Fairbairn et al v. Wells Fargo Bank N.A. et al
Filing
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ORDER granting 16 Motion to Dismiss/General (Written Opinion). Signed by Senior Judge Paul A. Magnuson on 10/02/2014. (LLM)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
John Fairbairn and Mary Fairbairn,
Case No. 14-cv-1635 (PAM/JJK)
Plaintiffs,
v.
MEMORANDUM AND ORDER
Kodi Acquisitions LLC, Utah Loan
Servicing LLC, Mortgage Electronic
Registration Systems, Inc., Wells Fargo
Bank, N.A. d/b/a Wells Fargo Home
Mortgage, Inc., and J.P. Morgan Chase
Bank, N.A.,
Defendants.
This matter is before the Court on the Motion to Dismiss filed by Kodi Acquisitions
LLC, Utah Loan Servicing LLC, and Mortgage Electronic Registration Systems, Inc.
(collectively “Defendants”).1 For the reasons that follow, the Court grants the Motion.
BACKGROUND
In 1997, John and Mary Fairbairn bought the property at 19560 Patrick Place,
Corcoran, Minnesota 55340. (Compl. (Docket No. 1) ¶¶ 3, 11-12.) The Fairbairns
subsequently mortgaged the property twice. In 2003, they granted Wells Fargo Home
Mortgage, Inc. a first mortgage to secure a $164,000 loan. (Id. ¶¶ 13-14.) And in 2005, they
granted J.P. Morgan Chase Bank, N.A. a second mortgage to secure a $120,000 loan. (Id.
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Though the Fairbairns have not asserted direct claims against them, Wells Fargo and
Chase answered the Complaint. (See Answer (Docket No. 14); Answer (Docket No. 15).)
¶ 15.) Three years later, the Fairbairns filed for Chapter 7 bankruptcy. (Id. ¶ 16.) They
eventually obtained a discharge of the loan secured by the second mortgage, but the mortgage
obligation stayed subordinate to the first mortgage. (Id. ¶¶ 17-19.)
The ensuing mortgage assignments and foreclosure are the focus of this case. On
April 27, 2010, Chase assigned its interest in the second mortgage to Mortgage First, LLC.
(Id. ¶ 20.) A month later, on May 25, Mortgage First requested that Chase’s interest be
recorded as assigned to MERS. (Id. ¶¶ 21, 23.) A month after that, on June 29, the
Fairbairns received notice that the second mortgage had been transferred to Mortgage First
and would be serviced by ULS. (Id. ¶¶ 24, 26.) The Fairbairns were also told that they
defaulted on the mortgage, owed the outstanding balance of the discharged debt, and would
be foreclosed on unless they brought the account current. (Id. ¶¶ 29-30.)
Over a year later, the Fairbairns remained in default. (Id. ¶ 33.) On August 18, 2011,
MERS assigned its interest in the second mortgage to ULS, who then initiated foreclosure
proceedings. (Id. ¶¶ 32, 35.) ULS executed two notices of pendency for a sheriff’s sale of
the property, after the Fairbairns recorded two affidavits of postponement, and finally
scheduled the sale for August 9, 2012. (Id. ¶¶ 33-35, 37-38.)
A week before the sale, however, the Fairbairns sued Mortgage First and ULS in
Minnesota state court. Fairbairn v. Mortg. First, LLC, No. 27-cv-12-16117 (Hennepin Cty.
Dist. Ct.). They asserted claims for unlicensed mortgage loan servicing under the Minnesota
Residential Mortgage Originator and Servicer Licensing Act (“SLA”), continued and
fraudulent collection efforts under the Fair Debt Collection Practices Act (“FDCPA”),
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inadequate disclosure of an assignment under the Truth in Lending Act (“TILA”), untimely
scheduling of a sheriff’s sale under Minn. Stat. § 580.07, common-law negligence, and
negligent misrepresentation. (Compl. ¶ 39.) They also moved for a temporary restraining
order enjoining further foreclosure activity, which the district court granted. (Id. ¶¶ 40-42.)
Following cross motions for summary judgment, the district court granted summary
judgment to the Fairbairns on their SLA, TILA, and § 580.07 claims, and to Mortgage First
and ULS on the FDCPA, common-law negligence, and negligent-misrepresentation claims.
(Id. ¶ 43.) The court also dissolved the injunction, allowing ULS to continue with the
foreclosure. (Id.)
After the state-court proceedings, ULS notified the Fairbairns of the sheriff’s sale,
which occurred on April 11, 2014. (Id. ¶¶ 45-46.) The sale was subject to a five-week
redemption period; the redemption period expired on May 16. (Id. ¶ 46.)
The Fairbairns then brought the current lawsuit in federal court. They alleged many
of the same facts that they alleged in the previous lawsuit, but they added MERS and Kodi
as parties and asserted three new claims: a quiet-title action resolving that ULS and MERS
have no adverse claims against the property because the assignments were improperly
recorded and giving the Fairbairns the property in fee simple (id. ¶¶ 41-55); a declaratoryjudgment action stating that ULS’s foreclosure was defective due to an unlawful assignment
and an inadequate redemption period, and thus is void (id. ¶¶ 55-61); and a defamation-oftitle action determining that MERS allowed Kodi to enter the second mortgage into its
database even though ULS never assigned its servicing rights to Kodi and awarding the
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Fairbairns any resulting damages (id. ¶¶ 61-73).
