Residential Funding Company, LLC v. SouthTrust Mortgage Corporation et al
Filing
79
ORDER denying 51 Motion to Dismiss the amended complaint. (Written Opinion). Signed by Senior Judge David S. Doty on 7/21/2014. (PJM)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 13-3524(DSD/JJG)
Residential Funding Company, LLC,
Plaintiff,
ORDER
v.
SouthTrust Mortgage Corporation
and Wells Fargo Bank, N.A.,
Defendants.
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 Richard
C. St. John, Esq. and Munger, Tolles & Olson, 355 South
Grand Avenue, Suite 3500, Los Angeles, CA 90071, counsel
for defendant.
This matter is before the court upon the motion to dismiss the
amended complaint by defendant Wells Fargo Bank, N.A. successor by
merger to defendant SouthTrust Mortgage Corporation (collectively,
Wells
Fargo).
Based
on
a
review
of
the
file,
record
and
proceedings herein, and for the following reasons, the court denies
the motion.
BACKGROUND
This business dispute arises out of the sale of Wells Fargounderwritten
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 Wells Fargo,
who
were
information
responsible
and
for
collecting
underwriting
the
and
loan.
verifying
Id.
¶
borrower
21.
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.
Id. ¶ 3.
Wells Fargo and RFC entered into a “Seller/Servicer Contract”
(Contract),
which
Servicer Guides.”
the Seller
and
incorporated
by
reference
See, e.g., id. Ex. A, at 1.
Servicer
Guide
referenced
in
the
“Seller
and
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. ¶ 19 (noting that different versions of relevant Guides
existed over time).
Pursuant to the Agreement, Wells Fargo made
several representations and warranties regarding the loans sold to
RFC.
See id. ¶ 25.
Failure to comply with such representations
and warranties by Wells Fargo constituted an “Event of Default”
under the Agreement.
See id. ¶ 27.
Further, the Agreement
specified the remedies available to RFC if an Event of Default
occurred, including Wells Fargo’s obligation to indemnify RFC
against liabilities resulting from such events.
2
See id. ¶ 30.
Wells Fargo and RFC operated pursuant to the Agreement until
May 2012.
See id. ¶ 2.
Over time, many of the loans sold by Wells
Fargo went into default or became delinquent, resulting in losses
to RFC in excess of $126.2 million.
Id. ¶ 40.
Wells Fargo
repurchased some defective loans pursuant to the Agreement.
¶ 46.
Id.
RFC was sued in numerous actions stemming from defective
loans it had re-sold.
See id. ¶ 49.
bankruptcy protection on May 14, 2012.
RFC filed for Chapter 11
See ¶ 51.
2013, the bankruptcy plan became effective.
On December 17,
Id. ¶ 76.
On March 28, 2014, RFC filed an amended complaint, alleging
claims for (1) breach of warranties and (2) indemnification. Wells
Fargo 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.”
Ashcroft v.
Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atl. Corp. v.
3
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,1 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. See Hendricks
v. Callahan, 972 F.2d 190, 193 (8th Cir. 1992) (applying Minnesota
law).
Further, RFC must likely allege reliance on the warranty.2
See Lyon Fin. Servs., Inc. v. Ill. Paper & Copier Co., No. A131944, 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
1
The heading of the first claim characterizes it as a breach
of contract claim. Wells Fargo 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 warranties, rather than a general breach of contract
claim.
2
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
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
clear
and
definite
that
warranties involved.”).
there
was
actual
reliance
upon
the
Wells Fargo 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 relevant Guides and (2) fails to specifically
allege the breaches, loans and damages at issue.
A.
Warranties
Wells Fargo argues that it does not have fair notice of the
claim. Specifically, Wells Fargo argues that the amended complaint
does not adequately allege that the Client Guide is equivalent to
the Seller and Servicer Guide or 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).
As an initial matter, RFC provides in the amended complaint
that not all existing iterations of the Client Guide have been
attached, but that all material portions have been included.
See Am. Compl. ¶ 19.
For purposes of the instant motion, the court
accepts such an assertion as true.
Further, RFC alleges breach of
several specific provisions of the Client Guide.
¶
25.
