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Galvin v. U.S. Bank, N.A.

United States Court of Appeals, First Circuit

March 29, 2017

MARK B. GALVIN; JENNY G. GALVIN, Plaintiffs, Appellants,
v.
U.S. BANK, N.A., as Trustee Relating to Chevy Chase Funding, LLC Mortgage Back Certificates Series 2007-1; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.; CAPITAL ONE, N.A., a/k/a CAPITAL ONE BANK, f/k/a CHEVY CHASE BANK, FSB, Defendants, Appellees.

         APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Richard G. Stearns, U.S. District Judge]

          James T. Ranney for appellants.

          Kevin P. Polansky, with whom Christine M. Kingston and Nelson Mullins Riley Scarborough LLP were on brief, for appellees.

          Before Thompson and Kayatta, Circuit Judges, and Barbadoro, [*] District Judge.

          KAYATTA, Circuit Judge.

         This appeal arises out of a suit by defaulting borrowers who seek to assign fault to the manner in which a creditor foreclosed on its collateral, in this instance a multi-million dollar home located on Martha's Vineyard. For the following reasons, we reject the borrowers' fusillade of challenges to the creditor's conduct, except that we find that the creditor waived its rights to a deficiency judgment by failing to comply with a Massachusetts statute that regulates the availability of actions for such judgments.

         I. Background

         We summarize the uncontested facts, reserving further discussion of the facts alleged in the complaint for the section on the motion to dismiss and further discussion of the evidentiary facts in the summary judgment record for the section on the motion for summary judgment.

         On November 15, 2006, the plaintiffs, Mark and Jenny Galvin, took out a loan to buy a property in Tisbury, Massachusetts, and executed a mortgage naming the Mortgage Electronic Registration Systems, Inc. ("MERS") as the mortgagee "acting solely as a nominee for [Chevy Chase Bank, FSB] and [its] successors and assigns." On the same day, Mark Galvin executed a promissory note in the amount of $2, 385, 000 to Chevy Chase Bank, FSB (now known as Capital One, N.A.--for our purposes, "Capital One"). In late 2009, the Galvins fell behind on their mortgage payments. On March 2, 2011, their loan servicer, Specialized Loan Servicing ("SLS"), sent them a "Notice of Default and Notice of Intent to Foreclose."

         At some point prior to August 3, 2012, U.S. Bank as Trustee Relating to Chevy Chase Funding, LLC Mortgage Back Certificates Series 2007-1 ("U.S. Bank") came into physical possession of the note, which was indorsed from "Chevy Chase Bank, F.S.B." to "U.S. Bank, N.A. as Trustee."[1] In July 2012, MERS assigned the mortgage to U.S. Bank. On October 2, 2012, this assignment was recorded in the town land records.

         From December 2011 to November 2014, employees of a company hired by SLS[2] entered onto the Galvins' property roughly once per month to perform inspections. In February 2012 and November 2012, these individuals entered the house to inspect and winterize it. During the November 2012 interior inspection, they also changed the lock on the rear door. On September 7, 2012, the Galvins sent SLS a letter demanding that no one trespass on their property. On April 17, 2013, the Galvins sent a thirty-day demand letter to U.S. Bank regarding these "unreasonable" inspections and any related fees, pursuant to Chapter 93A of the Massachusetts General Laws.

         U.S. Bank conducted a foreclosure sale of the property on November 18, 2014, four days after the Galvins filed their complaint in this action. U.S. Bank itself was the purchaser.

         The Galvins' complaint contained six counts relevant to this appeal: a claim against all defendants[3] for a declaratory judgment that the foreclosure was invalid (count I); a claim against U.S. Bank and MERS for breach of contract (count II); a claim against U.S. Bank and MERS for breach of the implied covenant of good faith and fair dealing (count III); a claim against U.S. Bank for trespass (count IV); a claim against U.S. Bank for a Chapter 93A violation (count VI); and a claim against all defendants for intentional and/or negligent infliction of emotional distress (count VII). U.S. Bank filed an answer and asserted counterclaims for deficiency, unjust enrichment, and possession.

         The district court disposed of the Galvins' complaint in three separate rulings. In the first ruling, the district court granted the defendants' partial motion to dismiss several counts under Federal Rule of Civil Procedure 12(b)(6). In the second ruling, it granted summary judgment to U.S. Bank on its counterclaim for possession. The district court entered a separate judgment (the "first judgment") on this counterclaim for possession pursuant to Rule 54(b) of the Federal Rules of Civil Procedure. In the third ruling, the district court granted summary judgment to the defendants on the Galvins' remaining claims and to U.S. Bank on its counterclaim for deficiency (the "second judgment").[4] Between the ruling on the partial motion to dismiss and the ruling on the counterclaim for possession, the district court granted in part U.S. Bank's motion for a preliminary injunction and "enjoin[ed] and prevent[ed] the short term occupancies" of fourteen parties who had entered into leases with the Galvins to occupy their home during the summer of 2015.

