                                                              FILED
                                                  United States Court of Appeals
                     UNITED STATES COURT OF APPEALS       Tenth Circuit

                            FOR THE TENTH CIRCUIT                          June 4, 2013

                                                                      Elisabeth A. Shumaker
                                                                          Clerk of Court
ROBERT V. BRAZELL,

             Plaintiff-Appellant,

v.                                                         No. 12-4047
                                                  (D.C. No. 2:11-CV-00709-BSJ)
AARON WAITE, as Trustee,                                     (D. Utah)

             Defendant-Appellee,

and

PHH MORTGAGE CORP.; MERRILL
LYNCH CREDIT CORPORATION;
US BANK, as Trustee; MORTGAGE
ELECTRONIC REGISTRATION
SYSTEMS, and Does 1 to 5,

             Defendants.


                            ORDER AND JUDGMENT*


Before LUCERO, ANDERSON, and BALDOCK, Circuit Judges.




*
      After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and collateral
estoppel. It may be cited, however, for its persuasive value consistent with
Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
      This case involves a homeowner’s efforts to halt a foreclosure and/or to hold

the foreclosing parties liable for damages. It was filed in Utah state court and

removed to federal court on the basis of diversity jurisdiction. Although the only

remaining defendant, trustee Aaron Waite, is a resident of Utah, we hold that his

citizenship could be disregarded for removal purposes because the claims against him

were meritless and premature and he was at best a nominal party named

unnecessarily or improperly as a defendant. Having properly removed the case,

however, the district court should have dismissed Waite without prejudice rather than

ruling on the merits of the remaining claim against him. We therefore remand with

instructions to modify the dismissal with prejudice of the remaining claim against

Waite to a dismissal without prejudice.

                                  BACKGROUND

      In 2005, plaintiff Robert V. Brazell, a resident of Utah, signed a note

(the Note) secured by a deed of trust encumbering certain Utah real property

(the Property). In the Note, Brazell promised to pay the principal due on the Note,

plus interest, to Merrill Lynch Credit Corporation (Merrill Lynch). Mortgage

Electronic Registration Systems, Inc. (MERS) was the beneficiary of the deed of

trust, which specified that MERS acted solely as nominee for Merrill Lynch. Merrill

Lynch was identified as the “Lender.”

      On June 2, 2011, trustee Waite, a Utah attorney, filed a Notice of Sale,

indicating that the Property would be sold at public auction on July 12, 2011. Waite


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signed the Notice of Sale as successor trustee. The notice stated he was acting on

behalf of the current beneficiary of the trust deed, U.S. Bank National Association

(U.S. Bank).

        Before the sale could take place, however, Brazell brought this action in Utah

state court. Brazell asserted that Merrill Lynch had no remaining interest in the trust

deed, and that MERS had no interest in the Note or the Property. His complaint

contained four claims:

        (1) A claim for unauthorized sale pursuant to Utah Code Ann. § 57-1-23.5,

arguing that Waite was not a person authorized to serve as trustee, and therefore was

unauthorized to hold a foreclosure sale;

        (2) A claim for declaratory judgment under Utah’s Uniform Commercial Code

(U.C.C.), arguing that none of the defendants were holders of the Note or

“nonholders in possession” and therefore none of them were entitled to enforce the

Note;

        (3) A claim that Waite had breached his trustee’s duty of good faith and fair

dealing because he was not an authorized trustee in the state of Utah; and

        (4) A claim for quiet title, based on the fact that the trust deed was being held

separately from the Note and the trust deed was therefore a nullity.

        The defendants filed a notice to remove the action to federal court. Their

removal was purportedly based on diversity jurisdiction. The day after they removed

the case to federal court, the defendants filed a motion to dismiss Brazell’s


                                           -3-
complaint. Following the briefing on the motion to dismiss, Brazell voluntarily

dismissed all parties except Waite, and all claims except his § 57-1-23.5 claim

against Waite. He also filed a motion to remand the case to state court.

