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In re RFC and ResCap Liquidating Trust Litigation

United States District Court, D. Minnesota

April 25, 2017

In Re RFC and ResCap Liquidating Trust Litigation,
v.
InterLinc Mortgage Services, LLC, in its own capacity, and as successor to Hometown Mortgage Services, Inc., Douglas Rohm, and Edward Danielczyk, Case No. 16-cv-3024 (SRN/HB) This document relates to: Residential Funding Company, LLC, and ResCAP Liquidating Trust

          Peter E. Calamari, Isaac Nesser, David Elsberg, Quinn Emanuel Urquhart & Sullivan, LLP, Anthony P. Alden, Johanna Ong, Matthew Scheck, Quinn Emanuel Urquhart & Sullivan, LLP, Jeffrey A. Lipps, Jennifer A.L. Battle, Carpenter Lipps & Leland LLP, Donald G. Heeman, and Jessica J. Nelson, Felhaber, Larson, Fenlon & Vogt P.A., for Plaintiffs.

          Mark G. Schroeder, Jason R. Asmus, Daniel J. Supalla, Michael M. Sawers, Briggs & Morgan, P.A., Steven M. Pincus, Brooke D. Anthony, and Steven C. Kerbaugh, Anthony Ostlund Baer & Louwagie, P.A., for Defendants.

          MEMORANDUM OPINION AND ORDER

          SUSAN RICHARD NELSON, United States District Judge

         I. INTRODUCTION

         This matter comes before the Court on Defendants' separate motions to dismiss the Complaint. Defendant InterLinc Mortgage Services, LLC (“InterLinc”), a Texas company, moves to dismiss for lack of personal jurisdiction, improper venue, and failure to state a claim upon which relief can be granted. (See generally InterLinc Mot. to Dismiss [Doc. No. 1853].) See Fed. R. Civ. P. 12(b)(2), (3), and (6). Defendants Douglas Rohm and Edward Danielczyk (the “Individual Defendants”), both of Birmingham, Alabama, move to dismiss for lack of personal jurisdiction and failure to state a claim upon which relief can be granted. In the alternative, they urge the Court to transfer this action to the Northern District of Alabama, pursuant to 28 U.S.C. §§ 1404 or 1406. (See generally Individual Defs.' Mot. to Dismiss [Doc. No. 1846].)

         For the reasons set forth below, the Court finds that it has jurisdiction over all defendants, that venue is proper in this district, and that transfer is unwarranted. Accordingly, Defendants' motions are denied as to those issues. However, the Court agrees that as the Complaint is currently pleaded, Plaintiffs Residential Funding Company, LLC and ResCap Liquidating Trust (collectively, “RFC”) have failed to properly state claims for breach of contract and indemnification against InterLinc, and constructive fraudulent transfer against all defendants. In keeping with that determination, Defendants' Rule 12(b)(6) motions are granted in part, and denied in part, although RFC will be given the opportunity to replead if it so chooses.

         II. BACKGROUND

         The general facts pertaining to this consolidated matter are set forth in previous rulings from this court, and are incorporated herein by reference. See, e.g., Residential Funding Co. v. Impac Funding Corp., No. 13-cv-3506 (SRN/HB), 2016 WL 6953484, at *1-2 (D. Minn. Apr. 27, 2016); Residential Funding Co. v. Academy Mortg. Corp., 59 F.Supp.3d 935, 938-41 (D. Minn. 2014); Residential Funding Co. v. Terrace Mortg. Co., 850 F.Supp.2d 961, 962-64 (D. Minn. 2012). Stated briefly, prior to its bankruptcy in May 2012, RFC was in the business of acquiring and securitizing residential mortgage loans. (See Compl. ¶ 15 [Case No. 13-cv-3024, Doc. No. 1].) Its business model was built on acquiring loans from “correspondent lenders, ” and distributing those loans by either pooling them together with other similar mortgage loans to sell into residential mortgage-backed securitization (“RMBS”) trusts, or selling them to whole loan purchasers. (Id. ¶ 16.) To ensure loan-quality, RFC required its correspondent lenders to abide by certain representation and warranties regarding the loans. (Id. ¶ 18.) Among other things, RFC contends that lenders were responsible for collecting information from the borrowers, verifying the accuracy of that information, and properly underwriting the loans. (Id. ¶ 30.)

