The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court’s ruling to stay federal court proceedings brought by a litigious borrower, noting their practical identity to a pending state contested foreclosure action involving the same parties.
The Seventh Circuit also concluded that it had appellate jurisdiction because the stay order was entered with the expectation that the state litigation would “largely” resolve the federal litigation.
A copy of the opinion in Loughran v. Wells Fargo Bank, N.A. is available at: Link to Opinion.
The borrowers defaulted on their home mortgage, and in the ensuing foreclosure litigation, the borrowers pursued procedural delay tactics, and remained in possession of their home despite not having made a mortgage payment in nine years.
With their state court foreclosure litigation more than seven years old, the borrowers accused the mortgagee and its counsel of committing fraud during those proceedings. Months later, the borrowers went to federal court, with a complaint that copied and pasted large swaths of text from their state court filings.
The mortgagee responded to the federal complaint by moving to stay the action pending the outcome of the state foreclosure proceedings. It also moved to dismiss the complaint under Rule 12(b)(6), arguing that the borrowers failed to state a claim for fraud because the complaint and relevant documents showed that, under Illinois law, the mortgagee was the legal holder of the note by virtue of the transfer of the note to a common law trust and the mortgagee’s physical possession of the note as a trust custodian.
The trial court granted the mortgagee’s motion to stay. Given this decision, it did not rule on the Rule 12(b)(6) motion. The borrowers timely appealed.
The Seventh Circuit noted that, under Idlewild Bon Voyage Liquor Corp. v. Epstein, 370 U.S. 713 (1962), and Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), appellate jurisdiction over stay orders is not limited to situations in which the state court would finally decide the federal court claims with preclusive effect. Rather, jurisdiction under 28 U.S.C. § 1291 extends to cases in which there remains some chance that the case would return to federal court to dispose of residual issues.
The key question for jurisdictional purposes is whether the “object of the stay order is to require all or an essential part of the federal suit to be litigated in a state forum.” Moses Cone, 460 U.S. at 10-11 n.11.
Because the stay order in the current case was entered with the expectation that the state litigation would “largely” resolve the federal litigation, the Seventh Circuit held that the test was met.
The Seventh Circuit then recognized that, in a limited number of circumstances, federal courts may decline to hear cases that otherwise fall within their jurisdiction. The Court acknowledged one such situation in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), where the Supreme Court of the United States held that it may dismiss a federal suit in favor of a concurrent state court action if “exceptional circumstances” merit abstention, and deference to the state court action would promote “wise judicial administration.” Id. at 813, 818.
The Seventh Circuit then stated its intent to use a two-step inquiry in its assessment of whether Colorado River abstention was appropriate for this matter.
First, the Court asked “whether the concurrent state and federal actions [were] … parallel.” DePuy Synthes Sales, Inc. v. OrthoLA, Inc., 953 F.3d 469, 477 (7th Cir. 2020) (quoting LaDuke v. Burlington N. R.R. Co., 879 F.2d 1556, 1559 (7th Cir. 1989)). If so, then the Court would consider “whether the necessary exceptional circumstances exist to support a stay or dismissal.” DePuy, 953 F.3d at 477.
Courts have developed a checklist of 10 exceptional circumstances that support stay or dismissal:
- Whether the case concerns rights in property, and if so, whether the state has assumed jurisdiction over that property;
- The inconvenience of the federal forum;
- The desirability of consolidating litigation in one place: that is, the value in avoiding “piecemeal” litigation;
- The order in which jurisdiction was obtained in the concurrent fora;
- The source of governing law: federal or state;
- The adequacy of the state court action to protect the federal plaintiffs’ rights;
- The relative progress of the state and federal proceedings;
- The presence or absence of concurrent jurisdiction;
- The availability of removal; and
- Whether the federal action is vexatious or contrived.
DePuy, 953 F.3d at 477; see also Lumen Constr. Corp. v. Brant Const. Co., 780 F.2d 691, 694b 95 (7th Cir. 1985).
Turning to the first step of the inquiry, the Seventh Circuit agreed with the trial court that the borrower’s federal and state foreclosure actions were parallel. It is not necessary for concurrent suits to be “formally symmetrical.” Freed v. J.P. Morgan Chase Bank, N.A., 756 F.3d 1013, 1019 (7th Cir. 2017). It is enough if the state and federal suits involve “substantially the same parties … contemporaneously litigating substantially the same issues.” Huon v. Johnson & Bell, Ltd., 657 F.3d 641, 646 (7th Cir. 2011).
At the heart, the “critical question” is whether there is a “substantial likelihood that the state litigation will dispose of all claims presented in the federal case.” Id.
Because the state and federal actions were deemed parallel, the Seventh Circuit next considered whether the trial court abused its discretion in reaching its decision to abstain. DePuy, 953 F.3d at 480. In summary, the Court held that trial courts have discretion to stay proceedings in federal suits that substantially duplicate litigation that was well underway in state court when the federal case was filed.
Regarding the 10 exceptional circumstances to support a stay or dismissal, the Seventh Circuit held that:
- The first inquiry is whether the state court has assumed jurisdiction over the property at issue. It is relevant only if there is property at issue in both the federal and the state proceedings, but that was not the case here. While the state foreclosure action concerned property rights, the borrower’s federal suit concerned fraud and misconduct.
- The convenience (or lack thereof) of the federal forum did not support abstention here. The state and federal courts here were in close geographical proximity to one another and equally convenient.
- The interest in avoiding piecemeal litigation supported the stay. As the trial court noted, the state action would likely “dispose of a majority of the factual and legal issues presented in this case” and thus a stay would save judicial resources.
- The order in which the two courts obtained jurisdiction strongly favored the stay. The state foreclosure action began in 2011 and the federal action did not begin until May 2019.
- The source of the governing law neither favored nor disfavored abstention, because the federal action involved both federal and state law claims.
- The federal rights of the borrowers would be adequately protected because the trial court stayed rather than dismissed the federal action.
- The relative progress of the two proceedings also supported the stay because, at the time of the trial court’s order, the state court proceedings were well advanced, while the federal action had not progressed beyond the motion to dismiss stage.
- The presence or absence of concurrent jurisdiction did not push the needle either way.
- The borrowers, as Illinois citizens being sued in Illinois, could not have removed the foreclosure action to federal court. See 28 U.S.C. § 1441(b)(2). Thus, the unavailability of removal favored a stay because the purpose of this factor is to prevent litigants from circumventing the removal statute. See Freed, 756 F.3d at 1023.
- The trial court was entitled to infer from the borrower’s litigation strategy to date that the federal suit was another in a long line of delay tactics meant to buy time before foreclosure.
In sum, the Seventh Circuit held that the trial court did not abuse its discretion in staying the proceedings before it, in deference to the ongoing state court litigation.
The Court concluded that, at its core, the borrower’s federal suit accused the parties involved in their foreclosure action of engaging in misconduct during state court proceedings and that the borrowers were asking the federal judiciary to monitor and discipline how parties conduct themselves in state court. The Court held that this is a task that extends beyond its role. See Harold v. Steel, 773 F.3d 884, 885b 87 (7th Cir. 2014).
Accordingly, the Seventh Circuit affirmed the decision of the trial court to stay the federal court proceedings.