Interestingly, the Nevada Supreme Court noted that the designation of MERS as initial beneficiary resulted in a split of the note from the deed of trust, which split would normally prevent a nonjudicial foreclosure based on either the note or the deed of trust. The court then went on to hold that when the note and deed of trust are reunited, the party holding both can proceed with nonjudicial foreclosure.
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DAVID EDELSTEIN, Appellant, vs. BANK OF NEW YORK MELLON, Respondent.
No. 57430
SUPREME COURT OF NEVADA
128 Nev. Advance Rep. 48; 2012 Nev. LEXIS 90
September 27, 2012, Filed
COUNSEL: Law Office of Jacob Hafter & Associates and Jacob L. Hafter and Michael K. Naethe, Las Vegas, for Appellant.
Pite Duncan, LLP, and Gregg A. Hubley and Allison R. Schmidt, Las Vegas, for Respondent.
JUDGES: Hardesty, J. We concur: Cherry, C.J., Douglas, J., Saitta, J., Gibbons, J., Pickering, J., Parraguirre, J.
OPINION BY: HARDESTY
OPINION
BEFORE THE COURT EN BANC.
By the Court, HARDESTY, J.:
In this appeal, which arises out of Nevada's Foreclosure Mediation Program (FMP), we examine the note-holder and beneficial-interest status of a party seeking to foreclose. We conclude that, to participate in the FMP and ultimately obtain an FMP certificate1 to proceed with the nonjudicial foreclosure of an owner-occupied residence, the party seeking to foreclose must demonstrate that it is both the beneficiary of the deed of trust and the current holder of the promissory note.
FOOTNOTES
1 For a valid nonjudicial foreclosure sale to occur under NRS 107.080, a Program certificate must be issued. NRS 107.086; Holt v. Regional Trustee Services Corp., 127 Nev. , , 266 P.3d 602, 606 (2011).
In [*2] determining whether the party seeking to foreclose in this case met those requirements, we also address whether, as is argued here, the designation of Mortgage Electronic Registration System, Inc. (MERS), as the initial beneficiary of the deed of trust irreparably splits the promissory note and the deed of trust so as to preclude foreclosure. We conclude that when MERS is the named beneficiary and a different entity holds the promissory note, the note and the deed of trust are split, making nonjudicial foreclosure by either improper. However, any split is cured when the promissory note and deed of trust are reunified. Because the foreclosing bank in this case became both the holder of the promissory note and the beneficiary of the deed of trust, we conclude that it had standing to proceed through the FMP.
FACTS AND PROCEDURAL HISTORY
In 2006, appellant David Edelstein executed a promissory note (the note) in favor of lender New American Funding, which provided Edelstein with a loan to buy a house. The note provided that "the Lender may transfer [the] [n]ote," and that "[t]he Lender or anyone who takes [the] [n]ote by transfer and who is entitled to receive payments under this [n]ote [*3] is called the 'Note Holder.'"
Edelstein and New American Funding also executed a deed of trust to secure the note, which named New American Funding as the lender, Chicago Title as the trustee, and MERS as the beneficiary. Specifically, the deed of trust described "MERS [as] a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns." It also characterized "MERS [as] the beneficiary under this Security Instrument," and later characterized MERS as "[t]he beneficiary of this Security Instrument . . . (solely as nominee for Lender and Lender's successors and assigns) and the successors and assigns of MERS." The deed of trust also stated that "Borrower understands and agrees that MERS holds only legal title to the Interests granted by Borrower in this Security Instrument," but that "MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender . . . ."
Subsequently, both the note and the deed of trust were transferred several times. With regard to the note, New American [*4] Funding created an allonge (the allonge),2 endorsing the note to the order of Countrywide Bank, N.A. Countrywide Bank then endorsed the note to the order of Countrywide Home Loans, Inc., which in turn endorsed the note in blank, as follows: "Pay to the order of Without Recourse." Meanwhile, the deed of trust was also conveyed when MERS granted, assigned, and transferred "all beneficial interest" under the deed of trust to respondent Bank of New York Mellon (BNY Mellon); the conveyance language on the assignment stated that it was assigned and transferred "together with the [N]ote . . . ."3 BNY Mellon designated ReconTrust Company as its new trustee, replacing Chicago Title. At the time of the mediation, ReconTrust physically possessed (1) the note, which was endorsed in blank, and (2) an assignment of the deed of trust, which named BNY Mellon as the beneficiary.
FOOTNOTES
2 An allonge is a "slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further [e]ndorsements when the original paper is filled with [e]ndorsements." Black's Law Dictionary 1859 (9th ed. 2009). However, an "allonge is valid even if space is available on the instrument." Id.; see also [*5] NRS 104.3204(1) ("For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.").
3 The MERS assignment is dated February 19, 2010, but the allonge and both endorsements are undated. Thus, it is unclear which event occurred first.
The foreclosure mediation
Edelstein stopped paying on the note and consequently received a notice of default and election to sell; he subsequently elected to participate in the FMP.
Attending the July 2010 foreclosure mediation was Edelstein and his counsel, as well as counsel for BNY Mellon's loan servicer, Bank of America, who appeared as BNY Mellon's agent and representative. A Bank of America representative with purported authority to negotiate the loan participated by telephone. Bank of America provided certified copies of the note, endorsed in blank, the deed of trust and its assignment, and the substitution of trustee. It also provided a short sale proposal and a broker's price opinion.
After the mediation concluded without resolving the foreclosure issue, the mediator filed a report determining that "[t]he parties participated but were unable to agree to a loan modification or [*6] make other arrangements." Notably, the mediator did not report that the beneficiary or its representative failed to attend the mediation, failed to participate in good faith, failed to bring the required documents to the mediation, or did not have authority to mediate.
The proceedings before the district court
On August 5, 2010, Edelstein, acting in proper person, filed a petition for judicial review with the district court, seeking a determination that BNY Mellon had participated in the mediation in bad faith and sanctions for statutory violations. He argued that BNY Mellon failed to "provide sufficient documents concerning the assignment of the mortgage note, deed of trust[,] and interest in the trust," and an appraisal or broker's price opinion. He further argued that BNY Mellon failed to "have the authority or access to a person with the authority" to modify the loan as required by NRS 107.086 because the "person representing [BNY Mellon] was not available to fully negotiate in good faith, and did not provide sufficient documentation that [BNY Mellon] held a legal claim to the beneficial proceeds of the [D]eed." Finally, he argued that BNY Mellon "failed to offer any modification [*7] offers." Edelstein requested sanctions from the district court based on "bad faith or failure to comply with statutory requirements."
Bank of America (on behalf of BNY Mellon) responded, generally disagreeing with each of Edelstein's arguments and also arguing that Edelstein's petition should not be considered because it was untimely. Edelstein, now represented by counsel, replied. He argued that because the allonge was an invalid "assignment," BNY Mellon was "required legally to show that it own[ed] those rights[,] or it ha[d] no legal authority to be attempting any foreclosure of the Edelstein home." Moreover, he contended that MERS' assignment of the deed of trust was invalid because MERS was a "sham" beneficiary. Edelstein also argued that his petition for judicial review was timely filed.
The parties reiterated their arguments in multiple hearings before the district court. Edelstein emphasized that "[BNY] Mellon ha[d] no standing in [the] matter" because "[t]here was no chain of title that [came] from New American [Funding] to the acting party, . . . [BNY] Mellon." The district court subsequently issued two separate orders. In the first order, the district court found that Edelstein [*8] timely filed his petition for judicial review and that BNY Mellon had properly appeared at the mediation. In its second order, the court found that BNY Mellon did not participate in bad faith, that the parties agreed to negotiate further, and that "absent a timely appeal, a Letter of Certification will issue." Edelstein now appeals.
DISCUSSION
The primary issue on appeal is whether BNY Mellon may properly participate in the FMP and obtain an FMP certificate to proceed with foreclosure proceedings against Edelstein.4 To resolve this issue, we first address the party-status requirements to pursue nonjudicial foreclosure in Nevada and next address whether BNY Mellon met those requirements in the context of NRS 107.086.
FOOTNOTES
4 BNY Mellon also argues that Edelstein's petition was untimely filed and should not have been considered by the district court. Edelstein actually received the statement by mail on or after July 20, 2010. Accordingly, his petition for judicial review was timely filed. FMR 6(2) (2010) (amended and renumbered as FMR 21(2) (effective March 1, 2011)).
The parties also dispute the appropriate standard of review and whether the Program requirements must be strictly or substantially [*9] complied with, but the opening and answering briefs on appeal were filed before this court's decisions in Leyva v. National Default Servicing Corp., 127 Nev. , 255 P.3d 1275 (2011), and Pasillas v. HSBC Bank USA, 127 Nev. , 255 P.3d 1281 (2011), which resolve both issues.
Requirements to pursue nonjudicial foreclosure in Nevada
Edelstein argues that "[t]he first step [within the FMP] requires the beneficiary of a deed of trust to prove to the homeowner that the beneficiary has a right to foreclose on the property." With some explanation, we agree.
Background of nonjudicial foreclosures in Nevada
In Nevada, promissory notes on real estate loans are typically secured by deeds of trust on the property. "The note represents the right to the repayment of the debt, while the [deed of trust] . . . represents the security interest in the property that is being used to secure the note." Robert E. Dordan, Mortgage Electronic Registration Systems (MERS), Its Recent Legal Battles, and the Chance for a Peaceful Existence, 12 Loy. J. Pub. Int. L. 177, 180 (2010). Thus, the borrower, or grantor, executes both the note and the deed of trust in favor of the lender, who was historically the beneficiary [*10] under both, and who names a trustee on the deed of trust "to assure the payment of the debt secured by the trust deed." 54A Am. Jur. 2d Mortgages § 122 (2009); see also NRS 107.028; NRS 107.080. The deed of trust may then be recorded. Former NRS 106.210.5
FOOTNOTES
5 Prior to 2011, Nevada law provided that any assignment of the beneficial interest under a deed of trust "may" be recorded. Assembly Bill 284 amended this statute to now require that "any assignment of the beneficial interest under a deed of trust must be recorded." NRS 106.210 (emphasis added); 2011 Nev. Stat., ch. 81, § 1, at 327.
Considered a form of mortgage in Nevada,6 the deed of trust does not convey title so as to allow the beneficiary to obtain the property without foreclosure and sale, but is considered merely a lien on the property as security for the debt, subject to the laws on foreclosure and sale. Hamm v. Arrowcreek Homeowners' Ass'n, 124 Nev. 290, 298-99, 183 P.3d 895, 901-02 (2008); Orr v. Ulyatt, 23 Nev. 134, 140, 43 P. 916, 917-18 (1896). To enforce the obligation by nonjudicial foreclosure and sale, "[t]he deed and note must be held together because the holder of the note is only entitled to repayment, and does not [*11] have the right under the deed to use the property as a means of satisfying repayment." Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1039 (9th Cir. 2011). "Conversely, the holder of the deed alone does not have a right to repayment and, thus, does not have an interest in foreclosing on the property to satisfy repayment." Id.; see also Leyva v. National Default Servicing Corp., 127 Nev. , , 255 P.3d 1275, 1279-80 (2011) (recognizing that the note and the deed of trust must be held by the same person to foreclose under NRS Chapter 107).
