4th Circuit: McFadden v. Fannie Mae- Complete Diversity Jurisdiction; Dual-Tracking of Loan Modification and Foreclosure

Summary: The McFaddens obtained a mortgage from Flagstar in July 2007 for $116,500.00, secured by their real property located in Virginia. The note provided that it could be freely transfered by Flagstar and that the agreements in the Deed of Trust would bind and benefit successors and assignees of the note. Before August 2009, the note was transferred to Fannie Mae and around the same time the McFaddens fell delinquent on their payments. The McFaddens attempted to complete a HAMP modification, but the application took several months due to missing documents, with the parties disputing who was responsible for the missing documents. While the HAMP application was pending, the McFaddens were notified that White, P.C., a Virginia law firm, had been appointed as the substitute trustee and that a foreclosure was pending. Flagstar, still servicing the mortgage, allegedly informed the McFaddens that the loan modification was being processed and no foreclosure would occur. The home was, nonetheless, sold at foreclosure, with Flagstar as the highest bidder. The McFaddens brought suit in state court asserting, among other causes of action, a quiet title claim, an equitable claim to set aside the foreclosure and violations by White, P.C. of the Virginia Consumer Protection Act (VCPA). Based on diversity jurisdiction, the defendants removed the matter to federal district court, which ultimately denied the McFadden’s motion to remand to state court and granted the Defendants’ motion to dismiss on the basis that the state law claims were pre-empted or, alternatively, that the McFaddens had failed to state a claim upon which relief could be granted. The McFaddens argued that because White, P.C. is a defendant in the action and a Virginia citizen, there was not complete diversity as required by 28 U.S.C. § 1332. The Defendants, however, asserted that White, P.C., was a “fraudulently joined party”. The Court of Appeals agreed with the Defendants, noting that the doctrine of fraudulent joinder was a misnomer as it did not require fraud or other bad intent by the plaintiff, but instead “merely addresses the adequacy of the plaintiff’s pleadings” and must show: (1) There is no possibility that the plaintiff would be able to establish a cause of action” against the non-diverse party; or (2) There has been “outright fraud in the plaintiff’s pleading of jurisdictional facts.” Hartley v. CSX Transp. Inc., 187 F.3d 422, 424 (internal quotations, emphasis, and citation omitted). In reviewing the causes of action against White, P.C., the majority found that the quiet title claim would absolutely have failed, as Flagstar was not prohibited from appointing a substitute trustee as an entity other than lender had authority to foreclose under Virginia law despite transfer of loan, based on entity’s status as note holder. See Horvath v. Bank of N.Y., N.A., 641 F.3d 617, 622 (4th Cir. 2011). Regarding the equitable relief based on the “dual tracking” of the loan modification and foreclosure, the McFaddens made no allegations that White, P.C. was involved in the alleged misconduct. Nor did the alleged violations of the VCPA apply to White, P.C., which was appropriately appointed as substitute trustee and the VCPA did not create an independent fiduciary duty between White, P.C. and the McFaddens. As to the motion to dismiss, the majority again relied on Horvath and held that “naming MERS as the beneficiary was valid and served merely to establish a consistent beneficiary that enhanced ‘the ease with which the deed of trust could be transferred.’” 641 F.3d at 620. The alleged promises by Flagstar to halt foreclosure while the loan modification was pending, “while ... certainly improper”, could not serve to overturn the foreclosure as, pursuant to the Statute of Frauds, “oral promises and contracts affecting real property are not enforceable.” Va. Code § 11-2. The dissent, however, would have found that the “Defendants’ generalized assertions and (mis)characterizations of the McFaddens’ claims fail to demonstrate that those state-law claims necessarily depend on questions of federal law so disputed and so substantial that they warrant wresting the state-law complaint from the state court in which it was filed.” Further, the Defendants had failed to either meet their burden as to complete preemption and substantial question jurisdiction or even to allege fraudulent joinder in their notice of removal. Accordingly, the dissent would have found that the case should not have been removed this case to federal court. For a copy of the opinion, please see: McFadden v. Fannie Mae- Complete Diversity Jurisdiction; Dual-Tracking of Loan Modification and Foreclosure.pdf