UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
In re: Chapter 7
David C. Kapla, Case No. 11-68878
Debtor. Hon. Phillip J. Shefferly
[This opinion modified here by the insertion of these three sentences for attribution with some bolding and SEO. Flint Bankruptcy Lawyer Terry Bankert posted this opinion on Good Morning Flint 12/17/12. If you have questions contact Flint Bankruptcy Attorney Terry Bankert 810-235-1970 or http://www.attorneybankert.com ]
David C. Kapla, Adversary Proceeding
No. 12-04000-PJS
Plaintiff,
v.
Federal National Mortgage Association, Inc.,
Defendant,
and
Federal Housing Finance Agency,
Intervenor-Defendant.
/
OPINION GRANTING DEFENDANTS’ MOTION TO DISMISS
Introduction
The plaintiff in this adversary proceeding is the debtor in this Chapter 7 case. The plaintiff
filed this adversary proceeding to set aside a foreclosure sale of his home and to obtain other relief.
The defendants filed a motion to dismiss the adversary proceeding. For the reasons explained in this
opinion, the Court grants the motion.
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Jurisdiction
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and 157(a). The
complaint alleges that this is a core proceeding under 28 U.S.C. § 157(b)(2). The Court finds that
it is not a core proceeding, but instead is related to a case under title 11. The parties have not
objected to the Court hearing and determining this matter, and to enter appropriate orders and
judgments.
Background
On November 7, 2011, David C. Kapla (“Debtor”) filed a Chapter 13 petition. The Debtor’s
schedule A filed with his petition states that he has a “fee simple” interest in a home located at
36419 Avondale Street, Westland, Michigan (“Property”). On November 14, 2011, Fannie Mae
filed a motion for relief from the automatic stay to enforce its rights in the Property. The motion
alleged that the Debtor did not have any interest in the Property because of a foreclosure sale of the
Property that was held on September 15, 2010. The motion further alleged that the time to redeem
from the foreclosure sale under applicable Michigan law expired on September 15, 2011. Finally,
the motion alleged that because the Debtor did not redeem from the foreclosure sale, the Debtor’s
bankruptcy estate did not have an interest in the Property. The Debtor objected to the motion. On
December 13, 2011, the Court held a hearing. At the conclusion of the hearing, the Court granted
the motion. The order granting the motion was entered on December 15, 2011. The Debtor then
converted his bankruptcy case from Chapter 13 to Chapter 7. The Debtor also moved for
reconsideration of the order granting Fannie Mae’s motion for relief from the automatic stay. The
Court denied the Debtor’s motion.
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After converting his case to Chapter 7, the Debtor filed this adversary proceeding against
Fannie Mae on January 1, 2012. The complaint seeks to set aside the foreclosure sale of the
Property, and requests various other forms of injunctive and declaratory relief against Fannie Mae.
Although the Debtor’s claims against Fannie Mae all relate to events that occurred prior to the
Debtor’s bankruptcy case, the Debtor’s schedule B filed in his bankruptcy case does not list any
claims against Fannie Mae.
After the complaint was served on Fannie Mae, the Debtor and Fannie Mae stipulated to
extend the time for Fannie Mae to answer the complaint. On April 24, 2012, the Debtor and Fannie
Mae stipulated to permit the Federal Housing Finance Agency (“FHFA”) to intervene as a defendant
in this adversary proceeding. The stipulation explains that on September 6, 2008, FHFA was
appointed as the conservator of Fannie Mae in accordance with the Housing and Economic
Recovery Act of 2008, Pub. L. 110-289, 122 Stat. 2654 (codified at 12 U.S.C. § 4617), and the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. §§ 4501 -
4642) The stipulation further explains that FHFA, as conservator of Fannie Mae, succeeded to all
of the rights, titles, powers and privileges of Fannie Mae, including the right to sue and be sued in
federal court. On April 27, 2012, the Court entered an order approving the stipulation and
permitting FHFA to intervene.
On April 30, 2012, FHFA and Fannie Mae (“Defendants”) filed a motion to dismiss this
adversary proceeding pursuant to Fed. R. Bankr. P. 7012(b) and Fed. R. Civ. P. 12(b)(6). By
agreement of the parties, the Debtor obtained several extensions of time to answer the motion.
Eventually, the Debtor filed an answer to the motion. The Defendants subsequently filed a reply to
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the Debtor’s answer. On October 29, 2012, the Court held a hearing on the motion, and took the
matter under advisement.
The complaint
The complaint alleges the following facts.
On June 24, 1994, the Debtor obtained financing from D&N Bank for the purchase of the
Property (¶ 8). D&N Bank assigned the mortgage to Bank of America pursuant to an assignment
recorded July 27, 2000 (¶ 9). Bank of America serviced the loan for Fannie Mae (¶ 10). When the
Debtor began to experience financial problems and became late on his mortgage payments, he tried
to work with Bank of America, but Bank of America insisted that his account be placed into default,
accelerated, and then foreclosed (¶ 18). At that time, the Debtor would have qualified for a reverse
mortgage, but neither Bank of America nor Fannie Mae would engage in good faith discussions with
the Debtor to resolve his delinquency (¶ 19). Fannie Mae treated the Debtor differently than other
similarly situated homeowners in distress by not allowing him to refinance a reverse mortgage to
pay off Fannie Mae (¶ 26). Fannie Mae also acted in bad faith by refusing to offer the Debtor all
of the available options that it provided to other distressed homeowners, and by failing to accept a
payment that was just beyond 30 days late (¶ 33). When the Debtor was laid off from his job, he
defaulted on the mortgage (¶ 11). Pursuant to the statutory provisions in Michigan regarding nonjudicial
mortgage foreclosures, Bank of America, the “seller servicer,” purchased the Property at a
sheriff sale held on September 15, 2010 (¶ 12). After the sheriff sale, Bank of America executed and
delivered a quit claim deed of the Property to Fannie Mae on May 2, 2011 (¶ 14). Fannie Mae is
a corporation operated by the United States that was “placed under the conservatorship of a federal
agency in September, 2008” (¶ 7) in order to “prevent it from going out of business” (¶ 12). After
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the one year redemption period from the foreclosure sale expired on September 15, 2011, Fannie
Mae brought a summary proceeding in the 18th Judicial District Court for the State of Michigan
(“State Court Lawsuit”) on October 14, 2011 (¶ 15). On October 24, 2011, a judgment of possession
(“State Court Judgment”) was entered in the State Court Lawsuit in favor of Fannie Mae and against
the Debtor (¶ 15).
