Linda Clark v. Lender Processing Services

NOT RECOMMENDED FOR PUBLICATION
File Name: 14a0276n.06

No. 13-3799

UNITED STATES COURTS OF APPEALS
FOR THE SIXTH CIRCUIT

LINDA CLARK; JOHN W. WHITEMAN; ) FILED
MICHAEL C. RYSH; DOROTHY L. RYSH, )
Apr 14, 2014
)
DEBORAH S. HUNT, Clerk
Plaintiffs-Appellants, )
)
and )
)
LAURA YEAGER; MICHAEL YEAGER )
)
Plaintiffs, )
)
ON APPEAL FROM THE
v. )
UNITED STATES DISTRICT
)
COURT FOR THE
LENDER PROCESSING SERVICES; LPS )
NORTHERN DISTRICT OF
DEFAULT SOLUTIONS; DOCX, LLC; LERNER, )
OHIO
SAMPSON & ROTHFUSS; MANLEY, DEAS )
KOCHALSKI, LLC, )
)
Defendants-Appellees, )
)
and )
)
REIMER, ARNOVITZ, CHERNEK & JEFFREY )
CO., )
)
Defendant. )

BEFORE: COLE and ROGERS, Circuit Judges; HOOD, District Judge.*

ROGERS, Circuit Judge. The plaintiffs are Ohio homeowners who were defendants in

foreclosure suits filed during the financial crisis. Their underlying challenge is to the

effectiveness of the series of assignments of mortgage documents, which plaintiffs say led to

*
The Honorable Joseph M. Hood, United States District Judge for the Eastern District of Kentucky, sitting by
designation.
No. 13-3799, Clark v. Lender Processing Servs.

violations of federal and state law. However, statements made by the defendants in this case that

they had a right to foreclose under Ohio law were not materially misleading so as to violate

federal fair debt collection law (at least as to the two appellants in this case who brought such

federal law claims), because the foreclosing parties did have standing to foreclose, despite any

irregularities in the assignments. The plaintiffs’ state law claims moreover cannot succeed

because the defendants—a vendor that provides services to mortgage servicers and lenders, its

subsidiaries, and two law firms—are not suppliers involved in consumer transactions for

purposes of the Ohio Consumer Sales Practices Act. For these reasons, the district court

properly granted summary judgment to the defendants.

The background, facts, and procedural history of this suit are well set out by the district

court as follows:

[T]he named Plaintiffs are individuals whose homes were foreclosed in
cases where it appears beyond dispute that the mortgage assignments, affidavits,
and transfers were fabricated by one or more of the loan processing Defendants,
and the financial institutions bringing the foreclosure actions were represented by
one of the law firm Defendants. Plaintiffs bring a putative class action claiming
that Defendants violated the FDCPA and OCSPA by filing state court foreclosure
lawsuits on behalf of trustees of securitized trusts. Plaintiffs’ theory of the case is
that the foreclosing trusts lacked standing to bring foreclosure actions against
Plaintiffs because (1) the transfer of their mortgages to non-party securitized
trusts did not comply with the alleged deadlines in the applicable Pooling and
Servicing Agreements (“PSAs”), and (2) Defendants conspired to create the
appearance of standing, after the trusts had lost standing, by using allonges to
notes, mortgage assignments, and other mortgage documents that were
defectively executed, thereby breaking the chain of title. Plaintiffs bring this
action on behalf of a proposed class consisting of:

All Ohio homeowners who were (a) defendants in judicial
foreclosure actions on first lien mortgages that were purportedly
held by securitization trusts, and that were knowingly initiated and
prosecuted by Defendants on behalf of parties that lacked legal
standing to do so, and (b) who were damaged by Defendants'
abusive debt collection practices, including: (i) preparing,
executing, and notarizing fraudulent court documents and
assignments of mortgages and other property records that were

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No. 13-3799, Clark v. Lender Processing Servs.

used to initiate and prosecute such foreclosures, and (ii) imposing
inflated, unfair, unreasonable and/or fabricated fees for “default
management services” (the “Class”).

[Compl. ¶ 1].

