Residential Funding Company, LLC v. Standard Pacific Mortgage, Inc.

Filing 81

MEMORANDUM OPINION AND ORDER granting in part and denying in part defendant's 49 Motion to Dismiss. 1) The motion is denied with respect to Count II and with respect to Count I for loans sold on or after May 14, 2006. 2) The motion is granted with respect to Count I for loans sold before May 14, 2006. Count I with respect to the loans sold before May 14, 2006, is dismissed with prejudice. (Written Opinion). Signed by Judge John R. Tunheim on October 14, 2014. (DML)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 13-3468 (JRT/JJK)
RESIDENTIAL FUNDING COMPANY,
LLC,
Plaintiff,
v.
COMMUNITY WEST BANK, N.A.,
Defendant.
Civil No. 13-3498 (JRT/JSM)
RESIDENTIAL FUNDING COMPANY, LLC
and RESCAP LIQUIDATING TRUST,
Plaintiffs,
v.
PNC BANK, N.A., as successor in interest to
National City Mortgage Co., NCMC Newco,
Inc. and North Central Financial Corporation,
Defendant.
Civil No. 13-3520 (JRT/JSM)
RESIDENTIAL FUNDING COMPANY,
LLC,
Plaintiff,
v.
HOMESTEAD FUNDING CORP.,
Defendant.
Civil No. 13-3526 (JRT/JJK)
RESIDENTIAL FUNDING COMPANY,
LLC,
Plaintiff,
v.
STANDARD PACIFIC MORTGAGE, INC.,
Defendant.
28

MEMORANDUM OPINON
AND ORDER ON MOTIONS
TO DISMISS

David Elsberg, QUINN EMANUEL URQUHART & SULLVIAN LLP,
51 Madison Avenue, 22nd Floor, New York, NY 10010; and Donald G.
Heeman, FELHABER LARSON, 220 South Sixth Street, Suite 2200,
Minneapolis, MN 55402, for plaintiff.
Jeffrey R. Ansel and Michael A. Rosow, WINTHROP & WEINSTINE,
PA, 225 South Sixth Street, Suite 3500, Minneapolis, MN 55402, for
defendant Community West Bank, N.A.
Richard E. Gottlieb, BUCKLEYSANDLER LLP, 123 North Wacker
Drive, Suite 1450, Chicago, IL 60606; and David A. Schooler, BRIGGS
AND MORGAN, PA, 80 South Eighth Street, Suite 2200, Minneapolis,
MN 55402, for defendant PNC Bank, N.A.
Arthur G. Boylan, STINSON LEONARD STREET LLP, 150 South
Fifth Street, Suite 2300, Minneapolis, MN 55402, for defendant
Homestead Funding Corp.
Philip R. Stein, BILZIN SUMBERG BAENA PRICE & AXELROD
LLP, 1450 Brickell Avenue, Suite 2300, Miami, FL 33131; and
Janine Wetzel Kimble, GREENE ESPEL PLLP, 222 South Ninth Street,
Suite 2200, Minneapolis, MN 55402, for defendant Standard Pacific
Mortgage, Inc.
Plaintiff Residential Funding Company, LLC (“RFC”) is an entity that purchased
mortgage loans from various banks and securitized them in batches to sell to investors.
After the subprime mortgage crisis in 2007 and 2008, RFC was sued by investors who
had purchased its residential mortgage-backed security (“RMBS”) investments. RFC
went into bankruptcy as a result, and has ultimately reached a global settlement for over
$10 billion. RFC now brings these actions – four at issue here, but many more in this
district and across the country1 – against the banks from which it originally purchased the
1

See, e.g., Residential Funding Co., LLC v. Broadview Mortgage Corp., Civ. No. 133463, 2014 WL 4104819 (D. Minn. Aug. 19, 2014); Residential Funding Co., LLC v. Stearns
Lending, Inc., Civ. No. 13-3516, 2014 WL 4186486 (D. Minn. Aug. 22, 2014); Residential
(Footnote continued on next page.)

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mortgages involved in its global settlement. Before the Court are RFC’s lawsuits against
four banks: Defendants Community West Bank, N.A. (“Community West”), PNC Bank,
N.A. (“PNC”), Homestead Funding Corp. (“Homestead”), and Standard Pacific
Mortgage, Inc. (“Standard Pacific”) (collectively, “Defendants”).2

RFC brings two

claims against each Defendant: one count for breach of contract on the basis that
Defendants breached various representations and warranties about the quality of the
mortgages they sold to RFC when they knew those representations and warranties to be
false, and one count for indemnification for the portions of the $10 billion settlement that
RFC claims are attributable to each Defendant.
Each Defendant moves to dismiss. Defendants’ arguments for dismissal generally
fall into three categories. First, Defendants argue that RFC’s claims are barred by the
statute of limitations because most of the mortgage sale agreements were executed more
than six years before RFC initiated these suits in December 2013. Second, Defendants
argue that RFC lacks standing to assert rights under the mortgage sale agreements
____________________________________
(Footnote continued.)

Funding Co., LLC v. Americash, Civ. No. 13-3460, 2014 WL 3577312 (D. Minn. July 21, 2014);
Residential Funding Co., LLC v. Mortgage Access Corp., Civ. No. 13-3499, 2014 WL 3577403
(D. Minn. July 21, 2014); Residential Funding Co., LLC v. Embrace Home Loans, Inc., Civ.
No. 13-3457, 2014 WL 2766114 (D. Minn. June 18, 2014).
2

The Court addresses Defendants’ motions to dismiss in their respective cases in this
consolidated memorandum opinion and order because the motions raise similar legal issues. The
order will distinguish between the cases by noting docket items in RFC v. Community West
Bank, N.A., Civ. No. 13-3468, as “Community West Docket;” docket items in RFC v. PNC Bank,
N.A., Civ. No. 13-3498, as “PNC Docket;” docket items in RFC v. Homestead Funding Corp.,
Civ. No. 13-3520, as “Homestead Docket;” and docket items in RFC v. Standard Pacific
Mortgage, Inc., Civ. No. 13-3526, as “Standard Pacific Docket.”

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because it assigned the relevant rights to third-party investors upon reselling the
mortgages. Finally, Defendants argue that RFC fails to state a claim because it has failed
to specifically identify which warranties and representations Defendants made falsely,
how the loans were defective, and how any of the warranties’ and representations’
alleged falsities caused damage to RFC.
The Court concludes that the statute of limitations was tolled when RFC entered
bankruptcy proceedings on May 14, 2012, so RFC’s claims for mortgages it purchased
before May 14, 2006 are barred by the statute of limitations, but claims for those
purchased after May 14, 2006 are not. With regard to standing, the Court declines to
consider the documents forming the basis of Defendants’ arguments at this pleading
stage, but concludes in the alternative that they would likely present a fact issue
inappropriate for dismissal at this stage in the proceedings. Finally, the Court concludes
that RFC has adequately alleged claims for breach of contract and indemnification. The
Court will therefore deny each Defendant’s motion to dismiss.

BACKGROUND
I.

