Court: District Court, D. Minnesota; November 11, 2014; Federal District Court
The court, presided over by District Judge Susan Richard Nelson, has denied the motions to dismiss the First Amended Complaint filed by each Defendant involved in the case. The lawsuits stem from allegations that the Defendants sold defective mortgage loans to Plaintiff Residential Funding, LLC (RFC). Prior to May 2012, RFC engaged in acquiring and securitizing residential mortgage loans, purchasing these loans from correspondent lenders like the Defendants, who were tasked with verifying borrower information and underwriting the loans.
The relationship between RFC and each Defendant was governed by a Seller Contract that included terms from the RFC Client Guide, collectively referred to as the Agreements. The Defendants made numerous representations and warranties regarding the loans, asserting that their origination and servicing were performed legally and properly, that all information provided was accurate, and that the loans complied with applicable laws, among other assurances. Any failure to uphold these representations constituted an "Event of Default," allowing RFC to exercise remedies such as loan repurchase or indemnification without needing to notify the Defendants or allow them a chance to remedy the breach.
RFC purchased various mortgage loans from multiple Defendants, totaling over 600 loans (with a principal balance of over $77 million) from Academy Mortgage Corporation, over 300 loans (over $125 million) from First California Mortgage Company, over 6,900 loans (over $2.6 billion) from Provident Funding Associates, L.P., and additional loans from T.J. Financial, Inc., Universal American Mortgage Company, LLC, and Wells Fargo Financial Retail Credit, Inc. The loans were either pooled for residential mortgage-backed securitization or sold to whole loan purchasers, with detailed lists of the loans included in the First Amended Complaints.
RFC relied on information from Defendants to pass its representations and warranties to buyers but alleges that Defendants violated these representations, leading to many loans defaulting or becoming delinquent and resulting in millions of dollars in losses. An internal review by RFC revealed that hundreds of loans sold by each Defendant breached the Agreements, constituting Events of Default. The identified defects included misrepresentations related to income, employment, occupancy, appraisals, undisclosed debt, inadequate credit scores, lien positions, and missing or inaccurate documents. RFC claims to have incurred liabilities and losses from these defective loans and related litigation. Starting in 2008, RFC faced various lawsuits due to these defective loans, culminating in millions spent on repurchasing them. In May 2012, RFC filed for Chapter 11 bankruptcy, during which hundreds of claims regarding defective mortgage loans were filed. The Bankruptcy Court approved a global settlement for over $10 billion related to RMBS liabilities, with a Chapter 11 Plan confirmed in December 2013, transferring RFC's claims against Defendants to the ResCap Liquidating Trust. RFC asserts that Defendants are contractually obligated to compensate it for settlement-related losses due to their breaches. RFC subsequently filed lawsuits against Defendants between December 12 and 15, 2013, alleging breach of representation and warranty (Count One) and seeking indemnification for losses (Count Two). Defendants moved to dismiss the complaint, arguing insufficient pleading and lack of standing, with some also claiming that certain claims were time-barred. The motions were consolidated for oral argument, heard on June 5, 2014.
When evaluating a motion to dismiss under Rule 12(b)(6) for failure to state a claim, the Court assumes the Complaint's facts are true and interprets them favorably to the plaintiff. However, conclusory allegations and legal conclusions drawn from the facts are not accepted as true. The Court generally does not consider materials outside the pleadings but may take into account exhibits attached to the complaint, documents necessarily embraced by the pleadings, and public records.
The Court addresses the argument regarding RFC’s standing to bring claims, emphasizing that a lack of standing results in a lack of subject matter jurisdiction. Four defendants challenge RFC’s standing, asserting that RFC did not adequately allege an injury or that any injury was caused by them. Additionally, some defendants argue that RFC lacks standing because it assigned away its rights related to the loans. At this stage, the Court finds RFC has sufficiently alleged an actual injury and causation, leading to the denial of the defendants' motions to dismiss based on standing.
For standing, a plaintiff must demonstrate: (1) an "injury in fact" that is concrete, particularized, and actual or imminent; (2) that the injury is traceable to the defendant's actions; and (3) that a favorable decision is likely to prevent or redress the injury. At the pleading stage, general factual allegations can suffice, with the presumption that these allegations support the necessary specific facts.