       The district court denied Brazell’s motion to remand, reasoning that diversity

jurisdiction had been proper at the time of the removal, and that it had discretion to

allow claims against the non-diverse party, Waite, to remain in federal court to be

adjudicated on the merits. It then determined that “all claims against [Waite] are

entirely dependent on the ‘split-note’ claim,” Aplt. App. at 155, and that the Utah

courts had rejected that basis for liability. Accordingly, the district court dismissed

the claims against Waite with prejudice.

       Brazell subsequently filed a Fed. R. Civ. P. 59(e) motion in which he argued

that the district court should not have dismissed his § 57-1-23.5 claim against Waite

with prejudice. He asserted that the claim against Waite had been premature or

unripe, because a trustee’s sale had not yet been held. Brazell therefore sought a

dismissal without prejudice. The district court denied the motion.

       On appeal to this court, Brazell again argues that the district court should not

have dismissed his § 57-1-23.5 claim against Waite with prejudice because it was

unripe or premature. But on screening, we identified a more fundamental problem.

We requested supplemental briefing concerning whether the district court even had

jurisdiction to enter a judgment on the merits in the first place, in light of the fact that

Waite was a non-diverse party and the district court’s jurisdiction was based on


                                           -4-
diversity. See City of Colo. Springs v. Climax Molybdenum Co., 587 F.3d 1071,

1078-79 (10th Cir. 2009) (noting this court’s duty to raise jurisdictional issue sua

sponte).

      Having considered the supplemental briefing, we now hold that this case was

properly removed to federal court because, as to each of Brazell’s claims, Waite was

either fraudulently joined or a nominal party. Once the case had been removed to

federal court, however, the district court should have dismissed the claims against

Waite without prejudice for lack of jurisdiction. We therefore vacate that portion of

the district court’s order dismissing the remaining claim against Waite with

prejudice, and remand with instructions to modify the dismissal to one without

prejudice.

                                      ANALYSIS

      I. Fraudulent Joinder/Nominal Party

      A defendant may remove a civil action brought in state court to federal court if

“the district courts of the United States have original jurisdiction” over the action.

28 U.S.C. § 1441(a). This court reviews de novo whether a case was removable to

federal court. Frederick v. Hartford Underwriters Ins. Co., 683 F.3d 1242, 1245

(10th Cir. 2012). There is a presumption against removal jurisdiction, Laughlin v.

Kmart Corp., 50 F.3d 871, 873 (10th Cir. 1995), and the party seeking removal has

the burden of proof to establish jurisdiction, Martin v. Franklin Capital Corp.,

251 F.3d 1284, 1290 (10th Cir. 2001).


                                          -5-
       Diversity jurisdiction, the basis for removal here, exists when the

amount-in-controversy requirement is met and the parties are completely diverse.

See 28 U.S.C. § 1332(a). Both Brazell and Waite are citizens of Utah and are

therefore non-diverse. But the district court accepted the defendants’ argument that

Waite had been fraudulently joined or was a “nominal” party and that Brazell’s

claims against him should therefore be disregarded for purposes of diversity

jurisdiction.

       Fraudulent joinder need not involve actual fraud in the technical sense.

Instead, it can occur when the plaintiff joins a “resident defendant against whom no

cause of action is stated” in order to prevent removal under a federal court’s diversity

jurisdiction. Dodd v. Fawcett Pubs., Inc., 329 F.2d 82, 85 (10th Cir. 1964). When

this occurs, the district court disregards the fraudulently joined non-diverse party for

removal purposes.

       In general, the removing party must show that the plaintiff has “no cause of

action” against the fraudulently joined defendant. See id.; Roe v. Gen. Am. Life Ins.

Co., 712 F.2d 450, 452 n.* (10th Cir. 1983). The objective, however, is not to pre-try

the merits of the plaintiff’s claims. As the Third Circuit put it, “[a] claim which can

be dismissed only after an intricate analysis of state law is not so wholly insubstantial

and frivolous that it may be disregarded for purposes of diversity jurisdiction.”

