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Bank of America, N.A. v. Reyes-Toledo

Supreme Court of Hawaii

October 9, 2018

BANK OF AMERICA, N.A., SUCCESSOR BY MERGER TO BAC HOME LOANS SERVICING, LP FKA COUNTRYWIDE HOME LOANS SERVICING LP, Respondent/Plaintiff-Appellee,
v.
GRISEL REYES-TOLEDO, Petitioner/Defendant-Appellant, and WAI KALOI AT MAKAKILO COMMUNITY ASSOCIATION; MAKAKILO COMMUNITY ASSOCIATION; and PALEHUA COMMUNITY ASSOCIATION, Respondents/Defendants-Appellees.

          CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-15-0000005; CIVIL NO. 12-1-0668)

          R. Steven Geshell for petitioner

          Jade Lynne Ching, Nakashima Ching LLC for respondent

          NAKAYAMA, ACTING C.J., MCKENNA, POLLACK, AND WILSON, JJ., AND CIRCUIT COURT JUDGE GARIBALDI, IN PLACE OF RECKTENWALD, C.J., RECUSED

          OPINION

          McKENNA, J.

         I. Introduction

         This case returns to us after it was remanded to the Intermediate Court of Appeals ("ICA") by our February 28, 2017 opinion Bank of America, N.A. v. Reyes-Toledo, 139 Hawai'i 361, 390 P.3d 1248 (2017) ("Reyes-Toledo I"). In Reyes-Toledo I, we vacated a foreclosure decree based on issues of fact regarding whether Bank of America, N.A., a National Association, as successor by merger to BAC Home Loans Servicing, LP FKA Countrywide Home Loans Servicing LP ("Bank of America") held the note at the time the foreclosure lawsuit was filed. See 139 Hawai'i at 373, 390 P.3d at 1260.

         Relevant to this certiorari proceeding, Reyes-Toledo I remanded the case to the ICA for a determination of whether the Circuit Court of the First Circuit ("circuit court")[1] erred by dismissing Grisel Reyes-Toledo's ("Homeowner['s]") four-count counterclaim before granting summary judgment for foreclosure in favor of Bank of America. See 139 Hawai'i at 373, 390 P.3d at 1260. On remand, the ICA ruled the circuit court properly dismissed the wrongful foreclosure, declaratory relief, and quiet title counts in Homeowner's counterclaim, but that it erred in dismissing the unfair and deceptive trade practices count. See Bank of America, N.A., Successor v. Reyes-Toledo, No. CAAP-15-0000005 (App. July 21, 2017) (SDO).

         In sum, the ICA concluded the three counts were appropriately dismissed pursuant to Hawai'i Rules of Civil Procedure ("HRCP") Rule 12(b)(6) because: (1) as Homeowner did not provide any authority to support "the proposition that a wrongful foreclosure claim can be raised prior to foreclosure or the sale of the property in judicial foreclosure," no set of facts would entitle Homeowner to relief, Reyes-Toledo, SDO at 6; (2) the face of the Mortgage listed MERS as "mortgagee" and "nominee," and as such, Homeowner's arguments in support of her allegations that "MERS was nothing more than a strawman and a conduit for fraud being practiced upon the Defendant and others" lacked merit, Reyes-Toledo, SDO at 7; and (3) Homeowner's quiet title count does not allege that she paid, or was able to pay, the outstanding debt on the Property "so as to demonstrate the superiority of her claim," Reyes-Toledo, SDO at 9. In so concluding, the ICA applied the "plausibility" pleading standard set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which it had previously adopted in Pavsek v. Sandvold, 127 Hawai'i 390, 279 P.3d 55 (App. 2012) . See Reyes-Toledo, SDO at 2-4; see also Ashcroft v. Iqbal, 556 U.S. 662, 677-80 (2009) (clarifying Twombly).

         Homeowner timely filed an application for writ of certiorari ("Application"), asserting the ICA erred in upholding the dismissal of the other three counts as it applied the wrong pleading standard.[2] According to Homeowner, these three counts should have survived dismissal because when a party moves to dismiss a complaint pursuant to Hawai'i Rules of Civil Procedure ("HRCP") Rule 12(b)(6), the party admits the well-pleaded allegations of fact.

         This appeal raises two issues: (1) the standard a pleading[3]must meet to overcome a HRCP Rule 12(b)(6) motion to dismiss; and (2) whether a claim for wrongful foreclosure exists under Hawai'i law.

         As to the first issue, this court has never adopted the Twombly/Iqbal "plausibility" pleading standard, and we now expressly reject it. We reaffirm that in Hawai'i state courts, the traditional "notice" pleading standard governs. This provides citizen access to the courts and to justice.

         As to the second issue, we hold that a party may bring a claim for wrongful foreclosure before the foreclosure actually occurs.

         We therefore vacate the ICA's judgment on appeal affirming the circuit court's dismissal of three counts of Homeowner's counterclaim, and remand the case to the circuit court for further proceedings consistent with this opinion as well as our opinion in Reyes-Toledo I.