Defendants Academy and First California contend that RFC has not adequately specified damages in the First Amended Complaint, claiming that the alleged injuries are merely "conjectural" or "hypothetical." They argue that RFC has failed to demonstrate that it, rather than a third party, caused the alleged damages. Specifically, Academy points out that RFC does not claim to have been harmed by the loans it purchased from Academy and suggests that RFC's claims of injury stemming from Academy and others indicate a lack of causation. Similarly, First California argues that RFC’s assertion that litigation arose from securitized trusts containing its loans does not establish a direct causal link between its loans and RFC's injuries.
In contrast, RFC asserts that it has provided detailed factual allegations supporting its claims of injury and the causal relationship with the Defendants' actions. RFC cites multiple material representations and warranties made by Academy regarding the loans, contractual remedies for breaches, and specific breaches that resulted in damages to RFC. The Court agrees with RFC, noting that it has alleged the sale of over 600 and 300 mortgage loans by Academy and First California, respectively, and that these loans were accompanied by representations and warranties which were violated. RFC claims to have incurred losses due to defective loans, obligations to repurchase those loans, and costs associated with defending against related litigation. The Court concludes that RFC's allegations are sufficient to establish both injury and causation at this stage, affirming that the presence of additional third-party causes does not negate the injuries attributed to the Defendants.
A plaintiff must assert their own legal rights and cannot base their claims on the rights of third parties. In assessing standing, what matters are the nonfrivolous claims of a party, not the ability to prove those claims. Defendants T.J. Financial and Universal contend that RFC lacks standing because it assigned its rights when selling loans into securitized trusts, citing agreements that indicate RFC assigned "all right, title and interest" in the loans. Academy similarly argues that RFC's failure to assert retained rights negates its standing and asserts RFC cannot pursue claims on behalf of its affiliates involved in a bankruptcy settlement. RFC counters that its complaints do not indicate it assigned its rights or is pursuing its affiliates' claims, asserting that these factual issues are inappropriate for a motion to dismiss. RFC maintains that the documents referenced by the Defendants, even if considered, do not show that RFC assigned its claims against them. The court agrees with RFC, noting that its complaints assert RFC's rights to seek remedies for breaches of representations and warranties from the Defendants. Although RFC mentions pooling loans into trusts or selling them, it does not claim to have sold its rights to sue for breaches. RFC’s allegations indicate it has a legal right to sue under the agreements, and questions about the enforceability of those agreements or the assignment of rights pertain to the merits of the claims, not standing.
Defendants assert that RFC’s pleadings are insufficient to establish a claim, referencing Rule 8(a)(2) of the Federal Rules of Civil Procedure, which requires a complaint to include a concise statement demonstrating entitlement to relief. The Supreme Court rulings in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly clarify that while detailed factual allegations are not necessary, facts must be specified enough to raise the right to relief above mere speculation. A complaint must contain sufficient facts to present a plausible claim for relief and cannot rely on threadbare recitals of the elements supported by conclusory statements.
RFC's claims include breach of representation and warranty and indemnification. The elements necessary for a breach of warranty claim are the existence of a warranty, reliance on it, a breach, and a causal link to the harm. Importantly, under Minnesota law, reliance need not be pleaded in contract actions related to breaches of future legal compliance. Indemnity claims arise from a contractual relationship requiring one party to reimburse the other, which can occur through an express contract detailing such obligations.
Defendants argue that RFC's First Amended Complaint lacks specificity by failing to identify the specific loans involved, the particular representations and warranties breached for each loan, and the manner of those breaches. However, the court finds that RFC has adequately stated its claims for breach of representation and warranty and indemnification, thereby denying the motions to dismiss for insufficient pleading.
Defendants cite several cases, including Motley v. Homecomings Financial, Torchlight Loan Services v. Column Financial, and Wells Fargo Bank v. LaSalle Bank, to support their motions to dismiss. They argue that RFC fails to specify damages related to each Defendant’s loans or how their actions caused those losses. In contrast, RFC relies on Ace Securities Corp. Home Equity Loan Trust to assert that Rule 8 does not mandate loan-specific allegations, claiming that its allegations sufficiently support its breach of representation and warranty and indemnification claims. The Court agrees with RFC, stating that Rule 8 only requires a "short and plain statement of the claim" and does not necessitate detailed factual allegations. The Court emphasizes that excessive loan-specific details could lead to overly lengthy complaints, which would violate the principles of Rule 8. Thus, the Court concludes that RFC's general allegations are adequate and do not require specificity to survive dismissal motions.
