Angel Garcia, et al v. FNMA, et al

Filing

OPINION and JUDGMENT filed : The judgment of the district court is AFFIRMED. Decision for publication. Gilbert S. Merritt (AUTHORING), Jane Branstetter Stranch, and Bernice Bouie Donald (CONCURRING IN THE JUDGMENT), Circuit Judges.

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 15a0064p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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ANGEL GARCIA; ESTELA GARCIA,
Plaintiffs-Appellants, │
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v.
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No. 14-1687

>

FEDERAL NATIONAL MORTGAGE ASSOCIATION;
MORTGAGE ELECTRONIC REGISTRATION SYSTEMS,
INC.; BAC HOME LOANS SERVICING, LP; BANK OF
AMERICA, N.A.,
Defendants-Appellees,
FEDERAL HOUSING FINANCE AGENCY,
Intervenor-Appellee.

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┘

Appeal from the United States District Court
for the Western District of Michigan at Grand Rapids
No. 1:13-cv-01259—Robert J. Jonker, District Judge.
Decided and Filed: April 7, 2015
Before: MERRITT, STRANCH, and DONALD, Circuit Judges.
_________________
COUNSEL
ON BRIEF: Jason D. Jenkinson, Traverse City, Michigan, for Appellants. Steven R. Smith,
Jena M. Valdetero, BRYAN CAVE, LLP, Chicago, Illinois, for Defendants-Appellees. Howard
N. Cayne, Asim Varma, Michael A. Johnson, ARNOLD & PORTER LLP, Washington, D.C.,
for Intervenor-Appellee.
MERRITT, J., delivered the opinion of the court, in which STRANCH, J., joined.
DONALD, J. (pp. 11–12), concurred in the judgment only.

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_________________
OPINION
_________________
MERRITT, Circuit Judge. This case presents another appeal from a home foreclosure in
Michigan. Plaintiffs raise one issue on appeal: Whether the district court erred in dismissing
plaintiffs’ due process claim because it found that the Federal National Mortgage Association,1
commonly referred to as Fannie Mae, was not a state actor for constitutional purposes when it
foreclosed upon their home? We affirm the district court’s judgment dismissing the due process
claim as without merit, but on the ground that the Michigan foreclosure procedure does not
violate due process.
I.
Plaintiffs Angel and Estela Garcia obtained a home loan in 2003 from First Guaranty
Mortgage Corporation and granted a mortgage to Mortgage Electronic Registration Systems,
Inc., sometimes referred to as “MERS,” 2 as mortgagee and nominee for lender First Guaranty
and its successors and assigns. The mortgage was duly recorded with the Leelanau Register of
Deeds. In January 2011, Mortgage Electronic Registration Systems assigned the mortgage to
BAC Home Loans Servicing, LP, and the assignment was recorded. BAC Home Loans merged
into Bank of America on July 1, 2011, and Bank of America became the mortgage holder. As
successor by merger, Bank of America was not required to record the assignment.
Plaintiffs do not dispute that in 2007 they fell behind on their mortgage payments and
defaulted on the loan. In January 2011, plaintiffs received a letter regarding the default and
containing information explaining their rights, including the right to seek a loan modification.
Plaintiffs sought foreclosure-related assistance from the Northern Michigan Community Action
1

Fannie Mae, and its twin brother Freddie Mac, are government–sponsored private enterprises that
purchase and securitize residential mortgages. Specifically, Fannie Mae is a federally chartered corporation that
operates in the secondary mortgage market, purchasing and securitizing residential mortgages to provide mortgage
lenders with capital to use to fund additional mortgages.
2

MERS is a system for electronically tracking interests in mortgages that are traded on the secondary
market. MERS members (approximately 6,000) agree that MERS serves as mortgagee or beneficiary, and when loan
ownership or servicing rights are sold from one MERS member to another, MERS remains the titleholder to the
security instrument as nominee on behalf of whoever owns the loan. The language on a standard mortgage or deed
of trust reads: “MERS is the mortgagee [or beneficiary] of this security instrument. MERS is a separate corporation
that acts solely as nominee on behalf of the lender and its successors and assigns.”

