Hua v. Lehman XS Trust Mortg. Pass-Through Certificates

TRACY HUA, et al. v. LEHMAN XS TRUST MORTGAGE PASS-THROUGH CERTIFICATES,SERIES 2007-7N, U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE, et al.

CIVIL ACTION NO. 17-1457

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

September 25, 2017

MEMORANDUM

KEARNEY, J.

After losing a trial in the state court and an earlier case here, two real estate borrowers now again sue their lenders after defaulting on a mortgage on their investment property. They challenged the default and foreclosure judgment before the state court. Though displeased with their losses, they did not appeal in the state courts. Instead, they filed here in 2015 and our colleague Judge Savage dismissed their duplicative claims. After returning to state court and obtaining multiple delays, the Sheriff sold their investment property earlier this year. They now return to us again challenging conduct after the state court judgment although almost all of their facts are resolved by the 2014 final state court judgment addressed by Judge Savage. Their "new" statutory claims, even if allegedly based on conduct after Judge Savage dismissed their first case, are barred as a matter of law because their statutory claims are limited to residential property, not investment property. They also fail to allege a breach of contract or racketeering claim not otherwise barred by res judicata. In the accompanying Order, we grant the lenders' motion to dismiss but grant the real estate borrowers one last leave, if possible in good faith, to plead a breach of contract or racketeering claim arising after the 2014 judgment with specificity.

I. Facts

Plaintiffs Tracy Hua and Chi Hung Mu signed a $96,000.00 promissory note secured by a mortgage on their investment real property in Philadelphia (the "Property").¹ Defendant Countrywide Bank, FSB ("Countrywide") originated the loan.² The mortgage named Defendant Mortgage Electronic Registration Systems, Inc. ("MERS"), the nominee for lender Countrywide, as the mortgagee.³ The property owners admit the Property is not their primary residence.⁴

Hua and Mu made timely mortgage payments until February 2011.⁵ Hua and Mu dispute the timing of default, and allege they contacted "Defendants" for a loan modification.⁶ In June 2011, MERS assigned the mortgage to Defendant U.S. Bank National Association ("U.S. Bank") as Trustee for the "Certificateholders of XS 2007-7N Trust Fund."⁷

Hua and Mu continued to contact "Defendants" to work out a loan modification and "Defendants" represented "it" would extend a loan modification if Hua and Mu submitted an application and documents.⁸ Hua and Mu timely submitted loan modification applications and supporting documents, but "Defendants" failed to respond for nearly six years.⁹ "Defendants" most recently denied Hua and Mu's loan modification application on March 1, 2017 "for the sole reason that the property was not a primary residence . . . [a] fact well known at the start of the application process."¹⁰ Hua and Mu allege "Defendants" should not have required submission of new loan modification applications when "Defendants had no intention of working in good faith" or "any intention to modify the loan, but just sought to accrue additional late fees, arrearages and other costs including exorbitant attorneys [sic] fees."¹¹

On April 24, 2012, U.S. Bank filed a complaint in foreclosure against Hua and Mu in the Philadelphia County Court of Common Pleas.¹² In January 2013, Defendant Bank of America,N.A. as the attorney-in-fact for U.S. Bank, assigned the mortgage from one Lehman entity to the other.¹³ Hua and Mu challenge these mortgage assignments, arguing there is a "missing link" in the assignment from Countrywide to MERS and in the second assignment to U.S. Bank and complain the address for the assignee on the January 2013 assignment is not U.S. Bank, but Defendant Specialized Loan Servicing, LLC.¹⁴

After a June 2014 trial, the Philadelphia County Court of Common Pleas entered an in rem judgment order on July 2, 2014 in favor of U.S. Bank and against Hua and Mu for approximately $135,816 plus interest and other costs and charges collectible under the mortgage for foreclosure and sale of the Property.¹⁵ Hua and Mu did not appeal from the judgment order.

