FILED

NOT FOR PUBLICATION

SEP 29 2017

UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK

U.S. COURT OF APPEALS

FOR THE NINTH CIRCUIT

DAVID A. KESTER, on behalf of himself No. 16-15774 and all others similarly situated, D.C. No. 2:15-cv-00365-NVW Plaintiff-Appellant,

v. MEMORANDUM*

CITIMORTGAGE INC.; et al.,

Defendants-Appellees.

Appeal from the United States District Court for the District of Arizona Neil V. Wake, District Judge, Presiding

Argued and Submitted June 6, 2017 Pasadena, California

Before: REINHARDT and KOZINSKI, Circuit Judges, and BERG,** District Judge.

David A. Kester (“Kester”) filed a putative class action suit alleging that

CitiMortgage and CR Title (“Defendants”) knowingly caused the recording of

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Terrence Berg, United States District Judge for the Eastern District of Michigan, sitting by designation. invalid property documents in violation of ARIZ. REV. STAT. (“A.R.S.”) § 33-

420(A). The district court granted Defendants’ motion to dismiss. We reverse and

remand.

1. Kester has standing to bring this action, despite the fact that A.R.S. § 33-

411(C) provides that “an instrument affecting real property containing any defect,

omission or informality in the certificate of acknowledgment and which has been

recorded for longer than one year . . . shall be deemed to have been lawfully

recorded on and after the date of its recording.”1 “The irreducible constitutional

minimum of standing consists of three elements. The plaintiff must have (1)

suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of

the defendant, and (3) that is likely to be redressed by a favorable judicial

decision.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016), as revised (May

24, 2016). Kester has adequately alleged all three elements. See Washington Env’tl

Council v. Bellon, 732 F.3d 1131, 1139 (9th Cir. 2013) (“The plaintiff . . . bears the

burden of proof to establish standing ‘with the manner and degree of evidence

1 It is undisputed that the statute of limitations for § 33-420(A) claims is four years, Sitton v. Deutsche Bank Nat. Trust Co., 311 P.3d 237, 241 (Ariz. Ct. App. 2013), and that the limitations period had not expired when Kester filed suit, although he filed “nearly four years after the recording. ” 2 required at the successive stages of the litigation.’ (quoting Lujan v. Defenders of

Wildlife, 504 U.S. 555, 561 (1992))).

First, “the recording of false or fraudulent documents that assert an interest

in a property may cloud the property’s title”; therefore, Kester has adequately

alleged “a distinct and palpable injury as a result of those clouds on [his former

property’s] title.” In re Mortg. Elec. Registration Sys., Inc., 754 F.3d 772, 783 (9th

Cir. 2014) (quoting Stauffer v. U.S. Bank Nat. Ass’n, 308 P.3d 1173, 1179 (Ariz.

Ct. App. 2013)). Second, this injury is fairly traceable to Defendants’ conduct:

despite receiving notice of the revocation of Kristen Lindner’s notary commission,

Defendants allegedly continued to use her notary services to execute Assignments

of Deeds of Trust, Substitutions of Trustee, Notices of Default, and Notices of

Trustee Sale for three months. Third, Kester’s “injury would be redressed by an

award of statutory damages, which [A.R.S. § 33-420(A)] makes available to

prevailing [former property owners].” See Tourgeman v. Collins Fin. Servs., Inc.,

755 F.3d 1109, 1116 (9th Cir. 2014), as amended on denial of reh’g and reh’g en

banc (Oct. 31, 2014).

2. The district court incorrectly held that A.R.S. § 33-420(A) requires Kester

to allege “material” invalidity in the trustee’s sale documents. Arizona caselaw

does not clearly resolve the question whether a plaintiff must allege materiality to

3 state any claim under A.R.S. § 33-420(A), rather than just for alleged

“misstatement[s] or false claim[s.]” A.R.S. § 33-420(A).2 Defendants and the

district court relied on two Arizona intermediate appellate cases, Sitton v. Deutsche

Bank Nat. Trust Co., 311 P.3d 237 (Ariz. Ct. App. 2013), and Stauffer v. Premier

Service Mortgage, LLC, 382 P.3d 790 (Ariz. Ct. App. 2016) (“Stauffer II”), to

argue that materiality is a necessary element of all claims under A.R.S. § 33-

420(A) (knowingly recording a “document [that] is forged, groundless, contains a

material misstatement or false claim or is otherwise invalid” gives rises to liability

for statutory damages). Those cases, however, interpret only the statute’s

requirement that a “material misstatement or false claim” gives rise to liability

under A.R.S. § 33-420(A) (emphasis added). They do not clearly hold that a

2 We review de novo the district court’s interpretation of state law, subject to the following principles:

When interpreting state law, a federal court is bound by the decision of the highest state court. In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance. However, in the absence of convincing evidence that the highest court of the state would decide differently, a federal court is obligated to follow the decisions of the state’s intermediate courts.