Batoff v. State Farm Ins. Co., 977 F.2d 848, 853 (3d Cir. 1992). But neither is the

court compelled to believe whatever the plaintiff says in his complaint. Rather,


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“upon allegations of fraudulent joinder designed to prevent removal, federal courts

may look beyond the pleadings to determine if the joinder, although fair on its face,

is a sham or fraudulent device to prevent removal.” Smoot v. Chicago, Rock Island

and Pac. R.R. Co., 378 F.2d 879, 881-82 (10th Cir. 1967).

      As this court has further explained: “the ‘citizens’ upon whose diversity a

plaintiff grounds jurisdiction must be real and substantial parties to the controversy.

Thus, a federal court must disregard nominal or formal parties and rest jurisdiction

only upon the citizenship of real parties to the controversy.” Lenon v. St. Paul

Mercury Ins. Co., 136 F.3d 1365, 1369 (10th Cir. 1998) (internal quotation marks

omitted). Upon consideration, we have determined that none of Brazell’s claims

stated a cause of action against Waite as a real or substantial party to the controversy.

             A. Unauthorized Sale Claim

      About two months before Brazell filed his complaint, the Utah legislature

passed a statute protecting trustors (i.e., those who owe money under a note secured

by a trust deed) from unauthorized sales by out-of-state investors. This statute

provides that “[a]n unauthorized person who conducts an unauthorized sale is liable

to the trustor for the actual damages suffered by the trustor as a result of the

unauthorized sale or $2,000, whichever is greater.” Utah Code Ann.

§ 57-1-23.5(2)(a). An “unauthorized person” is someone who “does not qualify as a

trustee under [Utah Code Ann. §] 57-1-21(1)(a)(i) or (iv).” Id. § 57-1-23.5(1)(a). An

“unauthorized sale” is one conducted by such an “unauthorized person.”


                                           -7-
      To qualify as an “authorized” trustee under Utah law, an individual must be

       (i) any active member of the Utah State Bar who maintains a place
      within the state where the trustor or other interested parties may meet
      with the trustee to:

       (A) request information about what is required to reinstate or payoff the
      obligation secured by the trust deed;

       (B) deliver written communications to the lender as required by both
      the trust deed and by law;

       (C) deliver funds to reinstate or payoff the loan secured by the trust
      deed; or

       (D) deliver funds by a bidder at a foreclosure sale to pay for the
      purchase of the property secured by the trust deed;

Utah Code Ann. § 57-1-21(1)(a)(i).

      There is no question that Waite is an active member of the Utah State Bar and

that he has an office in Utah. In his complaint, however, Brazell alleged that “Waite

does not know who the true beneficiary . . . of the trust deed is,” and therefore could

not fulfill the duties of a trustee under subsections (A) through (C) of the statute.

Aplt. App. at 9. But as defendants pointed out in their motion to dismiss, a 2010

Assignment of Deed of Trust attached to Brazell’s own complaint showed that MERS

had assigned the beneficial interest under the Deed of Trust to U.S. Bank. Id. at 35.

Defendants also argued that Brazell himself knew who the “servicer” of the loan is,

to whom payments must be made.

      In response to these arguments, Brazell argued that Waite could not deliver

communications to the “lender” because Waite did not know who the “lender” is, and


                                          -8-
therefore could not serve as trustee. He argued “[i]t is simply inconceivable that a

homeowner would be able to determine the identity of the ‘lender’ in any foreclosure

considering the securitization of mortgages.” Id. at 145.

      The district court determined that this claim was entirely dependent on

Brazell’s meritless “split the note” argument. Although the Utah courts have not yet

ruled on this specific issue, it seems likely in fact that a Utah court would reject

Brazell’s § 57-1-23.5(2)(a) claim as meritless. But even if there is some question

about whether Waite is “unauthorized” as a trustee, the claim fails on its face because

it is unripe. Brazell has now admitted that his claim against Waite was unripe

because no trustee’s sale had taken place when he brought it.

      An otherwise colorable claim can be considered meritless (and thus,

disregarded for diversity purposes) if brought in the absence of jurisdiction.

