Deutsche Bank National Trust Company v. McLeod et al

Filing 21

ORDER, Defendants' Motion 11 to Dismiss for Lack of Jurisdiction and Failure to State a Claim Fed. R. Civ. P. 12(b)(1) and 12(b)(6) is granted; the Clerk shall enter judgment dismissing this action with prejudice, but without prejudice to seeking relief from the Default Judgment from the state court; the Clerk shall terminate this case. Signed by Judge Neil V Wake on 12/1/14.(REW)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Deutsche Bank National Trust Company,
Plaintiff,

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ORDER

v.

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No. CV-14-01720-PHX-NVW

Kenneth McLeod, et al.,

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Defendants.

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Deutsche Bank National Trust Company sues to foreclose a note and deed of trust

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on Kenneth and Carol McLeod’s house. Before the Court is Defendants’ Motion to

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Dismiss for Lack of Jurisdiction and Failure to State a Claim Fed. R. Civ. P. 12(b)(1) and

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12(b)(6) (Doc. 11). A prior state court judgment bars the relief Deutsche Bank seeks, so

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the Bank cannot state a claim upon which relief can be granted. Deutsche Bank refused,

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in five years of further proceedings following entry of that judgment, to ask the state

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court to fix the supposed error, and it refuses even now to make that request in post-

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judgment proceedings. This Court lacks jurisdiction to change the state court judgment

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by fixing the error Deutsche Bank contends underlies it. Whichever way one comes at it,

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the McLeods’ Motion to Dismiss must be granted. This dismissal will leave Deutsche

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Bank free to seek correction in the state court, if it can justify its five-year delay, or to

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reacquire the note and deed of trust from the current holder. It can then seek amendment

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of the state court judgment based on changed circumstances to allow foreclosure based

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on the new endorsement.

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I.

BACKGROUND

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In October 2006, the McLeods delivered to New Century Mortgage Corporation a

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$771,000 note secured by a deed of trust on their home in Chandler, Arizona (the

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“Property”).

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ownership of the note and deed of trust in February 2007. When the McLeods defaulted

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on their loan payments in June 2007, the loan servicer at the time “gave notice of default

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and made demand upon the McLeods for payment of the amounts due and owing on the

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loan.” Doc. 1 at 5. In response, the McLeods filed an action in Maricopa County

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Superior Court on August 4, 2008.

Plaintiff Deutsche Bank represented at oral argument that it obtained

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A partial copy of the state court complaint provided to this Court at oral argument

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reveals that the McLeods sued a number of entities—including “Deutsche Bank National

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Trust Company, a California Corporation” and “Securitized Asset Backed Receivables

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LLC Trust 2007-NC2, a New York LLC”—on a variety of theories, from violations of

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the federal Truth in Lending Act and Home Ownership and Equity Protection Act to

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breach of contract and violations of the Arizona Consumer Fraud Act.

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Deutsche Bank conceded at oral argument that Deutsche Bank National Trust

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Company was served with process in the McLeods’ suit. Deutsche Bank does not appear

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to contest the McLeods’ claims that “Securitized Asset Backed Receivables LLC …

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w[as] served August 6, 2008,” Doc. 11 at 4, or that “Deutsche Bank, Trustee and its

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principal SABR Trust answered the suit on August 29, 2008,” Doc. 11-3 at 2. Two

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weeks after the suit was filed, Mortgage Electronic Registration Systems, Inc., which was

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listed as the nominee beneficiary under the deed of trust, recorded an assignment of its

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beneficial interest to Deutsche Bank National Trust Company as Trustee under Pooling

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and Servicing Agreement dated as of February 1, 2007 Securitized Asset Backed

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Receivables LLC Trust 2007-NC2 Mortgage Pass-Through Certificates, Series 2007-

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NC2.

