LNV Corporation v. Outsource Service Management, LLC et al

Filing 71

ORDER denying Plaintiff's 56 Motion to Dismiss (Written Opinion). Signed by Judge Joan N. Ericksen on March 4, 2014. (CBC)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

LNV Corporation,
Plaintiff,
Civil No. 13-1926 (JNE/LIB)
ORDER

v.
Outsource Service Management, LLC
d/b/a Presidium Asset Solutions and
BF-Negev, LLC,
Defendants.

LNV Corporation brought this action against Outsource Service Management, LLC
(“OSM”) and BF-Negev, LLC. OSM asserted counterclaims against LNV, and LNV has now
moved to dismiss a portion of those counterclaims. ECF No. 56.
For the reasons discussed below, the motion will be denied.

Background
In relevant part, this case arises from LNV and OSM’s dispute over their respective rights
and obligations stemming from a $140 million construction loan, known as the Lake Austin loan,
that was made to a developer to build the Grande Palisades resort and condominium complex
near Disney World in Orlando, Florida. 1
According to OSM’s allegations, the Lake Austin loan was originated by the Marshall
Financial Group of Minneapolis in 2007. To finance the loan, Marshall entered into participation
1

LNV is also suing BF-Negev in connection with a different loan, referred to in the papers
as the Bahia loan. BF-Negev and the Bahia loan are not relevant to the motion currently before
the Court.
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agreements with a number of different banks. One of them was Columbian Bank of Kansas,
which purchased an approximately 4.3% undivided interest in the loan. According to the
Participation Agreement, when the borrower made a draw request for an “Advance” of principal
from Marshall, Columbian Bank was to deposit its pro rata share of the disbursement into
Marshall’s designated account. Columbian Bank also agreed to pay its proportion of any
“Extraordinary Expenses,” or costs that the lead lender may have to incur to “collect and enforce
payment and performance” from the borrower.
In August of 2008, Columbian Bank was closed by the Kansas State Bank Commissioner
and the Federal Deposit Insurance Corporation was appointed as receiver. 2 Over a year later, on
September 30, 2009, the FDIC-R finalized the sale of a pool of loans owned by Columbian Bank
to LNV. Included in this package was Columbian Bank’s interest in the Lake Austin loan, which
by then was non-performing. As of the date on which LNV signed the Loan Sale Agreement
with the FDIC-R, OSM alleges that over $3 million in Advances due under the Participation
Agreement had gone unpaid. That shortfall had been made up by a group of other participants in
the Lake Austin loan.
By October of 2009, through a series of assignments, OSM had become the lead lender
and servicer of the loan. The next month, OSM commenced litigation against the defaulted
borrower and its guarantors seeking collection of the debt and a judicial foreclosure on the Lake
Austin project. Owing to that litigation and other efforts, OSM alleges that it incurred over $15
million in Extraordinary Expenses.

2

Hereinafter, “FDIC-R” refers to the FDIC in its capacity as receiver for Columbian Bank,
while “FDIC” refers generally to the agency.
2

Since 2009, OSM repeatedly demanded payment from LNV of both the unfunded
Advances and its share of the Extraordinary Expenses under the terms of the Participation
Agreement. LNV repeatedly refused, and this action followed.

Discussion
On these allegations, OSM brought counterclaims against LNV for breach of contract,
declaratory judgment, and unjust enrichment. With its Motion to Dismiss, LNV argues that a
portion of OSM’s breach of contract claim should be dismissed for lack of subject matter
jurisdiction, and that OSM’s declaratory judgment and unjust enrichment claims should each be
dismissed both for lack of subject matter jurisdiction and for failure to state a claim on which
relief can be granted.
The jurisdictional issues LNV raises under Federal Rule of Civil Procedure 12(b)(1),
“whether they involve questions of law or fact, are for the court to decide.” Osborn v. U.S., 918
F.2d 724, 729 (8th Cir. 1990) (citation omitted). Accordingly, if the parties submit matters
outside the pleadings – as they have done here – the court is
free to weigh the evidence and satisfy itself as to the existence of its power to hear
the case. In short, no presumptive truthfulness attaches to the [claimant’s]
allegations, and the existence of disputed material facts will not preclude the trial
court from evaluating for itself the merits of jurisdictional claims. Moreover, the
[claimant] will have the burden of proof that jurisdiction exists.
Id. at 730 (quoting Mortensen v. First Fed. Sav. & Loan Ass’n, 549 F.2d 884, 891 (3rd Cir.
1977)). With that said, however, a decision on jurisdiction may be deferred if it is “so bound up
with the merits that a full trial on the merits may be necessary to resolve the issue.” Osborn, 918
F.2d at 730 (internal quotation and citation omitted).

