United States District Court, D. Minnesota
In re: RFC and ResCap Liquidating Trust Litigation.
Mortgage Network, Inc., No. 13-cv-3491 (DWF/HB) This document relates to Residential Funding Company, LLC Residential Funding Company, LLC
Lake Forest Bank & Trust Company, No. 13-cv-3497 (PAM/FLN) Residential Funding Company, LLC
Circle Mortgage Corp., No. 13-cv-3545 (PAM/JJK) Residential Funding Company, LLC
DB Structured Products, Inc. and MortgageIT, Inc., No. 14-cv-143 (ADM/TNL) Residential Funding Company, LLC
Home Loan Center, Inc., No. 14-cv-1716 (DWF/JJK) Residential Funding Company, LLC
Decision One Mortgage Company, LLC and HSBC Finance Corporation, No. 14-cv-1737 (MJD/JSM) Residential Funding Company, LLC
E-Loan, Inc., No. 14-cv-1739 (PAM/JJK) Residential Funding Company, LLC
RBC Mortgage Company, No. 14-cv-3093 (PJS/BRT) Residential Funding Company, LLC
CMG Mortgage, Inc., 14-cv-3522 (ADM) Residential Funding Company, LLC
Synovus Mortgage Corp., No. 14-cv-3525 (DWF/BRT) Residential Funding Company, LLC
Honor Bank f/k/a The Honor State Bank, No. 14-cv-3942 (DWF) Residential Funding Company, LLC
Primary Capital Advisors, LLC, No. 14-cv-3950 (DWF) Residential Funding Company, LLC
PHH Mortgage Corporation, No. 14-cv-4701 (JRT) Residential Funding Company, LLC
First Mariner Bank, No. 15-cv-92 (SRN/JJK)
MEMORANDUM OPINION AND ORDER
SUSAN RICHARD NELSON, District Judge.
This matter is before the Court on Defendant Decision One Mortgage Company, LLC's Motion to Dismiss Plaintiff's First Amended Complaint [Doc. No. 215]. Defendants Mortgage Network, Inc. [Doc. No. 262], Lake Forest Bank & Trust Company [Doc. No. 235], Circle Mortgage Corp. [Doc. No. 252], DB Structured Products, Inc. [Doc. No. 249], MortgageIT, Inc. [Doc. No. 249], Home Loan Center, Inc. [Doc. No. 261], HSBC Finance Corporation [Doc. No. 246], E-Loan, Inc. [Doc. No. 251], RBC Mortgage Company [Doc. No. 273], CMG Mortgage, Inc. [Doc. No. 260], Synovus Mortgage Corp. [Doc. No. 275], Honor Bank f/k/a The Honor State Bank [Doc. No. 269], Primary Capital Advisors, LLC [Doc. No. 274], PHH Mortgage Corporation [Doc. No. 265], and First Mariner Bank [Doc. No. 276] each joined this Motion in whole or in part. For the reasons set forth below, the Motion is 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, 21.) RFC alleges that it was understood by Defendants that RFC would not be re-underwriting the loans. (Id. ¶ 21.)
According to RFC, its 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. ¶¶ 18-19 & Exs. A, B-1, B-5-B-31.) Those Agreements, or excerpts thereof, are attached to the First Amended Complaint. Pursuant to the Agreements, Defendants made many representations and warranties regarding the loans, including that Defendants would "promptly notify" RFC of any material acts or omissions regarding the loans. (Id. ¶ 25(b) (citing Client Guide A201(M)).) The Agreements also provided for certain remedies for RFC in the event of a breach, including repurchase of the defective loan or indemnification against losses and liabilities resulting from the breach. (Id. ¶¶ 30-34.)
After purchasing loans from Defendants, RFC either pooled the loans to sell into residential mortgage-backed securitization ("RMBS") trusts or sold them to whole loan purchasers. (Id. ¶¶ 3, 37.) According to RFC, many of the loans eventually defaulted or became delinquent and, beginning in 2008, RFC faced claims and lawsuits resulting from defective loans it had purchased from Defendants. (Id. ¶¶ 49, 57.) By May 2012, RFC had spent millions of dollars repurchasing defective loans, including loans sold to it by Defendants. (Id. ¶ 78.) And, on May 14, 2012, RFC filed for Chapter 11 bankruptcy in the Bankruptcy Court for the Southern District of New York. (Id. ¶ 79; 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. ¶ 80.) The Bankruptcy Court eventually approved "a global settlement that... provided for the resolution of all of the Debtors' RMBS-related liabilities for more than $10 billion in allowed claims." (Id. ¶ 83.) The Bankruptcy Court confirmed the Chapter 11 Plan on December 11, 2013, and the Plan became effective on December 17, 2013. (Id. ¶ 84; 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].)