RFC’S BUSINESS
RFC is a Delaware limited liability company with its principal place of business in

Minneapolis, Minnesota. (Community West Docket, Am. Compl. (“Community West
Compl.”) ¶ 13, April 7, 2014, Docket No. 33.)3 Prior to its bankruptcy in May 2012,

3

The amended complaints in each case are substantially similar, with the exception of
examples specific to each defendant, which do not affect the numbering of the paragraphs across
(Footnote continued on next page.)

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Plaintiff RFC was in the business of acquiring and securitizing residential mortgage
loans. (Id. ¶ 2.) RFC’s business model was built on acquiring loans from correspondent
lenders, such as the Defendants, and distributing those loans in two ways: by pooling
those loans together with similar mortgage loans to sell into residential mortgage-backed
securitization (“RMBS”) trusts, or by selling them to whole loan purchasers. (Id. ¶ 3.)
RFC purchased loans from each of the Defendants here.

From Defendant

Community West, RFC purchased more than 75 mortgage loans with an original total
principal balance of more than $25 million dollars. (Id. ¶ 4.) From Defendant PNC, RFC
purchased more than 37,500 mortgage loans, with an original total principal balance of
more than $7.6 billion to RFC.

(PNC Docket, Am. Compl. (“PNC Compl.”) ¶ 4,

Mar. 28, 2014, Docket No. 41.) From Defendant Homestead, RFC purchased more than
500 mortgage loans, with an original total principal balance of more than $66 million.
(Homestead Docket, Am. Compl. (“Homestead Compl.”) ¶ 4, Apr. 25, 2014, Docket
No. 28.) From Defendant Standard Pacific, RFC purchased more than 1,000 mortgage
loans, with an original total principal balance of more than $350 million. (Standard
Pacific Docket, Am. Compl. (“Standard Pacific Compl.”) ¶ 4, Apr. 4, 2014, Docket
No. 35.)

____________________________________
(Footnote continued.)

each complaint. For general background not specific to each Defendant, this Order will cite to
the operative complaint against Defendant Community West for the sake of simplicity.

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A.

Loan Purchases From Defendants

RFC alleges that it entered into contractual agreements with its correspondent
lenders, including each of the Defendants, which required the lender to abide by loanlevel contractual representations and warranties. (Community West Compl. ¶ 5). These
representations and warranties are set forth in the RFC Client Guides, (the “Client
Guide”), which is a document created by RFC that is part of its contracts with lenders and
incorporated by reference into those contracts. (See, e.g., PNC Docket, Am. Compl.,
Ex. A at 16 (incorporating GMAC-RFC Client Guide into loan sale contract).) RFC
alleges that the Client Guide and contract “collectively form the parties’ Agreement, and
set the standards to which [Defendants’] loans sold to RFC were expected to adhere.”
(Id. ¶ 18.) RFC has attached excerpts of the Client Guide to each amended complaint,
alleging that “[t]he complete versions of the Client Guide are known to the parties and
too voluminous to attach in their entirety,” but that “the omitted portions of the Client
Guides do not affect the obligations set forth in this Amended Complaint.” (Id.) RFC
lists examples of the warranties and representations assured to it in the Client Guide,
which include, for example, representations that
[n]o Loan is a . . . loan considered a ‘high-cost,’ covered, ‘high-risk,’
‘predatory’ or any other similar designation under any State or local law in
effect at the time of the closing of the loan if the law imposes greater
restrictions or additional legal liability for residential mortgage loans with
high interest rates, points and/or fees[,]
(id. ¶ 24(h)), and that “[t]he Loan is of investment quality, has been prudently originated
and has been underwritten in compliance with all requirements of this Client Guide,” (id.
¶ 24(j)). It appears that there are several versions of the Client Guide and that various
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versions applied at different points in time, such that different versions apply to different
loans sold to RFC by Defendants. RFC alleges that the representations and warranties in
the Client Guide were “material terms” in its agreements with the banks, because if they
“turned out to be false, RFC could have exposure to . . . third parties (to which it sold
loans).” (Id. ¶ 25.)
RFC alleges that, as correspondent lenders, Defendants had the initial
responsibility for collecting information from the borrower, verifying its accuracy, and
underwriting the loans. RFC alleges that it was understood between the parties that RFC
would generally not be re-underwriting the loans. (Id. ¶ 20.) The representations and
warranties were important to RFC’s business because RFC took the loans it purchased
from Defendants and sold them again, making its own representations and warranties. If
any of Defendants’ representations and warranties turned out to be false, this could
expose RFC to the third parties. (Id. ¶ 25.) Pursuant to the Client Guide, Defendants’
failure to comply with its representations and warranties or any other requirements,
terms, or conditions of the Client Guide constituted an “Event of Default,” as did
Defendants’ failure to provide RFC with true, accurate, and complete information in a
timely manner. (Id. ¶ 26.)
RFC alleges that under its Agreements with Defendants, the Defendants expressly
agreed that RFC was permitted to exercise any remedy allowed by law or in equity in
connection with such Events of Default. (Id. ¶ 28.) Furthermore, RFC alleges that the
Client Guide specifies the remedies available to RFC in case of an Event of Default. (Id.
¶ 29.) These remedies included, but were not expressly limited to, repurchase of the
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defective loan, substitution of another loan for the defective one, or indemnification
against liabilities resulting from such breaches. (Id.) The repurchase provisions required
Defendants to compensate RFC for defective loans according to a formula specified in
the Client Guide that is based on the original principal balance of the loans. (Id. ¶ 31.)
RFC also alleges that Defendants were obligated to repurchase loans and/or pay RFC the
repurchase price even if the loans had already been foreclosed upon. (Id. ¶ 32.)
RFC also alleges that the Client Guide includes “broad indemnification
provisions,” stating that Defendants shall indemnify RFC
from all losses, damages, penalties, fines, forfeitures, court costs and
reasonable attorneys’ fees, judgments, and any other costs, fees and
expenses . . . includ[ing], without limitation, liabilities arising from (i) any
act or failure to act, (ii) any breach of warranty, obligation, or
representation contained in the Client Guide, (iii) any claim, demand,
defense or assertion against or involving [RFC] based on or resulting from
such breach, (iv) any breach of any representation, warranty or obligation
made by [RFC] in reliance upon any warranty, obligation or representation
made by [Defendant] contained by the Client Contract . . . .
(Id. ¶ 33.)

B.

Sale to Third Parties

RFC explains in the complaints that it sold the loans it acquired from the
Defendants, either into RMBS trusts, which issued certificates to outside investors, or in
whole loan portfolios to other mortgage companies and banks. (Id. ¶ 36.) When it sold
the loans, it “passed on a more limited set of representations and warranties to the
Trusts,” and “in making those representations and warranties, RFC relied on information

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provided to it by” Defendants, and that “that information in many cases violated
[Defendants]’ representations and warranties to RFC.” (Id. ¶¶ 36-37.)

C.

Problems with Loans

RFC alleges that Defendants breached their “extensive contractual representations
and warranties by delivering loans that were not originated or underwritten in accordance
with the requirements of the Agreement,” and “did not meet the representations and
warranties made as to those loans.” (Id. ¶ 38.) Specifically, RFC alleges that “[o]ver
time, many of the loans sold” to it by Defendants “defaulted or became seriously
delinquent” at rates that far exceeded “what would normally be expected in a given
population of mortgage loans.”

(Id. ¶¶ 39-40.)

