United States District Court, D. Minnesota
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For Plaintiff: Donald G. Heeman, David L. Hashmall, and Jessica J. Nelson, Felhaber Larson, Minneapolis, MN; Edward P. Sheu and Kyle R. Hardwick, Best & Flannagan LLP, Minneapolis, MN; Peter E. Calamari, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY; Jeffrey A. Lipps, Carpenter Lipps & Leland LLP, Columbus, OH.
For Academy Mortgage Corporation, Defendant: David M. Souders and Tessa K. Somers, Weiner Brodsky Kider PC, Washington, D.C.
For First California Mortgage Company, Defendant: J. Robert Keena and Carol R. M. Moss, Hellmuth & Johnson, PLLC, Edina, MN; James W. Brody and Greg W. Chambers, Novato, CA.
For Provident Funding Associates, L.P., Defendant: Mark G. Schroeder and Daniel N. Moak, Briggs and Morgan, P.A., Minneapolis, MN; Neil R. O'Hanlon, Hogan Lovells U.S. LLP, Los Angeles, CA.
For T.J. Financial, Inc., Defendant: Erin Sindberg Porter and Janine W. Kimble, Greene Espel PLLP, Minneapolis, MN; Philip R. Stein and Shalia Sakona, Bilzin Sumberg Baena Price & Axelrod LLP, Miami, FL.
For Universal American Mortgage Company, LLC, Defendant: Erin Sindberg Porter and Janine W. Kimble, Greene Espel PLLP, Minneapolis, MN; Philip R. Stein and Shalia Sakona, Bilzin Sumberg Baena Price & Axelrod LLP, Miami, FL.
For Wells Fargo Financial Retail Credit, Inc. f/k/a Norwest Financial Acceptance, Inc., Defendant: Marc T. G. Dworsky, Richard C. St. John, and Todd J. Rosen, Munger, Tolles & Olson LLP, Los Angeles, CA; Christian K. Wrede, Munger, Tolles & Olson LLP, San Francisco, CA; Richard T. Thomson and Amy L. Schwartz, Lapp, Libra, Thomson, Stoebner & Pusch, Chtd., Minneapolis, MN.
MEMORANDUM OPINION AND ORDER
SUSAN RICHARD NELSON, United States District Judge.
This matter is before the Court on a Motion to Dismiss the First Amended Complaint filed by each Defendant in the above-captioned matters. For the reasons set forth below, the Motions are denied.
These lawsuits arise out of Defendants' sale of allegedly defective mortgage loans to Plaintiff Residential Funding, LLC (" RFC" ). (First Am. Compl. ¶ 1.) Prior to May 2012, RFC was " in the business of acquiring and securitizing residential mortgage loans." (Id. ¶ 2.) RFC acquired the loans from " 'correspondent lenders,'" such as Defendants, who were responsible for collecting and verifying information from the borrower and underwriting the loans. (Id. ¶ ¶ 3, 20.)
As alleged in the First Amended Complaints, RFC's relationship with each Defendant was governed by a Seller Contract that incorporated the terms and conditions of the RFC Client Guide (collectively, " the Agreements" ). (Id. ¶ ¶ 17-18 & Exs. A, B.) Those Agreements, or excerpts thereof, are attached to the First Amended Complaints as Exhibits A and B, respectively. Pursuant to the Agreements, Defendants made many representations and warranties regarding the loans, including: (1) Defendants' origination and servicing of the loans was " legal, proper, prudent and customary" ; (2) Defendants would " promptly notify" RFC of any material acts or omissions regarding the loans; (3) all loan-related information that Defendants provided to RFC was " true, complete and accurate" ; (4) all loan documents were " genuine" and " in recordable form" ; (5) all loan documents were in compliance with local and state laws; (6) there was
" no default, breach, violation or event of acceleration" under any note transferred to RFC; (7) each loan was " originated, closed, and transferred" in compliance with all applicable laws; (8) none of the loans were " high-cost" or " high-risk" ; (9) there were no existing circumstances that could render the loans an " unacceptable investment," cause the loans to become " delinquent," or " adversely affect" the value of the loans; (10) the loans were underwritten in compliance with the Client Guide; (11) appropriate appraisals were conducted when necessary; (12) the market value of the premises was at least equal to the appraised value stated on the loan appraisals; and (13) there was no fraud or misrepresentation by the borrower or Defendants regarding the origination or underwriting of the loans. (Id. ¶ 24.) RFC considered these representations and warranties to be material, and any failure to comply constituted an " Event of Default" under the Agreements. (Id. ¶ ¶ 25-26.) RFC retained sole discretion to declare an Event of Default, and the available remedies include repurchase of the defective loan, substitution of another loan, or indemnification against liabilities resulting from the breach. (Id. ¶ ¶ 29-33.) The Agreements do not, however, require that RFC provide Defendants with notice or an opportunity to cure, or demand repurchase within a particular amount of time. (Id.)