RFC claims that Defendants are obligated, pursuant to the Agreements, to compensate RFC for the portion of the global settlement and other losses and liabilities related to Defendants' breaches of representations and warranties. (Id. ¶ 85.) Accordingly, RFC filed lawsuits asserting two causes of action against each Defendant. In Count One, a claim for breach of contract based on alleged breaches of representations and warranties, RFC alleges that, although it "complied with all conditions precedent, if any, and all of its obligations under the Agreement, " (id. ¶ 99), 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. ¶ 100). 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. ¶¶ 101-02.) In Count Two, RFC alleges that it is entitled to indemnification from Defendants for those losses and liabilities. (Id. ¶¶ 105-09.)
In its Motion to Dismiss, Decision One argues that: (1) RFC's claims fail because it did not provide the contractually-required notice and opportunity to repurchase or cure prior to bringing this lawsuit; (2) RFC cannot bring suit on liquidated loans; (3) RFC is not entitled to relief with respect to claims brought against it for which it incurred no actual losses; and (4) the statute of limitations precludes recovery on loans purchased prior to May 14, 2006. (Mot. to Dismiss of Decision One Mortg. Co. [Doc. No. 215] at 1-2.) As noted above, several other Defendants joined this Motion in whole or in part. After the matter was heard on March 31, 2015, RFC was permitted to submit briefing on "unique issues in opposition" to the joinder of certain Defendants [Doc. No. 353], and those Defendants were permitted a reply [Doc. No. 368]. (See Pretrial Order No. 4 [Doc. No. 214] at 3-4.) The issues raised in the supplemental briefing were heard on April 24, 2015.
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 documents that are necessarily embraced by the pleadings, Mattes v. ABC Plastics, Inc., 323 F.3d 695, 697 n.4 (8th Cir. 2003), and may also consider public records, Levy v. Ohl, 477 F.3d 988, 991 (8th Cir. 2007).
Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint "must contain... a short and plain statement of the claim showing that the pleader is entitled to relief." The U.S. Supreme Court, in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), clarified that this Rule does not require that a complaint contain "detailed factual allegations, " but it does require that it contain facts with enough specificity "to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. In other words, this standard "calls for enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the claim]." Id. at 556. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555). Thus, to survive a motion to dismiss, a complaint must contain "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570.
Here, Defendants have raised arguments relating to the sufficiency of RFC's pleading and satisfaction of conditions precedent, RFC's ability to assert claims based on liquidated loans, RFC's right to relief based on losses and liabilities, and the running of the statute of limitations as to certain claims. The Court will address each issue below.
A. Conditions Precedent
Defendants first argue that RFC's breach of contract and indemnification claims fail because RFC does not, and cannot, allege that it performed the conditions precedent necessary to maintain those claims-i.e., that it gave Defendants the contractually required notice of breach and opportunity to repurchase or cure the allegedly defective loans. (Def. Decision One's Mem. of Law in Supp. of Mot. to Dismiss [Doc. No. 217] ("Def.'s Mem.") at 12.) According to Defendants, although RFC alleges that the Agreements did not require RFC to provide notice and an opportunity to cure, that allegation is contradicted by the plain terms of the Seller Contract which-as an exhibit to the First Amended Complaint-trumps the allegations. (Id. at 12, 14-15.) Defendants argue that, instead, RFC's allegations state that it is only requesting relief for loans for which it did not provide notice and seek repurchase. (Id. at 15.) According to Defendants, the failure to perform such conditions precedent is a basis for dismissal of a breach of contract claim. (Id. at 13-14.)
In response, RFC argues that a general allegation that all conditions precedent have been satisfied is sufficient under Federal Rule of Civil Procedure 9(c) and that the Agreements do not contradict that allegation but rather allow for an exercise of remedies without a notice obligation. (See Pl.'s Opp. to Decision One's Mot. to Dismiss [Doc. No. 223] ("Pl.'s Opp.") at 4-7, 10.) In addition, RFC asserts that failure to satisfy a condition precedent is an affirmative defense involving disputes of facts and for which Defendant bears the burden of pleading and proving, and that it would not make sense to bar RFC's claims for a failure to notify Defendants of breaches when Defendants had an obligation to notify RFC of those breaches. (See id. at 7-12.) RFC also asserts that there is no affirmative allegation that notice was not provided and that, even if the First Amended Complaint alleges that notice was given as to some loans, it does not mean that notice was not given as to others. (Id. at 6-7.)
