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Azad v. PNC Bank, N.A.

United States District Court, D. Hawaii

June 6, 2019

FARZAD AZAD, KATHRYN M. AZAD, PATRICIA HELEN LEILANI FRANCO, ROBERT A. KOVACH, and NINA TANNER-SMITH, individually and as Trustee of the Nina-Tanner-Smith Revocable Trust dated May 18, 2001, Plaintiffs,
v.
PNC BANK, N.A., a National Banking Association; CHARLES ZOLTAN FEDAK; MERI LYNN FEDAK; JESSECA F. KAUFMAN; CARI TODD KEENAN; BANK OF HAWAII; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.; FLAGSTAR BANK, FSB.; BENJAMIN KANE; FIRST HAWAIIAN BANK; JOHN M. TROBOUGH; LAURIE A. TROBOUGH; and DOE DEFENDANTS 1-50, Defendants.

          FINDINGS AND RECOMMENDATION TO GRANT MOTION FOR ORDER OF REMAND

          KENNETH J. MANSFIELD UNITED STATES MAGISTRATE JUDGE

         The plaintiffs in this action are citizens of Hawaii, Texas, and California. Plaintiffs Farzad Azad, Kathryn M. Azad, and Patricia Helen Leilani Franco are Hawaii citizens, plaintiff Robert A. Kovach is a Texas citizen, and plaintiff Nina Tanner-Smith is a California citizen (collectively, “Plaintiffs”). Plaintiffs' Motion for Order of Remand (“Motion for Remand”) arises from the January 22, 2019 Notice of Removal (“Removal”) filed by defendant PNC Bank, N.A. (“PNC”), which PNC removed to this district court on the basis of diversity pursuant to 28 U.S.C. §§ 1332(a) and 1441. PNC's Removal alleges that Plaintiffs fraudulently joined: (1) Hawaii citizen defendants Jesseca F. Kaufman, Cari Todd Keenan, John M. Trobough, and Laurie A. Trobough; (2) Hawaii based banks, Bank of Hawaii and First Hawaiian Bank (together with Hawaii citizen defendants, “Hawaii Citizens”); (3) California citizens Benjamin Kane, Charles Zoltan Fedak, and Meri Lynn Fedak (“California Citizens”); (4) Mortgage Electronic Registration Systems, Inc., a Delaware corporation (“MERS”); and (5) Flagstar Bank, FSB, a Michigan federally chartered savings bank (“Flagstar”). PNC argues that the inclusion of the Hawaii Citizens and California Citizens as defendants (“Non-Diverse Citizens”) destroys federal diversity jurisdiction because the Azads are Hawaii citizens and Tanner-Smith is a California citizen.

         PNC asserts that only PNC is a proper defendant for the purposes of determining this district court's diversity jurisdiction because the inclusion of the Hawaii Citizens, California Citizens, MERS, and Flagstar constitutes fraudulent joinder. PNC thus contends that, because PNC is a Delaware citizen and none of the plaintiffs are Delaware citizens, this district court maintains diversity jurisdiction in this action. The Court disagrees.

         For the reasons discussed in this order, the Court FINDS and RECOMMENDS that the district court remand to the State of Hawaii Circuit Court of the Second Circuit (“State Court”).

         BACKGROUND

         Plaintiffs in this case share a similar background. Each plaintiff owned a property on the island of Maui. Between 2004 and 2009, each plaintiff executed an unrecorded promissory note and mortgaged their home as security for the note. PNC, as assignee and/or mortgagee of each of Plaintiffs' mortgages, is the entity that ultimately commenced nonjudicial foreclosure proceedings against all Plaintiffs (through its agent, the law firm of Routh Crabtree Olson) pursuant to the power of sale contained in each of Plaintiffs' mortgages (“Power of Sale Provision”) and pursuant to HRS chapter 667. ECF No. 1-2 at ¶¶ 41-42.

         (1) The Azads owned a property in Lahaina, Maui (“Azad Property”). ECF No. 1-2 at 8 ¶ 31. In 2006, the Azads executed an unrecorded promissory note, agreeing to pay MERS a total of $1, 235, 000.00 (“Azad Note”). Id. at 8 ¶ 32. The Azads also executed a mortgage in favor of MERS on October 26, 2006 (“Azad Mortgage”), and recorded the Azad Mortgage in the State of Hawaii Bureau of Conveyances (“BOC”) on November 8, 2006, using the Azad Property as security for the Azad Note. Id.

         MERS assigned the Azad Mortgage to Bank of America, N.A. (“Bank of America”) and recorded the assignment on March 17, 2009 at the BOC. See ECF No. 11-10. On September 20, 2010, PNC (loan servicer for Bank of America) filed a Mortgagee's Affidavit of Foreclosure Under Power of Sale (the “Foreclosure Affidavit”) in the BOC in connection with the Azad Property. See ECF No. 11-8. PNC certified in the Foreclosure Affidavit that in accordance with its power of sale and HRS chapter 667, it had foreclosed on the Azad Property, held a sale, then transferred the Azad Property by quitclaim deed from Bank of America to Bank of America. ECF No. 11-8. Bank of America then sold the Azad Property by special warranty deed to Lars Werner, who then sold the Azad Property to the Fedak Defendants by warranty deed. See ECF Nos. 11-8 to 11-13.