On October 30, 2014, the Court of Common Pleas issued a writ of execution on the Property.¹⁶ Less than a month later, Hua sued U.S. Bank and other defendants in this District.¹⁷ Hua argued the same facts alleged here constituted violations of the Fair Debt Collections Practices Act ("FDCPA")¹⁸ and sought "actual damages in the amount of value" of the Property and other damages. Judge Savage dismissed Hua's action under the Rooker-Feldman doctrine, finding Hua complained of injury caused by the state court foreclosure judgment: "To grant Hua relief, we would have to reject the state court judgment. After a trial, judgment was entered against her. The state court determined that the mortgage was in default and assessed the amount owed. It also concluded that the mortgage was valid and the plaintiff, Lehman XS, with U.S. Bank as trustee, had the right to foreclose on the mortgage. We cannot review the state court judgment. Nor can we reject it. . . .."¹⁹

Hua then returned to state court with a "motion to strike pleading" - presumably the complaint in foreclosure - which the state court denied on February 3, 2015.²⁰ U.S. Bank again filed a writ of execution and Hua and Mu filed an emergency motion to postpone the Sheriff'ssale.²¹ After the state court held a hearing, it granted Hua and Mu's motion and postponed the Sheriff's sale until August 2, 2016.²²

After U.S. Bank filed writs of execution in December 2016 and March 2017, the Philadelphia County Sheriff listed the Property for sale on April 4, 2017.²³ On March 27, 2017, Hua and Mu petitioned the state court to open the judgment and postpone the Sheriff's sale. After holding a hearing on the petition to open judgment, the state court denied the motion on March 30, 2017.²⁴

Having lost again in the state court, Hua and Mu decided to try their luck here and sued again on March 31, 2017 followed by an ex parte motion for temporary restraining order and emergency injunctive and declaratory relief seeking to stay the Sheriff's sale.²⁵ Judge O'Neill applied Younger abstention and denied the motion for temporary restraining order, emergency injunctive and declaratory relief.²⁶

The Sheriff sold the Property on April 5, 2017. On May 10, 2017, Hua and Mu moved to set aside the Sheriff's sale and to re-open the case in the state court. The Court of Common Pleas denied the motion.²⁷ Hua and Mu did not file an appeal from this order either. As pleaded, the state court action is over. We now review Hua and Mu's "new" cloaking of facts to state claims: Fraud Stemming from Violation of Regulation Z (Count 1); Fair Debt Collection Practices Act (Count 2); Violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law (Count 3); Breach of Contract (Count 4); Wire Fraud (Count 5); and Violation of Real Estate Settlement Procedures Act (Count 6).

II. Analysis

U.S. Bank, Bank of America, and MERS move to dismiss Hua and Mu's complaint under Rule 12(b)(1)²⁸ and 12(b)(6)²⁹ arguing: the action is barred by the Rooker-Feldman doctrine andthe res judicata effect of the state court action; there are no allegations against Countrywide and MERS in the complaint; allegations of fraud in violation of Regulation Z, the implementing regulation for the Truth in Lending Act ("TILA"), fail to meet Federal Rule of Civil Procedure 9(b); the Fair Debt Collection Practices Act, ("FDCPA"), Pennsylvania's Unfair Trade Practices and Consumer Protection Law ("UTPCPL"),and the Real Estate Settlement Procedures Act ("RESPA") and breach of contract claims are insufficiently pleaded; the Racketeer Influenced and Corrupt Organizations Act ("RICO") wire fraud claim lacks the requisite elements and specificity; and RESPA, FDCPA, and UTPCPL do not apply to commercial transactions.

Hua and Mu's response addresses only the res judicata and Rooker-Feldman arguments. They do not oppose the remaining arguments challenging whether they state a claim. Our examination of all the claims compels we grant Defendants' motion to dismiss without prejudice.

A. The Rooker-Feldman³⁰ doctrine deprives us of jurisdiction over all claims relating to the state court judgment.

The Rooker-Feldman doctrine prohibits federal courts from exercising jurisdiction in "cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments."³¹ Our court of appeals emphasizes the "narrowness of the doctrine" and distinguishes "between injuries caused by the state-court judgment and those brought about by the defendants' actions."³²

Four elements are required to apply the Rooker-Feldman doctrine: "(1) the federal plaintiff lost in state court; (2) the plaintiff 'complain[s] of injuries caused by [the] state-court judgments'; (3) those judgments were rendered before the federal suit was filed; and (4) the plaintiff is inviting the district court to review and reject the state judgments."³³ The "critical question" is whether Hua and Mu are state-court losers complaining of injuries caused by the inrem judgment order rendered by the state court before the filing of the instant action and asks us to review and reject the judgment.³⁴

Applying the Great Western test, we conclude Hua and Mu's claims based on conduct before the state court judgment, except the RESPA claims to the extent allegations are based on conduct after the July 2014 judgment, are barred by Rooker-Feldman. The first and third elements are easily met; Hua and Mu lost in state court when the state court entered the July 2, 2014 in rem judgment in foreclosure against them and the state court judgment pre-dates the filing of this case. Judge Savage...