Herbert McFadden v. Federal National Mortgage Ass'n

UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 12-1125

HERBERT A. MCFADDEN; ROSETTA E. MCFADDEN,

Plaintiffs - Appellants,

v.

FEDERAL NATIONAL MORTGAGE ASSOCIATION; FLAGSTAR BANK, FSB;
SAMUEL I. WHITE, P.C.,

Defendants - Appellees.

Appeal from the United States District Court for the Western
District of Virginia, at Roanoke. James C. Turk, Senior
District Judge. (7:11-cv-00335-JCT)

Argued: January 30, 2013 Decided: May 20, 2013

Before WILKINSON, KEENAN, and WYNN, Circuit Judges.

Affirmed by unpublished opinion. Judge Keenan wrote the
majority opinion, in which Judge Wilkinson joined. Judge Wynn
wrote a dissenting opinion.

ARGUED: Thomas Dean Domonoske, Harrisonburg, Virginia, for
Appellants. Joseph Samuel Dowdy, NELSON MULLINS RILEY &
SCARBOROUGH, LLP, Raleigh, North Carolina; Ronald James Guillot,
Jr., SAMUEL I. WHITE, PC, Virginia Beach, Virginia, for
Appellees. ON BRIEF: George E. Kostel, NELSON MULLINS RILEY &
SCARBOROUGH, LLP, Washington, D.C., for Appellees Federal
National Mortgage Association and Flagstar Bank, FSB.
Unpublished opinions are not binding precedent in this circuit.

2
BARBARA MILANO KEENAN, Circuit Judge:

Herbert A. McFadden and Rosetta E. McFadden (the McFaddens)

filed a complaint in a Virginia state court against Flagstar

Bank, F.S.B. (Flagstar), Federal National Mortgage Association

(Fannie Mae), and Samuel I. White, P.C. (White, P.C.)

(collectively, the defendants), asserting various claims

relating to the foreclosure and sale of the McFaddens’ home.

After the defendants removed the action to the federal district

court, the McFaddens filed a motion to remand the case to the

state court on the ground that the district court lacked subject

matter jurisdiction. The district court summarily denied the

motion to remand. After a hearing, the court granted the

defendants’ motions to dismiss. Among other things, the court

held that the McFaddens failed to state a claim under Federal

Rule of Civil Procedure 12(b)(6). The McFaddens filed a timely

appeal to this Court.

Upon our review, we hold that the district court did not

err in denying the McFaddens’ motion to remand, because the

court had diversity jurisdiction over the McFaddens’ claims

pursuant to 28 U.S.C. § 1332. We further hold that the district

court did not err in dismissing under Rule 12(b)(6) their claim

to quiet title and their equitable claim to set aside the

foreclosure sale, because those claims lacked a sufficient

factual and legal basis.

3
 I.

The McFaddens alleged in their complaint the following

facts, which we accept as true for purposes of this appeal. 1 In

July 2007, the McFaddens obtained a loan from Flagstar for

$116,500, which was secured by a deed of trust on the McFaddens’

home in Pulaski County, Virginia (the property). The terms of

the loan were set forth in a note, in which the McFaddens agreed

to make monthly payments of about $900 for 20 years.

The terms of the note established that Flagstar could

freely transfer the note to a third party without notice to the

McFaddens. The deed of trust similarly provided for the free

transfer of the note and stated that the agreements in the deed

of trust “shall bind . . . and benefit the successors and

assigns” of the lender. The deed of trust named Flagstar as the

lender, and named Mortgage Electronic Registration Systems, Inc.

(MERS) as the beneficiary and “nominee for Lender and Lender’s

successors and assigns.”

At some point before August 2009, Flagstar transferred the

note to Fannie Mae, but retained the obligation to receive the

loan payments and continued to function as the “servicer” on the

loan. After the McFaddens began having trouble making loan

1
We employ this standard because the case was decided on a
motion to dismiss under Rule 12(b)(6). Flood v. New Hanover
Cnty., 125 F.3d 249, 251 (4th Cir. 1997).

4
payments, Flagstar sent them a letter describing the Home

Affordable Modification Program (HAMP), a federal program

designed to help certain homeowners who are financially unable

to meet their current mortgage obligations. See U.S. Dep’t of

the Treasury, Home Affordable Modification Program Guidelines

(Mar. 4, 2009) 2; see also Loan Modification Group, Inc. v. Reed,

694 F.3d 145, 147 (1st Cir. 2012) (describing HAMP). The letter

stated that if the McFaddens qualified under HAMP and complied

with the terms of a “trial period plan,” their loan would be

modified, permitting them to avoid foreclosure.

In response to this letter, the McFaddens submitted

documentation to Flagstar seeking to qualify for a loan

modification, and the application process continued over a

period of many months. According to Flagstar, the process was

delayed due to the McFaddens’ failure to submit all the required

documents. The McFaddens alleged, however, that Flagstar lost

certain documents that they had submitted, and required them to

provide various duplicate items on several occasions. Before

receiving a final decision on their loan modification

application, the McFaddens were notified that because they

2
Available at http://www.treasury.gov/press-center/press-
releases/documents/modification_program_guidelines.pdf.

5
defaulted on the loan, their property would be sold at auction

on March 10, 2011 (the foreclosure sale).

