Metcalf et al v. Deutsche Bank National Trust Company et al
Filing
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MEMORANDUM OPINION AND ORDER granting 7 Motion to Dismiss, filed by Bank of America NA, Deutsche Bank National Trust Company, Recontrust Company, N.A. and denying as moot alternative Motion for more Definite Statement. The court grants plaintiffs 30 days from the date this memorandum opinion and order is filed to file an amended complaint. (Ordered by Chief Judge Sidney A Fitzwater on 6/26/2012) (Chief Judge Sidney A Fitzwater)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
JAMES METCALF, et al.,
Plaintiffs,
VS.
DEUTSCHE BANK NATIONAL
TRUST COMPANY, AS TRUSTEE
FOR THE HOLDERS OF THE FIRST
FRANKLIN MORTGAGE LOAN
TRUST 2005-FF2, et al.,
Defendants.
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Civil Action No. 3:11-CV-3014-D
MEMORANDUM OPINION
AND ORDER
In this removed case arising from an attempted foreclosure on the property
(“Property”) of plaintiffs James Metcalf and Barbara Cline (“Cline”) by defendants Deutsche
Bank National Trust Company (“Deutsche Bank”), as Trustee for the Holders of the First
Franklin Mortgage Loan Trust 2005-FF2 (the “Trust”), Bank of America, N.A. (“BOA”), and
Recontrust Company NA (“Recontrust”), defendants move to dismiss under Fed. R. Civ. P.
12(b)(6) for failure to state a claim on which relief can be granted, or, alternatively, for a
more definite statement under Rule 12(e). For the reasons that follow, the court grants the
Rule 12(b)(6) motion, denies the alternative Rule 12(e) motion as moot, and allows plaintiffs
to replead.
I
In 2004 Cline executed a note, and both plaintiffs made and delivered a deed of trust
regarding the Property.1 Both the note and deed of trust named First Franklin Financial
Corporation (“First Franklin”) as the lender. Plaintiffs were notified that the Property would
be foreclosed on in October 2011. The notice identified the current mortgagee as Deutsche
Bank, as Trustee of the Trust. BOA, acting as attorney-in-fact for Deutsche Bank,
purportedly executed the appointment of Recontrust as the substitute trustee to conduct the
foreclosure sale. In a letter from Recontrust to plaintiffs, Recontrust represented that BOA
is “the creditor to whom the debt is owed.” Pet. 6.
On the eve of foreclosure, plaintiffs filed suit in a Texas court, asserting claims of
quiet title, estoppel, declaratory judgment,2 and, concurrently or in the alternative, breach of
contract. They request damages, exemplary damages, and fees and costs.
Plaintiffs allege on two grounds that defendants lack authority to foreclose on the
Property, which serves as the basis for plaintiffs’ quiet title, estoppel, and declaratory
judgment claims (but not their breach of contract claim). First, plaintiffs assert that Deutsche
Bank could not have acquired an interest in the Property on behalf of the Trust because First
1
In deciding defendants’ Rule 12(b)(6) motion, the court construes plaintiffs’ original
petition in the light most favorable to them, accepts as true all well-pleaded factual
allegations, and draws all reasonable inferences in their favor. See, e.g., Lovick v. Ritemoney
Ltd., 378 F.3d 433, 437 (5th Cir. 2004).
2
Plaintiffs seek a declaratory judgment under the Texas statute, Tex. Civ. Prac. &
Rem. Code Ann. § 37.003 (West 1985) As the court explains infra at note 15, on removal,
this claim was converted into one brought under the federal Declaratory Judgment Act.
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Franklin had already previously assigned its interest to another entity. Plaintiffs allege that,
on May 2, 2005, First Franklin filed an “Assignment of Deed of Trust” (dated April 26,
2005) that purported to assign the note and deed of trust to Goldman Sachs Mortgage
Company (“Goldman Sachs”). Although Rockwall County property records do not show an
assignment of the note or deed of trust back to First Franklin, First Franklin executed a
second “Assignment of Deed of Trust” on October 31, 2005 that purported to assign the same
note and deed of trust to Deutsche Bank, as Trustee for the Trust.
Plaintiffs’ second argument focuses on the securitization of their note and deed of
trust. According to plaintiffs, the Trust “is a New York common law asset-backed trust,” and
“[a]sset-backed trusts are independent entities created for the purpose of holding mortgage
loans or similar assets that will be converted into mortgage-backed securities, which are
saleable securities.” Id. at 3. Asset-backed trusts are governed by their trust documents,
particularly the “Pooling and Service Agreement” (“PSA”). In addition to providing how a
trust will be set up and managed, the PSA establishes the timing and chain of title in which
mortgage loans are to be acquired. Plaintiffs allege that because defendants failed to properly
transfer and deposit the note and deed of trust in the Trust according to the PSA’s timing and
chain of title requirements, their note and deed of trust are not part of the Trust, and Deutsche
Bank, as trustee for the Trust, lacks authority to foreclose on property that is not part of the
Trust.
Regarding timing, plaintiffs contend that the PSA establishes a “closing date” or
“startup date”—“the date by which a trust’s assets are to be acquired.” Id. And, in order to
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be treated as a Real Estate Mortgage Investment Conduit (“REMIC”) under the Internal
Revenue Code, a trust must acquire its assets by the close of the third month after the closing
date. The Trust’s closing date was set for April 28, 2005. It was thus required to acquire its
assets by July 31, 2005 to qualify for REMIC status. Plaintiffs aver that the Trust did not
acquire their note and deed of trust until October 31, 2005, when First Franklin purportedly
executed a second “Assignment of Deed of Trust” to Deutsche Bank. They allege that
because this assignment “exceeded the authority set out in the Trust’s regulatory documents,”
it “could not have happened.” Id. at 4.
