Dixon v. Select Portfolio Servicing Co.

DAVE L. DIXON, et al. v. SELECT PORTFOLIO SERVICING COMPANY c/o Lawyers Incorporating Service Company, et al.

Civil Action No. DKC 19-1710

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

January 29, 2020

MEMORANDUM OPINION

Presently pending and ready for resolution in this fraud and breach of contract case are the motion to dismiss filed by Defendants Select Portfolio Servicing, Inc. ("SPS"), Mortgage Electronic Registration Systems, Inc. ("MERS"), and HSBC Bank, USA, as Trustee in Trust for the Registered Holders of Ace Securities Corp. Home Equity Loan Trust, Series 2007-WM1, Asset Back Pass Through Certificates (the "HSBC Trust"), (ECF No. 9), and the motion for leave to amend filed by Plaintiffs Dave and Juliana Dixon ("Plaintiffs" or "Mr. Dixon" and "Mrs. Dixon," respectively), (ECF No. 15) . The issues have been briefed, and the court now rules, no hearing being deemed necessary. Local Rule 105.6. For the following reasons, the motion to dismiss will be granted, albeit without prejudice, and the motion for leave to amend denied, again with leave to file again.

I. Background

Unless otherwise noted, the facts outlined here are undisputed and construed in the light most favorable to Plaintiffs. On August 31, 2006, Plaintiffs purchased a property at 10013 Old Frederick Road in Ellicott City, Maryland ("the property"). Plaintiffs financed their purchase with a promissory note ("the Note") from WMC Mortgage Corp. ("WMC). The Note was secured by a Deed of Trust ("the Deed of Trust"), through which the Plaintiffs agreed to provide the noteholder, or its assigns, a first priority lien on the Property. The Deed of Trust defined MERS as "a separate corporation that is acting solely as a nominee for [WMC] and [WMC's] successors and assigns." (ECF No. 9-4, at 15)¹. The Deed of Trust further named MERS as "the beneficiary under this Security Instrument[,]" (id.), and stated explicitly that "The Note or a partial interest in the Note (together with this Security Instrument) can be sold one or more times without prior notice to [Mr. and Mrs. Dixon.]" (Id. at 24).

On or about February 18, 2012, MERS purportedly assigned the Deed of Trust to the HSBC Trust. (ECF No. 1, ¶ 10). A second assignment from MERS to the HSBC Trust was also signed and recorded on June 5, 2012. (Id. ¶ 11). On September 5, 2014, the HSBC Trust substituted trustees, replacing Richard T. Cregger with Mark H.Wittstadt and Gerard Wittsadt, Jr. (Id. ¶ 12). On July 18, 2017, the HSBC Trust again substituted trustees, replacing the Wittstadts with James E. Clarke, Renee Dyson, Hugh J. Green, Shannon Menapace, Christine M. Drexel, and Brian Thomas as substitute trustees. (Id. ¶ 13). Some time thereafter, Mr. and Mrs. Dixon received a Notice of Default in the mail, followed by a Notice of Foreclosure. (Id. ¶¶ 14-15). The former listed the HSBC Trust as the current noteholder, and the latter stated that SPS is a debt collector working on the HSBC Trust's behalf.

The most recent substitute trustees subsequently filed an Order to Docket Foreclosure ("the Foreclosure Case") in the Circuit Court for Howard County Maryland ("the Circuit Court") on August 31, 2017. (ECF No. 9-4 at 41). While that case remained pending, Plaintiffs filed their own complaint in the Circuit Court ("the Circuit Court Action"), alleging the same causes of action as in the instant case. (ECF No. 9-3).

On October 15, 2018, Defendants moved to dismiss Plaintiff's complaint in the Circuit Court Action. (ECF No. 9-4). Defendants argued 1) that Plaintiffs lacked standing to challenge the assignment of the Note, (id. at 8), that Maryland courts "Have Routinely Upheld MERS Business Model," (id. at 9), and 3) that Plaintiffs' claims otherwise failed as a matter of law, (id. at 10-14). On December 20, 2018, the Circuit Court granted Defendants' motion to dismiss, and ordered the Circuit Court Actiondismissed with prejudice. (ECF No. 9-5). The Circuit Court issued its order without an accompanying opinion. (Id.).

Plaintiffs subsequently filed a motion to alter or amend the Circuit Court's judgment, which was denied, and Plaintiffs have not since appealed the Circuit Court's judgment. (ECF No. 9-8).

Plaintiffs filed this case on June 11, 2019. (ECF No. 1). Defendants moved to dismiss on the basis of res judicata and failure to state a claim on July 19, 2019, (ECF No. 9), and Plaintiffs have since opposed that motion, (ECF No. 14), and filed a motion for leave to file an amended complaint, (ECF No. 15), which Defendants oppose, (ECF No. 17).