It alleges that internal reviews it

conducted determined that many of the loans sold to it by the banks “violated the Client
Guide and/or other representations or warranties made by [Defendants], resulting in an
Event of Default under the Agreement.” (Id. ¶ 41 (alleging that “hundreds” of loans sold
by Community West violated the Client Guide”); see also PNC Docket, Am. Compl. ¶ 41
(alleging that upon internal reviews of loans sold by PNC, “[m]ore than 50% of the loans
reviewed were deemed to have a defect”); Homestead Docket, Am. Compl. ¶¶ 39-40
(“[m]ore than ten percent of the loans [Homestead] sold RFC and RFC securitized
eventually sustained losses,” and the “delinquency and default rates far exceed what
would normally be expected in a given population of mortgage loans”); Standard Pacific
Docket, Am. Compl. ¶ 41 (“Internal reviews conducted by RFC determined that dozens
of the loans sold to RFC by Standard Pacific violated the Client Guide . . . .”).) It alleges

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that “[t]ypes of defects varied, but included income misrepresentation, employment
misrepresentation, insufficient credit scores, appraisal misrepresentations or inaccuracies,
undisclosed debt, and missing or inaccurate documents.” (Community West Compl.
¶ 42.)

It further alleges that “a number of the loans defaulted very shortly after

origination (constituting Early Payment Defaults or EPDs), which is widely recognized in
the industry as often signaling fraud or other problems in the origination and
underwriting of the loans.” (Id.)
In each complaint, RFC then lists examples of loans with “significant and material
defects violating the Client Guide representations and warranties.” (See, e.g., id. ¶ 43.)
For example, the Community West complaint lists the following example:
Loan ID # 3141050 – The borrower on this loan left both of his jobs prior
to the funding date, which was not disclosed at the time of funding. In
addition, the borrower took out a loan during the gap period with a monthly
payment of $180. Not long after the loan funded, the borrower filed for
chapter 13 bankruptcy protection. The failure to disclose the borrower’s
lack of employment and the additional debt made it materially riskier than
represented by Community West which rendered the loan unacceptable to
RFC.
(Id. ¶ 43(a).) The Community West complaint contains nine examples of defective loans.
(See id.) An example listed in RFC’s complaint against Standard Pacific states:
Loan ID #10900725 – This loan’s combined loan-to-value ratio, as well as
the borrower’s debt-to-income ratio, materially exceeded program
guidelines and did not qualify the borrower for the terms of the loan.
Review by RFC’s internal quality audit personnel also revealed the
borrower had inadequate reserves and adverse credit. The loan therefore
contained material breaches of Standard Pacific’s representations and
warranties, including a number of those identified in paragraphs 24 and 27
above, rendering the loan unacceptable to RFC.

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(Standard Pacific Compl. ¶ 43(a).)

The Standard Pacific complaint includes four

examples of defective loans. (See id.) The other complaints similarly include specific
examples: the PNC complaint includes five examples and the Homestead complaint
includes two examples. (See PNC Compl. ¶ 43; Homestead Compl. ¶ 43.) RFC does not
intend for such examples “to be an exhaustive list of the loans . . . that contained material
breaches of representations and warranties;” instead, “these loans represent a sampling of
the material defects found in the loans . . . sold to RFC.” (Id. ¶ 44.) RFC acknowledges
that, prior to the commencement of these lawsuits, the Defendants conceded that certain
of their loans sold to RFC were materially defective and had already paid sums to RFC to
cover those defects. RFC is not seeking to recover again on those sums. (Id. ¶ 34.)

II.

BANKRUPTCY AND THIS ACTION
RFC alleges that due to the failure of Defendants and other correspondent lenders

to honor their contractual representations and warranties, RFC was sued by numerous
counterparties and investors in its RMBS securities, based on allegations that the loans
were defective and rife with fraud and compliance problems. (Id. ¶¶ 46-50.) By May
2012, RFC was facing over two dozen lawsuits, all alleging that the loans RFC has
securitized were defective, as well as claims by investors in hundreds of its RMBS
securities seeking tens of billions of dollars based on loan-level problems. (Id. ¶ 8.)
RFC’s complaints detail several of the lawsuits that are specific to the loans sold to RFC
by each Defendant. (See, e.g., id. ¶¶ 51-55; PNC Compl. ¶¶ 54-57; Homestead Compl.
¶¶ 58-63; Standard Pacific Compl. ¶¶58-65.) All of the lawsuits alleged that “the loans

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RFC sold into RMBS securitizations were defective in a variety of ways, including
because of borrower fraud, missing or inaccurate documentation, fraudulent or inflated
appraisals, misrepresentations concerning owner-occupancy, or failure to comply with
applicable state and federal law.” (Community West Compl. ¶ 57.) RFC alleges that,
“[a]cross the dozens of securitizations involved in these lawsuits,” each of the Defendants
were responsible for a given number of the loans involved: Community West was
responsible for over 35 loans, PNC was responsible for over 11,000 loans, Homestead
was responsible for over 500 loans, and Standard Pacific was responsible for over 1,000
loans. (Id. ¶ 59; PNC Compl. ¶ 62; Homestead Compl. ¶ 67; Standard Pacific Compl.
¶ 69.)
As a result of the exposure from the lawsuits, RFC filed for Chapter 11 bankruptcy
protection in the Southern District of New York on May 14, 2012. (Id. ¶¶ 49, 61.) In
each complaint, RFC provides specific examples of proofs of claim filed on the basis of
defective loans, alleging that trustees and investors in RFC-sponsored securitizations
asserted loan-level defects totaling in the millions of dollars. (Id. ¶ 62; PNC Compl. ¶ 65;
Homestead Compl. ¶ 70; Standard Pacific Compl. ¶ 72.) RFC resolved its RMBS-related
liabilities through bankruptcy in global settlement for over $10 billion of allowed claims
in its bankruptcy case. (Id. ¶¶ 10, 65-66.) Pursuant to the Second Amended Joint
Chapter 11 Plan Proposed by Residential Capital, LLC, et. al and the Official Committee
of Unsecured Creditors, which took effect on December 17, 2013, ResCap Liquidating
Trust succeeded to all of RFC’s rights and interests under RFC’s agreements with each of
the defendants, and now controls RFC. (Id. ¶¶ 13, 66.)
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RFC initiated these actions against Defendants on December 13, 2013.
(Community West Docket, Compl., Dec. 13, 2013, Docket No. 1; PNC Docket, Compl.,
Dec. 13, 2013, Docket No. 1; Homestead Docket, Compl., Dec. 13, 2013, Docket No. 1;
Standard Pacific Docket, Compl., Dec. 13, 2013, Docket No. 1.) It has since amended its
complaint in all four actions. The amended complaints include two counts: one for
breach of contract and one for indemnification. With its breach of contract claim, RFC
alleges that it entered into an Agreement with each Defendant under which RFC acquired
mortgage loans, and that pursuant to those Agreements, the banks “made representations
and warranties to RFC regarding the quality and characteristics of the mortgage loans
sold,” but that Defendants “materially breached [their] representations and warranties to
RFC inasmuch as the mortgage loans did not comply with the representations and
warranties.” (Community West Compl. ¶¶ 69-71.) RFC alleges that these material
breaches constituted Events of Default under the Agreements and that RFC has been
injured and suffered financial loss as a result. (Id. ¶¶ 73-74.)
With its indemnification claim, RFC alleges that it has incurred liabilities, losses,
and damages on account of the defects in the loans sold to RFC and that Defendants
“expressly agreed to indemnify RFC for the liabilities, losses, and damages” which RFC
has incurred. (Id. ¶ 78.) It alleges that pursuant to its express contractual obligations,
Defendants are obligated to compensate RFC for the portion of the global settlement
associated with its breaches of representations and warranties, as well as for the portion
of RFC’s other liabilities and losses, including RFC’s attorneys’ fees to defend against,

