Keo v. Federal Home Loan Mortgage Corporation

Background

Chanht Keo sued Federal Home Loan Mortgage Corporation, which the opinion calls Freddie Mac, over the nonjudicial foreclosure of property where Keo continued to reside pending eviction. Keo alleged that the foreclosure did not provide adequate notice and an opportunity to be heard, violating the Fifth Amendment’s due-process protection. She also sought cancellation of instruments, arguing that Freddie Mac’s purchase of the property through a credit bid at the trustee sale was invalid because Freddie Mac was not the present beneficiary of the deed at the time of sale.

Before filing this federal case, Keo had brought three state-court actions challenging the defendants’ authority to foreclose. The first included claims such as wrongful foreclosure, fraud, quiet title, recoupment, and declaratory relief. The second asserted claims under California’s Homeowner’s Bill of Rights and the federal Truth in Lending Act, among others. The third again challenged the authority to foreclose. The state courts dismissed the relevant claims, and the California Court of Appeal affirmed rulings in the first two actions. In the third action, the Superior Court ruled that the claims were barred by claim preclusion, and it later denied Keo’s motion for relief from dismissal. The opinion states that two appeals related to the third action were pending.

Nationstar Mortgage LLC, Freddie Mac’s loan servicer and agent according to the opinion, had been named as a defendant in the earlier state cases, while Freddie Mac was named for the first time in this federal case. The Federal Housing Finance Agency intervened as conservator of Freddie Mac and adopted Freddie Mac’s motion to dismiss.

Motion and governing standard

Freddie Mac moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court could consider public records and filings from the related state proceedings through judicial notice without converting the motion into a summary-judgment motion. The court granted Freddie Mac’s request for judicial notice of specified recorded documents and state-court filings. It denied Keo’s request for judicial notice as moot because the document concerned whether Freddie Mac could be considered a government actor, an issue the court said it did not need to reach.

Claim preclusion analysis

The court applied California claim-preclusion law because the earlier judgments were issued by California courts. Claim preclusion, also called res judicata, generally prevents a party from bringing claims that were raised or could have been raised in an earlier action. Under the court’s description of California law, it applies when: (1) the earlier decision is final and on the merits; (2) the current and earlier actions involve the same cause of action; and (3) the parties, or parties legally connected to them, are the same.

The court held that all three requirements were satisfied. First, it concluded that the Court of Appeal’s decision affirming dismissal in the first state action could constitute a final judgment on the merits for claim-preclusion purposes. The pending appeals in the third state action did not undermine the finality of the first action because Keo had not sought review of that decision by the California Supreme Court.

Second, the court found that both federal claims involved the same cause of action as the earlier state proceedings. Under California’s “primary rights” theory, the focus is on the harm involved. Although Keo presented her due-process claim as a new constitutional theory concerning the notice and hearing process, the court determined that the core of the complaint remained the alleged wrongful foreclosure and the question whether Freddie Mac had the right to foreclose. The court also held that the cancellation claim concerned the same underlying alleged wrongful foreclosure and sale that had been challenged previously.

The court emphasized that claim preclusion applies to claims that could have been brought earlier, even if they were not actually asserted or decided. It reasoned that Keo could have raised the constitutional challenge in one of the earlier state proceedings, including the third action.

Third, the court found sufficient legal connection, or privity, between Nationstar and Freddie Mac. The court stated that Freddie Mac owned the loan and Nationstar serviced it as Freddie Mac’s agent, so the earlier rulings concerning Nationstar’s ability to foreclose on Freddie Mac’s behalf affected Freddie Mac’s interests. The court also relied on Keo’s earlier filings, which showed that she knew or believed as early as 2013 that Freddie Mac might own the loan.

Disposition

The court held that claim preclusion barred both of Keo’s claims. It granted Freddie Mac’s motion to dismiss without leave to amend and dismissed Keo’s complaint with prejudice. The court did not decide whether Freddie Mac was a government actor subject to the Fifth Amendment because the claim-preclusion ruling resolved the case.