This Subprime Bubble Will Burst in State Court

Mireles v. Wells Fargo Bank, N.A., et al, 2012 WL 84723 (C.D. Cal. Jan. 11, 2012).

In an action brought by borrowers alleging fraudulent and negligent misrepresentation against national banks, a district court remanded the case to state court, finding that the defendants primarily failed to meet their burden to establish that this was a mass action under CAFA.

The borrowers brought an action in the Los Angeles Superior Court alleging fraudulent concealment, misrepresentation, and violation of California’s Unfair Competition Law (“UCL”) relating to the way the defendants serviced their respective mortgages. The complaint contained various allegations regarding the citizenship of the parties and the amount-in-controversy. The complaint listed 108 plaintiffs, all of whom were alleged to reside and own property in California. The complaint named nine defendants, all of whom were national banking institutions except Cal-Western Reconveyance Corporation (“Cal-Western”), which was a California corporation.

The plaintiffs contended that as part of a massive scheme of investor fraud, the defendants inflated property appraisals, disregarded underwriting standards, sold predatory loan products, and promised refinancing packages, all while asserting that they were prudently lending to qualified homeowners. The defendants allegedly sold mortgage products to borrowers who could not otherwise meet traditional underwriting standards for such loans, thereby contributing to a massive housing price bubble. According to the plaintiffs, the defendants allegedly created risky “mortgage pools,” promising investors lucrative benefits and managed risk through leverage and derivatives trading. The plaintiffs alleged that the defendants purportedly knew that the mortgage pools contained loans that were at high risk of default. The plaintiffs contended that, after the housing bubble burst, their net worth and credit ratings were devastated.

The defendants removed the action to the United States District Court for the Southern District of California, invoking the Court’s jurisdiction under CAFA’s “mass-action” provision, 28 U.S.C. § 1332(d)(11)(B)(i). The defendants asserted that the minimal diversity requirement was satisfied, because at least one plaintiff was a California citizen and another defendant was a South Dakota citizen. The defendants also invoked the court’s diversity jurisdiction under 28 U.S.C. § 1332(a).

The plaintiffs filed a motion to remand.

As to CAFA’s mass action requirements, the parties did not dispute (1) that the number of plaintiffs in this action exceeded 100; (2) that the plaintiffs’ claims involved common questions of law or fact; or (3) that the citizenship of the parties was minimally diverse, as all the plaintiffs were citizens of California and one of the defendants was a South Dakota citizen.

The parties did dispute, however, whether the amount-in-controversy requirement was met, and whether various exceptions to CAFA applied. Here, the plaintiffs did not allege the required $5 million aggregate amount-in-controversy, nor did they allege a specific amount-in-controversy for each individual plaintiff on their claims. Instead, the complaint stated that some number of plaintiffs – fewer than 100 – alleged an amount in controversy that, ‘as to them,’ did not exceed $75,000. The Court found that, because of this ambiguity in the pleadings, the defendants had the burden to show by a preponderance of the evidence that the amount-in-controversy requirement was satisfied.

In support of their argument, the defendants submitted the declaration of an operations analyst of the South Dakota citizen who asserted that the total unpaid principal on the outstanding mortgage loans at issue was well in excess of $5 million. The Court noted that the defendants’ contention was largely based on their assertion that, irrespective of the allegations in the complaint, the plaintiffs actually sought to enjoin foreclosure of their properties or to unwind foreclosures that had already taken place.

The Court remarked that the defendants had misread the complaint, as a close reading would reveal that the plaintiffs alleged claims of fraudulent concealment and intentional and negligent misrepresentation. The Court remarked that the plaintiffs did not seek injunctive relief on those claims, but rather damages caused by the plaintiffs’ reliance on the defendants’ misconduct. The Court observed that only a small subset of the individual plaintiffs (in the fifth and sixth causes of action) had implicated the foreclosure of their homes and seemed to have placed the full value of their properties into the controversy. The Court found that none of the counts in the complaint supported the defendants’ contention that the amount-in-controversy exceeded $ 5 million. Accordingly, the Court concluded that the defendants had failed to establish that this case was a CAFA mass action.

As to the court’s diversity jurisdiction under § 1332(a), the Court reiterated that there must be complete diversity, i.e., all plaintiffs must have citizenship different from all defendants, and the amount in controversy must exceed $75,000. Here, the parties disagreed as to whether the South Dakota defendant should really be considered a California citizen, whether Cal-Western had been fraudulently joined, and whether the jurisdictional amount in controversy had been met.

The Court observed that, pursuant to 28 U.S.C. § 1348, the district courts have original jurisdiction of any civil action against any national banking association; and that all national banking associations shall be deemed to be citizen of the States in which they are respectively located. The Court also observed that neither the Supreme Court nor the Ninth Circuit had ruled on the citizenship of national banks, which had led to conflicting determinations by the district courts in the Ninth Circuit. The Court noted that those courts – including itself – that had previously concluded that Wells Fargo was a California citizen were “swayed by the fact that § 1348 was intended to place national banks ‘on the same footing as the banks of the state where they were located.’” Focusing on Congressional intent, those courts had concluded that the citizenship of national banks should be coextensive with the citizenship of state banks.

The Court noted, however, that Excelsior Funds, Inc. v. JP Morgan Chase Bank, N.A., 470 F.Supp.2d 312 (S.D. N.Y. 2006) offered a compelling counter-argument. Recognizing Congress’s intent to create parity, the Excelsior court noted that, at the time § 1348 was enacted, a state bank was only a citizen of a single state: the state in which it was incorporated. The Court here found this analysis persuasive and concluded that Wells Fargo was a citizen of South Dakota only (the place in which it was chartered) and not California. Because Wells Fargo was not a California citizen, the Court concluded that its citizenship was diverse from the plaintiffs.

However, the defendants could not convince the Court that Cal-Western was fraudulently joined, as the Court remarked that it would not decide the sufficiency of plaintiffs’ conspiracy allegations at that time. It did note, however, that under a conspiracy theory, all defendants could be held responsible for the acts of their co-conspirators, so long as those acts were undertaken in furtherance of the conspiracy. Therefore, the Court rejected the defendants’ argument that the complaint lacked allegations that could result in Cal–Western being held liable for the wrongful conduct charged.

The Court also concluded that the diversity jurisdiction was lacking as, yet again, the defendants had failed to demonstrate that the amount-in-controversy on each plaintiff’s claims exceeded $75,000. The Court explained that when a complaint is silent regarding the amount-in-controversy, the defendants had the burden of proving by a preponderance of the evidence that the jurisdictional threshold was met. As explained in its analysis in its “mass action” discussion, the Court found that the defendants had failed to meet their burden.

Accordingly, the district court concluded that it did not have jurisdiction to try this case and remanded the case to the state court.