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Deutsche Bank National Trust Co. v. McLeod

United States District Court, D. Arizona

December 1, 2014

Deutsche Bank National Trust Company, Plaintiff,
v.
Kenneth McLeod, et al., Defendants.

ORDER

NEIL V. WAKE, District Judge.

Deutsche Bank National Trust Company sues to foreclose a note and deed of trust on Kenneth and Carol McLeod's house. Before the Court is Defendants' Motion to Dismiss for Lack of Jurisdiction and Failure to State a Claim Fed.R.Civ.P. 12(b)(1) and 12(b)(6) (Doc. 11). A prior state court judgment bars the relief Deutsche Bank seeks, so the Bank cannot state a claim upon which relief can be granted. Deutsche Bank refused, in five years of further proceedings following entry of that judgment, to ask the state court to fix the supposed error, and it refuses even now to make that request in post-judgment proceedings. This Court lacks jurisdiction to change the state court judgment by fixing the error Deutsche Bank contends underlies it. Whichever way one comes at it, the McLeods' Motion to Dismiss must be granted. This dismissal will leave Deutsche Bank free to seek correction in the state court, if it can justify its five-year delay, or to reacquire the note and deed of trust from the current holder. It can then seek amendment of the state court judgment based on changed circumstances to allow foreclosure based on the new endorsement.

I. BACKGROUND

In October 2006, the McLeods delivered to New Century Mortgage Corporation a $771, 000 note secured by a deed of trust on their home in Chandler, Arizona (the "Property"). Plaintiff Deutsche Bank represented at oral argument that it obtained ownership of the note and deed of trust in February 2007. When the McLeods defaulted on their loan payments in June 2007, the loan servicer at the time "gave notice of default and made demand upon the McLeods for payment of the amounts due and owing on the loan." Doc. 1 at 5. In response, the McLeods filed an action in Maricopa County Superior Court on August 4, 2008.

A partial copy of the state court complaint provided to this Court at oral argument reveals that the McLeods sued a number of entities-including "Deutsche Bank National Trust Company, a California Corporation" and "Securitized Asset Backed Receivables LLC Trust 2007-NC2, a New York LLC"-on a variety of theories, from violations of the federal Truth in Lending Act and Home Ownership and Equity Protection Act to breach of contract and violations of the Arizona Consumer Fraud Act.

Deutsche Bank conceded at oral argument that Deutsche Bank National Trust Company was served with process in the McLeods' suit. Deutsche Bank does not appear to contest the McLeods' claims that "Securitized Asset Backed Receivables LLC... w[as] served August 6, 2008, " Doc. 11 at 4, or that "Deutsche Bank, Trustee and its principal SABR Trust answered the suit on August 29, 2008, " Doc. 11-3 at 2. Two weeks after the suit was filed, Mortgage Electronic Registration Systems, Inc., which was listed as the nominee beneficiary under the deed of trust, recorded an assignment of its beneficial interest to Deutsche Bank National Trust Company as Trustee under Pooling and Servicing Agreement dated as of February 1, 2007 Securitized Asset Backed Receivables LLC Trust 2007-NC2 Mortgage Pass-Through Certificates, Series 2007-NC2.

The state court entered a default judgment ("Default Judgment") on November 24, 2008, against Securitized Asset Backed Receivables LLC Trust 2007-NC2 ("SABR"), which had been "properly served by personal service." Doc. 1-8 at 1. That judgment quieted title to the Property in favor of the McLeods as against SABR and provided that "SABR is permanently enjoined and prohibited from recording any documents affecting or purporting to affect title of the subject property; and, any acts or recordings now or in the future by Defendant SABR relating to the subject property shall be of no force or effect." Id. at 2. Both parties agreed at oral argument that the basis for the state court's entry of the Default Judgment was the McLeods' assertion that SABR did not hold the note and therefore could not foreclose on the Property. The McLeods told this Court they had not argued to the state court that there was any flaw in the lien or the security instrument, or that the debt was extinguished or void. Rather, the Default Judgment adjudicated only that SABR had no lien because it was not the holder of the note.