FOOTNOTES
6 NRS 0.037 states, "Except as used in chapter 106 of NRS and unless the context otherwise requires, 'mortgage' includes a deed of trust." For purposes of this opinion, the two terms will be used interchangeably.
When the grantor defaults on the note, the deed-of-trust beneficiary can select the judicial process for foreclosure pursuant to NRS 40.430 or the "nonjudicial" foreclosure-by-trustee's sale procedure under NRS Chapter 107. Nevada Land & Mtge. v. Hidden Wells, 83 Nev. 501, 504, 435 P.2d 198, 200 (1967). At issue here, in a nonjudicial foreclosure, the trustee may sell the property to satisfy the obligation only after certain statutory [*12] requirements are met. NRS 107.080. First, the trustee must give notice by recording a notice of default and election to sell and serving the grantor with a copy of that notice. NRS 107.080(2)(c). The grantor then has a certain number of days in which to make good the deficiency. NRS 107.080(2)(a) and (b). After at least three months have passed from the recording of the notice of default, the trustee must give notice of the sale. NRS 107.080(4). Once the sale is completed, title vests in the purchaser; upon court action, however, a sale may be voided if carried out without substantially complying with the statutory requirements. NRS 107.080(5). See Rose v. First Federal Savings & Loan, 105 Nev. 454, 456-57, 777 P.2d 1318, 1319 (1989).
In 2009, amid concerns with the rapidly growing foreclosure rate in this state, the Legislature enacted additional requirements that trustees must meet before proceeding with a nonjudicial foreclosure of owner-occupied housing. A.B. 149, 75th Leg. (Nev. 2009); see Pasillas v. HSBC Bank USA, 127 Nev. , , 255 P.3d 1281, 1284 (2011). The legislation increased the redemption period for owner-occupied housing, see NRS 107.080(2)(b), and it created the [*13] FMP, requiring the trustee to obtain and record an FMP certificate before proceeding with the foreclosure. See NRS 107.086.
Under the FMP, as described in Pasillas, the trustee must serve an election-of-mediation form with the notice of default and election to sell. 127 Nev. , 255 P.3d 1284; see also Holt v. Regional Trustee Services Corp., 127 Nev. , , 266 P.3d 602, 606 (2011). If the grantor/homeowner elects to mediate, the beneficiary of the deed of trust or a representative must, in order for an FMP certificate to issue, "(1) attend the mediation; (2) mediate in good faith; (3) provide the required documents; or (4) if attending through a representative, have a person present with authority to modify the loan or access to such a person." Pasillas, 127 Nev. at , 255 P.3d at 1284 (citing NRS 107.086(5)); see also Holt, 127 Nev. at , 266 P.3d at 606. The documents required under the third item are designed to enable a determination both of whether a person with the required authority over the note is available and of whether the party seeking to foreclose is in fact "[t]he beneficiary of the deed of trust or a representative." NRS 107.086(4); see Leyva, 127 Nev. at , 255 P.3d at 1279 [*14] (explaining that "[t]he legislative intent behind requiring a party to produce the assignments of the deed of trust and mortgage note is to ensure that whoever is foreclosing actually owns the note and has authority to modify the loan," and that "[a]bsent a proper assignment of a deed of trust," one "lacks standing to pursue foreclosure proceedings" (internal quotations omitted)). In other words, the party seeking to obtain an FMP certificate through the FMP must show that it is the proper entity, under the nonjudicial foreclosure statutes, to proceed against the property. Id.
As explained above, to have standing to foreclose, the current beneficiary of the deed of trust and the current holder of the promissory note must be the same.7 Here, the note, the deed of trust, and each assignment were produced at the mediation. NRS 107.086(4). However, as Edelstein argues, "[j]ust providing documents is not enough, as the documents need to demonstrate . . . authority, as proven through the authenticated documents, to foreclose on a home." Edelstein primarily argues that no documents were provided to demonstrate a clear chain of both the deed of trust and the note from New American Funding, [*15] the original lender, to BNY Mellon. Specifically, he asserts that because "MERS was merely a nominee and failed to provide evidence of its authority on behalf of . . . New American Funding to assign an interest in the deed of trust, [BNY Mellon] could not legally become beneficiary and noteholder for the purpose of participating in the mediation." In other words, Edelstein argues, BNY Mellon lacked "authority to foreclose" because the note was "split" from the deed of trust. To determine whether BNY Mellon had standing to foreclose, we consider whether the use of MERS irreparably "splits" the note and the deed of trust or otherwise impacts BNY Mellon's entitlement to enforce the note and the deed of trust.
FOOTNOTES
7 Indeed, in placing the onus of complying with the FMP requirements on the "beneficiary of the deed of trust," the Legislature considered the beneficiary of the deed of trust to be the same party as the note holder. For example, the Legislature expressed that it does "not want anyone who has no beneficial interest in the process to be required to attend the mediation. This is for the holder of the note." Hearing on A.B. 149 Before the Joint Commerce and Labor Comm., 75th Leg. (Nev., [*16] February 11, 2009) (testimony of Assemblywoman Barbara Buckley). Moreover, the Legislature has characterized the requirement that "the person who is foreclosing actually owns the note" as "an elemental legal step." Id. The Program rules, at least as they existed at the time of Edelstein's mediation, likewise anticipated a single note and deed beneficiary, and they interchangeably used the term beneficiary of the deed of trust and lender. See, e.g., former FMR 5(8)(a) (2010) (amended and renumbered as FMR 10(1)(a) (effective March 1, 2011)) (describing requirements for the "Beneficiary (lender)").
The effect of MERS
"MERS is a private electronic database . . . that tracks the transfer of the 'beneficial interest' in home loans, as well as any changes in loan servicers." Cervantes, 656 F.3d at 1038; see also Jackson v. Mortgage Electronic, 770 N.W.2d 487, 490 (Minn. 2009). Before discussing MERS' impact on this case, we explain how MERS works, as described in various reported decisions.
MERS was created in response to state recording laws governing deed of trust assignments. Many lenders sell all or part of their beneficial interests in home loan notes; they also change servicers. Cervantes, 656 F.3d at 1038. [*17] Indeed, "[i]t has become common for original lenders to bundle the beneficial interest in individual loans and sell them to investors as mortgage-backed securities, which may themselves be traded." Id. at 1039. Correspondingly, the beneficial interest in the security—the deeds of trust—would also be assigned. In most states, however, lenders are required to record any changes to the deed of trust beneficiary and trustee. Id. As the selling of loans increased, "[t]his recording process became cumbersome to the mortgage industry," id., often causing "confusion, delays, and chain-of-title problems." Jackson, 770 N.W. 2d at 490. Thus, "MERS was designed to avoid the need to record multiple transfers of the deed." Cervantes, 656 F.3d at 1039.
Typically, when a loan is originated, "MERS is designated in the deed of trust as a nominee for the lender and the lender's 'successors and assigns,' and as the deed's 'beneficiary' which holds legal title to the security interest conveyed." Id. MERS' role in subsequent note transfers depends on whether or not the note is transferred to another MERS member or a non-MERS member. "If the lender sells or [transfers] the . . . [note] to another MERS member, [*18] the change is recorded only in the MERS database, not in county records, because MERS continues to [be the beneficiary of record] on the new lender's behalf." Id.; see also In re Agard, 444 B.R. 231, 248 (Bankr. E.D.N.Y. 2011) ("So long as the sale of the note involves a MERS Member, . . . [t]he seller of the note does not and need not assign the [deed of trust] because under the terms of that security instrument, MERS remains the holder of title to the [deed of trust], that is, the mortgagee, as the nominee for the purchaser of the note, who is then the lender's successor and/or assign." (internal quotations omitted)), vacated in part by Agard v. Select Portfolio Servicing, Inc., Nos. 11-CV-1826(JS), 11-CV-2366(JS), 2012 WL 1043690 (E.D.N.Y. Mar. 28, 2012). "According to MERS, this system 'saves lenders time and money, and reduces paperwork, by eliminating the need to prepare and record assignments when trading loans.'" Jackson, 770 N.W.2d 490. However, "[a] side effect . . . is that a transfer of an interest in a mortgage [note] between two MERS members is unknown to those outside the MERS system." Id. Conversely, "[i]f the . . . [note] is sold to a non-MERS member, the [assignment] [*19] of the deed from MERS to the new lender is recorded in county records and the [note] is no longer tracked in the MERS system." Cervantes, 656 F.3d at 1039.
A representative from MERS testified before a bankruptcy court that its "members often wait until a default or bankruptcy case is filed to have a mortgage or deed of trust assigned to them so that they can take steps necessary to seek stay relief and/or to foreclose." In re Tucker, 441 B.R. 638, 644 (Bankr. W.D. Mo. 2010). In general, "[t]he reason they wait is that, if a note is paid off eventually, as most presumably are, MERS is authorized to release the [deed of trust] without going to the expense of ever recording any assignments." Id.
The use of MERS does not irreparably split the note and the deed of trust
Edelstein contends that MERS "is merely a nominee or agent that cannot act without authorization by its principal," and that the use of MERS irreparably splits the note and the deed of trust, thereby divesting BNY Mellon of ability to foreclose or to modify the loan. He further argues that "[a]ny actions by MERS with respect to the mortgage note or deed of trust would be ineffective." Because nothing in Nevada law prohibited [*20] MERS' actions, we reject Edelstein's argument and examine the two more common approaches taken by other jurisdictions to resolve the issue of whether splitting a promissory note and a deed of trust is irreparable or fatal to a beneficiary's entitlement to enforce the note and the deed of trust.8
FOOTNOTES
8 We recognize that there exist other approaches to this issue. Each state must individually determine whether this system designed to create a national electronic promissory note tracking system comports with state law concerning both promissory notes and title to real property. See Bain v. Metropolitan Mortg. Group, Inc., P.3d , 2012 WL 3517326 (Wash. 2012) (holding that MERS is not a deed of trust beneficiary for failure to meet Washington's statutory requirement that a beneficiary of a deed of trust must hold the promissory note and rejecting the proposition that phrase nominee creates an agency relationship between MERS and note holders); Niday v. GMAC Mortgage, P.3d , 2012 WL 2915520 (Or. Ct. App. 2012) (holding that the secured party note holder is always the beneficiary of the deed of trust and rejecting MERS' standing in nonjudicial foreclosure); U.S. Bank Nat. Ass'n v. Ibanez, 941 N.E.2d 40, 53-54 (Mass. 2011) [*21] (discussing MERS' standing in foreclosure proceedings).
