Security Service Federal Credit Union v. First American Mortgage Funding, LLC et al

Filing 1067

ORDER. ORDERED that Orange Coast Title Company of Southern California and Stewart Title of California's Motions To Dismiss [774 & 778] are DENIED AS MOOT. ORDERED that Orange Coast Title Company of Southern California and Lawyers Title's Motion For Judgment On The Pleadings [ECF No. 904] is DENIED AS MOOT. ORDERED that Orange Coast Title Company of Southern California, Lawyers Title Company, the FAM Defendants, and Stewart Title of California's Motions For Summary Judgment [8 89, 914, 919, & 939] are GRANTED to the extent they argue that Security Service Federal Credit Union is not the proper plaintiff in this action. Security Service Federal Credit Union's claims are DISMISSED WITH PREJUDICE. ORDERED that Securit y Service Federal Credit Union's Motion For Partial Summary Judgment On The First And Twelfth Claims For Relief 913 is DENIED AS MOOT. ORDERED that Security Service Federal Credit Union's Motion For Leave To File More Than A Single Motion For Summary Judgment 900 is DENIED AS MOOT. ORDERED that the Pro Se Defendants' Motion For Sanctions And Attorney's Fees 920 is DENIED by Judge Wiley Y. Daniel on 03/20/13.(jjhsl, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Senior Judge Wiley Y. Daniel
Civil Action No. 08-cv-00955-WYD-CBS
SECURITY SERVICE FEDERAL CREDIT UNION,
Plaintiff,
v.
FIRST AMERICAN MORTGAGE FUNDING, ET AL.,
Defendants.
______________________________________________________________________
ORDER
______________________________________________________________________
THIS MATTER is before the Court on the following motions:
1. Orange Coast Title Company of Southern California’s Motion To Dismiss
[ECF No. 774], filed on May 25, 2012;
2. Stewart Title of California, Inc.’s Motion To Dismiss [ECF No. 778], filed on
May, 29, 2012;
3. Orange Coast Title Company of Southern California’s Motion For Summary
Judgment [ECF No. 889], filed on September 29, 2012;
4. Security Service Federal Credit Union’s Motion For Leave To File More Than
A Single Motion For Summary Judgment [ECF No. 900], filed on October 2,
2012;
5. Orange Coast Title Company of Southern California’s Motion For Judgment
On The Pleadings [ECF No. 904], filed on October 8, 2012;
6. Lawyers Title Company’s Motion For Summary Judgment [ECF No. 914], filed
on October 8, 2012;
7. Security Service Federal Credit Union’s Motion For Partial Summary
Judgment On The First And Twelfth Claims For Relief [ECF No. 913], filed on
October 9, 2012;

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8. First American Mortgage Funding, LLC (“FAM”), First American Mortgage,
Inc., Construction Disbursement Services, Inc., Construction Financial
Services, LLC, Kevin B. Jordan, William Depuy, Jeffrey Jordan, Shaun
Jordan, and Mark Campbell’s (“the FAM Defendants”) Defendants’ Motion for
Summary Judgment [ECF No. 919], filed on October 9, 2012;
9. Kevin B. Jordan, William Depuy, Jeffrey Jordan, Shaun Jordan, and
Mark Campbell’s (“the Pro Se Defendants”) Motion for Sanctions
[ECF No. 920], filed on October 9, 2012; and,
10. Stewart Title of California’s Motion for Summary Judgment [ECF No. 939],
filed on October 11, 2012.
BACKGROUND
This suit arises from the issuance of 26 construction loans in an alleged “straw
borrower” scheme.
On August 1, 2003, New Horizons Community Credit Union (“New Horizons”)
entered into a Funding and Servicing Agreement (“FSA”) [ECF No. 917-2] with
defendant, First American Mortgage Funding, LLC (“FAM”). Pursuant to the FSA, FAM
agreed to “originate, close, service and administer [construction loans for New Horizons]
and provide a commitment for permanent financing to pay off the construction loan[s]
upon maturity.” ECF No. 917-2, p. 2, ¶ 3. FAM originated 26 construction loans for New
Horizons, and in turn, New Horizons funded the loans. Five different title companies
performed closing procedures for the loans: (1) defendant, Orange Coast Title
Company of Southern California (“Orange Coast”); (2) defendant, Lawyers Title
Company (“Lawyers Title”); (3) defendant, Stewart Title of California (“Stewart Title”); (4)
defendant, First American Title Insurance Company (“First American”); and, (5)
defendant, North American Title Company of Colorado (“North American”).1