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In contrast, when considering a motion to dismiss for failure to state a claim under Rule
12(b)(6), a court cannot consider matters outside the pleadings without converting the motion
into one for summary judgment. Fed. R. Civ. Pro. 12(d); Osborn, 918 F.2d at 729. Instead, on a
motion to dismiss, the court must accept the alleged facts as true and grant all reasonable
inferences in favor of the claimant. Mulvenon v. Greenwood, 643 F.3d 653, 656 (8th Cir. 2011).
To survive the motion, the complaint need not contain detailed factual allegations, but it “must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id.
With these rules and standards in mind, the Court turns to the substance of the motion.

I.

Lack of subject-matter jurisdiction (FIRREA).
On the Rule 12(b)(1) portion of its motion, LNV argues that the Financial Institutions

Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) bars this Court from entertaining
a portion of OSM’s breach of contract claim, as well as its declaratory judgment and unjust
enrichment claims.

A. Breach of contract.
OSM’s first claim is that LNV has breached the Participation Agreement by failing to pay
its pro rata share of Advances, Extraordinary Expenses, and servicing fees to OSM in its capacity
as the lead lender and loan servicer. LNV has moved to partially dismiss this claim for lack of

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subject matter jurisdiction insofar as it concerns funds that came due prior to LNV’s purchase of
Columbian Bank’s participation in the Lake Austin loan from the FDIC-R on September 30,
2009.
LNV’s argument is that 12 U.S.C. § 1821(d)(13)(D) divests the Court of subject matter
jurisdiction over that pre-9/30/2009 portion of OSM’s breach of contract claim. Section
1821(d)(13)(D) reads as follows:
Except as otherwise provided in this subsection, no court shall have jurisdiction
over—
(i)

any claim or action for payment from, or any action seeking a
determination of rights with respect to, the assets of any depository
institution for which the [FDIC] has been appointed receiver,
including assets which the Corporation may acquire from itself as
such receiver; or

(ii)

any claim relating to any act or omission of such institution or the
Corporation as receiver.

This provision was enacted with FIRREA, which Congress passed at the height of the savings
and loan crisis to, among other purposes, reform the federal deposit insurance system and bolster
the powers of the FDIC to efficiently and independently wrap up the affairs of failed depository
institutions. See Pub .L. No. 101-73, § 101.
One of the ways in which Congress achieved the latter goal was by granting the FDIC the
authority to determine claims against the assets of a failed depository institution for which it has
been appointed receiver. 12 U.S.C. § 1821(d)(3)(A). Under the administrative process
established by the statute, persons or entities with a claim against the institution are required to
promptly present that claim, along with proof thereof, to the FDIC-R. Id. at (d)(3)(B). If the
receiver disallows the claim, the claimant may then either file suit in federal district court or
pursue administrative review. Id. at 1821(d)(6)(A). If the claimant takes the latter course and

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the claim is still disallowed, that result is a final agency decision that is subject to judicial review
under the Administrative Procedures Act. Id. at (d)(7)(A). Therefore, the jurisdiction provision
at § 1821(d)(13)(D) effectively makes these the only paths to federal court for a person or entity
with a claim either against the assets of the institution or relating to the actions of the institution
or the FDIC-R. See, e.g., RTC Mortg. Trust 1994-N2 v. Haith, 133 F.3d 574, 578 (8th Cir. 1998)
(finding exhaustion of FIRREA’s administrative claims procedure to be a mandatory
“precondition to civil litigation”).
LNV’s jurisdiction argument, then, is predicated upon its contention that OSM and its
predecessors could have, but failed to, pursue a claim with the FDIC-R for payment of the funds
that came due under the Participation Agreement before the loan sale date of 9/30/2009. In
response, OSM concedes that no claim for payment out of Columbian Bank’s assets was ever
presented to the FDIC-R, but argues on various grounds that that failure is not determinative here
because it and its predecessors did not have a claim that could have been pursued through
FIRREA’s administrative process.
Upon a careful review of the pleadings, as well as the Participation Agreement and Loan
Sale Agreement that are incorporated therein, it is evident that this dispute is not ripe for
adjudication. Whether OSM or its predecessors could have, or must have, brought a claim
through the administrative process is a secondary question. The answer to the preliminary
question – whether OSM or its predecessors ever had a cognizable claim against the assets of
Columbian Bank for breach of contract, and if so exactly what the claim was for and when it
accrued – is a function of the contract. But the parties have not addressed the terms of the
Participation Agreement in any depth here, including how, if at all, Columbian Bank’s obligation
to pay Advances and Extraordinary Expenses under the Participation Agreement prior to

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9/30/2009 would have been affected by the other participants’ funding of the shortfall that arose
during the receivership – and, for that matter, how it may have been affected by the borrower’s
default.
By the same token, whether OSM has a valid claim against LNV arising out of any pre9/30/2009 facts would appear to be a function of the rights and obligations LNV assumed from
Columbian Bank via the Loan Sale Agreement it signed with the FDIC-R. To grant the motion
that LNV has brought would thus require the Court to construe both of the contracts at issue and
apply them to a factual record that, at this early stage in the litigation, is far from fully
developed.
The Court therefore denies the motion with respect to OSM’s breach of contract claim.