Plaintiffs allege that “[t]wo categories of defendants acted in concert and
conspired in furtherance of the fraudulent scheme to generate enormous profits
from default servicing fees by knowingly initiating foreclosure actions on behalf
of entities that lacked standing to bring such actions.” [Compl. ¶ 2]. The first
category of Defendants is the loan processing Defendants, [Lender Processing
Services]. Plaintiffs allege that the loan processing defendants are “vendors or
sub-servicers to the vast majority of national mortgage services to manage all
default servicing for those servicers.” (Id.) The second category of Defendants is
an alleged network of law firms, here [Manley, Deas Kochalski, LLC] and
[Lerner, Sampson & Rothfuss]. Plaintiffs allege that law firm Defendants
“specialize in prosecuting a high volume of foreclosure cases, and are commonly
known as ‘foreclosure mills.’” (Id.) Plaintiffs allege that the law firm Defendants
entered into a “Network Agreement” with [Lender Processing] which “requires
these law firms to pay quid pro quo consideration to [Lender Processing] for
referrals of foreclosure cases and other default related matters . . .” (Id.) Plaintiffs
further allege that law firm Defendants “were not only retained by defendant
[Lender Processing], they were also supervised and directed by [Lender
Processing], and knowingly used forged and fabricated documents created by or
at the direction of [Lender Processing] and/or its subsidiaries.” (Id.)

The [complaint] describes the national housing collapse, the mortgage
foreclosure crisis, and the role of the [Lender Processing] Defendants who
allegedly fabricated mortgage assignments, fraudulently endorsed affidavits,
backdated mortgage transfers and did whatever was necessary to support standing
for its clients (i.e., the financial institutions bringing foreclosure actions against
defaulting mortgagors). The [complaint] also describes the role of the law firm
Defendants who allegedly paid the [Lender Processing] Defendants for
foreclosure referrals and allegedly knew or should have known these standing-
supporting documents were fabricated and their clients lacked standing. The crux
of Plaintiffs’ allegations is as follows:

The Defendants have engaged in a widespread conspiracy
to deceive the Ohio courts and borrowers by engaging in unfair
and deceptive debt collection practices, including fabricating
thousands of mortgage assignments and affidavits. These
fraudulent documents purported to establish the required
intervening note endorsement and transfers of the mortgages
to the trusts, thereby giving the illusion of “standing”. If these
transfers had actually occurred on the dates the documents were
fabricated, they would have been void inasmuch as they were not

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No. 13-3799, Clark v. Lender Processing Servs.

made pursuant to the terms of the governing documents and the
Trustees were not permitted to accept late and out of time
assignments.

In furtherance of this deceptive scheme, from at least 2006
until the present, Defendants have knowingly and intentionally
prepared and filed or caused to be filed these fabricated mortgage
assignments and other mortgage documents with courts and county
recorder of deed's office across the country, including in Ohio, and
have produced them to borrowers across the nation, including in
Ohio.

From at least 2006 to the present, [Lender Processing] and
its network of law firms have used these fabricated note
indorsements, mortgage assignments and affidavits to conceal the
fact that the trusts, which purport to hold the notes and mortgages,
are missing critical documents, namely, properly endorsed notes
and valid mortgage assignments that were supposed to have been
delivered to the trusts within 90 days of the closing of the trust.

These note endorsements and mortgage assignments were
materially false and misrepresented that Defendants' clients had
standing to foreclose when they did not. Defendants knew or
should have known of the falsity of the representations in these
documents, yet Defendants used these fabricated documents to
foreclose on Ohio homeowners, with the intent to deceive
borrowers and the courts who justifiably believed that these
fabricated and forged documents were valid.

[Compl. ¶¶ 11–14] (emphasis in original, footnote omitted).

Plaintiffs allege that many of the Ohio homeowners who comprise the
Class were unaware that the documents were forged and that the foreclosing
parties lacked standing. Plaintiffs allege that, as a result, homeowners have lost
their homes in foreclosures initiated and prosecuted by Defendants. Further,
Plaintiffs allege that “thousands of Ohio homeowners have been wrongfully
required to defend frivolous foreclosure actions and have incurred substantial
legal fees and inflated and/or fabricated foreclosure-related fees charged by
Defendants when the plaintiff lacked the standing to institute the foreclosure
proceedings against them in the first instance.” [Compl. ¶¶ 15–16]. In sum,
Plaintiffs claim that the above-described “unfair and deceptive debt collection
practices violate the FDCPA and the OCSPA and have been perpetrated on an
institutionalized basis through the knowing participation and coordination of each
Defendant.” [Compl. ¶ 17].