1

Plaintiff, Security Service Federal Credit Union (“Security Service”), voluntarily dismissed all claims
against First American on April 1, 2011, [ECF No. 604] and voluntarily dismissed all claims against North
American on November 9, 2011 [ECF No. 720].

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Collectively, the title companies are referred to as “the Closing Agents.”
On December 13, 2005, Colorado’s State Commissioner of Financial Services
issued New Horizons a Cease and Desist Order [ECF No. 892, pp. 40-49] stating that it
had engaged in unsafe and unsound practices regarding its loan portfolio with FAM. On
December 31, 2005, the National Credit Union Association (“NCUA”) issued a Report of
Examination on New Horizons [ECF No. 894]. The report states that the examination
raised “extensive and severe red flags” with respect to some of the FAM loans and that
the examiners had “grave concerns regarding NHCCU’s [New Horizons’s] residential
construction loan lending program.” ECF No. 894, p. 5, ¶¶ 5 & 7. On or about January
11, 2006, New Horizons hired Financial Institution Management Associates Corporation
(“FIMAC”) to investigate the FAM loans. FIMAC’s report allegedly stated that at least
some of the loans originating from FAM involved straw borrowers.
In April 2006, New Horizons was placed into conservatorship. On July 10, 2007,
the NCUA, as liquidating agent of New Horizons, entered into a Purchase and
Assumption Agreement (“PAA”) [ECF No. 917-1] with the plaintiff, Security Service
Federal Credit Union (“Security Service”). The agreement states that the NCUA’s
Board accepted appointment from Colorado’s Division of Financial Services as New
Horizons’s liquidating agent due its “bankruptcy or insolvency.” ECF No. 917-1, p. 2, ¶
2. Under the PAA’s terms, Security Service “agreed to accept the transfer of certain of
the assets, liabilities, and shares of the Liquidating Credit Union [New Horizons] . . . ” Id.
at ¶ 4.
On May 7, 2008, Security Service filed its original complaint [ECF No. 1] alleging
11 claims against the defendants in connection with the 26 construction loans funded by

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New Horizons. On July 18, 2011, Security Service filed its Fourth Amended Complaint
[ECF No. 687]. In the Fourth Amended Complaint, Security Service asserts 20 claims
against the named defendants including, inter alia, claims for breach of contract, breach
of fiduciary duty, negligence, negligent misrepresentation, conspiracy, and fraud. The
base allegation is that FAM, along with the Closing Agents, fraudulently induced New
Horizons to fund 26 construction loans to straw borrowers i.e., borrowers who were
allegedly paid by FAM or the Closing Agents in exchange for FAM and the Closing
Agents to use the borrowers’ personal information, including their credit score, to secure
construction loans. The straw borrowers allegedly had no intent to ever reside or
construct a residence on the property for which the loan was procured. All the straw
borrowers defaulted on their construction loans, leaving New Horizons with a debt of
several million dollars. Thus, Security Service, as New Horizons’s alleged successor in
interest, filed this suit seeking to hold the defendants liable for their actions in the
alleged straw borrower scheme.
Orange Coast and Stewart Title filed Motions To Dismiss [ECF Nos. 774 & 778],
arguing that California’s Economic Loss Rule bars Security Service’s tort claims.2
Orange Coast also filed a Motion For Judgment On The Pleadings [ECF No. 904] in
which Lawyers Title joined, arguing that FAM’s Third Party Complaint [ECF No. 83]
should be dismissed. Orange Coast, Lawyers Title, the FAM defendants, and Stewart
Title filed Motions For Summary Judgment [ECF Nos. 889, 914, 919, & 939], arguing
inter alia, that pursuant to the PAA’s terms, Security Service is not the proper plaintiff in
this action. Security Service filed a Motion For Partial Summary Judgment On The First

2

On March 21, 2012, I issued an Order [ECF No. 731] stating that California law applies to Security
Service’s contract claims. ECF No. 731, pp. 13-17.