The notice of foreclosure was signed by White, P.C., which

was listed as substitute trustee. Attached to that notice was a

document executed by Flagstar, stating that it was “the present

holder or the authorized agent of the holder of the note secured

by the deed of trust,” and that, as such entity, Flagstar had

appointed White, P.C. as substitute trustee.

Upon receiving the notice of foreclosure, the McFaddens

contacted Flagstar, and a Flagstar representative allegedly

informed them orally that “their loan modification was in

process, and that no foreclosure would occur.” However, the

foreclosure sale proceeded in accordance with the terms

contained in the notice. Flagstar was the highest bidder at the

sale, and purchased the property for $123,009.

Flagstar assigned its rights in the property to Fannie Mae,

after which White, P.C. executed and delivered a deed of trust

transferring the property to Fannie Mae (the foreclosure deed).

About one week after the foreclosure sale, the McFaddens

received written notice from Flagstar that their loan

modification application had been denied.

Fannie Mae filed an unlawful detainer action in Virginia

state court against the McFaddens, seeking to evict them and to

take possession of the property. In response, the McFaddens

6
filed the present action in Virginia state court against the

defendants asserting six claims, including the quiet title claim

and a claim for equitable relief to set aside the foreclosure

sale. The McFaddens also asserted violations of the Virginia

Consumer Protection Act (VCPA) against White, P.C. 3 The

defendants removed the case to the federal district court, on

the basis that the court had federal question jurisdiction under

28 U.S.C. § 1331. According to the defendants, the McFaddens’

claims were governed by the Home Owners Loan Act (HOLA), 12

U.S.C. §§ 1461-1470.

The McFaddens filed a motion to remand, contending that the

district court lacked subject matter jurisdiction because the

claims presented only questions of state law. In opposition to

the motion to remand, Flagstar and Fannie Mae argued that in

addition to federal question jurisdiction, the district court

had diversity jurisdiction over the action in accordance with 28

U.S.C. § 1332. Flagstar and Fannie Mae contended that even

though both the McFaddens and one defendant, White, P.C., were

citizens of Virginia, there was complete diversity of the

parties because the McFaddens lacked any possible cause of

action against White, P.C. and, therefore, under the doctrine of

3
The McFaddens also asserted claims of negligence against
Flagstar and fraudulent conduct against Flagstar and Fannie Mae.

7
fraudulent joinder, White, P.C.’s citizenship should not be

considered.

The district court summarily denied the McFaddens’ motion

to remand, and did not state on which basis the court was

exercising jurisdiction. The court proceeded to consider the

defendants’ motions to dismiss the case. After a hearing, the

district court granted the motions to dismiss, concluding that

HOLA preempted the McFaddens’ claims and, alternatively, that

the McFaddens’ complaint failed to state a claim under Rule

12(b)(6). The McFaddens timely filed the present appeal.

II.

A.

The McFaddens contend that the district court lacked

subject matter jurisdiction over their state law claims. We

review de novo questions of subject matter jurisdiction,

including questions related to the propriety of removal.

Moffitt v. Residential Funding Co., LLC, 604 F.3d 156, 159 (4th

Cir. 2010). Because of concerns involving principles of

federalism, this Court strictly construes a district court’s

jurisdiction when considering an issue of removal. Mulcahey v.

Columbia Organic Chems. Co., Inc., 29 F.3d 148, 151 (4th Cir.

1994).

8
 Under 28 U.S.C. § 1441, “any civil action brought in a

State court of which the district courts of the United States

have original jurisdiction, may be removed by the defendant” to

the appropriate district court. 28 U.S.C. § 1441(a). The

defendants argue that the district court had both federal

question jurisdiction and diversity jurisdiction over the

McFaddens’ claims.

We first consider whether the district court had

jurisdiction over the removed action on the basis of diversity

of citizenship of the parties. To invoke the district court’s

diversity jurisdiction, the parties must be completely diverse,

meaning that none of the plaintiffs shares citizenship with any

of the defendants, and the amount in controversy must exceed the

jurisdictional threshold. 28 U.S.C. § 1332; Mayes v. Rapoport,

198 F.3d 457, 461 (4th Cir. 1999); Owens-Illinois, Inc. v.

Meade, 186 F.3d 435, 440 (4th Cir. 1999). In the present case,

the parties do not dispute that the required amount in

controversy is satisfied. Instead, they focus their arguments

on the question whether the parties are completely diverse,

given the fact that the McFaddens and White, P.C. are both

citizens of Virginia.

The McFaddens assert that because White, P.C. is a

defendant in their quiet title, equitable, and VCPA claims, the

parties to the lawsuit do not meet the requirement of complete

9
diversity. In response, the defendants contend that White, P.C.

was a fraudulently joined party, because the McFaddens lacked

any possible cause of action against White, P.C. Therefore, the

defendants submit that the citizenship of White, P.C. was not a

barrier to diversity jurisdiction in this case. See Hartley v.

CSX Transp. Inc., 187 F.3d 422, 424 (4th Cir. 1999) (explaining

that when a party is fraudulently joined, courts disregard that

party’s citizenship for jurisdictional purposes). We agree with

the defendants’ argument that the parties were completely

diverse.

The doctrine of fraudulent joinder permits a federal court

to “disregard, for jurisdictional purposes,” the citizenship of

non-diverse defendants. Mayes, 198 F.3d at 461. A defendant

alleging fraudulent joinder must show either that: (1) “there is

no possibility that the plaintiff would be able to establish a

cause of action” against the non-diverse party, or (2) there has

been “outright fraud in the plaintiff’s pleading of

jurisdictional facts.” Hartley, 187 F.3d at 424 (internal

quotations, emphasis, and citation omitted).

