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Split-Up Foreclosure Case Has 9th Circuit Puzzled

SAN FRANCISCO (CN) - As a Georgia man's wrongful foreclosure case came before the 9th Circuit in San Francisco, the appellate judges wrestled with where it belongs.

Judge William Fletcher agreed with attorney John Ates' description of the case as "A procedural morass."

Ates' client, Dustin Rollins, had filed the suit in Georgia's Fulton County Superior Court against Mortgage Electronic Registration Systems and MERSCORP in 2010.

The defendants had the case removed to a federal court in Georgia because the company faced similar claims in several states. A federal judicial panel then transferred the case to Arizona where multidistrict litigation against MERS was pending.

Rollins claims that MERS did not have the right to sell his home in a foreclosure sale because it did not own or record a note on Rollins' home prior to foreclosure. His lawsuit also says that MERS falsely identified itself as the secured creditor in its notices of foreclosure and trustee's sale. These deficiencies "violated Georgia's unique foreclosure and corporate fiduciary statutes and constituted wrongful foreclosure under Georgia law," according to his appeal to the 9th Circuit.

U.S. District Judge James Teilborg in Arizona decided to send some parts of Rollins' case back to Georgia and dismiss the rest.

He ruled that prior cases have established that it's OK to split a promissory note from the deed of trust as part of incorporating a note into a security in a process called securitization, as long as the deed holder is acting as an agent of the note holder.

"In this case, plaintiff does not dispute that he received notice of the sale and he does not dispute that he was in default on his loan," Teilborg wrote. "Rather, he argues that because MERS 'was not the secured creditor,' the notice was invalid."

Because MERS acted as an agent, however, Teilborg found that "whether the notice was provided by the secured creditor directly or its agent is of no consequence in this case."

He dismissed Rollins' claims for declaratory judgment and other relief and remanded back to the federal judicial panel Rollins' claim that MERS was prohibited from acting as a corporate fiduciary under Georgia law.

Teilborg refused to hear the Georgia law claims based on a condition set by U.S. Judicial Panel on Multidistrict Litigation, or JPML, that he "should not retain claims relating to loan origination or collection practices and whose facts would needlessly entangle the litigation in unrelated, fact-intensive issues."

The order also refused to grant Rollins leave to amend his complaint, saying that all his arguments had already been rejected in Arizona and Georgia.

Ates, the attorney for Rollins, noted at the appellate hearing last week that they filed our notice of appeal on Monday before the clerk could effectuate the judge's order."

"So the case was frozen and it was frozen for a reason," he said.

He said Teilborg's order created uncertainty over where Rollins should appeal the order's different rulings. Because the Northern District of Georgia is in the 11th Circuit and the District of Arizona is in the 9th Circuit, Ates said he wanted to "freeze" the case until the jurisdictional boundaries were clear.

Judge Jacqueline Nguyen, one of three on the circuit panel asked: "Did you go before Judge Teilborg and say, 'Look, we need clarification because we to clear this up for the purposes of an appeal'?"

Ates replied that Teilborg lost jurisdiction once the notice of appeal was filed, and that Teilborg had nevertheless concluded that the federal court in Georgia had jurisdiction.

"What we thought was a safer course was to freeze it," Ates said. "If you look at the Northern District of Georgia docket, it still says the case is terminated."

The 9th Circuit should view Tielborg's judgment as final and find that Tielborg abused his discretion in not allowing Rollins to amend his complaint, Ates said.

Judge A. Wallace Tashima said he "didn't appreciate" that Ates filed an appeal to the 9th Circuit without simultaneously asking Teilborg for a certification that his order constituted a partial, final judgment. Such a certification under Rule of Civil Procedure 54(b) Rul is usually needed before an appeal in a pending case can be heard by a federal appeals court.

"If I need to go that route, Judge Tashima, I certainly will," Ates said. "This is not clear and if we chose the wrong route I apologize. But this court, from our research, had not given explicit guidance in this area of the law."

Representing MERS, Bobby Brochin of Morgan, Lewis & Bockius argued that, of what he called the three basic claims in Rollins' suit, the Arizona federal court had properly dismissed the two related to the handling of the note and the notice of trustee's sale. He also seemed confident that, once Rollins' claim that MERS violated Georgia law returned to a Georgia federal court, it would also be dismissed.

Teilborg's order was an implicit Rule 54(b) partial final judgment that gave the 9th Circuit jurisdiction over only the first two claims related to how the note and notice were handled, Brochin said

Judge Fletcher, though, said, "I have trouble with the notion that we should find a 54(b) certification by the district judge when the district judge says nothing about it."

Brochin said Teilborg's earlier decisions in multiple wrongful foreclosure cases showed that he intended his order as an implicit 54(b) judgment.

Judge Nguyen chimed in with Fletcher. In the absence of any express findings by Teilborg on the issue, she said, "I'm not sure what the District Court intended." She said that if the 9th Circuit dismissed the appeal and the case went to a Georgia federal court, and was appealed there, it could end up in the 11th Circuit, which might view the 54(b) issue differently than the 9th Circuit did.

"That would be messy," she said.

Brochin laughed and agreed, "That would be messy. I don't know what we would do."

Judge Fletcher was left still wondering. He said that usually the JPML court sends a complete and entire case to the MDL court, which decides the common issues. Once those are decided, an individual party can decide to settle, or the MDL court can decide the challenges or send a case back to the JPML.

"That avoids the problem of this darn split that's so puzzling to us," he said.

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