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And Twelfth Claims For Relief [ECF No. 913], arguing that it is entitled to summary
judgment on its breach of contract claims against the defendants. Security Service also
filed a Motion For Leave To File More Than A Single Motion For Summary Judgment
[ECF No. 900]. The Pro Se Defendants filed a Motion For Sanctions [ECF No. 920],
requesting that I impose sanctions pursuant to FED. R. CIV. P. 11 against Security
Service for filing frivolous complaints.
For the reasons discussed below, I find that Security Service is not the proper
plaintiff in this action and therefore its claims are DISMISSED WITH PREJUDICE.
ANALYSIS
A. Proper Plaintiff
All defendants filed Motions for Summary Judgment [ECF Nos. 889, 914, 919, &
939], and in those motions all defendants challenge Security Service’s capacity to bring
this suit. The defendants’ challenge is based upon the PAA executed by the NCUA and
Security Service on July 10, 2007. The PAA states, in pertinent part:
*

*

*

*

5. Transfer of Assets
The Liquidating Agent [NCUA] hereby transfers, assigns,
conveys, and delivers to the Assuming Credit Union
[Security Service] the right, title and interest of the
Liquidating Agent and the Liquidating Credit Union [New
Horizons] in the assets listed in Schedules A through H of
this Agreement. The Assuming Credit Union agrees to
accept the loans and other assets at the values listed in
Schedules A and B and agrees to accept the assets listed in
Schedules C through H. The Liquidating Agent herby
assigns the right, title, and interest in all charged off loans on
the Liquidating Credit Union to the Assuming Credit Union.
The transfer of all assets conveyed to Assuming Credit
Union under this Agreement will be effective as of the
execution date of this Agreement.
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6. Retention of Claims and Recoveries
Except as otherwise specifically provided for in the
Agreement, the parties agree that the Liquidating Agent
[NCUA] retains, for the benefit of the liquidation estate of the
Liquidating Credit Union [New Horizons], the sole right to
pursue claims (through arbitration, litigation, insurance
claims, bond claims or otherwise) and to recover any and all
losses incurred by the Liquidating Credit Union prior to
liquidation.
ECF No. 917-1, p. 6. The defendants argue that under Provision 6, the NCUA, as
Liquidating Agent, retained all claims that could be asserted by Security Service, and
therefore Security Service lacks the capacity to pursue any claim asserted in the Fourth
Amended Complaint [ECF No. 687]. Security Service argues that any claims that could
be asserted against the defendants were transferred, assigned, and conveyed to it
under Provision 5’s “right, title, and interest” clause.
Provision 5 is entitled “Transfer of Assets” while Provision 6 is entitled “Retention
of Claims and Recoveries.” ECF No. 917-1, p. 6. It logically follows that because the
two provisions are titled differently, they will address different subject matter; otherwise
a distinction between the two provisions would be immaterial. Provision 5, entitled
Transfer of Assets, neither mentions the word “claim” nor does it mention the word
litigation. Provision 5 deals exclusively with assets that the NCUA transferred,
conveyed, and assigned to Security Service. Provision 6 on the other hand, entitled
Retention of Claims and Recoveries, states that the NCUA “retains, for the benefit of the
liquidation estate of the Liquidating Credit Union [New Horizons], the sole right to
pursue claims (through arbitration, litigation, insurance claims, bond claims or
otherwise) and to recover any and all losses incurred by the Liquidating Credit Union
prior to liquidation.” ECF No. 917-1, p. 6 (emphasis added). This language is clear,
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express, and it unambiguously grants the NCUA the sole right to pursue claims
associated with losses incurred by New Horizons prior to its liquidation. To interpret
Provision 5 to mean that the NCUA transferred to Security Service all claims associated
with New Horizons’s losses, as suggested by Security Service, would mean that I
completely disregard Provision 6, which is the only provision in the entire PAA that
addresses retention of claims. To do so would be counterintuitive and I will not interpret
Provision 5 as such.
During this Court’s February 26, 2013, Motions Hearing on all pending motions,
Security Service argued that Provision 8 bolsters its argument that Provision 5
transferred, conveyed, and assigned to Security Service all claims associated with New
Horizons’s losses. Pursuant to Provision 8:
8. Transfer of Records
The Liquidating Agent [NCUA] hereby assigns, transfers,
and delivers to the Assuming Credit Union [Security Service]
certain books and records of the Liquidating Credit Union
[New Horizons]. The books and records will include, but not
be limited to, the following:


Membership and signature cards and any other
agreement between the Liquidating Credit Union and
its members.



Insurance policies.



Posting source documents which support receipts,
disbursements and journal entries.



Records of deposit and investment balances.



Payroll and employee records.



All loan documents within its custody, attributed to the
loans being purchased.

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

Collateral physically held as security on loans.



Copies of member statements.



Deeds, mortgages, abstracts, surveys, and other
instruments or records of title pertaining to real estate
owned, if any.

ECF No. 917-1, p. 7. Security Service argued that the NCUA could not possibly retain
any claims against future defendants for losses incurred by New Horizons if it assigned
and transferred all evidence e.g., loan documents, deeds, and mortgages, that could be
used to pursue litigation for such claims.
Provision 9 reconciles the supposed discord within the PAA raised by Security
Service regarding retention of claims. Provision 9 states, in pertinent part:
9. Preservation of Records
*

*

*

*

(b) Upon reasonable notice and during regular business
hours, the Assuming Credit Union [Security Service] agrees
to provide the Liquidating Agent, NCUA, and other federal,
state or local law enforcement agencies unconditional
access to said files, books, records, and supporting
documents within the bounds of any applicable law or
regulation, and to permit said documents to be copied at the
NCUA’s expense.
(c) The Assuming Credit Union [Security Service] agrees to
cooperate in any investigation of the activities of the
Liquidating Credit Union [New Horizons] conducted by the
Liquidating Agent, the NCUA, or their agents, or by other
federal, state or local law enforcement agencies. The NCUA
agrees to reimburse the Assuming Federal Credit Union for
reasonable expenses associated with the Assuming Credit
Union’s responses to such requests.
(d) The Assuming Credit Union [Security Service] agrees to
assist the Liquidating Agent [NCUA] in documenting any
bond claim the Liquidating Agent may file in connection with
losses sustained by the Liquidating Credit Union [New
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Horizons]. This assistance will include, but is not limited to,
research and document production of various files, records
and documents of the Liquidating Credit Union that have
been transferred to the Assuming Credit Union under the
provisions of this Agreement . . .
ECF No. 917-1, p. 8 (emphasis added). Security Service is correct that Provision 8
assigns and transfers any and all evidence that could possibly be used to litigate claims
arising from the New Horizons’s losses. However, Provision 9 grants the NCUA
“unconditional access” to such evidence. Further, federal, state, and local law
enforcement agencies have the same unfettered access to all files, books, records, and
supporting documents. Security Service also agreed “to cooperate in any investigation
of the Liquidating Credit Union [New Horizons] . . . ” ECF No. 917-1, p. 8. Security
Service also agreed to assist the NCUA “in documenting any bond claim the Liquidating
Agent [NCUA] may file in connection with losses sustained by the Liquidating Credit
Union [New Horizons].” Id. These clauses manifest the NCUA’s clear intention to retain
claims associated with New Horizons’s losses. If the NCUA intended to divest itself of
all claims it could assert arising from New Horizons’s losses, as Security Service
suggests, there would be no need for it to: (1) retain unconditional access to all
documents and records transferred to Security Service; (2) mandate Security Service’s
cooperation with any future investigation of New Horizons; and, (3) mandate Security
Service’s assistance in documenting any bond claim that it may file in connection with
New Horizons’s losses. The PAA is clear: (1) the NCUA retained all claims associated
with New Horizons’s losses; and, (2) if and when the NCUA chooses to pursue such
claims, it will have unconditional access to all documents and records in Security
Service’s possession that are needed to support those claims. Therefore, Security