The complaint contains four counts. Count I seeks injunctive relief staying any eviction of
the Debtor from the Property. Count II seeks declaratory relief adjudicating that Fannie Mae is a
government actor, and that its actions with respect to the Property have deprived the Debtor of equal
protection and due process. Count III seeks a money judgment against Fannie Mae for violations
of 42 U.S.C. § 1983. Count IV seeks a money judgment against Fannie Mae because it has deprived
the Debtor of equal protection. The Defendants’ motion seeks dismissal of all four counts.
Applicable legal standard
Fed. R. Civ. P. 8(a)(2), incorporated by Fed. R. Bankr. P. 7008(a), requires that a pleading
contain “a short and plain statement of the claim showing that the pleader is entitled to relief[.]” The
purpose of this pleading standard is “to give the defendant fair notice of what the . . . claim is and
the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)
(internal quotation marks and citation omitted). A motion to dismiss for failure to state a claim
pursuant to Fed. R. Civ. P. 12(b)(6), incorporated by Fed. R. Bankr. P. 7012, challenges whether a
complaint meets this standard.
“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted
as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Twombly, 550 U.S. at 570). In deciding a motion to dismiss for failure to state a
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claim upon which relief may be granted, “[t]he court must construe the complaint in the light most
favorable to the plaintiff [and] accept all the factual allegations as true . . . . A court may not grant
a Rule 12(b)(6) motion based on disbelief of a complaint's factual allegations.” Bovee v. Coopers &
Lybrand C.P.A., 272 F.3d 356, 360 (6th Cir. 2001) (citations omitted).
“A claim has facial plausibility when the plaintiff pleads factual content that allows the court
to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.
Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). “Factual allegations must be enough to
raise a right to relief above the speculative level, on the assumption that all the allegations in the
complaint are true (even if doubtful in fact).” Twombly, 550 U.S. at 555 (citations omitted).
“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed
factual allegations, a plaintiff's obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’
requires more than labels and conclusions . . . .” Id. “[A] formulaic recitation of the elements of a
cause of action will not do.” Id. (citation omitted). “Nor does a complaint suffice if it tenders
‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Ashcroft v. Iqbal, 556 U.S. at 678
(quoting Twombly, 550 U.S. at 557). Likewise, “[t]hreadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not suffice.” Id. (citing Twombly, 550 U.S.
at 555). This is because “the tenet that a court must accept as true all of the allegations contained
in a complaint is inapplicable to legal conclusions.” Id. “Where a complaint pleads facts that are
‘merely consistent with’ a defendant’s liability, it ‘stops short of the line between possibility and
plausibility of “entitlement to relief.”’” Id. (quoting Twombly, 550 U.S. at 557).
Ordinarily, in considering a motion to discuss under Rule 12(b)(6), a court’s review is
limited to the allegations in the complaint and “any exhibits attached thereto, public records, items
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appearing in the record of the case and exhibits attached to [a] defendant’s motion to dismiss so long
as they are referred to in the [c]omplaint and are central to the claims” in the complaint. Bassett v.
National Collegiate Athletic Association, 528 F.3d 426, 430 (6th Cir. 2008) (citing Amini v. Oberlin
College, 259 F.3d 493, 502 (6th Cir. 2001)). However, Fed. R. Civ. P. 12(d), incorporated by
Fed. R. Bankr P. 7012, states that “[i]f, on a motion under Rule 12(b)(6) . . . , matters outside the
pleadings are presented to and not excluded by the court, the motion must be treated as one for
summary judgment under Rule 56.” The rule goes on to provide that in such event, “[a]ll parties
must be given a reasonable opportunity to present all of the material that is pertinent to the motion.”
The Debtor’s complaint in this case has a number of documents attached as exhibits. Most
of these documents relate to the Property and include the assignment of mortgage from D&N Bank
to Bank of America (Exhibit B), the sheriff’s deed (Exhibit C), the quit claim deed from Bank of
America to Fannie Mae (Exhibit D), and the State Court Judgment (Exhibit E). However, two of
the documents do not specifically relate to the Property and instead relate more generally to Fannie
Mae. Exhibit A is a Congressional Research Report for Congress dated September 15, 2008 titled
“Fannie Mae and Freddie Mac in Conservatorship.” This five page document provides a summary
of the actions taken by FHFA on September 7, 2008 to place Fannie Mae and Freddie Mac into
conservatorships. The complaint refers to Exhibit A in paragraph 7, which alleges that Fannie Mae
“was placed under the conservatorship of a federal agency in September, 2008.” Exhibit F consists
of two separate deeds, neither of which relate in any way to the Debtor or the Property, and both of
which are signed by Fannie Mae. The complaint refers to Exhibit F in paragraph 20, which alleges
that Fannie Mae obtains exemptions on the transfer tax of its properties by claiming that it is a
United States government entity.
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Although the Defendants’ motion seeks dismissal under Fed. R. Civ. P. 12(b)(6), which only
requires the court to measure the sufficiency of the complaint, many lengthy documents are attached
to the motion as exhibits: statements of Edward J. DeMarco, the acting director of FHFA
(Exhibits A and B), a fiscal year 2012 Analytical Perspectives report on the Budget of the
U.S. Government from the Office of Management and Budget (Exhibit C), statements by James B.
Lockhart issued in 2008 and 2009 (Exhibits D and E), FHFA Reports to Congress for 2009 and 2010
(Exhibits F and G), a Form10-K Annual Report for Fannie Mae to the United States Securities and
Exchange Commission for fiscal year 2011 (Exhibit H), and a copy of a published opinion from a
United States District Court (Exhibit I). None of these exhibits are referred to in the Debtor’s
complaint.