B. Declaratory judgment and unjust enrichment.
In Count II of its Counterclaims, OSM seeks a declaration that LNV is obligated to pay
its share of Advances and Extraordinary Expenses under the Participation Agreement regardless
of whether those amounts were incurred before or after 9/30/2009, and – what is essentially the
same – that FIRREA does not pose a jurisdictional bar to OSM’s recovery of those funds. In
Count III, OSM asserts that LNV has been unjustly enriched by retaining the monies it should
have paid out under the Participation Agreement.
LNV argues that both of these claims should be dismissed because FIRREA, at 12 U.S.C.
§ 1821(j), precludes a federal court from granting equitable relief in these circumstances.
Section 1821(j) states that:
Except as provided in this section, no court may take any action, except at the
request of the Board of Directors by regulation or order, to restrain or affect the
exercise of powers or functions of the [FDIC] as a conservator or a receiver.

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According to LNV, OSM’s declaratory judgment and unjust enrichment claims are barred by §
1821(j) because, if granted, they would affect the FDIC-R’s exercise of its powers by “rewriting” the terms of the Loan Sale Agreement and thereby diluting its value.
LNV’s argument is not persuasive. At bottom, OSM seeks to recover from LNV, and
such relief simply would not “restrain or affect” the FDIC-R in any way. Furthermore, the
Eighth Circuit has explained that § 1821(j) “fully accords with the intent of Congress . . . to
enable the FDIC and the Resolution Trust Corporation (“RTC”) to expeditiously wind up the
affairs of . . . failed financial institutions throughout the country.” Hanson v. F.D.I.C., 113 F.3d
866, 871 (8th Cir. 1997) (quoting Freeman v. F.D.I.C., 56 F.3d 1394, 1398 (D.C. Cir. 1995)).
LNV cites no authority for the proposition that an entity in its position as a third-party purchaser
of a failed institution’s assets may assert a defense that the statute grants specifically – and solely
– to the FDIC-R.
LNV’s motion, in this respect, is therefore denied.

II.

Failure to state a claim upon which relief can be granted.
LNV also moves to dismiss OSM’s declaratory judgment and unjust enrichment counts

for failure to state a claim upon which relief can be granted. LNV argues that these are both
equitable claims that fail as a matter of Minnesota law because OSM has an adequate alternative
legal remedy, whether through FIRREA’s administrative procedures or via the breach of contract
claim it brings here. See U.S. Fire Ins. Co. v. Minnesota State Zoological Bd., 307 N.W.2d 490,
497 (Minn. 1981) (finding that “equitable relief cannot be granted where the rights of the parties
are governed by a valid contract”).

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As an initial matter, LNV’s argument is inapplicable to OSM’s request in Count II for a
declaration regarding the monies in dispute as well as the application of FIRREA’s jurisdictional
bar to these facts. The declaratory judgment OSM seeks under 28 U.S.C. § 2201 is “neither legal
nor equitable,” Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 284 (1988), and
the “existence of an adequate alternative remedy does not preclude a declaratory judgment that is
otherwise appropriate,” Fed. R. Civ. P. 57. See also id. advisory committee’s note (“When
declaratory relief will not be effective in settling the controversy, the court may decline to grant
it. But the fact that another remedy would be equally effective affords no ground for declining
declaratory relief.”)
With that said, the unjust enrichment claim OSM asserts in Count III is certainly
equitable in nature. While OSM does not contest the application of Minnesota law to that claim,
it argues that its dismissal at this stage of the litigation would be premature. The Court agrees.
Federal Rule of Civil Procedure 8(d) allows OSM to bring its claims in the alternative; its unjust
enrichment claim may move forward along with the breach of contract claim “unless and until
[the] contract is deemed to be valid and to govern the dispute.” U.S. Bank Nat. Ass’n v.
Education Loans Inc., Civ. No. 11-1145 (RHK/JJG), WL 5520437 (D.Minn. Nov. 14, 2011).

Based on the files, records, and proceedings herein, and for the reasons stated above, IT
IS ORDERED THAT:
1. Plaintiff’s Motion to Dismiss [ECF No. 56] is DENIED.

Dated: March 4, 2014

s/Joan N. Ericksen
JOAN N. ERICKSEN
United States District Judge

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