Residential Funding Company, LLC v. Mortgage Access Corp.

Filing 59

ORDER granting in part consistent with this order 39 Motion to Dismiss; denying as moot 18 Motion to Dismiss the original complaint. (Written Opinion). Signed by Senior Judge David S. Doty on 7/21/2014. (PJM)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 13-3499(DSD/FLN)
Residential Funding Company, LLC,
Plaintiff,
ORDER

v.
Mortgage Access Corp., doing
business as Weichert Financial
Services
Defendant.

David Elsberg, Esq. and Quinn, Emanuel, Urquhart &
Sullivan, LLP, 51 Madison Avenue, 22nd Floor, New York,
NY 10010 and David L. Hashmall, Esq. and Felhaber Larson,
220 South Sixth Street, Suite 2200, Minneapolis, MN
55402, counsel for plaintiff.
Greg W. Chambers, Esq., American Mortgage Law Group PC,
75 Rowland Way, Suite 350, Novato, CA 94945 and Carol
R.M. Moss, Esq. and Hellmuth & Johnson, PLLC, 8050 West
78th Street, Edina, MN 55439, counsel for defendant.

This matter is before the court upon the motion to dismiss the
amended complaint by defendant Mortgage Access Corporation, doing
business as Weichert Financial Services (Mortgage Access).

Based

on a review of the file, record and proceedings herein, and for the
following reasons, the court grants the motion in part.

BACKGROUND
This business dispute arises out of the sale of Mortgage
Access-underwritten mortgage loans to plaintiff Residential Funding
Company, LLC (RFC).

RFC is a business engaged in the acquisition

and securitization of residential mortgage loans.

Am. Compl. ¶ 2.

RFC acquired loans from correspondent lenders, such as Mortgage
Access, who were responsible for collecting and verifying borrower
information

and

underwriting

the

loan.

Id.

¶

20.

Once

underwritten, loans were sold to RFC and then distributed in pools
to be sold into residential mortgage-backed securitization (RMBS)
trusts or to whole loan purchasers.
Mortgage

Access

and

RFC

Id. ¶ 3.

entered

into

a

“Seller/Servicer

Contract” (Contract), which incorporated by reference the “Seller
and Servicer Guides.”
the Seller

and

See, e.g., id Ex. A, at 1.

Servicer

Guide

referenced

in

RFC alleges that
the

Contract

is

equivalent to the “Client Guide,” and that the Contract and Client
Guide collectively formed the parties’ agreement (Agreement).

See

Am. Compl. ¶ 18 (noting that different versions of relevant Guides
existed over time). Pursuant to the Contract, Mortgage Access made
several representations and warranties regarding the loans sold to
RFC.

See id. ¶ 24.

Failure to comply with such representations

and warranties by Mortgage Access constituted an “Event of Default”
under the Agreement.

See id. ¶ 26.

Further, the Agreement

specified the remedies available to RFC if an Event of Default
occurred, including Mortgage Access’s obligation to indemnify RFC
against liabilities resulting from such events.

See id. ¶ 29.

Mortgage Access and RFC operated pursuant to the Agreement
until May 2012.

See id. ¶ 2.

Over time, many of the loans sold by

2

Mortgage Access went into default or became delinquent, resulting
in losses to RFC in excess of $21 million.

Id. ¶ 39.

Mortgage

Access repurchased some defective loans pursuant to the Agreement.
Id. ¶ 44.

RFC was sued in numerous actions stemming from defective

loans it had re-sold.

See id. ¶ 48.

bankruptcy protection on May 14, 2012.

RFC filed for Chapter 11
See ¶ 49.

2013, the bankruptcy plan became effective.

On December 17,

Id. ¶ 76.

On March 25, 2014, RFC filed an amended complaint,1 alleging
claims for (1) breach of warranties and (2) indemnification.
Mortgage Access moves to dismiss.

DISCUSSION
I.