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Agency, and Mr. Garcia and his son attended a workshop offered by the agency on how to
prevent foreclosure. Plaintiffs also attended a meeting with Bank of America’s legal counsel in
April 2011, providing counsel with financial information and forms prepared with help from the
Northern Michigan Community Action Agency.3
Plaintiffs were offered a loan modification by Bank of America allowing for reduced
payments for a three-month trial period. The letter offering the loan modification directed
plaintiffs to make the lowered payments on time for three months and stated that if all the trial
period payments were timely made, the loan would be permanently modified. Plaintiffs allege
that they made the three payments in accordance with the letter, but that they did not receive any
further information regarding a new payment amount after the three modified payments were
made. They also allege that Bank of America returned two payments they attempted to make in
March 2012. Despite the returned payments, Bank of America offered plaintiffs a permanent
loan modification in May 2012 and instructed them to execute and return the loan modification
agreement sent to them. Plaintiffs do not allege that they ever executed or returned the loan
modification agreement to Bank of America, and Bank of America confirms that it never
received any of the required loan modification documents.
In August 2012, Bank of America’s legal counsel sent plaintiffs a letter informing them
that because they were in default and had not accepted the loan modification agreement, a nonjudicial foreclosure would proceed. Notice of the foreclosure was published in accordance with
Michigan law and the property was sold at a sheriff’s sale on October 12, 2012. Bank of
America was the high bidder and purchased the property. It then executed a quitclaim deed to
Fannie Mae that was recorded on November 29, 2012. The six-month statutory redemption
period under Michigan law expired on April 12, 2013. In June 2013, Fannie Mae filed a
possession action in the local court. On October 15, 2013, more than six months after the
statutory redemption period had expired, plaintiffs filed this action in Michigan state court
against defendants Fannie Mae, Mortgage Electronic Registration Systems, BAC Home Loans
Servicing, LP, and Bank of America, N.A. Defendants removed the case to federal court
3

Plaintiffs claim that they are not proficient in the English language, but they do not claim that this
prohibited them from receiving adequate notice of the default or understanding their rights in the foreclosure process
with help from the Northern Michigan Community Action Agency and their son.

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pursuant to both diversity and federal-question jurisdiction.

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The Federal Housing Finance

Agency, the federal “conservator” for winding up the affairs of Fannie Mae, was permitted to
intervene.4
Plaintiffs brought four claims in their complaint: (1) Quiet Title pursuant to Mich.
Comp. Laws § 600.2932; (2) violations of Fifth and Fourteenth Amendment Due Process Rights;
(3) illegal/improper foreclosure and sheriff’s sale pursuant to Mich. Comp. Laws § 600.3204;
and (4) violation of Mich. Comp. Laws § 3205 et seq. Defendants Fannie Mae, Mortgage
Electronic Registration Systems, BAC Home Loans Servicing and Bank of America filed a
motion to dismiss, as did the intervenor, Federal Housing Finance Agency. The district court
granted the motions to dismiss on all claims. Plaintiffs appeal only the dismissal of Count II,
which claims violation of their Fifth and Fourteenth Amendment Due Process Rights.
II.
We review a ruling on a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss
de novo. Casias v. Wal–Mart Stores, Inc., 695 F.3d 428, 435 (6th Cir. 2012). A complaint must
contain sufficient factual matter, accepted as true, to “state a claim [for] relief that is plausible on
its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is plausible on its
face if the “plaintiff pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009).