The traditional rule
Under the traditional rule, a court need follow only the ownership of the note, not the corresponding deed of trust, to determine who has standing to foreclose. Specifically, "when a note secured by a mortgage is transferred, 'transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.'" In re Vargas, 396 B.R. 511, 516 (Bankr. C.D. Cal. 2008) (quoting Carpenter v. Longan, 83 U.S. 271, 275 (1872)). "'The [deed] can have no separate existence.'" Id. at 517 (quoting Carpenter, 83 U.S. at 275). Put another way, "'an assignment of the note carries the [deed] with it, while an assignment of the latter alone is a nullity.' While the note is 'essential,' the [deed] is only 'an incident' to the note." Id. (quoting Carpenter, 83 U.S. at 274). Thus, under the traditional rule, splitting the note and the deed of trust is impossible. The holder of the note always has both.
Pursuant to the traditional rule, MERS' "assignment of the deed of trust separate from the note" would have no force. Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623-24 (Mo. Ct. App. 2009) [*22] (explaining that "MERS never held the promissory note, thus its assignment of the deed of trust . . . separate from the note had no force"). Adopting the traditional rule would be inconsistent with our holding in Leyva v. National Default Servicing Corp., however, in which we explained that "[t]ransfers of deeds of trust and mortgage notes are distinctly separate." 127 Nev. , , 255 P.3d 1275, 1279 (2011). Indeed, to foreclose, one must be able to enforce both the promissory note and the deed of trust. Id.; NRS 107.086(4). Under the traditional rule, entitlement to enforce the promissory note would be sufficient to foreclose; it would be superfluous to then require one to separately prove that a previous beneficiary "properly assigned its interest in land via the deed of trust" by requiring the new beneficiary "to provide a signed writing . . . demonstrating that transfer of interest." Leyva, 127 Nev. at , 255 P.3d at 1279. Accordingly, we decline to adopt the traditional rule and instead consider the Restatement approach.
The Restatement approach
Under the Restatement approach, a promissory note and a deed of trust are automatically transferred together unless the parties agree [*23] otherwise. Specifically, "[a] transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise." Restatement (Third) of Prop.: Mortgages § 5.4(a) (1997). Similarly, "[e]xcept as otherwise required by the Uniform Commercial Code, a transfer of a [deed of trust] also transfers the obligation the [deed of trust] secures unless the parties to the transfer agree otherwise." Id. at § 5.4(b). Thus, unlike the traditional rule, a transfer of either the promissory note or the deed of trust generally transfers both documents. The Restatement also diverges from the traditional rule in that it permits the parties to separate a promissory note and a deed of trust, should the parties so agree.
The Restatement notes that "[i]t is conceivable that on rare occasions a mortgagee will wish to disassociate the obligation and the [deed of trust], but that result should follow only upon evidence that the parties to the transfer so agreed. The far more common intent is to keep the two rights combined." Id. at § 5.4 cmt. a. This is because, as we have discussed, both the promissory note and the deed must be held together to foreclose; "[t]he [general] [*24] practical effect of [severance] is to make it impossible to foreclose the mortgage." Id. at § 5.4 cmt. c; see also Cervantes, 656 F.3d at 1039.
In this case, New American Funding was the initial holder of the note, whereas MERS was characterized in the deed of trust as "a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns." (Emphasis added.) The deed of trust also stated that "MERS is the beneficiary under this Security Instrument." (Emphasis added.) When interpreting a written agreement between parties, this court "is not at liberty, either to disregard words used by the parties . . . or to insert words which the parties have not made use of. It cannot reject what the parties inserted, unless it is repugnant to some other part of the instrument." Royal Indem. Co. v. Special Serv., 82 Nev. 148, 150, 413 P.2d 500, 502 (1966) (internal quotations omitted). Thus, we examine the effect of designating MERS both as a nominee for New American Funding and its successors and assigns, and as a beneficiary of the deed of trust. Other courts have held that MERS' designation as nominee "is more than sufficient to create an agency relationship between [*25] MERS and the Lender and its successors." In re Tucker, 441 B.R. at 645; In re Martinez, 444 B.R. 192, 205-06 (Bankr. D. Kan. 2011) (concluding that based on the language in the relevant documents giving MERS a role as "nominee" for "[the lender] and its successors and assigns, . . . sufficient undisputed evidence [was presented] to establish that MERS was acting as an agent," and that the choice of the word "'nominee,' rather than 'agent,' does not alter the relationship between the[ ] . . . parties, especially given the fact that the two terms have nearly identical legal definitions"); Cervantes, 656 F.3d at 1044 (explaining MERS' role as an agent).
We agree with the reasoning of these jurisdictions and conclude that, in this case, MERS holds an agency relationship with New American Funding and its successors and assigns with regard to the note. Pursuant to the express language of the deed of trust, "MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender . . . ." Accordingly, MERS, as an agent for [*26] New American Funding and its successors and assigns, had authority to transfer the note on behalf of New American Funding and its successors and assigns. See generally Leyva, 127 Nev. at , 255 P.3d at 1279-80 (discussing "[t]he proper method of transferring . . . a mortgage note").
The deed of trust also expressly designated MERS as the beneficiary; a designation we must recognize for two reasons. First, it is an express part of the contract that we are not at liberty to disregard, and it is not repugnant to the remainder of the contract. See Royal Indem. Co., 82 Nev. at 150, 413 P.2d at 502. In Beyer v. Bank of America, the United States District Court for the District of Oregon examined a deed of trust which, like the one at issue here, stated that "MERS is the beneficiary under this Security Instrument." 800 F. Supp. 2d 1157, 1160-62 (D. Or. 2011). After examining the language of the trust deed and determining that the deed granted "MERS the right to exercise all rights and interests of the lender," the court held that "MERS [is] a proper beneficiary under the trust deed." Id. at 1161-62. Further, to the extent the homeowners argued that the lenders were the true beneficiaries, [*27] "the text of the trust deed contradicts [their] position." Id. at 1161; accord Reeves v. ReconTrust Co., N.A., 846 F. Supp. 2d 1149 (D. Or. 2012). Similarly here, the deed of trust's text, as plainly written, repeatedly designated MERS as the beneficiary, and we thus conclude that MERS is the proper beneficiary. Second, it is prudent to have the recorded beneficiary be the actual beneficiary and not just a shell for the "true" beneficiary. In Nevada, the purpose of recording a beneficial interest under a deed of trust is to provide "constructive notice . . . to all persons."9 NRS 106.210. To permit an entity that is not really the beneficiary to record itself as the beneficiary would defeat the purpose of the recording statute and encourage a lack of transparency. However, whether designating MERS as the beneficiary on the deed of trust demonstrates an agreement to separate the promissory note from the deed of trust is an issue of first impression for this court.
FOOTNOTES
9 As noted earlier, Nevada law changed in 2011 to now require that "any assignment of the beneficial interest under a deed of trust must be recorded." NRS 106.210 (emphasis added); 2011 Nev. Stat., ch. 81, § 1, at 327.
Although [*28] we conclude that MERS is the proper beneficiary pursuant to the deed of trust, that designation does not make MERS the holder of the note. Designating MERS as the beneficiary does, as Edelstein suggests, effectively "split" the note and the deed of trust at inception because, as the parties agreed, an entity separate from the original note holder (New American Funding) is listed as the beneficiary (MERS). See generally In re Agard, 444 B.R. 231, 247 (Bankr. E.D.N.Y. 2011). And a beneficiary is entitled to a distinctly different set of rights than that of a note holder. See Cervantes, 656 F.3d at 1039 (explaining that a "holder of [a] note is only entitled to repayment," whereas a "holder of [a] deed alone does not have a right to repayment," but rather, has the right "to use the property as a means of satisfying repayment." (Emphasis added)); Leyva, 127 Nev. at , 255 P.3d at 1279 (explaining that while a deed of trust "is an instrument that 'secure[s] the performance of an obligation or the payment of any debt,'" a mortgage note is a negotiable instrument that entitles the note holder to a payment of debt (alteration in original) (quoting NRS 107.020)).
However, this split at the [*29] inception of the loan is not irreparable or fatal. "Separation of the note and security deed creates a question of what entity would have authority to foreclose, but does not render either instrument void." Morgan v. Ocwen Loan Servicing, LLC, 795 F. Supp. 2d 1370, 1375 (N.D. Ga. 2011). Rather, "[a]ssuming arguendo, that there was a problem created by the physical separation of the Security Deed from the Note, that problem vanishe[s]" when the same entity acquires both the security deed and the note. In re Corley, 447 B.R. 375, 384-85 (Bankr. S.D. Ga. 2011). Indeed, while entitlement to enforce both the deed of trust and the promissory note is required to foreclose, nothing requires those documents to be unified from the point of inception of the loan. In re Tucker, 441 B.R. 638, 644 (Bankr. W.D. Mo. 2010). Instead, "[a] promissory note and a security deed are two separate, but interrelated, instruments," Morgan, 795 F. Supp. 2d at 1374, and their transfers are also "distinctly separate," Leyva, 127 Nev. at , 255 P.3d at 1279.10
FOOTNOTES
10 The idea that various rights concerning real property may be severed and freely assigned without destroying such rights is not novel or unique. Indeed, [*30] real property is generally described as a bundle of rights. See ASAP Storage, Inc. v. City of Sparks, 123 Nev. 639, 173 P.3d 734 (2007). In other contexts of real property, it is commonly accepted that a right may be severed and later reunified. For example, the right to travel over a property may be carved out by the creation of an easement, but if that easement is later transferred to the title holder, the easement merges back into the fee. Breliant v. Preferred Equities Corp., 109 Nev. 842, 846-47, 858 P.2d 1258, 1261 (1993). This general concept is consistent with our holding here.
Because the Restatement approach is more consistent with reason and public policy and with our recent holding in Leyva, we adopt the approach of the Restatement (Third) of Property and hold that MERS is capable of being a valid beneficiary of a deed of trust, separate from its role as an agent (nominee) for the lender. We further conclude that such separation is not irreparable or fatal to either the promissory note or the deed of trust, but it does prevent enforcement of the deed of trust through foreclosure unless the two documents are ultimately held by the same party. Cervantes, 656 F.3d at 1039. [*31] MERS, as a valid beneficiary, may assign its beneficial interest in the deed of trust to the holder of the note, at which time the documents are reunified. Applying these holdings to the facts of this case, we now address whether BNY Mellon was entitled to enforce both the deed of trust and the note.