Standard of Review
To survive a motion to dismiss for failure to state a claim,

“a complaint must contain sufficient factual matter, accepted as
true, to state a claim to relief that is plausible on its face.”
Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009)
(citations and internal quotation marks omitted).
facial

plausibility

when

the

plaintiff

[has

“A claim has

pleaded]

factual

content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.”

1

Ashcroft v.

On March 4, 2014, Mortgage Access moved to dismiss the
complaint. Thereafter, RFC filed an amended complaint. See ECF
No. 36. As a result, the motion to dismiss the original complaint
will be denied as moot.
3

Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 556 (2007)).

Although a complaint need not

contain detailed factual allegations, it must raise a right to
relief above the speculative level.

See Twombly, 550 U.S. at 555.

“[L]abels and conclusions or a formulaic recitation of the elements
of a cause of action” are not sufficient to state a claim.

Iqbal,

129 S. Ct. at 1949 (citation and internal quotation marks omitted).
The court does not consider matters outside the pleadings
under Rule 12(b)(6).

See Fed. R. Civ. P. 12(d).

The court,

however, may consider matters of public record, some materials that
do not contradict the complaint, exhibits attached to the complaint
and materials that are “necessarily embraced by the pleadings.”
See Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir.
1999) (citation and internal quotation marks omitted).

Here, the

Contract, Client Guide excerpts and list of loans submitted by RFC
are attached to the amended complaint and are properly before the
court.

4

II.

Breach of Warranties
To state a claim for breach of warranties,2 a plaintiff must

allege the existence of a warranty, a breach of the warranty and a
causal

link

between

the

breach

and

the

alleged

harm.3

See

Hendricks v. Callahan, 972 F.2d 190, 193 (8th Cir. 1992) (applying
Minnesota law).
warranty.4

Further, RFC must likely allege reliance on the

See Lyon Fin. Servs., Inc. v. Ill. Paper & Copier Co.,

2

The heading of the first claim characterizes it as a breach
of contract claim. Mortgage Access argues that such a claim is
solely one for breach of contract and cannot be interpreted to
allege a breach of warranty claim. A breach of warranty claim,
however, “is a breach of contract claim.” Bluewater Yacht Sales,
Inc. v. Liberty Coach, Inc., No. 07-3039, 2009 WL 1684454, at *4
(W.D. Ark. June 12, 2009) (emphasis added); see also Malone v.
Husker Auto Grp., Inc., No. 4:08CV3199, 2008 WL 5273670, at *4 (D.
Neb. Dec. 17, 2008) (“[T]he label which a plaintiff applies to a
pleading does not determine the nature of the cause of action which
he states.” (citation and internal quotation marks omitted)).
Indeed, RFC states that it does not assert a general breach of
contract claim. See Mem. Opp’n 8. As a result, the court looks to
the substance of the claim and concludes that RFC asserts a claim
for breach of warranty, rather than a general breach of contract
claim.
3

Mortgage Access also argues that RFC lacks standing because
it fails to plead “manifestation of the defect.” Reply Mem. 11.
Such an argument, however, relates to implied warranties and
consumer products, rather than express contractual warranties.
See, e.g., O’Neil v. Simplicity, Inc., 574 F.3d 501, 503 (8th Cir.
2009). Mortgage Access points to no factually-similar authority
requiring such an element to state a claim for breach of
warranties. As a result, such an argument is without merit.
4

The Minnesota Supreme Court has recently held that “breach
of a contractual representation of future legal compliance [is]
actionable under Minnesota law without proof of reliance.”
See Lyon Fin. Servs., Inc. v. Ill. Paper & Copier Co., No. A-131944, 2014 WL 2965404, at *3 (Minn. July 2, 2014).
The court
declined to reach the issue of whether proof of reliance is
(continued...)
5

No. A13-1944, 2014 WL 2965404, at *4 (Minn. July 2, 2014); Midland
Loan Fin. Co. v. Madsen, 14 N.W.2d 475, 481 (Minn. 1944) (“To
enable a party relying upon breach of ... warranty to recover, it
must be clear and definite that there was actual reliance upon the
warranties involved.”). Mortgage Access argues that RFC has failed
to state a claim for breach of warranties because it (1) fails to
adequately specify the warranties at issue, given the multiple
versions of the Client Guide and (2) fails to specifically allege
the breaches, loans and damages at issue.5
A.