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Service is not the proper party to bring claims that arise out of New Horizons’s losses
and Security Service’s claims are DISMISSED WITH PREJUDICE.
B. The Pro Se Defendants’ Motion For Sanctions [ECF No. 920]
The Pro Se Defendants argue that I should impose sanctions against Security
Service pursuant to FED. R. CIV. P. 11 for filing frivolous claims. Specifically, the Pro Se
defendants argue that Security Service:
knew FAM and the Pro Se Defendants were not involved in
the origination of the Loans and did not have personal
knowledge of the purported Fraud Claims. Even after
conducting extensive and exhaustive discovery the
information in Plaintiff’s possession from the very start
confirmed that FAM and the Pro Se Defendants did not
originate the Loans or have knowledge of the purported
fraud claims.
ECF No. 920, p. 17, ¶ 1.
Under the FSA, FAM agreed to “originate, close, service and administer
[construction loans for New Horizons] and provide a commitment for permanent
financing to pay off the construction loan[s] upon maturity.” ECF No. 917-2, p. 2, ¶ 3.
Further, while I express no opinion as to the merits of this action, based on Security
Service’s filings and the parties’ arguments in open court, there was enough evidence to
at least assert a claim against the Pro Se defendants. Thus, I find the Pro Se
Defendants’ Motion For Sanctions [ECF No. 920] meritless, and the motion is DENIED.
CONCLUSION
After careful consideration of the parties’ filings and their arguments before me in
open court, I find that Security Service is not the proper plaintiff in this action and lacks
capacity to bring this suit. Because the defendants address this issue in their Motions
for Summary Judgment [ECF Nos. 889, 914, 919, & 939], and because this is a
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threshold issue, I need not address arguments presented in Orange Coast and Stewart
Title’s Motions to Dismiss [ECF Nos. 774 & 778] or Orange Coast and Lawyers Title’s
Motion for Judgment on the Pleadings [ECF No. 904]. Further, this Order is limited in
scope to the issues of whether Security Service is the proper plaintiff in this action and
whether imposition of sanctions against Security Service is proper. I express no opinion
as to the validity or accuracy of any other arguments presented in the defendants’
Motions for Summary Judgment [ECF Nos. 889, 914, 919, & 939] or Security Service’s
Motion for Partial Summary Judgment On The First And Twelfth Claims For Relief [ECF
No. 913]. Accordingly, it is
ORDERED that Orange Coast Title Company of Southern California and Stewart
Title of California’s Motions To Dismiss [ECF Nos. 774 & 778] are DENIED AS MOOT.
It is
FURTHER ORDERED that Orange Coast Title Company of Southern California
and Lawyers Title’s Motion For Judgment On The Pleadings [ECF No. 904] is DENIED
AS MOOT. It is
FURTHER ORDERED that Orange Coast Title Company of Southern California,
Lawyers Title Company, the FAM Defendants, and Stewart Title of California’s Motions
For Summary Judgment [ECF Nos. 889, 914, 919, & 939] are GRANTED to the extent
they argue that Security Service Federal Credit Union is not the proper plaintiff in this
action. Security Service Federal Credit Union’s claims are DISMISSED WITH
PREJUDICE. It is
FURTHER ORDERED that Security Service Federal Credit Union’s Motion For
Partial Summary Judgment On The First And Twelfth Claims For Relief [ECF No. 913]

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is DENIED AS MOOT. It is
FURTHER ORDERED that Security Service Federal Credit Union’s Motion For
Leave To File More Than A Single Motion For Summary Judgment [ECF No. 900] is
DENIED AS MOOT. It is
FURTHER ORDERED that the Pro Se Defendants’ Motion For Sanctions And
Attorney’s Fees [ECF No. 920] is DENIED.
Dated: March 20, 2013.

BY THE COURT:
/s/ Wiley Y. Daniel
Wiley Y. Daniel
Senior U. S. District Judge

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