In the present case, the defendants maintain that the

citizenship of White, P.C. should be disregarded for

jurisdictional purposes because the McFaddens lacked any

possible cause of action against White, P.C., the non-diverse

party. Thus, as applied here, use of the term “fraudulent

10
joinder” effectively is a misnomer, because application of the

doctrine under the present facts “does not reflect on the

integrity” of the plaintiff, AIDS Counseling & Testing Ctrs. v.

Grp. W Television, Inc., 903 F.2d 1000, 1003 (4th Cir. 1990),

but merely addresses the adequacy of the plaintiffs’ pleadings.

As a preliminary matter, we consider the McFaddens’

contention that we should refrain from considering whether

White, P.C. was a fraudulently joined party, and instead should

permit the district court to consider that question in the first

instance. We decline this request because, as a court of

limited jurisdiction, we have an obligation to determine our own

jurisdiction, as well as the jurisdiction of the district court.

Stephens v. Cnty. of Albemarle, 524 F.3d 485, 490 (4th Cir.

2008) (citing Bender v. Williamsport Area Sch. Dist., 475 U.S.

534, 541 (1986)). Thus, we will consider directly the issue of

subject matter jurisdiction in this case. See Leimbach v.

Allen, 976 F.2d 912, 916 (4th Cir. 1992); see also In re

Kirkland, 600 F.3d 310, 314-15 (4th Cir. 2010) (“Subject matter

jurisdiction cannot be forfeited or waived” and can be raised

sua sponte by the court) (citation omitted).

Additionally, we observe that the argument regarding

fraudulent joinder was raised in the district court in the

pleading filed by Flagstar and Fannie Mae opposing remand to the

state court. The district court’s failure to address that

11
argument does not preclude this Court from considering it. Cf.

Eisenberg v. Wachovia Bank, N.A., 301 F.3d 220, 222 (4th Cir.

2002) (explaining that this Court can affirm a judgment on any

basis supported by the record). Moreover, on the present

record, further development of the facts would not aid our

analysis. Therefore, we proceed to consider the question

whether the fraudulent joinder doctrine is applicable, thereby

permitting the district court to exercise diversity jurisdiction

over the case. 4 In conducting this analysis, we resolve all

issues of law and fact in the plaintiff’s favor. Hartley, 187

F.3d at 424.

As noted above, in the McFaddens’ complaint, they asserted

claims against White, P.C. in three different counts, namely,

the quiet title claim, the claim for equitable relief to set

4
The dissenting opinion cites In re Blackwater Security
Consulting, LLC, 460 F.3d 576 (4th Cir. 2006) to support the
position that we should not consider the defendants’ diversity
jurisdiction and fraudulent joinder arguments. Post at 26.
However, the decision in Blackwater is inapposite. In contrast
to the present case, the district court in Blackwater remanded
the removed action to state court for want of jurisdiction. 460
F.3d at 582. On appeal, we held that 28 U.S.C. § 1447(d) barred
our review of the remand order. Id. at 595. In a footnote, we
explained our refusal to consider the appellant’s argument that
the court had jurisdiction because appellant was a federal
officer, stating that the argument had not been raised in the
district court. Id. at 590 n.8. Here, the issues of fraudulent
joinder and diversity jurisdiction were raised in the district
court, and the district court exercised its jurisdiction over
the removed action without articulating a basis for
jurisdiction.

12
aside the foreclosure sale, and the VCPA claim. 5 We address each

of these claims in turn.

An action to quiet title is “based on the premise that a

person with good title to certain real or personal property

should not be subjected to various future claims against that

title.” Maine v. Adams, 672 S.E.2d 862, 866 (Va. 2009). In

such an action, a plaintiff seeks to compel an “adverse claimant

to prove a competing ownership claim or forever be barred from

asserting it.” Id.

In their quiet title claim, the McFaddens asserted that the

foreclosure sale was unlawful, because the deed of trust and the

appointment of White, P.C. as substitute trustee were invalid.

By seeking to void the foreclosure sale, the McFaddens impliedly

alleged that neither the purchaser of the property at auction,

Flagstar, nor its assignee, Fannie Mae, held good title to the

property. Accordingly, in this claim, the McFaddens contended

that they remained the true owners of the property.

The McFaddens have not alleged, nor could they, that White,

P.C. had any basis for asserting a competing ownership claim to

the property. Under Virginia law, a trustee executing a

5
Our determination whether there is any possibility that
the McFaddens would be able to establish a right to relief under
these state law claims against White, P.C. is informed by
Virginia law. See generally Erie R.R. Co. v. Tompkins, 304 U.S.
64 (1938).

13
foreclosure takes possession of the property in order to sell

it. Va. Code § 55-59(7). As trustee, White, P.C. was divested

of any interest in the property after the foreclosure sale when

White, P.C. delivered the foreclosure deed conveying the

property to Fannie Mae. See Sovran Bank, N.A. v. Creative

Indus., Inc., 425 S.E.2d 504, 505 n.2 (Va. 1993) (a “trustee

under a deed of trust retains legal title to the property until

the deed is delivered”). Thus, the McFaddens’ sole basis for

asserting their quiet title claim against White, P.C. rested on

their assertion that, under the deed of trust, White, P.C. could

not have taken legal possession of the property and transferred

it to the auction purchaser Flagstar, or to its assignee, Fannie

Mae.