Warranties

Mortgage Access argues that it does not have fair notice of
the claim.

Specifically, Mortgage Access argues that the amended

complaint does not specify which version of the Client Guide
applies to each allegedly-defective loan. A complaint must provide
“fair notice of what the ... claim is and the grounds upon which it
rests.”

Twombly,

550

U.S.

at

556

(alteration

in

original)

(citation and internal quotation marks omitted). RFC responds that

(...continued)
required in breach of warranties claims. See id. at *4 n.6. As a
result, the court assumes the continuing viability of the rule
announced in Midland Loan Fin. Co. v. Madsen, 14 N.W.2d 475, 481
(Minn. 1944).
5

Mortgage Access also argues that dismissal is warranted
because RFC does not allege that it performed requisite conditions
precedent or that the alleged breaches were material in nature.
Allegations of materiality and that conditions precedent were
performed are not necessary, however, as neither is an element of
a breach of warranties claim. See Hendricks, 972 F.2d at 193.
6

Mortgage Access has sufficient notice of the allegedly-breached
warranties because it has attached relevant excerpts from the
Client Guide, and that any omitted portions are irrelevant to its
claim.

The court agrees.

Here, RFC alleges breach of several specific provisions of the
Client Guide.

See Am. Compl. ¶ 18.

Specifically, RFC cites

numerous warranties and representations made by Mortgage Access,
including, among others, (1) the legality of loan origination,
servicing and transfer, id. Ex. B-2, at §§ A201(K), A202(I);
(2) the obligation to promptly notify RFC of any act or omission
materially affecting the loans or mortgagor, id. at § A201(M);
(3) the accurate and proper execution of all loan documents, id. at
§§

A202(A),(D);

and

(4)

the

absence of

any

default,

breach,

violation or event of acceleration relating to any transferred note
or security instrument, id. at § A202(G).

See Am. Compl. ¶ 24.

Although multiple versions of the Client Guide exist and certain
portions have been omitted, RFC alleges that the omitted excerpts
of the Client Guide are not material.
specifically

alleges

that

“[t]he

See id. ¶ 18.
Contract

and

Further, RFC
Client

Guide

collectively form the parties’ Agreement” and, for purposes of the
instant motion, the court accepts such an assertion as true.

RFC

has identified the warranties at issue and, as a result, the
argument that RFC failed to adequately plead such warranties is
without merit.

7

B.

Breaches, Causal Link and Reliance

Mortgage Access next argues that RFC fails to enumerate each
allegedly

defective

loan

in

the

amended

complaint,

rendering

Mortgage Access “unable to determine basic facts of RFC’s claim
such as which loans were defective, how those loans were defective,
what portions of the parties’ contract was allegedly breached, and
how [RFC] was allegedly harmed.”

Mem. Opp’n 12.

Such an argument

is unavailing.
The amended complaint, while not a model of clarity, alleges
facts sufficient to put defendants on notice of the breach of
warranties claim. Rule 8(a) requires only that a complaint include
“a short and plain statement of the claim showing that the pleader
is entitled to relief.”

Fed. R. Civ. P. 8(a).

“This is both a

floor and a ceiling: Rule 8 can be violated by a complaint that
pleads too little and by a complaint that pleads too much.” Wright
v. Medtronic, Inc., No. 09-0443, 2010 WL 1027808, at *13 (D. Minn.
Mar. 17, 2010).

Here, Mortgage Access points to no factually-

similar authority holding that RFC is obligated to plead its claims
on a loan-by-loan basis.