         One of the correspondent lenders with whom RFC did business was Hometown Mortgage Services, Inc. (“Hometown”), an Alabama corporation. (Id. ¶¶ 9, 18.) At all times relevant to this suit, Individual Defendants were Hometown's sole shareholders, officers, and directors. (Id. ¶¶ 1, 88.) According to RFC, Hometown sold over 2, 000 mortgages to it over the course of the parties' relationship, many of which it now alleges were defective and violated Hometown's representations and warranties. (Id. ¶ 5.) RFC alleges that these defects-compounded with those of other lenders-contributed materially to its Chapter 11 bankruptcy in May 2012. (Id. ¶ 20.) Due to Hometown's allegedly faulty origination, underwriting, and quality control practices, RFC commenced suit against it in this Court in December 2013, asserting claims for indemnification and breach of contract. See Residential Funding Co. v. Hometown Mortg. Servs., Inc., No. 13-cv-3509 (SRN/HB) (D. Minn. 2013) (the “Hometown Action”). All told, RFC claims to have suffered $44 million in damages as a result of Hometown's malfeasance.

         A few months after RFC filed its complaint in the Hometown Action, Hometown entered into an Asset Purchase Agreement (the “APA”) with InterLinc. (Id. ¶¶ 90-92.) Ostensibly, InterLinc agreed to purchase only Hometown's office furniture and other equipment, paying the “Net Book Value” of those assets, which was $124, 806.70. (See Compl., Ex. G.) It also agreed to the assignment of certain leases applicable to Hometown's offices. (See id.) These were the only liabilities InterLinc expressly assumed, and the APA expressly disclaimed all other liabilities. (See Id. at §§ 1.01, 1.04.) Of note, however, the APA was subject to a condition precedent mandating that certain key employees of Hometown, including Individual Defendants, “must have accepted an offer of employment with [InterLinc] prior to the Closing of the employee's branch Transaction.” (Id. at §5.04.)

         RFC alleges that the purpose of the InterLinc-Hometown transaction was clear- after the APA was executed on March 3, 2014, InterLinc continued to operate Hometown's business from the former Hometown office, with former Hometown employees, just under the InterLinc name. (See Pls.' Omnibus Mem. in Opp'n to Defs.' Mots. to Dismiss [Doc. No. 1961] (“Pls.' Mem.”) at 7-8.) To support its assertion that InterLinc essentially subsumed Hometown, RFC alleges that the new InterLinc Alabama division holds itself out to the public as “formerly” or “previously known” as Hometown. (See Compl. ¶ 91.) RFC also highlights various press releases issued by InterLinc and Hometown trumpeting the seeming merger of the two companies. (See Scheck Decl. [Doc. No. 1962], Exs. B, E.) In RFC's view, InterLinc essentially acquired a fully-functioning mortgage company-including its equipment, office, employees, good will and ongoing business-for only $124, 806.70. (See Compl. ¶¶ 89-95.) In turn, RFC contends that the Individual Defendants secured employment with InterLinc and continued to manage the new Alabama office, essentially as if nothing had happened. (See Id. ¶¶ 89, 91.)

         On September 1, 2015-approximately eighteen months after the APA was executed-Hometown filed for Chapter 7 bankruptcy. (See Scheck Decl., Ex. A.) The bankruptcy petition showed Hometown to be insolvent, with total listed assets of $140, 930.93, and total liabilities of $285, 999.39. (See Id. at 5.) Hometown's only assets were a checking account containing $135, two defaulted residential mortgage loans, various files held in storage, and one computer server valued at $200. (See Id. at 8-10.) In an attempt to hide from Hometown's creditor the fact that “hometown's business was continuing under the InterLinc name, ” RFC alleges that the Individual Defendants “caused Hometown's bankruptcy petition to disclose only that InterLinc had paid $124, 806.70 for Hometown's ‘office furniture and equipment.' Hometown did not disclose that InterLinc . . . was continuing Hometown's business under a new name.” (Compl. ¶ 95.)