Because there were ten other Defendants, the state court litigation continued for an additional five-and-a-half years after entry of the Default Judgment. During that time, Deutsche Bank did not "(1) move to set aside the State Court Judgment; (2) file a Motion for Judgment on the Pleadings; (3) file a Motion for Reconsideration; (4) file a Motion for Summary Judgment; (5) file a special action; or (6) directly appeal." Doc. 11 at 7-8. In November 2013, the state court "on its own motion [amended] the caption of this matter to reflect that the named Defendant Deutsche Bank National Trust Company's true name is Deutsche Bank National Trust Company as Trustee Under Pooling and Servicing Agreement Dated as of February 1, 2007 Securitized Asset Backed Receivables LLC Trust 2007-NC2 Mortgage Pass-Through Certificates, Series 2007-NC2." Doc. 11-4 at 1. By that time, all other defendants named in the complaint had been voluntarily dismissed. Finally, in March 2014, the state court determined that, because the McLeods had received the only remedy they sought in their complaint-i.e., the Default Judgment against SABR-the action had been completed at the time that the other state court defendants ceased to be parties to the action. The state court then dismissed the remainder of the action.

Deutsche Bank filed the instant action in July of this year, seeking (1) "a judgment of foreclosure in its favor" on the Property, (2) a declaratory judgment that the Default Judgment is invalid, does not affect Deutsche Bank's lien interest in the Property, did not extinguish the deed of trust, and "did not result in... free and clear title to the McLeods without payment of the debt, " and (3) an order that the McLeods pay the outstanding balance of their mortgage to Deutsche Bank, along with interest, fees and costs. Doc. 1 at 9-11. By this Complaint, Deutsche Bank, as agent for SABR, does exactly what the state court judgment enjoins SABR, its principal, from doing. The McLeods' Motion to Dismiss argues that (1) pursuant to Federal Rule of Civil Procedure 12(b)(1), this Court lacks jurisdiction over the case under the Rooker-Feldman doctrine, (2) Deutsche Bank's claim is barred by res judicata, and thus does not state a claim upon which relief can be granted, as provided by Rule 12(b)(6), and (3) Deutsche Bank's suit is untimely.

II. LEGAL ANALYSIS

A. Res Judicata

"The Full Faith and Credit Act, 28 U.S.C. § 1738, requires federal courts as well as state courts to give state judicial proceedings the same full faith and credit... as they have by law or usage in the courts of such State... from which they are taken.'" Parsons Steel, Inc. v. First Ala. Bank, 474 U.S. 518, 519 (1986) (ellipses in original). Under Arizona law of "the doctrine of res judicata, a judgment on the merits in a prior suit involving the same parties or their privies bars a second suit based on the same cause of action." Gilbert v. Bd. of Med. Exam'rs, 155 Ariz. 169, 174, 745 P.2d 617, 622 (Ct. App. 1987). "A default judgment has the same res judicata effect as a judgment on the merits where the issues were litigated." Norriega v. Machado, 179 Ariz. 348, 353, 878 P.2d 1386, 1391 (Ct. App. 1994).

Here, Deutsche Bank asserts it is not bound by the Default Judgment because that judgment "was not entered as to [Deutsche Bank]." Doc. 16 at 11. In other words, Deutsche Bank's position is that "because [the Default Judgment] was taken against a trust instead of the trustee representing the trust, " id. at 12, Deutsche Bank, in its role as trustee, is not bound by the Default Judgment.

Under general principles of trust law, a trust is "a fiduciary relationship with respect to property... subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons." Restatement (Third) of Trusts § 2 (2003). That is, a trust is not itself capable of taking legal action, such as recording documents that affect title to real property, because it is no more than a relationship among different actors. To the extent that courts sometimes refer to trusts as legal entities, this terminology connotes only "the trust estate and the associated fiduciary relation between the trustee and the beneficiaries." See id. cmt. a. In this sense, a trustee may be said to owe duties "to the trust, '" but the trust is not capable, independent of the trustee, of managing the ...


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