Given the historically high volume of both residential and commercial foreclosures, lenders in those states that utilize a judicial foreclosure process have often found themselves faced with significant delays. Because of certain perceived benefits of federal court, including the belief that federal court may be proceed more quickly than the corresponding state court in a particular jurisdiction, commercial lenders may seek to file judicial foreclosure actions in federal court rather than in state court.
In a recent decision in U.S. Bank National Association v. Nesbitt Bellevue Property LLC (“Nesbitt”), a judge in the Southern District of New York ruled that a commercial foreclosure action filed by the trustee of a commercial mortgage backed securitization (“CMBS”) trust may remain in federal court based on diversity jurisdiction1 even though the citizenship of the special servicer was not diverse to the citizenship of the borrower defendants.2 The decision appears to pave a path to federal court for mortgage securitization trustees who were previously uncertain how their citizenship would be determined for purposes of diversity jurisdiction.
In Nesbitt, the trustee, U.S. Bank National Association (the “Trustee”), commenced a foreclosure action in federal court and then filed a motion for the appointment of a temporary receiver for the defendants’ properties. The defendants responded to the Trustee’s receiver motion by seeking to dismiss the case for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P 12(b)(1). The parties agreed that the Trustee and the defendants were citizens of different states for purposes of diversity jurisdiction. The defendants argued, however, that the citizenship of the special servicer must also be evaluated in determining diversity jurisdiction, which all parties agreed would eliminate diversity.
In denying the defendants’ motion to dismiss, the Court ruled that the special servicer’s citizenship did not need to be considered for the purpose of assessing the Court’s diversity jurisdiction based on two determinations.
First, the Court concluded that the Trustee was a real party in interest in the case, rejecting the defendants’ argument that, because the relevant pooling and servicing agreement (the “PSA”) gave the special servicer the power to prosecute the action, the Trustee was not a real party in interest. The Court determined that the defendants’ argument failed because the PSA did not convey to the special servicer the exclusive power over claims and because the Trustee possessed “customary powers to hold, manage and dispose of interests.” Second, the Court reject defendants’ argument that the special servicer’s citizenship should be considered for diversity purposes. The determination of real party in interest status and which party or parties should be considered for determining if there is diversity of citizenship are similar, but not identical, issues. A party’s citizenship is relevant for diversity purposes if it is a “real and substantial party to the controversy.”
The Court determined that the special servicer was not a “real and substantial party to the controversy.” The Trustee had a stake in the outcome of the foreclosure litigation by virtue of the Trustee’s ownership of “all right, title and interest” in the commercial mortgage and the Trustee’s fiduciary duties to the certificateholders of the CMBS trust and was therefore to be considered for diversity purposes. By contrast, the special servicer appeared solely in its capacity as an agent without its own stake in the litigation apart from its duties under the PSA to represent the Trustee, the real party in interest. The fact that the special servicer’s parent company was a certificateholder in the CMBS trust did not change this analysis, as this did not give the special servicer an independent interest in the foreclosure separate and apart from its representative capacity. As such, the special servicer’s citizenship was irrelevant to the diversity analysis.
While the Court’s decision in Nesbitt does not guarantee that all federal judges will determine a mortgage securitization trustee’s citizenship under the same framework, it does provide guidance in an area of great concern and few published decisions. The decision in Nesbitt provides a simple analysis of a mortgage securitization trustee’s citizenship for the purpose of determining diversity jurisdiction, a common issue and potential concern for trustees considering the venue in which to commence a foreclosure action.