In re Kirkland, 915 F.2d 1236, 1238–39 (9th Cir. 1990) 4 plaintiff must plead materiality to state a claim for recording of “forged,”

“groundless,” or “otherwise invalid” documents. A.R.S. § 33-420(A).

Moreover, Arizona Court of Appeals cases and a recent Ninth Circuit case

found that defendants recorded invalid documents without conducting any

materiality analysis. See Williamson v. PVOrbit, Inc., 263 P.3d 77, 80 (Ariz. Ct.

App. 2011) (concluding that subcontractor’s lien was “invalid” on the basis of

A.R.S. § 33–1002’s owner-occupant exception without any materiality analysis);

Delmastro & Eells v. Taco Bell Corp, 263 P.3d 683, 691 (Ariz. Ct. App. 2011)

(mechanic’s lien was invalid “because the descriptions of the jobsite and labor and

materials it had provided in its preliminary notices were legally inadequate” under

A.R.S. §§ 33–981(D), 33–992.01(B), and summary judgment for plaintiff was

proper under § 33-420(A) because defendant had reason to know of invalidity; no

analysis of whether invalidity was “material”); In re Mortg. Elec. Registration Sys.,

Inc., 754 F.3d 772, 783–84 (9th Cir. 2014) (allegations that defendants’ recorded

documents were “invalid because they [we]re ‘robo-signed (forged)’” sufficient to

state a claim under § 33-420(A) without any analysis of materiality).

Finally, even if Stauffer and Sitton did stand for the proposition that

materiality is an element of any and all claims under § 33-420(A), the plain text

and purpose of the statute constitute “convincing evidence” that the Arizona

5 Supreme Court would not follow this broad reading of the word “material” in § 33-

420(A). See In re Kirkland, 915 F.2d at 1239. The statute lists several types of

defects in the disjunctive: § 33-420(A) is violated by where a document that is

“forged, groundless, contains a material misstatement or false claim or is otherwise

invalid” is knowingly recorded. A.R.S. §33-420(A) (emphasis added).

Thus, § 33-420(A) lays out three specific and independent means by which the

statute may be violated ((1) forgery, (2) groundlessness, (3) material misstatement

or false claim), followed by a general, catch-all violation for documents that are (4)

“otherwise invalid.”3

In their specialized legal usage, neither “forged,”4 nor “groundless,”5 nor

3 The Defendants’ waiver argument is without merit. According to Defendants, Kester “never developed an argument under the statute’s other alleged ‘prongs’” before the district court. This position is contradicted by the record: Kester’s argument based on the different “prongs” of § 33-420(A) was sufficiently raised below. 4 “The act of fraudulently making a false document or altering a real one to be used as if genuine.” Forgery, BLACK’S LAW DICTIONARY (10th ed. 2014). 5 “Black’s Dictionary equates the term ‘groundless’ with the term ‘frivolous.’ ‘A claim ... is frivolous if a proponent can present no rational argument based upon the evidence or law in support of that claim.’” Evergreen W., Inc. v. Boyd, 810 P.2d 612, 619 (Ariz. Ct. App. 1991) (quoting BLACK’S LAW DICTIONARY at 704 (6th ed. 1990)). 6 “invalid”6 contain an intrinsic element of “materiality,” i.e. that a “reasonable

person would attach importance to its existence or nonexistence in determining his

or her choice of action in the transaction in question.” Sitton, 311 P.3d at 243

(citations and quotation marks omitted). In light of the three specific terms that

precede “otherwise invalid” and the fact that “material” only modifies

“misstatement or false claim,” the phrase “otherwise invalid” is most naturally

interpreted to refer broadly to any legal defect, besides a forgery, groundlessness,

or a material misstatement, that would make a property document “not legally

binding.” Invalid, BLACK’S LAW DICTIONARY (10th ed. 2014); see, e.g., State v.

Taylor, 312 P.2d 162, 164 (Ariz. 1957) (demonstrating that the use of the word

“otherwise” sometimes results in a broadening, rather than narrowing, of the words

that precede it, depending on the context in which it is used). Section 33-420(A)

plaintiffs are not required to demonstrate that a defect in a recorded document was

material to them in order to establish that the document was “invalid.”