At the hearing on the motion, the Court inquired of the parties whether it should consider the
exhibits attached to the Defendants’ motion pursuant to Rule 12(d) and treat the motion as a motion
for summary judgment. The Defendants answered yes. The Debtor’s answer was a bit more
complicated. Initially, the Debtor stated that the Court should review and consider all of the
documents attached by the parties as exhibits to their papers. However, the Debtor later stated that
the Debtor had not been given a reasonable opportunity to present all matters that might be pertinent
to the Defendants’ motion and that the Debtor would like to have the opportunity to take discovery
and learn all of the facts that may be pertinent to the motion.
In light of the Debtor’s response to the Court’s questions at the hearing, it would be improper
for the Court to consider the Defendants’ exhibits to their motion without providing the Debtor a
reasonable opportunity to present all of the material that he may wish to present pertinent to the
motion. Consistent with Fed. R. Civ. P. 12(d), for purposes of adjudicating the Defendants’ motion
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to dismiss, the Court will therefore exclude from consideration all of the exhibits attached to the
motion other than Exhibit I, which the Court may permissibly consider since it is a legal authority
that is cited in the memorandum of law in support of the motion. The Court will not treat the motion
as a motion for summary judgment under Fed. R. Civ. P. 56, and will instead analyze the motion
solely as a motion to dismiss for failure to state a claim upon which relief can be granted under
Fed. R. Civ. P. 12(b)(6).
Discussion
The Defendants’ motion makes four basic arguments. First, the Defendants argue that the
Debtor can prevail on any of the four counts in his complaint only if the actions alleged to have
taken place were performed by a “government actor.” The Defendants assert that Fannie Mae is not
a government actor for constitutional purposes under long standing precedent of the United States
Supreme Court, and that FHFA’s appointment as conservator of Fannie Mae does not somehow
transform Fannie Mae into a government actor. Second, the Defendants argue that even if Fannie
Mae is a government actor, the Debtor’s complaint must still be dismissed because the statutorily
prescribed non-judicial foreclosure process used with respect to the foreclosure sale of the Property
under Michigan law satisfies all of the due process requirements imposed upon a government actor.
Third, the Defendants argue that the Debtor’s complaint is an impermissible attempt to relitigate
issues already decided in the State Court Lawsuit and is, therefore, barred under both the Rooker-
Feldman doctrine and under principles of res judicata. Finally, the Defendants argue that the Debtor
lacks standing to challenge the foreclosure sale of the Property.
Although the Defendants and the Debtor both request that the Court first tackle the issue of
whether Fannie Mae is a government actor, it makes much more sense for the Court to first consider
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1
Although the Defendants’ motion to dismiss is brought under Fed. R. Civ. P. 12(b)(6),
incorporated by Fed. R. Bankr. P. 7012, the Defendants’ Rooker-Feldman argument is more
properly considered under Fed. R. Civ. P. 12(b)(1), incorporated by Fed. R. Bankr. P. 7012,
since this argument challenges this Court’s subject matter jurisdiction.
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the Defendants’ Rooker-Feldman argument because the Court may not have jurisdiction to
adjudicate any other issues if the Rooker-Feldman doctrine is applicable to this case.
1
Rooker-Feldman
requires dismissal of some of the Debtor’s claims
Under the U.S. Supreme “Court’s Rooker-Feldman abstention doctrine, . . . a party losing
in state court is barred from seeking what in substance would be appellate review of the state
judgment in a United States district court, based on the losing party’s claim that the state judgment
itself violates the loser’s federal rights.” Johnson v. De Grandy, 512 U.S. 997, 1005-06 (1994)
(citing District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 482 (1983); Rooker v.
Fidelity Trust Co., 263 U.S. 413, 416 (1923)).
[A]ppellate jurisdiction to reverse or modify a state-court judgment is
lodged . . . exclusively in [the Supreme] Court. Federal district courts . . . are
empowered to exercise original, not appellate, jurisdiction. Plaintiffs in Rooker and
Feldman had litigated and lost in state court. Their federal complaints . . . essentially
invited federal courts of first instance to review and reverse unfavorable state-court
judgments. We declared such suits out of bounds,
i.e., properly dismissed for want
of subject-matter jurisdiction.
Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 283-84 (2005). The doctrine “is
confined to cases . . . brought by state-court losers complaining of injuries caused by state-court
judgments rendered before the district court proceedings commenced and inviting district court
review and rejection of those judgments.” Id. at 284. For Rooker-Feldman to apply, the party
asserting claims in federal court must have first lost in state court. The Sixth Circuit Court of
Appeals has succinctly stated the rule as follows: “The
Rooker-Feldman doctrine applies, if it
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applies at all, only when the state court loser files a new lawsuit in federal court
after the state court
adversely rules.” Rugiero v. DiNardo (In re Rugiero), No. 11-2639, 2012 WL 4800059, at *2
(6th Cir. Oct. 10, 2012).
The Debtor argues that the Rooker-Feldman doctrine does not apply in this case because this
adversary proceeding “is running parallel with on-going state court litigation pertaining to the
invalidity of the state court possession judgment and Sheriff’s Sale by Fannie Mae . . . . ” (Debtor’s
Br. at 27, docket entry no. 38). In other words, the Debtor has not yet lost and the State Court
Lawsuit is ongoing. The Debtor’s point of law is correct: the Rooker-Feldman doctrine is not
triggered solely because there is a pending state court action concerning the same matter before the
federal court. Exxon Mobil Corp., 544 U.S. at 292. However, the Debtor’s factual assertion that
the Debtor did not lose in state court is simply wrong.
The State Court Judgment was entered in the State Court Lawsuit on October 24, 2011. The
State Court Judgment unambiguously awarded possession of the Property to Fannie Mae. The State
Court Judgment obviously makes the Debtor the loser in the State Court Lawsuit. The Debtor has
not identified any “on-going state court litigation.” The State Court Lawsuit is over. The Debtor
did not file the complaint in this adversary proceeding until January 1, 2012, more than two months
after the State Court Judgment. The only remaining question regarding the application of Rooker-
Feldman to this adversary proceeding is whether the claims in the Debtor’s complaint allege an
injury caused by the State Court Judgment, or whether they allege some other injury. Although the
parties do not address this question in their briefs, the Sixth Circuit has addressed the legal principles
that govern this question.