         RFC filed a proof of claim in Hometown's Chapter 7 case on December 23, 2015, based on the Hometown Action and asserted damages arising out of Hometown's sale to RFC of defective mortgages. (Id. ¶ 99.) In lieu of the de minimis distribution to which it would otherwise have been entitled, RFC negotiated an agreement with the trustee allowing RFC's full claim against Hometown in the amount of $44 million, and assigning any causes of action available to the bankruptcy estate to RFC. (Id. 100.) The bankruptcy court approved the agreement between RFC and the trustee, and the Hometown estate was closed on October 18, 2016-a little more than a month after the present Complaint was filed. (Id. ¶ 101; Pls.' Mem. at 10.)

         The Complaint in this suit raises four causes of action-two against InterLinc solely, and two against all defendants generally. In Count I, RFC alleges that InterLinc is liable for Hometown's breach of contract regarding the defective mortgages because InterLinc is a “mere continuation of, or de facto merged with, ” Hometown. Accordingly RFC contends that InterLinc is subject to successor liability under applicable statutory or common law. Count II states a claim for indemnification against InterLinc, again on a theory of successor liability. Finally, Counts III and IV state claims for constructive fraudulent transfer and actual fraudulent transfer against InterLinc and the Individual Defendants, pursuant to both state and federal law.

         Defendants have now moved to dismiss on several grounds. First, both the Individual Defendants and InterLinc contend that they have no contacts with Minnesota, and thus that this Court cannot assert personal jurisdiction over them. Second, InterLinc asserts a motion to dismiss for improper venue. Third, InterLinc argues that Counts I and II of the Complaint should be dismissed for failure to state a claim because it argues that it is not subject to successor liability. Fourth, all defendants argue that the fraudulent transfer claims should be dismissed for failure to state a claim. Finally, the Individual Defendants argue that, in the alternative, this matter should be transferred to the Northern District of Alabama, pursuant to 28 U.S.C. §§ 1404 or 1406.

         In addressing these issues, the Court will attempt to proceed in order. For reasons that will become clear, however, the personal jurisdiction analysis necessarily encompasses elements of the successor liability and fraudulent transfer analyses, as well.

         III. DISCUSSION

         A. Personal Jurisdiction

         1. Standard of Review

         To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(2), the plaintiff must make a prima facie showing that the court's exercise of jurisdiction is proper. Fastpath, Inc. v. Arbela Techs. Corp., 760 F.3d 816, 820 (8th Cir. 2014). The plaintiff may meet this burden by pleading facts sufficient to “support a reasonable inference that the defendant[] can be subjected to jurisdiction within the [forum] state.” Dever v. Hentzen Coatings, Inc., 380 F.3d 1070, 1072 (8th Cir. 2004). This inference is subject to testing not solely on the pleadings alone, however, but “by the affidavits and exhibits presented with the motions and in opposition thereto.” Dairy Farmers of Am., Inc. v. Bassett & Walker Int'l, Inc., 702 F.3d 472, 475 (8th Cir. 2012) (citation omitted). Where-as is the case here-the Court has not conducted an evidentiary hearing, it must view the facts in the light most favorable to the nonmoving party, and resolve all factual conflicts in that party's favor. Pangaea, Inc. v. Flying Burrito LLC, 647 F.3d 741, 745 (8th Cir. 2011). However, “the party seeking to establish the court's personal jurisdiction carries the burden of proof and that burden does not shift to the party challenging jurisdiction.” Fastpath, 760 F.3f at 820.

