A 2013 Nevada Supreme Court Certification created a legal dilemma for the Banks and purchasers of deeds of trust.

Removal to U.S. District court  may not be an option in residential wrongful foreclosure actions for banks and other purchasers of trust deeds, and their eviction counterparts, after the Nevada Supreme Court’s recent en banc opinion in Chapman v. Deutsche Bank Nat’l Trust Co., 129 Nev. Adv. Op. 34 (May 30, 2013).

Typically, in Nevada, when a residential borrower defaults, the mortgage servicer will initiate a nonjudicial foreclosure. After completing Nevada’s mandatory foreclosure mediation program, the nonjudical foreclosure will proceed to a trustee’s sale. Often, borrowers will continue to improperly occupy the property, forcing the purchaser at the trustee’s sale (typically the bank or servicer) to begin eviction proceedings in state justice court. In response, and in an effort to stay eviction proceedings, borrowers will often file a separate lawsuit in state district court for wrongful foreclosure/quiet title, among other claims.

At this point, if the defendant purchaser of the property can establish diversity or federal question jurisdiction, it will usually seek removal of the borrower’s lawsuit to U.S. District court. The purchaser’s eviction proceedings remain in state justice court and are either completed before the borrower’s lawsuit is adjudicated or the eviction proceedings are stayed pending the outcome of the lawsuit in U.S. District court. In any event, a purchaser could at least rest assured that its lawsuit would proceed in U.S. District court and not be remanded to state court.

Chapman has changed all of that in that it significantly impairs the federal court removal option under this typical scenario. Accordingly, banks and other purchasers of trust deeds will have to alter how they deal with evictions and nonjudicial foreclosures in Nevada to reduce Chapman’s affect.

Chapman is the result of  two questions certified to the Nevada Supreme Court by the Ninth Circuit Court of Appeals in Chapman v. Deutsche Bank Nat’l Trust Co., 651 F.3d 1039 (9th Cir. 2011). The Ninth Circuit asked the Nevada Supreme Court:

1. Is a quiet title action under Nevada Revised Statutes § 40.010, which is premised on an allegedly invalid trustee’s sale under Nevada Revised Statutes § 107.080(5)(a), properly characterized under Nevada law as a proceeding in personam, in rem, or quasi in rem?
2. Is an unlawful detainer action under Nevada Revised Statutes § 40.255(1)(c) properly characterized under Nevada law as a proceeding in personam, in rem, or quasi in rem?

Id. at 1048.

The Nevada Supreme Court answered these questions by determining that eviction and quiet title actions are both properly characterized as proceedings involving a property interest. To be precise, the Court chose not to make a distinction between in rem and quasi in rem proceedings, but held that eviction and quiet title actions are not in personam. At first glance, this holding seems rather benign, but the practical effects are far reaching because of the typical scenario explained above. If the bank first files an eviction proceeding, and while the eviction process is still open, the borrower files a separate action in state court contesting ownership to the property, under Chapman, removal of the borrower’s action to U.S. District court is prevented under a doctrine known as the prior exclusive jurisdiction doctrine.

Under this doctrine, “when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res.” Marshall v. Marshall, 547 U.S. 293, 311 (2006). Accordingly, where parallel state and federal court proceedings seek to “‘determine interests in specific property as against the whole world’ (in rem), or where ‘the parties’ interests in the property … serve as the basis of the jurisdiction’ for the parallel proceedings (quasi in rem), then ‘the doctrine of prior exclusive jurisdiction fully applies.’” Chapman, 651 F.3d at 1044 (internal citations omitted).

Hence, if an eviction proceeding was first filed and remains open while a second quiet title lawsuit is filed by a borrower, removal of the quiet title action is now precluded in Nevada by the prior exclusive jurisdiction doctrine. If one does remove the second matter, a swift and likely successful motion to remand can now be expected. In order to avoid this situation, and to protect a party’s ability to litigate in U.S. District court, there are a few options worth considering.

First, if a bank has an ongoing eviction proceeding in state justice court, and then is served with a quiet title action in state district court, a trust deed purchaser may move on an expedited basis to transfer the eviction proceeding to where the quiet title action was filed, and then remove to U.S. District court. Because the right to remove is governed by statute, 28 U.S.C. §1441(a), and in the normal case a defendant has only 30 days to remove after being served, 28 U.S.C. § 1446(b), the bank will need to be extra vigilant in moving to transfer the eviction proceeding to state district court and then timely remove the case to U.S. District court. A second option is to voluntarily dismiss the eviction action without prejudice,  then remove the quite title proceeding to U.S. District court. The bank can then move in the U.S. District court to evict. In the appropriate case, a trust deed purchaser can initiate a quiet title action in U.S. District court and seek injunctive relief to remove a borrower from the trustee deed purchaser’s property.

The Chapman case will certainly change the way the financial services industry and other purchasers of trust deeds handle eviction proceedings in Nevada. Chapman does not preclude removal, but banks and other purchasers of trust deeds will have to carefully consider the timing and method by which it removes borrowers from property that has been foreclosed upon.

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