         (2) Plaintiff Franco owned a property in Makawao, Maui (“Franco Property”). ECF No. 1 at 8 ¶ 33. In 2005, Plaintiff Franco executed an unrecorded promissory note, agreeing to pay AccuBanc Mortgage (“Accubanc”), a division of National City Bank of Indiana, a National Banking Association (“NCB”), a total of $287, 000.00 (“Franco Note”). Id. at 8 ¶ 34. Plaintiff Franco also executed a mortgage in favor of Accubanc on February 8, 2005 (“Franco Mortgage”), and recorded the Franco Mortgage in the BOC on February 15, 2005, using the Franco Property as security for the Franco Note. Id. NCB is PNC's predecessor by merger. Id. at 9 ¶ 35.

         On April 23, 2010, Accubanc filed a Foreclosure Affidavit in the BOC in connection with the Franco Property. See ECF No. 11-14. PNC certified in the Foreclosure Affidavit that in accordance with its power of sale and HRS chapter 667, it had foreclosed on the Franco Property, and transferred the Franco Property by quitclaim deed from Accubanc to Accubanc. Id. at 1-2. Accubanc then transferred the Franco Property by quitclaim deed to the Federal Home Loan Mortgage Corporation (“FHLMC”). ECF No. 11-16. FHLMC then sold the Franco Property by limited warranty deed to Merritt K. Kaufman and Jesseca F. Kaufman on May 2, 2011. ECF No. at 11-17. The Kaufmans granted mortgages on the Franco Property to Bank of Hawaii and MERS, as nominee for Flagstar. ECF No. 1-2 at 31 ¶ 112; ECF No. 11-20. The Kaufmans transferred the Franco Property by quit claim deed to Defendant Jesseca F. Kaufman on August 5, 2014. See ECF No. 11-18. Defendant Jesseca F. Kaufman thereafter transferred the Franco Property to Defendant Cari Todd Keenan on September 8, 2014. See ECF No. 11-19.

         (3) Plaintiff Kovach owned a leasehold interest in property in Lahaina, Maui (“Kovach Property”). ECF No. 1-2 at 9 ¶ 36. In 2004, Plaintiff Kovach executed an unrecorded promissory note, agreeing to pay Accubanc a total of $130, 500.00 (“Kovach Note”). Id. at 9 ¶ 37. Plaintiff Kovach also executed a mortgage in favor of Accubanc on March 23, 2004 (“Kovach Mortgage”), and recorded the Kovach Mortgage in the BOC on April 6, 2004, using the Kovach Property as security for the Kovach Note. ECF No. 11-22.

         On October 18, 2010, PNC filed a Foreclosure Affidavit in the BOC in connection with the Kovach Property. ECF No. 11-21. PNC stated in the Foreclosure Affidavit that in accordance with its power of sale and HRS chapter 667, it had foreclosed on the Kovach Property and sold the Kovach Property to itself. Id. at 3. PNC then assigned the lease by quitclaim deed from PNC to its nominee FHLMC. ECF No. 1-2 at 32 ¶ 121; ECF No. 11-21. FHLMC then sold the Kovach Property by Apartment Deed and Assignment of Ground Lease (Limited Warranty) to Carol Ann Jung on July 19, 2012, who subsequently transferred that same interest to the Carol Ann Jung 2010 Trust on October 26, 2015. ECF No. 11-24 to 25. The Trust then assigned its interest by Assignment of Apartment Lease to Defendant Kane on September 26, 2018. ECF No. 11-26. Defendant Kane granted First Hawaiian Bank a mortgage using the Kovach Property as security on September 25, 2018. ECF No. 11-27.

         (4) Plaintiff Tanner-Smith owned a property in Kihei, Maui (“TS Property”). Id. at 9 ¶ 38. In 2009, Plaintiff Tanner-Smith executed an unrecorded promissory note, agreeing to pay Commonwealth United Mortgage, a division of NCB, a total of $376, 200.00 (“TS Note”). Id. at 9 ¶ 39. Plaintiff Tanner-Smith also executed a mortgage in favor of Commonwealth United Mortgage on September 28, 2005 (“TS Mortgage”), and recorded the TS Mortgage in the BOC on October 6, 2005, using the TS Property as security for the TS Note. ECF No. 11-29.

         On January 2, 2009, PNC filed a Foreclosure Affidavit in the BOC in connection with the TS Property. ECF No. 11-28. PNC stated in the Foreclosure Affidavit that in accordance with its power of sale and HRS chapter 667, it had foreclosed on the TS Property, and sold the TS Property by limited warranty deed to Wailana PS, LLC on June 10, 2011. ECF Nos. 11-28, 11-30. Wailana PS, LLC subsequently transferred the property by apartment deed to the Trobough Defendants on May 7, 2012. ECF No. 11-31.