         II. Background

         Only the factual and procedural backgrounds relevant to the issues on certiorari are discussed below.[4]

         A. Homeowner's Answer and Counterclaim

         In response to Bank of America's complaint seeking foreclosure ("Complaint") of Homeowner's property ("Property"), Homeowner filed her Answer and Counterclaim on September 28, 2012, denying all of the allegations in the Complaint, except those pertaining to her personal background, her September 24, 2007 execution of a promissory note made payable to Countrywide Bank, FSB ("Note"), and the recordation of a mortgage on the Property that secured the Note ("Mortgage"). She also asserted the following defenses in her Answer: (1) failure to state a claim upon which relief can be granted, (2) assumption of risk and contributory negligence, (3) fraud, based on Homeowner's reasonable belief that Bank of America was not the real party-in-interest and owner of the Note and Mortgage through any claimed assignment by Mortgage Electronic Registration Systems, Inc. ("MERS"), and (4) illegality, insofar as Bank of America was not the owner and holder of the Note and Mortgage and therefore not entitled to foreclose on the Mortgage. She also contended that there was no valid interim assignment of the Mortgage to Bank of America and no valid negotiation for value of the Note to Bank of America. She further asserted MERS could not be a lawful beneficiary of the Mortgage if it lacked possession of the Note.

         Homeowner also asserted the following defenses in the event the Note and Mortgage had been transferred into a trust and securitized: (1) the claimed assignment of the Note and Mortgage into the trust may have violated the ninety-day closing date; (2) the claimed Mortgage assignment to Bank of America in October 2011 would be void as a violation of the express terms of the trust; (3) the purported assignment by which Bank of America claimed ownership of the Note and Mortgage may violate the trust provisions for the closing-date rule; (4) the purported transfers or assignments of the Mortgage after the closing date of the trust would be void in violation of the express terms of the trust and 26 U.S.C. § 860 et seq.; (5) the purported transfers may violate New York trust law and would therefore be void; (6) the Note may never have been transferred into the trust; (7) MERS was not a lender, banker, or servicer and therefore any transfers by MERS were void; (8) the purported transfers into and out of the trust violated the Internal Revenue Code, 26 U.S.C. § 860; (9) the claimed assignments into and out of the trust may have violated the Pooling and Service Agreement ("PSA"), together with the Underwriting Agreement for the trust; (10) if there were transfers into a trust under the PSA, the transfers were not performed according to the terms of the trust and were therefore void; (11) the Note and Mortgage may never have been deposited or transferred into the trust; and (12) if the transfers were made into and out of a securitized trust, the signatures may have been by unauthorized persons and therefore void as forgeries, which would render the purported transfers fraudulent and void.

         Homeowner asserted four counts in the counterclaim filed along with her Answer: (1) wrongful foreclosure; (2) declaratory relief; (3) quiet title; and (4) unfair and deceptive trade acts and practices (sometimes "UDAP") under HRS § 480-1 et seq.

         In the first count of her counterclaim, alleging wrongful foreclosure, Homeowner incorporated by reference the defenses in her Answer, and alleged that Bank of America's conduct in commencing the foreclosure action was willful, malicious, and without just cause.

         In the second count of her counterclaim, seeking declaratory relief, Homeowner incorporated by reference the allegations in the wrongful foreclosure count. She asserted she was entitled to declaratory relief pursuant to HRS § 632-1 that (1) Bank of America was not the owner of the Mortgage and Note; (2) Bank of America was not entitled to foreclose on the Mortgage and Note; and (3) MERS was not the mortgagee on the Mortgage but rather was a "sham and fraud" that "acted only as a strawman." She also requested that the court determine the identity of the mortgagee and award her costs and attorney's fees pursuant to HRS § 607-14.

         In the third count of her counterclaim, requesting the quieting of her title, Homeowner again incorporated by reference the allegations in the wrongful foreclosure count. She asserted she was entitled to have her legal title to the Property quieted against Bank of America's claims pursuant to HRS § 669-1 et seq., and that she was entitled to recover her costs and attorney's fees pursuant to HRS § 607-14.

         Finally, in the fourth count of her counterclaim, alleging unfair and deceptive trade acts and practices, Homeowner again incorporated by reference the allegations in the wrongful foreclosure count. She alleged she was a consumer with respect to the Mortgage and Note, and she asserted the acts and conduct of Bank of America, its agents and predecessors, and MERS constituted an unfair and deceptive trade practice by "either or both mortgage lenders, mortgage servicers, mortgage holders, claimants, debt collectors, and/or finance companies." Homeowner claimed she paid about $55, 593 to Bank of America based on erroneous information and billings, and on the assumption that Bank of America was the rightful owner of the Mortgage. She maintained Bank of America and MERS were therefore subject to liability under HRS §§ 480-2 and 480-13 for injuries and damages of not less than $1, 000, or for treble damages, plus attorney's fees and costs. Additionally, Homeowner asserted she was entitled to injunctive relief to enjoin the unlawful practices of Bank of America, its agents and predecessors, and MERS.

