Kelly v. Deutsche Bank National Trust Company, as Trustee et al

Filing 20

Judge Richard G. Stearns: Memorandum and ORDER entered granting 3 Motion to Dismiss "...For the foregoing reasons, Deutsche Bank's motion to dismiss Counts I, II and III will be ALLOWED. The Clerk will enter a dismissal pursuant to Rule 12(b)(6) and close the case." (Flaherty, Elaine)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 11-10328-RGS
JOHN A. KELLY
v.
DEUTSCHE BANK NATIONAL TRUST COMPANY, as trustee for Soundview
Home Loan Trust 2006-OPT3, Asset-Backed Certificates, Series 2006-OPT3, and
SAND CANYON CORPORATION, f/k/a Option One Mortgage Corporation
MEMORANDUM AND ORDER ON
DEFENDANT DEUTSCHE BANK’S MOTION TO DISMISS
June 9, 2011
STEARNS, D.J.
This case arises from plaintiff John A. Kelly’s attempt to save his home from
foreclosure by invoking a rescission of the underlying mortgage. On March 7, 2011,
defendant Deutsche Bank National Trust Company (Deutsche Bank)1 moved to dismiss
all claims. A hearing on the motion was held on June 7, 2011.
BACKGROUND
On December 30, 2005, Kelly refinanced the mortgage on his single family home
at 1 Daybreak Drive in Dracut, Massachusetts, with Option One Mortgage Corporation

1

Deutsche Bank is suing in its capacity as trustee of the Soundview Home Loan
Trust 2006-OPT3, Asset-Backed Certificates, Series 2006-OPT3.

(now known as “Sand Canyon Corporation”).2 Kelly later defaulted on his mortgage
payments. Deutsche Bank, acting as the trustee-holder of the mortgage, commenced
foreclosure proceedings and scheduled a foreclosure sale for February 16, 2011. On
February 4, 2011, Kelly filed the instant lawsuit in Middlesex Superior Court. On
February 28, 2011, the case was removed to the federal district court on diversity
grounds.3
Count I alleges that Kelly has a right of rescission under the MCCCDA by way
of recoupment because Option One failed to provide him with two copies of the notice
of his right to cancel the transaction.4 Count II alleges that Deutsche Bank lacks the

2

According to the Complaint, the mortgage loan was a consumer credit
transaction subject to a three business-day right of rescission pursuant to Mass. Gen.
Laws ch. 140D, § 10(a), also known as the Massachusetts Consumer Credit Cost
Disclosure Act (MCCCDA).
3

The Superior Court issued a Short Order of Notice returnable on February 14,
2011. After a hearing, Justice Billings temporarily enjoined the foreclosure sale. The
Superior Court did not forward the case file to this court until March 28, 2011.
Deutsche Bank, however, has abided by the terms of the injunction pending this court’s
decision.
4

Under the federal Truth in Lending Act (TILA), “a creditor shall deliver two
copies of the notice of the right to rescind to each consumer . . . .” 12 C.F.R. § 226.23.
(The MCCCDA is “closely modeled” on TILA. Mayo v. Key Fin. Servs., Inc., 424
Mass. 862, 864 (1997)). Kelly asserts that he was only given a single copy. For
present purposes, the court will assume (dubitante) that the Massachusetts state court
would find the failure to tender a second copy of the right to cancel notice a material
breach of the MCCCDA in accordance with TILA. Judge Tauro concluded otherwise
in McKenna v. Wells Fargo Bank, N.A., 2011 WL 1100160, * 2 (D. Mass. Mar. 21,
2

power to initiate a foreclosure under Massachusetts law because it is neither the holder
of the underlying promissory note nor a transferee of the note with the rights of a
holder. Count III alleges in the alternative that Deutsche Bank did not acquire the note
and/or mortgage in accordance with the terms of the Pooling and Servicing Agreement
(PSA) and is therefore not a valid assignee. Deutsche Bank moves to dismiss the
Complaint on grounds of lack of subject-matter jurisdiction, Fed. R. Civ. P. 12(b)(1),
and failure to state a claim, Fed. R. Civ. P. 12(b)(6).
DISCUSSION
Standard of Review under Fed. R. Civ. P. 12(b)(6)5
To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a complaint must
allege “a plausible entitlement to relief.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
559 (2007). “While a complaint attacked by a Rule 12(b)(6) motion does not need

2011). See also Melfi v. WMC Mortg. Corp., 568 F.3d 309, 312 (1st Cir. 2009)
(“technical deficiencies do not matter if the borrower receives a notice that effectively
gives him notice as to the final date for rescission and has the three full days to act. Our
test is whether any reasonable person, in reading the form provided in this case, would
so understand it.”)
5

