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Residential Funding Co., LLC v. Broadview Mortgage Corporation

United States District Court, D. Minnesota

August 19, 2014

Residential Funding Company, LLC, Plaintiff,
v.
Broadview Mortgage Corporation, Defendant. Residential Funding Company, LLC, Plaintiff,
v.
First Equity Mortgage Bankers, Inc., Defendant. Residential Funding Company, LLC, Plaintiff,
v.
Central Pacific Homeloans, Inc., Central Pacific Bank, and Central Pacific Financial Corporation, Defendants. Residential Funding Company, LLC, Plaintiff,
v.
Lenox Financial Mortgage Corp., Defendant. Residential Funding Company, LLC, Plaintiff,
v.
Wells Fargo Bank, N.A., Defendant. Residential Funding Company, LLC, Plaintiff,
v.
National Bank of Kansas City, Defendant.

Donald G. Heeman, Esq., David L. Hashmall, Esq., Jessica J. Nelson, Esq., and Richard R. Voelbel, Esq., Felhaber Larson, Minneapolis, MN; Peter E. Calamari, Esq., David Elsberg, Esq., Isaac Nesser, Esq., Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY; and Jeffrey A. Lipps, Esq., Carpenter Lipps & Leland LLP, Columbus, OH, on behalf of Residential Funding Company, LLC in Civil Nos. 13-3463, 13-3473, 13-3476, 13-3495, and 13-3528.

Edward P. Sheu, Esq., and Kyle R. Hardwick, Esq., Best & Flanagan LLP, Minneapolis, MN; Peter E. Calamari, Esq., David Elsberg, Esq., and Isaac Nesser, Esq., Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY; and Jeffrey A. Lipps, Esq., Carpenter Lipps & Leland LLP, Columbus, OH, on behalf of Residential Funding Company, LLC in Civil No. 13-3521.

J. Robert Keena, Esq., and Carol R.M. Moss, Esq., Hellmuth & Johnson, PLLC, Edina, MN; and James W. Brody, Esq., and Greg W. Chambers, Esq., American Mortgage Law Group, PC, Novato, CA, on behalf of Broadview Mortgage Corporation, Central Pacific Homeloans, Inc., Central Pacific Bank, Central Pacific Financial Corporation, and Lenox Financial Mortgage Corporation.

Joseph W. Anthony, Esq., Amelia R. Selvig, Esq., and Brooke D. Anthony, Esq., Anthony Ostlund Baer & Louwagie, PA, Minneapolis, MN; and Philip R. Stein, Esq., Bilzin Sumberg Baena Price & Axelrod LLP, Miami, FL, on behalf of First Equity Mortgage Bankers, Inc.

Marc T.G. Dworsky, Esq., Richard C. St. John, Esq., Todd J. Rosen, Esq., and Christian K. Wrede, Esq., Munger, Tolles & Olson LLP, Los Angeles, CA, and San Francisco, CA; and Richard T. Thomson, Esq., and Amy L. Schwartz, Esq., Lapp, Libra, Thomson, Stoebner & Pusch, Chartered, Minneapolis, MN, on behalf of Wells Fargo Bank, N.A.

Nancy A. Temple, Esq., and Scott N. Gilbert, Esq., Katten & Temple LLP, Chicago, IL; and Seth Leventhal, Esq., Leventhal PLLC, Minneapolis, MN, on behalf of National Bank of Kansas City.

MEMORANDUM OPINION AND ORDER

ANN D. MONTGOMERY, District Judge.

I. INTRODUCTION

On June 10, 2014, the undersigned United States District Judge heard oral argument on Defendants Broadview Mortgage Corporation, First Equity Mortgage Bankers, Inc., Central Pacific Homeloans, Inc., Central Pacific Bank, Central Pacific Financial Corporation, Lenox Financial Mortgage Corp., Wells Fargo Bank, N.A., and National Bank of Kansas City's Motions to Dismiss the complaints filed against them by Plaintiff Residential Funding Company, LLC ("RFC"). RFC initiated six separate actions against Defendants, and Defendants separately moved to dismiss in each action.[1] Given the significant overlap in factual and legal issues, the parties agreed to a consolidated hearing on the motions. For the reasons stated below, Defendants' motions are denied.

