McMichael v. Select Portfolio Servicing

JOSH MCMICHAEL, et al., Plaintiffs, v. SELECT PORTFOLIO SERVICING, INC., et al. Defendants.

NO. 6:20-cv-00004

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF VIRGINIA LYNCHBURG DIVISION

June 10, 2020

MEMORANDUM OPINION

JUDGE NORMAN K. MOON

Before the Court is Defendant Select Portfolio Servicing, Inc.'s ("SPS") motion to dismiss, Dkt. 17, which Defendant Professional Foreclosure Corporation of Virginia ("PFC") joins, Dkt. 22 at 1, as well as Defendant PFC's motion to dismiss, Dkt. 21, and Plaintiffs Josh and Penni McMichael's motion to remand, Dkt. 30.

Plaintiffs claim Defendants breached their deed of trust based on three different types of violations. Claims A and B are brought against only SPS for alleged violations of federal mortgage regulations, which Plaintiffs contend have been incorporated into their deed of trust. Claim C is brought against SPS and PFC for selling Plaintiffs' property for a grossly inadequate price at foreclosure. The Court concludes that it has subject matter jurisdiction over Claims A and B, pursuant to 28 U.S.C. § 1331, and it will deny Plaintiffs' motion to remand as to those two claims. The Court will grant Defendants' motion to dismiss Claims A and B for failure to state a claim on which relief can be granted.

Because the Court will dismiss the only claims over which it has original jurisdiction, it will decline to exercise supplemental jurisdiction over Claim C, which arises under state law. Instead, it will grant Plaintiffs' motion to remand as to that claim, remanding Claim C to the state court for any further proceedings. Accordingly, Defendant PFC's motion to dismiss, Dkt. 21, which sought dismissal of only Claim C, will be dismissed as moot.

I. ALLEGED FACTUAL BACKGROUND

Plaintiffs Josh and Penni McMichael allege entering into a mortgage loan contract on February 14, 2007, as borrowers, secured by their property in Rockbridge County, Virginia. Dkt. 16 at ¶¶ 4-5. The Deed of Trust states that Taylor, Bean & Whitaker Mortgage Corp., who is not a party to this suit, acted as the lender. Dkt. 18-2 at 1. The Deed of Trust names J. Steven Grist, who is also not a party to this suit, as the trustee. Id. The factual allegations in the complaint identify PFC as the substitute trustee. Dkt. 16 at ¶ 3. Neither the factual allegations in the complaint, nor the Deed of Trust itself, identify SPS's specific role during the relevant time period or their obligations under the Deed of Trust.

In early 2019, Plaintiffs began to experience financial hardship after Penni McMichael lost her job and Josh McMichael experienced a reduction in income. Dkt. 16 at ¶ 9. While Plaintiffs continued to make payments for some time after their hardship began, they eventually fell behind on their mortgage payments. Id. at 10. Plaintiffs submitted a loan modification request in the fall of 2019, id. at ¶ 11, but it was denied on October 23, 2019.¹ Plaintiffs allege that they appealed the denial of their loan modification request within the appeal period that SPS provided.

Plaintiffs further claim that, despite the ongoing review of their loss mitigation request, SPS in late November 2019 scheduled a foreclosure sale of Plaintiffs' property on December 31, 2019. Id. at ¶ 13. Plaintiffs represent that SPS claimed that their loan modification appeal wasdenied on December 17, 2019. Id. at ¶ 14. SPS engaged in "dual tracking" the loan, Plaintiffs contend, because it continued to review its loss mitigation options while the appeal of Plaintiffs' loan modification request was pending while "actively proceeding with a foreclosure auction." Id. at ¶ 15. Plaintiffs also claim that while they were assigned a single point of contact to assist them with loss mitigation options, id. at ¶ 16, they were transferred to "representatives who were unfamiliar with their mortgage loan account" each they attempted to contact that single point of contact, id. at ¶ 17.

As Plaintiffs represent, SPS and PFC sold Plaintiffs' property at auction December 31, 2019 at 10:00 a.m., id. at ¶ 18, for $273,000. The complaint does not identify the buyer. At the time of sale, Plaintiffs claim that their home was estimated to be worth $482,000 and they had approximately $164,000 in equity in the property with a principal balance on their mortgage of approximately $318,000, id. at ¶¶ 46-47.