We conclude that there was no possibility that the

McFaddens could have prevailed on this claim against White, P.C.

The provision of the deed of trust permitting the appointment of

a substitute trustee conformed with the requirements of Virginia

Code Section 55-59(9). Under that statute, the party secured by

the deed of trust or the holder of more than fifty percent of

the obligations secured thereby has authority to appoint a

substitute trustee. Id.

Flagstar was not prohibited from appointing a substitute

trustee simply because Flagstar had assigned the loan to Fannie

Mae. Such a transfer, which is permitted under the plain

14
language of the deed of trust and the note, did not impede

Flagstar’s ability to serve as the new lender’s agent. See

Horvath v. Bank of N.Y., N.A., 641 F.3d 617, 622 (4th Cir. 2011)

(explaining that entity other than lender had authority to

foreclose under Virginia law despite transfer of loan, based on

entity’s status as note holder). Therefore, White, P.C.

properly was appointed under the deed of trust, and had

authority to act as substitute trustee and to perform the

attendant duties authorized by Virginia law. See Va. Code § 55-

59(7), (9).

We next conclude that the McFaddens lacked any possibility

of prevailing on their claim for equitable relief to set aside

the foreclosure sale, which they alleged as an alternative to

the quiet title claim. In the allegations specifically

supporting this claim for equitable relief, the only defendant

referenced was Flagstar. The McFaddens asserted that Flagstar

made numerous misrepresentations regarding the loan modification

program and application process, including that the pending loan

modification application would prevent foreclosure of the

property. These allegations, which did not mention White, P.C.

or its role in the foreclosure sale, plainly did not state a

claim against White, P.C., nor can we discern any possible cause

of action against White, P.C. related to this claim.

15
 Finally, we hold that the McFaddens lacked any possibility

of prevailing on their VCPA claim against White, P.C., which was

the sole defendant named in this claim. In the VCPA claim, the

McFaddens alleged that under Virginia Code Section 59.1-198,

White, P.C. was a “supplier,” and that the loan and related

foreclosure sale were “part” of a “consumer transaction.” 6

The McFaddens asserted two bases for their allegation that

White, P.C. violated the VCPA. First, they asserted that White,

P.C. misrepresented that it had been properly appointed as

substitute trustee, because Flagstar was not authorized to make

that appointment after it assigned the note to Fannie Mae.

Second, the McFaddens alleged that White, P.C. misrepresented

that it would serve as a fiduciary to the McFaddens, and that

White, P.C. breached its fiduciary duties. We address each

asserted VCPA violation in turn.

First, the VCPA is inapplicable to any “aspect of a

consumer transaction” that is “authorized” under Virginia law.

Va. Code § 59.1-199(A). As we already have stated in our above

discussion of the McFaddens’ quiet title claim, the appointment

6
The purpose of the VCPA is to “promote fair and ethical
standards of dealings between suppliers and the consuming
public.” Va. Code § 59.1-197. We assume without deciding, for
purposes of this appeal, that White, P.C. could qualify as a
“supplier” engaged in a “consumer transaction” by conducting the
foreclosure sale.

16
of substitute trustees and the process for such appointments is

set forth in Virginia Code Section 55-59(9), which authorizes

the party secured by the deed of trust or the holder of more

than fifty percent of the obligations secured thereby to appoint

a substitute trustee. Id. As we further explained above, the

appointment of White, P.C. as substitute trustee under the deed

of trust met the requirements of Virginia law. See id.

Therefore, because the appointment of White, P.C. as substitute

trustee was valid under Virginia law, the VCPA did not provide a

basis in law for this component of the McFaddens’ VCPA claim.

We next consider the second component of the McFaddens’

VCPA claim, namely, that White, P.C. misrepresented that it

would act as a fiduciary toward the McFaddens, and that White,

P.C. breached its fiduciary duties. However, under Virginia

law, the duties of a trustee appointed under a deed of trust are

limited and defined by the instrument under which the trustee

acts. Warner v. Clementson, 492 S.E.2d 655, 657 (Va. 1997).

The McFaddens have not alleged that White, P.C. owed them such

unspecified fiduciary duties under the terms of the deed of

trust, and the VCPA does not provide an independent basis for

maintaining a claim based on this vague, unsupported allegation

regarding White, P.C. Thus, we hold that the McFaddens lacked

any possibility of establishing their claim under the VCPA

against White, P.C., because they have presented neither a legal

17
nor a factual foundation that would give rise to any such right

of recovery.

Because we conclude that the McFaddens lacked any

possibility of prevailing on their three claims against White,

P.C., we hold that, under the fraudulent joinder doctrine, the

citizenship of White, P.C. should not be considered for

jurisdictional purposes. See Mayes, 198 F.3d at 461.

Therefore, we hold that the district court did not err in

denying the McFaddens’ motion to remand the action to state

court, because the remaining parties were completely diverse. 7

See 28 U.S.C. § 1332(a).

B.