Cf. Kruso v. Int’l Tel. & Tel. Corp., 872 F.2d 1416, 1425-27 (9th Cir. 1989)

(affirming dismissal of defendants as fraudulently joined where plaintiffs lacked

standing to pursue claims against those defendants). Moreover, in this case, the lack

of ripeness is arguably as much a defect on the merits as a jurisdictional defect. It

reflects the fact that the necessary factual predicate for a statutory element of

Brazell’s claim against Waite has not yet occurred. Section 57-1-23.5 provides a

damage remedy against one who conducts an “unauthorized sale.” An “unauthorized

sale” is “the exercise of a power of sale by an unauthorized person.” § 57-1-

23.5(1)(b). At the time the complaint was filed, all Waite had done was to give


                                           -9-
notice of the sale. Utah law makes it clear that a notice of sale is a precondition for

exercise of a power of sale, not exercise of that power itself. See Five F, LLC v.

Heritage Sav. Bank, 81 P.3d 105, 107 (Utah App. 2003) (“A trustee may not exercise

the power of sale until the trustee files a notice of default, waits three months, and

gives notice of the sale.” (emphasis added)). This claim against Waite should never

have been brought as part of this action, and may be disregarded for diversity

purposes.

               B. “Good Faith” Claim Against Waite

         Brazell’s complaint included another claim directed specifically against Waite,

alleging that he had breached his duty of good faith and fair dealing as a trustee.

See, e.g., Five F, 81 P.3d at 107 (detailing trustee’s duty of good faith under deed of

trust). This claim rested on assertions that Waite owed a “duty of reasonable

diligence in good faith” as trustee to Brazell, and that Waite “breached that duty

because it [sic] is foreclosing on behalf of a party who has no authority to do so” and

“because it [sic] is not an authorized trustee in the state of Utah.” Aplt. App. at 11.

         The assertion that Waite breached his duty of good faith and fair dealing

because he was not technically authorized to be a trustee is meritless. The assertion

that Waite was not a proper trustee establishes no specific breach of a duty by Waite

as trustee, the very status that created the duty of good faith alleged in Brazell’s

claim.




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       The other allegation, that Waite was foreclosing on behalf of a party without

authority, is also meritless. In this claim, Brazell asserts that Waite is liable for

breach of a duty of good faith and fair dealing. Brazell only makes conclusory

allegations that Waite breached any duty, however, and makes no specific allegations

that Waite violated the trust deed or the foreclosure statutes. See Five F, LLC,

81 P.3d at 106, 109 (holding that trustee’s fiduciary duty required it to do no more

than follow requirements of trust deed and statute, and that trustor’s claim for breach

of implied covenant of good faith and fair dealing was therefore not viable).

Particularly here, where Brazell failed to allege that Waite had good reason to believe

that he could not foreclose on behalf of the current beneficiary of the trust deed, the

“good faith and fair dealing” claim was without merit and did not prevent removal.

              C. Other Claims

       Finally, Brazell’s complaint included two claims against “the defendants”

generally. The UCC claim sought a “declaratory judgment that defendants have no

non-judicially enforceable interest in the trust deed and therefore lack authority to

foreclose or assign [Brazell’s property],” based on their failure to prove that they

properly held the Note. Aplt. App. at 11. A careful parsing of its language shows

that it in fact seeks no relief specifically against Waite and he is at best a nominal

party with regard to this claim.

       Brazell asserts that “[n]one of the defendants are ‘holders’” of the Note, id. at

10; that none of them “are entitled to the rights of a nonholder in possession,” id.;


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and that none of them could “enforce the rights of the original Note holder by

appointing Waite as substitute trustee,” id. at 11. As noted, the claim requests a

declaratory judgment “that defendants have no non-judicially enforceable interest in

the trust deed and therefore lack authority to foreclose or assign [Brazell’s

property].” Id. These assertions differentiate between the “defendants,” who are the

alleged wrongdoers, and Waite, whom they have appointed as trustee. They do not

specifically target Waite, and he is therefore nothing but a nominal party with regard

to them.1

      Brazell’s fourth and final claim sought “quiet title” based on the “split note”

theory—that “because the promissory note and the trust deed are not held by the

same party, the trust deed is a nullity and of no further force and effect.” Id. at 12.