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negotiate, and settle claims relating to allegedly defective loans associated with those
breaches. (Id. ¶ 67.)
All Defendants now move to dismiss RFC’s claims.4

The three primary

arguments presented by Defendants in favor of dismissal are that (1) RFC’s claims are
time-barred because Defendants sold the loans to RFC over six years before this action
was initiated in 2013, (2) RFC does not have any rights under any agreements with
Defendants to assert because it assigned them all to the third-party purchasers of the
loans, and (3) RFC’s allegations are inadequate and fail to state a claim.5

ANALYSIS
I.

STANDARD OF REVIEW
In reviewing a motion to dismiss brought under Federal Rule of Civil Procedure

12(b)(6), the Court considers all facts alleged in the complaint as true to determine if the
complaint states a “‘claim to relief that is plausible on its face.’” Gomez v. Wells Fargo
Bank, N.A., 676 F.3d 655, 660 (8th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009)). To survive a motion to dismiss, a complaint must provide more than
“‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action.’”

4

RFC initially filed motions to transfer these actions to bankruptcy court in S.D.N.Y. but
has since withdrawn those motions. (Community West Docket, Letter, June 4, 2014, Docket
No. 47; PNC Docket, Letter, June 4, 2014, Docket No. 60; Homestead Docket, Letter, June 4,
2014, Docket No. 35; Standard Pacific Docket, Letter, June 4, 2014, Docket No. 63.)
5

Although Defendants each raise slightly different variations on each of these main
arguments, the Court addresses all of Defendants’ arguments collectively and does not
distinguish between which Defendants made which version of an argument.

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Ashcroft, 556 U.S. at 678 (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.

“Where a complaint pleads facts that are merely consistent with a

defendant’s liability, it stops short of the line between possibility and plausibility,” and
therefore must be dismissed.

Id. (internal quotation marks omitted). Finally, Rule

12(b)(6) “authorizes a court to dismiss a claim on the basis of a dispositive issue of law.”
Neitzke v. Williams, 490 U.S. 319, 326 (1989).

II.

STATUTE OF LIMITATIONS
Defendants argue that RFC’s claims are barred by the six-year statute of

limitations applicable to breach of contract and indemnification claims.

A.

Breach of Contract

Under Minnesota law, breach of contract claims have a statute of limitations of a
period of six years, running from the time of breach.

See Minn. Stat. § 541.05,

subd. 1(1); Pederson v. Am. Lutheran Church, 404 N.W.2d 887, 889 (Minn. Ct. App.
1987). Defendants generally argue that RFC’s breach of contract claims are untimely
because RFC alleges that the Agreements included representations and warranties for the
loans that Defendants knew to be false at the time of the sale, such that the statute of
limitations began to run when Defendants sold the loans to RFC. They assert that most
of the loan sales occurred more than six years before RFC initiated these suits on
December 13, 2013. RFC counters that the statute of limitations was tolled for two years
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when it filed for bankruptcy on May 14, 2012, so, at a minimum, loans sold after May 14,
2006 are within the statute of limitations. It does not concede that loans sold before that
date are untimely, but rather argues that they may be timely depending on the facts and
circumstances of the case, which is not properly resolved at the pleading stage.

1.

Bankruptcy Tolling

Under 11 U.S.C. § 108(a), if a limitations period “has not expired before the date
of the filing of the petition, the trustee may commence such action only before the later
of” the expiration of the limitations period or two years after the final approval of the
reorganization or liquidation plan. 11 U.S.C. § 108(a)(1)-(2). Although RFC is not the
trustee here, it argues that it is entitled to this tolling because it is the debtor-in-possession
with respect to the bankruptcy proceeding and 11 U.S.C. § 1107(a) affords a debtor-inpossession the same rights as a trustee with respect to § 108(a). See 11 U.S.C. § 1107(a)
(“[A] debtor in possession shall have all the rights, other than the right to compensation
under section 330(a) of this title . . . of a trustee serving in a case under this chapter.”);
see also Johnson v. First Nat. Bank of Montevideo, Minn., 719 F.2d 270, 278 n.11
(8th Cir. 1983) (“Although the language of § 108 refers only to the trustee, it is generally
agreed that the debtor-in-possession is also entitled to the statute’s privileges.”).
RFC was the debtor-in-possession when it filed for bankruptcy on May 14, 2012
and therefore § 108(a) tolled the statute of limitations on RFC’s claims such that, when it
filed these actions on December 13, 2013, any claims arising on or after May 14, 2006
were timely. Defendants make two arguments against this conclusion, neither of which is

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persuasive.

First, Defendants point to the Eighth Circuit’s unpublished opinion in

Comcast of Illinois X v. Multi-Vision Elecs., Inc., 369 F. App’x 761, 763 (8th Cir. 2010),
in which it held that the district court did not abuse its discretion in concluding that a
debtor’s claims were untimely despite § 108(a), because the debtor was not a trustee, and
was therefore not entitled to tolling. The court there did not cite 11 U.S.C. § 1107(a), nor
did it explain whether or why its conclusion might extend to a chapter 11 bankruptcy, like
RFC’s here, rather than a chapter 7 bankruptcy. In light of the statute and Eighth Circuit
precedent, see Johnson, 719 F.2d at 278 n.11, Comcast does not deprive RFC of
bankruptcy tolling here.
Second, Defendants argue that when the global settlement plan was approved on
December 11, 2013, (see Community West Compl. ¶ 10), RFC no longer existed as an
entity and was replaced by a liquidating trust, such that RFC could not benefit from
tolling when it filed these actions on December 13, 2013. But the plan did not become
effective until December 17, 2013, (id. ¶ 66), and the Court treats the plan’s effective
date as the relevant date for determining whether RFC remained in existence as the
debtor-in-possession.

Even if RFC could be considered to have dissolved into the

liquidating trust before the filing of this action, some courts have held that liquidating
trusts in this situation are entitled to § 108(a) tolling as a representative of the estate.
Antioch Litig. Trust v. McDermott Will & Emery LLP, 500 B.R. 755, 763 (S.D. Ohio
2013) (permitting trust, as representative of the estate, to toll claims under § 108(a),
observing that “[o]ther courts have concluded that estate representatives, other than a
trustee or a debtor-in-possession, can invoke the tolling provisions of Section 108,” and
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that “[t]he Trust is acting on behalf of a debtor-in-possession, as a representative of its
estate, and is pursuing claims that belonged to the debtor for the benefit of the debtor’s
creditors”). The Court therefore concludes that the tolling provision in § 108(a) renders
timely RFC’s claims for loans sold on or after May 14, 2006.