Clark v. Lender Processing Servs., Inc., 949 F. Supp. 2d 763, 767–69 (N.D. Ohio 2013).

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No. 13-3799, Clark v. Lender Processing Servs.

The plaintiffs originally filed this lawsuit as a putative class action in Ohio state court.

Their complaint asserted a claim under the Ohio Consumer Sales Practices Act (OCSPA) and

other state law causes of action. The defendants removed to federal court under the Class Action

Fairness Act, 28 U.S.C. § 1332(d). The plaintiffs then amended their complaint to add a claim

under the federal Fair Debt Collection Practices Act (FDCPA). After the plaintiffs voluntarily

dismissed certain claims against some of the defendants, the Ryshes had claims under the

FDCPA, and all of the present plaintiff-appellants had claims under the OCSPA. The district

court granted the defendants’ motion to dismiss these claims based on several alternative

arguments. The district court first reasoned that the plaintiffs did not have standing to challenge

the transfer of the mortgages to the trusts. This holding was based on the rule that a person that

is not a party to an assignment may not challenge that transfer. By way of example, the final

transfer involving Clark’s mortgage was between JP Morgan and Bank of New York. Because

Clark had no involvement in that transaction, she lacked standing to challenge it. The district

court next held that Whiteman and the Ryshes’ claims were impermissible collateral attacks on

the state foreclosure cases, and that their claims were barred by res judicata because Whiteman

and the Ryshes had already challenged Deutsche Bank’s standing to foreclose in their state

foreclosure cases, and doing so again in the guise of a consumer protection claim was

impermissible. Next, the court concluded that the Ryshes had failed to state an FDCPA claim

because Lender Processing was not a “debt collector” because its business is too far removed

from the business of debt collection and because it did not make any materially misleading

statements. Finally, the court reasoned that the plaintiffs’ OCSPA claims failed because the

OSCPA excludes transactions between “financial institutions” and their customers and because

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the defendants were not “suppliers” of consumer goods because they do not offer services to

consumers. The plaintiffs appeal.

First, notwithstanding plaintiffs’ arguments on appeal, the district court had jurisdiction

over the plaintiffs’ state-law claims under the Class Action Fairness Act, 28 U.S.C. § 1332(d).

The plaintiffs argue that the district court only had federal-question jurisdiction over the FDCPA

claims and supplemental jurisdiction over the OCSPA claims. According to the plaintiffs, the

district court should have remanded the case back to state court after the district court dismissed

the plaintiffs’ FDCPA claim because “a federal court that has dismissed a plaintiff’s federal-law

claims should not ordinarily reach the plaintiff’s state-law claims. . . . Residual jurisdiction

should be exercised only in cases where the interests of judicial economy and the avoidance of

multiplicity of litigation outweigh our concern over needlessly deciding state law issues.” Moon

v. Harrison Piping Supply, 465 F.3d 719, 728 (6th Cir. 2006) (internal quotation marks and

citations omitted). But that argument fails because the district court had original jurisdiction

under the Class Action Fairness Act. That act provides that “[t]he district courts shall have

original jurisdiction of any civil action in which the matter in controversy exceeds the sum or

value of $5,000,000 . . . and is a class action in which [there is minimal diversity].” 28 U.S.C. §

1332(d)(2).

