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Residential Funding Company, LLC v. Embrace Home Loan, Inc.

United States District Court, District of Minnesota

March 19, 2015

Residential Funding Company, LLC, Plaintiff,
v.
Embrace Home Loans, Inc., Defendant.

MEMORANDUM AND ORDER

PAUL A. MAGNUSON, UNITED STATES DISTRICT COURT JUDGE.

This matter is before the Court on Defendant Embrace Home Loans’s Motion to Dismiss Plaintiff Residential Funding Company’s Second Amended Complaint. For the reasons that follow, the Motion is denied.

BACKGROUND

This is the second Motion to Dismiss filed in this case. The full factual background of the matter is set forth in the Court’s previous Order and will not be repeated here. Residential Funding Co., LLC v. Embrace Home Loans, Inc., 27 F.Supp. 3d 980 (D. Minn. 2014). As relevant to the instant Motion, that Order determined that RFC’s claims for loans it sold before May 14, 2006, were untimely, id. at 985; that RFC had not sufficiently pled a continuing violation under the parties’ contract that might otherwise forestall the running of the statute of limitations, id. at 984; and that RFC’s claims as to post-May 14, 2006, loans were insufficiently pled, id. at 986. The Order therefore dismissed the untimely claims with prejudice and the timely claims without prejudice, to allow RFC to replead. Id.

Embrace now moves to dismiss RFC’s Second Amended Complaint (Docket No. 58), contending again that RFC’s claims are untimely and insufficiently pled.

DISCUSSION

Embrace sold more than 8, 700 mortgage loans to RFC over the course of the parties’ relationship. (2d Am. Compl. ¶ 4.) Some of these loans were aggregated into mortgage-backed securities, and others were not securitized but were either retained by RFC or sold as whole loans. (Id. ¶ 19.) A complete list of the loans Embrace sold to RFC is attached to the Second Amended Complaint as Exhibits C-1 and C-2. (Id.)

In the Amended Complaint, RFC contended that “hundreds” of these loans were defective. (Am. Compl. ¶ 41.) The previous Order found that allegation insufficient, but gave RFC leave to replead as to loans within the statute of limitations-loans Embrace sold after May 14, 2006. The Second Amended Complaint now alleges that RFC conducted a random sampling of loans from the pool of loans Embrace sold and RFC subsequently securitized. (2d Am. Compl. ¶ 39.) RFC conducted what it calls a re-underwriting of the random sample of 150 of these loans, actually reviewing the contents of the loan file for each of this sample of loans. (Id.) This analysis “demonstrated that 73% of the loans in the sample were defective and violated Embrace’s representations and warranties.” (Id.) A list of all defective loans in this sample is attached to the Second Amended Complaint at Exhibit D. The pleading goes on to list 15 examples from the list of defective loans, including far more detail about the loan and the warranties allegedly breached than was contained in the Amended Complaint. (Id.)

RFC also reviewed all of the more than 2, 900 Embrace loans that RFC securitized using an automated-value model (“AVM”) and the borrowers’ tax records. The findings revealed by this review showed that more than 80% of the loans Embrace sold to RFC that were subsequently securitized had loan-to-value ratios greater than 100%, in addition to other serious defects. (Id. ¶ 44.) This forensic review showed that 83% of these loans had at least one defect. (Id. ¶ 49.) A list of those defective loans is attached to the Second Amended Complaint as Exhibit E.

To preserve its appeal rights, the Second Amended Complaint re-asserts RFC’s breach of contract claim as to all loans, not just the loans that are within the limitations period. RFC asks the Court to reconsider that statute-of-limitations ruling. The Second Amended Complaint also re-asserts the indemnification claim.

In this Motion, Embrace once again contends that RFC’s breach-of-contract claim is untimely, arguing that the Second Amended Complaint does not relate back to either the original Complaint or the Amended Complaint. Embrace also contends that RFC has failed to state a breach-of-contract claim with respect to the loans Embrace sold RFC that were not subsequently securitized, the so-called “whole” loans. Finally, Embrace argues that RFC’s indemnification claim fails because RFC has not pled any causation between Embrace’s alleged breaches of its representations and warranties and RFC’s losses.

A. Statute of Limitations

Embrace contends that a dismissal without prejudice means that a re-filing of the dismissed claims does not relate back to the original filing. But this is directly contrary to the Federal Rules and logic. As Rule 15 provides, an amended pleading “relates back to the date of the original pleading . . . .” Fed.R.Civ.P. 15(c)(1)(B). Moreover, the previous Order stated that RFC would be allowed to re-plead its breach-of-contract claims for loans sold after May 14, 2006. Thus, even assuming Embrace’s argument was correct, the Court’s Order supersedes any contrary authority. RFC’s breach-of-contract claims for loans sold after May 14, 2006, are timely and will not be dismissed on this basis.

In its opposition to Embrace’s statute-of-limitations argument, RFC contends that the parties’ agreements extended the statute of limitations for the life of the loans Embrace sold RFC. (Pl.’s Opp’n Mem. at 16-17 (citing 2d Am. Compl. Ex. B-1 (Client Guide) § 205(C)).) This may be true, but RFC did not raise ...


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