Jurisdiction – Diversity – Mortgage

Where a case involving a mortgage foreclosure has been removed from state court on the basis of diversity jurisdiction, the plaintiffs’ motion to remand should be denied because naming the lender’s counsel as one of the defendants constituted fraudulent joinder.

“Plaintiffs Equine Luxury Properties, LLC (‘Equine’) and 138 River Street, LLC (‘138 River’), brought this action in state court for declaratory and injunctive relief against Defendants Commercial Capital BIDCO, Inc. (‘CCB’) and Trott Law, P.C. (‘Trott Law’), seeking to prevent Defendants from foreclosing on two properties located in Michigan. Defendants removed the action to this Court on the basis of diversity jurisdiction. Before the Court is Plaintiffs’ motion to remand the case for lack of subject matter jurisdiction (ECF No. 16) and Plaintiffs’ motion for summary judgment (ECF No. 18). The Court will deny both motions.

“The Court must remand the case to state court if the Court lacks subject matter jurisdiction. Diversity jurisdiction requires complete diversity of the parties. The parties do not dispute that complete diversity is lacking here because Plaintiffs and Defendant Trott Law are all citizens of Michigan. However, Defendants argue that the Court can ignore the citizenship of Trott Law because it is not a proper party. In other words, Defendants contend that Trott Law has been fraudulently joined to the action. Without Trott Law, there would be complete diversity because CCB, the only other defendant, is a citizen of Tennessee. Also, the amount in controversy exceeds $75,000.

“The Court must decide whether Plaintiffs have any colorable claim against Trott Law.

“As indicated, Plaintiffs’ declaratory judgment action is focused solely on its obligations to CCB under the loan agreement. Plaintiffs’ arguments regarding usury and wrongful conduct are defenses to enforcement of that agreement. Trott Law is not a party to that agreement. According to the complaint, Trott Law’s only connection to the case is its role as counsel for CCB. Indeed, Plaintiffs expressly allege that when Trott Law sent them a notice of default and initiated the foreclosure by advertisement, it acted on behalf of CCB. In other words, Trott Law was not attempting to enforce its own rights against Plaintiffs. Thus, as to Trott Law, there is no colorable claim because there are no rights to adjudicate between Plaintiffs and Trott Law. Whatever the Court decides about CCB’s rights will necessarily apply to Trott Law to the extent it acts on behalf of CCB.

“In other cases where a debtor challenging a foreclosure sued the lender and the lender’s foreclosure attorneys, courts in Michigan have not hesitated to conclude that the foreclosure attorneys were fraudulently joined.

“In short, Plaintiffs assert no colorable claim against Trott Law. Consequently, the Court can ignore Trott Law’s citizenship because it was fraudulently joined to this action. Without Trott Law, the parties are diverse, so the Court has subject matter jurisdiction over the case and will deny Plaintiffs’ motion to remand the case to state court.

“Plaintiffs ask the Court to grant summary judgment on their claim that the loan agreement with CCB is unenforceable under Michigan law because it charged a rate of interest that exceeded the 25% rate in Michigan’s criminal usury statute, Mich. Comp. Laws 438.41.

“Apart from the criminal usury statute, Michigan law generally allows parties to agree in writing to any rate of interest ‘not exceeding 7% per annum.’ Mich. Comp. Laws 438.31(1). But there are various exceptions to the foregoing limits.

“In other words, Mich. Comp. Laws 438.61(2) permits business entities to agree to any rate of interest when borrowing money from certain regulated lenders. And Mich. Comp. Laws 438.61(3) permits business entities to agree to any rate of interest up to the amount permitted by the criminal usury statute when borrowing money from nonregulated lenders.

“CCB responds that Michigan law does not apply here because the parties agreed that Tennessee law would govern their loan agreement.

“In short, CCB can rely on the exception in Mich. Comp. Laws 438.31c(11) to avoid the usury restrictions in Michigan law. That exception permitted CCB to charge Plaintiffs any rate of interest to which they agreed in writing. Accordingly, Plaintiffs have not shown that Michigan law prohibits the loan between them and CCB. As such, Plaintiffs have not shown that the Court should disregard Plaintiffs’ selection of Tennessee law in their loan agreement with CCB. For similar reasons, Plaintiffs have not shown that their agreement with CCB is unenforceable.

“For the reasons herein, the Court has subject matter jurisdiction because Trott Law was fraudulently joined to the action. Accordingly, the Court will deny Plaintiffs’ motion to remand and dismiss Trott Law due to fraudulent joinder.

“Furthermore, the Court is not persuaded that Plaintiffs are entitled to a declaration that their loan agreement with CCB is unenforceable or that it violates Michigan’s usury laws. Accordingly, the Court will deny Plaintiffs’ motion for summary judgment.”

Equine Luxury Prop. LLC v. Commercial Capital BIDCO Inc; MiLW 03-108047, 17 pages; U.S. District Court for the Western District of Michigan; Jarbou, J.

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