The plaintiffs do not dispute that this case met the requirements of § 1332(d)(1), but

rather argue that the Class Action Fairness Act could not have provided jurisdiction because the

“home state” and “local controversy” exceptions found in § 1332(d)(4) apply. Those exceptions

require a court to decline jurisdiction when “greater than two-thirds of the members of all

proposed plaintiff classes in the aggregate are citizens of the State in which the action was

originally filed” and certain other requirements are met or when “two-thirds or more of the

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members of all proposed plaintiff classes in the aggregate, and the primary defendants, are

citizens of the State in which the action was originally filed.” Id. § 1332(d)(4). However, the

local-controversy and home-state exceptions do not deprive a court of jurisdiction. See Graphic

Commc’ns Local 1B Health & Welfare Fund A v. CVS Caremark Corp., 636 F.3d 971, 973 (8th

Cir. 2011); Visendi v. Bank of Am., N.A., 733 F.3d 863, 869–70 (9th Cir. 2013). The statute

speaks only of a district court’s declining jurisdiction if the exceptions apply. This language

clearly indicates that the exceptions do not deprive the court of jurisdiction it otherwise possesses

because a court could not “decline” jurisdiction that it never had in the first place. While perhaps

the exceptions may have applied, the plaintiffs did not make that argument to the district court.

Because the exceptions are not jurisdictional and the plaintiffs did not alert the district court of

their potential applicability, this court will not consider whether they should have applied on

appeal. See Visendi, 733 F.3d at 869–70. Because the applicability of the home-state or local-

controversy did not deprive the district court of jurisdiction under the Class Action Fairness Act,

it had federal jurisdiction and did not need to rely on supplemental jurisdiction to consider the

plaintiffs’ OCSPA claims.

The Ryshes are the only plaintiffs still parties on appeal raising FDCPA claims, and their

claims are without merit. Because Deutsche Bank held the Ryshes’ note, the defendants did not

make materially misleading statements about the bank’s right to foreclose. At bottom, the

Ryshes’ consumer protection claims are premised on the argument that the defendants lied and

cheated to establish their bank-client’s standing to foreclose. The Ryshes argue that defendants

forged signatures on assignments of mortgages and lied about complying with the terms of the

pooling agreements. But if Deutsche Bank had standing to foreclose in spite of those alleged

misrepresentations, then the defendants’ statements were not materially misleading.

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To state a claim under the FDCPA, a plaintiff must show that a defendant violated one of

the substantive provisions of the FDCPA while engaging in debt collection activity. Glazer v.

Chase Home Fin. LLC, 704 F.3d 453, 459–60 (6th Cir. 2013). Section 1692e forbids “false,

deceptive, or misleading representation[s] or means in connection with the collection of any

debt.” Furthermore, this court has held that a statement must be more than just misleading—it

“must be materially false or misleading to violate Section 1692e.” Wallace v. Wash. Mut. Bank,

F.A., 683 F.3d 323, 326 (6th Cir. 2012). “The materiality standard . . . means that in addition to

being technically false, a statement would tend to mislead or confuse the reasonable

unsophisticated consumer.” Id. at 326–27.

Here the statements made by the defendants were not false (much less materially

misleading) because the complaint makes clear that Deutsche Bank had the right to foreclose

against the Ryshes. When a homeowner has to borrow money to purchase a home, that borrower

typically executes a promissory note and a mortgage. “The promissory note is a contract by

which the [borrower] promises to repay the loan to the [lender]. The security instrument [or

mortgage] gives that [lender] the right to foreclose on the property if the [borrower] defaults on

the loan obligation.” Zachary A. Kisber, Reevaluating MERS in the Wake of the Foreclosure

Crisis, 42 Real Es. L.J. 183, 186 (2013). Under Ohio law, possession of either the note or the

mortgage gives a party standing to foreclose. CitiMortgage, Inc. v. Patterson, 984 N.E.2d 392,

397–98 (Ohio Ct. App. 2012) (citing Fed. Home Loan Mortg. Co. v. Schwartzwald, 979 N.E.2d

1214, 1220 (Ohio 2012)). In other words, if Deutsche Bank owned or held the Ryshes’ note or

mortgage, and the Ryshes defaulted, then it was perfectly justified in filing a foreclosure suit.

