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From Banking and Finance Law Daily, November 16, 2018

Federal law on due-on-sale clauses does not allow private suits

By Richard A. Roth, J.D.

A federal law that preempts state efforts to block mortgage creditors’ enforcement of due-on-sale clauses does not create a private right of action for violations, a majority of a panel of the U.S. Court of Appeals for the Sixth Circuit has determined. As a result, federal courts have no subject matter jurisdiction over efforts to assert the federal law, or a state law that incorporates the federal law, in a wrongful foreclosure suit (Estate of Cornell v. Bayview Loan Servicing, LLC, Nov. 13, 2018, Suhrheinrich, R.).

Payments on a home stopped after the homeowner died, and the creditor, Bayview Loan Servicing, eventually foreclosed on the mortgage due to an unpaid balance of less than $6,000. Six months later, the deceased homeowner’s estate sued, claiming that the creditor had no standing to foreclose under the federal Garn-St. Germaine Depository Institutions Act. Citing the federal law claim, Bayview removed the suit to federal court.

Federal law. One provision of Garn-St. Germaine generally preempts state law due-on-sale bans (12 U.S.C. §1701j-3), so that creditors may exercise whatever rights they have under their loan contracts. However, 12 U.S.C. §1701j-3(d) specifies nine situations in which a state can prevent the exercise of a due-on-sale clause in a mortgage on real property that includes four or fewer residences.

After the removal, Bayview convinced the district court judge that Garn-St. Germaine does not create a private right of action to challenge foreclosures. As a result, he entered a judgment in favor of the creditor.

The appellate court engaged in a different analysis. The two-judge majority pointed out that federal courts have an obligation to ensure they have subject matter jurisdiction before deciding a suit. In this case, the lack of a private right of action that could be asserted by the estate meant the federal courts did not have subject matter jurisdiction over the suit. As a result, the district court judge had no authority to decide in favor of the creditor.

Cause of action. To decide the subject matter jurisdiction question, the court majority said it had to determine whether either of two criteria were met—did the estate have either a cause of action that was created by federal law or a state-law claim that implicated significant federal issues. The estate failed to meet both criteria, the majority said.

No cause of action created. Garn-St. Germaine neither explicitly nor implicitly created a federal law cause of action, the majority first said. The text of the law said nothing about suits in federal court, so no cause of action was created explicitly.

To create a cause of action implicitly, Congress must act clearly and unambiguously, the majority continued. The federal law in question must identify both the right and the beneficiary, and Garn-St. Germain did not identify a beneficiary of its protections. The act’s legislative history added nothing of importance, the majority added.

A creditor’s judicial foreclosure effort in one of the nine described situations could allow a mortgagor to raise Garn-St. Germaine as a defense, the majority observed. Also, states can pass laws that allow mortgagors to raise Garn-St. Germain to block nonjudicial foreclosures, and Michigan—where this home was located—had done so. "But there is nothing implicit in the Act granting immediate access to federal court," the majority said.

Substantial federal law question. The Michigan law that adopted Garn-St. Germain’s nine situations in which a due-on-sale clause cannot be enforced failed to implicate a substantial question of federal law, the majority then said. While the state law did raise a federal law question by referring explicitly to the federal law, that question was not substantial because:

  • no federal agency was involved in the case;
  • the federal question was not important;
  • the federal question would not determine the result of the case; and
  • a decision on the federal law question would not affect many other cases because Michigan was one of only two states that had enacted such laws.

Federal court jurisdiction also would "disturb the balance of state and federal responsibilities," the majority added.

In the absence of federal court subject matter jurisdiction, Bayview’s removal of the suit to federal court was impermissible, the majority decided. The district court judgment was vacated, and the judge was instructed to remand the suit to the state court.

Dissenting opinion. Circuit Judge Moore dissented from the decision, believing that there was a federal question sufficiently significant that the case arose under federal law. The test was met because the estate’s cause of action would not exist in the absence of the federal law. The estate’s suit "rises or falls on the answer to the federal question," she said.

Judge Moore disputed the majority’s conclusions about the four points bearing on the substantiality of the federal question. She added that exercising jurisdiction would not mean that the federal courts were interfering with the state-federal balance of responsibilities. Congress did that when it passed Garn-St. Germaine, she said.

The case is No. 18-1245.

Attorneys: Vanessa G. Fluker (Vanessa G. Fluker, Esq., PLLC) for Estate of Robert Cornell, Jr., Audrey D. Bantom, and Anthony Cornell. Deborah S. Lapin (Maddin, Hauser, Roth & Heller, PC) for Bayview Loan Servicing, LLC. Joseph J. Bernardi (Bernardi, Ronayne & Glusac, PC) for Thien Hoang Tran.

Companies: Bayview Loan Servicing, LLC

MainStory: TopStory ConsumerCredit KentuckyNews Loans MichiganNews Mortgages OhioNews Preemption TennesseeNews

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