BNY Mellon is entitled to enforce the deed of trust and the note11
FOOTNOTES
11 Edelstein argues that there was no "written statement" proving Bank of America's authority to attend the mediation. Neither party provides evidence that BNY Mellon authorized Bank of America to enforce the note. See generally In re Veal, 450 B.R. 897, 920 (B.A.P. 9th Cir. 2011); see also NRS 111.205(1) (requiring an agent negotiating an interest in real property to have written authority). However, BNY Mellon indicated at the hearing before the district court that Bank of America was BNY Mellon's servicer, and a servicer is a representative within the meaning of NRS 107.086(4). Additionally, in responding to Edelstein's petition for judicial review, counsel appearing on behalf of BNY Mellon described her law firm as "[a]ttorneys for Bank of America, duly authorized servicer for The Bank of New York Mellon," and she alleged [*32] that she was informed by Bank of America's representative attending the mediation that "he had full authority to negotiate the loan on behalf of [BNY Mellon]." Further, Edelstein informed the district court that he was making his payments to Bank of America, and "[t]he servicer of the loan collects payments from the borrower." Cervantes, 656 F.3d at 1039. We note that while a servicing agreement would have been helpful to discern the extent of Bank of America's authority in this mediation, production of such an agreement is not expressly required by statute or the Program rules.
In his petition in the district court, Edelstein requested sanctions based on his arguments that BNY Mellon did not have authority to foreclose and that it participated in the mediation in bad faith. The district court also refused to impose sanctions and authorized issuance of the FMP certificate. This court reviews a district court's factual determinations deferentially, Ogawa v. Ogawa, 125 Nev. 660, 668, 221 P.3d 699, 704 (2009) (explaining that a "district court's factual findings . . . are given deference and will be upheld if not clearly erroneous and if supported by substantial evidence"), and its legal [*33] determinations de novo. Clark County v. Sun State Properties, 119 Nev. 329, 334, 72 P.3d 954, 957 (2003). Absent factual or legal error, the choice of sanction in an FMP judicial review proceeding is committed to the sound discretion of the district court. Pasillas v. HSBC Bank USA, 127 Nev. , , 255 P.3d 1281, 1287 (2011).
To prove that a previous beneficiary properly assigned its beneficial interest in the deed of trust, the new beneficiary can demonstrate the assignment by means of a signed writing. Leyva, 127 Nev. at , 255 P.3d at 1279. Here, BNY Mellon claims that it can enforce the deed of trust because MERS assigned its beneficial interest in the deed of trust to BNY Mellon. Certified copies of the deed of trust and the subsequent assignment were produced at the mediation; thus, BNY Mellon is entitled to enforce the deed of trust.12 With respect to the note, MERS also assigned its beneficial interest in the deed of trust "[t]ogether with the note or notes therein . . ." to BNY Mellon. Because we hold that MERS, as agent (nominee) for New American Funding's successors and assigns, can transfer the note on behalf of the successors and assigns, we conclude that this action [*34] also transferred the note to BNY Mellon. See id. at , 255 P.3d at 1281 (explaining that, without showing a valid negotiation, a party can establish its right to enforce the note by demonstrating a proper transfer).
FOOTNOTES
12 On appeal, Edelstein contends that the assignment of the deed of trust is invalid because the notary predates the date of the assignment. In this, and without citation to specific authority, Edelstein claims that the assignment was void. However, Edelstein did not raise this issue in the district court; thus, we need not address it on appeal. See In re AMERCO Derivative Litigation, 127 Nev. , n.6, 252 P.3d 681, 697 n.6 (2011) (declining to consider an issue raised for the first time on appeal).
Even independently of MERS' assignment, BNY Mellon was entitled to enforce the note. The Uniform Commercial Code, Article 3, governs transfers of negotiable instruments, like the note. Leyva, 127 Nev. at , 255 P.3d at 1279. Therefore, for a subsequent lender to establish that it is entitled to enforce a note, it must present "evidence showing [e]ndorsement of the note either in its favor or in favor of [its servicer]." In re Veal, 450 B.R. 897, 921 (B.A.P. 9th Cir. 2011); [*35] see also Leyva, 127 Nev. at , 255 P.3d at 1279.
When a note is endorsed to another party, Article 3 of the UCC permits a note to "be made payable to bearer or payable to order," depending on the type of endorsement. Leyva, 127 Nev. at , 255 P.3d at 1280 (citing NRS 104.3109). Relevant here, "[w]hen endorsed in blank, an instrument becomes payable to bearer . . . ." NRS 104.3205(2). Further, "a note initially made payable 'to order' can become a bearer instrument, if it is endorsed in blank." Bank of New York v. Raftogianis, 13 A.3d 435, 439 (N.J. Super. Ct. Ch. Div. 2010); see also U.C.C. § 3-205 cmt. 2 (2004) (explaining that if "the holder of an instrument, intending to make a special [e]ndorsement, writes the words 'Pay to the order of without . . . writing the name of the [e]ndorsee," the instrument becomes bearer paper). Here, New American Funding, the original lender, endorsed the note to Countrywide Bank, N.A., who then endorsed the note to Countrywide Home Loans, Inc.13 Countrywide Home Loans endorsed the note, in blank, as follows: "Pay to the order of Without Recourse." Thus, the note was bearer paper.
FOOTNOTES
13 Edelstein argues in his reply brief that because the document [*36] merely says "Patty Arvielo and the term 'V.P.,'" not V.P. of New American Funding, it was an "anomalous endorsement and would not be sufficient to negotiate the note to Countrywide Home Loans, Inc." However, he does not make this argument in his opening brief; thus, we do not consider it. See generally Weaver v. State, Dep't of Motor Vehicles, 121 Nev. 494, 502, 117 P.3d 193, 198-99 (2005) (stating that this court need not consider issues raised for the first time in an appellant's reply brief).
"If the note is payable to bearer, that 'indicates that the person in possession of the promise or order is entitled to payment.'" Leyva, 127 Nev. at , 255 P.3d at 1280 (quoting NRS 104.3109(1)(a)); see also NRS 104.3205(2) (explaining that an instrument endorsed in blank is payable to bearer and "may be negotiated by transfer of possession alone"); NRS 104.3201(2) ("If an instrument is payable to bearer, it may be negotiated by transfer of possession alone."). This means that to be entitled to enforce the note, BNY Mellon would merely have to possess the note. Cf. Leyva, 127 Nev. at , 255 P.3d at 1280 (discussing the process to be entitled to enforce order paper).
At the time of the mediation, [*37] ReconTrust, BNY Mellon's trustee, physically possessed the note. Edelstein argues that because ReconTrust "was in possession, not [BNY Mellon]," ReconTrust was arguably "the holder and person entitled to enforce bearer paper." However, Edelstein did not raise this issue in the district court. See In re AMERCO Derivative Litigation, 127 Nev. , n.6, 252 P.3d 681, 697 n.6 (2011) (declining to consider an issue raised for the first time on appeal). Accordingly, we conclude that because ReconTrust as trustee possessed the note, BNY Mellon, the beneficiary, was entitled to enforce it. See generally Monterey S.P. Part. v. W.L. Bangham, 777 P.2d 623, 627 (Cal. 1989) (explaining that "[b]ecause a deed of trust typically secures a debt owed the beneficiary, it is the beneficiary, not the trustee, whose economic interests are threatened when the existence or priority of the deed of trust is challenged," and noting that the beneficiary is the real party in interest); accord In re Veal, 450 B.R. at 917 (holding that Wells Fargo could not establish holder status because "it did not show that it or its agent had actual possession"); cf. NRS 104.9313 and UCC § 9-313, cmt. 3 "Possession" (explaining [*38] that principles of agency apply in determining actual possession in the UCC, and that where an agent of a secured party has physical possession of a note, the secured party has taken actual possession).
Because BNY Mellon was entitled to enforce both the note and the deed of trust, which were reunified,14 we conclude that BNY Mellon demonstrated authority over the note and to foreclose, and thus, there was no abuse of discretion or legal error on the part of the district court.15
FOOTNOTES
14 Because it is not at issue in this case, we need not address what occurs when the promissory note and the deed of trust remain split at the time of the foreclosure. See, e.g., U.S. Bank Nat. Ass'n v. Ibanez, 941 N.E.2d 40, 53-54 (Mass. 2011) (discussing what occurs in instances "where a note has been [transferred] but there is no written assignment of the [deed] underlying the note").
15 Edelstein argues that BNY Mellon failed to act in good faith because it lacked authority and failed to produce adequate documents to establish its authority. Based on our holdings in this opinion, we reject his argument.
Accordingly, we affirm the judgment of the district court.
/s/ Hardesty, J.
Hardesty
We concur:
/s/ Cherry, C.J.
Cherry
/s/ [*39] Douglas, J.
Douglas
/s/ Saitta, J.
Saitta
/s/ Gibbons, J.
Gibbons
/s/ Pickering, J.
Pickering
/s/ Parraguirre, J.
Parraguirre
Friday, September 28, 2012
Friday, September 21, 2012
9th Circuit dismisses another qui tam suit against MERS
BARRETT BATES, STATE OF CALIFORNIA ex rel. Barrett R.
Bates, qui tam plaintiff, on behalf of real parties in interest, Alameda County, et al., Plaintiff-Appellant,
v.
MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC.;
BANK OF AMERICA, NA; BANK OF AMERICA, NA, FKA Countrywide
Home Loans, Inc.; CITIMORTGAGE, INC.; GMAC MORTGAGE LLC;
JPMORGAN CHASE BANK; WELLS FARGO BANK, NA, Defendants-Appellees.
Bates, qui tam plaintiff, on behalf of real parties in interest, Alameda County, et al., Plaintiff-Appellant,
v.
MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC.;
BANK OF AMERICA, NA; BANK OF AMERICA, NA, FKA Countrywide
Home Loans, Inc.; CITIMORTGAGE, INC.; GMAC MORTGAGE LLC;
JPMORGAN CHASE BANK; WELLS FARGO BANK, NA, Defendants-Appellees.
No. 11-15894
D.C. No. 2:10-cv-01429-GEB-CMK
D.C. No. 2:10-cv-01429-GEB-CMK
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
Submitted August 9, 2012
Filed September 17, 2012
Filed September 17, 2012
Summaries:
Source: Justia
Plaintiff, a realtor, filed suit under the California False Claims Act (CFCA), Cal. Gov't Code 12650-12655, against defendants on behalf of numerous California counties, alleging that defendants made false representations in naming MERS as a beneficiary in recordedmortgage documents in order to avoid paying recorded fees. Defendants moved to dismiss the qui tam action under Rule 12(b)(1) for lack of subject matter jurisdiction and 12(b)(6) for failure to state a claim upon which relief may be granted. Because plaintiff failed to demonstrate that the district court erred in dismissing his claims as jurisdictionally barred, the court affirmed the district court's decision.
Page 11324
Page 11325
Treva J. Hearne and Robert R. Hager, Hager & Hearne, Reno, Nevada, and Mark Mausert, Reno, Nevada, for the plaintiff-appellant.