4

Congress enacted the Housing and Economic Recovery Act, Pub. L. 110–289, 122 Stat. 2654, on July 30,
2008. The Act created the Federal Housing Finance Agency as the successor agency to the Office of Federal
Housing Enterprise Oversight, which had been established in 1992 to regulate Fannie Mae and Freddie Mac, and the
Federal Housing Finance Board. Congress designated the Federal Housing Finance Agency “an independent agency
of the Federal Government” and authorized the Director to issue regulations, using notice and opportunity for public
comment pursuant to the Administrative Procedure Act, 5 U.S.C. § 553. The Federal Housing Finance Agency
regulates and supervises Fannie Mae, Freddie Mac, and the twelve Federal Home Loan Banks. 12 U.S.C. § 4511
(2008). Additionally, the Federal Housing Finance Agency serves as conservator or receiver of Fannie Mae and
Freddie Mac for purposes of “reorganizing, rehabilitating, or winding up [their] affairs.” Id. § 4617(a)(2). The
Director of the Federal Housing Finance Agency was given “general regulatory authority over” Fannie Mae and
Freddie Mac (as well as the Federal Home Loan Banks and the Office of Finance), id. § 4511(b)(2), and was
directed to ensure, among other things, that Fannie Mae and Freddie Mac operate “in a safe and sound manner” and
“foster liquid, efficient, competitive, and resilient national housing finance markets . . . .” 12 C.F.R. § 1200.2.

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III.
The Fifth and Fourteenth Amendments prohibit the deprivation of property by a state
actor without due process of law. Our previous decisions concerning the Due Process Clause as
it relates to foreclosures by Freddie Mac and Fannie Mae have focused on whether Freddie Mac
and Fannie Mae have been transformed into state actors in light of the conservatorship of the
Federal Housing Finance Agency.5 We have not addressed the questions of whether the Federal
Housing Finance Agency is a state actor and what restrictions the Due Process Clause may
impose on the Agency in its direction of Fannie Mae. We find it unnecessary to wade into that
discussion in this case. Even if the Due Process Clause constrains the Federal Housing Finance
Agency in its direction of Fannie Mae, its compliance with Michigan’s foreclosure-byadvertisement procedures satisfied the requirements of the Due Process Clause.
We begin with a brief look at the historical development of foreclosure and redemption at
common law. At early common law, the mortgagee had the right to confiscate the mortgaged
property at the time of the first missed payment. If the mortgagor had made a number of
payments, the mortgagee received a windfall because it kept all payments made up to the time of
default and then also received full title to the property as well. Accordingly, the Court of
Chancery in the sixteenth century sought to mitigate this harsh result by granting the mortgagor
an equitable period of time to redeem the property by coming current with the payments. The
mortgagor’s equity of redemption demonstrates the equity courts’ reluctance to permit unfair or
inequitable loss of a person’s property. However, the ambiguity surrounding the equitable
redemption process, particularly the uncertainty of the amount of time to redeem the property,
prompted states to regularize the process with statutory redemption periods starting in the early
1800s. See Theodore F. T. Plucknett, A Concise History of the Common Law 603-08 (1956);
Thomas W. Bigley, Comment, Property Law–The Equity of Redemption: Who Decides When It
Ends?, 21 Wm. Mitchell L. Rev. 315, 319-22 (1995); Grant Nelson & Dale Whitman, Real
Estate Finance Law §§ 7:1-7:5 (3d ed. 1994).
5

See Mik v. Fed. Home Loan Mortg. Corp., 743 F.3d 149, 168 (6th Cir. 2014); Rubin v. Fannie Mae, 587 F.
App’x 273 (6th Cir. 2014); Bernard v. Fed. Nat’l Mortg. Ass’n, 587 F. App’x 266 (6th Cir. 2014), petition for cert.
filed, 83 U.S.L.W. 3636 (U.S. Dec. 29, 2014) (No. 14-804); Fed. Home Loan Mortg. Corp. v. Gaines, 589 F. App’x
314 (6th Cir. 2014), petition for cert. filed, 83 U.S.L.W. 3636 (U.S. Dec. 29, 2014) (No. 14-804); Heibel v. Fed.
Nat’l Mortg. Ass’n, 581 F. App’x 543 (6th Cir. 2014).

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As a result, two types, or phases, of the right to redemption now generally exist in the
United States. The first is an “equitable” redemption period that occurs before the foreclosure
and sale of the property. It allows the mortgagor to pay the outstanding debt and have his rights
to the property restored. This opportunity may not be waived by contract and is a creation of the
Court of Chancery four centuries ago. The right to redeem after the foreclosure and sale is a
“statutory right of redemption.” Statutory redemption provides that even after the equitable right
of redemption has been foreclosed, the borrower has one more opportunity to regain the property
by paying the purchaser at the foreclosure sale the price paid at the sale.