RFC alleges that, pursuant to these Agreements, it purchased: (1) over 600 mortgage loans, with an original principal balance exceeding $77 million, from Defendant Academy Mortgage Corporation (" Academy" ); (2) over 300 mortgage loans, with an original principal balance exceeding $125 million, from Defendant First California Mortgage Company (" First California" ); (3) over 6,900 mortgage loans, with an original principal balance exceeding $2.6 billion, from Defendant Provident Funding Associates, L.P. (" Provident" ); (4) over 600 mortgage loans, with an original principal balance exceeding $227 million, from Defendant T.J. Financial, Inc. (" T.J. Financial" ); (5) over 3,000 mortgage loans, with an original principal balance exceeding $800 million, from Defendant Universal American Mortgage Company, LLC (" Universal" ); and (6) over 3,700 mortgage loans, with an original principal balance exceeding $155 million, from Defendant Wells Fargo Financial Retail Credit, Inc. f/k/a Norwest Financial Acceptance, Inc. (" Wells Fargo" ). (Id. ¶ ¶ 4, 17.) RFC then either pooled those loans to sell into residential mortgage-backed securitization (" RMBS" ) trusts or sold them to whole loan purchasers. (Id. ¶ ¶ 3, 36.) A list of the loans sold to RFC by each Defendant and securitized is attached to the respective First Amended Complaints as Exhibit C.
In passing on its own representations and warranties to its buyers, RFC relied on the information provided to it by Defendants. (Id. ¶ 37.) However, RFC alleges that, in many instances, Defendants violated their representations and warranties. (Id.) According to RFC, many of the loans eventually defaulted or became delinquent and sustained millions of dollars in losses. (Id. ¶ 39.) After conducting an internal review, RFC determined that hundreds of
loans sold by each Defendant violated the Agreements and resulted in an Event of Default. (Id. ¶ 41.) The types of defects included income and employment misrepresentation, owner occupancy misrepresentation, appraisal misrepresentations or inaccuracies, undisclosed debt, insufficient credit scores, lien position, and/or missing or inaccurate documents, among others. (Id. ¶ 42.)
RFC alleges that it has incurred liabilities and losses resulting from Defendants' defective loans and litigation regarding the quality of those loans. (See id. ¶ ¶ 46-60.) Beginning in 2008, RFC faced claims and lawsuits resulting from defective loans it had purchased from Defendants, (id. ¶ 49), and by May 2012, RFC had spent millions of dollars repurchasing defective loans, including loans sold to it by Defendants, (id. ¶ 61). And, on May 14, 2012, RFC filed for Chapter 11 bankruptcy in the Bankruptcy Court for the Southern District of New York. (Id. ¶ 62; In re Residential Capital, LLC, Case No. 12-12020 (MG) (Bankr. S.D.N.Y.).) According to RFC, hundreds of proofs of claim related to allegedly defective mortgage loans, including those sold to RFC by Defendants, were filed in connection with the bankruptcy proceedings. (First Am. Compl. ¶ 63.) The Bankruptcy Court eventually approved a global settlement that provided for resolution of the RMBS-related liabilities for more than $10 billion. (Id. ¶ 67.) The Bankruptcy Court confirmed the Chapter 11 Plan on December 11, 2013, and the Plan became effective on December 17, 2013. (Id.; Findings of Fact at 1, In re Residential Capital, LLC, Case No. 12-12020 (MG), (Bankr. S.D.N.Y. Dec. 11, 2013) (Doc. No. 6066).) Under the Plan, the ResCap Liquidating Trust succeeded to RFC's rights and interests, including its claims against Defendants. (First Am. Compl. ¶ 67.)
RFC alleges that Defendants are obligated, pursuant to the Agreements, to compensate RFC for the portion of the global settlement, and other losses, related to Defendants' breaches of representations and warranties. (Id. ¶ 68.) Accordingly, RFC filed these lawsuits between December 12 and 15, 2013, asserting two causes of action against each Defendant. In Count One, a claim for breach of representation and warranty, RFC alleges that, although it " complied with all conditions precedent, if any, and all of its obligations under the Agreement[s]," (id. ¶ 72), Defendants materially breached the representations and warranties they made to RFC because the mortgage loans they sold to RFC did not comply with those representations and warranties, (id. ¶ ¶ 71, 73). RFC asserts that these material breaches constitute Events of Default under the Agreements and have resulted in losses and liabilities related to the defective loans, as well as losses associated with defending the lawsuits and proofs of claim that stem from those loans. (Id. ¶ ¶ 74-75.) In Count Two, RFC alleges that it is entitled to indemnification from Defendants for those losses and liabilities. (Id.
¶ ¶ 77-80.)
Defendants each filed a motion to dismiss Plaintiff's First Amended Complaint, arguing that RFC has insufficiently pleaded its claims. Defendants Academy, First California, T.J. Financial, and Universal also assert that RFC lacks standing to bring its claims. And, Defendants Academy, First California, Provident, T.J. Financial, and Universal argue that at least some of RFC's claims are time-barred. Because the motions raise substantially similar issues, they were consolidated for oral argument, and the matter was heard on June 5, 2014.
When evaluating a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, for failure to state a claim upon which relief can be granted, the Court assumes the facts in the Complaint to be true and construes all reasonable inferences from those facts in the light most favorable to the plaintiff. Morton v. Becker,793 F.2d 185, 187 (8th Cir. 1986). However, the Court need not accept as true wholly conclusory allegations, see Hanten v. Sch. Dist. of Riverview Gardens, 183 F.3d 799, 805 (8th Cir. 1999), or legal conclusions the plaintiff draws from the facts pled, Westcott v. City of Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990). In addition, the Court ordinarily does not consider matters outside the pleadings on a motion to dismiss. See Fed.R.Civ.P. 12(d). The Court may, however, consider exhibits attached to the complaint and ...