         II. Discussion

         We review the motion to dismiss and motion for summary judgment rulings de novo, see Gorski v. N.H. Dep't of Corrs., 290 F.3d 466, 471 (1st Cir. 2002), and the grant of the preliminary injunction for abuse of discretion, see Waldron v. George Weston Bakeries Inc., 570 F.3d 5, 8 (1st Cir. 2009). The parties agree that we apply Massachusetts substantive law. See Wilson v. HSBC Mortg. Servs., Inc., 744 F.3d 1, 7 (1st Cir. 2014).

         A. Appellate Jurisdiction

         Although neither party raised this issue, "we have an independent obligation to confirm our jurisdiction to hear this dispute." Me. Med. Ctr. v. Burwell, 841 F.3d 10, 15 (1st Cir. 2016). The district court had jurisdiction over this case under 28 U.S.C. § 1332 based on diversity of citizenship. The only arguable basis for our jurisdiction over these appeals is 28 U.S.C. § 1291, which grants this court "jurisdiction of appeals from all final decisions of the district courts." See also Guillemard-Ginorio v. Contreras-Gómez, 490 F.3d 31, 37 n.4 (1st Cir. 2007) (noting that "[i]n the ordinary course, our jurisdiction extends only to appeals from 'final decisions of the district courts' (quoting 28 U.S.C. § 1291)). Thus, we must determine whether the second judgment entered by the district court was a "final decision."[5] When dealing with a "garden-variety" civil judgment like this one, "a final decision is one 'that disposes of all claims against all parties.'" Me. Med. Ctr., 841 F.3d at 15 (quoting Bos. Prop. Exch. Transfer Co. v. Iantosca, 720 F.3d 1, 6 (1st Cir. 2013)). There are three defendants in this action: U.S. Bank, MERS, and Capital One. We pause to consider whether the second judgment was a final decision as to Capital One.

         The record is somewhat ambiguous on this point. All three defendants were named in the original complaint filed in state court. In the notice of removal, U.S. Bank and MERS noted that Capital One had not provided consent to removal because, as far as the state court docket showed, the plaintiffs had not served it with process. After the case was removed to federal court, Capital One never filed an appearance. The district court noted this fact in its ruling on the partial motion to dismiss. Following that ruling, the parties filed a "Joint Statement" pursuant to Local Rule 16.1(d), in which they stated that "according to the Court's docket, it does not appear that Defendant Capital One, N.A., a/k/a Capital One Bank, f/k/a Chevy Chase Bank, FSB ('Capital One') has yet been served with the complaint." The district court subsequently ordered that "Amended Pleadings & Joinder of Parties" would be "due by 5/15/2015, " but that date passed without action or comment.

         Two counts in the complaint named Capital One as a defendant: the declaratory judgment count (count I) and the intentional infliction of emotional distress count (count VII). The district court disposed of these counts at different times. It dismissed the declaratory judgment count in its entirety when ruling on the partial motion to dismiss. It dismissed the intentional infliction of emotional distress count as to MERS only in the same ruling. The district court later allowed U.S. Bank's motion for summary judgment as to the intentional infliction of emotional distress count and instructed the clerk of court to "close the case."

         We conclude that the court disposed of both claims against Capital One. The ruling dismissing the declaratory judgment count was not limited to the two defendants who had appeared. The ruling on U.S. Bank's motion for summary judgment is a closer question. However, in granting that motion and ordering the clerk to close the case, the district court effectively granted summary judgment to Capital One on the intentional infliction of emotional distress claim against it. Between that ruling and the ruling on the partial motion to dismiss, the district court held that the factual basis for the intentional infliction of emotional distress claim against Capital One was insufficient as a matter of law.[6] Neither party contended otherwise in the district court or on appeal. The district court's order and its instruction to the clerk to close the case therefore constituted a final decision. See Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100, 106 (2009) ("A 'final decisio[n]' is typically one 'by which a district court disassociates itself from a case.'" (alteration in original) (quoting Swint v. Chambers Cty. Comm'n, 514 U.S. 35, 42 (1995))).[7] Having concluded that we have jurisdiction over this appeal, we proceed to the merits.

         B. Motion to Dismiss

         The Galvins challenge the district court's dismissal of the counts for declaratory judgment, breach of contract, breach of the covenant of good faith and fair dealing, negligent infliction of emotional distress as to MERS, and intentional infliction of emotional distress as to MERS. We review these decisions under the usual Rule 12(b)(6) standard. "Setting aside any statements that are merely conclusory, we construe all factual allegations in the light most favorable to the non-moving party to determine if there exists a plausible claim upon which relief may be granted." Woods v. Wells Fargo Bank, N.A., 733 F.3d 349, 353 (1st Cir. 2013).

         1. Declaratory Judgment of Invalid Foreclosure (All Defendants)[8]

         On appeal, the Galvins advance two arguments as to why the foreclosure on their property was invalid. First, they argue that U.S. Bank lacked standing to foreclose because it did not own both the note and the mortgage at the time of foreclosure. Second, they argue that U.S. Bank could not exercise the statutory power of sale because it had failed to adhere strictly to the terms of the mortgage, in particular paragraph 22.