2.

Loans Sold Before May 14, 2006

RFC does not concede that loans sold before May 14, 2006 are time barred, and
instead argues that it would be premature to dismiss claims based on those loans because,
depending on the facts of each loan, its claims for breaches of the warranties and
representations may be timely. In support, it cites to cases that indicate that where
contracts involving continuing performance over time or where “future event[s] . . . will
determine whether” a contract is breached, “the statute does not begin to run until the
happening of such future event.” City of Pipestone v. Wolverine Ins. Co., Civ. No. 4-84634, 1985 WL 1845, at *4 (D. Minn. June 28, 1985); see also Moore v. Medtronic, Inc.,
Civ. No. 99-2066, 2001 WL 1636248, at *2 (D. Minn. July 30, 2001) (“Where a contract
provides for continuing performance over a period of time, each breach may begin the
running of the statute anew such that accrual occurs continuously.” (internal quotations
omitted)).
RFC has not demonstrated how any of its allegations suggest that Defendants’
alleged breaches could be the type that occurred over time or after the initial sale of the
loan.

Nor does it explain how Defendants could be liable in the event that the

circumstances for a loan changed after its initial sale to RFC such that the representations

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and warranties became false at a date later than the initial sale. Cf. Residential Funding
Co., LLC v. Mortgage Access Corp., Civ. No. 13-3499, 2014 WL 3577403 (D. Minn.
July 21, 2014) (observing that the defects RFC alleges were present in the loans – income
misrepresentation, employment misrepresentation, owner occupancy misrepresentations,
appraisal misrepresentations or inaccuracies, undisclosed debt, and missing or inaccurate
documents – “occur at the time a loan is underwritten, not at some later date,” and
dismissing as untimely RFC’s claims for loans sold before May 14, 2006). The Court
will therefore grant Defendants’ motion to dismiss with respect to RFC’s claims for loans
it purchased from Defendants prior to May 14, 2006.6

B.

Indemnification

Defendants also argue that RFC’s indemnification claims are barred by the statute
of limitations. “Under the common law, 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 or more than a commensurate
6

RFC also argues that its claims for loans purchased before May 14, 2006 may proceed
because statute of limitations is an affirmative defense, and not appropriate for resolution on a
motion under Rule 12(b)(6). See, e.g., Walker v. Barrett, 650 F.3d 1198, 1203 (8th Cir. 2011)
(“[A]s a general rule, the possible existence of a statute of limitations defense is not ordinarily a
ground for Rule 12(b)(6) dismissal.” (internal quotations omitted)). But the general rule that
statute of limitations is not a ground for dismissal under Rule 12(b)(6) is excepted when the
“complaint itself establishes the defense.” Jessie v. Potter, 516 F.3d 709, 713 (8th Cir. 2008). As
explained above, RFC’s complaints do not include any allegations giving rise to a plausible
inference that its claims are for continuing breaches of representations and warranties or that
Defendants breached the contracts after the initial sale. To the extent that RFC argues that the
Client Guide provides for remedies for the full life of the loans, that does not establish that RFC
may seek remedies for breaches on the basis of representations and warranties becoming false
after the initial sale, but rather that it is not precluded from seeking remedies for breaches of
representations and warranties after the initial sale of the loans.

- 19 -

share of it.” Metro. Prop. & Cas. Ins. Co. v. Metro. Transit Comm’n, 538 N.W.2d 692,
695 (Minn. 1995) (internal quotations omitted). Here, RFC’s losses were presumably
fixed or attained during the bankruptcy proceeding, which began in May 2012.
But Defendants argue that this common law rule does not apply here because
RFC’s indemnification claims are too intertwined with its contract claims and are
therefore governed by the statute of limitations for its contract claims, which is six years
from the initial sale of the loan. They argue that, because RFC has the right to seek
repurchase of the loans in the event of a failure of a representation or warranty, the
relevant statute of limitations for indemnification should be the same date as it would be
for repurchase. Citing two cases from other districts, they argue that such date would be
the sale of the loan. See Lehman Bros. Holdings, Inc. v. Evergreen Moneysource Mortg.
Co., 793 F. Supp. 2d 1189 (W.D. Wash. 2011); Lehman Bros. Holding Inc. v. Standard
Pacific Am. Mortg. Co., Civ. No. 13-cv-930, 2014 WL 1715365 (D. Colo. April 30,
2014). But both cases involved a different factual circumstance than is present here: in
both, the plaintiff-loan purchasers made demands for payment upon the defendant-loan
sellers, which were refused. In Universal American Mortgage, the court found that
plaintiff’s breach of contract claim accrued at the time it purchased the mortgage from
defendants, not when it repurchased the allegedly defective loan from the third-party
purchaser to which it had sold the loan. 2014 WL 1715365, at *3. The court also
rejected plaintiff’s alternative argument that the suit was timely because the defendants’
failure to repurchase the loan within thirty days of the plaintiff’s demand was an
independent breach, starting its own statute of limitations. Id. at *4.
- 20 -

In Evergreen, the court similarly rejected Plaintiff’s argument that the statute of
limitations for breach of contract action did not begin to run until after the defendant
refused, by letter, to indemnify plaintiff for losses it suffered on a loan purchased from
defendant. 793 F. Supp. 2d at 1194.

The court reasoned that the defendant’s duty to

“indemnify for losses incurred as a result of a mortgage loan is only triggered by a breach
of any of the representations, warranties, or covenants” and that New York carries a sixyear statute of limitations from the date of the first alleged breach of a contract. Id.
(internal quotations omitted). The court also rejected what it considered to be plaintiff’s
attempt to “improperly circumvent statutes of limitations by simply recasting their claims
[for breach of contract] as ones for indemnity.” Id. at 1199 n.2. Significantly, the
plaintiff in Evergreen did not allege that it suffered any liability to a third party. Id.
The Court concludes that RFC’s claim for indemnification accrued, at the earliest,
when it filed for bankruptcy in May 2012. This is not a case where the plaintiff has made
a demand for indemnification upon a defendant pursuant to a contractual provision,
which was refused. In that circumstance, if the plaintiff believed the refusal to be
contrary to a contractual provision, it would give rise to a breach of contract claim, not
necessarily an indemnification claim. But here, where RFC alleges that it has been
ordered to make payments to third parties on account of mistakes for which it alleges
Defendants are required to indemnify it, it would not make sense for the statute of
limitations to have accrued at the original sale. Such a rule would leave open the
possibility that a plaintiff was required to file a lawsuit for indemnification before any
judgment or order for it to make payment to a third party was final, in order for the
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plaintiff to preserve a claim’s timeliness.

The rulings in Evergreen and Universal

American Mortgage do not pose such a challenge because there, the adverse judgment or
demand for payment had been made upon the plaintiff such that the amount and details of
the indemnification demand against the defendant were known. Without further support
from Minnesota case law to ignore its clear rule regarding the application of the statute of
limitations for indemnity claims, the Court declines to adopt the restrictive interpretation
urged by Defendants. Cf. Discovery Grp. LLC v. Chapel Dev., LLC, 574 F.3d 986, 989
(8th Cir. 2009) (applying Missouri law, and holding that where third-party claims against
plaintiff “remained unresolved . . . , the full measure of their losses in defending against
[the third-party] claims was not yet sustained or capable of ascertainment, so their cause
for indemnity had not yet accrued”). The Court therefore concludes that RFC’s claims
for indemnification are timely.7

III.