While a federal court must ordinarily decide the 12(b)(1) jurisdictional issue
first, if good reasons counsel otherwise, the court may proceed directly to the 12(b)(6)
motion. A good reason is presented, for example, when the 12(b)(1) motion is
predicated solely on the lack of a federal question or, where as here, the 12(b)(1)
motion is not dispositive of the case. See Ne. Erectors Ass’n of the BTEA v. Sec’y of
Labor, 62 F.3d 37, 39 & n.1 (1st Cir. 1995).
3

detailed factual allegations, a plaintiff’s obligation to provide the ‘grounds’ of his
‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic
recitation of a cause of action’s elements will not do.” Id. at 545 (internal citations
omitted). See also Berner v. Delahanty, 129 F.3d 20, 25 (1st Cir. 1997) (dismissal for
failure to state a claim is appropriate if the pleadings fail to set forth “factual
allegations, either direct or inferential, respecting each material element necessary to
sustain recovery under some actionable legal theory”), quoting Gooley v. Mobil Oil
Corp., 851 F.2d 513, 515 (1st Cir. 1988). “If the factual allegations in the complaint
are too meager, vague, or conclusory to remove the possibility of relief from the realm
of mere conjecture, the complaint is open to dismissal.” SEC v. Tambone, 597 F.3d
436, 442 (1st Cir. 2010), citing Twombly, 550 U.S. at 555.
Count I
Deutsche Bank first argues that Kelly fails to state a claim upon which relief can
be granted because any right of rescission is time-barred by the MCCCDA. Under the
MCCCDA, if the statutorily required disclosures are not provided at or delivered
following the closing, a plaintiff’s “right of rescission shall expire four years after the
date of consummation of the transaction or upon the sale of the property, whichever
occurs first . . . .” Mass. Gen. Laws ch. 140D, § 10(f). Deutsche Bank maintains that
Kelly’s right of rescission has expired because the loan transaction was consummated
4

on December 30, 2005, and he did not attempt to invoke the right to rescind until the
filing of this action on February 4, 2011.
For his part, Kelly argues that the four-year limitations period does not apply
because he seeks rescission by way of recoupment. In support of this argument, Kelly
points to section 10(i)(3) of the MCCCDA, which explicitly notes that “[n]othing in
this section shall be construed so as to affect a consumer’s right of recoupment under
the laws of the commonwealth.” Mass. Gen. Laws ch. 140D, § 10(i)(3). Kelly reasons
that the only way to construe section 10 to give full effect to its provisions is to read
it as requiring that an affirmative act of rescission by a debtor occur within the fouryear limitations period, while permitting a defensive action of recoupment to be filed
by the debtor at any time.6
The common-law doctrine of recoupment “allows a defendant to ‘defend’ against
a claim by asserting - up to the amount of the claim - the defendant’s own claim against
the plaintiff growing out of the same transaction.” Bolduc v. Beal Bank, SSB, 167 F.3d

6

Kelly argues that two Bankruptcy Court decisions, In re Fidler, 226 B.R. 734
(Bankr. D. Mass. 1997), and In re Maxwell, 281 B.R. 101 (Bankr. D. Mass. 2002),
support his position that his rescission claim is timely. As Deutsche Bank notes, the
cases are readily distinguishable because of the bankruptcy context in which they arose
– in both cases the debtor claimed recoupment as a defense (offset) to a creditor’s
proof of claim or motion for relief from the automatic stay, circumstances in which the
Bankruptcy Court has broad equitable powers to revise or extinguish a creditor’s rights
at law.
5

667, 672 (1st Cir. 1999), citing 6 Wright, Miller & Kane, Federal Practice and
Procedure § 1401 (2d ed. 1990). The affirmative defense of recoupment, properly
applied, may only serve “to reduce or extinguish the plaintiff’s claim, but it c[an] not
result in an affirmative recovery for the defendant.” Bose Corp. v. Consumers Union
of U. S., Inc., 367 Mass. 424, 427-428 (1975).7

Here, Kelly is not asserting

recoupment as a defense, but is attempting to use it to obtain affirmative relief
(cancellation of his debt).
Moreover, at law “a party requesting rescission must ‘restore or offer to restore
all that he received’ through the contract, although it ‘has been held that, where
complete restoration is not possible, rescission may, nevertheless, be granted upon such
equitable conditions as would amply protect the rights of the defendant.’” Walsh v.
Chestnut Hill Bank & Trust Co., 414 Mass. 283, 288 (1993) (citation omitted). Even
where, as here, rescission allegedly results from a “defendant’s wrongful actions, ‘[i]n
the absence of special circumstances rendering it inequitable the defendant will, in
general, be entitled to credit for payments made by [him] . . . .” Keville v. McKeever,
42 Mass. App. Ct. 140, 159 (1997). To extinguish a substantial debt over an arguably
7