This claim, as Brazell admits, has now been shown to be meritless under Utah law.

             D. Forum-Defendant Rule

      Finally, we note that § 1441(b)(2)—the so-called forum-defendant rule—

provides as a separate requirement that “[a] civil action otherwise removable solely


1
       Waite conceivably had an interest in avoiding a declaratory judgment that his
appointment was invalid, if it would affect his compensation for his services as
successor trustee, see Annot., P. H. Vartanian, Right of Trustee of Express Trust to
Appeal from Order or Decree Not Affecting His Own Personal Interest, 6 A.L.R. 2d
147 § 2 (1949) (stating trustee “has a personal interest to the extent that he is entitled
to a compensation for his services in the administration of the trust”). But Brazell
has not specifically requested a claim for declaratory judgment concerning Waite’s
appointment. Therefore, Waite is merely a stakeholder as far as this claim is
concerned. He was properly disregarded as a “nominal” party.



                                          - 12 -
on the basis of [diversity] jurisdiction . . . may not be removed if any of the parties in

interest properly joined and served as defendants is a citizen of the State in which

such action is brought.” Waite is a citizen of Utah, the forum state in which the

action was brought. His presence in the suit as a “forum defendant” would therefore

arguably prevent removal to federal district court even if diversity were established.

But the forum-defendant rule is not jurisdictional and may therefore be waived.

See Lively v. Wild Oats Markets, Inc., 456 F.3d 933, 940 (9th Cir. 2006) (collecting

cases). Neither party has specifically urged its application to prevent removal here.2

Moreover, for the foregoing reasons (the fraudulent joinder of Waite and his status as

a nominal party), we have serious doubt that Waite could be considered a “part[y] in

interest properly joined” as a defendant (emphasis added).3 Therefore, we will not

apply § 1441(b)(2) to block removal of this action.

      II. Dismissal of Waite Without Prejudice

      The foregoing analysis demonstrates that Waite was fraudulently joined or a

nominal party with respect to all claims against him. The district court therefore

properly disregarded his citizenship for removal purposes.

2
       On page four of his supplemental brief, Brazell quotes but does not provide a
citation to § 1441(b)(2), and he also notes that both Brazell and Waite were citizens
of Utah. But he fails to construct a separate, adequate argument for remand based on
the forum-defendant rule.
3
       But see Morris v. Nuzzo, No. 12-3220, ___F.3d___, 2013 WL 2248977, at *4
(7th Cir. May 23, 2013) (noting apparent lack of ruling from any federal appellate
court, and split among district courts, on the issue of “whether the fraudulent joinder
doctrine creates an exception to the forum defendant rule.”).


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      Once it determined that Waite had been fraudulently joined, however, the

district court lacked jurisdiction to enter judgment on the merits on the claims against

him. Rather, it was required to dismiss him from the case without prejudice.

See, e.g., Albert v. Smith’s Food & Drug Ctrs., Inc., 356 F.3d 1242, 1249 (10th Cir.

2004). Instead, the district court purported to enter judgment against Waite “with

prejudice” on the merits. We must therefore vacate the with-prejudice dismissal and

remand with instructions to modify the with-prejudice dismissal of Waite to one

“without prejudice.”

                                   CONCLUSION

      All of Brazell’s claims against the non-diverse defendant, Waite, were either

so meritless that Waite should be considered “fraudulently joined” or only named as

a nominal party. Therefore, the district court had diversity jurisdiction and properly

denied Brazell’s motion to remand to state court.

      But as a non-diverse party, Waite should have been dismissed without

prejudice. The district court lacked authority to enter its “with prejudice” dismissal

of Waite, and should have dismissed him “without prejudice.” For this reason, we

vacate the district court’s “with prejudice” dismissal of the remaining claim against

Waite, and remand with instructions to enter a dismissal without prejudice.


                                                  Entered for the Court


                                                  Stephen H. Anderson
                                                  Circuit Judge

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