         Under Massachusetts law, the note and the mortgage are separate legal instruments and, under the common law, they can travel separately. See Eaton v. Fed. Nat'l Mortg. Ass'n, 969 N.E.2d 1118, 1124 (Mass. 2012). However, "where a note has been assigned but there is no written assignment of the mortgage underlying the note . . . the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage." U.S. Bank Nat'l Ass'n v. Ibanez, 941 N.E.2d 40, 53-54 (Mass. 2011) (citing Barnes v. Boardman, 21 N.E. 308, 309 (Mass. 1889)).

         The note and mortgage may be transferred using different legal mechanisms. The note may be transferred by indorsement and delivery. Eaton, 969 N.E.2d at 1121 n.5. The Massachusetts Appeals Court has applied the provisions of the Uniform Commercial Code ("UCC") to the transfer of a mortgage note. See First Nat'l Bank of Cape Cod v. N. Adams Hoosac Sav. Bank, 391 N.E.2d 689, 693 (Mass. App. Ct. 1979); cf. Eaton, 969 N.E.2d at 1131 n.26 (reserving borrower's argument based on the UCC, but noting that the court "perceive[d] nothing in the UCC inconsistent with [its] view that in order to effect a valid foreclosure, a mortgagee must either hold the note or act on behalf of the note holder"). By contrast, the mortgage is an interest in land, which for our purposes can only be transferred by written assignment. See Mass. Gen. Laws ch. 183, § 3; Ibanez, 941 N.E.2d at 51. Although assignments may be recorded, "[a] valid assignment of a mortgage gives the holder of that mortgage the statutory power to sell after a default regardless whether the assignment has been recorded." Ibanez, 941 N.E.2d at 55.

         In this case, as in many others, the mortgage names MERS as the mortgagee "acting solely as a nominee for [the lender] and [the lender's] successors and assigns."

MERS is mortgagee of record for mortgage loans registered on [its] system, which tracks servicing rights and beneficial ownership interests in those loans . . . . [W]hen the beneficial interest in a loan is sold, the note is transferred by indorsement and delivery between the parties, and the new ownership interest is reflected in the MERS system. MERS remains the mortgagee of record so long as the note is sold to another MERS member; no aspect of such a transaction is publicly recorded.

Eaton, 969 N.E.2d at 1121 n.5. Although MERS holds mortgages as a "nominee, " MERS has the authority to assign the mortgage without authorization from the holder of the note. Sullivan v. Kondaur Capital Corp., 7 N.E.3d 1113, 1118 (Mass. App. Ct.), rev. denied, 15 N.E.3d 761 (Mass. 2014).

         Massachusetts is a nonjudicial foreclosure state, so banks generally foreclose by exercising the statutory power of sale. See Mass. Gen. Laws ch. 183, § 21; Mass. Gen. Laws ch. 244, §§ 11-17C; Pinti v. Emigrant Mortg. Co., 33 N.E.3d 1213, 1221 (Mass. 2015). In order to exercise this statutory power of sale, the bank must satisfy a number of requirements. Two of these requirements are relevant here. First, the foreclosing bank must hold both the note and the mortgage in order to have standing to sell the property at a foreclosure sale. See Eaton, 969 N.E.2d at 1125, 1129-30; Ibanez, 941 N.E.2d at 50 (citing Mass. Gen. Laws ch. 183, § 21; Mass. Gen. Laws ch. 244, § 14). If it does not, the foreclosure is void. See Galiastro v. Mortg. Elec. Registration Sys., Inc., 4 N.E.3d 270, 276 (Mass. 2014); Eaton, 969 N.E.2d at 1131; Ibanez, 941 N.E.2d at 50.[9] Second, the foreclosing bank must strictly comply with the default notice provisions in paragraph 22 of the mortgage. Pinti, 33 N.E.3d at 1221 n.16, 1222-24. Again, failure to do so renders the foreclosure void. Id. at 1225-26.[10]

         When borrowers challenge an entity's standing to foreclose, they often assert defects in the chain of mortgage assignments that ends with that entity. Under Massachusetts law, the borrowers themselves have standing to press such challenges to the validity of a mortgage assignment when a defect renders the assignment void, but not when it renders the assignment merely voidable by one of the parties to the assignment. See Bank of N.Y. Mellon Corp. v. Wain, 11 N.E.3d 633, 638 (Mass. App. Ct. 2014); Sullivan, 7 N.E.3d at 1116 & n.7; see also Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282, 291 (1st Cir. 2013).

         a. Whether U.S. Bank was Holder of the Note and Mortgage

         The Galvins argue that they adequately pled that U.S. Bank lacked standing to foreclose because it did not hold both the note and the mortgage at the time of the foreclosure sale. They pled a number of different bases for this argument, but advance just three on appeal: (1) the initial mortgage and all subsequent assignments of the mortgage were invalid because paragraph 20 of the mortgage did not allow it to be held and assigned separately from the note; (2) MERS could not hold the mortgage or assign the interest in the mortgage because doing so violated its internal "Rules of Membership, " and therefore the assignment to U.S. Bank was invalid; and (3) U.S. Bank does not hold the note because it was indorsed to "U.S. Bank as ...


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