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In re RFC and Rescap Liquidating Trust Litigation

United States District Court, D. Minnesota

June 8, 2015

In Re: RFC and RESCAP Liquidating Trust Litigation.
DB Structured Products, Inc., and MortgageIT, Inc., No. 14-cv-143 (ADM/TNL) This document relates to Residential Funding Company, LLC




This matter is before the Court on the Motion to Dismiss the First Amended Complaint filed by Defendants DB Structured Products, Inc. ("DBSP"), and MortgageIT, Inc. ("MortgageIT"). (Doc. No. 225.) After the Court held a hearing on the motion, the parties entered a stipulation by which DBSP withdrew that portion of the motion seeking to dismiss the claims against it that were premised on "alter-ego" liability. (Doc. No. 462 ¶ 7 (agreeing to withdraw motion to dismiss "Indirect Claims" against DBSP).) However, the motion survived the stipulation to the extent MortgageIT seeks to dismiss certain claims against it as time barred. (Id.; Doc. No. 465, May 20, 2015 Order Adopting Stipulation ¶ 1.) For the reasons set forth below, the surviving portion of the motion-in which MortgageIT contends that claims based on breaches of representations and warranties for loans sold prior to August 20, 2008, are barred by the statute of limitations-is denied.


A. Procedural History

Plaintiff Residential Funding Company, LLC ("RFC"), served its original Complaint on DBSP on December 16, 2013. (Case No. 14-cv-143 (ADM/TNL), Doc. No. 1, Notice of Removal.) At that time, MortgageIT was not named as a defendant. In its original Complaint, RFC alleged that it purchased loans from MortgageIT pursuant to a contract and that DBSP was liable for MortgageIT's breaches of that contract. RFC's theory was that DBSP was liable as MortgageIT's successor in interest. (Case No. 14-cv-143, Doc. No. 1-1 at 5, Compl.; Id., Compl. at 7, ¶ 13.)

Eight months later, on August 20, 2014, RFC filed its First Amended Complaint. (Case No. 14-cv-143, Doc. No. 36, First Am. Compl.) There were two major changes in the First Amended Complaint. The first was that RFC named MortgageIT as a defendant for the first time. (Id. ¶ 14.) As for the claims against MortgageIT in the First Amended Complaint, RFC alleged that MortgageIT was liable for its own breaches of warranties and representations about the condition of the loans it sold to RFC, which representations and warranties MortgageIT made in the parties' contract. The second major change was that RFC added an additional theory of recovery against DBSP, asserting that DBSP was MortgageIT's alter ego. (Id. ¶¶ 14, 89-99.)

On May 4, 2015, after this case had been administratively consolidated with several other related cases into this proceeding, RFC filed a Second Amended Complaint. (Case No. 13-cv-3451, Doc. No. 405, Second Am. Compl.) This Second Amended Complaint is now the operative pleading. The major difference between the Second Amended Complaint and the First Amended Complaint is that RFC has now added allegations regarding DBSP's direct sale of loans to RFC under a different agreement than the one that governs RFC's relationship with MortgageIT. ( E.g., Second Am. Compl. ¶¶ 14, 17.) In the Second Amended Complaint, RFC did not change the allegations it had made in the First Amended Complaint concerning MortgageIT's alleged breaches of representations and warranties.

Because RFC filed its Second Amended Complaint after MortgageIT filed the pending motion to dismiss, but did not alter the allegations it had asserted against MortgageIT in the First Amended Complaint, the Court can consider MortgageIT's motion to dismiss as being directed toward the latest version of the pleadings. See 6 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1476 at p. 558 (2d ed. 1990) ("[D]efendants should not be required to file a new motion to dismiss simply because an amended pleading was introduced while their motion was pending."); see also Delgado-O'Neil v. City of Minneapolis, et al., No. 08-cv-4924 (MJD/JJK), 2010 WL 330322, at *1 n.1 (D. Minn. Jan. 20, 2010) (same) (citing 6 Wright & Miller, § 1476 at p. 558).

B. Allegations in the Second Amended Complaint Regarding MortgageIT

RFC alleges the following historical facts in its Second Amended Complaint. RFC's relationship with MortgageIT was governed by a Seller Contract that incorporated terms of the RFC Client Guide (collectively, "the Agreements"). (Second Am. Compl. ¶¶ 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, MortgageIT made many representations and warranties regarding the loans, including: (1) MortgageIT's origination and servicing of the loans was "legal, proper, prudent and customary"; (2) MortgageIT would "promptly notify" RFC of any material acts or omissions regarding the loans; (3) all loan-related information that MortgageIT 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 MortgageIT 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. ¶¶ 28-30.) The Agreements do not, however, require that RFC provide MortgageIT with notice or an opportunity to cure, or demand repurchase within a particular amount of time. (Id. ¶ 30.)

In addition and of particular relevance here, RFC alleges that "MortgageIT also has a continuing obligation under Section A201(M) of the Client Guide to promptly notify RFC of any act or omissions which might impact the Loan, the Mortgaged Property, or the Mortgagor (as such terms are defined in the Client Guide)." (Id. ¶ 20.) RFC further asserts that "MortgageIT has continually breached this obligation [under Section A201(M)], including through to the present, by failing to inform RFC of the loan defects." (Id. )

RFC alleges that, pursuant to these Agreements, it purchased over 8, 200 loans from MortgageIT. (Id. ¶ 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.) A list of the loans sold to RFC by MortgageIT and securitized by RFC is attached to the First Amended Complaint as Exhibit C. (Id. ¶ 19.)

In passing on its own representations and warranties to its buyers, RFC relied on the information provided to it by MortgageIT. (Id. ¶ 38.) However, RFC alleges that, in many instances, MortgageIT violated its representations and warranties. (Id. ) According to RFC, many of the loans eventually defaulted or became delinquent and sustained millions of dollars in losses. (Id. ¶ 50.) After conducting an internal review, RFC determined that hundreds of loans sold by MortgageIT violated the Agreements and resulted in an Event of Default. (Id. ¶ 40.) The review demonstrated that the loans had one or more of the following defects: income and employment misrepresentations, owner occupancy ...

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