STANDING
Defendants argue that RFC lacks standing to bring these claims against them

because RFC assigned its rights in the loans to third-party purchasers. They point to
RFC’s agreements with its third-party purchasers, arguing that under the terms of those
agreements, RFC assigned to the purchasers any contract rights it had against the banks,
and that a “breach-of-contract claim cannot be maintained when the rights vested in the
7

The Court has received and reviewed Defendant Standard Pacific’s supplemental filing
notifying the Court of the recent disposition in Lehman Brothers Holdings, Inc. v. Universal
American Mortgage Co., LLC, Civ. No. 13-92 (D. Colo. Aug. 28, 2014). (See Letter to District
Judge, Sept. 2, 2014, Docket No. 75.) The reasoning and ruling in that case does not alter the
Court’s conclusion regarding the statute of limitations here.

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contract have been assigned to another party.” Dunn v. National Beverage Corp., 729
N.W.2d 637, 648 (Minn. Ct. App. 2007), aff’d, 745 N.W.2d 549 (Minn. 2008).
In making this argument, Defendants point to the securitization agreements that
RFC had with its purchasers, which are not part of RFC’s pleadings. For example, PNC
points to loans listed as examples in RFC’s complaint, which are covered by
securitization agreement 2005-KS2 AA, which it includes as an exhibit to its counsel’s
declaration. (See Decl. of Richard A. Gottlieb, Ex. 8, Apr. 25, 2014, Docket No. 50.) It
points to language in that securitization agreement that states:
Concurrently with the execution and delivery hereof, RFC hereby assigns
to the Company, and the Company hereby assumes, all of RFC’s rights and
obligations under the Seller Contracts with respect to the Mortgage Loans
to be serviced under the Pooling and Servicing Agreement, insofar as such
rights and obligations relate to (a) any representations and warranties
regarding a Mortgage Loan made by a Seller under any Seller Contract and
any remedies available under the Seller Contract for a breach of any such
representations and warranties if (i) the substance of such breach also
constitutes fraud in the origination of the Mortgage Loan or (ii) the
representation and warranty relates to the absence of toxic materials or
other environmental hazards that could affect the Mortgaged Property, or
(b) the Seller’s obligation to deliver to RFC the documents required to be
contained in the Mortgage File and any rights and remedies available to
RFC under the Seller Contract in respect of such obligation or in the event
of a breach of such obligation; provided that, notwithstanding the
assignment and assumption hereunder, RFC shall have the concurrent
right to exercise remedies and pursue indemnification upon a breach
by a Seller under any Seller Contract of any of its representations and
warranties.
(Id. at 10, ¶ 6 (emphasis added).) PNC does not quote the emphasized portion at the end.
Defendants do not exhaust all of the applicable securitization agreements, but argue that
these are illustrative of the assignment language applicable to RFC’s securitization
agreements with purchasers.

Defendants point to this contractual language as
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demonstration that RFC assigned away its rights, including the right to bring suit against
Defendants, when it sold loans to the third-party purchasers.
The Court finds that, at this pleading stage, RFC has adequately alleged that it has
standing to assert its rights in the loan sale Agreements with Defendants. First, the Court
observes that this argument is based upon documents not included in RFC’s pleadings.
Although the Court may consider documents “necessarily embraced by the pleadings,”
Saterdalen v. Spencer, 725 F.3d 838, 841 (8th Cir. 2013) (internal citation and quotations
omitted), the connection between RFC’s pleadings and the securitization agreements
upon which Defendants rely is thin. RFC alleges that it “sold the[] loans to RMBS trusts
and whole loan purchasers,” and that when it “sold the loans, it passed on a more limited
set of representations and warranties to the Trusts, and, as required by SEC regulations,
disclosed pertinent information about the loans to investors in the RMBS.” (Community
West Compl. ¶¶ 25, 37.) Defendants have not pointed to any other provisions of RFC’s
complaints that arguably relate to the securitization agreements. These allegations do not
mention any contract between RFC and the third parties, much less any contractual
arrangements under which RFC assigned its rights in the loan agreements. The Court
concludes that the securitization agreements are not necessarily embraced by the
pleadings, and therefore does not consider them at this stage in the proceeding.8

8

Defendants also argue that these agreements are properly considered at the pleading
stage because they are public records filed with the SEC. The Court nevertheless declines to
consider the documents at this stage, because Defendants rely on them to prove the truth of their
contents in order to prevail on a fact dispute with RFC over whether RFC has assigned the rights
it asserts here to third-party investors. See Lovelace v. Software Spectrum Inc., 78 F.3d 1015,
(Footnote continued on next page.)

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However, even if the Court were to consider the third-party agreements, the Court
would conclude that they raise factual issues that are not properly resolved at this
pleading stage.

At a minimum, the language from the portion of the agreement

referenced by PNC does not unambiguously support Defendants’ position. Although it
states that “RFC hereby assigns . . . all of RFC’s rights and obligations under the Seller
Contracts with respect to the Mortgage Loans,” it later includes a disclaimer “that,
notwithstanding the assignment and assumption hereunder, RFC shall have the
concurrent right to exercise remedies and pursue indemnification upon a breach by a
Seller under any Seller Contract of any of its representations and warranties.” (Gottlieb
Decl., Ex. 8 at 10, ¶ 6.) The Court cannot conclude that this language, which PNC points
to as an example of the assignments, deprives RFC of standing to assert rights under the
Agreements. Cf. Maniolos v. United States, 741 F. Supp. 2d 555, 567 (S.D.N.Y. 2010),
aff’d, 469 F. App’x 56 (2d Cir. 2012) (“[W]hen the language of a contract is ambiguous,
its construction presents a question of fact, which of course precludes summary dismissal
on a Rule 12(b)(6) motion.” (internal quotations omitted)). The Court concludes that

____________________________________
(Footnote continued.)

1018 (5th Cir. 1996) (adopting rule that public SEC documents may be considered “only for the
purpose of determining what statements the documents contain, not to prove the truth of the
documents’ contents”); see also Hennessy v. Penril Datacomm Networks, Inc., 69 F.3d 1344,
1354 (7th Cir. 1995) (“Given that there was considerable argument over the significance of the
10–K form, the judge properly found that its contents were subject to dispute.”). To the extent
that Defendants argue that these documents are not intended to prove that RFC does not have
standing, but rather to illustrate that RFC has failed to adequately allege that it has standing, that
is a distinction without a difference.

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RFC has plausibly alleged that it has standing to assert its rights in the Agreements
against Defendants.

IV.

ADEQUACY OF THE PLEADINGS
A.

Breach of Contract

Defendants argue that RFC has failed to allege specific facts that adequately state
a claim for breach of contract. In essence, they argue that, while RFC’s complaints allege
generally that loans it purchased from lending institutions were likely defective and
partially responsible for the lawsuits by third-parties for which RFC has now resolved in
a $10 billion settlement, RFC’s allegations fail to specifically allege that the individual
loans it purchased from Defendants caused any of RFC’s injuries.