But cf. Ace Sec. Corp. Home Equity Loan

Trust v. DB Structured Prods., Inc., Nos. 13-1869, 13-2053, 132828, 13-3687, 2014 WL 1116758, at *12-13 (S.D.N.Y. Mar. 20, 2014)
(allowing

pleading

to

survive

dismissal

8

without

loan-by-loan

allegations in a complaint, but noting that Rule 8(a) “does not
relieve Plaintiff of its burden of proving loan-by-loan breaches at
later stages of litigation”).
Further,

RFC

has

sufficiently

alleged

breach

of

the

warranties. Specifically, RFC pleads that Mortgage Access breached
warranties

“by

delivering

loans

that

were

not

originated

or

underwritten in accordance with the requirements of the Agreement;
did not meet the representations and warranties made as to those
loans; and/or failed to comply with applicable state and federal
law.”

Am. Compl. ¶ 38.

RFC further supports such allegations of

breach by pleading (1) that many of the loans Mortgage Access sold
to RFC defaulted shortly after the loans closed or performed
significantly worse than would be expected in the absence of
breach, id. ¶ 42, (2) that internal RFC reviews found defects in
many Mortgage Access loans, id. ¶ 41, (3) that it was obligated to
repurchase many of the Mortgage Access loans it had re-sold after
the discovery of loan defects, id. ¶¶ 53, 68, and (4) that,
following numerous lawsuits with non-parties and the filing of
hundreds of creditors’ proofs of claims in its own bankruptcy
proceeding, it has been shown that RFC purchased defective loans
from a variety of lenders, including Mortgage Access, id. ¶¶ 47-51,
56.

RFC specifically identifies certain allegedly-defective loans

and further provides a non-exhaustive “sampling” of other Mortgage

9

Access loans,6 including those that it claims were defective, which
lends further support to the breach allegations for pleading
purposes.

Id. ¶ 43, id. Ex. C.

pleaded a causal link.

Moreover, RFC has adequately

Specifically, RFC alleges that as a direct

result of Mortgage Access’s breaches, it was subject to extensive
repurchase demands, litigation and financial losses.
Compl. ¶¶ 54, 58, 68.

See Am.

Finally, RFC sufficiently alleges that it

relied on such warranties and representations.

The Client Guide

reflects Mortgage Access’s “recogni[tion] that it is [RFC’s] intent
to securitize some or all of the Loans sold to [RFC] by [Mortgage
Access]” and specifically notes that RFC would act “in reliance
upon [the] warrant[ies], obligation[s] or representation[s] made by
[Mortgage Access] contained in the Client Contract.” Id. Ex. A, at
§§ A202(II), A212.

Indeed, RFC specifically pleads that the

warranties at issue were material to its decisions to acquire
mortgage loans from Mortgage Access.
result,

RFC

has

sufficiently

pleaded

Am. Compl. ¶ 25.
a

plausible

As a

breach

of

warranties claim, and dismissal is not warranted.
III.

Indemnification
RFC next alleges a claim for indemnification.

Specifically,

RFC argues that it incurred damages from the material defects of
loans sold by Mortgage Access and that Mortgage Access expressly

6

While such sampling is illustrative for pleading purposes,
it is anticipated that RFC will identify specific all allegedlydefective loans in discovery.
10

undertook to indemnify RFC in such circumstances.

Mortgage Access

argues that dismissal of the indemnification claim is warranted
because

RFC

did

indemnification.

not

satisfy

conditions

precedent

to

seeking

Specifically, Mortgage Access argues that RFC

failed to provide to Mortgage Access “a request for payment, ...
includ[ing] copies of the relevant notices” as required the Client
Guide.7

Am. Compl. Ex. A, § A212.

“Indemnity arises out of a contractual relationship, either
expressed or implied by law, which requires one party to reimburse
the other entirely.”

Hernick v. Verhasselt Contr., Inc., Nos. CX-

02-1424, C0-02-1478, 2003 WL 1814876, at *4 (Minn. Ct. App. Apr. 8,
2003)

(citations

and

internal

quotation

marks

omitted).