Defendants now move to dismiss on the grounds of res judicata, collateral estoppel,
failure to state a claim, and failure to plead fraud with particularity. (Mot. to Dismiss
(Docket No. 16).)2
DISCUSSION
Although Defendants raise multiple grounds for dismissal, the Court need only
address two of them: res judicata and failure to state a claim. Those two grounds fully
resolve the Fairbairns’ claims against Defendants.
A.
Res Judicata
Defendants primarily argue that res judicata bars the Fairbairns from litigating their
claims in the current lawsuit because they could have litigated those claims in the previous
lawsuit. According to Defendants, the Fairbairns lost their fight to prevent foreclosure of and
extinguish the second mortgage in state court and may not revive that fight in federal court.
With one exception, Defendants are correct.
To promote finality and avoid piecemeal litigation, the doctrine of res judicata
precludes a party from pursuing claims in a subsequent lawsuit that were or could have been
raised and decided in a prior lawsuit. Laase v. Cnty. of Isanti, 638 F.3d 853, 857, 859 (8th
Cir. 2011). When the prior lawsuit occurred in state court, the Full Faith and Credit Statute,
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Despite having been afforded an ample extension to do so, the Fairbairns failed to
submit any briefing in response to Defendants’ Motion or timely notify the Court that another
extension was necessary.
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28 U.S.C. § 1738, requires that federal courts “give preclusive effect to state-court judgments
whenever the courts of the State from which the judgments emerged would do so.” Allen v.
McCurry, 449 U.S. 90, 96 (1980); see also St. Paul Fire & Marine Ins. Co. v. Compaq
Computer Corp., 539 F.3d 809, 821 (8th Cir. 2008) (stating that “[t]he law of the forum that
rendered the first judgment controls the res judicata analysis”). The Court therefore looks
to Minnesota law in analyzing whether the Fairbairns’ claims are barred by res judicata.
Under Minnesota law, res judicata applies as an absolute bar to a later claim when:
“(1) the earlier claim involved the same set of factual circumstances; (2) the earlier claim
involved the same parties or their privies; (3) there was a final judgment on the merits; [and]
(4) the estopped party had a full and fair opportunity to litigate the matter.” Hauschildt v.
Beckingham, 686 N.W.2d 829, 840 (Minn. 2004). If those elements are met, res judicata
bars not only claims as to matters actually litigated but also as to every matter that could have
been litigated. State v. Joseph, 636 N.W.2d 322, 327 (Minn. 2001). Except for the
redemption-period part of the Fairbairns’ declaratory-judgment claim, all of their claims
satisfy the elements of res judicata.
1.
Same Set of Factual Circumstances
First, the previous lawsuit involved the same set of factual circumstances as the
current lawsuit. The key focus of res judicata is whether the earlier claim “arises out of the
same set of factual circumstances” as the earlier claim. Hauschildt, 686 N.W.2d at 840
(citation, quotation marks, and emphasis omitted). Claims are based on the same facts if they
are supported by the same evidence. McMenomy v. Ryden, 148 N.W.2d 804, 807 (Minn.
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1967). Claims do not derive from the same factual predicate, however, if the right to assert
each claim did not exist at the same time. Hauschildt, 686 N.W.2d at 841.
The facts underlying the previous lawsuit centered on the assignments and foreclosure
of the second mortgage. The Fairbairns challenged the lawfulness of Chase’s assignment to
MERS as well as MERS’s assignment to ULS. They also attacked the validity of ULS’s
initiation and handling of the foreclosure. In other words, the previous lawsuit concerned all
of the factual circumstances surrounding the assignment and foreclosure process before the
sheriff’s sale.
All but one part of the Fairbairns’ claims arise out of identical factual circumstances.
The quiet-title claim seeks to resolve any interest that ULS and MERS may have in the
property given their respective assignments. The declaratory-judgment claim—to the extent
it is based on an unlawful assignment—seeks a judgment that the foreclosure was defective
because of those assignments. And the defamation-of-title claim seeks to determine any
interest that Kodi may have in the property as a result of its entry in MERS’s database.
These claims relate to the same property, the same mortgage, the same assignments, and the
same foreclosure that were at issue in the previous lawsuit.
But the Fairbairns’ declaratory-judgment claim—to the extent it is based on an
inadequate redemption period—arises out of different factual circumstances. The redemption
period necessarily succeeded the sheriff’s sale, which occurred after the previous lawsuit
ended. The right to assert that claim did not then exist at the same time as the right to assert
the other claims, which was before the previous lawsuit began. As this part of the
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declaratory-judgment claim does not involve the same set of factual circumstances as the
previous lawsuit, it cannot be barred by res judicata.
2.