Page 11326
Thomas Hefferon and Joseph Yenouskas, Goodwin Procter LLP, Washington, DC, Robert Padway, Robert James Espo-sito and Deborah Anne Goldfarb, Bryan Cave LLP, San Francisco, California, and Robert M. Brochin, Morgan, Lewis & Bockius LLP, Miami, Florida, for the defendants-appellees.
CALLAHAN, Circuit Judge:
Plaintiff Barrett R. Bates, a realtor, filed suit under the California False Claims Act ("CFCA"), Cal. Gov't Code §§ 12650-12655, against Defendants Mortgage Electronic Registration System, Inc. ("MERS"), Bank of America, N.A., Countrywide Home Loans, Inc., Citimortgage, Inc., GMAC Mortgage LLC,1 J. P. Morgan Chase Bank, and Wells Fargo, N.A. (collectively, "Defendants") on behalf of numerous California counties.Bates alleged that Defendants made false representations in naming MERS as a beneficiary in recorded mortgage documents in order to avoid paying recording fees. Defendants moved to dismiss the qui tam action under Federal Rules of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction and 12(b)(6) for failure to state a claim upon which relief may be granted. Following Defendants' motions, Bates filed a motion for leave to file a Second Amended Complaint. The district court concluded that the public disclosure provision in the CFCA required dismissal of the action for lack of subject matter jurisdiction and, as a result, it did not analyze the 12(b)(6) motion or the motion to amend. Because Bates has failed to demonstrate that the district court erred in dismissing his claims as jurisdictionally barred, we affirm the district court's decision.
Page 11327
On July 17, 2009, Bates filed his first complaint in state court, alleging violations of the CFCA on behalf of the real parties in interest, the counties of the state of California. On May 10, 2010, Bates filed the First Amended Complaint ("FAC"), which is the subject of this appeal. In the FAC, Bates alleged that, during the course of his work as a realtor in the secondary mortgage market business in June 2009, he discovered that Defendants were making false statements in order to avoid or decrease recording fees. Specifically, Bates alleged that Defendants falsely named MERS as a beneficiary in recorded mortgage documents. Bates's theory of liability involves the use of the MERS loan registry system ("MERS System"), which allows parties to a loan (borrowers and lenders) to agree that MERS can serve as mortgagee on the loan documents as nominee for the noteholder. Thus, when interests in the loans are transferred, the mortgage does not need to be assigned but instead the identity of the secured party is tracked by the MERS System.2 Bates argues that this system is fraudulent because the lenders' decision not to create and record assignments of a MERS mortgage deprived the Counties of recording-fee revenues.
MERS removed the action to the United States District Court for the Eastern District of California, asserting diversity jurisdiction under 28 U.S.C. § 1332. On June 18, 2010, Bates filed a motion to remand to state court, contending that the State of California was a real party in interest in the lawsuit
Page 11328
whose presence destroyed diversity. The District Court denied Bates's motion, finding that complete diversity existed between the parties and that the amount in controversy, exclusive of interest and costs, exceeded $75,000. The court held that the State was a nominal party, whose listing in the caption of the FAC would be disregarded in determining diversity of citizenship because Bates's suit only sought to recover recording fees which, when due, are payable to and usable by the Counties exclusively. Accordingly, the district court determined that the only real parties in interest were the Counties, and Bates had "failed to point to any allegation in his complaint showing that he is also suing on behalf of the State."
Between August 19 and August 23, 2010, Defendants filed motions to dismiss the FAC, contending that the claims were jurisdictionally barred under the CFCA. The district court granted the motion to dismiss, holding that Bates's suit was jurisdictionally barred by the "public disclosure" exception of the CFCA. In ruling on the motions to dismiss, the district court reasoned that because Bates's allegations "are substantially similar to information already in the public domain," his action is barred by the CFCA. State ex rel. Grayson v. Pac. Bell Tel. Co., 142 Cal. App. 4th 741, 749 (2006). The court further reasoned that Bates could not have been an "original source" leading to the public disclosure of the fraudulent acts because he alleged that he became aware of these acts only in June 2009, which was long after the information was already in the public domain. Because the district court found this issue dispositive, it declined to rule on Defendants' motion to dismiss for failure to state a claim.
Following the court's ruling on the motions to dismiss, the district court entered judgment in favor of Defendants. Bates timely appealed. We have jurisdiction under 28 U.S.C. § 1291.
Page 11329
A. Standard of Review
The district court's dismissal under Federal Rule of Civil Procedure 12(b)(1) and denial of the motion to remand are reviewed de novo. A-1 Ambulance Serv., Inc. v. California, 202 F.3d 1238, 1242-43 (9th Cir. 2000). All of the facts alleged in the complaint are presumed true, and the pleadings are construed in the light most favorable to the nonmoving party. Rowe v. Educ. Credit Mgmt. Corp., 559 F.3d 1028, 1029-30 (9th Cir. 2009).
B. The Court Did Not Err in Denying Bates's Motion to Remand.
[1] As an initial matter, Bates contends that because the State of California is a real party in interest, diversity jurisdiction is defeated and the case should have been remanded to state court. However, the district court properly determined that Bates "failed to point to any allegation in his complaint showing that he is also suing on behalf of the State." Under Navarro Savings Ass'n v. Lee, 446 U.S. 458, 461 (1980), courts "must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy." Bates cannot resuscitate his motion to remand through conjecture when his pleadings do not disclose any ground for treating the State as a real party in interest. If Bates were successful in his suit, the State would not realize any benefit as a result. Because the FAC discloses that this suit was brought to remedy an alleged fraud committed solely against the Counties, the Counties are the real parties in this controversy. Accordingly, the district court properly denied the motion to remand.
C. Bates's Qui Tam Action is Jurisdictionally Barred by the CFCA.
[2] The CFCA is a "whistleblower" statute that is designed to protect public finances by allowing individuals to file suit
Page 11330
under seal on behalf of the State or Counties. However, to prevent profiteering, the CFCA provides that "[n]o court shall have jurisdiction" over a qui tam civil action under the statute when the action is "based upon the public disclosure" of the allegations of transactions raised in the action. Cal. Gov't Code § 12652(d)(3)(A). This public disclosure provision "erects a jurisdictional bar to qui tam actions that do not assist the government in ferreting out fraud because the fraudulent allegations or transactions are already in the public domain." Grayson, 142 Cal. App. 4th at 748 (internal citation omitted).
[3] An action is barred under the public disclosure provision when the prior public disclosures are "sufficient to place the government on notice of the alleged fraud" or "practice prior to the filing of the qui tam action." Id. at 748, 752. "A relator's ability to recognize the legal consequences of a publicly disclosed fraudulent transaction does not alter the fact that the material elements of the violation already have been publicly disclosed." United States ex rel. Findley v. FPC-Boron Emps. Club, 105 F.3d 675, 688 (D.C. Cir. 1997). As the court below concluded, the numerous prior public disclosures sufficed to place the government on notice of the factual allegations in Bates's FAC.
[4] Bates contends that, under City of Hawthorne v. H&C Disposal Co., 109 Cal. App. 4th 1668, 1678 (2003), prior to his litigation, no one "sufficiently alerted the government to the possibility" fraud was being committed. He further contends that he was the "original source" of the allegations in the complaint, and that the court "misapplied the law in holding that [Bates] could not qualify as an 'original source' based solely on the dates of the articles and other information purportedly within the public domain." However, we conclude that substantially similar information toBates's allegations already existed in the public domain at the time he filed suit. Bates's allegations reveal the equivalent of information already available to the public through other cases and published articles: that MERS is named as a beneficiary in mort-
Page 11331
gage documents and that the MERS System allows parties to avoid the recordation of mortgage documents and payment of the corresponding fees to the Counties. To be considered "substantially similar" under Grayson, the public disclosures need not consist of legal conclusions identical to those of the qui tam plaintiff. Grayson, 142 Cal. App. 4th at 750-52. Rather, the lawsuit is jurisdictionally barred if the complaint "substantially repeats" facts that are already known. Id.3
[5] Moreover, Bates cannot escape the public disclosure bar by arguing that he was the "original source" of the information because his alleged discovery of the MERS System fraud in June 2009 postdated numerous public disclosures. It is thus temporally impossible for Bates's discovery of the information to have been the catalyst for the public disclosures. Bates cannot demonstrate that a causal relationship exists between himself and the public disclosures. See Cal. Gov't Code § 12652(d)(3)(B) ("'Original source' means an individual . . . whose information provided the basis or catalyst for the investigation, hearing, audit, or report that led to the public disclosure."). Accordingly, the district court properly dismissed the action as jurisdictionally barred.4
Page 11332
The district court did not err in denying Bates's motion to remand the action to state court because Bates did not demonstrate how the State of California is anything more than a nominal party. Furthermore, Bates's factual allegations regarding the MERS System had already been publicly disclosed, and the dates in the FAC foreclose the possibility that Bates could be an original source of the information. Accordingly, the district court properly found that Bates's claims are jurisdictionally barred by the CFCA. The district court's judgment is AFFIRMED.
--------
Notes:
*. The panel unanimously finds this case suitable for decision without oral argument. Fed. R. App. P. 34(a)(2).
**.The Honorable Edward R. Korman, District Judge for the United States District Court for the Eastern District of New York, sitting by designation.
1.GMAC Mortgage LLC has since filed a Notice of Bankruptcy, and this appeal is automatically stayed as to GMAC.
2.We recently discussed MERS at length in affirming the dismissal of a putative class action lawsuit alleging that lenders (some of whom are Appellees here) used the MERS System to commit fraud and facilitate wrongful foreclosures. See Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034 (9th Cir. 2011) (explaining that MERS was specifically created as a solution to streamline the tedious recording process).
3.Bates attempts to dissuade us from applying Grayson, arguing that the California Court of Appeal decision "erroneously applied a federal standard." Bates's argument is not well-taken. This court is bound to follow the appellate decision from California "in the absence of convincing evidence that the highest court of the state would decide [the issue] differently." Hubbard v. SoBreck, LLC, 554 F.3d 742, 745 (9th Cir. 2009). Bates has provided no such convincing evidence in his briefs. Further, Grayson did not erroneously apply a federal standard. Accordingly, we accept Grayson as setting forth California law.
4.Because we conclude that the district court did not err in dismissing Bates's claims for lack of subject matter jurisdiction, we do not reach Defendants' argument that the dismissal may be upheld because Bates failed to state a claim upon which relief may be granted.
Class Action against Countrywide for improper fees allowed to go forward
In the Matter of: YDALIA RODRIGUEZ, Debtor
YDALIA RODRIGUEZ; MARIA ANTONIETA HERRERA; DAVID HERRERA;
LUCY MORENO; ALFONSO MORENO, Plaintiffs - Appellees
v.