II. BACKGROUND

Each of these six actions arose based on separate but similar sets of transactions between RFC and Defendants. Before it declared bankruptcy in May 2012, RFC was "in the business" of buying and securitizing residential mortgage loans. Am. Compl. [Broadview Dkt. No. 37] ("Broadview Compl.") ¶ 2.[2] RFC purchased these mortgage loans from various "correspondent lenders, " including Defendants, who had primary responsibility for underwriting the loans. RFC then "pooled" loans with similar characteristics together, and sold the bundled loans into securitization trusts. The loans served as collateral for the trusts' securitized investments (commonly referred to as "residential mortgage-backed securities" or "RMBSs"). RFC sold the RMBSs to investors, and it also occasionally sold pooled loans to "whole loan" investors. Id . ¶¶ 21-22.

Defendants sold numerous mortgage loans to RFC in accordance with different iterations of the "Client Contract, " which in turn incorporated different iterations of the voluminous "Client Guide." Although multiple versions applied to the transactions at issue, RFC contends the applicable Client Contracts and Client Guides have the same material terms concerning loan quality. Id . ¶ 18. Through the Client Guides, Defendants made numerous representations and warranties to RFC regarding the residential loans it sold. Among other representations, Defendants agreed they had: verified the accuracy of the information used by borrowers to obtain the loans; ensured the proper completion and execution of loan forms; complied with applicable laws; determined that no default or other breach of loan terms had occurred in any loan; confirmed the market value of the mortgaged property; and not sold any "high-risk" loans to RFC. Id . ¶ 24. Defendants further stated that none of loans sold were based on borrower or lender misrepresentations or fraud. Id.

The Client Guides provide RFC with broad remedies. The Client Guides state that any failure by Defendants to comply with the representations and warranties made will result in an "Event of Default." Similarly, any failure by a borrower, appraiser, broker, or other intermediary to provide accurate information is an "Event of Default, " regardless of whether Defendants knew of the misrepresentation. Id . ¶¶ 26-27. RFC reserved the sole right to declare an Event of Default, upon which RFC could require the lender to repurchase or replace the loan. Id . ¶¶ 29-30. The Client Guides also granted RFC indemnification for any liability resulting from a lender's breach. Defendants agreed to indemnify RFC for all losses, damages, or other costs resulting from any breach of contract, breach of warranty, or misrepresentation. Id . ¶ 33.

Many of the loans sold by Defendants to RFC defaulted or became delinquent. These loan defaults, in turn, led to significant investor losses. In selling the RMBSs to investors, RFC made required disclosures to the Securities and Exchange Commission (SEC) and also made representations and warranties to investors. When the RMBSs failed, investors, insurers, and other interested parties filed lawsuits against RFC for selling faulty investments. RFC alleges it was exposed to "billions of dollars" in liability. Id . ¶¶ 37-39, 45. In the ensuing litigation, investors and their insurers discovered that many of the loans underlying their investments had significant underwriting problems. See, e.g., id. ¶¶ 59, 62, 64. The paperwork for many loans was either incomplete or included inaccurate information about key aspects of the loans, such as borrower income, loan-to-value ratios, and property values. The loans also defaulted at higher than normal rates. See id. ¶¶ 40, 62.

In May 2012, RFC declared bankruptcy in the Bankruptcy Court for the Southern District of New York. The dozens of lawsuits against RFC involved a balance of more than $100 billion in original loan principal. And because RFC extended a promise to repurchase faulty loans and investments as part of its offerings, RFC had already spent millions of dollars repurchasing investments and loans. Id . ¶ 70. After RFC declared bankruptcy, investors and other interested parties filed hundreds of proofs of claim. Id . ¶ 72. Ultimately, the bankruptcy court approved a global settlement of over $10 billion to resolve the claims against RFC. The settlement assigned the rights and interests of RFC to the ResCap Liquidating Trust. Id . ¶ 76.

After the bankruptcy settlement took effect in December 2013, RFC filed dozens of actions against the lenders from whom it had purchased residential mortgage loans, including the six at issue here. RFC has alleged a breach of the Client Contracts and incorporated Client Guides against all Defendants except NBKC. In all six cases, RFC has also alleged a claim for indemnification.

A. Broadview Mortgage Corporation

Broadview Mortgage Corporation ("Broadview") is a California corporation with its principal place of business in Orange, California. Over the course of their dealings, RFC purchased "over 200" mortgage loans from Broadview, with an original principal balance in excess of $55 million. Broadview Compl. ¶¶ 4, 14. ...


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