“A

claimant may recover indemnity ... [w]here there is an express
contract between the parties containing an explicit undertaking to
reimburse for liability of the character involved.”

Id. at *5

(second alteration in original) (citations and internal quotations
omitted).
Here, Mortgage Access argues that § A212 of the Client Guide
states that indemnification is contingent on RFC providing Mortgage
Access with “a request for payment, which request shall include
copies of the relevant invoices.”

7

Am. Compl. Ex. B-1, at § A212.

Mortgage Access also argues that indemnification claim
should be dismissed because RFC never requested repurchase of the
allegedly-defective loans. The indemnification provision, however,
does not require that RFC make such a request. See Am. Compl. Ex.
B-1, at § A212.
11

Even if the Agreement required notice as a condition precedent to
indemnification, however, RFC satisfies its pleading burden.

See

Hartford Fire Ins. Co. v. Pearson Mech. Servs., Inc., No. 10-2818,
2011 WL 3793972, at *3 (D. Minn. Aug. 25, 2011) (listing elements
for

breach

of

indemnity

agreement

claim).

In

the

amended

complaint, RFC alleges that it “at all times performed all of its
obligations to Mortgage Access, if any, under the Agreement, and
all conditions precedent to the relief sought in this action, if
any, have been satisfied.”
complies with

Am. Compl. ¶ 35.

Such pleading

Rule 9(c), which provides that “[i]n pleading

conditions precedent, it suffices to allege generally that all
conditions precedent have occurred or been performed.”8

Fed. R.

Civ. P. 9(c); see also, e.g., Cummins Law Office, P.A. v. Norman
Graphic Printing Co., 826 F. Supp. 2d 1127, 1129 (D. Minn. 2011).
As a result, dismissal on this basis is not warranted.
IV.

Statute of Limitations
A.

Breach of Warranties

Finally, Mortgage Access argues that much of the breach of
warranties

claim

is

barred

by

the

statute

of

limitations.

Specifically, Mortgage Access argues that any portion of the breach
of warranties claim based on loans sold or assigned to RFC prior to

8

Mortgage Access argues that it was not provided with such
notices.
At this stage in the proceedings, however, the court
accepts as true the allegations by RFC that it has satisfied the
conditions precedent. See Braden, 588 F.3d at 594.
12

December 16, 2007 - the date six years prior to commencement of the
instant action - is untimely due to the six-year statute of
limitations for such claims in Minnesota.

See Mem. Supp. 15-16.

RFC argues that the statute of limitations is tolled due to the
application of 11 U.S.C. § 108.

The court agrees.

The parties agree that the six-year statute of limitations for
contract actions applies to the breach of warranties claim.
Minn. Stat. § 541.05, subidv. 1(1).

See

RFC argues, however, that the

filing of the bankruptcy petition on May 14, 2012, extended the
statute of

limitations.

Under

11

U.S.C. §

108(a)(2),

“[i]f

applicable nonbankruptcy law ... fixes a period within which the
debtor may commence an action, and such period has not expired
before the date of the filing of the petition, the trustee may
commence such action ... before ... two years after the order for
relief.” See also 11 U.S.C. § 1107(a) (providing that a Chapter 11
debtor-in-possession enjoys most rights possessed by trustees); In
re Martinson, 731 F.2d 543, 544 n.2 (8th Cir. 1984); Johnson v.
First Nat’l Bank of Montevideo, 719 F.2d 270, 278 n.11 (8th Cir.
1983).

Thus, § 108 renders timely the portion of the breach of

warranties claim relating to loans sold or assigned after May 14,
2006 - the date six years prior to the filing of the bankruptcy
petition.

See Residential Funding Co., LLC v. Embrace Home Loans,

13

Inc., Nos. 13-3457, 13-3509, 13-3545, 2014 WL 2766114, at *4 (D.
Minn. June 18, 2014).