Case law supports RFC’s position regarding the sufficiency of its claims. The U.S. District Court for the Southern District of New York ruled in Ace Securities Corp. that a plaintiff is not required to specify each loan in repurchase allegations, as complaints must only meet federal pleading standards. Similarly, judges in this District have consistently held that RFC is not obligated to provide loan-specific allegations to comply with Rule 8. One judge highlighted that demanding such specificity in cases involving numerous loans contradicts the principle of providing a "short and plain statement" of claims, per Federal Rule of Civil Procedure 8(a)(2).
Contrary to the defendants' cited cases, where dismissals occurred due to a lack of contract details or breach specifics, the courts did not establish a necessity for loan-specific allegations for a complaint to withstand a motion to dismiss. Additionally, RFC's First Amended Complaints adequately address all claim elements with appropriate specificity, ensuring fair notice to the defendants. In its breach of representation and warranty claim, RFC detailed the existence of warranties governed by the Agreements, reliance on these warranties, identified breaches (including misrepresentations regarding income, employment, and other inaccuracies), and established a causal link between these breaches and the resulting harm, including significant financial liabilities and settlements.
RFC claims indemnification based on an express contract requiring reimbursement for liabilities due to breaches of representations and warranties. RFC has sufficiently alleged that the Defendants breached these representations, leading to incurred liabilities, which meets the plausibility standard under Rule 8. First California argues that RFC’s claims fail because it has not adequately pleaded the performance of conditions precedent necessary for breach of contract claims, citing RFC's vague assertion of having performed "all conditions precedent." First California also contends that RFC must identify specific conditions under the Client Guide for indemnification and that any alleged breaches must be material. In response, RFC asserts that proving performance of conditions precedent is not necessary for its breach of representation and warranty claims, and a general allegation of compliance suffices. Furthermore, RFC maintains that materiality is only required for repurchase demands, which it is not making. The court finds that even if conditions precedent and materiality were required elements, RFC's general allegations are sufficient under Rule 9, which allows for general assertions regarding conditions precedent. RFC's claims that the Defendants materially breached the agreements, resulting in harm, also satisfy the requirement for materiality.
Defendants, except for Wells Fargo, argue that RFC's claims for breach of representation and warranty and indemnification are barred by the statute of limitations. They assert that these claims accrued upon the sale of the loans to RFC, invoking Minnesota's six-year statute of limitations for contract claims. Defendants contend that RFC's claims based on loans sold more than six years prior to the filing of the First Amended Complaints should be dismissed as time-barred.
RFC counters that the statute of limitations was tolled due to its bankruptcy filing, making its claims timely for loans sold on or after May 14, 2006. RFC maintains that the timeliness of claims for loans sold before that date depends on the specific facts and circumstances surrounding each loan. The Court agrees that none of RFC's breach of representation and warranty claims can be dismissed as time-barred at this stage, as the relevant statute of limitations had not expired for loans sold after May 14, 2006 when RFC filed for bankruptcy on May 14, 2012. The actions were filed in December 2013, within the two-year period following the bankruptcy court’s order for relief, thus supporting RFC's position that its claims are timely.
A trustee in a Chapter 11 case, as established in Johnson v. First Nat’l Bank of Montevideo, is entitled to privileges under § 108, which also extends to debtors-in-possession. Residential Funding Co. LLC (RFC) is arguing that the statute of limitations for its claims does not begin until a future event, which relates to warranties regarding loan notifications. If a warranty breach occurs after a loan sale, the statute of limitations may not commence until that event, potentially allowing claims related to loans sold to RFC before May 14, 2006, to proceed.
Regarding indemnification claims, Defendants contend that the statute of limitations began when they sold the loans, asserting that the essence of RFC’s claim is a breach of representations and warranties. Conversely, RFC claims that the limitations period starts only after the underlying liability is established, which it argues occurred when the Chapter 11 Plan was confirmed in December 2013. The court agrees that RFC’s indemnification claims are not barred by the statute of limitations, as common law dictates that indemnity rights arise once liability is fixed. The usual statute of limitations for indemnification is six years post-final judgment or settlement. RFC's complaints detail substantial liabilities and damages stemming from defective loans sold by Defendants, including over $10 billion in claims and significant legal costs incurred since 2008.
RFC's indemnification claims are deemed timely because the liability was not definitively established until after 2008, and the First Amended Complaints were filed in December 2013, within the six-year statute of limitations. The court has issued an order denying all motions to dismiss from various defendants in multiple cases: Academy Mortgage Corporation, First California Mortgage Company, Provident Funding Associates, L.P., T.J. Financial, Inc., Universal American Mortgage Company, LLC, and Wells Fargo Financial Retail Credit, Inc. Additionally, the court notes that there are separate First Amended Complaints for each case, with citations made to the Academy case as a reference point for identical allegations across the complaints. RFC identifies specific loans from each defendant that allegedly breached the representation and warranty agreements.