         Plaintiffs filed a complaint in State Court on December 12, 2018, alleging three claims: wrongful deprivation of real property; unfair and deceptive trade practices (“UDAP”) and unfair methods of competition (“UMOC”) pursuant to Hawaii Revised Statutes (“HRS”) chapter 480; and quiet title and ejectment. Plaintiffs allege only the quiet title and ejectment claim against the Non-Diverse Citizens. The crux of the allegations against the Non-Diverse Citizens is related to the statements in the Foreclosure Affidavits, namely, PNC's alleged failure to conduct the foreclosure of the Azad, Franco, Kovach, and TS properties (collectively, “Properties”) in accordance with the Power of Sale Provisions and Hawaii law. Plaintiffs aver that, because PNC failed to conduct a proper foreclosure sale of the Properties when PNC transferred the Properties to itself or its nominees, PNC's foreclosures were wrongful and thus, Plaintiffs have superior title to the Properties, despite PNC's (or its nominees') transfer of the Properties to third-parties.

         DISCUSSION

         I. Determining Federal Jurisdiction Where Defendant Alleges Fraudulent Joinder

         “Federal courts are courts of limited jurisdiction. They possess only that power authorized by Constitution and statute . . . . It is to be presumed that a cause lies outside this limited jurisdiction . . . .” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (citations omitted). Courts in this circuit must “strictly construe the removal statute against removal jurisdiction.” Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). “Federal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance.” Id.; see 28 U.S.C. § 1447(c) (“If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.”).

         The burden of establishing this district court's jurisdiction rests on PNC, the party asserting federal jurisdiction. Kokkonen, 511 U.S. at 377. In addition, because PNC is alleging fraudulent joinder, it faces not only the strong presumption against removal jurisdiction, but also, the “general presumption against fraudulent joinder.” See Hunter v. Philip Morris USA, 582 F.3d 1039, 1046 (9th Cir. 2009) (“Hunter”) (quoting Hamilton Materials, Inc. v. Dow Chem. Corp., 494 F.3d 1203, 1206 (9th Cir. 2007)). PNC can meet its burden of establishing this Court's jurisdiction if PNC can prove that Plaintiffs' joinder of the Non-Diverse Citizens was “fraudulent.”

         The joinder of a defendant is fraudulent if the party asserting federal jurisdiction can prove, by clear and convincing evidence, that (1) the plaintiff fails to state a cause of action against the non-diverse defendant(s), and (2) the failure is obvious according to the settled rules of the state. McCabe v. Gen. Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987). Notably, the fraudulent joinder standard requires even less of a plaintiff than what Federal Rule of Civil Procedure 12(b)(6) requires. Grancare, LLC v. Thrower by & through Mills, 889 F.3d 543, 549 (9th Cir. 2018) (“A claim against a defendant may fail under 12(b)(6), but that defendant has not necessarily been fraudulently joined.”). The Ninth Circuit has held that the fraudulent joinder is “similar to ‘wholly insubstantial and frivolous' standard for dismissing claims under Rule 12(b)(1) for lack of federal question jurisdiction.” Id. In addition, the Ninth Circuit has emphasized “that a federal court must find that a defendant was properly joined and remand the case to state court if there is a ‘possibility that a state court would find that the complaint states a cause of action against any of the [non-diverse] defendants.'” Id. (emphasis and brackets in Grancare) (quoting Hunter, 582 F.3d at 1046).

         In the face of this heavy burden, PNC argues that the Court need only determine whether settled Hawaii law provides the remedy of ejectment of an innocent third-party purchaser (“innocent purchaser” or “BFP”) in a quiet title action to determine whether Plaintiffs indeed state a cause of action against the Non-Diverse Citizens. ECF No. 26 at 13. PNC's position is that (1) the Non-Diverse Citizens are innocent purchasers, and (2) settled Hawaii law precludes ejectment claims against innocent purchasers as a wrongful foreclosure remedy. The Court disagrees with PNC's précis of this Court's task because it is at odds with the allegations in the Complaint. Plaintiffs squarely allege that the Non-Diverse Citizens are not innocent purchasers. ECF No. 1-2 at ¶¶ 88-92, 103-108, 122-27, 141-46. Thus, the Court must determine whether settled Hawaii law precludes Plaintiffs' claims against the Non-Diverse Citizens, as currently pled, not as PNC believes it will ultimately prove.

         In deciding whether a cause of action is stated, courts in the Ninth Circuit must “look only to a plaintiff's pleadings to determine removability[, ]” without recourse to the defendant's pleadings.” Ritchey v. Upjohn Drug Co., 139 F.3d 1313, 1318 (9th Cir. 1998) (citations omitted). Where fraudulent joinder is an issue, however, courts may “go somewhat further.” Id.; see also McCabe, 811 F.2d at 1339 (“The defendant seeking removal to the federal court is entitled to present the facts showing the joinder to be fraudulent.”). “[F]raudulent joinder claims may be resolved by ‘piercing the pleadings' and considering summary judgment-type evidence such as affidavits and deposition testimony.” Morris v. Princess ...


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