Although the meaning of the plain text is clear, and therefore recourse to

other indicia of meaning is unnecessary, it is worth noting that the purpose of the

statute would be undermined by reading a materiality requirement into all four

6 Invalid means “[n]ot legally binding.” Invalid, BLACK’S LAW DICTIONARY (10th ed. 2014). 7 types of § 33-420(A) violation. As the parties agree, “[t]he purpose of A.R.S. §

33–420 is to ‘protect property owners from actions clouding title to their

property.’” Stauffer II, 308 P.3d at 1179 (quoting Wyatt v. Wehmueller, 806 P.2d

870, 875 (Ariz. 1991) (en banc)). “[T]he underlying rationale [of § 33-420(A)] is

deterrence”: this purpose is served by penalizing individuals who record property

documents rendered invalid by fraudulent acknowledgment, regardless of whether

a “reasonable person” would have altered “his or her choice of action” if the

documents had been legally valid. See Sitton, 311 P.3d at 243.

3. The Assignment of Deed of Trust (“Assignment”) was invalid without

proper acknowledgment.7 As a “conveyance of real property,” the Assignment falls

within the ambit of A.R.S. § 33-401(B), which requires that: “Every deed or

conveyance of real property must be signed by the grantor and must be duly

acknowledged before some officer authorized to take acknowledgments.”

7 Contrary to Defendants’ argument, the “some basis” standard is not a test for validity that applies universally to all § 33-420(A) claims, but instead is an articulation of the standard for groundlessness under that section. See Evergreen W., Inc. v. Boyd, 810 P.2d 612, 619 (Ariz. Ct. App. 1991). Defendants’ interpretation of § 33-420 would render the words “otherwise invalid” meaningless; if “groundless” means “frivolous” (i.e. “has no arguable basis or is not supported by any credible evidence,” Evergreen, 810 P.2d at 619) then it would not be sensible to interpret “otherwise invalid” to mean frivolous as well. See State v. Thompson, 65 P.3d 420, 424 (Ariz. 2003) (en banc) (“[W]e construe statutes sensibly, attempting to effectuate the intent of the legislature, and we avoid constructions that would render statutes invalid or parts of them meaningless.”). 8 (Emphasis added). Courts have long recognized that failure to satisfy this

acknowledgment requirement renders the conveyance invalid. Lewis v. Herrera,

208 U.S. 309, 315 (1908). Kester has alleged that a notary whose commission had

been revoked performed the acknowledgment, which, if proven, would make the

document invalid. A.R.S. § 41-311(1) (“‘Acknowledgment’ means a notarial act in

which a notary certifies that a signer, whose identity is proven by satisfactory

evidence, appeared before the notary and acknowledged that the signer signed the

document.”

For the same reasons, the allegedly legally deficient acknowledgment, if

proven, would make the Substitution of Trustee, as a “conveyance of real

property,”8 invalid. See Lewis, 208 U.S. at 315; A.R.S. § 33-401(B).

The Notice of Trustee’s Sale, however, would not have been rendered

invalid by any deficient acknowledgment. The absence of an acknowledgment is

not sufficient to preclude “substantial compliance” with the exemplar Notice of

Sale in § 33-808(D).

4. The district court erred in concluding that any invalidity of the

Assignment and Substitution was cured “by operation of law” pursuant to “the

8 See A.R.S. § 33-801 (“‘Trustee’ means an individual, association or corporation qualified pursuant to § 33-803, or the successor in interest thereto, to whom trust property is conveyed by trust deed.”). 9 governing recording statutes [A.R.S. § 33-411] and the Deed of Trust Act [A.R.S.

§ 33-811(B)].” The district court’s reasoning fundamentally misunderstands the

“significant distinction between a cause of action for damages . . . pursuant to

A.R.S. § 33-420(A), and a cause of action to quiet title, which seeks a judicial

determination of title, rather than damages.” State v. Mabery Ranch, Co., L.L.C.,

165 P.3d 211, 227 (Ariz. App. Div. 1 2007). The recording statutes and the Deed

of Trust Act deal with the latter, by protecting bona-fide third-party purchasers and

essentially quieting title as to such purchasers.

Under § 33-411(C), the property documents in question constituted valid

constructive notice to anyone who purchased the property a year after recordation,

despite any defects in those documents. Similarly, § 33-811(B) of the Deed of

Trust Act “limit[s] post-sale actions seeking to unwind the trustee’s sale on

grounds of improper notice.” M & I Bank, FSB v. Coughlin, 805 F. Supp. 2d 858,

862 n.2 (D. Ariz. 2011); In re Hills, 299 B.R. 581, 586 (Bankr. D. Ariz. 2002)

(Under § 33-811(B), “a purchaser who purchases for value without actual notice of

any alleged defect in the notice of the sale is held to hold good title by means of the

Trustee’s Deed issued in its favor.”). Neither provision, however, precludes a

prior owner’s cause of action under § 33-420(A) for recording irregularities that

occurred prior to the sale.

10 5. For the reasons given above, we REVERSE and REMAND for further

proceedings consistent with this disposition.

