Ninth Circuit Restricts Availability of Diversity Jurisdiction When It Comes to Loan Modification Reviews

Read about a recent court decision involving federal court jurisdiction and foreclosures.

The Ninth Circuit, which covers the western states, plus Hawaii, Guam and the Northern Mariana Islands, recently limited the availability of diversity jurisdiction in federal court for foreclosure cases involving loan modification reviews.

Foreclosures Usually Go Through State Court—But Not Always

Foreclosures typically go through the state court system. But sometimes a party to a foreclosure case will ask to remove the case to federal court. "Removing" the case means transferring the case from state to federal court.

Why would someone prefer federal court? A homeowner might prefer to have a foreclosure go through state court because the foreclosure generally takes longer than in federal court. A mortgage servicer, on the other hand, might want a case to go through federal court, which might be quicker than state court.

What's Diversity Jurisdiction?

In order for a federal court to hear a case, it must have jurisdiction. One way to get a case into federal court is by having what's called "diversity jurisdiction." Diversity jurisdiction is the power of the federal courts to decide civil disputes between citizens of different states, provided the amount the plaintiff seeks in damages exceeds an amount set by Congress—currently $75,000. (The amount at stake in a lawsuit is called the "amount in controversy.")

Example. Suppose a citizen of Colorado sues a citizen of Michigan in federal court and claims $100,000 in damages. In this case, diversity jurisdiction exits.

Corral v. Select Portfolio Servicing, Inc.

In Corral v. Select Portfolio Servicing, Inc., — F.3d —, 2017 WL 6601872 (9th Cir. Dec. 27, 2017), the borrower (Corral) filed a suit in California state court seeking to enjoin (prohibit) a foreclosure sale until the servicer reviewed her loan modification application, and also sought unidentified compensatory damages and costs. (Most foreclosures in California are nonjudicial, which means they take place out of court. To get the case before a judge, homeowners typically have to file a lawsuit.)

The servicer (Select Portfolio Servicing) removed the action to federal court arguing that the $75,000 amount in controversy requirement was satisfied because the original principal balance on the loan was $680,000 and borrower's total indebtedness was more than $800,000. The district court agreed and denied borrower's motion to send the case back to state court. On appeal, the Ninth Circuit reversed.

The Ninth Circuit's Reasoning

The Ninth Circuit's reasoning for sending the case back to state court was that, in cases where the plaintiff is seeking injunctive relief (like to stop a foreclosure sale), the amount in controversy is "measured by the value of the object of the litigation." Here, because the borrower was seeking only a temporary halt to the foreclosure pending the servicer's decision about her loan modification application, the object of the suit was not the ownership of the home—but rather the delay in the foreclosure sale until the servicer made a decision to grant or deny the modification request.

The Ninth Circuit ultimately held that the servicer (as the party seeking to remove the case to federal court) failed to meet the burden of establishing the amount in controversy because it did not show:

  • that the benefit to the borrower of the foreclosure delay would be more than $75,000 or
  • the cost to the servicer from the delay would be more than $75,000.

The Ninth Circuit distinguished this case from ones where a plaintiff seeks to stop a foreclosure indefinitely or permanently as part of an effort to quiet title to the property or rescind a loan agreement. In those kinds of cases, the object of the litigation is the property's ownership so the value of the property or the indebtedness would count towards the amount in controversy.

Effective date: December 27, 2017