ResCap Liquidating Trust v. Equifirst Corporation et al

Filing 88

MEMORANDUM AND ORDER: IT IS HEREBY ORDERED that Defendants' Motion to Dismiss is DENIED 35 . (Written Opinion) Signed by The Hon. Paul A. Magnuson on 08/20/2015. (LLM)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

ResCap Liquidating Trust,

Civ. No. 15-1569 (PAM/HB)
Plaintiff,

v.

MEMORANDUM AND ORDER

EquiFirst Corporation, and
EFC Holdings Corporation,
Defendants.

This matter is before the Court on Defendants’ Motion to Dismiss Plaintiff ResCap
Liquidating Trust’s Complaint. For the reasons that follow, the Motion is denied.
BACKGROUND
Plaintiff ResCap Liquidating Trust is the successor to Residential Funding Company.
(The Court will refer to Plaintiff as ResCap but, when appropriate, will refer to the evidence
as pertaining to RFC.) This case is one of nearly 100 similar lawsuits ResCap has brought
in this District. As in all of the other cases, ResCap alleges that the mortgages Defendant
EquiFirst Corporation and its parent, Defendant EFC Holdings (collectively “EquiFirst”),
sold to RFC, and which RFC aggregated into mortgage-backed securities, were defective and
did not comply with the underwriting and originating standards in the parties’ agreements,
known as “Client Guides.” According to the Complaint, Defendants sold more than 83,000
loans to RFC over the course of the parties’ relationship, with an original total principal
balance of more than $12 billion. (Compl. ¶ 6.) Neither EquiFirst nor EFC are still in

business, both having filed for dissolution in 2010. (Id. ¶ 18.) The loans at issue were sold
between 1997 and 2007. (Id. Ex. C.)
The Complaint here, like those in all of the other ResCap and RFC actions, consists
of two claims: breach of contract and indemnification. And despite EquiFirst’s insistence
that this case is different from all of the others, the arguments in the Motion are identical to
the arguments made in the motions to dismiss in the other cases pending before this Court.
EquiFirst acknowledges that “some” judges in this District have denied motions to dismiss
on the identical bases EquiFirst raises here, but offers no argument or legal authority for its
belief that “these decisions are incorrect.” (Defs.’ Supp. Mem. (Docket No. 37) at 12 n.12.)
DISCUSSION
As noted, EquiFirst sold more than 80,000 mortgage loans to RFC from 1997 to 2007.
Some of these loans were aggregated into mortgage-backed securities, and indeed EquiFirst
sold so many loans to RFC that some of RFC’s mortgage-backed securities consisted only
of EquiFirst loans, or so-called “single-seller securitizations.” (Compl. ¶¶ 26-27.) Unlike
the allegations in the Embrace, Circle, and Cadence matters, however, it does not appear that
RFC retained any EquiFirst loans or that RFC sold any of EquiFirst’s loans as whole loans.
RFC reviewed all of the EquiFirst loans that RFC securitized using an automatedvalue model (“AVM”) and the borrowers’ tax records. The findings revealed by this review
showed that more than 50% of the loans EquiFirst sold to RFC had at least one defect. (Id.
¶ 50.) A list of those defective loans is attached to the Complaint at Exhibit E.

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EquiFirst raises two arguments in support of its Motion, both of which have been
raised in nearly every other similar case and all of which have been rejected in every case.
First, EquiFirst argues that the breach-of-contract claim is untimely and that all the decisions
in this District holding otherwise, on the basis of the breach-of-continuing-obligations theory,
are “incorrect.” EquiFirst’s second argument is that ResCap has not adequately alleged
causation between the alleged breaches of representations and warranties and ResCap’s
losses. This Court has previously rejected both of these arguments. Residential Funding Co.,
LLC v. Embrace Home Loans, Inc., No. 13cv3457, 2015 WL 1275340, at *3-4 (D. Minn.
March 19, 2015); ResCap Liquidating Trust v. Cadence Bank, N.A., No. 14cv3926, 2015
WL 3616064, at *2 (D. Minn. June 9, 2015). EquiFirst has offered no reason not to do the
same here.
EquiFirst points to a June 2015 decision from the New York Court of Appeals in
support of its argument that ResCap cannot rely on an alleged breach of a continuing
obligation to extend the statute of limitations. ACE Sec. Corp. v. DB Structured Prods., Inc.,
No. 85, 2015 WL 3616244 (N.Y. Ct. App. June 11, 2015) (slip op.). In ACE, the New York
court found that a breach of contract claim alleging breaches of representations and
warranties such as that raised by ResCap here accrues at the time the contract is signed and
is not subject to the continuing-obligation theory on which ResCap relies here. Id. But
EquiFirst acknowledges that the contracts at issue are not governed by New York law.
(Defs.’ Reply Mem. (Docket No. 75) at 3 n.4.) Thus, to the extent this opinion has any
relevance at all, it is as persuasive authority, nothing more.
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But as EquiFirst knows, every Judge in this District to have faced similar allegations
regarding a breach of a continuing obligation has determined that these allegations create at
least a fact issue as to whether the statute of limitations bars the duty-to-notify claim, making
dismissal inappropriate. See, e.g., Residential Funding Co., LLC. v. CTX Mortg. Co., LLC,
No. 14-cv-1710, 2015 WL 3408784, at *2 (D. Minn. Jan. 23, 2015) (Doty, J.) (finding
allegations that defendant breached its continuing obligations sufficient to survive a motion
to dismiss); Residential Funding Co., LLC v. Academy Mortg. Corp., No. 13-cv-3451, 2014
WL 5860566, at *12 (D. Minn. Nov. 12, 2014) (Nelson, J.) (finding breach-of-warranty
allegations “plausible” and sufficient to state a claim for timely breaches); accord, e.g.,
Residential Funding Co., LLC v. Gateway Bank, F.S.B., No. 13-cv-3518, 2014 WL 3952321,
at *16 (D. Minn. Aug. 13, 2014) (Davis, C.J., adopting recommendation of Mayeron, M.J.).
At this preliminary stage of the litigation, ResCap has sufficiently pled a breach of
EquiFirst’s continuing obligation to notify RFC of the defects in its loans. ResCap may
pursue its breach-of-warranty claim as to loans sold before May 14, 2006. EquiFirst is free,
of course, to raise this issue again, and if ResCap “is unable to demonstrate violations of a
legally-sound continuing obligation, its claims as to those loans will be dismissed.”
Residential Funding Co., LLC v. Broadview Mortg. Corp., No. 13-cv-3463, 2014 WL
4104819, at *7 (D. Minn. Aug. 19, 2014) (Montgomery, J.).

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CONCLUSION
EquiFirst has not established that the Complaint fails to state a claim on which relief
can be granted. Accordingly, IT IS HEREBY ORDERED that Defendants’ Motion to
Dismiss (Docket No. 35) is DENIED.

Dated: August 20, 2015

s/ Paul A. Magnuson
Paul A. Magnuson
United States District Court Judge

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