II. Motion to Dismiss

A. Res Judicata

Defendants argue that the Circuit Court Action has preclusive effect in this case, and that the court must dismiss under the doctrine of res judicata. (ECF No. 9-1, at 4). Consideration of the defense of res judicata on a motion to dismiss is appropriate under the circumstances presented here:

Although an affirmative defense such as res judicata may be raised under Rule 12(b)(6) "only if it clearly appears on the face of the complaint," Richmond, Fredericksburg & Potomac R.R. Co. v. Forst, 4 F.3d 244, 250 (4^th Cir. 1993), when entertaining a motion to dismiss on the ground of res judicata, a court may take judicial notice of facts from a prior judicial proceeding when the res judicata defense raises no disputed issue of fact, see Day v.Moscow, 955 F.2d 807, 811 (2d Cir. 1992); Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir. 1984); Briggs v. Newberry County Sch. Dist., 838 F.Supp. 232, 234 (D.S.C. 1992), aff'd, 989 F.2d 491 (4^th Cir. 1993) (unpublished).

Andrews v. Daw, 201 F.3d 521, 524 (4^th Cir. 2000); see also Q Int'l Courier Inc. v. Smoak, 441 F.3d 214, 216 (4^th Cir. 2006). Defendant attached public records from the Circuit Court to the motion to dismiss. Plaintiffs do not object to inclusion of this record.

Where, as here, a federal court litigant asserts that a state court judgment has preclusive effect, "[the] federal court must give to [the] state court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered." Migra v. Warren City Sch. Dist. Bd. Of Educ., 465 U.S. 75, 81 (1984). The Circuit Court Action was a Maryland state court proceeding, and thus Maryland law governing res judicata applies. Further, as res judicata is an affirmative defense, Daw, 201 F.3d at 524, Defendants bear the burden of establishing it. Goodman v. Praxair, Inc., 494 F.3d 458 (4^th Cir. 2007).

Under Maryland law, the elements of res judicata are: 1) that the parties in the present litigation are the same or in privity with the parties to the earlier dispute; 2) that the claim presented in the current action is identical to the one determined in the prior adjudication; and 3) that there has been a finaljudgment on the merits. See Anne Arundel County Bd. of Educ. v. Norville, 887 A.2d 1029, 1037 (Md. 2005). Defendants have not met the burden of establishing all of these elements. While they may be correct about the first two elements, Defendants are incorrect to say that the Circuit Court Action dismissal was a "final judgment on the merits." It may have been, but without an opinion clarifying the grounds on which that action was dismissed, it is possible that the Circuit Court dismissed based on a lack of standing.

Defendants argued in their Circuit Court Action motion to dismiss that:

[t]he underlying issue in each of the causes of action asserted in this Complaint is that Plaintiffs contest the Assignment of the Mortgage Loan and execution of the Appointment of Substitute Trustees. No matter how it is characterized, any claim based upon such an assertion must be dismissed, as a borrower does not have standing to bring a claim contesting the lender's compliance with the Pooling and Servicing Agreement or to challenge the enforceability of an assignment thereunder.

(ECF No. 9-4, at 4-5). To be sure, Defendants also argued that Plaintiffs had failed to state a claim. But without any indication of which ground the Circuit Court relied on in its dismissal, there remains the distinct possibility that the Circuit Court Action was dismissed for a lack of standing. If the prior judgment was a dismissal merely for lack of standing, then it may not qualify asa "judgment on the merits." See, e.g., Bank of New York Mellon v. Georg, 175 A.3d 720, 753 (Md. 2017).²

The Defendants have not met their burden in establishing that Plaintiffs' action is barred by res judicata.

B. Failure to State a Claim

Plaintiff brings several causes of action: 1) fraud, 2) a claim "to void or cancel assignment of deed of trust and substitution of trustee", 3) breach of contract, 4) breach of the implied covenant of good faith and fair dealing, and 5) a claim for a "temporary restraining order to show case re preliminary injunction[.]" (ECF No. 1, at 4-11).

1. Fraud

Plaintiffs' allegations of fraud are not entirely clear. They allege that Defendants withheld information from them relating to the Note and Deed of Trust "with the intent to defraud." (ECF No. 1, at 5). While mostly based on omissions by Defendants,Plaintiffs do allude to Defendants "utiliz[ing] amounts known to the Defendants to be inaccurate to determine the amount allegedly due and owing for purposes of foreclosure." (Id.).

Under Maryland law, the elements of fraud are:

(1) the defendant made a false representation to the plaintiff, (2) the falsity of the representation was either known to the defendant or the representation was made with reckless indifference to its truth, (3) the misrepresentation was made for the purpose of defrauding the plaintiff, (4) the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) the plaintiff suffered compensable injury as a result of the misrepresentation.

State Construction Corp. v. Slone Associates, Inc., 385 F.Supp.3d 449, 469 (D.Md. 2019) (citing Hoffman v. Stamper, 867 A.2d 276, 292 (2005). When pleading fraud, Plaintiffs need not prove every element, of course,...