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In Kovacic v. Cuyahoga County Department of Children & Family Services, 606 F.3d 301
(6th Cir. 2010), the Sixth Circuit explained how the Supreme Court in Exxon Mobil Corp.
“tightened the scope of
Rooker-Feldman.” Id. at 309.
In post-
Exxon analysis, we have distinguished between plaintiffs who bring an
impermissible attack on a state court judgment—situations in which
Rooker-Feldman
applies—and plaintiffs who assert independent claims before the district
court—situations in which
Rooker-Feldman does not apply.
In
McCormick, we explained that the pertinent inquiry after Exxon is whether
the “source of the injury” upon which plaintiff bases his federal claim is the state
court judgment, not simply whether the injury complained of is “inextricably
intertwined” with the state-court judgment[.]
Id. (citing McCormick v. Braverman, 451 F.3d 382, 393 (6th Cir. 2006) (other citations omitted).
The Sixth Circuit in McCormick emphasized that “[t]he key point is that the source of the injury
must be from the state court judgment itself; a claim alleging another source of injury is an
independent claim.” 451 F.3d at 394; see also Hood v. Keller, 341 F.3d 593, 597 (6th Cir. 2003)
(instructing that in Rooker-Feldman determinations, “federal courts cannot simply compare the
issues
involved in the state-court proceeding to those raised in the federal-court plaintiff’s complaint,
but instead must pay close attention to the
relief sought by the federal-court plaintiff”) (internal
quotation marks and citation omitted).
The allegations of fact in the Debtor’s complaint in this adversary proceeding virtually all
relate to the foreclosure sale of the Property. Counts I and II of the complaint specifically request
the Court to set aside the foreclosure sale and allow the Debtor to retain possession of the Property.
These counts directly challenge the State Court Judgment, which awarded possession of the Property
to Fannie Mae based upon the deed that it received from the successful purchaser at the foreclosure
sale. It is hard to see how any of the Debtor’s claims attacking the foreclosure sale could be heard
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by this Court without this Court having to review the State Court Lawsuit and then make a finding
that the State Court Judgment wrongly decided the issues before the state court. Therefore, the
Court lacks jurisdiction over counts I and II of the Debtor’s complaint.
However, the complaint also contains some allegations of fact that do not attack the
foreclosure sale of the Property, or the injury caused by the State Court Judgment, but instead relate
to other conduct of Fannie Mae. For example, paragraph 17 of the complaint alleges that the Debtor
qualified for a reverse mortgage on the Property; paragraph 19 alleges that the Debtor would have
qualified for a reverse mortgage, but Fannie Mae would not engage him in any good faith
discussions; paragraph 26 alleges that Fannie Mae treated the Debtor differently than other similarly
situated homeowners in distress by not allowing him to finance a reverse mortgage to pay off Fannie
Mae; paragraph 33 alleges that Fannie Mae acted in bad faith by refusing to accept a payment from
the Debtor that was just beyond 30 days late and by refusing to offer the Debtor all available options
that it made applicable to other distressed homeowners; paragraph 34 alleges that Fannie Mae
treated the Debtor differently than similarly situated homeowners to whom it had granted late
payment forbearances, short sales, reverse mortgages and loan modifications; and paragraph 40
alleges that Fannie Mae selectively denied or refused to properly and fairly consider and/or approve
the Debtor for a short sale, reverse mortgage and/or loan modification. Counts III and IV of the
Debtor’s complaint each request a judgment awarding the Debtor damages in excess of $75,000
along with punitive and exemplary damages, costs, interests and attorney’s fees.
Apart from whether these additional allegations of fact are sufficient to state a claim for relief
under either count III or IV, the point here is that for Rooker-Feldman purposes, these allegations
must first be scrutinized to determine whether they complain about the injury caused by the State
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Court Judgment, or whether they complain about a different injury for which an independent claim
may exist against Fannie Mae. Keeping in mind that this matter is before the Court upon the
Defendants’ motion to dismiss, and accepting, as the Court must, that all of the factual allegations
in the Debtor’s complaint are true, the Court concludes that the allegations contained in
paragraphs 17, 19, 26, 33, 34 and 40, and the relief sought in counts III and IV, do not complain of
an injury caused by the State Court Judgment. Instead, these allegations complain of a different
injury, consisting of Fannie Mae’s failure to approve the Debtor for a reverse mortgage and failure
to afford the Debtor those alternatives that it made available to other distressed homeowners. That
alleged injury could conceivably give rise to an independent claim against Fannie Mae that does
not require this Court either to set aside the foreclosure sale or the State Court Judgment. As such,
Rooker-Feldman does not apply to those claims. Therefore, this Court does not lack jurisdiction
over those claims, which form the basis for counts III and IV of the Debtor’s complaint. Those
claims may proceed in this adversary proceeding, subject, of course, to the Defendants’ other
arguments as to why such claims should still be dismissed under Rule 12(b)(6).
In sum, the Court holds that the Rooker-Feldman doctrine prevents this Court from having
jurisdiction to consider the Debtor’s attack on the foreclosure sale and the State Court Judgment.
The Debtor is the loser in the State Court Lawsuit, which adjudicated the validity of the foreclosure
sale. The State Court Judgment was entered prior to the time that this adversary proceeding was
filed. On the other hand, the Debtor is not precluded by Rooker-Feldman from asserting other
independent claims against Fannie Mae that relate to injuries not caused by the foreclosure sale and
the State Court Judgment, but are alleged to be caused by other conduct of Fannie Mae. Because
the application of Rooker-Feldman does not bar
all of the claims set forth in the Debtor’s complaint,
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the Court will grant the Defendants’ motion based upon Rooker-Feldman only in part. The Court
will therefore consider the Defendants’ other arguments for dismissal of the Debtor’s remaining
claims.