The McFaddens also appeal the district court’s order

dismissing two of their state law claims discussed above,

namely, their quiet title claim and their claim for equitable

relief to set aside the foreclosure sale. 8 The McFaddens contend

that the district court erred in concluding that these claims

were preempted by HOLA, and, alternatively, in concluding that

these claims failed to state a claim under Rule 12(b)(6). We

7
Based on this conclusion, we need not consider the
defendants’ additional argument that the district court had
federal question jurisdiction over the action.
8
The McFaddens do not challenge the dismissal of their
remaining claims asserted in the complaint.

18
focus our analysis on the court’s dismissal of the claims under

Rule 12(b)(6).

We review de novo the district court’s dismissal of a

complaint for failure to state a claim. Walters v. McMahen, 684

F.3d 435, 439 (4th Cir. 2012). To survive a motion to dismiss

under Rule 12(b)(6), a plaintiff must state a plausible claim

for relief and allege sufficient facts to establish the elements

of the claim. Id. (citations omitted).

As set forth above, in the McFaddens’ quiet title claim,

they challenged the validity of the deed of trust and of the

appointment of White, P.C. as substitute trustee. They first

alleged that the deed of trust improperly named MERS as the

beneficiary, when the true beneficiary of the deed of trust was

the lender. This contention is without merit, however, because

the plain language of the deed of trust sets forth that MERS, as

beneficiary, is “acting solely as a nominee for Lender and

Lender’s successors and assigns.” As we explained in our

decision in Horvath, naming MERS as the beneficiary was valid

and served merely to establish a consistent beneficiary that

enhanced “the ease with which the deed of trust could be

transferred.” 641 F.3d at 620.

The McFaddens additionally alleged in their quiet title

claim that the deed of trust, and the appointment of White, P.C.

as substitute trustee, were invalid. As we explained above,

19
however, those claims are groundless because the deed of trust

providing for the appointment of a substitute trustee, and the

appointment of White, P.C. in that capacity, conformed with the

requirements of Virginia law. See Va. Code § 55-59(9).

Because of their inability to demonstrate that the deed of

trust and the document appointing White, P.C. as the substitute

trustee were invalid instruments, the McFaddens have failed to

state a valid claim of ownership in the property. See Adams,

672 S.E.2d at 866. Therefore, we conclude that the district

court properly dismissed their quiet title claim under Rule

12(b)(6).

In the McFaddens’ claim for equitable relief to set aside

the foreclosure sale, they alleged that Flagstar made the

following misrepresentations: (1) that Flagstar would provide

them with a loan modification if they met certain criteria; (2)

that the McFaddens’ loan application materials were incomplete;

and (3) that the McFaddens should disregard the notice of

foreclosure due to their pending loan modification request. In

essence, the McFaddens asserted that they relied on oral

promises by Flagstar that it would modify the terms of the loan

and that the foreclosure and sale of the property, of which the

McFaddens were notified in writing, would not take place.

While any such promises certainly would have been improper,

such alleged oral promises cannot serve as a basis to set aside

20
a foreclosure sale of real property. Under the statute of

frauds, as provided under Virginia law, oral promises and

contracts affecting real property are not enforceable. Va. Code

§ 11-2.

Moreover, the McFaddens do not dispute the fact that they

defaulted on their loan. The terms of the deed of trust

remained in effect and authorized the foreclosure and sale of

the property. Therefore, we conclude that the McFaddens failed

to state a claim for equitable relief to set aside the

foreclosure sale, and that the district court did not err in

dismissing this claim under Rule 12(b)(6). 9

III.

In sum, based on our conclusion that the district court had

diversity jurisdiction over the removed action, and that the

court correctly determined that the quiet title claim and the

claim for equitable relief to set aside the foreclosure sale

were subject to dismissal under Rule 12(b)(6), we affirm the

district court’s judgment.

AFFIRMED

9
Based on this conclusion, we need not consider the
district court’s alternative basis for dismissal of these
claims, relating to preemption under HOLA.

21
WYNN, Circuit Judge, dissenting:

Plaintiffs Herbert and Rosetta McFadden filed state-law

claims in a state court. Only one of the three named

defendants, Flagstar Bank, FSB, took action to remove the case

from state court to federal court. And it did so on only one

ground: purported federal question jurisdiction.

On appeal, Defendant Samuel I. White, P.C. (“White”)

argued, for the first time ever, that even in the absence of

federal question jurisdiction, it was fraudulently joined as a

defendant and thus diversity jurisdiction also exists. Neither

Flagstar Bank nor Federal National Mortgage Association (“Fannie

Mae”) advanced this argument in their jointly-filed brief.

Nevertheless, on appeal, this Court ignores the stated

ground for removal—federal question jurisdiction—and “hold[s]

that the district court did not err in denying the McFaddens’

motion to remand, because the court had diversity jurisdiction

over the McFaddens’ claims . . . .” In short, the majority

bases federal jurisdiction on a ground that Defendants failed to

properly preserve. With this, I cannot agree. Because I

believe that the McFaddens’ state-law claims should be sent back

to state court, I respectfully dissent.

22
 I.

Herbert and Rosetta McFadden went to state court, with

state-law claims against Fannie Mae, Flagstar Bank, and White.

The McFaddens alleged that they applied for a loan modification

for their home mortgage, but that Flagstar Bank repeatedly lost

their modification materials, stymying the process. The

McFaddens alleged that they received a foreclosure notice but

that Flagstar Bank affirmatively told them “not to worry,” that

their loan modification was “in process,” and that “no

foreclosure would occur” while that process was ongoing. J.A.

