Federal vs. State Court: Foreclosure and Quiet Title

Lately I am seeing more and more Quiet Title complaints getting shot down before they even get off the ground. Let me explain what is going on.

A complaint is filed in state court for a Quiet Title action pertaining to title of real property. Within this complaint, allegations are made that pertain to facts allowing a legal remedy. The courts ask: is there a proper cause of action being brought forth?

The 12(b)(6) Problem

Wrongful foreclosure, improperly executed assignments, and fraud all sound good as allegations. The truth is these are not a proper cause of action by themselves. The case filed in state court too often gets remanded immediately to federal court. Once remanded, a motion to dismiss is filed and a 12(b)(6) ruling follows: failure to state a claim upon which relief can be granted. This rule allows the court to dismiss a complaint before trial ever begins.

No proper cause of action has been given to the court for which it can grant relief. The Quiet Title complaint contains state law causes of action. No federal cause of action has been pleaded. Without concise, specific arguments using a proper federal cause of action, dismissal is certain.

The problem is structural. A quiet title complaint filed in state court may state valid state law causes of action. But when the case is removed to federal court based on diversity jurisdiction, the federal court looks for federal causes of action. If the complaint only contains state law claims, the court has nothing to hang its hat on. The 12(b)(6) motion succeeds not because the homeowner’s claims are meritless, but because the complaint fails to state a claim the federal court can grant relief on.

The Goal Is to Get to Trial

The goal is to get to trial. The purpose of a trial is to test the facts. The defendants file a Motion to Dismiss to test the law. Their objective is to deprive litigants of their right to a trial by jury. Summary Judgment is one of the tools used to accomplish this.

The banks know that if the case gets to trial, the facts will be tested. The chain of title will be examined. The assignments will be scrutinized. The endorsements will be checked. The timing of the transfers will be analyzed. A thorough quiet title investigation provides the evidence needed to survive these challenges. In many cases, the facts will show that the bank did not properly acquire the rights it claims to have. The banks would rather have the case dismissed before the facts ever see the light of a courtroom.

Playing Offense Versus Defense

I would be looking at other avenues of action alongside the state action. A properly pleaded federal complaint can offer claims that run separately from the state action. A federal complaint would be for damages. You would be playing offense versus defense.

This is also a good venue to bring to light violations of federal statutes associated with improper conveyance of real property. I would be jockeying for a negotiable position by exposing the hearsay claims of improper parties coming forth claiming to be the Person Entitled to Enforce (PETE) in a foreclosure action. A PETE analysis applies the UCC Article 3 framework to determine whether the foreclosing party qualifies.

Playing offense and defense simultaneously changes the entire dynamic. Instead of merely defending against the foreclosure, the homeowner is also pursuing affirmative claims for damages. The bank must now defend its own conduct, not just prosecute the homeowner’s default. A bank facing a federal damages claim is much more likely to come to the table than a bank merely prosecuting a foreclosure against a passive homeowner.

Federal Causes of Action to Consider

When building a federal complaint alongside the state quiet title action, several federal statutes may be relevant depending on the facts. Violations of federal statutes associated with improper conveyance of real property can provide the federal cause of action that a 12(b)(6) motion cannot dismiss. The key is to identify which federal laws were violated by the bank’s conduct and to plead those violations with specific facts and specific statutes.

The complaint must be precise. It must cite the specific statute, identify the specific conduct that violated the statute, and demonstrate how the homeowner was damaged. Vague allegations of fraud or wrongful foreclosure will not survive a motion to dismiss.

Choosing Your Weapons Wisely

In this writer’s opinion, one cannot have enough weapons in their arsenal to fight wrongdoers. This is a war with many battles on many fronts being played concurrently. Choose your weapons wisely.

The attorney who files only a state quiet title complaint and hopes for the best is fighting with one hand tied behind their back. The attorney who files a state quiet title action and simultaneously files a federal complaint for damages is fighting on two fronts, putting pressure on the bank from multiple directions.

Filing the wrong complaint in the wrong court with the wrong causes of action will result in dismissal. Filing the right complaint in the right court with the right causes of action will get you to trial, where the facts can be tested and the truth can come out.

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Joseph Esquivel, Mortgage Compliance Investigators. Copyrighted, all rights reserved.