CONSTITUTIONAL LAW--PERSONAL JURISDICTION--NORTH CAROLINA SUPREME COURT FINDS NO JURISDICTION OVER NEW YORK TRUST.--Skinner v. Preferred Credit, 638 S.E.2d 203 (N.C. 2006), reh'g denied, 643 S.E.2d 591 (N.C. 2007).
In early March 2007, the Dow Jones Industrial Average plunged nearly 250 points when missed payments by subprime mortgage holders hit a four-year high. (1) Later that month, when the Senate Committee on Banking, Housing, and Urban Affairs held hearings on what analysts were already calling a mortgage market crisis, the issue of subprime lending was firmly thrust into the national spotlight. (2) By the time Congress began this effort to "protect hard-working Americans from unscrupulous financial actors," (3) however, subprime mortgages--offered to borrowers whose flawed credit history prevents them from obtaining prime rates--were thriving as alternative lending vehicles. (4) Not surprisingly, this burgeoning market, and the sophisticated financial infrastructure that has grown around it, poses important questions for legislators and courts. Recently, in Skinner v. Preferred Credit, (5) the North Carolina Supreme Court refused to extend personal jurisdiction to a nonresident trust that held a subprime mortgage on in-state realty, allegedly in violation of the state's usury statutes. (6) By examining the financial infrastructure that legally insulated the trust but ignoring the trust's functional reach, the court failed to recognize the trust's purposeful contacts with North Carolina and denied an important legal protection to potentially vulnerable borrowers.
In January 1997, Garry and Judy Skinner closed on a second mortgage loan from Preferred Credit Corporation.(7) The interest rate on the loan was 14.75%, and the costs charged at closing included a $3600 origination fee. (8) Preferred Credit subsequently entered into a Pooling and Servicing Agreement (PSA) with Credit Suisse First Boston Mortgage Securities Corporation as depositor, Advanta Mortgage Corporation USA as servicer, and Deutsche Bank Trust Company Americas (DB Trust Co.) as trustee. (9) By means of the PSA, the 1997-1 Trust was formed under New York law. (10) The primary purpose of the Trust was to hold and receive income from mortgage loans, distribute payments, and issue certificates. (11) Under a separate agreement, Credit Suisse purchased mortgage loans, including the Skinners' loan, from Preferred Credit. (12) Credit Suisse subsequently assigned all rights under this agreement to the 1997-1 Trust, an assignment that included mortgage loans from multiple borrowers in North Carolina. (13)
Amidst this horde of financial actors, the Skinners filed suit, alleging that Preferred Credit charged excessive loan origination fees and usurious interest rates. (14) The Skinners' case went to trial with eighteen named defendants, all of whom were later dismissed either voluntarily or by the trial court on jurisdictional grounds. (15) The Skinners appealed the court's dismissal. By the time the case reached the court of appeals, the Skinners had voluntarily dismissed all but two defendants--the 1997-1 Trust and DB Trust Co. (16)
The North Carolina Court of Appeals, in a divided opinion, affirmed the trial court's holding. The Skinners asserted that three subsections of North Carolina's long-arm statute authorized jurisdiction, but the court rejected each in turn, emphasizing that the Trust was only a passive holder of assigned mortgage notes--a fatally "tenuous" connection. (17) Because it found no statutory basis for jurisdiction, the court did not address the due process question in its personal jurisdiction analysis. (18)
A divided North Carolina Supreme Court affirmed. The court's fourjudge majority chose to resolve the case only on the basis of personal jurisdiction over the 1997-1 Trust. (19) Like the court of appeals, the supreme court began by considering the three subsections of the long-arm statute that the Skinners raised as bases for personal jurisdiction. …