Wednesday, January 3, 2018

FYI: 9th Cir Holds Temporary Stay of Foreclosure Not Enough to Satisfy Diversity "Amount in Controversy"

The U.S. Court of Appeals for the Ninth Circuit recently held that the trial court did not have subject matter jurisdiction based upon diversity over claims which sought a temporary stay of a foreclosure sale pending the review of a loan modification application because the amount of controversy did not exceed $75,000. 

In so ruling, the Court held that, for claims which merely seek a temporary stay of a foreclosure sale, the amount in controversy is not the value of the underlying loan. 

A copy of the opinion is available at:  Link to Opinion

Following a borrower's default on her mortgage loan, the mortgage loan servicer provided a notice of default and scheduled the property for non-judicial foreclosure sale.   Prior to the sale, the borrower filed a complaint in state court asserting alleged violations of the California Homeowners Bill of Rights (HBOR) and of California's unfair competition law, Cal. Bus. & Prof. Code § 17200, et seq. 

The borrower's complaint did not seek a specific dollar amount in damages, and instead, it prayed for an "order enjoining the sale of the Subject property while Plaintiff's loan modification application is under review" plus compensatory damages and costs, and the potential award of punitive damages for an intentional, reckless or willful violation. 

The servicer filed a notice of removal to the United States District Court based upon diversity jurisdiction.  In the notice of removal, the servicer alleged that complete diversity of citizenship existed and the amount in controversy exceeded $75,000 based upon the value of the unpaid principal balance for the mortgage loan.

The trial court denied the borrower's motion to remand concluding that the borrower's gains from the temporary injunction would surely exceed $75,000 in light of the value of the property and the amount of the indebtedness.

Subsequently, the trial court granted the servicer's motion to dismiss for failure to state a claim, and the borrower filed her appeal.

Although the borrower did not directly appeal the lower court's denial of her motion to remand, as noted by the Ninth Circuit, federal courts have an "independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party." Arbgaugh v. Y&H Corp., 546 U.S. 500, 514 (2006).

As you may recall, federal courts are courts of limited jurisdiction and the burden of establishing its jurisdiction lies with the party asserting its existence.   As noted by the Ninth Circuit, "this burden is particularly stringent for removing defendants because 'the removal statute is strictly construed, and any doubt about the right of removal requires resolution in favor of remand,'" quoting Moore-Thomas v. Alaska Airlines, Inc., 553 F.3d 1241, 1244 (9th Cir. 2009).

28 U.S.C. § 1332 provides federal courts with subject matter jurisdiction over diversity claims where the amount in controversy exceeds $75,000 and the parties are citizens of different states.

The Ninth Circuit determined there was no issue or dispute over the complete diversity of citizenship between the parties, and narrowly framed the issue on appeal solely as whether value of the indebtedness was a proper measure of the amount in controversy in a complaint seeking only a temporary injunction against foreclosure while a loan modification application is pending.

In answering this question, the Court begins it analysis with the general rule that in actions seeking declaratory or injunctive relief, it is well established that the amount in controversy is measured by the value of the object of the litigation.  Further explaining that the "either viewpoint" rule provides that the test for determining the amount in controversy is whether the pecuniary result to either party "i.e. the benefit to the plaintiff or the cost to the defendant" is sufficient to cross the jurisdictional bar.

In the case at hand, the Ninth Circuit explained that neither the benefit to the borrower or the cost to the servicer equaled the amount of indebtedness.  The Court reasoned that the "length of the temporary injunction would almost certainly be minimal", and almost fully in the servicer's control as it is based upon the time required to evaluate the borrower's loan modification application in support of its determination of a minimal cost to the servicer. 

Specifically, the Court determined that the only pecuniary harm that would be suffered by the servicer was the cost of having to review the borrower's loan modification application and of having to delay foreclosure for the length of that review.  Similarly, the Court reasoned that the only pecuniary benefit to the borrower would be derived from temporarily retaining possession of the property while the servicer reviews the application. 

Thus, the Court concluded that the amounts in controversy under the "either viewpoint" test did not equal the amount of the indebtedness because neither outcome resulted in the borrower being relieved of the obligation to repay to the debt to the servicer.

The Court specifically noted that its determination was not inconsistent with and did not overrule prior Ninth Circuit case law which established that in cases seeking a permanent injunction or declaration of quiet title that the amount in controversy was properly established by the value of the property or amount of indebtedness. See Chapman v. Deutsche Bank Nat l Trust Co., 651 F.3d 1039 (9th Cir. 2011); Garfinkle v. Wells Fargo Bank, 483 F.2d 1074 (9th Cir. 1973).  In so noting, the Court distinguished the present case and restricted its holding to cases where the "object of the litigation is only a temporary injunction while [the servicer] considers [the borrower's] loan modification application."

The Ninth Circuit further clarified that it's holding should not be construed such that every case seeking a temporary injunction of a foreclosure sale could not meet the amount in controversy requirement, only that the proper valuation of the amount in controversy was not the value of the property or the amount of the indebtedness.  

As an example, the Court stated that the jurisdictional limit could be established by other measures such as "the transactional costs to the lender of delaying foreclosure or a fair rental value of the property during the pendency of the injunction."  In the case at hand, the servicer failed to assert these claims in support of removal.  

The Court found that the servicer had failed to establish the amounts in controversy exceeded $75,000 as required, and consequently, the trial court lacked subject matter jurisdiction and its denial of the motion to remand was in error.

Having determined that the lower court lacked subject matter jurisdiction the Ninth Circuit did not address the merits of the motion to dismiss, and the trial court's decision was vacated and remanded with direction to return the matter to the state court.



Eric Tsai
Maurice Wutscher LLP 
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Email: etsai@MauriceWutscher.com

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