II. ANALYSIS

The Court will first address whether it has subject matter jurisdiction to hear this case. Determining that it does, the Court will then address the merits of Defendant's motion to dismiss. Because the Deed of Trust does not incorporate 12 U.S.C. §§ 1024.41 and 1024.40, the alleged violations of which Plaintiffs argue form the basis of Defendant SPS's breach of that instrument, the Court will dismiss Claims A and B for failure to state a claim. Because the Court will dismiss all claims over which it has original jurisdiction, it will decline to exercise supplemental jurisdiction over Plaintiffs' last remaining claim, Claim C, which the parties agree arises under state law. The Court will remand Claim C to the state court for any further proceedings. The Court need not address Plaintiffs' requests for rescission of the foreclosure sale or for attorneys' fees,because they are remedies for the alleged harm suffered in Claims A through C, not independent claims for relief.

A. Motion to Remand

1. Standard of Review

Federal district courts possess only the jurisdiction created by the U.S. Constitution and authorized by Congress. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Generally, state court defendants may remove a case to federal district court if the state court action could have been originally filed there. 28 U.S.C. § 1441(a) ("Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or defendants, to the district court").

"Because removal jurisdiction raises significant federalism concerns, we must strictly construe removal jurisdiction." Mulcahey v. Columbia Organic Chems. Co., 29 F.3d 148, 151 (4th Cir. 1994). Consequently, all doubts about the propriety of removal are resolved in favor of retaining state court jurisdiction. Flying Pigs, LLC v. RRAJ Franchising, LLC, 757 F.3d 177, 181 (4th Cir. 2014); Marshall v. Manville Sales Corp., 6 F.3d 229, 232 (4th Cir. 1993). The removing party bears the burden of showing removal was proper. Md. Stadium Auth. v. Ellerbe Becket Inc., 407 F.3d 255, 260 (4th Cir. 2005).

2. Analysis

"Subject matter jurisdiction defines a court's power to adjudicate cases or controversies—its adjudicatory authority—and without it, a court can only decide that it does not have jurisdiction." United States v. Wilson, 699 F.3d 789, 793 (4th Cir. 2012). Defendants assert thatthis Court possesses subject-matter jurisdiction over this action by virtue of 28 U.S.C. § 1331, which grants federal courts jurisdiction over actions "arising under" federal law. Burrell v. Bayer Corp., 918 F.3d 372, 380 (4th Cir. 2019). Courts evaluate assertions of "arising under" jurisdiction using the "well-pleaded complaint rule," "which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). This means that affirmative defenses, counter arguments, or federal questions that may (or even must) arise later in the case do not count. While this rule "makes the plaintiff the master of the claim [and] he or she may avoid federal jurisdiction by exclusive reliance on state law," Caterpillar Inc., 482 U.S. at 392, "a plaintiff's characterization of a claim as based solely on state law is not dispositive of whether federal question jurisdiction exists," Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 65 (1987). Because the court's subject matter jurisdiction under 28 U.S.C. § 1331 has been clearly invoked in Plaintiffs' complaint, the Court will deny Plaintiffs' motion to remand.

"[T]he vast majority" of cases arising under federal law "are those in which federal law creates the cause of action." Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808 (1986). However, an alternative category of cases may also be said to arise under federal law even when a plaintiff sues purely under state causes of action, Gunn v. Minton, 568 U.S. 251, 258 (2013), but only where "the vindication of a right under state law necessarily turn[s] on some construction of federal law." Merrell Dow Pharm. Inc., 478 U.S. at 808 (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Tr., 463 U.S. 1, 9 (1983)). This category of cases "captures the commonsense notion that a federal court ought to be able to hear claims recognized under state law that nonetheless turn on substantial questions of federal law, and thus justify resort to the experience,solicitude, and hope of uniformity that a federal forum offers on federal issues," Grable & Sons Metal Prod., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 312 (2005).

Under this branch of "arising under" jurisprudence, "federal jurisdiction over a state law claim will lie if a federal issue is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress." Gunn, 568 U.S. at 258; see Pressl v. Appalachian Power Co., 842 F.3d 299, 303 (4th Cir. 2016). As it is Defendants' burden to establish the propriety of removal, it is likewise Defendants' burden to establish that the four factors outlined in Gunn are satisfied. See Burrell, 918 F.3d at 381 (finding no jurisdiction because the defendants failed to establish Gunn's third and fourth prongs). In examining whether the Court has jurisdiction over the case, the Court "looks only to the 'plaintiff's statement of [their] own claim,' as set forth in the complaint."...