Regarding the chain of title, plaintiffs assert that “the PSA establishes that the
depositor, GS Mortgage Securities Corp. [(“GS Mortgage”)], concurrently with the execution
of the PSA, ‘[is obligated to] sell[], transfer[], assign[], set[] over and otherwise convey[] to
the Trustee for the benefit of the Certificateholders, without recourse, all the right, title and
interest of the Depositor in and to the Trust Fund.[’]” Id. “In other words, all assets of the
Trust [are] to be acquired from . . . GS Mortgage[.]” Id. Plaintiffs also assert that defendants
and GS Mortgage made the following representation in the PSA:
Immediately prior to the transfer and assignment by the
Depositor [GS Mortgage] to the Trustee on the Closing Date, the
Depositor had good title to, and was the sole owner of each
Mortgage Loan, free of any interest of any other Person, and the
Depositor has transferred all right, title and interest [.]”
Id. at 5. According to plaintiffs, this further requires that GS Mortgage own the mortgage
loan before transferring and assigning it to the Trust by the closing date of April 28, 2005.
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But, on April 26, 2005, First Franklin assigned the deed of trust to Goldman Sachs,3 and there
is no record in the Rockwall County property records of any assignment from Goldman
Sachs to any other party from April 26 to 28, 2005.
Plaintiffs also assert, “[c]oncurrently or in the alternative,” a breach of contract claim.
Id. at 9. They allege that, “[n]otwithstanding the above,” an attachment to the note, a “Non
Impound Notice,” was breached. Id. at 6. The “Non Impound Notice” allegedly states that
the “lender for this mortgage will not impound for real estate taxes and homeowners
insurance.” Id. In March 2010 plaintiffs received a letter from Home Loan Services, Inc.
(“Home Loan”) informing them that their monthly mortgage payment of $2,123.43 was
increasing by 77%, to $3,758.67, allegedly due entirely to taxes and insurance. They also
assert that “this letter injected yet another unidentified party—[Home Loan]—into the
discussion of who actually owned the Note.” Id.
After defendants removed this case based on diversity of citizenship, defendants filed
the instant motion to dismiss under Rule 12(b)(6), or, alternatively, for a more definite
statement under Rule 12(e). Defendants maintain that plaintiffs’ state-court original petition
(“petition”) fails to state a plausible claim for relief because plaintiffs lack standing to
challenge the assignments and PSA and they have failed to plead necessary elements for their
causes of action. Plaintiffs oppose this motion.
3
This first “Assignment of Deed of Trust” was then filed on May 2, 2005.
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II
To survive defendants’ Rule 12(b)(6) motion, plaintiffs must plead “enough facts to
state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007). “A claim has facial plausibility when the plaintiff[s] plead[] 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) (citing Twombly, 550 U.S.
at 556). “The plausibility standard is not akin to a ‘probability requirement,’ but it asks for
more than a sheer possibility that a defendant has acted unlawfully.” Id. (quoting Twombly,
550 U.S. at 556); see also Twombly, 550 U.S. at 555 (“Factual allegations must be enough
to raise a right to relief above the speculative level[.]”). “[W]here the well-pleaded facts do
not permit the court to infer more than the mere possibility of misconduct, the complaint has
alleged—but it has not ‘shown’—‘that the pleader is entitled to relief.’” Iqbal, 556 U.S. at
679 (alteration omitted) (quoting Rule 8(a)(2)).
Furthermore, under Rule 8(a)(2), a pleading must contain “a short and plain statement
of the claim showing that the pleader is entitled to relief.” Id. Although “the pleading
standard Rule 8 announces does not require ‘detailed factual allegations,’. . . [a] pleading that
offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action
will not do.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). “Nor [will] a
complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’”
Id. (alteration in original) (quoting Twombly, 550 U.S. at 557).
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III
Defendants challenge plaintiffs’ standing to contest the assignments of the note and
deed of trust and compliance with the terms of the PSA.
A
Defendants argue under Rule 12(b)(6)4 that plaintiffs lack standing to challenge the
validity of the assignments and to assert noncompliance with the PSA because they were not
parties or third-party beneficiaries of the assignments or the PSA. Defendants cite several
cases that hold that “[p]laintiff[s] ha[ve] no standing to contest the various assignments as
[they were] not a party to the assignments,” Eskridge v. Federal Home Loan Mortgage
Corp., 2011 WL 2163989, at *5 (W.D. Tex. Feb. 24, 2011), and that “to the extent that
[p]laintiffs seek to base claims on violations of the PSA, [p]laintiffs were not parties to the
PSA and lack any standing to assert such claims,” Long v. One West Bank, FSB, 2011 WL
3796887, at *4 (N.D. Ill. Aug. 24, 2011).
B
The court considers initially the second ground on which plaintiffs rely for their
claims for quiet title, estoppel, and declaratory judgment: that because defendants failed to
comply with the PSA’s requirements, the Property is not a part of the Trust and Deutsche
Bank, as trustee of the Trust, lacks authority to foreclose on the Property.
4
Defendants recognize that this is a merits-based ground for dismissal under Rule
12(b)(6) for failure to state a claim, as opposed to an allegation that plaintiffs lack
constitutional standing under Rule 12(b)(1) or prudential standing under Rule 12(b)(6).
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This argument is based on the alleged breach of the PSA, in particular, provisions
regarding the securitization of mortgage loans. To prove a breach of a contract under Texas
law, “a party must prove its privity to the agreement, or that it is a third-party beneficiary.”
