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Financial Services Law Insights and Observations

5th Circuit remands nonjudicial foreclosure suit back to state court

Courts Appellate Fifth Circuit Debt Collection Foreclosure Mortgages State Issues Texas

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On June 16, the U.S. Court of Appeals for the Fifth Circuit held that a plaintiff borrower’s requested damages in a foreclosure lawsuit did not exceed the federal jurisdictional threshold amount of $75,000, and sent the case back to Texas state court. The plaintiff sued the financial institution in state court after it sought a nonjudicial foreclosure on his house, asserting violations of the Texas Debt Collection Act, breach of the common-law duty of cooperation, fraud, and negligent misrepresentation. The suit was removed to the U.S. District Court for the Northern District of Texas, with the defendant arguing that the suit automatically stayed its nonjudicial foreclosure sale, thus putting the value of the house ($427,662) as the amount in dispute, instead of the plaintiff’s requested relief of $74,500. The plaintiff moved to remand the case to state court on the premise “that the amount in controversy could not exceed the stipulated maximum of $74,500.” The district court denied the plaintiff’s motion, ruling that it “had to measure the amount in controversy ‘by the value of the object of the litigation,’” and not by what the plaintiff’s complaint says the damages were not to exceed.

In reversing and remanding the case to state court, the 5th Circuit concluded that, because the defendant did not show that the automatic stay brought the house’s value into controversy, it “failed to establish by a preponderance of the evidence that the amount in controversy exceeded $75,000.” The appellate court agreed with the plaintiff’s assertion that the house was simply collateral and “thus irrelevant to the amount in controversy,” writing that “[i]t is well-settled that neither the collateral effect of a suit nor the collateral effect of a judgment may count toward the amount in controversy.” The 5th Circuit also determined that the plaintiff expressly stipulated in both his original state-court petition and in a declaration “that he is seeking total damages not to exceed $74,500,” and that this stipulation is legally binding.

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