Commerce Home Mortgage LLC v. Federal Home Loan Bank of San Francisco

Background

Commerce Home Mortgage LLC filed the case in California state court. Commerce alleged that the Federal Home Loan Bank of San Francisco approved its application for membership, required it to buy more than $1 million in the Bank’s stock, and then did not provide the promised credit facility or other membership services. The Bank later rescinded the membership approval and declared the membership void, citing Commerce’s failure to satisfy a federal operating-liquidity requirement. Commerce later reapplied for membership, but the Bank denied that application.

Commerce asserted three state-law causes of action: fraud, violations of California Business and Professions Code section 17200, and breach of contract. The Bank removed the case to federal court under federal-question jurisdiction, arguing that the claims necessarily raised substantial questions under federal law. Commerce moved to remand, meaning it asked the federal court to return the case to state court.

The Federal Housing Finance Agency, which filed an amicus brief with the court’s permission, argued that remand would be futile because it might seek to intervene in state court and then remove the case again. The court rejected that argument because the Agency had not shown that intervention and renewed removal were certain to occur.

Federal Jurisdiction Analysis

The court applied the rule that a state-law claim can support federal-question jurisdiction only when a federal issue is necessarily raised, actually disputed, substantial, and capable of resolution in federal court without upsetting the federal-state balance. The Bank had the burden of establishing that removal was proper.

For the fraud claim, Commerce alleged that the Bank made promises about membership benefits while intending to deceive Commerce, regardless of whether Commerce actually qualified for membership under federal regulations. The court therefore concluded that the fraud claim did not necessarily require deciding whether Commerce satisfied the federal liquidity requirement. The Bank had not shown federal jurisdiction over that claim.

The section 17200 claim was based on the same alleged fraudulent scheme. The court likewise found that it did not necessarily raise a federal issue. The Bank also argued that federal law completely preempted the claim. The court explained that complete preemption occurs when a federal statute entirely replaces a state-law cause of action and supplies the exclusive claim, procedures, and remedies. It distinguished defensive preemption, which may provide a defense to a state-law claim but does not make the claim removable. Because the Bank identified no federal statute providing the exclusive cause of action and remedies for Commerce’s unfair-competition claim, the court found no federal jurisdiction over that claim.

For the breach-of-contract claim, Commerce alleged that the Bank breached the parties’ agreement by rescinding the membership approval outside the circumstances allowed by the agreement. The court found that resolving the claim would require interpreting the agreement, not deciding whether the Bank properly applied federal membership regulations. The agreement’s choice-of-law provision stated that federal statutory and common law would govern, with California law applying where federal law incorporated or deferred to state law. The Bank did not identify federal common law governing interpretation of this agreement or federal law requiring the use of state contract law. The court therefore concluded that the provision did not create federal jurisdiction.

Disposition

The court held that the Bank failed to establish federal jurisdiction over all three of Commerce’s claims. It granted Commerce’s motion to remand and remanded the case to the Superior Court of the State of California for the County of San Francisco. Judge Maxine M. Chesney entered the order on May 24, 2021.