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The state court entered a default judgment (“Default Judgment”) on November 24,

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2008, against Securitized Asset Backed Receivables LLC Trust 2007-NC2 (“SABR”),

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which had been “properly served by personal service.” Doc. 1-8 at 1. That judgment

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quieted title to the Property in favor of the McLeods as against SABR and provided that

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“SABR is permanently enjoined and prohibited from recording any documents affecting

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or purporting to affect title of the subject property; and, any acts or recordings now or in

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the future by Defendant SABR relating to the subject property shall be of no force or

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effect.” Id. at 2. Both parties agreed at oral argument that the basis for the state court’s

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entry of the Default Judgment was the McLeods’ assertion that SABR did not hold the

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note and therefore could not foreclose on the Property. The McLeods told this Court they

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had not argued to the state court that there was any flaw in the lien or the security

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instrument, or that the debt was extinguished or void. Rather, the Default Judgment

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adjudicated only that SABR had no lien because it was not the holder of the note.

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Because there were ten other Defendants, the state court litigation continued for an

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additional five-and-a-half years after entry of the Default Judgment. During that time,

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Deutsche Bank did not “(1) move to set aside the State Court Judgment; (2) file a Motion

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for Judgment on the Pleadings; (3) file a Motion for Reconsideration; (4) file a Motion

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for Summary Judgment; (5) file a special action; or (6) directly appeal.” Doc. 11 at 7-8.

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In November 2013, the state court “on its own motion [amended] the caption of this

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matter to reflect that the named Defendant Deutsche Bank National Trust Company’s true

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name is Deutsche Bank National Trust Company as Trustee Under Pooling and Servicing

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Agreement Dated as of February 1, 2007 Securitized Asset Backed Receivables LLC

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Trust 2007-NC2 Mortgage Pass-Through Certificates, Series 2007-NC2.” Doc. 11-4 at 1.

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By that time, all other defendants named in the complaint had been voluntarily dismissed.

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Finally, in March 2014, the state court determined that, because the McLeods had

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received the only remedy they sought in their complaint—i.e., the Default Judgment

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against SABR—the action had been completed at the time that the other state court

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defendants ceased to be parties to the action.

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remainder of the action.

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The state court then dismissed the

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Deutsche Bank filed the instant action in July of this year, seeking (1) “a judgment

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of foreclosure in its favor” on the Property, (2) a declaratory judgment that the Default

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Judgment is invalid, does not affect Deutsche Bank’s lien interest in the Property, did not

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extinguish the deed of trust, and “did not result in … free and clear title to the McLeods

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without payment of the debt,” and (3) an order that the McLeods pay the outstanding

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balance of their mortgage to Deutsche Bank, along with interest, fees and costs. Doc. 1 at

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9-11. By this Complaint, Deutsche Bank, as agent for SABR, does exactly what the state

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court judgment enjoins SABR, its principal, from doing. The McLeods’ Motion to

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Dismiss argues that (1) pursuant to Federal Rule of Civil Procedure 12(b)(1), this Court

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lacks jurisdiction over the case under the Rooker-Feldman doctrine, (2) Deutsche Bank’s

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claim is barred by res judicata, and thus does not state a claim upon which relief can be

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granted, as provided by Rule 12(b)(6), and (3) Deutsche Bank’s suit is untimely.

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II.

LEGAL ANALYSIS

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A.

Res Judicata

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“The Full Faith and Credit Act, 28 U. S. C. § 1738, requires federal courts as well

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as state courts to give state judicial proceedings ‘the same full faith and credit . . . as they

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have by law or usage in the courts of such State . . . from which they are taken.’”

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Parsons Steel, Inc. v. First Ala. Bank, 474 U.S. 518, 519 (1986) (ellipses in original).

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Under Arizona law of “the doctrine of res judicata, a judgment on the merits in a prior

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suit involving the same parties or their privies bars a second suit based on the same cause

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of action.” Gilbert v. Bd. of Med. Exam’rs, 155 Ariz. 169, 174, 745 P.2d 617, 622 (Ct.

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App. 1987). “A default judgment has the same res judicata effect as a judgment on the

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merits where the issues were litigated.” Norriega v. Machado, 179 Ariz. 348, 353, 878

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P.2d 1386, 1391 (Ct. App. 1994).

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Here, Deutsche Bank asserts it is not bound by the Default Judgment because that

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judgment “was not entered as to [Deutsche Bank].” Doc. 16 at 11. In other words,

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Deutsche Bank’s position is that “because [the Default Judgment] was taken against a

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trust instead of the trustee representing the trust,” id. at 12, Deutsche Bank, in its role as

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trustee, is not bound by the Default Judgment.