Fannie Mae is not a government actor for purposes of constitutional claims,
requiring dismissal of the Debtor’s remaining claims
The Defendants assert that even if some of the Debtor’s claims in his complaint survive a
Rooker-Feldman analysis, and are therefore within this Court’s jurisdiction, the Defendants’ motion
to dismiss must still be granted because all of the Debtor’s remaining claims are based on alleged
constitutional violations by Fannie Mae. Although the Debtor’s complaint is not entirely precise
or consistent in its use of the terms due process and equal protection, it is sufficiently clear to the
Court that all of the Debtor’s remaining claims against the Defendants are claims for constitutional
violations. The Debtor does not contend otherwise. As such, the determination of whether these
claims must be dismissed turns on the question of whether Fannie Mae is a “government actor,”
because an entity is only liable for claims based on constitutional violations if the entity is held to
be a government actor. Dusenbery v. United States, 534 U.S. 161, 167 (2002) (“The Due Process
Clause of the Fifth Amendment prohibits the United States, as the Due Process Clause of the
Fourteenth Amendment prohibits the States, from depriving any person of property without ‘due
process of law.’”); Center for Bio-Ethical Reform, Inc. v. Napolitano, 648 F.3d 365, 379 (6th Cir.
2011) (holding that “[t]he Fifth Amendment . . . does not itself contain a guarantee of equal
protection, but instead, incorporates, as against the federal government, the Equal Protection Clause
of the Fourteenth Amendment” and evaluating “equal protection claims against the federal
government under the Fifth Amendment just as [it] would evaluate equal protection claims against
the state and local governments under the Fourteenth Amendment”). The parties agree that the
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question of whether Fannie Mae is a government actor for purposes of a constitutional claim is an
important one. However, they do not seem to agree on what case law governs the issue.
The Defendants’ motion argues that the United States Supreme Court has set forth a
controlling three-part test in Lebron v. National Railroad Passenger Corporation, 513 U.S. 374
(1995) to determine whether a private corporation can be considered to be a government actor for
purposes of federal constitutional claims. Lebron involved an action brought by the plaintiff against
the National Railroad Passenger Corporation, commonly known as Amtrak. The plaintiff claimed
that Amtrak violated his First Amendment rights by refusing to place his advertisement on an
Amtrak billboard because of the advertisement’s political content. Id. at 377. The issue before the
court was whether Amtrak “was . . . itself a federal entity” for the purpose of determining claims
based upon individual rights guaranteed by the Constitution. Id. at 378-79. The court conducted
an extensive review of the history of government created and government sponsored entities. The
court then turned to the specific facts and circumstances of Amtrak. First, the court noted that
Congress established Amtrak by special legislation in 1970. Id. at 383-84. Second, the court noted
that the purpose for creating Amtrak was to further federal government objectives of requiring the
continuance and improvement of railroad passenger service in the interest of the public convenience
and necessity. Id. at 384. Third, the court noted that the legislation creating Amtrak “provides for
a board of nine members, six of whom are appointed directly by the President of the United States,”
with the other three appointments made by the President upon “the advice and consent of the
Senate.” Id. at 385. The court further noted other devices for government control of Amtrak
provided for in the legislation creating Amtrak. The court then held as follows:
We hold that where, as here, the Government creates a corporation by special law,
for the furtherance of governmental objectives, and retains for itself permanent
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authority to appoint a majority of the directors of that corporation, the corporation
is part of the Government for purposes of the First Amendment.
Id. at 400.
The Defendants assert that prior to the appointment of FHFA as a conservator for Fannie
Mae, it was indisputable that Fannie Mae was not a government actor under the Lebron test. The
Defendants do not contest that Fannie Mae was created by special legislation, nor do they contest
that Fannie Mae was created to further certain governmental objectives. Instead, the Defendants
focus on the third element of Lebron, which requires permanent governmental control over the
entity. Citing H.R. Rep. No. 90-1585, at 65-66 (1968) and 12 U.S.C. § 1717(a)(2), the Defendants
note that “[i]n 1968, Congress established Fannie Mae as a ‘private corporation’ that, while
chartered by the federal government, would be ‘entirely privately owned.’” (Defs.’ Br. at 6-7, docket
no. 20.) Therefore, because Fannie Mae is a private entity, over which the government has not
retained permanent authority to appoint a majority of directors, the third requirement under Lebron
is not met and Fannie Mae is not a government actor under Lebron for purposes of constitutional
claims.
In further support of their assertion that Fannie Mae is not a government actor, the
Defendants cite two other cases. The first case, American Bankers Mortgage Corp. v. Federal Home
Loan Mortgage Corp., 75 F.3d 1401 (9th Cir. 1996), held that “upon an application of
Lebron
principles,” Freddie Mac (a government sponsored enterprise substantially identical in all material
respects to Fannie Mae) “is not a government agency subject to the Fifth Amendment’s Due Process
Clause.” Id. at 1409. The second case is Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.D.C. 2012).
Herron involved constitutional claims brought against Fannie Mae after the FHFA appointment as
conservator. Before turning to the effect of the conservatorship upon Fannie Mae, the Herron court
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first stated that “[i]t is well-settled that pre-conservatorship, Fannie Mae was a private actor.” Id.
at 92.
The Debtor’s response to the Defendants’ motion only briefly discusses Lebron. The Debtor
does not seem to quarrel with the Defendants’ contention that pre-conservatorship, Fannie Mae was
not considered to be a government actor under Lebron. However, the Debtor does argue that the
appointment of FHFA as conservator, and the actions taken by FHFA as conservator, now provide
the requisite level of permanent control over Fannie Mae to make it a government actor under
Lebron. Putting Lebron aside, the Debtor then discusses extensively what he describes as the
“seminal” case of Northrip v. Federal National Mortgage Association, 527 F.2d 23 (6th Cir. 1975).
Northrip dealt with an action by a property owner against Fannie Mae alleging due process
and other constitutional violations based upon Fannie Mae’s foreclosure of a mortgage on the
plaintiff’s property under Michigan’s non-judicial foreclosure statute. The Sixth Circuit reviewed
the legislation that created Fannie Mae and the legislative history explaining the congressional
intent. The court noted that “[t]here is some, and perhaps even significant, government involvement
in, and regulation of, the workings of [Fannie Mae].” Id. at 31. However, the court ultimately held
that there was not sufficient government involvement implicated in Fannie Mae’s mortgage
foreclosure to permit the plaintiff to bring an action for constitutional violations against Fannie Mae.
