Metropolitan News-Enterprise


Wednesday, July 30, 2014


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Panel Affirms Rejection of Todd Rundgren’s Foreclosure Suit

Ninth Circuit Says Bank Not Liable for Acts of Insolvent Predecessor Where Administrative Remedies Not Exhausted




The successor to an insolvent lender is not liable for an alleged wrongful foreclosure if the property owner failed to exhaust administrative remedies offered by the Federal Deposit Insurance Corporation, the Ninth U.S. Circuit Court of Appeals ruled yesterday.

The court upheld the dismissal of claims by singer/songwriter/music producer Todd Rundgren and his wife that Washington Mutual Bank defrauded them into taking out a $3 million mortgage on a home in Kilauea, Kauai that they could not repay. Among other things, Todd and Michele Rundgren claim, the bank substituted a falsified mortgage application for the one they filled out, inflating their assets.

WaMu was later seized by federal regulators. The FDIC took control of the bank in September 2008 and sold certain of its assets and liabilities, including the Rundgren mortgage, to JP Morgan Chase Bank.

State Court Action

Chase initiated a non-judicial foreclosure in 2009, and the Rundgrens brought a state court action to block the sale and for damages. Chase removed the action to U.S. District Court, where Judge J. Michael Seabright ruled for Chase, holding that the court lacked jurisdiction because the plaintiffs failed to exhaust administrative remedies as required by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, better known as FIRREA, and that the complaint failed to state a cause of action.

Judge Sandra S. Ikuta agreed with the district judge as to the jurisdictional issue.

FIRREA, Ikuta explained, requires that anyone with claims against a failed institution present a claims form to the FDIC within a strictly limited period of time. If the FDIC rejects a claim, the claimant can opt for an administrative appeal or a suit in federal district court.

Because the Rundgrens did not present a claim, the district court had no jurisdiction over their lawsuit, Ikuta said, rejecting their contention that they were not “creditors” of Washington Mutual and thus not subject to the statutory bar.

The statutory language, the judge noted, encompasses anyone with a “claim” for an “act or omission” of the bank. The Rundgrens clearly fall within that language, she said.

Defense Rejected

Ikuta also rejected the contention that the Rundgrens were not seeking affirmative relief, but merely raising affirmative defenses.

She explained:

“Here, the Rundgrens had contractually agreed to allow the lender to exercise a power of sale and foreclosure without judicial proceedings. Because the lender had no need to pursue foreclosure through a court action, the Rundgrens could not block a foreclosure by raising affirmative defenses; rather, they exercised their right under Hawaii state law to bring a lawsuit raising their claims against WaMu and Chase. Nothing in FIRREA allows us to ignore common legal usage and recharacterize the Rundgrens’ lawsuit for legal and equitable relief and damages as one raising affirmative defenses.”

The judge also rejected the plaintiffs’ reliance on Bolduc v. Beal Bank, SSB, 167 F.3d 667 (1st Cir. 1999). The court held there that a person who is merely alleged to owe money is not a claimant, and while acknowledging that a mortgage has a “dual aspect” in the sense that the bank has both a right to be paid, and a right to force a sale of the property if it is not paid, concluded that on balance, the property owner was not required to exhaust FIRREA remedies in order to sue to block the foreclosure.

Ikuta disagreed.

Bolduc did not address the language of § 1821(d)(13)(D)(ii), which refers to a ‘claim relating to any act or omission’ of the failed bank,” she wrote. “In our view, the reasoning of Bolduc is neither clear nor persuasive.”

Judges Andrew Hurwitz and William Fletcher joined the opinion.

The case is Rundgren v. Washington Mutual Bank, FA, 12-15368.


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