Pagosa Oil & Gas, L.L.C. v. Marrs & Smith P’ship, 323 S.W.3d 203, 210 (Tex. App. 2010,
no pet.) (citing OAIC Commercial Assets, L.L.C. v. Stonegate Vill., L.P., 234 S.W.3d 726,
738 (Tex. App. 2007, pet. denied)). Plaintiffs lack standing to challenge this alleged lack of
compliance with the PSA because they have not pleaded facts that allow the court to draw
the reasonable inference that they are in privity with or are third-party beneficiaries of the
PSA. See, e.g., Deerinck v. Heritage Plaza Mortg. Inc., 2012 WL 1085520, at *5 & n.10
(E.D. Cal. Mar. 30, 2012) (“Plaintiffs lack standing to challenge the process in which their
mortgage was securitized because they are not a party to the PSA. Plaintiffs were not
investors of the . . . . Trust, nor are they third-party beneficiaries of the PSA, thus, they do
not have standing to challenge an alleged breach of that agreement.”) (collecting cases);
Edwards v. Ocwen Loan Servicing, LLC, 2012 WL 844396, at *5 (E.D. Tex. Mar. 12, 2012)
(holding in response to argument that defendants could not establish that valid PSA would
authorize foreclosure that, “[a]s multiple district courts have agreed, a mortgagor does not
have standing to challenge [the] pooling and service agreements because the mortgagor is not
a party to the . . . agreements.”) (collecting cases); In re Walker, 466 B.R. 271, 284-85 nn.28
& 29 (Bankr. E.D. Pa. 2012) (“[A] judicial consensus has developed holding that a borrower
lacks standing to (1) challenge the validity of a mortgage securitization or (2) request a
judicial determination that a loan assignment is invalid due to noncompliance with a pooling
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and servicing agreement, when the borrower is neither a party to nor a third party beneficiary
of the securitization agreement, i.e., the PSA.”) (collecting cases); Bittinger v. Wells Fargo
Bank NA, 744 F.Supp.2d 619, 625-26 (S.D. Tex. 2010) (holding that plaintiffs “ha[ve] no
ability under Texas law to sue for breach of [the PSA]” because they “[were] not a party to
this agreement and did not become a party, agent or assignee of a party, or a third-party
beneficiary of the agreement”).
Moreover, it is unclear under Texas law that the assignment becomes invalid merely
because it conflicts with the PSA, was made after the Trust was closed, or that the trust fails
to qualify for REMIC status. See Long, 2011 WL 3796887, at *4 (noting that “Plaintiffs
have also not cited any precedent holding that an assignment is invalid simply because it
conflicts with a PSA and it is irrelevant to the validity of the assignment whether or not it
complied with the PSA”). Because plaintiffs’ claims of quiet title, estoppel, and declaratory
judgment are based in part on defendants’ alleged failure to comply with the PSA
requirements, the court dismisses these claims in part.5
C
The court now considers the second ground on which plaintiffs rely for their claims
for quiet title, estoppel, and declaratory judgment. The gravamen of this ground is that
Deutsche Bank could not have acquired any interest in the Property from First Franklin in
5
Plaintiffs’ remaining claim of breach of contract regarding the “Non Impound
Notice” does not appear to be based on defendants’ alleged breach of the PSA and therefore
is not being dismissed on this basis.
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the alleged second “Assignment of Deed of Trust” because First Franklin had already
conveyed its interest to Goldman Sachs. Plaintiffs reason that, because Deutsche Bank is a
stranger to the Property, it lacks authority to foreclose on it.
1
Defendants assert that plaintiffs lack standing to contest the assignment agreements
because they were not a party to the assignments. The court agrees. “Courts in this circuit
have repeatedly held that borrowers do not have standing to challenge the assignments of
their mortgages because they are not parties to those assignments.” See Garrett v. HSBC
Bank USA, N.A., 2012 WL 1658796, at *2 (N.D. Tex. May 11, 2012) (Fitzwater, C.J.) (citing
cases); DeFranceschi v. Wells Fargo Bank, N.A., ___ F.Supp.2d ____, 2011 WL 3875338,
at *5 (N.D. Tex. Aug. 31, 2011) (Means, J.); see also, e.g., Eskridge, 2011 WL 2163989, at
*5.
Plaintiffs do have standing, however, to challenge defendants’ authority to foreclose
on the ground that foreclosure did not comply with the terms of the deed of trust. Such a
challenge does not contest assignment agreements to which plaintiffs were not parties, in
privity, or third party beneficiaries; instead, it relies on the terms of the deed of trust that
plaintiffs executed in favor of First Franklin. Defendants derive their authority to foreclose
from the power of sale in the deed of trust.
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Texas courts have consistently held that the terms set out in a
deed of trust must be strictly followed. As this Court has stated,
“[a] trustee has no power to sell the debtor’s property, except
such as may be found in the deed of trust.” Thus, when a
foreclosure sale is held pursuant to the power granted in the
deed of trust, the power of sale can only be exercised by those
authorized in the instrument. The reason that “strictness” is
required in following the terms of the power granted by the deed
of trust is to protect the property of the debtor. Failure to follow
the terms of the deed of trust will give rise to a cause of action
to set aside the trustee’s deed.
Univ. Sav. Ass’n v. Springwoods Shopping Ctr., 644 S.W.2d 705, 706 (Tex. 1982) (citations
omitted).6 Many of the cases that state that borrowers lack standing to contest the
assignments of their mortgages have examined whether the note or deed of trust permitted
the assignment and foreclosure. See Woods v. Bank of Am., N.A., 2012 WL 1344343, at *5
6
See also, e.g., Slaughter v. Qualls, 162 S.W.2d 671, 675 (Tex. 1942) (“A trustee has
no power to sell the debtor’s property, except such as may be found in the deed of trust; and
the powers therein conferred must be strictly followed.”) (citing cases); Bonilla v. Roberson,
918 S.W.2d 17, 21 (Tex. App. 1996, no writ) (“The power of the trustee to sell the deed for
the parties is derived wholly from the trust instrument . . . . [A] trustee must strictly pursue
the terms of the instrument, the provisions of law relative to such a sale, and the details
prescribed as to the manner of the sale.”) (citations omitted); Harwath v. Hudson, 654
S.W.2d 851, 854 (Tex. App. 1983, writ ref’d n.r.e.) (“[T]he right of a grantor of a deed of
trust to have its provisions strictly complied with to effect a valid foreclosure sale is absolute.
Since strict compliance was lacking in this case, the foreclosure sale was invalid.”); 30 Tex.
