The Davises sued their lender in Federal Court alleging violations of the Racketeering Act (RICO) and the Federal Fair Debt Collection Practices Act. Essentially, they claimed they were damaged because the bank employees were “robo-signers” on their foreclosure documents and that the foreclosure affidavits were fraudulent.
However, the plaintiffs lost their home in foreclosure after a state court judgment more than a year before. On a purely technical level, they were required to fight the foreclosure then—during the state court action. At least, that is what the lender is asserting in their recent motion filed November 10, 2010 to dismiss the Federal case.
Unlike California, where lenders have the option of pursuing a non-judicial foreclosure sale, in Indiana where the Davises lived, foreclosures go through the state court process. By suing now after the foreclosure lawsuit is over, a number of legal doctrines and defenses are available to the banks such as res judicata (Latin for “this same stuff has been litigated already between the same people even”), collateral estoppel (legalese for “this same stuff has been litigated already between a different group of related people”) and the Rooker-Feldman doctrine (legalese for “federal district courts cannot directly review a prior state court decision on state law, only the Supreme Court can”).
I think the bank’s motion to dismiss has merit, as least as to the banks. Not just because of the legal theories argued above, but also under the recent Supreme Court case of Ashcroft v. Iqbal (2009) that puts a much higher pleading standard on plaintiffs in federal court. That means that this Motion to Dismiss (Federal Rule 12(b)(6)) may be granted, although Courts can be quite lenient and grant the plaintiffs leave to amend to try to cure the defects in their complaint.
This could have been a whole different ball game if the Davises had brought these defenses and claims in their underlying state foreclosure action. They could have sued in Federal court, brought a motion to remove the matter to federal court and then stayed the state court action pending the outcome of the federal litigation or perhaps consolidated the two matters.
More lawsuits are coming and then perhaps the issues presented by the Davis case can be litigated on the merits. For example, the Fair Debt Collection Practices Act claims. Right now, the state of the law is that lenders are not debt collectors, there are merely creditors trying to collect on their own debts. However, the lender’s loan servicers are debt collectors, which is why though I think Countrywide/BofA’s motion to dismiss might have merit on their behalf, their loan servicer may not be covered.
California plaintiff lawyers are presently trying to tie the FDCPA to the foreclosure practices, and find a way to get what is essentially a state claim (foreclosure) litigated in a federal forum where they can seek attorney fees. That was tried in prior years with TILA rescission claims but with far less success. In actuality, after bringing a TILA rescission claim, many plaintiff’s counsel could negotiate a good loan workout for their client but be paid little to nothing for their efforts. This new variation on foreclosure defense could prove to have more legs because in reality, the paperwork is shoddy and the lenders are going to have a lot more scrutiny by the courts on it. Already in the bankruptcy courts in California, judges have put the pressure on lenders to produce the note or otherwise prove up their entitlement to foreclose.