Banking and Finance Law Daily ReconTrust has nonjudicial foreclosure sale authority due to Texas law
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Thursday, November 3, 2016

ReconTrust has nonjudicial foreclosure sale authority due to Texas law

By Richard A. Roth, J.D.

ReconTrust can foreclose on Utah homes because the company carried out its fiduciary activities in Texas, not Utah, according to the U.S. Court of Appeals for the Tenth Circuit. ReconTrust is a Texas-based national bank subsidiary formed by Bank of America to foreclose on mortgages, and the National Bank Act section on fiduciary powers implies a bank can be located in only one state, the court said. The factors relevant to where a bank is located for fiduciary activity purposes made Texas the state that mattered (Dutcher v. Matheson, Nov. 2, 2016, Holmes, J.).

The suit was a class action by homeowners challenging ReconTrust’s nonjudicial foreclosures on their Utah homes. It was filed in state court in Utah and removed to federal district court by ReconTrust, B of A, and ReconTrust’s attorneys.

Federal law and regulation. National banks can be given the authority to engage in fiduciary activities under 12 U.S.C. §92a, which says that the Office of the Comptroller of the Currency can grant a bank’s request for fiduciary authority equal to that of its competitors "under the laws of the State in which the national bank is located." However, the NBA does not say how to decide in which state the bank is located.

The OCC’s regulation offers clarity. First, the regulation says a bank is located in the state in which it acts in a fiduciary capacity for the relationship at issue. It also says that the applicable state laws are the laws of the state where the bank acts in a fiduciary capacity (12 CFR §9.7).

The regulation then says a bank acts in a fiduciary capacity by accepting a fiduciary appointment, executing documents that create the fiduciary relationship, and making discretionary investment and distribution decisions. It says nothing about foreclosures.

(One result of the "fiduciary capacity" definitions is that a national bank can be located in one state for fiduciary power purposes, under 12 U.S.C. §92a, and in a different state for diversity of citizenship purposes, under 28 U.S.C. §1348.)

Ambiguous statute. The court began by noting that the NBA’s use of "located" is ambiguous. The law does not make clear where a bank is located when foreclosure-related activities occur in more than one state. Prior court opinions cited by the homeowners saying that a national bank is located where it conducts business were not helpful because the NBA did not specify which business acts were relevant.

Since the word "located" in the NBA was ambiguous, the OCC had the authority to adopt a reasonable interpretation. Since the homeowners had waived any argument that the OCC’s rule was unreasonable, all that remained was to apply that interpretation.

Regulatory definitions. Based on 12 CFR §9.7, ReconTrust was located in Texas, the court concluded. Specifically, it was noted that:

  • the substitution of trustee documents were executed in Texas;
  • ReconTrust used a Texas return address;
  • ReconTrust’s notices of the mortgage loan defaults were signed and notarized in Texas; and
  • the homeowners offered no facts showing that any actions deemed relevant by the regulation took place in any other state.

Concurring opinion. Judge Lucero conceded that the homeowners had waived any argument that the OCC regulation was unreasonable by failing to raise it properly on appeal. However, he left no doubt that he would have accepted the argument had it been raised.

Limiting the consideration of where a bank is located to the three factors identified by the OCC is unreasonable, he said. The NBA does not specify which activities were relevant, and omitting the liquidation of trust property through foreclosure was an unreasonable interpretation of the statute.

Judge Lucero added that while 12 U.S.C. §92a was intended to establish a level playing field for national banks and state banks, 12 CFR §9.7 actually gave national banks an advantage. For example, ReconTrust was able to fix its location in Texas, which allowed it to engage in activities prohibited for both state and federal banks located in Utah.

CAFA-based jurisdiction. Before considering how to interpret the NBA, the appellate court had to address whether federal court jurisdiction existed under the Class Action Fairness Act. More precisely, since it was clear the suit satisfied CAFA’s jurisdiction requirements—the described class had at least 100 members, there was more than $5 million in controversy, and minimal diversity of state citizenship existed—the court had to analyze the homeowners’ attempts to assert three exceptions.

None of the three exceptions to CAFA jurisdiction existed, the court decided:

  • The "local controversy" exception did not apply because another class action raising similar claims against ReconTrust had been filed less than three years earlier.
  • The "home state" exception did not apply because not all of the primary defendants were citizens of Utah, where the suit had been filed.
  • The discretionary exception did not apply because, again, not all of the primary defendants were Utah citizens.

The case is No. 14-4085.

Attorneys: Marcus R. Mumford (Mumford PC) for Richard Dutcher, Gwen Dutcher, Richard Ferguson, Michelle Ferguson, and Catherine Richards Ahlers. Amy Miller (McGuireWoods LLP) for Stuart T. Matheson, B.A.C. Home Loans Servicing, LP, Bank of America, N.A., Matheson, Mortenson, Olsen & Jeppson, P.C., and ReconTrust Company, N.A.

Companies: B.A.C. Home Loans Servicing, LP; Bank of America, N.A.; Matheson, Mortenson, Olsen & Jeppson, P.C.; ReconTrust Company, N.A.

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