Jur. 3d Deeds of Trust and Mortgages § 138 (2012) (“When the exercise of a power of sale
depends on the direction or request of a given person, that direction or request is
indispensable to a valid exercise of the power. Where the deed of trust gives the holder of
the underlying note or indebtedness the right to request a sale, the sale may be made at the
request of the assignee of the note or indebtedness.”) (footnote omitted); 15 Mike Baggett,
Texas Practice Series, Texas Foreclosure: Law and Practice § 2.42, at 115(2001) (“Only the
parties designated in the deed of trust may appoint a substitute trustee, although the deed of
trust may grant this power to any subsequent holder of the indebtedness.”) (footnotes
omitted).
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(N.D. Tex. Apr. 17, 2012) (Boyle, J.) (“MERS had the authority to assign the Deed of Trust,
and the subsequent foreclosure on the Deed of Trust was effective,” and “Plaintiff fails to
allege how an assignment by MERS violates any terms or conditions of the Deed of Trust,
or how any other defect in the foreclosure otherwise constitutes a breach of the contract.”);
Edwards, 2012 WL 844396, at *5 (“The note at issue in this case specifically provided that
the borrower understands that the note may be transferred and that, ‘Lender or anyone who
takes this Note by transfer and who is entitled to receive payments under this Note is called
the Note Holder.’”) (internal quotation marks omitted); DeFranceschi, 2011 WL 3875338,
at *4 (“Because the deed of trust specifically provided that MERS would have the power of
sale, MERS had the power of sale that was passed to U.S. Bank upon MERS’s assignment.”);
Eskridge, 2011 WL 2163989, at *5 (stating that “[e]ven if she has standing, her allegations
are without merit because MERS was given the authority to transfer the documents in the
Deed of Trust”).7
7
In In re Bailey, 468 B.R. 464, 2012 WL 1192785 (Bankr. D. Mass. 2012), the court
examined a similar contention under Massachusetts law, which authorizes a mortgage holder
to foreclose on property without judicial authorization if the mortgage grants a power of sale.
See id. at *5. The debtor asserted in the case that Wells Fargo Bank, NA (“Wells Fargo”) was
not the holder of the mortgage and thus had no authority to foreclose on her property because
Washington Mutual Bank (“Washington Mutual”), the entity that purportedly assigned the
mortgage to Wells Fargo, had not acquired any rights in the mortgage to assign. See id. at
*2-3, *6. The Bailey court concluded that “absent Wells Fargo’s status as holder of the
Mortgage, the Foreclosure Sale is void,” and it held that the debtor could challenge the
validity of the foreclosure sale through her request for declaratory judgment. See id. at *6,
*8.
In reaching this decision, the Bailey court considered and distinguished the same
arguments that defendants raise in this case. First, the court examined Wells Fargo’s
assertion that the debtor lacked standing to challenge the assignment of the mortgage. See
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2
Although plaintiffs have standing to assert claims based on defendants’ alleged
noncompliance with the terms of the deed of trust, they have not alleged plausible claims on
this basis. For example, plaintiffs have failed to plead the contents of the deed of trust, such
as whether the deed of trust authorized First Franklin to assign the mortgage; whether
Deutsche Bank qualified as an assignee of the mortgage, whether an assignee was authorized
to appoint a trustee or substitute trustee to foreclose on the Property, and whether the deed
of trust otherwise named Deutsche Bank as the trustee or substitute trustee. Cf. Slaughter
v. Qualls, 162 S.W.2d 671, 675 (Tex. 1942) (holding that because deed of trust authorized
id. at *6. It reasoned that the debtor was not attacking the assignment itself (e.g., arguing that
the assignment was defective because of lack of consideration), but was instead
“challeng[ing] Wells Fargo’s assertion that Washington Mutual held the Mortgage at the time
it executed the Assignment,” and was arguing that “as a stranger to the Mortgage,
Washington Mutual could not have passed any ownership rights in the Mortgage to Wells
Fargo.” Id. The Bailey court also considered “recent cases [that] have contained somewhat
broader language to the effect that a borrower has no standing to challenge a mortgage
assignment, as the borrower is neither a party to, nor a third-party beneficiary of, the
assignment.” Id. at *7 (citing cases). It distinguished this line of cases because “the Debtor
[was] not, as previously discussed, challenging the Assignment per se” but was instead
“question[ing] only whether the assignor had any rights in the Mortgage to transfer to the
assignee.” Id.
Second, the Bailey court examined cases in which “courts have found that . . .
borrowers lacked standing to challenge a mortgage assignment based on an alleged breach
of an underlying PSA, because the borrowers were neither parties to nor third-party
beneficiaries under those agreements.” Id. (citing cases). In the present case, this court
relied on this type of argument to dismiss plaintiffs’ claims based on the alleged breach of
the PSA. See supra § III(B). Bailey distinguished these cases, concluding that they were
inapposite to the debtor’s argument. Bailey reasoned that “The Debtor’s argument here is
not based on the breach of an underlying contract to which she was not a party; instead, her
argument is aimed at the ownership of the Mortgage at the time it was purportedly assigned.”
Bailey, 2012 WL 1192785, at *7.
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sale only by trustee or duly-appointed substitute trustee after default, sale by a third party was
unauthorized); Burnett v. Mfr.’s Hanover Trust Co., 593 S.W.2d 755, 757 (Tex. Civ. App.
1979, writ ref’d n.r.e.) (“The Texas cases reveal that a foreclosure sale by a person not
properly appointed as a substitute trustee according to the terms of the deed of trust is not
merely an irregularity in the foreclosure proceedings. Rather, such sales have been declared
void because they are not conducted within the authority conferred by the deed of trust.”)
(citing cases); Lawson v. Gibbs, 591 S.W.2d 292, 294 (Tex. Civ. App. 1979, no writ) (“An
examination of the deed of trust . . . reveals that the ‘legal owner and holder’ of the note
secured is the ‘beneficiary.’ The deed of trust authorizes the beneficiary to appoint a
substitute trustee, by designation in writing, who succeeds to all the rights and powers of the
original trustee.”). Without such factual detail, the court is unable to conclude that plaintiffs’
claims of quiet title, estoppel, and declaratory judgment are plausible. The court therefore
dismisses these claims to the extent they challenge defendants’ authority to foreclose on the
ground that Deutsche Bank did not receive any rights in the mortgage from First Franklin.8
See Twombly, 550 U.S. at 570.
