Haynes v. EMC Mortg. Corp., Slip Copy, 2010 WL 1445650 (N.D. Cal. Apr. 12, 2010) (No. C 10-00372 WHA).

The District Court in California remanded the action to state court under the “local controversy” exception to CAFA removal holding that because the local defendant’s conduct was intertwined with the out-of-state defendant, and even though the local defendant was not explicitly named in the proposed class definition, it was clear that the local defendant was significantly implicated.

The plaintiff brought a class action in state court against EMC Mortgage Corporation, Bear Stearns, and Quality Loan Service Corporation for money damages and equitable relief.

In May 2006, the plaintiff purchased a residence with a mortgage loan from EquiFirst Corporation.  The deed of trust listed Placer Title Company as the trustee, and Mortgage Electronic Registration Systems, Inc. (MERS) as the beneficiary.  When the plaintiff stopped making payments on his mortgage loan, the defendant, Quality Loan, as an agent for MERS issued the plaintiff a notice of default and election to sell.  MERS then substituted Quality Loan as the trustee on the deed of trust, replacing Placer Title Company.  Later, Quality Loan recorded a notice of trustee’s sale of the property, and sold the plaintiff’s residence at a trustee’s sale.  The new trustee’s deed upon sale named Quality Loan as the trustee and EMC as the foreclosing beneficiary.

The plaintiff alleged a claim for unfair, unlawful, or fraudulent business act or practice pursuant to California Code of Business and Professions against all the defendants for failing to comply with Cal. Civ. Code § 2932.5 asserting that there was no public record of any transfer of property interest from EquiFirst to EMC, Bear Stearns; and that EMC and Bear Stearns directed Quality Loan to initiate a trustee’s sale, even though they had not complied with § 2932.5 and failed to record the assignment of the title.  The plaintiff also asserted a claim for collecting unlawful fees in connection with foreclosure proceeding against EMC and Bear Stearns, and for a breach of contract claim against Quality Loan.

The defendants removed the action to federal court pursuant to CAFA, and the plaintiff sought to remand contending that the amount in controversy did not exceed $5 million, and the local controversy exception to CAFA, 28 U.S.C. 1332(d)(4)(A), applied to this action.

First, as Cal. Civ. Code § 704.730 provides the homestead exemption ranging from $75,000 to $175,000, the Court found that the thousands of putative class members’ claim for homestead rights put the amount in controversy well above $5 million.

The Court, however, opined that “local controversy exception” to CAFA applied here. While holding so, the Court noted that greater than two-thirds of the members of the proposed classes were California citizens, and that the place of injury was California.

The Court next found thatQuality Loan—a California citizen was the significant defendant because the plaintiff sought significant relief from Quality Loan and that its conduct formed a significant basis for the claims—caused a major injury.

Because both, the statute and the Ninth Circuit had not discussed the meaning of “significant relief” and “significant basis” as used in CAFA, the Court looked to Kaufman v. Allstate N.J. Ins. Co., 561 F.3d 144, 156 (3d Cir. 2009) and Evans v. Walter Indus., Inc., 449 F.3d 1159 (11th Cir. 2006), where the Third and Eleventh Circuits have held that these provisions require a comparison between the local defendant’s significance and the significance of all the defendants. (Editors’ Note: See the CAFA Law Blog analysis of Kaufman posted on October 14, 2009 and the analysis of Evans posted on May 25, 2006 and our special report on Evans posted on May 26, 2006).

The Court noted that Quality Loan was one of three named defendants, and had four claims alleged against it: (1) two claims for unfair, unlawful, or fraudulent business act or practice pursuant to Cal. Code of Business and Professions for failing to comply with Cal. Civ. Code § 2932.5; (2) a breach of contract claim; and (3) a claim for violation of California Consumer Remedies Act.  The central claim against Quality Loan was that it allegedly improperly foreclosed upon the plaintiff’s residence, following directions from defendant EMC.  Thus, the Court found that Quality Loan’s conduct was so deeply intertwined with that of EMC that it could not be disregarded as a significant defendant, and thus claims against Quality Loan were not peripheral to this action. Therefore, even though Quality Loan was not explicitly named in the proposed class definition, it was clear that Quality Loan was significantly implicated.

Finally, the Court noted that a class action–Dalton, et al., v. Citimortgage, Inc., et al., No. 09-00534, challenging the validity of nonjudicial foreclosure against defendants EMC and Quality Loan was filed within the last three-year period.  Dalton specifically challenged the formation and the operation of MERS system, an electronic mortgage registration system that tracks beneficial ownership interests in mortgage loans.  The Court found that while some of the larger policy issues raised in Dalton were also raised in this case, the factual allegations were not sufficiently similar enough to determine that the case asserted the same or similar factual allegations.

Accordingly, the Court concluded that this was a classic issue of California state law that California state courts would be best suited to decide.