Defendants’

arguments focus on the level of detail of the allegations with regard to the defects in the
loans in many respects. First, they argue that RFC fails to identify the loans in a way that
allows Defendants to identify the loans because in the attachments to the complaints RFC
uses the identifying loan numbers that RFC has assigned to the loans, not the numbers
that the Defendants used. Second, they argue that RFC’s allegations fail to identify the
contracts that Defendants allegedly breached, because different versions of the Client
Guide were in effect at different times, and RFC does not indicate what language from
each Client Guide applies to each allegedly defective loan. Third, they argue that RFC’s
allegations fail to identify which representations and warranties were violated with regard
to loans, or how Defendants had violated them.

Finally, they argue that RFC’s

allegations fail to identify how Defendants or any of their alleged conduct caused any of

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the damages RFC alleges it suffered. Defendants argue that without allegations of these
details with regard to each allegedly defective loan, RFC has not provided them with
adequate notice of the claims against them and has failed to plausibly allege that
Defendants breached any loan sale Agreements in a way that actually caused RFC injury.
RFC argues that its allegations suffice to state claims against Defendants for
breach of contract, because it is not necessary to plead with specificity with regard to
each individual loan it alleges is defective. Rather, it argues that its pleadings adequately
give rise to a plausible inference that Defendants breached their contracts with RFC if it
both gives examples of the types of defects in the loans and includes allegations making
it plausible that the defects were widespread. It argues that it has adequately pleaded as
much because the complaint and exhibits list which loans are at issue (see, e.g.,
Community West Compl., Ex. C), how the loans are defective and which contract
provisions those defects violate, that these defects were widespread, and how they
harmed RFC. RFC also argues that case law indicates that loan-level allegations are not
required to survive a motion to dismiss. In particular, it points to Ace Securities Corp.
Home Equity Loan Trust, Series 2007-HE3 ex rel. HSBC Bank USA, Nat. Association v.
DB Structured Products, Inc. (“Ace Securities”), Civ. No. 13-1869, 2014 WL 1116758
(S.D.N.Y. Mar. 20, 2014), an action brought by trusts which had purchased
securitizations against the sponsor of those securitizations – so akin to the third-party
investors here bringing an action against RFC. There, the plaintiff alleged that the
defendant failed to repurchase loans which would have been eligible for repurchase on
account of defects that violated representations and warranties the defendant made to
- 27 -

plaintiffs. Id. at *1-4. The relevant contract required the plaintiff to send a notice to the
defendant whenever it discovered a breach of representations and warranties. Id. at *4.
Some of the notices were included in the pleadings, and “provided, for each loan as to
which a breach had been identified, the loan number, the specific representations and
warranties that had been breached, the specific subsections of the MLPA setting forth
those representations and warranties, and a description of the facts establishing the
breaches.”

Id.

The court held that the plaintiff’s allegations sufficed to meet the

plausibility standard in Twombly and Iqbal, observing that “a complaint for repurchase
need not contain specific allegations regarding each loan at issue,” and that “many courts
have accepted statistical ‘sampling’ as a means of demonstrating liability.” Id. at *13 &
n.9.
Defendants argue that Ace Securities does not help RFC here because it is a
different kind of case – one by investors against the sponsor of securitizations rather than
a case by the sponsor against loan originators – and while sampling may be acceptable in
an RMBS securitization case, it is not here, where Defendants sold individual loans rather
than securitizations to RFC. Defendants further argue that, even if the court’s holding in
Ace Securities that loan-level allegations are not necessary applies here, the allegations
there were far more detailed than those here, as the notices with specific information
about many of the loans at issue were included in the pleadings. The Court recognizes
the distinction between an RMBS case against a securitization sponsor as in Ace

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Securities and RFC’s claims against the loan originators, and thus does not find that case
to be dispositive of whether loan-level allegations are necessary here.9
Instead, examining RFC’s allegations in light of the elements of a breach of
contract claim under Minnesota law, the Court concludes, drawing on “its judicial
experience and common sense,” Iqbal, 556 U.S. at 679, that RFC’s allegations here
adequately give rise to a plausible inference that Defendants breached the representations
and warranties in its loan sale Agreements with RFC without loan-level allegations.
Residential Funding Co., LLC v. Broadview Mortgage Corp., Civ. No. 13-3463, 2014
WL 4104819, at *5 (D. Minn. Aug. 19, 2014) (“RFC will not be required to plead with
loan-by-loan specificity in the cases at issue here. Requiring such specificity in cases
involving hundreds or thousands of loans contravenes the requirement of pleading a
‘short and plain statement’ of claims.” (quoting Fed. R. Civ. P. 8(a)).
To adequately plead a cause of action for breach of contract under Minnesota law,
a plaintiff must show (1) formation of a contract, (2) performance by the plaintiff of any
conditions precedent, (3) breach of the contract by defendants, and (4) damages. General
9

Plaintiffs also point to Oklahoma Police Pension & Retirement System v. U.S. Bank
National Ass’n, 291 F.R.D. 47 (S.D.N.Y. 2013), another RMBS case in which investors sued the
trustee for fourteen RMBS trusts. Id. at 51-52. As in Ace Securities, the court denied the
defendant’s motion to dismiss, observing that plaintiffs “allege[d] that there have been
significant losses in the Covered Trusts, that the mortgage files were riddled with document
deficiencies, that federal and state investigators have uncovered widespread abuses in such files,
and that there were numerous document deficiencies found in the public records of the
foreclosures on two of the Covered Trusts,” and further finding sufficient plaintiff’s allegations
that the trusts “performed extremely poorly, that there is documented evidence of irregularities in
other, similar trusts, and that the seller repurchased less than 1% of the mortgage loans in the
Covered Trusts.” Id. at 66-67, 69. Like Ace Securities, the claims at issue in Oklahoma Police
Pension & Retirement System are distinct enough from those at issue that the Court does not find
the reasoning there to be dispositive with regard to the adequacy of RFC’s allegations here.

- 29 -

Mills Operations, LLC v. Five Star Custom Foods, Ltd., 703 F.3d 1104, 1107 (8th Cir.
2013). The parties do not dispute the first two elements. Looking to whether RFC has
adequately alleged that Defendants breached their Agreements with RFC, the Court
concludes that RFC has adequately alleged which provisions Defendants breached and
how it breached them. It is sufficient that RFC alleges that Defendants breached the
representations and warranties provisions of the Client Guide and listed specific
examples of the representations and warranties it breached. (See, e.g., Community West
Compl. ¶ 24.) To the extent that Defendants argue that this is inadequate because RFC
does not allege specifically which representations and warranties were false with respect
to each individual loan, as the Court explains below, that level of specificity is not
necessary to bring these allegations past “the line between possibility and plausibility of
‘entitlement to relief.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557).10

10

Defendants also argue that RFC’s breach of contract allegations are inadequate because
RFC does not distinguish between the various versions of the Client Guide nor indicate which
version of the Client Guide applies to which loan. RFC attached excerpts of the Client Guide to
its complaints (see, e.g., Community West Compl., Ex. B) and alleges that “[t]he complete
versions of the Client Guide are known to the parties and too voluminous to attach in their
entirety,” but that “the omitted portions of the Client Guides do not affect the obligations set
forth in this Amended Complaint.” (Id. ¶ 18.) RFC has adequately alleged that the Client Guide
provides the relevant representation and warranties terms, and Defendants do not challenge their
facial validity. Rather, counsel for Standard Pacific indicated at oral argument that RFC’s
excerpting of the Client Guide was problematic for Standard Pacific because it no longer had in
its possession the Client Guides it agreed to for the loan sales to RFC. This is a problem and
dispute for discovery and later stages in this proceeding, not the pleading stage, the purposes for
which RFC’s allegations suffice.
PNC also argues that RFC’s allegations about the applicability of the Client Guide is
faulty because Commitment Letters, which were also part of the loan sale Agreements and which
controlled over the Client Guide in the event of a conflict, state that the loans were governed by
the seller’s underwriting guidelines, not RFC’s. (See PNC Docket, Mem. in Supp. of Mot. to
(Footnote continued on next page.)