         B. Motion to Dismiss Counterclaim

         On October 22, 2012, Bank of America filed a Motion to Dismiss Defendant Grisel Reyes-Toledo's Counterclaim ("Motion to Dismiss Counterclaim"). As to the wrongful foreclosure count, Bank of America asserted Homeowner did not describe any foreclosure that had actually occurred or what was wrongful about the alleged foreclosure, and that therefore the count should be dismissed. As to the declaratory judgment count, Bank of America alleged the involvement of MERS in loan transactions has been repeatedly approved by this court and that there was no allegation that MERS exceeded its traditionally approved role in Homeowner's case.

         As to the quiet title count, Bank of America alleged that Homeowner failed to state a claim because she did not assert she had fully paid off the underlying obligation or is able to tender the full amount before seeking relief. Finally, Bank of America asserted that although the unfair and deceptive trade acts and practices count incorporated by reference the allegations in the wrongful foreclosure count, Homeowner did not describe the alleged unfair or deceptive acts or practices in any detail.

         In her Memorandum in Opposition to Bank of America's Motion to Dismiss Counterclaim, Homeowner argued that all counts of her counterclaim, including the wrongful foreclosure count, were sufficient to survive a HRCP Rule 12(b)(6) motion to dismiss. She argued if she were to prove the facts alleged in her counterclaim, which incorporated the allegations in her Answer, she would be entitled to relief against Bank of America. Homeowner also asserted that Bain v. Metro Mortgage Group, Inc., 285 P.3d 34 (Wash. 2012) supports her claim that MERS is merely a registration system and not a holder of the Note. Additionally, Homeowner maintained sufficient facts were pled for both the declaratory judgment and quiet title counts pursuant to Amina v. Bank of New York Mellon, Civil No. 11-00714 JMS/BMK, 2012 WL 3283513 (D. Haw. 2012), in which the court held that a borrower need not tender payment or allege that a note and mortgage were satisfied to quiet title against a party who is not a mortgagee.[5]

         In its Reply Memorandum, Bank of America asserted that if Homeowner believed Bank of America lacked authority to foreclose, then her arguments were defenses, not affirmative claims for relief. Bank of America also asserted that a claim for wrongful foreclosure cannot arise before a foreclosure occurs. Bank of America alleged that to the extent Homeowner's other counts relied upon allegations set forth in the wrongful foreclosure count, they should also be dismissed.

         On February 12, 2013, the circuit court entered an order granting Bank of America's Motion to Dismiss Counterclaim ("Order Dismissing Counterclaim"). Homeowner filed a motion for reconsideration contending she had sufficiently pled her "compulsory" counterclaim as Bank of America was not the mortgagee, had no right to bring a foreclosure action, and was liable to her for over $160, 000 based on her UDAP counterclaim. In the alternative, she moved for entry of final judgment and a HRCP Rule 54(b) certification allowing immediate appeal of the order Dismissing Counterclaim. She also requested a stay pending appeal pursuant to HRCP Rule 62(d) and (h).

         After Bank of America filed its opposition, on December 31, 2013, the circuit court denied Homeowner's Motion for Reconsideration and Rule 54(b) Certification ("Order Denying Defendant Grisel Reyes-Toledo's Motion for (1) Reconsideration of the February 12, 2013 Order Dismissing Counterclaim; (2) HRCP Rule 54(b) Certification; and (3) HRCP Rule 62(d) and (h) Stay Pending Appeal Filed on February 22, 2013") ("Order Denying Motion for Reconsideration").[6]

         C. ICA's Decision on Remand

         Addressing the propriety of the dismissal of Homeowner's counterclaim for the first time on remand from Reyes-Toledo I, the ICA affirmed in part and vacated in part the circuit court's Order Dismissing Counterclaim, entering its summary disposition order ("SDO") on July 21, 2017. See Reyes-Toledo, SDO at 12. The ICA applied the following standard to evaluate Bank of America's HRCP Rule 12(b)(6) motion to dismiss:

A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his or her claim that would entitle him or her to relief. We must therefore view a plaintiff's complaint in a light most favorable to him or her in order to determine whether the allegations contained therein could warrant relief under any alternative theory. For this reason, in reviewing a circuit court's order dismissing a complaint our consideration is strictly limited to the allegations of the complaint, and we must deem those allegations to be true.

Reyes-Toledo, SDO at 3 (quoting In Re Estate of Rogers, 103 Hawai'i 275');">103 Hawai'i 275, 280-81, 81 P.3d 1190, 1195-96 (2003)). The ICA went on, however, to quote an excerpt from Twombly, 550 U.S. at 555, which the ICA previously quoted in Pavsek, 127 Hawai'i 390, 279 P.3d 55 (App. 2012):

While a complaint attacked by [a HRCP] Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the "grounds" of his "entitlement to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level on the ...

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