COUNTRYWIDE HOME LOANS, INCORPORATED, Defendant - Appellant
YDALIA RODRIGUEZ; MARIA ANTONIETA HERRERA; DAVID HERRERA;
LUCY MORENO; ALFONSO MORENO, Plaintiffs - Appellees
v.
COUNTRYWIDE HOME LOANS, INCORPORATED, Defendant - Appellant
No. 11-40056
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
September 14, 2012
Summaries:
Source: Justia
Countrywide appealed a class certification order of the bankruptcy court. Plaintiffs are former chapter 13 debtors with mortgages serviced by Countrywide. Plaintiffs claimed, among other things, that the fees Countrywide charged while plaintiffs' bankruptcy cases were still pending were unreasonable, unapproved, and undisclosed under Federal Rule of Bankruptcy Procedure 2016(a). Because the bankruptcy court's decision was not an abuse of discretion, the court affirmed its grant of class certification for plaintiff's injunctive relief claim. Because the court's precedence rejected the fail-safe class prohibition, the court concluded that the bankruptcy court did not abuse its discretion when it defined the class in the present case. Because the court concluded that Countrywide's Rule 59(e) motion for reconsideration was not based on newly discovered evidence, the court did not revisit the bankruptcy court's separate merits denial of the motion.
Before GARZA, DENNIS, and HIGGINSON, Circuit Judges.
HIGGINSON, Circuit Judge.
Countrywide appeals a class certification order of the bankruptcy court. We AFFIRM. Named plaintiffs Ydalia Rodriguez, Maria Antonieta and David Herrera, and Lucy and Alfonso Moreno are former chapter 13 debtors with mortgages serviced by Countrywide Home Loans, Inc. ("Countrywide"). The Plaintiffs each cured their pre-petition mortgage arrearages, completed their chapter 13 plans, and received a discharge from their bankruptcy cases. They allege that after they emerged from bankruptcy, Countrywide threatened to
Page 2
foreclose on their homes if they did not pay fees that were charged while their bankruptcy cases were still pending. Plaintiffs claim that these fees were unreasonable, unapproved, and undisclosed under Federal Rule of Bankruptcy Procedure 2016(a).1 Additionally, they claim thatCountrywide misapplied mortgage payments to satisfy some of the unauthorized fees, instead of properly applying the payments as they were intended—to satisfy the amount due each month on their mortgages. Plaintiffs sought (1) a declaratory judgment that Countrywide's conduct violated the Bankruptcy Code, (2) an injunction preventing Countrywide from trying to collect undisclosed fees, (3) compensatory damages (including disgorgement and restitution), (4) punitive damages, and (5) sanctions from the bankruptcy court.
The bankruptcy court found that Countrywide "admits that it misapplied plan payments and charged fees without first receiving Court approval" but Countrywide contended that (1) the misapplications and charges were sporadic
Page 3
rather than part of a regular practice and (2) the fees did not violate Rule 2016(a). In response, the bankruptcy court held that, "'[u]nder the plain language of Rule 2016, a mortgage lender must file a Rule 2016 application before collecting any reimbursable fees and costs while a chapter 13 case remains pending.'" Rodriguez v. Countrywide Homes Loans, Inc. (In re Rodriguez), 421 B.R. 356, 372 (Bankr. S.D. Tex. 2009). The bankruptcy court concluded that Rule 2016(a) applied to fees that were "assessed during bankruptcy but not collected until post-bankruptcy," rejecting Countrywide's arguments.
Plaintiffs moved for class certification of both a Rule 23(b)(2) class and also a Rule 23(b)(3) class on December 2, 2009. See Fed. R. Civ. P. 23. After a three-day hearing, the bankruptcy court denied Rule 23(b)(2) as well as Rule 23(b)(3) class certification for Plaintiffs' damages claims because they did not satisfy Rule 23(b) but granted narrow class certification for Plaintiffs' injunctive relief claim. In doing so, the bankruptcy court determined that the proposed injunction would state that, "Countrywide shall not collect or attempt to collect any fees that (1) were incurred during the pendency of a class member's bankruptcy case, (2) are governed by Rule 2016(a), and (3) have not yet been authorized pursuant to Rule 2016(a)." It also exercised its "great discretion in certifying and managing an action," Vizena v. Union Pac. R.R. Co., 360 F.3d 496, 502 (5th Cir. 2004) (citation and internal quotation marks omitted), and redefined the class, narrowing it to only include individuals:
(a) who owed funds on a Countrywide serviced note as of February 26, 2008;
(b) who have not fully paid the relevant mortgage note, fees, or costs owed to Countrywide, its successors and assigns;
(c) who filed a chapter 13 proceeding in the United States Bankruptcy Court for the Southern District of Texas on or before October 15, 2005 and have confirmed chapter 13 plans that treated mortgages serviced by Countrywide; and
Page 4
(d) as to whom Countrywide has assessed a fee or cost governed by Rule 2016(a), attributable to a time after the filing of a bankruptcy petition and before the date on which the individual received a chapter 13 discharge, unless such fee or cost was approved in a Bankruptcy Court order.
The narrowed class definition excluded those who would not be able to benefit from redeeming time because they either had already paid their mortgages in full or no longer had a mortgage serviced by Countrywide. See In re Monumental Life Ins. Co., 36,5 F.3d 408 (5th Cir. 2004) (citingBolin v. Sears, Roebuck & Co., 231 F.3d 970, 978 (5th Cir. 2000)) (requiring that "most of the class" seeking injunctive relief be able to benefit from the injunction).
On appeal, Countrywide challenges the bankruptcy court's class certification order, arguing that (1) the grant of class certification is precluded by Rule 23(b) and our holding in Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn) ("Wilborn II"),2 609 F.3d 748 (5th Cir. 2010)); (2) the bankruptcy court did not define an ascertainable class; and (3) the bankruptcy court abused its discretion in failing to reconsider classcertification after a consent judgment in the United States District Court for the Central District of California ("the consent judgment") rendered injunctive relief in the instant case moot.
I. Class Certification
We review a denial of class certification for abuse of discretion and legal questions implicated by the denial de novo. Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 227 (5th Cir. 2009); Vizena, 360 F.3d at 502. "'Implicit in this deferential standard is a recognition of the essentially factual basis of the certification inquiry and of the [trial] court's inherent power to
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manage and control pending litigation.'" Monumental Life, 365 F.3d at 414 (quoting Allison v. Citgo Petroleum Corp., 151 F.3d 402, 408 (5th Cir. 1998)).
Parties seeking to certify a class must satisfy Fed. R. Civ. P. 23(a)'s four threshold requirements3 and the requirements of Fed. R. Civ. P. 23(b)(1), (2), or (3). Maldonado v. Ochsner Clinic Found., 493 F.3d 521, 523 (5th Cir. 2007). "The party seeking class certification bears the burden of demonstrating that the requirements of [R]ule 23 have been met." O'Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 737-38 (5th Cir. 2003) (citing Allison, 151 F.3d at 408).
Countrywide contests the bankruptcy court's holding that Plaintiffs met the requirements of Rule 23(b)(2).4 "[Rule 23(b)(2)'s] focus on injunctive and declaratory relief presumes a class best described as a 'homogenous and cohesive group with few conflicting interests among its members.' Class certification centers on the defendants' alleged unlawful conduct, not on individual injury." Monumental Life, 365 F.3d at 415 (quoting Allison, 151 F.3d at 413). Rule 23(b)(2)5 requires that (1) the defendant's actions or refusal to act are generally
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applicable to the class as a whole and (2) injunctive relief predominates over damages sought. Bolin, 231 F.3d at 975.
A. General Applicability to the Class
"Instead of requiring common issues, 23(b)(2) requires common behavior by the defendant towards the class." Casa Orlando Apartments, Ltd. v. Fed. Nat'l Mortg. Ass'n, 624 F.3d 185, 198 (5th Cir. 2010). "The court may certify a class under Rule 23(b)(2) if 'the party opposing theclass has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole.'" Bolin, 231 F.3d at 975 (citing Fed. R. Civ. Proc. Rule 23(b)(2)).
The bankruptcy court did not abuse its discretion when it concluded that Countrywide's fee charging actions in alleged derogation of Rule 2016(a) were generally applicable to the narrowly certified "unapproved fees" class of approximately 125 individuals. Countrywide charged every class member purportedly unauthorized fees in contravention of Rule 2016(a). It is this alleged common behavior towards all members of the class—"systematically ignor[ing] Rule 2016(a) by charging unauthorized fees"—that led to the class members allegedly being harmed in the same way. See Bolin, 231 F.3d at 975 n.22. As the bankruptcy court explained, "[t]he [class action] therefore eliminates piecemeal litigation concerning whether Countrywide must seek Court approval for fees that it imposes: once the class is certified and the injunction is granted or denied, that issue will be resolved as to all class members."
Countrywide argues that our decision in Wilborn II, involving similar facts to the instant case, mandates that class certification be denied. Wilborn II, however, was exactingly adhered to by the bankruptcy court, which extensively applied Wilborn II's reasoning to redefine and narrow the instant class and
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proposed injunction and to deny class certification as to any damages. The Wilborn II plaintiffs alleged that, "for each named plaintiff and each unnamed class member Wells Fargo impermissibly charged post-petition fees and costs without obtaining approval from the bankruptcy court, as purportedly required by Title 11 and [Federal Rule of Bankruptcy Procedure 2016]." 609 F.3d at 752. The bankruptcy court granted classcertification for the plaintiffs' claims for declaratory judgment, disgorgement, injunctive relief, and sanctions. Id. at 751. On appeal, after rejectingclass certification under Rule 23(b)(3), we determined that class certification was also improperly granted under Rule 23(b)(2) because "[a]gain, the circumstances and court orders differ between the judges and cases. And the injunctive or declaratory relief sought by the plaintiffs must predominate over claims for monetary relief." Id. at 757 (citing Maldonado, 493 F.3d at 524). We concluded that to determine which fees should be disgorged, the bankruptcy court would have to conduct an individual assessment of each individual's claims to figure out how and why certain fees were charged or paid. Id. at 756—57.6 Such an assessment would include deciding whether debtors agreed to the fees, whether the parties entered into an agreement to modify the stay or agreed to a loan modification, whether the bankruptcy court approved of the fees, and whether the defendant had a viable defense to each particular plaintiff's fees. Id.
