Avila et al v. Ocwen Loan Servicing, LLC et al

Filing 8

ORDER re 4 Motion to Dismiss for Failure to State a Claim filed by Litton Loan Servicing, LP, U.S. Bank, National Association, as Trustee under the Pooling and Servicing Agreement dated as of August 1, 2006, GSAMP Trust 2006-HE5, Mo rtgage Pass-Through Certificates, Series 2006-HE5, Ocwen Loan Servicing, LLC, Mortgage Electronic Registration Systems, Inc.; The Avilas shall have till NOvember 20, 2014 to file their eveidence and response to the Defendant's Motion for Summary Judgment. Signed by Judge Xavier Rodriguez. (wg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
LUIS L. AVILA AND MAYRA V. AVILA, §
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Plaintiffs,
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v.
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OCWEN LOAN SERVICING, LLC, ITS
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SUCCESSORS AND ASSIGNS, U.S.
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BANK NATIONAL, ITS SUCESSORS
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AND ASSIGNS, GSAMP TRUST 2006§
HE5, ITS SUCCESSORS AND ASSIGNS, §
SOUTHSTAR FUNDING, LLC, LITTON
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LOAN SERVICING LP, ITS
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SUCCESSORS AND ASSIGNS, AND
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MORTGAGE ELECTRONIC
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REGISTRATION SYSTEMS, INC.
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Defendants.
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Civil Action No. SA-14-CV-807-XR

ORDER
On this day the Court considered Defendants’ Motion to Dismiss for Failure to State a
Claim (docket no. 4). For the following reasons, the Court converts the motion to dismiss to a
motion for summary judgment pursuant to Federal Rule of Civil Procedure 12(d). Plaintiffs will
be given until November 20, 2014 to respond.
BACKGROUND
Plaintiffs Luis and Mayra Avila filed a state court petition with an application for a
temporary restraining order (TRO) in the 225th Judicial District Court of Bexar County, Texas,
on September 2, 2014. (Docket no. 1, Ex. 5). By their lawsuit, the Avilas sought to stop a
foreclosure sale.

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The Avilas purchased the property at 1006 Bridle Forest, San Antonio, Texas 78245 (the
“Property”) on June 23, 2006. To purchase the Property, the Avilas received a loan from
Defendant Litton Loan Servicing, LP, in exchange for executing a promissory note in favor of
Litton. The Avilas allege the note and loan servicing was subsequently transferred to Defendants
US Bank National, Ocwen Loan Servicing, LLC, and Southstar Funding, LLC. The Avilas
allege 8 causes of action in their state court petition: 1) breach of contract; 2) breach of fiduciary
duty; 3) negligent misrepresentation; 4) fraud; 5) “bad faith;” 6) tortious interference with
contract; 7) conversion; and 8) quasi estoppel.

The Avilas sought damages and equitable

remedies, including a TRO, which the state court granted on September 2, 2014.
Defendants1 then removed the case to federal court on September 12, 2014, based on
diversity jurisdiction. In the notice of removal (docket no. 1), Defendants point out that the
Avilas have brought these claims, or substantially similar ones, three times previously. The
previous lawsuits were dismissed with prejudice by a federal court. First, Judge Biery dismissed
the Avilas’ case in Avila v. Ocwen Loan Servicing, et. al, No. 5:13-CV-00027-FB on the merits.
Then Judge Biery and Judge Garcia dismissed the case on res judicata grounds in Avila v.
Ocwen Loan Servicing, et. al, No. 5:13-cv-01082-FB and Avila v. Ocwen Loan Servicing, et. al,
No. 5:14-CV-00460-OLG, respectively.
Defendants moved to dismiss the case on September 19, 2014, arguing only that the
Avilas’ claims are barred due to res judicata and collateral estoppel. The Avilas did not respond
to the motion to dismiss or participate in forming the scheduling order as directed by the Court.
The Court, nevertheless, evaluates the merits of Defendants’ motion to dismiss. See Webb v.
Morella, 457 F. App’x 448, 452 n.4 (5th Cir. 2012).

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All Defendants except Southstar signed both the notice of removal and motion to dismiss. Southstar does not
appear to be able to act as it was liquidated in a bankruptcy. More on this below.

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JURISDICTION AND IMPROPER JOINDER
Defendants removed based on diversity jurisdiction.

