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ACA Financial Guaranty Corporation and UMB Bank, N.A. v. City of Buena Vista

United States District Court, W.D. Virginia, Lynchburg Division

August 9, 2017

ACA Financial Guaranty Corporation and UMB Bank, N.A., Plaintiffs,
City of Buena Vista, Virginia, ET AL., Defendants.



         This case is before the Court on two types of motions to dismiss. A bank (UMB Bank) and a bond insurer (ACA Financial) sued the City of Buena Vista and its recreational authority (“Authority”), asserting claims for breach of contract, fraud, and quasi-contract. The main dispute is whether the contracts at issue create an enforceable obligation on Defendants to repay Plaintiffs for refinancing a golf course in 2005. Arguing no obligation exists and that the other claims fail, Defendants seek dismissal for failure to state claim under Rule 12(b)(6).

         Defendants also moved to dismiss under Rule 12(b)(7) for failure to join a necessary party. This motion pertains to two deeds of trust executed in favor of UMB Bank's predecessor. The deeds of trust pledged real estate as collateral in the event Defendants did not repay the bank. Defendants say that the trustees (who were residents of Virginia in 2005) are necessary parties whose presence would destroy the diversity jurisdiction of this Court. The current record, however, is insufficient to allow the Court to make a determination of that issue. Because that motion involves a colorable question of this Court's subject matter jurisdiction, the Court will order supplemental submissions on the Rule 12(b)(7) motion and defer its ruling on the Rule 12(b)(6) motion.


         Federal Rule of Civil Procedure 19 addresses joinder of necessary parties, and Rule 12(b)(7) permits motions to dismiss for failure to join a necessary party. Usually, courts “are loath to dismiss cases based on nonjoinder of a party, so dismissal will be ordered only when the resulting defect cannot be remedied and prejudice or inefficiency will certainly result.” Owens-Illinois, Inc. v. Meade, 186 F.3d 435, 441 (4th Cir. 1999); see Nat'l Union Fire Ins. Co. of Pittsburgh v. Rite Aid of S.C., Inc., 210 F.3d 246, 250 (4th Cir. 2000) (noting dismissal “is a drastic remedy” that “should be employed only sparingly”). Courts approach the issue of joinder “pragmatically” and “in the context of the substance of each case.” Owens-Illinois, 186 F.3d at 441.

         In assessing a Rule 12(b)(7) motion, a court “must first ask whether a party is necessary to a proceeding because of its relationship to the matter under consideration pursuant to Rule 19(a).” Owens-Illinois, 186 F.3d at 440. Next:

If a party is necessary, it will be ordered into the action. When a party cannot be joined because its joinder destroys diversity, the court must determine whether the proceeding can continue in its absence, or whether it is indispensable pursuant to Rule 19(b) and the action[1] must be dismissed.

Id. (emphasis added). While Rule 19 formally entails a two-step analysis under subparts (a) and (b), id., it functionally entails a three-pronged analysis. 5C Wright & Miller, Fed. Prac. & Proc.Civ. § 1359 (3d ed.) (quoting Paiute-Shoshone Indians of Bishop Cmty. of Bishop Colony v. City of Los Angeles, 637 F.3d 993, 997 (9th Cir. 2011))

         First, a court must decide if the would-be party is necessary (or in the present verbiage of the Rule 19(a), “required”).

         Second, if the party is “required” or necessary, a court must determine if that party's addition would destroy jurisdiction.

         Third, if the party would destroy jurisdiction, [2]the court must make an equitable assessment under Rule 19(b) “whether, in equity and good conscience, the action should proceed among the existing parties or should be dismissed.”


         Although the background facts of this case are complicated, only a few of them are integral to the joinder issue. As one aspect of a multi-transaction undertaking in 2005 to refinance a golf course, Defendants executed separate deeds of trust for the benefit of what is now UMB Bank. These documents provided partial motivation for UMB Bank to purchase bonds issued by the Authority, thus infusing roughly $9 million into the golf course project.

         The City's deed of trust secured various real estate owned by the City (including City Hall and the police department) as collateral in the event the City failed to meet certain conditions, chief among them repayment of the $9 million that UMB Bank was effectively loaning to Defendants. (See dkt. 1-5). The Authority's deed of trust-which contained substantively similar provisions-offered the golf course property (which the Authority owned) as collateral. (See dkt. 1-6). The deeds of trust named Russell J. Singer and Douglas L. Sbertoli as trustees, which is to say Defendants legally transferred title in the secured properties to them. (Dkt. 1-5 at 3; dkt.1-6 at 3). Both trustees were recognized in 2005 as “resident[s]” of Chesterfield County, Virginia. (Dkt. 1-5 at 1; dkt. 1-6 at 1).

         Plaintiffs assert claims against each Defendant for breaches of the respective deeds of trust. (Complaint ¶¶ 19-35, 83-101). They alleged that they are entitled to, among other things, “possession of the property pledged” by each deed of trust. (Id. ¶¶ 92, 101). They claim they have “an ownership stake” in those properties and seek appointment of a receiver to manage them until resolution of this case. (Id. ¶¶ 134-35, Prayer for Relief (h)). And they request other relief that would directly affect on the secured properties. (Id., Prayers for Relief (k)-(m)).

         I. Rule 19(a): The Trustees are Required Parties

         The trustees are required if “the court cannot accord complete relief among existing parties” without them, Fed.R.Civ.P. 19(a)(1)(A); or if they have “an interest relating to the subject of the action and [are] so situated” that proceeding without them would practically impair or impede their ability to protect that interest, Fed.R.Civ.P. 19(a)(1)(B)(i); or if proceeding without them would-in light of their interest-subject an existing party to “substantial risk of incurring double, multiple, or otherwise inconsistent obligations.” The Court must not apply these standards woodenly but rather grounds its analysis in the case's “substance.” Owens-Illinois, 186 F.3d at 441. Because this is a diversity case governed by Virginia law involving deeds of trust, some observations about that substance are in order.

         “The essential purposes of a deed of trust are two-fold: to secure the lender-beneficiary's interest in the parcel . . . and to protect the borrower from acceleration of the debt and foreclosure on the securing property prior to the fulfillment of the conditions precedent it imposes.” Mathews v. PHH Mortg. Corp., 283 Va. 723, 732 (Va. 2012). This two-sided protection is accomplished by the existence of the trustee, who holds title to the subject property:

         His power to foreclose-that is, initiate transferring the property to the lender-beneficiary-“is conferred by the deed of trust” and “does not accrue until its ...

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