In the instant case, the bankruptcy court conformed its ruling explicitly to our Wilborn II decision, explaining how it would not include damages claims in its class certification grant because, "when damages enter the fray, individualized issues begin to predominate as the Court must consider the harm
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suffered by each class member on a case-by-case basis." Similarly, because disgorgement and other damages claims were also excluded from this class action, Countrywide will not be required to adjudicate and repay fees, again, responding to our direction in Wilborn II that individualized disgorgements not be resolved through class action procedure. "[Rule 23(b)(2)] is clear that claims seeking injunctive or declaratory relief are appropriate for (b)(2) class certification." Allison, 151 F.3d at 411. The injunction being sought would target only the alleged Countrywidepractice of viewing Rule 2016(a) as inapplicable to any fee assessed post-petition but charged post-discharge and, accordingly, any practice of never seeking approval of such fees under Rule 2016(a). If Plaintiffs prevail, Countrywide would no longer be able to collect or attempt to collect fees within the scope of Rule 2016(a) that, according to its own readily accessed and comprehensive AS-400 database, were incurred post-petition and pre-discharge yet have not been authorized for collection pursuant to Rule 2016(a).7 "The focus is properly upon Countrywide's fee assessment and collection practice, not on the individualized manner in which each class member may have been affected by the practices."8 As a result, the injunctive claim on
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its own does not involve "the myriad issues that may arise in each case as to whether and how fees and costs were imposed." Wilborn II, 609 F.3d at 757.9
The bankruptcy court made factual findings based on multiple days of testimony and the fifty volume record and concluded therefrom that many of the factors cited by Countrywide as requiring an individualized assessment of claims are readily identifiable in Countrywide's AS-400 database. For each mortgagor, the AS-400 database tracks the type and amount of all fees; whether a fee was classified as recoverable (collectable) or non-recoverable (not collectable); the funds pre- and post-petition; all payments; the mortgagor's bankruptcy filings; the status, case number, and chapter of the mortgagor's bankruptcy case; the name of the trustee handling the mortgagor's bankruptcy case; the date of the chapter 13 plan confirmation; and all information relevant to the escrow and principal balance of the mortgage. After a firsthand review of the evidence, the bankruptcy court determined, based on testimony by one of Countrywide's witnesses, that Countrywide's AS-400 database was searchable, making the information easily ascertainable without court intervention.10 Since
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"Countrywide could [] query all the fees charged to every Countrywide account in the Southern District of Texas, or even to every mortgage account nationwide," the bankruptcy court faced unique facts that allowed it to conclude that it would not need to determine on a loan-by-loan basis whether fees were improperly charged.
Next, Countrywide argues that its conduct cannot be generally applicable to the class because Countrywide had no policy concerning Rule 2016(a) compliance. However, the bankruptcy court did not abuse its discretion when it determined that because "Countrywide assessed and charged fees to the class according to its understanding that its conduct was not regulated by Rule 2016(a) . . . . Plaintiffs have sufficiently alleged behavior applicable to the class as a whole under Rule 23(b)(2) and Bolin." The bankruptcy court reasonably determined, based on the extensive record, that Countrywide had a regular practice for dealing with fees accrued post-petition but charged post-discharge and Rule 2016(a). When it perceived that compliance with Rule 2016(a) was not required, Countrywide had a practice of noncompliance. The bankruptcy court summarized its findings from evidence submitted to it as follows:
Multiple employees of Countrywide, each of whom was intimately familiar with Countrywide's relevant bankruptcy and fee collection policies, testified that Countrywide would regularly assess fees without any concern for Rule 2016(a)'s requirements. The employees also testified that Countrywide would regularly classify unauthorized fees as recoverable from debtors in the AS-400 database.11
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In addition, Countrywide contends that the bankruptcy court was mistaken when it concluded that Countrywide's behavior was generally applicable to the class because there was no legal consensus regarding whether Rule 2016(a) applied to post-petition mortgage fees. However, this fact does not impact the general applicability of Countrywide's behavior because Countrywide treated all class members the same, failing to seek approval in every case. Irrespective of any legal uncertainty as to Rule 2016(a), Countrywide consistently did not apply for authorization pursuant to Rule 2016(a); there was no contradictory or sporadic treatment of Rule 2016(a) by Countrywide that would militate against certification of this class.12
Finally, Countrywide argues, citing Meyer v. Brown & Root Construction Co., 661 F.2d 369 (5th Cir. 1981), that the proposed injunction would be improper because it merely orders Countrywide to obey the law. Countrywide's argument misinterprets Meyer. In Meyer, the district court enjoined the defendant from "'engaging in the stated unlawful employment practice.'" Id. at 373. The defendant argued that such language was too vague because it merely ordered the defendant to obey the law generally rather than identifying what conduct was specifically prohibited. Id. We rejected that argument, holding that the injunction was sufficiently specific because the judgment made it clear that the unlawful employment practice being prohibited was "constructively discharging plaintiff when she was pregnant" in violation of Title VII. Id.
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Injunctions are problematic when they order a defendant to obey the law but do not simultaneously indicate what law the defendant needs to obey. Id. We did not hold that injunctions that order a defendant to obey a specific law are problematic. See id.
Therefore, we conclude that the bankruptcy court did not abuse its discretion by determining that Countrywide's failure to seek bankruptcy court approval under Rule 2016(a) is generally applicable, under these facts probingly ascertained by the bankruptcy court, to this narrow class.
B. Damages are "Incidental" to Injunctive Relief
Since no damages are part of this case's class certification, the bankruptcy court did not abuse its discretion when, after three days of hearings and consideration of extensive supporting evidence, it concluded that the Rule 23(b)(2) requirement that damages must be sufficiently incidental to injunctive relief was met. "[Trial] courts 'are in the best position to assess whether a monetary remedy is sufficiently incidental to a claim for injunctive or declaratory relief.'" Casa Orlando Apartments, 624 F.3d at 201 (quoting Allison, 151 F.3d at 416). The bankruptcy court recognized that, "monetary relief, to be viable in a [R]ule 23(b)(2) class, must 'flow directly from liability to the class as a whole on the claims forming the basis of the injunctive or declaratory relief,'" and properly applied the relevant analysis from Wilborn II to Plaintiffs' damages claims, denying class certification for those issues. The bankruptcy court then held that Rule 23(b)(2)'s predominance requirement was easily satisfied since only injunctive relief was at issue.13 Since no monetary relief is sought,
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monetary relief cannot be more than incidental to injunctive relief. This comports with our reasoning in James that since "much of the requested redress is pure injunctive relief," the pure injunctive relief "does not implicate a concern about monetary damages." 254 F.3d at 572; see also Allison, 151 F.3d at 411 (explaining that class certification would have been proper if the plaintiffs were only seeking injunctive relief because the plain language of Rule 23(b)(2) would have been satisfied).
Because the bankruptcy court's decision was not an abuse of discretion, we affirm its grant of class certification for Plaintiffs' injunctive relief claim.
II. Class Definition
Countrywide argues that the bankruptcy court adopted an improper class definition by certifying a so-called "fail-safe class." A fail-safeclass is a class whose membership can only be ascertained by a determination of the merits of the case because the class is defined in terms of the ultimate question of liability. Cf. Intratex Gas Co. v. Beeson, 22 S.W.3d 398, 404 (Tex. 2000) (describing the concept). "'[T]he class definition precludes the possibility of an adverse judgment against class members; the class members either win or are not in the class.'" Wilborn I, 404 B.R. at 860 (citation omitted); see also Adashunas v. Negley, 626 F.2d 600, 603—04 (7th Cir.1980) (holding that a reasonably defined class of "children entitled to a public education who have learning disabilities and 'who are not properly identified and/or who are not receiving' special education" did not exist because the class was "so highly diverse and so difficult to identify that it is not adequately defined or nearly ascertainable" and the proposed class definition would result in a "fail-safe" class); Beeson, 22 S.W.3d at 403—05. Stated otherwise, the classdefinition is framed as a legal conclusion. Beeson, 22 S.W.3d at 404.
Countrywide does not cite any case where we have rejected a class definition because it created a so-called fail-safe class. We rejected a rule
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against fail-safe classes in Mullen v. Treasure Chest Casino, 186 F.3d 620 (5th Cir. 1999), and Forbush v. J.C. Penney Co., 994 F.2d 1101 (5th Cir. 1993), abrogated on other grounds by Dukes, 131 S. Ct 2541. The plaintiff in Forbush proposed that the court should define its class as, "employees 'whose pension benefits have been, or will be, reduced or eliminated as a result of the overestimation of their Social Security benefits.'" 994 F.2d at 1105. The defendant argued that the class was not defined with sufficient specificity and was "hopelessly 'circular,' as the court must first determine whether an employee's pension benefits were improperly reduced before that person may be said to be a member of the class." Id. In response, we stated that, "[t]his argument is meritless and, if accepted, would preclude certification of just about any class of persons alleging injury from a particular action. These persons are linked by this common complaint, and the possibility that some may fail to prevail on their individual claims will not defeat class membership." Id.
In Mullen, the class was defined as, "all members of the crew of the M/V Treasure Chest Casino who have been stricken with occupational respiratory illness caused by or exacerbated by the defective ventilation system in place aboard the vessel." 186 F.3d at 623. The defendant argued that, "any class must be capable of objective identification before it can be certified" and because membership in the class was contingent upon "ultimate issues of causation," the defendant was "prejudiced by being forced to defend against claimants who may not end up being members of the class." Id. at 624 n.1. Relying on Forbush, we rejected this argument, holding that, "because the class is similarly linked by a common complaint, the fact that the class is defined with reference to an ultimate issue of causation does not prevent certification." Id. Because our precedent rejects the fail-safe class prohibition, we conclude that the bankruptcy court did not abuse its discretion when it defined the class in the present case.
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III. Motion for Reconsideration
Countrywide filed a Rule 59(e) motion for reconsideration, arguing that Plaintiffs' claim for injunctive relief was mooted by a consent judgment agreed to by the Federal Trade Commission ("FTC") and Countrywide in the United States District Court for the Central District of California (the "consent judgment").14 The bankruptcy court denied Countrywide's Rule 59(e) motion for reconsideration, holding that the nationwide injunction in section IX of the consent judgment did not include all of the relief available to the class in the proposed injunction. Specifically, the bankruptcy court determined that the consent judgment did not moot the proposed injunction because (1) the consent judgment allows Countrywide to collect fees without Rule 2016(a) bankruptcy court authorization by following instead debtor notice procedures set forth in the FTC consent judgement and (2) the consent judgment fails to provide relief to Plaintiffs who had payments misapplied by Countrywide.15
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We affirm the bankruptcy court's denial of Countrywide's motion for reconsideration of the certification order. Rule 59(e) motions are "not the proper vehicle for rehashing evidence, legal theories, or arguments that could have been offered or raised before the entry of judgment." Templet v. HydroChem Inc., 367 F.3d 473, 478-79 (5th Cir. 2004) (citing Simon v. United States, 891 F.2d 1154, 1159 (5th Cir. 1990)). They are used to "call[] into question the correctness of a judgment"and are "properly invoked 'to correct manifest errors of law or fact or to present newly discovered evidence.'" In re Transtexas Gas Corp., 30,3 F.3d 571 (5th Cir. 2002) (quoting Waltman v. Int'l Paper Co., 875 F.2d 468, 473 (5th Cir. 1989)). "Reconsideration of a judgment after its entry is an extraordinary remedy that should be used sparingly." Templet, 367 F.3d at 479 (internal citations omitted). We perceive no manifest error requiring the application of this extraordinary remedy because of Countrywide's consent judgment with the FTC.