Plaintiffs have not contested

jurisdiction or filed a motion to remand, but the Court has “a continuing obligation to examine
the basis for [its] jurisdiction” and may raise the issue sua sponte. MCG, Inc. v. Great W. Energy
Corp., 896 F.2d 170, 173 (5th Cir. 1990). A state court civil action may only be removed to
federal court if the federal court would have had original jurisdiction had the case been filed in
federal court. 28 U.S.C. § 1441(a). Federal courts have original jurisdiction over “all civil
actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of
interest and costs, and is between . . . citizens of different States.” 28 U.S.C. § 1332(a)(1).
Diversity jurisdiction requires complete diversity—i.e. when no plaintiff is a citizen of the same
state as any defendant. Wisconsin Dep't of Corr. v. Schacht, 524 U.S. 381, 388 (1998). Not all
named defendants are necessarily considered for diversity analysis. Salazar v. Allstate Texas
Lloyd’s, Inc., 455 F.3d 571, 574 (5th Cir. 2006). A court may ignore improperly joined, nondiverse defendants. Id. To establish improper joinder, the removing party must show “(1) actual
fraud in the pleading of jurisdictional facts, or (2) [the] inability of the plaintiff to establish a
cause of action against the non-diverse party in state court.” Smallwood v. Ill. Cent. R.R. Co.,
385 F.3d 568, 573 (5th Cir. 2004) (en banc).
If a court determines a defendant is improperly joined, the defendant is effectively
dismissed from the action. Akerblom v. Ezra Holdings Ltd., 509 F. App’x. 340, 347 (5th Cir.
2013) (per curiam). The removing party bears the burden of showing that federal jurisdiction
exists and that removal was proper. Vantage Drilling Co. v. Hsin-Chi Su, 741 F.3d 535, 537 (5th
Cir. 2014).

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The Avilas are citizens of Texas. Defendant Ocwen is a Delaware limited liability
company with its principal place of business in Florida. For diversity purposes, an LLC is a
citizen of all the states where its members are citizens. Ocwen’s sole member is Ocwen
Mortgage Servicing, Inc., which is a citizen of the U.S. Virgin Islands because it is incorporated
there. Defendant Ocwen is not a citizen of Texas. Defendant Litton is a limited partnership that
is considered a citizen of every state where a general or limited partner lives for diversity
purposes. Litton’s sole limited partner is Ocwen Capital Management LLC. Ocwen Capital
Management LLC’s sole member is Ocwen Financial Corporation, a Florida corporation with its
principal place of business in Georgia. Litton is therefore not a citizen of Texas for diversity
purposes. Defendant Mortgage Electronic Registration Systems, Inc. (“MERS”) is a Delaware
corporation with its principal place of business in Virginia. MERS is not a citizen of Texas for
diversity purposes, either. Finally, Defendant US Bank is the trustee of a trust. The citizenship
of a trust for diversity purposes is the citizenship of the trustee. A national bank is a citizen of
the state where its main office is located. Wachovia Bank, N.A. v. Schmidt, 546 U.S. 303, 318
(2006). US Bank’s main office is located in Ohio. US Bank is not a citizen of Texas for
diversity purposes. Therefore, none of the removing Defendants are citizens of Texas for
diversity purposes.
The Avilas’ state court petition does not allege an amount of damages. Defendants argue
the amount in controversy exceeds $75,000 because the value of right protected in this claim for
equitable relief is $82,450 according to the Bexar County Appraisal District. See docket no. 1,
ex. 10. The amount in controversy for diversity purposes in a foreclosure case is the value of the
property. See Farkas v. GMAC Mortg., L.L.C., 737 F.3d 338, 341 (5th Cir. 2013) (explaining
that for those cases in which a plaintiff seeks to enjoin a foreclosure sale, the value of the

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property represents the amount in controversy).