As a result, dismissal is not warranted as

to those loans sold or assigned after May 14, 2006.
The portion of the breach of warranties claim relating to
loans sold or assigned prior to May 14, 2006, however, is untimely.
RFC argues that it has sufficiently pleaded that Mortgage Access
breached a continuing warranty to provide RFC with certain material
information regarding the loans it had sold, such that the claims
accrued after the time of underwriting and that, as a result, such
claims are timely.

The court disagrees.

Here, RFC alleges that,

pursuant to the Client Guide, Mortgage Access undertook to
comply with all provisions of this Client
Guide and the Program Documents, and will
promptly notify [RFC] of any occurrence, act,
or omission regarding [Mortgage Access], the
Loan, the Mortgaged Property or the Mortgagor
of which [Mortgage Access] has knowledge,
which occurrence, act, or omission may
materially affect Mortgage Access], the Loan,
the Mortgaged Property, or the Mortgagor.
Am. Compl. Ex. B-1, § A201(M); see also id. § A210(A) (“If
[Mortgage Access] discovers an Event of Default, it should give
[RFC] prompt written notice.

Such notice should include a written

description of the Event of Default.”). RFC, however, alleges that
Mortgage Access had the “initial responsibility” and the “primary
responsibility” for underwriting the loans.

Am. Compl. ¶ 20.

also alleges

...

that

the

“types

of

defects

included

RFC

income

misrepresentation, employment misrepresentation, owner occupancy

14

misrepresentations, appraisal misrepresentations or inaccuracies,
undisclosed debt, and missing or inaccurate documents.”

Id. ¶ 42.

Such defects occur at the time a loan is underwritten, not at some
later date.

As a result, the court concludes that RFC does not

sufficiently allege the breach of a continuing obligation, and such
claims are untimely.
*3.

See Embrace Home Loans, 2014 WL 2766114, at

Therefore, dismissal is warranted as to the portion of the

breach of warranties claim relating to loans sold or assigned prior
to May 14, 2006.
B.

Indemnification

Mortgage Access also argues that the indemnification claim is
untimely.

Specifically,

Mortgage

Access

argues

that

any

indemnification obligation was triggered upon Events of Default,
which occurred outside of the applicable limitations period.
an argument is unavailing.

Such

Here, the Client Guide reflects that

Mortgage Access would indemnify RFC for “all losses, damages,
penalties,

fines,

forfeitures,

court

costs

and

reasonable

attorneys’ fees, judgments, and any other costs, fees and expenses
resulting from any Event of Default.”
(emphasis

added).

Such

language

Am. Compl. Ex. B-1, § A212

does not

indicate

that the

indemnity obligation accrued upon an Event of Default.
under

Minnesota

law,

the

“statute

of

Indeed,

limitations

in

an

indemnification case ordinarily is six years after final judgment
or

settlement.”

Hernick,

2003

15

WL

1814876,

at

*5

(citation

omitted).

That is, “the right of indemnity does not accrue until

the liability of the party seeking indemnity has become finally
fixed and ascertained, or until after the claimant has settled or
has paid the judgment.”

Metro. Prop. & Cas. Ins. Co. v. Metro.

Transit Comm’n, 538 N.W.2d 692, 695 (Minn. 1995) (citation and
internal quotation marks omitted).

As already explained, the

bankruptcy action was filed on May 14, 2012, RFC filed the instant
action

on

December

13,

2013

and

effective on December 17, 2013.
fixed

upon

Events

of

Default,

the

bankruptcy

plan

became

Thus, RFC’s liability was not
and

the

argument

that

an

indemnification claim is barred by the statute of limitations is
without merit.

As a result, the indemnification claim is timely,

and dismissal is not warranted.

CONCLUSION
Accordingly, based on the above, IT IS HEREBY ORDERED that:
1.

Defendant’s motion to dismiss the original complaint [ECF

No. 18] is denied as moot.
2.

Defendant’s motion to dismiss the amended complaint [ECF

No. 39] is granted in part, consistent with this order.
Dated:

July 21, 2014
s/David S. Doty
David S. Doty, Judge
United States District Court

16