10. Instead, however, the McFaddens’ home was foreclosed upon,

allegedly improperly by White, with Flagstar Bank itself the

high bidder at the foreclosure sale. The McFaddens, in turn,

brought claims to quiet title, to set aside foreclosure, and for

fraud, breach of contract, negligence, and violation of

Virginia’s Consumer Protection Act in the Circuit Court for the

County of Pulaski.

The sole party to file a notice of removal was Flagstar

Bank. 1 Its lone reason: federal question jurisdiction. Flagstar

Bank claimed that the McFaddens’ state-law claims were

1
Neither Fannie Mae nor White joined the notice of removal
or filed its own removal papers. Flagstar Bank’s notice of
removal simply alleges, “upon information and belief, [that]
both . . . consent to the removal of this action.”

23
completely preempted or, alternatively, presented a substantial

federal question such that they were removable to federal court.

Nowhere in its notice of removal did Flagstar Bank even suggest

that the McFaddens’ complaint was removable on diversity grounds

due to alleged fraudulent joinder. The only place Flagstar

Bank, then along with Fannie Mae, suggested that the McFaddens

had fraudulently joined White was in the final two paragraphs of

the 15-page brief in opposition to the McFaddens’ motion to

remand the matter to state court. Perhaps realizing that their

belated and cursory treatment of this issue below was

insufficient to preserve it, Flagstar Bank and Fannie Mae made

not a single mention of this purported basis for removal in

their appellee brief. Indeed, as this panel noted at oral

argument, Flagstar Bank’s and Fannie Mae’s appellee brief failed

to meaningfully argue anything beyond complete preemption as a

basis for federal jurisdiction.

Meanwhile, White, the allegedly fraudulently joined

defendant, never so much as hinted at this argument until the

case reached this Court. Indeed, at oral argument, White

plainly admitted that it should have raised the fraudulent

joinder issue earlier yet inexplicably failed to do so.

24
 II.

It is axiomatic that federal courts are courts of limited

jurisdiction. Kokkonen v. Guardian Life Ins. Co. of Am., 511

U.S. 375, 377 (1994). Accordingly, “[w]e presume that a cause

lies outside this limited jurisdiction, . . . and the burden of

establishing the contrary rests upon the party asserting

jurisdiction.” Barbour v. Int’l Union, 640 F.3d 599, 605 (4th

Cir. 2011) (en banc) (quotation marks omitted).

“Removal statutes, in particular, must be strictly

construed, inasmuch as the removal of cases from state to

federal court raises significant federalism concerns.” Id. See

also Lontz v. Tharp, 413 F.3d 435, 440 (4th Cir. 2005)

(Wilkinson, J.) (“not[ing] our obligation ‘to construe removal

jurisdiction strictly because of the ‘significant federalism

concerns’ implicated’ by it”). In turn, any doubts about the

propriety of removal should be resolved against the federal

forum and in favor of remanding to state court. Dixon v. Coburg

Dairy, Inc., 369 F.3d 811, 816 (4th Cir. 2004) (en banc).

Against this backdrop, the statute governing removal explicitly

requires that defendants file and serve a notice containing “a

short and plain statement of the grounds for removal” within

thirty days of a complaint’s service. 28 U.S.C. § 1446(a).

While a defendant may amend freely during the 30-day period in

which notice of removal must be filed and may be allowed to

25
correct defective allegations thereafter, a defendant may “not

[] add a new basis for removal jurisdiction.” 16 Moore’s

Federal Practice § 107.30[2][b] (3d ed. 2012). Put differently,

“defendants may not add completely new grounds for removal or

furnish missing allegations, even if the court rejects the

first-proffered basis of removal, and the court will not, on its

own motion, retain jurisdiction on the basis of a ground that is

present but that defendants have not relied upon.” 14C Wright &

Miller Federal Practice & Procedure, Jurisdiction & Related

Matters § 3733 (4th ed. 2012).

Accordingly, in In re Blackwater Security Consulting, LLC,

this Court refused to deem a notice of removal amended to add a

basis for federal jurisdiction not pled below. 460 F.3d 576,

590 n.8 (4th Cir. 2006). District courts throughout this

Circuit have similarly forbidden defendants from “attempt[ing]

to amend [their] Notice[s] of Removal” via memoranda in

opposition to motions to remand, holding that “[a] defendant may

not use a memorandum to attempt to amend his notice of removal

to add a basis for removal[,]” and making plain that new bases

not timely asserted in the removal notice will be rejected.

UMLIC Consolidated, Inc. v. Spectrum Fin. Servs. Corp., 665 F.

Supp. 2d 528, 533 (W.D.N.C. 2009) (ordering remand to state

court, holding that diversity jurisdiction was lacking, and

rejecting defendant’s attempt to amend its removal notice after

26
expiration of the 30-day removal period with arguments in remand

opposition brief that a named party was not a real party in

interest and that its citizenship should be disregarded). See

also, e.g., Phillips v. BJ’s Wholesale Club, Inc., 591 F. Supp.

