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In re RFC and Rescap Liquidating Trust Litigation

United States District Court, D. Minnesota

May 18, 2015

In Re: RFC and ResCap Liquidating Trust Litigation. This document relates to: ResCap Liquidating Trust
v.
CMG Mortgage, Inc., Case No. 14-cv-3522 (ADM) ResCap Liquidating Trust
v.
Synovus Mortgage Corp., Case No. 14-cv-3525 (DWF/BRT) ResCap Liquidating Trust
v.
Honor Bank f/k/a The Honor State Bank, Case No. 14-cv-3942 (DWF/JJK) ResCap Liquidating Trust
v.
Primary Capital Advisors, LLC, Case No. 14-cv-3950 (DWF/FLN) ResCap Liquidating Trust
v.
PHH Mortgage Corp., Case No. 14-cv-4701 (JRT) ResCap Liquidating Trust
v.
First Mariner Bank, Case No. 15-cv-0092 (SRN/JJK)

MEMORANDUM OPINION AND ORDER

SUSAN RICHARD NELSON, District Judge.

Before the Court is the Transfer Defendants' Collective Motion to Dismiss Plaintiff's Breach of Contract Claims [Doc. No. 266]. The above-captioned Defendants ("Transfer Defendants") seek to dismiss Plaintiff ResCap Liquidating Trust's breach of contract claims as time-barred. For the reasons stated herein, the motion is denied.

I. BACKGROUND

These lawsuits arise out of the Transfer Defendants' sale of allegedly defective mortgage loans to Residential Funding Corporation ("RFC"). (First Am. Compl. ¶ 1, Case No. 14-cv-3522 [Doc. No. 47].)[1] Plaintiff ResCap Liquidating Trust ("ResCap") is the successor to all of RFC's rights and interests under certain agreements between RFC and the Transfer Defendants. (Id. ¶¶ 6, 13.)

A. Events Preceding RFC's Bankruptcy

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 the Transfer Defendants, who were responsible for collecting and verifying information from the borrower and underwriting the loans. (Id. ¶¶ 3, 20.) After RFC purchased the loans from the Transfer Defendants, RFC either pooled the loans with similar loans to sell into residential mortgage-backed securitization ("RMBS") trusts or sold the loans to other purchasers. (Id. ¶ 3.)

As alleged in the First Amended Complaint, RFC's relationship with the Transfer Defendants 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.)[2] Pursuant to the Agreements, the Transfer Defendants made many representations and warranties regarding the loans, which RFC considered to be material. (Id. ¶¶ 24-25.) RFC considered any failure to comply with a representation or warranty an "Event of Default" under the Agreements. (Id. ¶ 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. ¶¶ 29-30.) RFC alleges that the Agreements do not, however, require RFC to provide the Transfer Defendants with notice or an opportunity to cure, or demand repurchase within a particular amount of time. (Id. ¶ 30.)

When RFC sold the loans acquired from the Transfer Defendants, RFC made its own representations and warranties, in reliance on the information provided to it by the Transfer Defendants. (Id. ¶ 37.) RFC alleges that, in many instances, the Transfer Defendants violated their representations and warranties, and many of the loans eventually defaulted or became delinquent. (Id. ¶¶ 37, 48.) After conducting an internal review, RFC determined that numerous loans violated the Agreements and resulted in an Event of Default. (Id. ¶ 49.) The types of defects included income and employment misrepresentations, owner occupancy misrepresentations, appraisal misrepresentations or inaccuracies, undisclosed debt, and missing or inaccurate documents. (Id. ¶ 50.) RFC alleges that it has incurred liabilities and losses resulting from Defendants' defective loans and litigation regarding the quality of those loans. (Id. ¶¶ 55-57.)

B. RFC's Bankruptcy Proceeding

RFC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York on May 14, 2012. (Id. ¶ 77); In re Residential Capital, LLC, Case No. 12-12020 (MG) (Bankr. S.D.N.Y. filed May 14, 2012). By this time, RFC had spent millions of dollars repurchasing defective loans, including loans sold to it by the Transfer Defendants. (First Am. Compl. ¶ 58, 76). According to RFC, hundreds of proofs of claim related to allegedly defective mortgage loans, including those sold to RFC by the Transfer Defendants, were filed in connection with the bankruptcy proceedings. (Id. ¶ 78.) The Bankruptcy Court eventually approved a global settlement that provided for resolution of the RMBS-related liabilities for more than $10 billion. (Id. ¶ 82.) 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, ResCap succeeded to all of RFC's rights and interests, including its claims against the Transfer Defendants. (First Am. Compl. ¶ 82.)

C. The Present Actions

On May 13, 2014, ResCap commenced separate lawsuits as adversary proceedings against the Transfer Defendants in the United States Bankruptcy Court for the Southern District of New York. ( E.g., ResCap Liquidating Trust v. CMG Mortg., Inc., Adv. No. 14-01998 (MG) (Bankr. S.D.N.Y filed May 13, 2014).) ResCap filed amended complaints in those proceedings on July 24 and 25, 2014. ( See Sullivan Decl. Exs. A-F, Case No. 13-cv-3451 [Doc. Nos. 270-1, 270-2].) ResCap alleged two claims against each Transfer Defendant: (1) a breach of contact claim founded on alleged breaches of warranties and representations, and (2) an indemnification claim. ( E.g., Sullivan Decl. Ex. E (First Am. Compl. ¶¶ 88, 95, ResCap Liquidating Trust v. CMG Mortg., Inc., Adv. No. 14-01998 (MG) (Bankr. S.D.N.Y.)) [Doc. No. 270-2].) ResCap invoked federal diversity jurisdiction under 28 U.S.C. § 1332 and bankruptcy jurisdiction under 28 U.S.C. § 1334 in each case. (Id. ¶ 15.)

The cases subject to the present motion were transferred to the United States District Court for the District of Minnesota by either stipulation or motion. The parties stipulated to withdraw the bankruptcy reference and transfer venue to this District in two cases. (Stip. & Order, ResCap Liquidating Trust v. Synovus Mortg. Corp., Case No. 14-cv-3525 [Doc. No. 31]; Stip. & Order, ResCap Liquidating Trust v. Honor Bank, Case No. 14-cv-3942 [Doc. No. 26].)[3] The other four cases were transferred here pursuant to court orders granting motions to withdraw the bankruptcy reference and transfer venue. (Order at 7, ResCap Liquidating Trust v. CMG Mortg., Inc., Case No. 14-cv-3522 [Doc. No. 21]; Order at 1, 12, ResCap Liquidating Trust v. Primary Capital Advisors, LLC, Case No. 14-cv-3950 [Doc. No. 31]; Order at 1 & n.1, ResCap Liquidating Trust v. PHH Mortg. Corp., Case No. ...


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