Deutsche Bank appears to have been the holder of the Ryshes’ note because it was

endorsed in blank. “Under R.C. 1303.31(A), the ‘holder’ of a negotiable instrument is a

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‘[p]erson entitled to enforce’ the instrument. A ‘holder’ includes a person who is in possession

of an instrument payable to bearer. R.C. 1301.01(T)(1)(a). When an instrument is endorsed in

blank, the instrument becomes payable to bearer and may be negotiated by transfer of possession

alone until specially endorsed [made payable to a particular person].” Deutsche Bank Nat’l Trust

Co. v. Najar, No. 98502, 2013-Ohio-1657, 2013 WL 1791372 at *6 (Ohio Ct. App. April. 25,

2013) (internal quotations marks, citations, and footnotes omitted). In other words, the person in

physical possession of a note endorsed in blank may enforce it. Here there appears to be no

dispute that the Ryshes’ note was endorsed in blank and that Deutsche Bank had physical

possession of the note at the time it initiated foreclosure proceedings. Tellingly, the allegations

in the complaint focus on shenanigans that arose during the transfer of the Ryshes’ mortgage, but

only generally assert that the note was improperly transferred. See, e.g., Compl. ¶¶ 212–16,

217–22.

On these facts, the defendant did not make materially misleading statements. In similar

cases, courts in this circuit have held that an FDCPA complaint will survive a motion to dismiss

“where a plaintiff alleges that the plaintiff in an underlying debt collection says that it was the

owner of a debt, all the while knowing that [it] did not have the means of proving that debt.”

Turner v. Lerner, Sampson & Rothfuss, 776 F. Supp. 2d 498, 506 (N.D. Ohio 2011) (internal

quotation marks omitted). Conversely, an FDCPA claim should be dismissed if the plaintiff in

the underlying debt collection action could in fact prove that it owned the debt. Based on its

possession of the Ryshes’ note, Deutsche Bank appears to have been able to prove debt

ownership.

The Ryshes could not have been misled by anything the defendants said or did in this

case. In Wallace, this court held that an FDCPA claim could proceed when a misstatement could

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mislead or confuse a consumer. 683 F.3d at 327. The plaintiff in that case alleged that a

statement misrepresenting which party held her note “caused her confusion and delay in trying to

contact the proper party concerning payment of her loan and resolution of her problem.” Id. No

similar allegations appear in this complaint. Wallace went on to explain that whether a lender

has “standing to bring a foreclosure action” is not “dispositive of whether a statement was

materially misleading.” Id. at 327 n.2. But here, the Ryshes contend that defendants’ statements

were misleading solely because those statements implied that Deutsche Bank had standing when

it did not. The complaint says:

Defendants’ communications were deceptive . . . as they misrepresented who held
and/or owned plaintiffs’ notes and mortgages at the time the underlying
foreclosure actions were filed, thus concealing the fact that their clients lacked the
legal capacity to bring the suits. Indeed, the plaintiffs in the underlying
foreclosure actions (i.e., Defendants’ clients) stated that they were the owners of,
holders of, and/or entitled to enforce the Plaintiffs’ debts, all the while knowing
that they did not have the means of proving their ownership, holder status, or
entitlement to enforce the debt. In fact, Defendants knowingly created and
executed false and misleading assignments of the notes to their clients in
furtherance of this scheme.

Compl. ¶ 270. As the Wallace court explained, a lender could have standing to foreclose but

nevertheless make a misleading statement in the course of trying to collect a debt. But here,

where the only misleading aspect of a communication or statement is that the statement implies

that the lender has standing to foreclose when it did not, whether or not the lender does in fact

have the right to foreclose appears to settle the matter.

For similar reasons, the plaintiffs claim under § 1692f claim fails. Section 1692f is a

catchall provision that forbids a debt collector from using “unfair or unconscionable means to

collect or attempt to collect any debt.” Other courts have held that “false but non-material

representations are not likely to mislead the least sophisticated consumer and therefore are not

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actionable under §§ 1692e or 1692f.” Donohue v. Quick Collect, Inc., 592 F.3d 1027, 1033 (9th

Cir. 2010). In other words, if a 1692f claim is premised on a false or misleading representation,

the misrepresentation must be material. See Lembach v. Bierman, 528 F. App’x 297, 303–04

(4th Cir. 2013). As discussed above, there appears to be no dispute that Deutsche Bank was in

possession of the Ryshes’ note and that note was endorsed in blank, and so any misrepresentation

was not material. Therefore, summary judgment was proper with respect to the Ryshes’ FDCPA

claims.

