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6th Cir. Holds No Federal Jurisdiction for Claim Under Garn-St. Germain Act

In a 2-1 decision, the U.S. Court of Appeals for the Sixth Circuit recently held that, because a complaint’s sole federal claim under the Garn-St. Germain Depository Institutions Act of 1982 did not provide a private cause of action, and because the state law claims did not implicate significant federal issues, the trial court lacked jurisdiction.

Accordingly, the Sixth Circuit vacated the trial court’s judgment with instructions to remand the case to state court.

A copy of the opinion in Estate of Cornell v. Bayview Loan Servicing, LLC is available at:  Link to Opinion.

The borrower died with an outstanding balance on his mortgage loan.  Although he was current on his mortgage loan at the time of his death, in the first five months following his death the loan went unpaid.

As a result, the defendant mortgagee foreclosed on the mortgage and purchased the home by sheriff’s deed at a public auction.  The mortgagee later sold the home to a third-party purchaser.

The borrower’s estate subsequently filed a complaint in state court against the mortgagee asserting claims for lack of standing to foreclose under the Garn-St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1701j-3, and Mich. Comp. Laws § 445.1626.

The mortgagee timely removed on the basis of federal question jurisdiction, citing the Garn-St. Germain Act.  The estate did not object to removal or seek remand, but instead filed an amended complaint adding a quiet title claim against the purchaser.

The mortgagee and purchaser (collectively, “defendants”) then moved for judgment on the pleadings in part based on the argument that the Garn-St. Germain Act does not authorize a private right of action.

The trial court agreed, ruling that the Garn-St. Germain Act does not authorize a private right of action and that the Garn-St. Germain Act did not apply to the estate’s claims.  The trial court therefore granted the defendants’ motion on all counts and entered judgment in their favor.

The estate timely appealed.

On appeal, the Sixth Circuit first noted that “[a]lthough no one has specifically addressed subject matter jurisdiction to this point, we have an independent obligation to consider it and may do so sua sponte.”

The Court observed that “the complaint reference[d] a federal statute, the Garn-St. Germain Act, . . . which is the sole basis for federal question jurisdiction removal from state court.”

As you may recall, the Garn-St. Germain Act prohibits states from banning due-on-sale clauses, providing in principal part that “[n]otwithstanding any provision of the constitution or laws (including judicial decisions) of any State to the contrary, a lender may, subject to subsection (c) of this section, enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.”  12 U.S.C. § 1701j-3(b)(1).

Thus, a “due-on-sale clause is presumptively valid unless it qualifies as one of nine exceptions listed in § 1701j-3(d),” and states can therefore only regulate nine types of due-on-sale clauses.  In response to the Garn-St. Germain Act, Michigan created its own cause of action for borrowers harmed by one of those nine banned due-on-sale clauses.  See Mich. Comp. Laws § 445.1626.

To determine whether it had subject matter jurisdiction, the Sixth Circuit explained that it “must determine whether a private cause of action ‘arises under’ the statute sufficient to confer federal subject matter jurisdiction.”

Moreover, “[t]he ‘arising under’ gateway into federal court . . . has two distinct paths: 1) ‘litigants whose causes of action are created by federal law,’ and 2) ‘state-law claims that implicate significant federal issues.’”

The Sixth Circuit held that “[b]ecause the Garn-St. Germain Act does not meet this first test, we join those courts, including this one, that have concluded 12 U.S.C. § 1701j-3 does not establish subject matter jurisdiction based on a federal cause of action.”

Further, “subject matter jurisdiction is also not established under the second test.”

In reaching its conclusion, the Court first examined whether the Garn-St. Germain Act created a private cause of action.  To make that determination, the court “begin[s] with the text of the statute,” which may provide for an express or implied private cause of action.

The Sixth Circuit concluded that “[t]he Garn-St. Germain Act does not create an express cause of action because it does not state, ‘in so many words, that the law permits a claimant to bring a claim in federal court.’”

Moreover, the Garn-St. Germain Act does not create an implied cause of action.  To do so, “the statute must specify the right and identify the beneficiary.”

However, the Garn-St. Germain Act does not identify specific beneficiaries.  “Although mortgagors may benefit, because § 1701j-3 ‘focus[es] on the person[s] regulated rather than the individuals protected,’ . . . and does not unambiguously specify a beneficiary, no right of action can be implied.”

The Sixth Circuit next examined whether the state law implicated a “substantial question of federal law” that would open the door to federal court.

To determine whether a “substantial question of federal law” is implicated, the court asks whether: (1) “a state-law claim necessarily raise[s] a stated federal issue,” (2) that is “actually disputed and substantial,” (3) “which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.”

In analyzing these factors, the Sixth Circuit determined that although Mich. Comp. Laws §§ 445.1626 and 445.1628 reference the Garn-St. Germain Act, “the question they raise is not sufficiently substantial to justify federal question jurisdiction.”

Thus, “because the federal statute does not create a cause of action, and the federal issue nested inside [the estate’s] state law cause of action is not substantial, the [trial] court lacked subject matter jurisdiction.”

Accordingly, the Sixth Circuit vacated the trial court’s judgment and instructed the district court to remand the matter to state court.

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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