In Templet, we refused to reverse a district court's rejection of a Rule 59(e) motion when "the underlying facts were well within the [plaintiffs'] knowledge prior to the district court's entry of judgment." Id. Here, the consent judgment was entered by the Central District of California on June 15, 2010. The
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bankruptcy court issued its order on July 21, 2010. The defendants first brought the consent judgment to the bankruptcy court's attention in its Rule 59(e) motion, filed on August 4, 2010. As the bankruptcy court emphasized, Countrywide could have filed a supplemental motion notifying the bankruptcy court of the consent judgment just as Countrywide had done after Wilborn II was decided. Because Countrywide had forty-one days to apprise the bankruptcy court of the consent judgment before the bankruptcy court issued its certification order, the consent judgment did not constitute newly discovered evidence compelling Rule 59(e) relief as Countrywide alleges.
Countrywide argues that it could not have known that the bankruptcy court would certify the class only for injunctive relief and therefore, that it could not have known that the consent judgment would moot the class certification grant. However, the consent judgment was relevant to the case no matter how broadly the bankruptcy court granted class certification. Although the bankruptcy court certified a narrower class than the one sought by Plaintiffs, Countrywide knew that Plaintiffs were seeking injunctive relief before the bankruptcy court issued its class certification order. The bankruptcy court could have explored and accepted Countrywide's argument and determined that Plaintiffs' claim for injunctive relief was moot even if the bankruptcy court had certified both a damages and an injunctive class. Because we conclude that Countrywide's Rule 59(e) motion for reconsideration was not based on newly discovered evidence, we do not revisit the bankruptcy court's separate merits denial of the motion.
VI. Conclusion
For the above reasons, we AFFIRM the certification of the injunctive class, the bankruptcy court's class definition, and the denial ofCountrywide's motion for reconsideration.
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Notes:
1. Fed. R. of Bankr. P. 2016(a) reads:
Application for Compensation or Reimbursement. An entity seeking interim or final compensation for services, or reimbursement of necessary expenses, from the estate shall file an application setting forth a detailed statement of (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested. An application for compensation shall include a statement as to what payments have theretofore been made or promised to the applicant for services rendered or to be rendered in any capacity whatsoever in connection with the case, the source of the compensation so paid or promised, whether any compensation previously received has been shared and whether an agreement or understanding exists between the applicant and any other entity for the sharing of compensation received or to be received for services rendered in or in connection with the case, and the particulars of any sharing of compensation or agreement or understanding therefor, except that details of any agreement by the applicant for the sharing of compensation as a member or regular associate of a firm of lawyers or accountants shall not be required. The requirements of this subdivision shall apply to an application for compensation for services rendered by an attorney or accountant even though the application is filed by a creditor or other entity. Unless the case is a chapter 9 municipality case, the applicant shall transmit to the United States trustee a copy of the application.
2. When citing Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn), we cite the bankruptcy court's decision, Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn) ("Wilborn I"), 404 B.R. 841, 860 (Bankr. S.D. Tex. 2009), reversed on class certification grounds by Wilborn II, 609 F.3d 748 (quoting Genenbacher v. CenturyTel Fiber Co. II, 244 F.R.D. 485, 488 (C.D. Ill. 2007)), as "Wilborn I," and our reversal of that decision as "Wilborn II."
3. Fed. R. Civ. P. 23(a) states:
(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.
4. Though Countrywide argues that the bankruptcy court did not properly conclude that the class met the requirements of 23(a), Countrywide has waived this argument since it did not raise this argument until its reply brief. "An appellant abandons all issues not raised and argued in its initial brief on appeal." Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994).
5. Fed. R. Civ. P. 23(b)(2) states that:
A class action may be maintained if Rule 23(a) is satisfied and if . . . the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.
6. Although these citations refer to the portion of Wilborn II that analyzes class certification under Rule 23(b)(3), the Rule 23(b)(2) discussion incorporates by reference the earlier Rule 23(b)(3) discussion. See Wilborn II, 609 F.3d at 757 ("For similar reasons, class certification is improper under Rule 23(b)(2). . . . Again, the circumstances and court orders differ between the judges and cases.").
7. In abundance of caution to avoid individualized litigation and a loss of class homogeneity, the bankruptcy court made clear that even injunctive success for the classto ensure Countrywide's compliance with Rule 2016(a) might mean specific fees validly collected by Countrywide will be retained.
8. The bankruptcy court's single-issue injunctive class redefinition and application of Wilburn II demonstrate that Countrywide's alleged fee practice defenses will not be implicated or compromised in this litigation. In fact, that concern, with careful inquiry into the named Plaintiffs' cases, was the basis for the bankruptcy court's broad application of Wilborn II to refuse certification even as to non-disgorgement damages claims. Regardless, our caselaw is clear that courts are "free . . . as often as necessary before judgment" to reconsider whether class certification continues to be appropriate. McNamara v. Felderhof, 410 F.3d 277, 280 (5th Cir. 2005) (citations omitted); see also Richard v. Byrd, 709 F.2d 1016, 1019 (5th Cir. 1983) (holding, before the 2003 amendments to Rule 23, that a district judge must decertify a class as appropriate). As contemplated by the bankruptcy court, it can determine across individual cases at trial whether authorization pursuant to Rule 2016(a) is unnecessary in circumstances where Countrywide would invoke waiver, estoppel, voluntary payment, or res judicata as a defense. The injunction, the court clarified, would not impede the retention or recovery of validly assessed fees.
9. Additionally, "there is no concern that 'the legitimate interests of potential class members who might wish to pursue their monetary [damages] claims individually' would be interfered with by this class certification." James v. City of Dallas, Tex., 254 F.3d 551, 572—73 (5th Cir. 2001) (quoting Allison, 151 F.3d 415), abrogated on other grounds by M.D. ex rel. Stukenberg v. Perry, 675 F.3d 832, 839—41 (5th Cir. 2012) (explaining that, contrary to prior Fifth Circuit caselaw that "[t]he fact that some of the Plaintiffs may have different claims, or claims that may require some individualized analysis, is not fatal to commonality," the Supreme Court held in Dukes v. Walmart, 131 S. Ct. 2541 (2011), that "[c]ommonality requires the plaintiff to demonstrate that the class members have suffered the same injury." (internal quotation marks omitted)). The proposed injunction does not indicate that it would have any preclusive effect on any of the individual plaintiffs' damages claims.
10. The bankruptcy court pointed out that "[t]he only relevant data noticeably absent from the AS-400 database is information concerning court authorization of fee awards"; consequently, the bankruptcy court explained that any fees already agreed upon by the parties would not be considered as a part of the class action.
11. The instant case, therefore, is distinguishable factually from Dukes v. Walmart, where the Supreme Court held that the plaintiffs had offered insufficient evidence to show that the discriminatory treatment at issue was typical of Wal-Mart's employment practices. 131 S. Ct. at 2554—55 (discussing and applying Bolin). The Supreme Court noted that Wal-Mart had a specific policy forbidding sex discrimination, and individual Wal-Mart managers were using their discretion over hiring matters to discriminate. Id. at 2553—54. In contrast, the bankruptcy court found that Plaintiffs in the present case have identified a regular practice within Countrywide of not following Rule 2016(a). See also id. at 2555. It is not the case that Countrywide required its employees to follow Rule 2016(a) but individual employees chose not to; in fact, noCountrywide employee filed a Rule 2016(a) application during the time period identified in the class definition.
12. Countrywide argues that to the extent that it did have a Rule 2016(a) policy, that policy was to defer decision-making to local counsel. However, local counsel was not charged with determining whether a fee fell within the scope of Rule 2016(a) or deciding whether or not bankruptcy court approval in compliance with Rule 2016(a) should be sought; instead, Countrywide only asserts that local counsel determined whether to seek approval of fees in ways other than complying with Rule 2016(a), including agreed orders and amended proofs of claim.
13. The bankruptcy court's limited grant of class certification is especially appropriate because "a court should certify a class on a claim-by-claim basis, treating each claim individually and certifying the class with respect to only those claims for which certification is appropriate." Bolin, 231 F.3d at 976. According to Bolin, "Rule 23(c)(4) explicitly recognizes the flexibility that courts need in class certification by allowing certification 'with respect to particular issues' and division of the class into subclasses." Id.
14. The relevant portion for the consent judgment states:
IT IS FURTHER ORDERED that Defendants, their officers, employees, agents, representatives, and all other Persons or entities in active concert or participation with them who receive actual notice of this Order by personal service or otherwise, directly or through any corporation, subsidiary, division, or other device, are hereby permanently restrained and enjoined, in connection with the Servicing of any Loan that incurred any Fee, Escrow Shortage, and/or Escrow Deficiency during a Chapter 13 Bankruptcy, from collecting any such Fee, Escrow Shortage, and/or Escrow Deficiency after Defendants obtain relief from the bankruptcy stay or, if relief from stay is not sought or granted, after the debtor is discharged or the bankruptcy case is dismissed, unless Defendants (1) obtained specific court approval for the charges during the Chapter 13 Bankruptcy case, or (2) provided to the consumer the notices required under Sections VIII and IX of this Order.
15. We also agree with the bankruptcy court's analysis of the merits of Countrywide's motion. The bankruptcy court examined whether Countrywide met its burden to show that there was a realistic prospect that the violations alleged by Plaintiffs would continue notwithstanding the consent judgment. The text of the consent judgment does not delineate the scope of Rule 2016(a) and could allow Countrywide to bypass bankruptcy court authorization by giving mortgagors notice of the fees through the consent judgment's notice procedures. As the bankruptcy court correctly explained, "this case is primarily about Plaintiffs' desire to force Countrywide to comply with Rule 2016(a) authorization before collecting fees incurred during Plaintiffs' bankruptcies." The consent judgment would not necessarily require this compliance.
Furthermore, Appellees argue that Countrywide could reclassify fees from recoverable to non-recoverable back to recoverable so that it could use the consent judgment's notice provision to avoid seeking bankruptcy court authorization. This comports with the bankruptcy court finding in its class certification decision, based on evidence considered by it, that Countrywide's employees "testified that Countrywide would regularly classify unauthorized fees as recoverable from debtors in the AS-400 database," and that there was a realistic possibility that Countrywide could reclassify fees from non-recoverable to recoverable to circumvent Rule 2016(a) by "collect[ing] unauthorized fees, which were deemed current during this class action, after the conclusion of this case."
Finally, the consent judgment explicitly does not include banks affiliated with Countrywide because banks are outside the jurisdiction of the FTC. The proposed injunction has no such limitation.
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