2d 822 (E.D. Va. 2008) (remanding to state court for lack of

diversity jurisdiction, holding that diversity jurisdiction did

not exist where removal notice alleged nothing about fraudulent

joinder, and failure to timely raise the issue, asserted for the

first time in response to a motion to remand, was not a mere

technical defect that warranted leave to amend removal notice

beyond the 30-day time limit); Tincher v. Ins. Co. of Penn., 268

F. Supp. 2d 666 (E.D. Va. 2003) (remanding and denying motion to

amend removal notice to allege fraudulent joinder where no

allegation of fraudulent joinder was made in notice and

defendant did not raise the issue until its response to

plaintiff’s motion to remand); Castle v. Laurel Creek Co., Inc.,

848 F. Supp. 62, 64 (S.D. W.Va. 1994) (remanding to state court

and denying belated attempt to add fraudulent joinder allegation

to notice of removal); Barnhill v. Ins. Co. of N. Am., 130

F.R.D. 46, 51 (D.S.C. 1990) (Hamilton, J.) (remanding to state

court and noting that “the overwhelming majority of courts allow

amendment after expiration of the statutory period for removal

only for the purpose of setting forth more specifically each

ground for removal which had been imperfectly set forth in the

27
original petition” but “deny leave to amend to supply missing

allegations or to supply new allegations”).

As then-District Court Judge Hamilton underscored in

Barnhill, “a number of compelling policy considerations . . .

require this court to apply a very restrictive view of

amendment-at least after the statutory period for removal . . .

has expired.” 130 F.R.D. at 50. Those considerations include:

“preventing federal court infringement upon rightful

independence and sovereignty of state courts[;]” “reducing

uncertainty as to the court’s jurisdiction in the marginal

cases, which a more liberal construction of the removal statute

would promote[;]” “allowing amendment of the notice of removal .

. . after the thirty day time limit for removal specified . . .

would ‘substantially eviscerate’ the specific time provision

enacted by Congress[;]” and “conceding that the traditional

justification for diversity jurisdiction-state court hostility

toward nonresident defendants-has been significantly reduced

since the time diversity jurisdiction was created[.]” Id. at

50-51.

Turning to the case at hand, it is clear that not one of

the three named defendants raised fraudulent joinder as a basis

for federal jurisdiction in the requisite removal papers. Nor

did any of the three named defendants at any time move to amend

the notice of removal to add any such allegations. Instead,

28
White, the only defendant to argue diversity in its brief to

this Court, plainly admitted that in doing so, it was, for the

first time ever, raising fraudulent joinder and diversity

jurisdiction. Flagstar Bank and Fannie Mae raised fraudulent

joinder and diversity jurisdiction below only as a fleeting

alternative argument in their opposition to the McFaddens’

motion to remand. And before this Court, they argued fraudulent

joinder and diversity jurisdiction not once in their brief, and

only half-heartedly in oral argument, when prompted to do so by

this panel.

As noted during oral argument, where substantial effort has

been expended, courts may view removal defects through a

different lens. Indeed, the Supreme Court instructed us to do

so in Caterpillar Inc. v. Lewis, 519 U.S. 61 (1996), holding

that a district court’s failure to remand a case improperly

removed on diversity grounds was not fatal to the ensuing

adjudication if federal jurisdictional requirements were met

when trial occurred and judgment was entered. Notably, however,

the Supreme Court emphasized that “[o]nce a diversity case has

been tried in federal court, with rules of decision supplied by

state law . . ., considerations of finality, efficiency, and

economy become overwhelming.” Id. at 75 (emphasis added).

29
 In Aqualon Co. v. Mac Equipment, Inc., this Court extended

the Caterpillar rationale to dispositive motions such as summary

judgment, stating:

Where a matter has proceeded to judgment on the merits
and principles of federal jurisdiction and fairness to
parties remain uncompromised, to disturb the judgment
on the basis of a defect in the initial removal would
be a waste of judicial resources. Although the
interest in judicial economy is most pressing where an
action has proceeded to trial, we feel that the same
considerations are applicable to summary judgment.

149 F.3d 262, 264-65 (4th Cir. 1998).

No such compelling judicial economy or efficiency arguments

exist here. This case was pending before the district court for

less than a half year prior to its dismissal, Defendants had not

even answered Plaintiffs’ complaint, and no discovery had been

undertaken, nor anything else of substance accomplished beyond

summarily denying remand in an order devoid of any analysis and

granting Defendants’ motions to dismiss. On this record, there

are very serious federalism implications of wresting this state-

law complaint from state court, overlooking the clear pleadings

failures of well-represented defendants, and ruling for the

first time on appeal on the unpreserved fraudulent joinder and

diversity issues.

30
 Nor have Defendants presented any other convincing basis

for maintaining this case in federal court. 2 Flagstar Bank and

Fannie Mae concededly put their eggs in the complete preemption

basket. Complete preemption is an exception to the well-pleaded

complaint rule dictating that the basis for a federal district

court’s removal jurisdiction must appear on the face of a

plaintiff’s complaint. The Supreme Court has read complete

preemption into statutory schemes in only three contexts:

Section 301 of the Labor and Management Relations Act (29 U.S.C.

§ 185); Section 502 of the Employee Retirement Income Security

Act of 1974 (29 U.S.C. § 1132); and Sections 85 and 86 of the

National Bank Act (12 U.S.C. §§ 85, 86). Beneficial Nat’l Bank

v. Anderson, 539 U.S. 1, 6-11 (2003). I cannot imagine that it

would find a fourth in the circumstances of this case.

While neither the Supreme Court nor this Court has

addressed whether HOLA completely preempts state law such that

it coverts exclusively state-law claims into a federal

complaint, a number of district courts have held that it does

not. For example, in McKenzie v. Ocwen Federal Bank, 306 F.