Count One, labeled "Breach of Contract," is asserted by RFC as a claim for "breach of representation and warranty." RFC's opposition memoranda indicate that they contend the defendants made specific representations and warranties regarding the mortgage loans sold to RFC, which the defendants allegedly breached. The court will interpret Count One as a breach of representation and warranty claim due to the substance of RFC’s allegations, despite the label applied. The court references case law, including Malone v. Husker Auto Group and Bandy v. Fifth Third Bank, emphasizing that the nature of a cause of action is determined by its substance rather than its label. Similar past cases, including Residential Funding Co. v. Americash, support this interpretation, indicating the court's approach to assessing claims based on their actual content rather than their formal designation.
First California's argument, presented for the first time in its reply brief, is deemed unnecessary to address as it ultimately fails. Defendants Provident, T.J. Financial, and Universal have not retracted their motions to dismiss the original complaint, but those motions will be denied as moot due to the filing of an amended complaint, which supersedes the original (referencing In re Atlas Van Lines, Inc. 209 F.3d 1064, 1067 (8th Cir. 2000)). The Court will consider several attached exhibits to the First Amended Complaint, including the Seller Contract, excerpts from the Client Guide, and a preliminary list of loans, as they are integral to the pleadings. Academy's assertion that RFC's claim of damages exceeding $75,000 lacks factual support fails because RFC is not obligated to make loan-specific allegations. The parties concur that Minnesota law governs RFC's claims. Wells Fargo and First California contend that "manifestation of the defect" is a necessary element for breach of warranty claims, arguing RFC has not demonstrated any such manifestations. However, RFC has alleged sufficient defects related to misrepresentations and inaccuracies in the loans, which have led to legal claims and forced RFC to repurchase loans, contributing to its bankruptcy. The Minnesota Supreme Court has not determined the ongoing relevance of the reliance requirement in breach of warranty claims.
RFC purchased and securitized loans from each Defendant, detailed in Exhibit C of the First Amended Complaints, which spans 7 to 151 pages. Several Defendants contend that RFC's claims lack specificity regarding the contracts governing their relationships, noting that RFC only provided excerpts of the Client Guide, which do not encompass all versions issued. RFC counters that its relationships are governed by the Agreements in Exhibits A and B and asserts that the complete Client Guide versions are known to the parties and too extensive to attach, with omitted portions deemed irrelevant to the allegations.
The Court acknowledges RFC's assertions as true and finds that RFC has adequately identified the contractual provisions supporting its claims. Specifically, Wells Fargo argues that RFC's claims against it are insufficient as RFC allegedly did not demonstrate that their contracts included the necessary representations, warranties, and indemnification clauses. Wells Fargo maintains that its Seller Contracts did not include the Client Guide but rather the "AlterNet Seller Guide." However, RFC argues that the Seller Contract authorized Wells Fargo to sell loans under RFC's "Alternet Program," which is linked to the Client Guide for non-conforming loans. RFC claims that both the Contract and Client Guide together form their Agreement, establishing standards for loans sold to RFC.
RFC further contends that the applicability of the Alternet Program does not negate the representations and warranties in the Client Guide. Consequently, RFC has sufficiently alleged that its contracts with Wells Fargo included the relevant provisions. Provident's argument that RFC's indemnification claim fails due to lack of a breach allegation is challenged, as Provident cites no authority requiring a breach to assert an indemnification claim. Academy asserts that RFC’s indemnification claim should be dismissed if based on RFC's own negligence.
RFC's claim of negligence cannot be resolved at the motion to dismiss stage, as it remains a factual issue. Provident contends that RFC's indemnification claim is invalid because RFC did not explicitly allege that it requested indemnification from Provident, interpreting this as a failure to meet necessary conditions precedent. However, this argument is rejected. First California cites Valspar Refinish, Inc. v. Gaylord’s, Inc. to assert that satisfying conditions precedent is essential for a breach of warranty claim. In Valspar, the court granted summary judgment due to the plaintiff's failure to satisfy conditions precedent before terminating the agreement. Nonetheless, that case did not address the pleading requirements for conditions precedent in a complaint, rendering it not applicable here. The Court concludes that a general allegation of satisfaction of conditions precedent suffices and will not further consider RFC's additional arguments on that matter.