8
The court does not suggest that a deed of trust assignment must be recorded. This
would be contrary to Texas law. See Bittinger, 744 F.Supp.2d at 625 (“Under Texas law,
there is no requirement that the deed of trust assignment be recorded. And under Texas law,
the ability to foreclose on a deed of trust is transferred when the note is transferred, not when
an assignment of deed of trust is either prepared or recorded.”) (citing JWD, Inc. v. Fed. Ins.
Co., 806 S.W.2d 327, 329-30 (Tex. App. 1991, no writ). Instead, the court holds that
plaintiffs can challenge whether Deutsche Bank received any interest in the loan on the basis
that First Franklin had already conveyed its interest to another party.
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D
In summary, plaintiffs’ claims of quiet title, estoppel, and declaratory judgment are
dismissed based on lack of standing or on the merits for failure to state a claim on which
relief can be granted. Because the court is permitting plaintiffs to replead, it will address
other grounds for dismissal that defendants have raised. By doing so, it may obviate the need
to address pleading defects that could recur in the amended complaint and meritless
arguments that could be included in a renewed motion to dismiss.
IV
The court considers first plaintiffs’ quiet title claim.
A
A suit to quiet title is an equitable action, and the principal issue is “the existence of
a cloud that equity will remove.” Bell v. Ott, 606 S.W.2d 942, 952 (Tex. Civ. App. 1980,
writ ref’d n.r.e.). The suit “enable[s] the holder of the feeblest equity right to remove from
his way to legal title any unlawful hindrance having the appearance of a better right.” Wright
v. Matthews, 26 S.W.3d 575, 578 (Tex. App. 2000, pet. denied) (quoting Bell, 606 S.W.2d
at 952) (internal quotation marks omitted). “Any deed, contract, judgment or other
instrument not void on its face that purports to convey any interest in or make any charge
upon the land of a true owner, the invalidity of which would require proof, is a cloud upon
the legal title of the owner.” Id.; see also Gordon v. W. Hous. Trees, Ltd., 352 S.W.3d 32,
42 (Tex. App. 2011, no pet.) (“A cloud on title exists when an outstanding claim or
encumbrance is shown, which on its face, if valid, would affect or impair the title of the
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owner of the property.”) (citing Hahn v. Love, 321 S.W.3d 517, 531 (Tex. App. 2009, no
pet.)). “The effect of a suit to quiet title is to declare invalid or ineffective the defendant[s’]
claim to title.” Gordon, 352 S.W.3d at 42.
“The elements of the claim for relief to quiet title are (1) an interest in a specific
property, (2) title to the property is affected by a claim by the defendant, and (3) the claim,
although facially valid, is invalid or unenforceable.” Bell v. Bank of Am. Home Loan
Servicing LP, 2012 WL 568755, at *7 (S.D. Tex. Feb. 21, 2012) (citing U.S. Nat’l Bank
Ass’n v. Johnson, 2011 WL 6938507, at *3 (Tex. App. Dec. 30, 2011, no pet.) (mem. op.)).
“To quiet title in [their] favor, . . . plaintiff[s] ‘must allege right, title, or ownership in himself
or herself with sufficient certainty to enable the court to see he or she has a right of
ownership that will warrant judicial interference.’” Wells v. BAC Home Loans Servicing,
L.P., 2011 WL 2163987, at *4 (W.D. Tex. Apr. 26, 2011) (quoting Wright, 26 S.W.3d at
578). “[P]laintiff[s] . . . must prove and recover on the strength of [their] own title, not the
weakness of [their] adversary’s title.” Fricks v. Hancock, 45 S.W.3d 322, 327 (Tex. App.
2001, no pet.) (citing Alkas v. United Sav. Ass’n of Tex., Inc., 672 S.W.2d 852, 857 (Tex.
App. 1984, writ ref’d n.r.e.)). Plaintiffs, however, “[are] not required to trace [their] title to
either the sovereign or to a common source.” See, e.g., Katz v. Rodriguez, 563 S.W.2d 627,
629-30 (Tex. Civ. App. 1977, writ ref’d n.r.e.) (citing cases).9
9
In their motion, defendants cite cases that involve suits for trespass to try title. For
example, defendants state that “[a] prevailing party’s remedy is title to, and possession of,
the real property interest at issue in the suit,” see Ds. Br. 4, and they cite Florey v. Estate of
McConnell, 212 S.W.3d 439, 449 (Tex. App. 2006, no pet.). But Florey reached this
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B
Plaintiffs allege that they “are the owner[s] of the [P]roperty . . . under a deed thereto
recorded in the office of the Rockwall County Clerk.” Pet. 2. They assert that “[t]he failure
of Defendants to obtain any interest in the obligations under the Note voided any title or
power they might have under the Trust Deed, and rendered the Trust Deed unenforceable by
them.” Id. at 8. Plaintiffs posit that their legal title to the Property is clouded by “[their]
inability . . . to safely discharge any lien of the Trust Deed against the [Property] in favor of
proper assignees of the Note and Trust Deed, and the threat of multiple recoveries or attempts
to recover against the [Property].” Id. They seek, inter alia, “an Order quieting title to the
[Property] in favor of Plaintiffs and against Defendants, freeing title to the [Property] of the
conclusion in the context of a trespass to try title suit. See Florey, 212 S.W.3d at 449 (“A
trespass-to-try title suit seeks title and possession of real property[.]”). “Trespass to try title
and suit to quiet title are two different causes of action.” Fricks, 45 S.W.3d at 327. “A suit
in trespass to try title is statutory and accords a legal remedy, while a suit to remove cloud
or to quiet title accords an equitable remedy.” Katz, 563 S.W.2d at 629. While both types
of actions require plaintiffs to “prevail based upon the strength of [their] own title,” if
plaintiffs in the present case were seeking relief in a suit for trespass to try title, they would
also be required to prove one of the following: “(1) a regular chain of conveyances from the
sovereign, (2) a superior title out of a common source, (3) title by limitations, or (4) prior
possession, which has not been abandoned.” Kennedy Con., Inc. v. Forman, 316 S.W.3d
129, 135 (Tex. App. 2010, no pet.). When a suit involves rival claims to property, it is a
trespass to try title suit. See Teon Mgmt., LLC v. Turquoise Bay Corp., 357 S.W.3d 719, 727
(Tex. App. 2011, no pet.).