2
The federal question basis set forth in the notice of
removal presents a thorny issue. By reaching beyond Defendants’
preserved basis for removal to get to diversity jurisdiction,
this Court avoids the first-impression issue of whether HOLA
completely preempts state law such that it coverts exclusively
state-law claims into a federal complaint.

31
Supp. 2d 543 (D. Md. 2004), the district court held that HOLA

did not completely preempt the borrowers’ state-law claims

against the defendant national bank for charging inspection fees

prohibited by state law, and thus did not justify removal of the

case to federal court. The court noted that the HOLA provisions

on which the defendant’s complete preemption argument was based

do not provide an exclusive cause of action. Id. at 546.

Further, the court ruled that no substantial federal question

existed and that that issue boiled down to a preemption defense—

which could not serve as a basis for removal. Id. at 547. The

court therefore remanded.

It seems self-evident that HOLA does not completely preempt

all state-law claims, including claims grounded in fraud, such

as the McFaddens’. This is because the HOLA preemption

regulation includes a savings clause expressly exempting certain

state-law claims from HOLA’s preemptive scope. 12 C.F.R. §

560.2(c). This Court’s recent opinion in McCauley v. Home Loan

Investment Bank, FSB, underscores the limited nature of HOLA

preemption:

OTS “does not intend to preempt state laws that
establish the basic norms that undergird commercial
transactions,” and “[a]ccordingly, in § 560.2(c), the
OTS has identified certain categories of state law
that are not preempted.” OTS Op. Letter, Preemption
of State Laws Applicable to Credit Card Transactions,
1996 WL 767462, at *5 (Dec. 24, 1996). Tort law is
one of these categories. See 12 C.F.R. § 560.2(c);
see also Lending & Investment, 61 Fed. Reg. at 50966

32
 (“OTS wants to make clear that it does not intend to
preempt basic state laws such as state uniform
commercial codes and state laws governing real
property, contracts, torts, and crimes.”).
Determining that the tort of fraud falls within the
scope of § 560.2 would preclude fundamental state
regulation of deceptive practices in which
unscrupulous savings and loan associations might
engage. Such an interpretation would contravene the
intent of OTS, whose “assertion of plenary regulatory
authority does not deprive persons harmed by the
wrongful acts of savings and loan associations of
their basic state common-law-type remedies.” Ocwen,
491 F.3d at 643.

__ F.3d __, 2013 WL 1189292, at *5 (4th Cir. 2013).

At the very least, because “we must construe removal

strictly [and] reasonable doubts must be resolved against the

complete preemption basis for it,” Lontz, 413 F.3d at 441

(Wilkinson, J.), Defendants should not be allowed to force the

McFaddens to litigate their state claims in federal court on the

basis of purported complete preemption.

Finally, at the end of their removal discussion in their

brief, Defendants touched on the substantial federal question

doctrine. “Under the substantial federal question doctrine, a

defendant seeking to remove a case in which state law creates

the plaintiff’s cause of action must establish two elements: (1)

that the plaintiff’s right to relief necessarily depends on a

question of federal law, and (2) that the question of federal

law is substantial. If the defendant fails to establish either

of these elements, the claim does not arise under federal law

33
pursuant to the substantial federal question doctrine, and

removal cannot be justified under this doctrine.” Pinney v.

Nokia, Inc., 402 F.3d 430, 442 (4th Cir. 2005) (quotation marks

and citation omitted). See also Grable & Sons Metal Prods.,

Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) (instructing

courts to analyze whether the federal issue is necessary,

disputed, and substantial, and whether the federal court’s

accepting jurisdiction would disrupt the balance between state

and federal judicial responsibilities).

Here, Flagstar Bank and Fannie Mae have failed to meet

their burden. Flagstar Bank and Fannie Mae assert, for example,

that “the McFaddens’ fraud and other state claims require an

analysis of whether Flagstar complied” with federal law.

Appellees’ Br. at 25. Yet this Court’s recent McCauley opinion

belies that assertion. Similarly, Flagstar Bank and Fannie Mae

sweepingly claim that “[b]ecause the McFaddens allege that

Flagstar fraudulently handled their loan modification, the

alleged misrepresentation was made in connection with the

servicing of a loan. Loan servicing falls within the express

preemption provision of § 560.2(b)(10), thus the district court

possessed subject matter jurisdiction . . . .” Appellees’ Br.

at 27. It clearly cannot be that any act occurring “in

connection with” a loan is preempted by HOLA. And we recently

34
made plain in McCauley that any assertion to the contrary flies

in the face of the law of this Circuit.

In sum, Defendants’ generalized assertions and

(mis)characterizations of the McFaddens’ claims fail to

demonstrate that those state-law claims necessarily depend on

questions of federal law so disputed and so substantial that

they warrant wresting the state-law complaint from the state

court in which it was filed. Further, because Defendants fail

to meet their burden as to complete preemption and substantial

question jurisdiction, and because they failed to allege

diversity jurisdiction based on fraudulent joinder in their

notice of removal and the circumstances here do not warrant

looking the other way, they should not have been allowed to

remove this case to federal court. Accordingly, the district

court and this Court should have remanded this matter back to

state court—a more than adequate forum in which Defendants would

be free to assert their preemption and other defenses. For

these reasons, I respectfully dissent.

35