Id. at 32. The Northrip analysis focused heavily on the specific conduct involved in implementing
the remedy of a non-judicial foreclosure in Michigan and whether that conduct sufficiently
implicated government action.
Although the Debtor acknowledges that Northrip’s holding does not help him, the Debtor
tries to avoid its holding by arguing that if Northrip were decided today, the Sixth Circuit would
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come to a different result. In support of this argument, the Debtor’s response to the motion to
dismiss points to many facts about Fannie Mae that the Debtor says have changed since Northrip
was decided. For example, the Debtor’s response generally discusses changes in the secondary
mortgage market, adverse trends in the mortgage industry, deterioration of property values and the
heightened prevalence of Fannie Mae in the secondary mortgage market. The Debtor also discusses
various federal government initiatives to encourage loan modifications and statements made by
congressional leaders about Fannie Mae. Although none of these facts are alleged in the Debtor’s
complaint, the Debtor argues that the Sixth Circuit would decide Northrip differently today based
upon these changed facts and would hold Fannie Mae to be a government actor for purposes of
constitutional claims. The Debtor concludes by citing numerous cases that were either decided prior
to Lebron or that address instances where Fannie Mae has been or may be considered to be a part
of the federal government for purposes other than liability for constitutional claims.
In considering whether Fannie Mae is a government actor for purposes of constitutional
claims, the first question to resolve is what is the appropriate test for the Court to apply. As noted,
the Defendants argue that the Lebron test governs. The Debtor asserts that various other tests are
available that have been used for purposes other than constitutional claims (e.g., determining
eligibility for exemptions from transfer taxes for real property). However, the Debtor does not
explain why those tests, and not Lebron, govern the question of whether Fannie Mae is a
government actor for purposes of liability for constitutional claims. Nor does the Debtor discuss a
Sixth Circuit case that has addressed which test to apply to determine whether a private corporation
is a government actor for constitutional claims.
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Parrett v. Southeastern Boll Weevil Eradication Foundation, Inc., 155 Fed. Appx. 188
(6th Cir. Nov. 15, 2005), involved a wrongful termination action brought by a former employee
against Southeastern Boll Weevil Eradication Foundation, Inc. (“Southeastern”). Id. at 189.
Southeastern filed a motion to dismiss, arguing that although it was a non-profit corporation formed
under Alabama law, it was formed for the purpose of carrying out programs sponsored or
recommended by the United States Department of Agriculture to eradicate the boll weevil. Because
of this, Southeastern argued that it was entitled to sovereign immunity because it was an arm of the
federal government. Id. at 189-90. In considering what was the proper test to apply to determine
whether state sovereign immunity is applicable, the Sixth Circuit noted that the test for determining
whether a corporation may invoke sovereign immunity is different than the test for determining
whether a corporation is a government actor for purposes of constitutional claims, even though those
tests may overlap. Id. at 192. Turning to the question of whether a corporation is an arm of the
federal government for purposes of constitutional claims, the Sixth Circuit explained as follows:
The leading case in this area of law is
Lebron v. National Railroad Passenger Corp.,
513 U.S. 374, 115 S.Ct. 961, 130 L.Ed.2d 902 (1995), where the Supreme Court
analyzed whether Amtrak could be sued for a First Amendment violation.
Lebron
identifies three major questions necessary to determine whether a private corporation
is an arm of the federal government for purposes of federal constitutional challenges:
(1) Creation: Did the government create the corporation by a special law?
(2) Objectives: Was the corporation created for the furtherance of governmental
objectives? (3) Control: Did the government retain for itself permanent authority to
appoint a majority of the directors of the corporation? . . .
Lebron itself suggests that
the inquiry over sovereign immunity differs from the inquiry over whether an
organization may be subject to constitutional claims: Although holding that Amtrak
was subject to First Amendment claims, the Court noted in
dicta that Amtrak would
not be entitled to sovereign immunity because the statute creating the organization
specifically states that Amtrak is not an agency of the federal government.
Id. at 191-92 (citing Lebron, 513 U.S. at 392, 400).
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The Debtor is correct that there are multiple other tests that may be used for determining
whether Fannie Mae should be treated as a government instrumentality for some purposes.
However, the Court concludes that the controlling test for whether Fannie Mae is a government actor
for purposes of liability for constitutional claims is the test set forth in Lebron, which Parrett
describes as “[t]he leading case in this area of the law.” Id. at 191. The Debtor concedes that under
the Lebron test, Fannie Mae was not treated as a government actor for purposes of constitutional
claims against it prior to the appointment of FHFA as conservator for it. However, as noted earlier,
the Debtor argues that whatever the law may have been regarding Fannie Mae
prior to the
appointment of FHFA as a conservator, that appointment was a “game changer.”
The effect of the appointment of FHFA as conservator for Fannie Mae upon the question of
whether Fannie Mae is a government actor for purposes of constitutional claims was considered in
three opinions that the parties cite to the Court. First, Herron v. Fannie Mae involved an action
brought by a former employee of Fannie Mae for wrongful discharge, civil conspiracy to terminate
employment, tortious interference with prospective contractual relations, and First Amendment
violations. 857 F. Supp. 2d 87, 88 (D.D.C. 2012). Similar to this case, FHFA intervened in Herron
as conservator for Fannie Mae. FHFA then moved to dismiss the constitutional claims under the
First Amendment. The District Court for the District of Columbia reviewed the history of Fannie
Mae up to the date of the appointment of FHFA as conservator. Id. at 89-90. The court noted that
in Lebron, “the Supreme Court defined what type of entity constitutes a federal actor for the purpose
of a constitutional claim.” Id. at 92. The court reviewed the legislation creating Fannie Mae, how
the purposes of Fannie Mae further certain governmental objectives, and noted that when Fannie
Mae was created by Congress, the government did not retain the permanent authority to appoint the
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majority of its directors. The Herron court then stated that “[p]re-conservatorship Fannie Mae . . .
was a non-governmental entity under the reasoning set forth in Lebron.” Id. at 93. In support of this
statement, Herron observed in a footnote that “[b]efore Lebron, courts regularly determined that
Fannie Mae was not a federal actor subject to the Fifth Amendment due process clause.” Id. at n.7
(citing Northrip, 527 F.2d at 30, and Roberts v. Cameron-Brown Co., 556 F.2d 356 (5th Cir. 1997)).