The statutory

redemption period is in fact an additional period granted to the property owner after the
equitable redemption period ends at the time of sale.
The requirement for “due process of law” functions somewhat like equity to require
procedural fairness and to prohibit the state from conducting unfair or arbitrary proceedings.
“Procedural due process” at its core requires notice and an opportunity to be heard “at a
meaningful time and in a meaningful manner.” Armstrong v. Manzo, 380 U.S. 545, 552 (1965);
see also Mathews v. Eldridge, 424 U.S. 319, 333 (1976). Accordingly, the Due Process Clause
is flexible and calls for such procedural protections as the particular situation demands. Due
process is required to prevent, to the extent possible, an erroneous deprivation of property. See
Gilbert v. Homar, 520 U.S. 924, 930-32 (1997) (due process calls for such procedural
protections as the situation demands). The extent to which procedural due process must be
afforded the plaintiff is influenced by the extent to which he may suffer loss and depends upon
whether his interest in avoiding that loss outweighs the governmental interest in summary
adjudication. Cafeteria & Rest. Workers Union v. McElroy, 367 U.S. 886 (1961), tells us that
“consideration of what procedures due process may require under any given set of circumstances
must begin with a determination of the precise nature of the government function involved as
well as of the private interest that has been affected by governmental action.” Id. at 895.
Although we find no Supreme Court opinion ruling on what procedures satisfy due
process in this foreclosure context, lower courts, scholars, Congress, and agencies have taken
varied approaches to the question of whether, and how, federally related entities, including the
Department of Veterans Affairs, and its predecessor the Veterans Administration, the Farmers

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Home Administration, and the Department of Housing and Urban Development are subject to
due process constraints when they foreclose mortgages. These agencies, which sometimes are
direct lenders and other times only insure loans to borrowers, may utilize nonjudicial
foreclosures that provide specified notice requirements but no hearing before the property is sold.
See Florence Wagman Roisman, Protecting Homeowners from Non-Judicial Foreclosure of
Mortgages Held by Fannie Mae and Freddie Mac, 43 Real Estate L. J. 125 (2014).
A. Notice
The traditional assumption in the United States has been that the required notice for a
foreclosure is a contractual or statutory matter and not a constitutional problem. See Scott v.
Paisley, 271 U.S. 632, 635 (1926) (notice to a mortgagor is sufficient if a sale of mortgaged
property is conducted in accordance with the terms of a contract). More recent Supreme Court
decisions have required that to satisfy the Due Process Clause, the notice must be “reasonably
calculated . . . to apprise interested parties . . . .” Mullane v. Cent. Hanover Bank & Trust Co.,
339 U.S. 306, 314 (1950); see also Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798
(1983) (“When the mortgagee is identified in a mortgage that is publicly recorded, constructive
notice by publication must be supplemented by notice mailed to the mortgagee’s last known
available address, or by personal service.”).
The Michigan foreclosure-by-advertisement statute’s notice requirements are not at odds
with notions of due process under both common law and Supreme Court precedent. The statute
requires notice and opportunities to cure the default or redeem the property at several points
before the borrower’s rights are fully extinguished. The process begins with written notice to the
borrower by the foreclosing party, by first-class mail and certified mail, return receipt requested,
both sent to the borrower’s last-known address. The notice must set forth the reasons that the
mortgage is in default and state the amount that is due and owing, and inform the borrower that
he has 30 days to request a meeting to attempt to work out a loan modification. If the borrower
requests such a meeting within 30 days of receiving notice of the default, foreclosure
proceedings will not commence until at least 90 days after the notice is mailed to the borrower.
The default notice must also inform the borrower of the number of days in the redemption period