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Under general principles of trust law, a trust is “a fiduciary relationship with

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respect to property … subjecting the person who holds title to the property to duties to

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deal with it for the benefit of charity or for one or more persons.” Restatement (Third) of

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Trusts § 2 (2003). That is, a trust is not itself capable of taking legal action, such as

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recording documents that affect title to real property, because it is no more than a

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relationship among different actors. To the extent that courts sometimes refer to trusts as

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legal entities, this terminology connotes only “the trust estate and the associated fiduciary

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relation between the trustee and the beneficiaries.” See id. cmt. a. In this sense, a trustee

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may be said to owe duties “to ‘the trust,’” but the trust is not capable, independent of the

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trustee, of managing the property that is held in trust. See id. Rather, it is only the

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trustee—“[t]he person who holds property in trust,” id. § 3(3)—who can buy, sell, lease

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or otherwise dispose of property for the beneficiary’s sake.

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But those general principles of trust law, under which a judgment concerning trust

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property must be against the trustee, are not the only principles that may govern here.

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The Deutsche Bank/SABR trust concerned SABR’s beneficial ownership of notes

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secured by Arizona deeds of trust on many properties. There are no common law deeds

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of trust under Arizona law. Deeds of trust are authorized and regulated only by statute.

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A.R.S. §§ 33-801 through 33-821; see generally M & I Bank, FSB v. Coughlin, 805 F.

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Supp. 2d 858, 861-63 (D. Ariz. 2011). Under those statutes, the beneficiary of the deed

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of trust may be sued and the trustee may not. “Any order of the court entered against the

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beneficiary is binding upon the trustee with respect to any actions that the trustee is

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authorized to take by the trust deed or by this chapter.” A.R.S. § 33-807(E). Deutsche

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Bank was apparently set up as a trustee to hold the notes secured by the deeds of trust,

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but the statutory right and obligation to sue the beneficiary, not the trustee, may apply

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here. This trust holding deeds of trust may not so easily evade the Arizona rule directing

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that actions be brought directly against the beneficiary of the deed of trust, rather than

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against the trustee who holds the formal title.

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Stripped of Deutsche Bank’s distracting labels, its argument is really that the state

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court erred in quieting title and enjoining actions as against the trust beneficiary rather

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than the trustee. That contention may or may not be correct, as noted in the preceding

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paragraph. But error does not dispense with res judicata—not in general and not here.

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“The lack of legal capacity of a person or organization named a party to an action does

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not prevent application of the rules of res judicata to the judgment therein unless the

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incapacity of the named party had a substantial adverse effect on the adequacy of the

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protection afforded his interests or the interests of others whom he represents.”

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Restatement (Second) of Judgments § 35 (1982). Because both Deutsche Bank and

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SABR were served and appeared in the state court litigation prior to entry of the Default

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Judgment, there can be no prejudice to SABR—or to Deutsche Bank. Indeed, as the state

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court litigation stretched on for more than five years, Deutsche Bank neglected to seek

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relief from the Default Judgment, which on its face bars this later action.

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Deutsche Bank now seeks, in effect, what it declined for five years to seek in the

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state court—an adjudication that the Default Judgment does not give what it plainly

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purports to give, and that it was error to grant the injunction it does give. Principles of

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res judicata bar Deutsche Bank from moving this case across the street to a new court and

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a new judge to make the motion it and SABR refused to make in the state court.

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Accordingly, Deutsche Bank’s Complaint is barred by res judicata and will be dismissed

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for failure to state a claim upon which relief can be granted.

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B.

Relief from the Default Judgment for Changed Circumstances

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Deutsche Bank’s refusal for five years to fix in the state court what it says has

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been wrong all along does not mean the McLeods get their house free and clear of what

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they borrowed. As noted above, the parties agree that the Default Judgment means only

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that SABR or its agent Deutsche Bank was not the beneficial owner of the note at the

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time of the judgment. That necessarily means that the note was not effectively endorsed

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to one of them, which in turn means the note is still with the last holder. That holder can

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foreclose or endorse the note afresh to anyone it wants. A foreclosure based on a new

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and valid endorsement should be good.