The plaintiffs moreover cannot bring an OCSPA claim because the defendants were not

suppliers engaged in consumer transactions. The OCSPA forbids a “supplier” from committing

an “unfair or deceptive act or practice in connection with a consumer transaction.” O.R.C. §

1345.02. Supplier is in turn defined as “a seller, lessor, assignor, franchisor, or other person

engaged in the business of effecting or soliciting consumer transactions.” Id. § 1345.01(C).

Consumer transaction “means a sale, lease, assignment, award by chance, or other transfer of an

item of goods, a service, a franchise, or an intangible, to an individual for purposes that are

primarily personal, family, or household.” Id. § 1345.01(A).

In Anderson v. Barclay’s Capital Real Estate, Inc., 989 N.E.2d 997 (Ohio 2013), the

Ohio Supreme Court held that a mortgage servicer is not a supplier involved in consumer

transactions under the OCSPA. The court explained that mortgage servicers do not engage in

consumer transactions because they contract with financial institutions to provide those

institutions services rather than to “transfer a service to the borrower.” Id. at 1001. “[A]

mortgage servicer neither sells nor gives the borrower the services it provides to the owner of the

mortgage and note.” Id. Furthermore, mortgage servicers are not suppliers because they do not

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“cause a consumer transaction to happen or . . . seek to enter into a consumer transaction.” Id. at

1003.

Although Anderson does not directly control this case because Lender Processing and its

subsidiaries are not mortgage servicers, the reasoning in Anderson applies by analogy to

companies like Lender Processing. When a homeowner defaults on a mortgage, a mortgage

servicer or lender can hire Lender Processing to manage the foreclosure process. The Anderson

court’s opinion limited its discussion to traditional mortgage servicers (i.e., businesses that

collect monthly mortgage payments on behalf of lenders), and so the opinion does not directly

address companies like Lender Processing (i.e., vendors that help lenders manage the foreclosure

process). But Anderson teaches that the plain language of the OSCPA should be taken seriously:

companies not in the business of “effecting or soliciting consumer transactions” are not suppliers

engaging in consumer transactions. Like a traditional mortgage servicer, Lender Processing falls

into a category of businesses that do not seek to provide consumers with services. Rather, both

mortgage servicers and companies like Lender Processing offer their services to lenders. As is

the case when a mortgage servicer collects a monthly mortgage payment on behalf of a financial

institution, Lender Processing helps initiate and manage foreclosure proceedings on behalf of a

financial institution. In fact, mortgage servicers offer at least some marginal service to

consumers because they collect money from those consumers on behalf of a lender. Consumers

would only interact with Lender Processing because its lender-client had hired the company to

help initiate and manage a foreclosure. Managing a process that ends with a consumer losing her

home could scarcely be considered a “service” for the consumer.

The plaintiffs do cite pre-Anderson decisions that indicated that companies involved in

the collection of consumer debts are suppliers. See, e.g., Celebrezze v. United Research, Inc.,

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482 N.E.2d 1260 (Ohio Ct. App. 1984). Traditional mortgage servicing, which involves the

collection of monthly payments, is also a type of debt collection. Nevertheless, the debt-

collection cases cited by the plaintiffs did not play a role in the Anderson court’s reasoning, and a

dissent criticized the court for failing to consider those cases. See Anderson, 989 N.E.2d at 1005

(O’Neill, J, dissenting). If a mortgage servicer’s involvement in debt collection was not relevant

in Anderson, there is no reason to believe that the Ohio Supreme Court would treat a company

like Lender Processing any differently. This reasoning applies not just to Lender Processing, but

also to its subsidiaries and the defendant law firms. In Glazer v. Chase Home Fin. L.L.C., No.

99875, 2013-Ohio-5589, 2013 WL 7869273, at *11 (Ohio Ct. App. Dec. 19, 2013), an Ohio

court held that an OCSPA claim fails against a defendant law firm when that law firm acted

solely as the agent of a company not involved in a consumer transaction. Because the defendants

were not suppliers engaged in consumer transactions, plaintiffs’ OCSPA claim fails.

We need not reach the other bases relied upon by the district court for denying relief. For

the foregoing reasons, we AFFIRM the judgment of the district court.

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