Thus, the amount in controversy exceeds

$75,000 and all Defendants, excluding Southstar, are citizens of Texas. The Court cannot
ascertain from the record Southstar’s citizenship for diversity purposes. The Court therefore
only has subject-matter jurisdiction based on diversity jurisdiction if Southstar was improperly
joined in this case. See 28 U.S.C. § 1332(a).
To establish improper joinder, a removing party must show a plaintiff cannot “establish a
cause of action against the non-diverse party in state court.” Id. (quoting Travis v. Irby, 326 F.3d
644, 646–47 (5th Cir. 2003)). A plaintiff cannot establish a cause of action against a defendant if
there is “no reasonable basis for the district court to predict that the plaintiff might be able to
recover against an in-state defendant.” Smallwood, 385 F.3d at 573.
The Avilas have no reasonable basis for a cause of action against Southstar. The state
court petition does nothing more than name Southstar as a defendant and allege it once held the
note without the Avilas’ knowledge. Defendants argue that Southstar filed for bankruptcy in
2007 and was liquidated in 2011. See In re Southstar Funding, LLC, Bankr., No. 07-65842PWB. The Avilas’ cannot state a viable claim against a bankrupt and defunct defendant. See
Toskich v. J.H. Inv. Servs., Inc., 806 F. Supp. 2d 1224, 1228 (M.D. Fla. 2011) (holding a
defendant as improperly joined when it had been in bankruptcy for two years before the petition
was filed); see also Brown v. Jevic, 575 F.3d 322, 327 (3d Cir. 2009). Southstar is therefore
improperly joined and complete diversity exists. Diversity jurisdiction is proper here.
ANALYSIS
The Avilas have brought claims to stop the foreclosure of the Property three times
previously. All three times, the lawsuits were dismissed by a federal court with prejudice; the
first time on the merits, the next two on res judicata grounds. See Avila v. Ocwen Loan

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Servicing, et al., No. 5:13-CV-00027-FB; Avila v. Ocwen Loan Servicing, et al., No. 5:13-cv01082-FB; Avila v. Ocwen Loan Servicing, et al., No. 5:14-CV-00460-OLG. Defendants only
argue the Avilas’ petition should again be dismissed due to res judicata and collateral estoppel.
The doctrine of res judicata bars the relitigation of claims already decided by a court with
proper jurisdiction in a prior proceeding. Test Masters Educ. Servs., Inc. v. Singh, 428 F.3d 559,
571 (5th Cir. 2005). “According to the doctrine of collateral estoppel, or issue preclusion, ‘when
an issue of ultimate fact has once been determined by a valid and final judgment, that issue
cannot again be litigated between the same parties in any future lawsuit.’” RecoverEdge L.P. v.
Pentecost, 44 F.3d 1284, 1290 (5th Cir. 1995) (quoting Ashe v. Swenson, 397 U.S. 436, 443, 90
S. Ct. 1189, 1194, (1970)).
The Fifth Circuit has held that res judicata and collateral estoppel should be pled as
affirmative defenses; not brought in a Rule 12(b)(6) motion to dismiss. Hall v. Hodgkins, 305 F.
App'x 224, 227 (5th Cir. 2008); Test Masters, 428 F.3d at 570, n. 2; but see Dean v. Mississippi
Bd. of Bar Admissions, 394 F. App'x 172, 175 (5th Cir. 2010) (“Dismissal under Rule 12(b)(6)
on res judicata grounds may be appropriate when the elements of res judicata are apparent on
the face of the pleadings.”). Though the Fifth Circuit indicates in these cases it may not find
reversible error when a district court grants a Rule 12(b)(6) motion to dismiss on res judicata and
collateral estoppel grounds, in an abundance of caution, the Court converts Defendants’ motion
to dismiss (docket no. 4) to a motion for summary judgment pursuant to Federal Rule of Civil
Procedure 12(d) in order to properly decide the res judicata and collateral estoppel issues. FED.
R. CIV. P. 12(d) (providing “if on a motion under Rule 12(b)(6) . . . matters outside the pleadings
are presented to and not excluded by the court, the motion must be treated as one for summary
judgment . . . .”).

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When converting a motion to dismiss to a motion for summary judgment under Rule
12(d), a court should not dismiss the case until the opposing party is given adequate notice and
time to respond. See Benchmark Elecs. v. J.M. Huber Corp., 343 F.3d 719, 725 (5th Cir. 2003);
Hazzard v. Bourgeios, No. CIV. A. C-11-51, 2011 WL 4738235, at *3 (S.D. Tex. Oct. 6, 2011).
Accordingly, the Court places the Avilas on notice to come forward with all of their evidence to
support their claim and to refute that their petition should not be dismissed due to res judicata
and collateral estoppel.

The Avilas shall file their evidence and response no later than

November 20, 2014.
It is so ORDERED.
SIGNED this 6th day of November, 2014.

XAVIER RODRIGUEZ
UNITED STATES DISTRICT JUDGE

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