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that will be available to the borrower if the property is eventually sold at a foreclosure sale.
Mich. Comp. Laws §§ 600.3205a-.3205e, 600.3212 (2012).6
The foreclosing party must then give notice to the borrower of the date of foreclosure and
sheriff’s sale by publishing a notice for four successive weeks, at least once in each week, in a
newspaper published in the county where the premises are located. A copy of the notice must
also be posted in a conspicuous place upon the premises described in the notice. Id. § 600.3208.
The notice must also include a statement that if the property is sold at a foreclosure sale, the
borrower may bid on the property at the sheriff’s sale. Id. § 600.3228.
Following the date of the sheriff’s sale, the borrower has a six-month, post-foreclosure
statutory redemption period in which he may redeem the property pursuant to the procedures set
forth in the Michigan law. Mich. Comp. Laws § 600.3240. As noted above, the borrower must
be given notice of this six-month statutory period for residential properties in the notice of
default. Mich. Comp. Laws § 600.3205a(j).
During the six-month post-foreclosure redemption period, if the borrower believes there
has been “fraud or irregularity” in the foreclosure process that has prejudiced his right to retain
or redeem his property, he may bring an action in a court of law requesting that the foreclosure
be stayed and that the sale be set aside. Kim v. JPMorgan Chase Bank, N.A., 825 N.W.2d 329,
337 (Mich. 2012). The borrower also has the full complement of Michigan common law
remedies regarding fraud, misrepresentation or other unfair practices or dealings, within their
applicable statutes of limitation, under which to bring legal action against appropriate parties if
the facts so warrant.
Plaintiffs do not dispute that they received the required statutory notice of the foreclosure
and subsequent sheriff’s sale by both notice posted on the property and notice in the local
newspaper.

Thus, the Michigan statute provides notice to the homeowner of the default,

foreclosure, and sale, as well as notice regarding how to cure the default, notice of an
opportunity to seek a loan modification, and notice of how to redeem the property. The plaintiffs

6

Portions of the Michigan foreclosure-by-advertisement statute have been repealed and replaced with new
language. However, we rely on the language in effect at the time of the proceedings at issue in this case.

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do not plead any erroneous deprivation of property through lack of notice that the Due Process
Clause seeks to avoid.
B. Right to a Hearing
Plaintiffs’ main argument is that—despite actual notice of default and a six-month
redemption period before foreclosure—due process entitles them to a judicial hearing before
foreclosure. Where only property rights are involved, however, the postponement of a structured
judicial hearing is not a denial of due process if there is adequate opportunity after the
foreclosure for such a hearing. Phillips v. Comm’r, 283 U.S. 589, 596–97 (1931) (“Where only
property rights are involved, mere postponement of the judicial enquiry is not a denial of due
process, if the opportunity given for ultimate judicial determination of liability is adequate.”); see
also Mitchell v. W.T. Grant Co., 416 U.S. 600, 611 (1974) (upholding Louisiana statute for
seizure of personal property as satisfying due process because the state has a legitimate interest
in enabling the creditor to enforce his security interest in the debtor’s property); see also Parratt
v. Taylor, 451 U.S. 527, 539 (1981) (state prison inmate unsuccessfully sued prison officials
alleging that the officials’ negligent loss of his mail deprived him of his property without due
process of law). Although no Supreme Court case we have found addresses the right to a hearing
in the foreclosure context, at least two circuit courts have held that where a borrower defaults on
a mortgage where the security interest is held by the government, a hearing is not required. Vail
v. Brown, 39 F.3d 208, 209 (8th Cir. 1994) (Department of Veterans Affairs was not obligated,
as matter of due process, to hold a pre-deprivation hearing if it provides notice that is “sufficient
to permit the [borrower] to participate in the foreclosure sale and to exercise his or her
preforeclosure options.”); McCachren v. U.S. Dep’t of Agric., Farmers Home Admin., 599 F.2d
655, 657 (5th Cir. 1979) (landowners entitled to a hearing only if the matter of default is in
question).
In the foreclosure context, these principles do not require a preforeclosure judicial
hearing because the mortgagor is given timely and adequate notice of the reasons for the default
in advance of the foreclosure and an opportunity to cure any default, followed by a six-month
period to redeem the property, as well as an opportunity to stop the foreclosure and set aside any
resulting sale for “fraud or irregularity” in the process. The Michigan statute provides adequate