This lawsuit, however, does not directly implicate any issues to be resolved by a
trespass to try title suit. The parties do not contest that plaintiffs hold title to the Property
that is the subject of a deed of trust. Instead, plaintiffs seek adjudication of the validity of
the deed of trust. See Florey, 212 S.W.3d at 449 (holding that quiet title claim was not
governed by the trespass-to-try title statute because “[t]he . . . suit . . . seeks adjudication of
the validity of Florey’s deed of trust as it impacts his entitlement to proceeds from the sale
of the McConnell property”).
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liens of the Trust Deed and leaving any obligations under the Note unsecured by any interest
in the [Property].” Id.10
C
Defendants maintain that plaintiffs have not pleaded any facts demonstrating the
strength of their title, focusing instead on whether the assignment of the mortgage was
valid.11 This argument lacks force. “It is clear that the claimant must show an interest of
some kind, but it is error that the claimant must show fee simple or uncontestable interest to
prevail in a suit to remove cloud on title or to quiet title.” Katz, 563 S.W.2d at 630; see also
Henry v. Chase Home Fin., LLC, 2011 WL 6057505, at *5 n.2 (S.D. Tex. Dec. 6, 2011)
(denying motion to dismiss quiet title claim based on insufficient allegations of plaintiff’s
interest because defendant did not explain why allegations that plaintiffs owned property, had
been in possession of property, and had paid property taxes was insufficient to plead an
interest); Mortg. Elec. Registration Sys., Inc. v. Groves, 2011 WL 1364070, at *4 (Tex. App.
Apr. 12, 2011, pet. denied) (mem. op.) (holding that plaintiff’s allegation that “she owns the
property by virtue of her recorded deed” was sufficient).
10
Plaintiffs also allege that “[t]he invalid transfer of the Note to the Trust creates
genuine issues as to the rightful present owner/holder of the Note and Trust Deed and
subjects Plaintiffs to multiple and unpredictable recoveries or attempts to recover against the
subject property.” Pet. 8. To the extent that this allegation relies on the alleged breach of
the PSA, the court has dismissed it for the reasons set out supra at § III(B).
11
Defendants also contend that plaintiffs are basing their claim on the asserted
weakness of defendants’ title by arguing that the assignment was untimely. This relates,
however, to the alleged breach of the PSA, a ground that the court has dismissed. See supra
§ III(B).
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Defendants also focus on plaintiffs’ requested remedies. Plaintiffs appear to seek two
remedies. First, they ask the court to quiet title in their favor against defendants. Defendants
do not present any arguments that relate to this request. Because “[t]he effect of a suit to
quiet title is to declare invalid or ineffective the defendant’s claim to title,” Gordon, 352
S.W.3d at 42, plaintiffs are in this respect seeking an available remedy.
Second, plaintiffs request that the court free the Property from “the liens of the Trust
Deed and leav[e] any obligations under the Note unsecured.” Pet. 8. Plaintiffs cannot obtain
this remedy if they prevail on their quiet title claim. If granted, this remedy would eliminate
any possible assignee’s interest in the note and deed of trust, even that of an assignee who
is not a party to this lawsuit and has had no opportunity to contest plaintiffs’ claim.
Accordingly, were the court not dismissing plaintiffs’ quiet title claim for other
reasons, the court would grant in part and deny in part a motion to dismiss based on these
additional grounds.
V
The court turns next to plaintiffs’ claim for estoppel.12
“Generally, Texas law defines estoppel as ‘conduct which causes the other party to
materially alter his position in reliance on that conduct.’” Monumental Life Ins. Co. v.
Hayes-Jenkins, 403 F.3d 304, 311 (5th Cir. 2005) (quoting Braugh v. Phillips, 557 S.W.2d
155, 158 (Tex. App. 1977, writ ref’d n.r.e.)).
12
In their petition, plaintiffs entitle their estoppel claim as “Cause of Action:
Estoppel/Declaratory Judgment.” Pet. 6.
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[T]he doctrine of equitable estoppel requires: (1) a false
representation or concealment of material facts; (2) made with
knowledge, actual or constructive, of those facts; (3) with the
intention that it should be acted on; (4) to a party without
knowledge or means of obtaining knowledge of the facts; (5)
who detrimentally relies on the representations.
Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 515-16 (Tex.
1998) (citing Schroeder v. Tex. Iron Works, Inc., 813 S.W.2d 483, 489 (Tex. 1991)).
Plaintiffs allege that defendants lacked authority to “declare a default, accelerate the
debt, appoint a substitute trustee, or conduct a substitute trustee’s sale” “[b]ecause the Trust
never acquired the Note or Trust Deed,” and that “[they] have been subjected to risks, abuses,
[and] prejudice, and the proper discharge of the obligations on the Note has been rendered
impossible.” Pet. 6.13 Assuming arguendo that estoppel is a legally viable claim,14 plaintiffs
do not plead sufficient facts to show how defendants falsely represented or concealed a
material fact, whether defendants did so with knowledge, actual or constructive, of the facts
and with the intention that the representations or concealed facts be acted on, and whether
plaintiffs lacked knowledge or a means of obtaining knowledge of the facts and detrimentally
relied on a representation or concealed fact. Plaintiffs must “plead[] factual content that
13
They also seek to estop defendants from “assert[ing] any present default on the Note
. . . or power of sale under the Trust Deed” and seek an order declaring that “Defendants lack
any interest under the Note and/or Trust Deed.” Id. at 7.