11

FILED

Kester v. CitiMortgage, No. 16-15774

SEP 29 2017

MOLLY C. DWYER, CLERK

KOZINSKI, Circuit Judge, dissenting: U.S. COURT OF APPEALS

Arizona property law either cured the defendants’ alleged statutory

violations or prevented them from clouding plaintiff’s title. Kester suffered no

concrete injury and thus lacks standing.

A deed of trust involves three parties: “The first party is the lender, who is

the trust beneficiary[;] [t]he second party is the borrower-trustor[;] . . . [t]he third

party is the trustee, an agent for both the lender and the borrower who . . . is

authorized to sell the property if the debtor defaults.” Ho v. ReconTrust Co., NA,

858 F.3d 568, 570 (9th Cir. 2016). Defendants used (1) an Assignment of Deed of

Trust and (2) a Substitution of Trustee to become beneficiary and trustee. After

Kester defaulted on his payments, defendants recorded (3) a Notice of Trustee’s

Sale to start foreclosure proceedings.

Kester claims that defendants violated statutory acknowledgment

requirements, which prevented these three documents from being lawfully

recorded. See Ariz. Rev. Stat. § 33-411(B). But Arizona law retroactively cured

any defect. Section 33-411(C) of the Arizona Revised Statutes provides that “an

instrument affecting real property containing any defect, omission or informality in

the certificate of acknowledgment and which has been recorded for longer than one page 2 year . . . shall be deemed to have been lawfully recorded on and after the date of its

recording.” Under this provision, the allegedly defective documents were “deemed

to have been lawfully recorded” after one year. Id. And the statute goes a step

further: It renders the documents lawful dating back to their recording. Id. In

other words, section 33-411(C) sanitizes the recording of the Assignment of Deed

of Trust, Substitution of Trustee and Notice of Trustee’s Sale. Because Kester

brought suit long after one year, any invalidity of the recording couldn’t have

clouded his title.

Kester claims that failure to properly acknowledge the documents also ran

afoul of “conveyance of real property” requirements. Ariz. Rev. Stat. § 33-401(B).

Yet each document remained valid despite any acknowledgment glitch. Arizona’s

Deed of Trust Act saves the Substitution of Trustee and Notice of Trustee’s Sale.

A Substitution of Trustee “shall be sufficient if acknowledged by all beneficiaries

under the trust deed.” Ariz. Rev. Stat. § 33-804(D). CitiMortgage, the only

beneficiary, acknowledged the Substitution of Trustee. Likewise, a Notice of

Trustee’s Sale need comply only substantially with a model statutory form to be

valid. See Ariz. Rev. Stat. § 33-808(D), (E). The majority concedes that

defendants satisfied that requirement.

That leaves the Assignment of Deed of Trust. Here, again, Arizona property page 3 law rescues the document from invalidity: “When an instrument in writing,

intended as a conveyance of real property or some interest therein, fails wholly . . .

to take effect . . . by virtue of the provisions of this chapter, it is valid nevertheless

and effectual as a contract.” Ariz. Rev. Stat. § 33-437. The Arizona Supreme

Court has held that an improperly acknowledged mortgage becomes “a contract

which may be specifically enforced as between the parties.” Heller v. Levine, 437

P.2d 983, 986 (1968). I see no basis for treating a deed of trust differently from a

mortgage. CitiMortgage became the beneficiary of Kester’s deed of trust

notwithstanding any acknowledgment flaws in the assignment.

The majority’s reliance on In re Mortg. Elec. Registration Sys., Inc., 754

F.3d 772 (9th Cir. 2014) (“In re MERS”), is risible. In that case, plaintiffs alleged

that “notices of trustee sale, notices of substitution of trustee, and assignments of

deed of trust . . . were . . . ‘robosigned’ with forged signatures.” Id. at 782. Forged

documents are void; the plaintiffs there were certainly injured. See Ariz. Cent.

Credit Union v. Holden, 432 P.2d 276, 279 (Ariz. Ct. App. 1967); see also First

Nat. Bank in Albuquerque v. Enriquez, 634 P.2d 1266, 1268 (N.M. 1981) (“It is

also a well settled principle of law that a forged deed is a void deed and transfers

no interest.”). The counterfeit documents in In re MERS are materially different

from the genuine documents here that, at worst, have minor defects. Arizona law page 4 cures the latter but not the former.

The Supreme Court made it clear in Hollingsworth v. Perry, 133 S. Ct. 2652,

2667 (2013), that state law cannot diminish Article III standing requirements. To

bring suit in federal court, a plaintiff who alleges a statutory violation under state

law must also have suffered a concrete injury. Spokeo, Inc. v. Robins, 136 S. Ct.

1540, 1549 (2016). Even if Kester suffered statutory violations and stated a claim

under Ariz. Rev. Stat. § 33-420(A), he can’t show that those violations clouded his

title or otherwise caused him a concrete injury. We must dismiss.