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process in both the period following notice of the default but prior to any sale of the property,
and then further opportunity by giving the homeowner another six months to set aside the sale if
there has been “fraud or irregularity” in the process. Kim, 825 N.W.2d at 337; Mich. Comp.
Laws § 600.3240 (2012). This ability to bring an action before expiration of the statutory
redemption period satisfies the requirement that there be a hearing “at a meaningful time and in a
meaningful manner” before permanent deprivation of property that the homeowner does not yet
own free and clear of debt due to the existence of a mortgage on the property.
Plaintiffs here simply have not alleged facts that would demonstrate that they were
erroneously deprived of their property years after they first defaulted on the mortgage. Plaintiffs
signed a mortgage and a note that allowed for the use of summary foreclosure proceedings in the
event of default.

Plaintiffs do not contest that they had actual notice of the default and

subsequent foreclosure. They contacted the lender several times about loan modification after
the foreclosure process was initiated. They met with Bank of America’s counsel and were
offered a permanent loan modification, which they did not accept. What plaintiffs here would be
able to demonstrate if given a pre-foreclosure hearing is left unstated. They acknowledge
defaulting on the loan.

They do not dispute that they did not accept the offered loan

modification. They did not redeem the property during the six-month statutory redemption
period. Nor have they alleged any facts demonstrating fraud or irregularity in the process they
received that prevented them from taking any of these many opportunities to keep their home.
Thus, on the merits of the case, plaintiffs have not stated a Fifth or Fourteenth Amendment due
process claim.
For the foregoing reasons, we affirm the judgment of the district court.

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_________________
CONCURRENCE
_________________
BERNICE BOUIE DONALD, Circuit Judge, concurring in the judgment. I agree with
the majority’s decision to affirm the judgment of the district court. I write separately to express
my view that the majority’s discussion of whether Fannie Mae’s compliance with Michigan’s
foreclosure-by-advertisement procedures satisfied the Due Process Clause is unnecessary to the
disposition of this case.
The majority opinion declines to “wade into” a discussion of whether Fannie Mae is a
state actor for purposes of the Fifth and Fourteenth Amendments. (Maj. Op. at 5.) But because
state action is a prerequisite to due process claims, this is a threshold—and dispositive—issue in
this case. See Waters v. City of Morristown, 242 F.3d 353, 359 (6th Cir. 2001) (noting that, in
the context of due process claims, the state-action issue is “a threshold matter”); Northrip v. Fed.
Nat’l Mortg. Ass’n, 527 F.2d 23, 25 (6th Cir. 1975) (“[A] predicate to finding a due process
violation is a finding of state action.”). I posit that no wading is required: our recent published
decisions foreclose Plaintiffs’ argument that Fannie Mae is a state actor by virtue of its
conservatorship under the supervision of the Federal Housing Finance Agency (“FHFA”).
In Mik v. Federal Home Loan Mortgage Corp., we held as a matter of law that Freddie
Mac was not a state actor “even though the [FHFA] became Freddie Mac’s conservator in 2008.”
743 F.3d 149, 168 (6th Cir. 2014). The reasoning in Mik is clear: a necessary condition
precedent to consider a once-private entity a state actor is that the government has “permanent”
control over the entity. Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374, 399 (1995).
FHFA’s conservatorship of Freddie Mac “for the purpose of reorganizing, rehabilitating, or
winding up [its] affairs” is, by definition, temporary. 12 U.S.C. § 4617(a)(2). Later panels of
this Court have extended Mik’s holding to Fannie Mae.

See, e.g., Rubin v. Fannie Mae,

587 F. App’x 273, 274-75 (6th Cir. 2014); Bernard v. Fed. Nat’l Mortg. Ass’n, 587 F. App’x
266, 271 (6th Cir. 2014); Heibel v. Fed. Nat’l Mortg. Ass’n, 581 F. App’x 543, 544 (6th Cir.
2014) (per curiam). Thus, on the threshold issue of state action, Plaintiffs’ constitutional claims

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fail. In my view, this renders any discussion of Michigan foreclosure-by-advertisement law
unnecessary.
Because I agree with the district court’s Rule 12(b)(6) dismissal of Plaintiffs’ due process
claims, albeit on the separate grounds discussed above, I concur in the judgment.