The court also noted that the Ninth Circuit held that pre-conservatorship Freddie Mac, a similar
entity, was not a government actor under Lebron. Id. at 93 (citing American Bankers Mortgage
Corp. v. Federal Home Loan Mortgage Corp., 75 F.3d 1401, 1405 (9th Cir. 1996)). The Herron
court then pointed out that “[s]ince Lebron, no other court has been presented with the issue of
whether pre-conservatorship Fannie Mae was a federal actor.” Id.
Having established that pre-conservatorship Fannie Mae was not a government actor under
Lebron, the Herron court then reviewed the following traits of the conservatorship to determine
whether the appointment of FHFA as conservator for Fannie Mae changed this result. In a federal
conservatorship, the conservator “takes over the day-to-day operations and assumes the powers of
shareholders, board of directors, and management.” Id. at 93. “The purpose of the conservator . .
. is to restore the entity to fiscal feasibility or to liquidate and distribute its assets.” Id. at 93-94. To
accomplish this, “[t]he conservator . . . steps in to the private status of the entity” and “take[s] over
its assets and the operation” of its business “in order to preserve and conserve the assets and
property of [the institution].” Id. at 94. Herron then concluded that the appointment of FHFA as
conservator for a private corporation such as Fannie Mae did not transform that corporation into a
government actor. Id.
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In reaching its conclusion, the Herron explained that the FHFA conservatorship does not
retain for the government the permanent authority to appoint a majority of Fannie Mae’s directors.
Id. at 95. Nor does the appointment “establish
permanent government authority to control Fannie
Mae.” Id. The fact that FHFA, as conservator, has control over Fannie Mae’s business does not
mean that this is a permanent condition. A “conservatorship is temporary by its nature,” and
“Fannie Mae remains a private corporation,” albeit it one that is under the supervision of a
conservator. Id. at 96. The Herron court summarized its holding as follows:
As described above, a conservator or receiver steps into the shoes of the private
entity—it assumes the private status of the entity. Fannie Mae was a private entity;
when FHFA took over as conservator of Fannie Mae, it stepped into Fannie Mae’s
private role. In sum, FHFA as conservator of Fannie Mae is not a government
actor[.]
Id. at 96 (citations omitted).
The Defendants cite two other decisions consistent with Herron supporting their contention
that the appointment of FHFA as conservator of Fannie Mae did not transform Fannie Mae into a
government actor for purposes of constitutional claims. Both of these decisions are unreported. See
Syriani v. Freddie Mac Multiclass Certificates Series 3365, et al., No. 12-3035-JFW (C.D. Cal.
July 10, 2012) (Defs.’ Reply Br., Ex. A, docket no. 43) (quoting extensively from Herron, and
holding that “Freddie Mac does not become a governmental actor for Fifth Amendment purposes
merely because it is placed into conservatorship” and that the “Federal Housing Finance Agency’s
‘control’ is merely the same control that Freddie Mac had before the conservatorship”); and Federal
Home Loan Mortgage Corp. v. Kelly, case no. 12-1734 LT (55th Dist. Mich., July 15, 2012) (Defs.’
Reply Br., Ex. B, docket no. 43) (citing Lebron, American Bankers Mortgage Corp., and Herron and
holding that Freddie Mac is not a government entity liable for constitutional claims). In addition,
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since this matter was heard, another court has ruled consistent with Herron. See Rubin v. Fannie
Mae, No. 12-cv-12832, 2012 WL 6000572, at *2-3 (E.D. Mich. Nov. 30, 2012) (finding “that Fannie
Mae is not a federal actor and dismiss[ing the plaintiff’s] constitutional claims” based on Northrip,
Lebron and Herron).
The Debtor acknowledges that there are no reported decisions accepting his argument that
the appointment of FHFA is a “game changer.” Further, the Debtor concedes that the very same
arguments that he makes in this case were expressly rejected by Herron. Nonetheless, the Debtor
suggests that Herron is distinguishable from his case because the constitutional claims alleged by
the plaintiff in Herron (i.e., first amendment) are different than the constitutional claims alleged by
the Debtor against Fannie Mae (i.e., due process and equal protection).
After reviewing all of the cases cited by the parties, the Court holds that the Defendants are
entitled to dismissal of not just counts III and IV, but of the entire complaint because the Debtor has
failed to plead any facts that plausibly suggest an entitlement to relief against Fannie Mae. First,
despite the fact that the Defendants do not rely upon Northrip, and that it was the Debtor who cited
Northrip, the Debtor offers no reason why Northrip does not control this case other than the Debtor’s
belief that it would be decided differently today. The Court is not persuaded that there are any facts
alleged in the Debtor’s complaint that would change the result in Northrip if it were decided today.
Northrip holds that “[m]ortgage foreclosures through power of sale agreements are not powers of
a government nature.” 527 F.2d 23, 31 (6th Cir. 1975). Northrip further holds that there is not “a
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2
If anything, the Debtor’s case is weaker than Northrip. Although the Debtor’s
complaint is imprecise, the Debtor does not even allege that Fannie Mae conducted the
foreclosure sale. Instead, paragraph 12 of the complaint alleges that “the property was sold to
Bank of America, the seller servicer,” and then later deeded to Fannie Mae. Even if this
language could be read as alleging that Fannie Mae had some role in the foreclosure process,
Northrip controls and requires dismissal of any claim by the Debtor against Fannie Mae
regarding the foreclosure sale process.
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sufficiently close nexus” between the government and the challenged act of foreclosure so that the
action of the latter may fairly be treated as that of the government. Id. at 32.