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Assuming the last holder again endorses the note to Deutsche Bank, the Default

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Judgment would need to be modified based on changed circumstances so that it did not

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prohibit foreclosure based on that new and valid endorsement.

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injunction must be obeyed until modified by the issuing court. See GTE Sylvania v.

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Consumers Union of the United States, 445 U.S. 375, 386 (1980) (citing “the established

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doctrine that persons subject to an injunctive order issued by a court with jurisdiction are

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expected to obey that decree until it is modified or reversed, even if they have proper

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grounds to object to the order” (citations omitted)). The addressee of an injunction may

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not violate the injunction and then defend on the basis that the injunction should be

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modified. That modification must be sought in advance in the issuing court, not some

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other court of the injunction addressee’s choice. See Sys. Fed’n No. 91 Ry. Emps.’ Dep’t

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v. Wright, 364 U.S. 642, 647 (1961) (“The source of the power to modify is of course the

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fact that an injunction often requires continuing supervision by the issuing court and

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always a continuing willingness to apply its powers and processes on behalf of the party

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who obtained that equitable relief. … [T]he court cannot be required to disregard

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significant changes in law or facts if it is ‘satisfied that what it has been doing has been

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turned through changing circumstances into an instrument of wrong.’” (emphasis added)

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(quoting United States v. Swift & Co., 286 U.S. 106, 114-15 (1932))).

But a permanent

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C.

Rooker-Feldman

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If res judicata principles alone do not bar Deutsche Bank from seeking this Court’s

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permission to violate the plain language of the state court’s Default Judgment, then the

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Rooker-Feldman doctrine does, even as narrowly understood. The Rooker-Feldman

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doctrine holds that federal district courts lack jurisdiction over “cases brought by state-

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court losers complaining of injuries caused by state-court judgments rendered before the

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district court proceedings commenced and inviting district court review and rejection of

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those judgments.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284

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(2005). Only the Supreme Court has jurisdiction over such cases. Id. at 283.

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Deutsche Bank’s Complaint does ask for adjudication that the state court’s Default

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Judgment is “invalid.” Doc. 1 at 10. But in its Response Deutsche Bank retrenches and

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says, “The instant action does not challenge the validity of the state court default

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judgment, but simply requests a determination as to its scope and effect.” Doc. 16 at 2.

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Deutsche Bank now disclaims any request to overturn the Default Judgment, and the

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Court holds Deutsche Bank to that renunciation. The renunciation necessarily precludes

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any request to modify the Default Judgment so as to take this foreclosure action outside

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its plain prohibition. If Deutsche Bank could now renounce its renunciation, its desired

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relief would be barred by the Rooker-Feldman doctrine.

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Notwithstanding res judicata and Rooker-Feldman, Deutsche Bank has remedies.

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It can ask the state court to fix the purported error if it can work around its five-year delay

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in asking. If Deutsche Bank obtains a new and valid endorsement of the note, it may be

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able to modify the Default Judgment to allow foreclosure on the Property. Ariz. R. Civ.

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P. 60(c)(6) (identical to Fed. R. Civ. P. 60(b)(6)).

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Deutsche Bank has failed to state a claim upon which relief can be granted.

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Because of the res judicata effects of the Default Judgment, there is nothing Deutsche

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Bank could allege in an amended pleading that would cure the defects in its Complaint.

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The Rooker-Feldman doctrine bars this Court from fixing any errors in the Default

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Judgment. The Complaint and the action will therefore be dismissed without leave to

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amend.

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Resolving Defendants’ Motion does not require applying Arizona’s statutes of
limitations to this case. Accordingly, the Court will not address that issue.

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IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss for Lack of

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Jurisdiction and Failure to State a Claim Fed. R. Civ. P. 12(b)(1) and 12(b)(6) (Doc. 11)

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is granted.

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IT IS FURTHER ORDERED that the Clerk enter judgment dismissing this action

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with prejudice, but without prejudice to seeking relief from the Default Judgment from

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the state court. The Clerk shall terminate this case.

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Dated this 1st day of December, 2014.

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Neil V. Wake
United States District Judge

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