Defendants' arguments fail for the same reasons this Court discussed in its decision in Residential Funding Co. v. Academy Mortgage Corp., 59 F.Supp. 3d 935, 949-51 (D. Minn. 2014). First, the elements of a breach of contract claim based on alleged breaches of representations and warranties are: existence of a warranty, reliance on the warranty, breach of the warranty, and a causal link between the breach and the alleged harm. See Hendricks v. Callahan, 972 F.2d 190, 192-94 (8th Cir. 1992) (citing Midland Loan Fin. Co. v. Masden, 14 N.W.2d 475, 481 (Minn. 1944)). Thus, satisfaction of conditions precedent is not an element of RFC's claims that RFC was required to plead. Moreover, the cases relied upon by Defendants for the proposition that conditions precedent are enforceable and that the failure to provide notice when required may bar a subsequent breach of contract claim, (see Def.'s Mem. at 12-14), were either decided on summary judgment-without a discussion of pleading requirements-or involved an admission of noncompliance with a condition precedent. See Cameo Homes v. Kraus-Anderson Constr. Co., 394 F.3d 1084, 1085 (8th Cir. 2005) (summary judgment); Sterling Fed. Bank, F.S.B. v. DLJ Mortg. Capital, Inc., No. 09 C 6904, 2010 WL 3324705, at *4 (N.D. Ill. Aug. 20, 2010) (admission); Valspar Refinish, Inc. v. Gaylord's, Inc., 764 N.W.2d 359, 363 (Minn. 2009) (summary judgment); Blaine Econ. Dev. Auth. v. Royal Elec. Co., 520 N.W.2d 473, 476 (Minn.Ct.App. 1994) (summary judgment); Surgical Principals, Inc. v. Minn. Med. Dev., Inc., No. A13-0694, 2014 WL 1660662, at *1 (Minn.Ct.App. Apr. 28, 2014) (summary judgment). Therefore, they are inapplicable to the present Motion.
Second, even assuming that satisfaction of conditions precedent is an element that RFC was required to plead, RFC's allegations are sufficient. Under Rule 9(c), "[i]n pleading conditions precedent, it suffices to allege generally that all conditions precedent have occurred or been performed." Fed.R.Civ.P. 9(c). Therefore, RFC's general allegation that it "complied with all conditions precedent, if any, and all of its obligations under the Agreement" is adequate. See, e.g., Cummins Law Office, P.A. v. Norman Graphic Printing Co., 826 F.Supp.2d 1127, 1129 (D. Minn. 2011) (finding the plaintiff's allegation that "[a]ny conditions precedent to [its] right to demand performance by [the defendant] have been performed'" to be sufficient under Rule 9); Residential Funding Co. v. Broadview Mortg. Corp., Civ. No. 13-3463 (ADM/SER), 2014 WL 4104819, at *8 (D. Minn. Aug. 19, 2014) (finding RFC's allegations in a similar case that "it performed all of its obligations to Defendants, and all conditions precedent to the relief sought in this action, if any, have been satisfied, '" to be sufficient at the pleading stage).
Third, all inferences must be drawn in RFC's favor at this stage of the proceedings. Thus, although Decision One argues that its Seller Contract with RFC contained a "specially-negotiated Addendum" with a unique notice requirement, (Reply Brief in Supp. of Mot. to Dismiss of Def. Decision One [Doc. No. 221] ("Def.'s Reply") at 1),  RFC points to an amendment to the Seller Contract and a later version of the Client Guide that purport to change or eliminate any notice requirement, (Pl.'s Opp. at 5 n.2, 10). Without the benefit of a more developed record, the Court is unable to determine which contractual provisions were in effect and governed the parties' relationship at the relevant time. Likewise, although Defendants contend that RFC admitted its failure to provide an opportunity to repurchase by conceding that it sold the loans to third parties, (see Def.'s Mem. at 15-16; Def.'s Reply at 1-2), RFC points to language in the agreements stating that RFC was not required to seek repurchase within a particular period of time, (see Pl.'s Opp. at 12 n.12). In light of the absence of an affirmative allegation that RFC did not provide notice, whether Defendants did, indeed, receive or have notice is a question of fact. See MASTR Asset Backed Sec. Trust 2006-HE3 ex rel. U.S. Bank Nat'l Ass'n v. WMC Mortg., LLC, 983 F.Supp.2d 1104, 1113-14 (D. Minn. 2013) (stating that a trustee should be given an opportunity to prove that the mortgage originator knew of a breach of representations and warranties because "[i]f, as the Trustee pleads, [the originator] knew of a breach... and the Trustee did not, then the Trustee did not have an opportunity to request [the originator] to cure or repurchase the defective mortgage, as provided by the sole remedies clause" of their agreement). Any inferences in Defendants' favor on these issues, based solely on the pleadings and the conflicting language in the exhibits to the pleadings, would be improper on a motion to dismiss.
B. Liquidated Loans
Defendants next argue that RFC's claims based on liquidated loans fail because the Client Guide contained a "survival clause" in Section A209(c), under which the representations and warranties at ...