2
Second, all of the claims in the Debtor’s complaint, including the foreclosure sale claims
governed by Northrip, allege constitutional violations by Fannie Mae. As explained above, Lebron
governs the question of whether Fannie Mae is a government actor for purposes of liability for
constitutional claims as the Sixth Circuit’s opinion in Parrett expressly stated. To be a government
actor for this purpose, Lebron requires a showing that the government has retained for itself
permanent authority to appoint a majority of the board of directors. The Debtor’s complaint does
not allege any facts to meet this showing other than the appointment of FHFA as conservator for
Fannie Mae. Nor does the Debtor cite to any reported or unreported decision holding Fannie Mae
to be a government actor for purposes of liability for constitutional claims. The sole fact pleaded
by the Debtor in his complaint upon which the Debtor alleges that Fannie Mae is a government actor
is the fact that the FHFA was appointed as conservator for Fannie Mae on September 7, 2008 (¶ 7
of complaint). The Court disagrees with the Debtor that this fact is a “game changer,” and instead
agrees with the analysis of this fact by the Herron court and the other cases cited by the Defendants.
A review of the statute that authorized the conservatorship also supports this analysis.
Although not mentioned in either the Debtor’s complaint or the Debtor’s brief, the statute
under which FHFA was appointed as conservator, 12 U.S.C. § 4617, specifies the powers and duties
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of the FHFA as conservator. There is nothing in the statute that makes the conservatorship
permanent. In § 4617(a)(2), the FHFA may “be appointed conservator or receiver for the purpose
of reorganizing, rehabilitating, or winding up the affairs” of Fannie Mae. Section 4617(a)(5)
authorizes judicial review by the United States District Court upon the request of Fannie Mae to
have the FHFA remove itself as conservator. Section 4617(a)(4)(D) provides that the appointment
of FHFA as receiver terminates the conservatorship. Section 4617(b) sets forth the powers and
duties of the FHFA as conservator. Although the powers of the conservator authorize it to step into
the shoes of Fannie Mae with respect to the assets and operations of Fannie Mae, there is no
provision in the statute that retains for the federal government any permanent control over Fannie
Mae.
Nor does the one exhibit attached to the Debtor’s complaint in any way suggest that the
appointment of FHFA as conservator is “game changer” for purposes of Lebron. The Congressional
Research Service Report that is attached as Exhibit A to the Debtor’s complaint summarizes the
reasons for the appointment of FHFA as conservator for Fannie Mae and the powers that FHFA has
over Fannie Mae as conservator. It contains only one statement even arguably relevant to the length
of time of the conservatorship, and whether the government has retained permanent control over
Fannie Mae by means of the conservatorship. Page 3 of the report states: “The conservatorship will
end when the FHFA finds that a safe and solvent condition has been restored.” However, the fact
that the conservatorship may be of an indefinite period of time to accomplish the purposes of the
conservatorship does not equate to a finding that the conservatorship implements permanent control
over Fannie Mae. Although the Debtor’s response to the Defendants’ motion to dismiss contains
many pages of other factual allegations about Fannie Mae and FHFA, none of those allegations are
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set forth in the Debtor’s complaint. There is no allegation either in the Debtor’s complaint or
incorporated by reference in the complaint by the Congressional Research Service Report attached
as Exhibit A that alleges any facts that plausibly suggest that the federal government permanently
retains control over Fannie Mae, which is one of the requirements in order to make Fannie Mae a
government actor under the Lebron test.
Third, the Debtor’s attempt to distinguish Herron is unpersuasive. It is irrelevant what the
specific constitutional violations may be for purposes of determining whether an entity is a
government actor under Lebron. The Lebron test applies without regard to whether the specific
alleged constitutional violation relates to the first amendment, as in Herron, or the fifth and
fourteenth amendments, as alleged by the Debtor. For purposes of Lebron, this is a distinction
without a difference.
The sole fact that the Debtor has pleaded in the complaint in support of his claim that Fannie
Mae is a government actor is that the FHFA was appointed as conservator for Fannie Mae. This fact
does not change Fannie Mae’s status under the Lebron test, nor does it make Fannie Mae liable for
any of the claims in the complaint, under Lebron, Northrip, or the analysis in Herron. This fact does
not plausibly suggest an entitlement to relief against Fannie Mae. The Debtor’s complaint does not
contain any other factual content for the Court to conclude that the Debtor is plausibly entitled to
a determination that Fannie Mae is a government actor. Therefore, the Debtor’s complaint must be
dismissed under Rule 12(b)(6) for failure to state a claim upon which relief can be granted.
Conclusion
As noted above, the Defendants have moved for dismissal on two additional grounds, res
judicata and standing. It is unnecessary for the Court to reach those alternative grounds for
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3
Although not raised by the Defendants, there is another problem with the Debtor’s
complaint that is worth mentioning. The Debtor is in Chapter 7. As such, all of the claims that
the Debtor may have against Fannie Mae based upon Fannie Mae’s pre-petition conduct are
property of the Debtor’s bankruptcy estate under § 541(a)(1) of the Bankruptcy Code. To the
extent any such claims exist (and the Debtor’s schedule B does not list any such claims), it is the
Chapter 7 Trustee, and not the Debtor, who has the sole right to bring such claims against Fannie
Mae. The Debtor has no standing to pursue such claims. Auday v. Wet Seal Retail, Inc., 698
F.3d 902, 904 (6th Cir. 2012).
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dismissal. For the reasons explained above, the Court concludes that the Rooker-Feldman doctrine
precludes the Debtor from attacking the foreclosure sale and the State Court Judgment and requires
dismissal of counts I and II. The Debtor lost in the State Court Lawsuit, and Fannie Mae was
awarded the State Court Judgment. The only claims asserted by the Debtor in his complaint in this
adversary proceeding that survive a Rooker-Feldman analysis are those claims asserted in counts III
and IV based upon facts alleged in paragraphs 17, 19, 26, 33, 34 and 40 of the Debtor’s complaint.
But any relief in favor of the Debtor and against Fannie Mae because of those factual allegations and
counts can only be awarded if Fannie Mae is a government actor. For the reasons explained above,
the Court concludes that under the Lebron test, Fannie Mae is not a government actor, and did not
become a government actor when FHFA was appointed as conservator. As a result, all of the
Debtor’s claims set forth in the complaint must be dismissed. The Court expresses no view about
the Defendants’ alternative grounds for dismissal based upon res judicata and standing.
3
The Court will enter an order consistent with this opinion.
.
Signed on December 14, 2012
/s/ Phillip J. Shefferly
Phillip J. Shefferly
United States Bankruptcy Judge
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