bank’s status as an unincorporated association. Appellees did not respond to SGK and Katz’s motion to remand, and the district court denied it, holding that U.S. Bank was a trustee and its citizenship in Ohio was determinative, which created complete diversity. U.S. Bank thereafter sought summary judgment on all of SGK and Katz’s claims. The district court granted summary judgment against Katz after he failed to respond within the time period set by the court, but denied summary judgment against SGK because it was involved in bankruptcy proceedings.⁴ U.S. Bank then foreclosed on the property and sold it for $2.5 million. Because there was a deficiency balance, U.S. Bank filed a counterclaim against Katz, SGK and Weinreb to recover the difference.

SGK and Katz answered U.S. Bank’s counterclaim and asserted three additional causes of action related to U.S. Bank’s authority to enforce the Note and foreclose on the property. U.S. Bank moved to strike these additional claims, which the court granted that same day without allowing Katz or SGK an opportunity to respond. The parties then filed several pleadings, including: (1) a motion for leave to amend their complaint to re-assert the stricken claims by SGK and Katz, (2) a motion to dismiss for lack of standing by Weinreb, (3) a counterclaim against U.S. Bank for fraudulent misrepresentation and breach of duty by Weinreb, to which U.S. Bank responded with a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) ; and (4) a motion for summary judgment by U.S. Bank on its counterclaim against Appellants. At a hearing, the court orally denied Katz and SGK’s motion to amend, denied Weinreb’s motion to dismiss, and granted U.S. Bank’s motions to dismiss and for summary judgment. The district court rendered final judgment in favor of U.S. Bank in the amount of $374,548.34 for the deficiency, as well as attorneys' fees and costs.

II. Discussion

On appeal, SGK, Katz and Weinreb challenge all of the district court’s adverse rulings and the final judgment. Specifically, Appellants raise the following issues: (1) whether the district court erred in denying SGK and Katz’s motion to remand; (2) whether the district court erred in granting U.S. Bank’s motion for summary judgment for its counterclaim; (3) whether the district court erred by holding that U.S. Bank had standing to pursue Weinreb to recover the deficiency judgment; (4) whether the district court erred in denying Weinreb’s fraudulent misrepresentation and breach of duty claims; (5) whether the district court abused its discretion in granting U.S. Bank’s motion to strike SGK and Katz’s additional causes of action; and (6) whether the district court erred in denying SGK and Katz leave to amend their complaint. We discuss each issue in turn.

A. SGK and Katz’s Motion to Remand

SGK and Katz argue that the district court erred by denying their motion to remand because U.S. Bank never established complete diversity of citizenship. We review denial of a motion to remand de novo. Int'l Energy Ventures Mgmt., L.L.C. v. United Energy Grp., Ltd. , 818 F.3d 193, 199 (5th Cir. 2016) (citing Scarlott v. Nissan N. Am., Inc. , 771 F.3d 883, 887 (5th Cir. 2014) ). "Under 28 U.S.C. § 1332(a), diversity jurisdiction exists where there is complete diversity of citizenship among the parties and the amount in controversy exceeds $75,000." Bynane v. Bank of New York Mellon for CWMBS, Inc. Asset-Backed Certificates Series 2006-24 , 866 F.3d 351, 355 (5th Cir. 2017). "[C]omplete diversity requires that all persons on one side of the controversy be citizens of different states than all persons on the other side." Settlement Funding, L.L.C. v. Rapid Settlements, Ltd. , 851 F.3d 530, 536 (5th Cir. 2017) (alteration in original) (quoting McLaughlin v. Miss. Power Co. , 376 F.3d 344, 353 (5th Cir. 2004) (per curiam) ). The party seeking the federal forum, here U.S. Bank, has the burden of establishing diversity jurisdiction. Id .

SGK and Katz specifically challenge the district court’s citizenship finding with respect to U.S. Bank. The district court found that there was complete diversity of citizenship, holding in relevant part that "U.S. Bank need not disclose the citizenship of the beneficiaries of the trust" because "[a]s trustee, its citizenship is determinative."⁵ They contend that the district court erred by considering only the citizenship of U.S. Bank as the trustee. Instead, they argue, the district court should have considered the citizenship of each of the trust’s shareholders and members. In so arguing, SGK and Katz aver that U.S. Bank is only a nominal or formal party present in the lawsuit on behalf of the trust.

It is true that "[i]n determining diversity jurisdiction, a federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of...