- 30 -

RFC has also plausibly alleged how Defendants breached the representations and
warranties. It lists examples of defective loans for each Defendant in each complaint,
explaining how those example loans breached representations and warranties. (See, e.g.,
Community West Compl. ¶ 43(a); Homestead Docket, Am. Compl. ¶ 43(a).) Defendants
make various arguments as to why these examples are faulty, including, for example, that
they have already been repurchased, were sold before May 14, 2006, or are simply too
few to support plausible allegations that other loans were similarly defective. But RFC
includes extensive other allegations that support a plausible inference that the types of
problems identified in the examples are widespread. It alleges that the loans it purchased
from Defendants had high delinquency and default rates – higher than what would have
been expected in a normal population of loans – and that many of the loans defaulted
shortly after origination, which “is widely recognized in the industry as often signaling
fraud or other problems in the origination and underwriting of the loans.” (Community
West Compl. ¶¶ 39-40, 42.) It also alleges that it undertook its own internal review,
which determined that many of the loans sold to RFC by Defendants violated the Client
Guide and other representations and warranties. (Id. ¶ 41.) Furthermore, RFC alleges
that with the loans at issue, it sought repurchase of loans from Defendants at higher rates
than average. For example, RFC alleges that it “ordinarily received a limited number of
repurchase demands,” but that in 2007 it began to receive repurchase demands and
____________________________________
(Footnote continued.)

Dismiss at 15, Apr. 25, 2014, Docket No. 49.) The Court accepts as true RFC’s allegation that
the Client Guide governed the loan sales at this pleading stage. PNC’s challenge to the accuracy
of that allegation must wait for later stages in this proceeding.

- 31 -

repurchased over $340,000 worth of loans from a bank affiliated with PNC. (PNC
Docket, Am. Compl. ¶¶ 51-52.) Taken as a whole, these allegations support a plausible
inference that defects such as those listed in the example loans in each complaint were
widespread. Cf. Broadview Mortgage, 2014 WL 4104819, at *6 (“The higher than
normal delinquency and default rates of Defendants’ loans plausibly demonstrate a
failure in underwriting procedures.”); but see Residential Funding Co., LLC v. Embrace
Home Loans, Inc., Civ. No. 13-3457, 2014 WL 2766114, at *5 (D. Minn. June 18, 2014)
(“RFC is asking the Court to make a leap: some of Embrace’s loans sustained losses or
went into early default, therefore Embrace breached its representations and warranties.
This leap is unsupported by the facts pled.”). RFC has adequately alleged that, by selling
loans with these types of defects, Defendants breached the representations and warranties
in the Client Guide.
Finally, RFC has also adequately alleged that these breaches caused the losses
RFC has faced and continues to face on account of its liability to trusts and third-party
investors. RFC alleges that its RMBS offerings “included a number of RMBS that
became the subject of more than a dozen lawsuits brought by investors and other
participants in the securitizations, alleging that an abnormally high percentage of the
loans contained in the RMBS offerings were defective in one or more ways.” (PNC
Docket, Am. Compl. ¶ 50.) On this point, Defendants similarly argue that RFC has failed
to specifically allege how the loans that each of them sold to RFC caused the loss to the
securitization trusts, particularly where the loans from each Defendant may have
amounted to a very small percentage of the loans in any given securitization. This
- 32 -

argument is best left for later stages in the proceeding – whether the effect of defects in a
very small number of loans in the context of a securitized batch of loans is enough to
cause any loss suffered by the security as a matter of law is a fact-specific inquiry. The
Court declines this invitation to convert this causation of damages question to one for
summary judgment. Where RFC has plausibly alleged that the loans that Defendants sold
contained defects that violated the representations and warranties and that it was sued on
account of securitizations, where high percentages of the loans in the securitizations were
defective, it has adequately alleged that defects in Defendants’ loans caused the losses
RFC now faces.11

B.

Indemnification

Defendants also argue that RFC has failed to adequately allege a claim for
indemnification. In making this argument, Defendants reiterate arguments they made
with regard to the damages element in RFC’s breach of contract claim – for example, that
RFC fails to plead how defective loans from Defendants caused RFC’s losses, which is
required by the indemnification clause in the Client Guide. The Court, as explained
above, finds that the sum of RFC’s pleadings suffice to allege that Defendants’ defective

11

At oral argument, counsel for Defendants informed the Court that they had received
voluminous documents the week before the hearing, allegedly listing additional loans.
Defendants argued that these filings undermine the adequacy of RFC’s pleadings because the
loans in the new documents do not match the lists of loans attached in exhibits to the complaint.
RFC explained that it submitted the documents to Defendants as part of voluntary discovery and
therefore was not improper, nor does it alter the pleadings in the complaint. The Court does not
consider the apparent submission of these documents, which were not provided to it and which it
has not reviewed, as either improper or altering its analysis of the adequacy of RFC’s pleadings.

- 33 -

loans caused RFC’s losses, even when those loans were combined with many others in
securitizations and may have accounted for only a small portion of the security.
Defendants also argue that RFC’s allegations fail to account for the possibility of RFC’s
wrongdoing and amount to fraud allegations, neither of which would entitle it to
indemnification under the Client Guide. But this argument ignores the standard of review
on a motion under Rule 12(b)(6) – the Court accepts RFC’s allegations as true. If
Defendants believe there are facts indicating that RFC is not, in fact, entitled to the relief
it seeks, they should raise those arguments at later stages in this proceeding. The Court
concludes that RFC has alleged a plausible claim for relief for indemnification.

ORDER
Based on the foregoing, and the records, files, and proceedings herein, IT IS
HEREBY ORDERED that Defendants’ Motions to Dismiss [Civ. No. 13-3468, Docket
No. 38; Civ. No. 13-3498, Docket No. 47; Civ. No. 13-3520, Docket No. 30; Civ. No.
13-3526, Docket No. 49] are DENIED in part and GRANTED in part as follows:.
1.

The motions are DENIED with respect to Count II and with respect to

Count I for loans sold on or after May 14, 2006.
2.

The motions are GRANTED with respect to Count I for loans sold before

May 14, 2006.

Count I with respect to the loans sold before May 14, 2006, is

DISMISSED with prejudice.
DATED: October 14, 2014
at Minneapolis, Minnesota.

____s/
____
JOHN R. TUNHEIM
United States District Judge

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