Specifically,
RFC
cites
numerous
See Am. Compl.
warranties
and
representations made by Wells Fargo, including, among others,
(1) the legality of loan origination, servicing and transfer, id.
6
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.
In sum, RFC has identified the warranties at
issue and, as a result, the argument that RFC failed to adequately
plead such warranties is without merit.
B.
Breaches, Causal Link and Reliance
Wells Fargo next argues that RFC fails to enumerate each
allegedly defective loan in the amended complaint, rendering Wells
Fargo unable to determine basic facts of RFC’s claim.
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, Wells Fargo points to no factually-similar
authority holding that RFC is obligated to plead its claims on a
7
loan-by-loan basis.
But cf. Ace Sec. Corp. Home Equity Loan Trust
v. DB Structured Prods., Inc., Nos. 13-1869, 13-2053, 13-2828, 133687, 2014 WL 1116758, at *12-13 (S.D.N.Y. Mar. 20, 2014) (allowing
pleading to survive dismissal 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,
warranties.
warranties
RFC
has
sufficiently
alleged
breach
of
the
Specifically, RFC pleads that Wells Fargo breached
“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. ¶ 39.
RFC further supports such allegations of
breach by pleading (1) that many of the loans Wells Fargo sold to
RFC
defaulted
shortly
after
the
loans
closed
or
performed
significantly worse than would be expected in the absence of
breach, id. ¶ 43, (2) that internal RFC reviews found defects in
many Wells Fargo loans, id. ¶ 42, (3) that it was obligated to
repurchase many of the Wells Fargo loans it had re-sold after the
discovery of loan defects, id. ¶¶ 55, 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
8
lenders, including Wells Fargo, id. ¶¶ 47-51, 57. RFC specifically
identifies certain allegedly-defective loans sold to it by Wells
Fargo and further provides a non-exhaustive “sampling” of other
Wells Fargo loans,5 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 Wells Fargo’s breaches, it was subject to extensive
repurchase demands, litigation and financial losses.
See Am.
Compl. ¶¶ 54, 70. Finally, RFC sufficiently alleges that it relied
on such warranties and representations.
Wells
Fargo’s
“recogni[tion]
that
it
The Client Guide reflects
is
[RFC’s]
intent
to
securitize some or all of the Loans sold to [RFC] by [Wells Fargo]”
and specifically notes that RFC would act “in reliance upon [the]
warrant[ies], obligation[s] or representation[s] made by [Wells
Fargo] contained in the Client Contract.”
A202(II),
A212.
Indeed,
RFC
specifically
Id. Ex. A, at §§
pleads
that
the
warranties at issue were material to its decisions to acquire
mortgage loans from Wells Fargo.
Am. Compl. ¶ 26.
As a result,
RFC has sufficiently pleaded a plausible breach of warranties
claim, and dismissal is not warranted.
5
While such sampling is illustrative for pleading purposes,
it is anticipated that RFC will identify specific all allegedlydefective loans in discovery.
9
III. Indemnification
RFC next alleges a claim for indemnification.
Specifically,
RFC argues that it incurred damages from the material defects of
loans sold by Wells Fargo, and that Wells Fargo expressly undertook
to indemnify RFC in such circumstances.
Wells Fargo argues that
dismissal of the indemnification claim is warranted because RFC
fails
to
adequately
allege
that
Wells
Fargo
is
bound
by
an
indemnification provision or the specifics of any such obligation.
The court disagrees.
“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, RFC has adequately pleaded that the Agreement provides
for remedies available to RFC upon an Event of Default, including
indemnification against liabilities resulting from breaches of
warranties.
See Am. Compl. Ex. B-1, at § A212.
Specifically, the
indemnification provision provides, “[Wells Fargo] shall indemnify
10
[RFC] from 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.
This includes any act or failure to act or any breach of warranty
... contained in the Client Contract[.]”).
Id.
Therefore, the
argument that RFC fails to state a claim for indemnification upon
which relief can be granted is without merit.
As a result,
dismissal on this basis is not warranted.
CONCLUSION
Accordingly, based on the above, IT IS HEREBY ORDERED that
defendant’s motion to dismiss the amended complaint [ECF No. 51] is
denied.
Dated:
July 21, 2014
s/David S. Doty
David S. Doty, Judge
United States District Court
11
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