14
“Equitable estoppel is not a cause of action but may be asserted as a defensive plea
to bar a defendant from raising a particular defense.” Joe v. Two Thirty Nine Joint Venture,
145 S.W.3d 150, 156 n.1 (Tex. 2004). Defendants do not move to dismiss plaintiffs’
estoppel claim on this basis.
- 20 -
allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” See Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
Accordingly, were the court not already dismissing plaintiffs’ equitable estoppel
claim, it would do so on this basis.
VI
The court now considers plaintiffs’ claim for declaratory judgment.15
The federal Declaratory Judgment Act (“DJA”), 28 U.S.C. §§ 2201, 2202, does not
create a substantive cause of action. See Lowe v. Ingalls Shipbuilding, A Div. of Litton Sys.,
Inc., 723 F.2d 1173, 1179 (5th Cir. 1984) (“The federal Declaratory Judgment Act . . . is
procedural only[.]”) (citing Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671
(1950)). A declaratory judgment action is merely a vehicle that allows a party to obtain “an
early adjudication of an actual controversy” arising under other substantive law. Collin
Cnty., Tex. v. Homeowners Ass’n for Values Essential to Neighborhoods, (HAVEN), 915 F.2d
167, 170 (5th Cir. 1990). Federal courts have broad discretion to grant or refuse declaratory
judgment. See, e.g., Torch, Inc. v. LeBlanc, 947 F.2d 193, 194 (5th Cir. 1991). “Since its
inception, the [DJA] has been understood to confer on federal courts unique and substantial
discretion in deciding whether to declare the rights of litigants.” Wilton v. Seven Falls Co.,
15
Although plaintiffs filed this lawsuit in Texas state court, “[w]hen a declaratory
judgment action filed in state court is removed to federal court, that action is in effect
converted into one brought under the federal Declaratory Judgment Act, 28 U.S.C. §§ 2201,
2202.” Redwood Resort Props., LLC v. Holmes Co., 2007 WL 1266060, at *4 (N.D. Tex.
Apr. 30, 2007) (Fitzwater, J.).
- 21 -
515 U.S. 277, 286 (1995). The DJA is “an authorization, not a command.” Pub. Affairs
Assocs., Inc. v. Rickover, 369 U.S. 111, 112 (1962). It gives federal courts the competence
to declare rights, but it does not impose a duty to do so. Id. (collecting cases).
Defendants maintain that the declaratory judgment claim should be dismissed because
plaintiffs have failed to state viable claims.
The court agrees.
See Turner v.
AmericaHomeKey Inc., 2011 WL 3606688, at *6 (N.D. Tex. Aug. 16, 2011) (Fitzwater, C.J.)
(declining to entertain declaratory judgment request because plaintiff failed to plead a
plausible substantive claim), appeal docketed, No. 12-10277 (5th Cir. Mar. 13, 2012).
Accordingly, were the court not dismissing plaintiffs’ declaratory judgment claim for other
reasons, it would do so on this ground.
Additionally, were the court not dismissing the claim for other reasons, it would also
raise sua sponte that, even if plaintiffs could adequately plead a substantive claim, the
declaratory judgment action should be dismissed because it duplicates plaintiffs’ quiet title
claim.16 Plaintiffs essentially request that the court declare that defendants have no interest
in the property, and therefore lack the authority to declare a default, sell, receive proceeds,
transfer title, or release the deed of trust. Because these issues will be resolved in the quiet
title action, a separate declaratory judgment action would be redundant. See, e.g., Kougl v.
16
The court can consider the sufficiency of a complaint and “dismiss an action on its
own motion ‘as long as the procedure employed is fair.’” Carroll v. Fort James Corp., 470
F.3d 1171, 1177 (5th Cir. 2006) (quoting Bazrowx v. Scott, 136 F.3d 1053, 1054 (5th Cir.
1998) (per curiam)); see also Coates v. Heartland Wireless Commnc’ns, Inc., 55 F.Supp.2d
628, 633 (N.D. Tex. 1999) (Fitzwater, J.).
- 22 -
Xspedius Mgmt. Co. of Dall./Fort Worth, L.L.C., 2005 WL 1421446, at *4 (N.D. Tex. June
1, 2005) (Fitzwater, J.); 6 Charles Alan Wright et al., Federal Practice & Procedure § 1406,
at 30-31 (3d ed. 2012) (“When the request for declaratory relief brings into question issues
that already have been presented in plaintiff’s complaint and defendant’s answer to the
original claim, however, a party might challenge the counterclaim on the ground that it is
redundant and the court should exercise its discretion to dismiss it.”). Accordingly, were the
court not dismissing the declaratory judgment claim for other reasons, it would in its
discretion dismiss the claim on the ground that it duplicates plaintiffs’ quiet title claim.
VII
The court now turns to plaintiffs’ breach of contract claim based on the “Non
Impound Notice,” a claim that has not already been dismissed above.
A
A breach of contract claim under Texas law requires proof of four elements: (1) the
existence of a valid contract, (2) plaintiffs’ performance of duties under the contract, (3)
defendants’ breach of the contract, and (4) damages to the plaintiffs resulting from the
breach. Lewis v. Bank of Am. NA, 343 F.3d 540, 544-45 (5th Cir. 2003) (citing Palmer v.
Espey Huston & Assocs., 84 S.W.3d 345, 353 (Tex. App. 2002, pet. denied)). Plaintiffs
allege in their petition, either “[c]oncurrently or in the alternative,” a breach of contract claim
against defendants solely on the basis of the “Non Impound Notice” that was attached to the
- 23 -
note,17 which allegedly obligated the “lender for this mortgage not [to] impound for real
estate taxes and homeowners insurance.” Pet. 6 & 9. Plaintiffs assert that they received a
letter from Home Loan purporting to increase their monthly mortgage payment of $2,123.43
by 77%, allegedly entirely due to taxes and insurance. They allege that, due to this conduct,
“Defendants[] failed to comply with the terms of the contract and have caused Plaintiffs
monetary damages.” Id. at 9.