         In order to make a determination that an exercise of personal jurisdiction over a defendant is proper, a federal court sitting in diversity must first determine that certain state and constitutional prerequisites have been met. Wessels, Arnold & Henderson v. Nat'l Med. Waste, Inc., 65 F.3d 1427, 1431 (8th Cir. 1995). First, the court must consider whether the requirements of Minnesota's long-arm statute have been satisfied. Second, the court must ask whether exercising jurisdiction over the defendant would comport with the Due Process Clause of the Fourteenth Amendment. In Minnesota, however, these two inquiries combine into a single due process examination, because the state long-arm statute has been held to be co-extensive with the constitutional bounds of jurisdiction. See Soo Line R.R. Co. v. Hawker Siddeley Canada, Inc., 950 F.2d 526, 528 (8th Cir. 1991) (citing Rostad v. On-Deck, Inc., 372 N.W.2d 717, 719 (Minn. 1985)).

         The Due Process Clause permits a court to exercise personal jurisdiction over a non-resident defendant when that defendant has ‘certain minimum contacts with [the forum state] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.'” Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (citation omitted). Underlying this standard is the conviction that “those who live or operate primarily outside a State have a . . . right not to be subjected to judgment in its courts as a general matter.” J. McIntyre Mach., Ltd. v. Nicastro, 564 U.S. 873, 881 (2011). Thus, the Supreme Court has made clear that there must be some showing that the defendant's “conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980). The defendant himself must create these connections-unilateral activity by the plaintiff within the forum, even if directly related to the defendant, is not sufficient to satisfy this requirement. See Walden v. Fiore, 134 S.Ct. 1115, 1122 (2014); Hanson v. Denckla, 357 U.S. 235, 253 (1958).

         Importantly for purposes of this case, however, the Supreme Court has also stated that a plaintiff may establish that personal jurisdiction is appropriate even over defendants who have never set foot in the forum state so long as their intentional, out-of-state acts were “expressly aimed” at the forum. Calder v. Jones, 465 U.S. 783 (1984). Thus, if the non-resident defendant's acts were performed “for the very purpose of having their consequences felt in the forum state, ” there may be personal jurisdiction over that defendant. Dakota Indus., Inc. v. Dakota Sportswear, Inc., 946 F.2d 1384, 1390-91 (8th Cir. 1991).

         2. InterLinc

         As an initial matter, it is plain that if this Court has personal jurisdiction over InterLinc, it must be in the form of specific, rather than general, jurisdiction. As the Eighth Circuit has explained “general jurisdiction refers to the power of a state to adjudicate any cause of action involving a particular defendant regardless of where the cause of action arose, while specific jurisdiction requires that the cause of action arise from or relate to a defendant's actions within the forum state.” Wells Dairy, Inc. v. Food Movers Int'l, Inc., 607 F.3d 515, 518 (8th Cir. 2010) (internal quotation and citation omitted). In order to assert general jurisdiction over a foreign corporation, a court must first determine that the corporation's affiliations with the forum are so “continuous and systematic” as to “render [it] essentially at home in the forum State.” Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011). Here, the Complaint raises no facts suggestive of any direct contacts between InterLinc and Minnesota-let alone “continuous and systematic” contacts.

         In contrast to InterLinc's relative dearth of contacts with Minnesota, the Complaint makes clear that Hometown is and would be subject to personal jurisdiction in this state. Most notably, for purposes of this litigation, Hometown is subject to a forum selection clause contained in the Client Contract between it and RFC that provides as follows:

Each of the parties irrevocably submits to the jurisdiction of any state or federal court located in Hennepin County, Minnesota, over any action, suit or proceeding to enforce or defend any right under this Contract or otherwise arising from any loan sale or servicing relationship existing in connection with this Contract . . . . Each of the parties irrevocably waives the defense of an inconvenient forum to the maintenance of any such action or proceeding and any other substantive or procedural rights or remedies it may have with respect to the maintenance of any such action or proceeding in any such forum . . . . Each of the parties further agrees not to institute any legal action or proceedings against the other party or any director, ...

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