The U.S. Court of Appeals for the Fifth Circuit recently affirmed a trial court’s denial of a mortgagor’s motion for remand because the non-diverse substitute foreclosure trustee was improperly joined in order to defeat diversity jurisdiction.

The Fifth Circuit also affirmed the trial court’s summary judgment ruling in favor of the trustee and loan servicer because the foreclosure sale never took place, and therefore the mortgagor could not state a cause of action for wrongful foreclosure under Texas law.

A copy of the opinion in Foster v. Deutsche Bank National Trust Co. is available at: Link to Opinion.

The mortgagor purchased a home with her husband in 2004 in Grand Prairie, Texas. Her husband signed the promissory note, but the plaintiff mortgagor did not. She did, however, sign the deed of trust.

The plaintiff mortgagor filed for divorce, and the state court awarded her exclusive use of the property on a temporary basis.

The husband defaulted on the loan and failed to cure the default, and the substitute trustee sent a notice of acceleration and notice of substitute trustee sale to the property address.

One day before the scheduled foreclosure sale, the plaintiff filed suit in Texas state court “alleging wrongful foreclosure and requesting a temporary restraining order and injunctive relief and, in the alternative, reformation of the deed of trust. She also alleged that she did not receive proper notice of the foreclosure sale and that she was not given an opportunity to cure the default.”

The state court issued a temporary restraining order stopping the foreclosure sale. The mortgagee, substitute foreclosure trustee, and servicer defendants then removed the case to federal court on the basis of diversity jurisdiction, even though the substitute trustee was a non-diverse defendant, arguing that the substitute foreclosure trustee was “improperly joined for the sole purpose of defeating diversity” as the foreclosure sale never took place.

The trial court disregarded the substitute foreclosure trustee’s joinder for purposes of determining jurisdiction, concluded that removal was proper and dismissed all claims against the substitute foreclosure trustee with prejudice.

The trial court later granted summary judgment in favor of the mortgagee and servicer, reasoning that because no foreclosure had actually occurred, there was no wrongful foreclosure in violation of the Texas statute governing the procedure for noticing a foreclosure sale. In addition, the trial court found that the fact the plaintiff’s name was misspelled on the deed of trust and that the Dallas County document number was incorrect on the notice of substitute trustee sale did not cause her any confusion or harm. Thus, the trial court also denied the plaintiff’s request for injunctive relief and for reformation of the deed because her substantive claim failed on the merits.

The plaintiff moved for reconsideration or, alternatively, to refer the case to the bankruptcy court because she had filed for Chapter 7 relief in 2012. The trial court denied the motion, reasoning that plaintiff’s claims arose after she filed bankruptcy and thus were not part of the bankruptcy estate. The plaintiff appealed.

On appeal, the plaintiff argued that the trial court erred by denying her motion to remand and finding that joinder of the substitute foreclosure trustee was improper because she had a valid wrongful foreclosure claim against the substitute foreclosure trustee under the Texas statute governing the procedure for noticing a foreclosure sale.

The Fifth Circuit rejected this argument, reasoning that “[a] substitute trustee has a duty under the deed of trust to ‘act with absolute impartiality and fairness to the grantor in performing the powers vested in him by the deed of trust.’ … [However,] breach of a trustee’s duty does not constitute an independent tort; rather, it yields a cause of action for wrongful foreclosure. … A claim of wrongful foreclosure cannot succeed, however, when no foreclosure has occurred.”

The Fifth Circuit agreed with the trial court that because the plaintiff could not state a cause of action against the substitute trustee in state court, its joinder as defendant was improper, and the trial court correctly denied the motion to remand the case to state court.

The Appellate Court then turned to the trial court’s grant of summary judgment in the defendants’ favor, reasoning that “[b]ecause the case was removed to federal court based on diversity jurisdiction, the district court applied the substantive laws of Texas in analyzing whether summary judgment was appropriate.”

Under Texas law, a wrongful foreclosure claim requires: “(1) a defect in the foreclosure sale proceedings; (2) a grossly inadequate selling price; and (3) a causal connection between the defect and the grossly inadequate selling price.” However, relying upon an unpublished opinion, the Fifth Circuit held that “a party cannot ‘state a viable claim for wrongful foreclosure’ if the party ‘never lost possession of the Property.’”

Noting that “courts in Texas do not recognize an action for attempted wrongful foreclosure,” the Fifth Circuit agreed with the trial court that because the foreclosure sale never took place, the plaintiff had no cause of action for wrongful foreclosure. Because the foreclosure sale never occurred, the Court did not find it necessary to address whether the notice of foreclosure was proper under the Texas Property Code.

Accordingly, the trial court’s judgment was affirmed.

Eric Rosenkoetter is based in Maurice Wutscher’s Austin office. For many years, he has focused his practice on various aspects of financial services law. As a litigation attorney, he has conducted every aspect of the litigation process, including countless depositions, motion proceedings, bench and jury trials, and appeals in various courts. In addition, he has significant experience as a compliance and transactional attorney, providing strategic, business growth, legislative, compliance and regulatory advice to national corporations and trade associations. For example, he has drafted consumer contracts and disclosures designed to state-specific statutory requirements, and developed “Best Practices” guides and state-by-state compliance grids, for national financial services companies. He also conducted research and crafted a metrics report for a national trade association with analysis designed to counter the claims of advocacy groups. Eric’s experience also includes working for a national corporation as Executive Counsel, Chief Compliance and Ethics Officer, and Director of Legislative Affairs, and as a federal lobbyist and Director of Government and Public Affairs for a national financial services trade association. In the government sector, Eric presided over approximately 6,000 state administrative hearings, served as a staff attorney for the Missouri Senate, and handled litigation in 33 counties as a regional managing attorney. Eric frequently speaks to audiences on topics relevant to the financial services industry and related advocacy initiatives.