B
The court dismisses plaintiffs’ breach of contract claim because they have failed to
allege that they performed their contractual obligations by remaining current on their
mortgage payments until the alleged breach. See, e.g., Obuekwe v. Bank of Am., N.A., 2012
WL 1388017, at *5 (N.D. Tex. Apr. 19, 2012) (Means, J.) (holding that plaintiff “cannot
state a claim for breach of the deed of trust because [plaintiff] admits that she defaulted on
the loan,” and therefore cannot demonstrate that she performed her duties under the contract)
(citing Mullins v. TestAmerica, Inc., 564 F.3d 386, 418 (5th Cir. 2009)); Owens v. Bank of
Am., NA, 2012 WL 912721, at *4 (S.D. Tex. Mar. 16, 2012) (dismissing breach of contract
claim because “plaintiffs have undisputedly not performed their contractual obligations
because they have not stayed current on their mortgage payments”).18 This is alone a
17
Plaintiffs do not otherwise contend that defendants breached the note or deed of
trust.
18
Defendants also moved for dismissal on the ground that plaintiffs had failed to plead
damages. After plaintiffs responded that the petition did allege monetary damages,
defendants did not reassert this position in their reply brief.
- 24 -
sufficient basis on which to dismiss plaintiffs’ breach of contract claim. See Lewis, 343 F.3d
at 544-45 (requiring proof of all four elements).
C
The court also raises sua sponte that this claim must be dismissed for two additional
reasons.19 First, plaintiffs fail to plead that defendants are parties to the contract. Defendants
“cannot have breached a contract to which [they were] not then a party.” Biggers v. BAC
Home Loans Servicing, LP, 767 F.Supp.2d 725, 729 (N.D. Tex. 2011) (Fitzwater, C.J.).
Plaintiffs allege in the facts section of their petition that defendants could not be considered
parties to the contract because they were not assignees of First Franklin.20 Moreover, the
petition permits the inference that, rather than defendants, Home Loan (the entity that sent
the letter regarding the increased mortgage payments) was a party to the contract, because
plaintiffs allege that the “letter injected yet another unidentified party . . . into the discussion
of who actually owned the Note.” Pet. 6.
Second, plaintiffs do not plead facts demonstrating that defendants breached the note.
As stated previously, plaintiffs assert that Home Loan sent the letter regarding increased
mortgage payment. Plaintiffs also allege that “Defendants, or their agents on their behalf,
19
As the court explains supra at note 16, this procedure is permissible, provided it is
fair to plaintiffs as the nonmovants.
20
Although the court can infer that, because the breach of contract claim is asserted
“[c]oncurrently or in the alternative,” Pet. 9, plaintiffs intend to allege that defendants were
parties to the contract, the petition does not show that plaintiffs are entitled to relief. See
Iqbal, 556 U.S. at 679 (“But where the well-pleaded facts do not permit the court to infer
more than the mere possibility of misconduct, the complaint has alleged—but it has not
‘show[n]’—‘that the pleader is entitled to relief.’”) (quoting Rule 8(a)(2)).
- 25 -
sent written correspondence to Plaintiffs unilaterally increasing their monthly mortgage
payment.” Id. at 9. But plaintiffs fail to plead facts that enable the court to draw the
reasonable inference that the actions of Home Loan are attributable to defendants. See Iqbal,
556 U.S. at 678 (“The plausibility standard . . . asks for more than a sheer possibility that a
defendant has acted unlawfully.”) (citing Twombly, 550 U.S. at 556).
Accordingly, the court dismisses plaintiffs’ breach of contract claim.
VIII
Defendants also move in the alternative under Rule 12(e) for a more definite
statement.
A party is entitled to a more definite statement when a portion of the pleadings to
which a responsive pleading is allowed “is so vague or ambiguous that the party cannot
reasonably prepare a response.” Rule 12(e). “Whether to grant a motion for a more definite
statement is a matter within the discretion of the trial court.” Russell v. Grace Presbyterian
Vill., 2005 WL 1489579, at *3 (N.D. Tex. June 22, 2005) (Solis, J.) (citing Mitchell v. E-Z
Way Towers, Inc., 269 F.2d 126, 130 (5th Cir. 1959)).
Defendants move for a more definite statement on several grounds, but each ground
is now moot.
First, they assert that the petition fails to identify plaintiffs’ compliance with the note
and deed of trust, which relates to their breach of contract claim. Because the court has
already addressed this contention in defendants’ motion to dismiss plaintiffs’ breach of
contract claim, resulting in dismissal of that claim, this request is denied as moot.
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Second, defendants contend that plaintiffs have failed to identify the alleged false
representation on which their estoppel claim is based. The court also denies this request as
moot because the court has already considered this argument and dismissed plaintiffs’
estoppel claim.
Third, defendants posit that plaintiffs have failed to identify a proper ground to
support a request for a declaratory judgment. This request is also denied as moot because
the court has dismissed plaintiffs’ declaratory judgment.
Accordingly, the court denies defendants’ alternative Rule 12(e) motion for a more
definite statement.
IX
Although the court is dismissing plaintiffs’ claims, it will permit them to replead. See
In re Am. Airlines, Inc., Privacy Litig., 370 F.Supp.2d 552, 567-68 (N.D. Tex. 2005)
(Fitzwater, J.) (“[D]istrict courts often afford plaintiffs at least one opportunity to cure
pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable
or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that
will avoid dismissal.”) (internal quotation marks and citation omitted). Because plaintiffs
have not stated that they cannot, or are unwilling to, cure the defects that the court has
identified, the court grants them 30 days from the date this memorandum opinion and order
is filed to file an amended complaint.
- 27 -
*
*
*
For the reasons explained, the court grants defendants’ Rule 12(b)(6) motion, denies
defendants’ alternative Rule 12(e) motion as moot, and grants plaintiffs 30 days from the date
this memorandum opinion and order is filed to file an amended complaint.
SO ORDERED.
June 26, 2012.
_________________________________
SIDNEY A. FITZWATER
CHIEF JUDGE
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