The strict demarcation between law and equity was abolished in Massachusetts
on July 1, 1974, and with it the doctrine of recoupment, which is now supplanted by
a single civil action in which the counterclaim performs the function of recoupment.
The doctrine of recoupment, however, remains viable in bankruptcy law, where all
actions are equitable in nature.
6

immaterial ministerial error, as Kelly seeks, would accomplish the opposite of equity
by conferring on him an unjustly enriching gain at his creditor’s expense. The court
finds that as a matter of law, Kelly’s right of rescission has long expired under the
MCCCDA’s statute of limitations, and that he may not revive the action by restyling
what in effect is a counterclaim as a recoupment. Deutsche Bank’s motion to dismiss
Count I consequently will be allowed.
Count II
Deutsche Bank next argues that Count II should be dismissed because Kelly
lacks standing to challenge its right to initiate a foreclosure. In his Complaint, Kelly
alleges that Deutsche Bank is neither the holder of the underlying promissory note nor
a transferee with the rights of the holder.8 Deutsche Bank asserts that it is not required
to demonstrate that it is a holder of the note because the Massachusetts statute
governing foreclosure sales grants the foreclosure power to the “mortgagee or person
having his estate in the land mortgaged.” Mass. Gen. Laws ch. 244, § 14. The court
agrees with Deutsche Bank’s reading of the statute and notes that at least two other
judges in the District of Massachusetts have reached the same conclusion. See

8

Under Massachusetts law, the transfer of a note secured by a mortgage
automatically transfers the mortgage with it, without the necessity of a formal
assignment or delivery. First Nat’l Bank of Cape Cod v. N. Adams Hoosac Sav. Bank,
7 Mass. App. Ct. 790, 796 (1979).
7

McKenna, 2011 WL 1100160, at *2 (“Under Massachusetts law, the current record
mortgagee and holder of the mortgage is the proper party to foreclose upon a property.
The Massachusetts statute governing foreclosures makes no mention of note holders.”)
(footnotes omitted); Valerio v. U.S. Bank, N.A., 716 F. Supp. 2d 124, 128 (D. Mass.
2010) (Gorton, J.) (“The Massachusetts statute governing foreclosure sales is
addressed to mortgagees, not note holders.”). Deutsche Bank’s motion to dismiss
Count II will therefore be allowed.9
Count III
Lastly, Deutsche Bank argues that Kelly lacks standing to challenge its authority
to foreclose under Massachusetts state law because he is neither a party to the PSA nor
an intended third-party beneficiary. Macksey v. Egan, 36 Mass. App. Ct. 463, 468-469
(1994). To recover as a third-party beneficiary in Massachusetts, a plaintiff must show
that he was an intended beneficiary of the contract. Cumis Ins. Soc’y, Inc. v. BJ’s
Wholesale Club, Inc., 455 Mass. 458, 464 (2009). “Because third-party beneficiary
status constitutes an exception to the general rule that a contract does not grant
enforceable rights to nonsignatories, . . . a person aspiring to such status must show
with special clarity that the contracting parties intended to confer a benefit on him.”
9

Deutsche Bank also makes the point that Kelly’s assertion that it is not the
holder of the promissory note is a conclusory allegation unsupported by any factual
evidence. See Compl. ¶ 15.
8

McCarthy v. Azure, 22 F.3d 351, 362 (1st Cir. 1994). Because Kelly has not made the
requisite showing by pleading or otherwise,10 Deutsche Bank’s motion to dismiss Count
III will be allowed.
ORDER
For the foregoing reasons, Deutsche Bank’s motion to dismiss Counts I, II, and
III will be ALLOWED. The Clerk will enter a dismissal pursuant to Rule 12(b)(6) and
close the case.

SO ORDERED.
/s/ Richard G. Stearns
________________________________
UNITED STATES DISTRICT JUDGE

10

Kelly does not dispute that he is neither a party to, nor a third-party beneficiary
of, the PSA; rather, he contends that his claim is not premised on either fact.
Ostensibly relying on U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011), Kelly
bases his challenge to Deutsche Bank’s authority to foreclose on the ground that the
assignment of the loan to Deutsche Bank was invalid. As Deutsche Bank counters, the
Ibanez plaintiffs had filed actions seeking to enforce the terms of pooling and servicing
agreements to which they were parties, a critical fact that distinguishes their case from
Kelly’s.
9