Same Parties or Their Privies
Second, the previous lawsuit involved the same parties or their privies as the current
lawsuit. Privity “expresses the idea that as to certain matters and circumstances, people who
are not parties to an action but who have interests affected by the judgment as to certain
issues in the action are treated as if they were parties.” SMA Servs., Inc. v. Weaver, 632
N.W.2d 770, 774 (Minn. App. 2001) (citation and quotation marks omitted). Because
Minnesota courts have not established a definition of privity for res judicata purposes, the
Court must carefully examine the circumstances of each case to determine privity.
McMenomy, 148 N.W.2d at 807. That said, parties in privity often include “those whose
interests are represented by a party to the action.” Margo-Kraft Distribs., Inc. v. Minneapolis
Gas Co., 200 N.W.2d 45, 48 (Minn. 1972) (citation and quotation marks omitted).
ULS was a party in the previous lawsuit, but MERS and Kodi were not. MERS and
Kodi, however, are privies of ULS. In particular, MERS and Kodi have interests affected
by the previous lawsuit and ULS represented those interests. The previous lawsuit directly
affected any interest MERS and Kodi might have in the property because ULS received its
mortgage interest from MERS and MERS allegedly allowed Kodi to take a servicer interest
from ULS. The resulting chain of interests creates privity between Defendants.
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3.
Final Judgment on the Merits
Third, the previous lawsuit concluded in a final judgment on the merits. The district
court disposed of the Fairbairns’ earlier claims on their merits by granting summary
judgment to the Fairbairns on three of the claims and to Defendants on the other three. And
that judgment became final once the Fairbairns opted not to appeal.
4.
Full and Fair Opportunity to Litigate the Matter
Finally, the Fairbairns had a full and fair opportunity to litigate their claims in the
previous lawsuit. In assessing whether a party had a full and fair opportunity to litigate a
matter, the Court considers several factors: “whether there were significant procedural
limitations in the prior proceeding, whether the party had the incentive to litigate fully the
issue, or whether effective litigation was limited by the nature or relationship of the parties.”
Joseph, 636 N.W.2d at 328 (citation and quotation marks omitted).
The Fairbairns had every opportunity to pursue their claims in state court. They faced
no significant procedural limitations: they secured an injunction delaying foreclosure while
their case was pending, were represented by competent counsel, and had sufficient access to
discovery. They should have had the incentive to comprehensively litigate the validity of the
impending foreclosure and needed to raise their other concerns then. See Dorso Trailer
Sales, Inc. v. Am. Body & Trailer, Inc., 482 N.W.2d 771, 774 (Minn. 1992) (explaining that
under res judicata, a party must “assert all alternative theories of recovery in the initial
action”). And they were not hindered by their relationship with Defendants.
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Ultimately, the Fairbairns’ current lawsuit—with the exception noted above—intends
to achieve what their previous lawsuit did not: to prevent foreclosure of and extinguish the
second mortgage. Based on Minnesota’s principles of res judicata, the state court’s judgment
in the previous lawsuit precludes this Court from considering most of the Fairbairns’ claims
in the current lawsuit.
B.
Failure to State a Claim
Having dismissed all but the redemption-period part of the Fairbairns’ declaratory-
judgment claim, the Court turns to that claim. Defendants argue that the Fairbairns have
failed to state a claim because Minnesota law allows a five-week redemption period when
the mortgagor records an affidavit of postponement, as the Fairbairns did here. Defendants
are again correct.
In Minnesota, the period in which a mortgagor can redeem foreclosed property from
a sheriff’s sale is generally six months. Minn. Stat. § 580.23, subd. 1. But this general rule
has an exception: if the mortgagor records an affidavit of postponement effectively
postponing the sheriff’s sale for five months, the redemption period is reduced to five weeks.
Minn. Stat. § 580.07, subd. 2(a) (“Recording of the affidavit and postponement of the
foreclosure sale pursuant to this subdivision shall automatically reduce the mortgagor’s
redemption period under section 580.23 to five weeks.”).
Here, the Fairbairns recorded an affidavit of postponement, which ULS honored by
postponing the sheriff’s sale. The affidavit extended the time before the sale by five months
yet triggered the statutory reduction of the redemption period after the sale from six months
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to five weeks. The Fairbairns cannot have it both ways: they could either allow the sale to
occur as scheduled and benefit from a longer redemption period or push off the sale but
suffer a shorter redemption period. They chose the latter option and must live with the
consequences.
The rest of the Fairbairn’s declaratory-judgment claim therefore fails to state a claim.
CONCLUSION
In sum, the Fairbairns’ quiet-title claim, declaratory-judgment claim as it relates to an
unlawful assignment, and defamation-of-title claim are barred by res judicata. And their
declaratory-judgment claim as it relates to an inadequate redemption period fails to state a
claim. Accordingly, IT IS HEREBY ORDERED that:
1.
Defendants’ Motion to Dismiss (Docket No. 16) is GRANTED; and
2.
The Fairbairns’ Complaint (Docket No. 1) is DISMISSED with prejudice as
to Defendants ULS, MERS, and Kodi.
Dated: October 2, 2014
s/ Paul A. Magnuson
Paul A. Magnuson
United States District Court Judge
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