iFreedom Direct v. Lehman Brothers Holdings
MEMORANDUM DECISION AND ORDER granting 47 Motion to Dismiss without Prejudice. Signed by Judge Tena Campbell on 6/23/2017. (jds)
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CORPORATION fka New Freedom
LEHMAN BROTHERS HOLDINGS,
Case No. 2:15-cv-00868-TC
Judge Tena Campbell
Ushering in a world-wide economic collapse, Lehman Brothers Bank
(Lehman) declared bankruptcy in the fall of 2008. A few years before Lehman’s
bankruptcy, iFreedom Direct Corporation (iFreedom) sold and brokered mortgage
loans to Lehman which then sold the loans to Lehman Brothers Holdings, Inc.
(LBHI). As part of the transaction, iFreedom agreed to indemnify Lehman and its
assignees for any defects in the loans.
Lehman asserts that many of the loans it bought, including those from
iFreedom, were defective and lead to its downfall.
After Lehman declared
bankruptcy, LBHI and iFreedom engaged in court-ordered mediation to resolve
LBHI’s claims for indemnification. The mediation failed. Expecting LBHI to
sue, iFreedom filed a declaratory-judgment action in this court, asking for a
declaration that LBHI’s indemnification claims are time-barred. Only a few days
later, LBHI sued iFreedom and over 100 other loan sellers for indemnification in
the United States Bankruptcy Court for the Southern District of New York
(Bankruptcy Court)—the court managing Lehman’s bankruptcy. With litigation
ongoing in the Bankruptcy Court, LBHI has moved to dismiss iFreedom’s
declaratory action so the parties can litigate the issues in the Bankruptcy Court.
Because the Bankruptcy Court provides a more effective forum for resolving this
dispute, the court grants LBHI’s motion.
The Loans and the Bankruptcy
In 2004 and 2005, iFreedom sold and brokered six mortgage loans to
Lehman which Lehman then assigned to LBHI. iFreedom agreed to indemnify
Lehman and its assigns for any defects in the mortgages. LBHI packaged these
mortgages with mortgages originated by other lenders and sold them to investors,
including the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac).
Many of the
mortgages sold in this way ended in foreclosure, causing one of the largest
economic collapses in history.
Lehman filed bankruptcy in 2008.
Lehman’s bankruptcy has been
described as “the largest in American history.” Michael J. de la Merced &
Andrew Ross Sorkin, Report Details How Lehman Hid Its Woes, N.Y. TIMES,
Mar. 11, 2010, at A1. And though bankruptcies commonly present thorny and
complex issues, the complexities of Lehman’s bankruptcy are possibly
unmatched. See In re LBHI, 480 B.R. 179, 185 (S.D.N.Y. 2012) (describing the
Lehman bankruptcy as “the most complex in United States history”).
Since 2008, the Bankruptcy Court has carried the heavy burden of
managing the intricacies of the Lehman bankruptcy. LBHI, in its role as the Plan
Administrator for the Lehman bankruptcy, must liquidate the estate in a
streamlined and cost-effective manner.
The Bankruptcy’s Offshoots, Indemnification Claims, and PreLitigation Mediation
In 2009 Fannie Mae and Freddie Mac filed proofs of claim with the
Bankruptcy Court, seeking payment for losses incurred on defective mortgages
sold to them by LBHI, including the loans from iFreedom. In 2014, Lehman
settled the dispute with Fannie Mae and Freddie Mac. The Bankruptcy Court
approved the settlement.
LBHI believes its possession valuable claims against parties that sold
defective mortgage loans into LBHI’s “loan sale and securitization channels.”
(Mot. to Dismiss or Stay the Proceedings vi, ECF No. 47.) LBHI contends that
these parties must indemnify the Lehman estate for its liability to subsequent
purchasers like Fannie Mae and Freddie Mac.
LBHI calls these claims
“Indemnification Claims” and maintains that it possesses thousands of them.
LBHI argues that it has several valid Indemnification Claims against iFreedom
which were triggered when it settled with Fannie Mae and Freddie Mac.
To manage the overwhelming volume of the Indemnification Claims the
Bankruptcy Court entered an alternative-dispute-resolution order, compelling
loan sellers like iFreedom to engage in pre-litigation mediation on LBHI’s
Statute-of-Limitations Litigation by Other Parties
While LBHI and iFreedom mediated, several loan sellers moved to dismiss
LBHI’s Indemnification Claims against them, arguing that the Indemnification
Claims were time-barred.
The Bankruptcy Court rejected their statute-of-
limitations argument. See LBHI v. LHM Fin. Corp., Adv. Pro. No. 14-2393SCC, Mem. Decision Den. Mot. to Dismiss, Dkt. No. 29. It found that the statute
of limitations began to run in 2014 when LBHI settled with Fannie Mae and
Freddie Mac, making the Indemnification Claims timely. Id. The loan sellers
sought leave to appeal which the United States District Court for the Southern
District of New York denied.
See Hometrust Mortg. Co. v. LBHI, No.
15CV4060, 2015 WL 5674899 (S.D.N.Y. Sept. 25, 2015). That court determined
that “[t]here can be no ‘substantial doubt’ that . . . [the] Indemnification Claims
accrued only when” LBHI settled with Fannie Mae and Freddie Mac. Id. at *3.
In the United States Court of Appeals for the Tenth Circuit, other parties
litigated different statute-of-limitations issues. LBHI v. Universal Am. Mortg.
Co., LLC, 660 F. App’x 554 (10th Cir. 2016). There, LBHI did not assert
“indemnification as a cause of action distinct from the cause of action for breach
of contract,” unlike its Indemnification Claims asserted in the Bankruptcy Court.
Id. at 567. Rather, LBHI asserted a breach-of-contract cause of action seeking
reimbursement for the defective loans. Id. Because LBHI had not asserted a
cause of action for express contractual indemnification, the Tenth Circuit relied
on implied-contractual-indemnification principles.
It held that LBHI’s
breach-of-contract claim was time-barred. Id. at 569.
The Adversary Action and the Declaratory Action
The court-ordered mediation between iFreedom and LBHI proved
unsuccessful. With litigation on the horizon, iFreedom pre-emptively sued for a
declaratory judgment in this court in late 2015 (the Declaratory Action), asking
the court to declare that LBHI’s Indemnification Claims are time-barred and
meritless. Only a couple days after iFreedom brought the Declaratory Action, but
before it served LBHI, LBHI filed adversary proceedings against iFreedom in the
Bankruptcy Court (the Adversary Action), seeking the resolution of its
Indemnification Claims there.
Additionally, LBHI brought similar adversary
proceedings based on its Indemnification Claims against more than 100 other
iFreedom moved to dismiss the Adversary Action in the Bankruptcy Court.
Additionally, iFreedom moved the United States District Court for the Southern
District of New York to withdraw the reference to the Bankruptcy Court. But the
district court, finding that “substantial efficiencies will be gained by consolidating
the resolution of [the Indemnification Claims proceedings] in a single forum” and
that “the bankruptcy judge is familiar with the facts and law in these actions and
is better positioned . . . to hear the cases,” denied iFreedom’s motion to withdraw
LBHI v. iFreedom, 1:16-cv-00423, Order, Dkt. No. 29 at 1.
Although the Bankruptcy Court has not ruled on iFreedom’s motion to dismiss, it
recently bound iFreedom to a case-management order developed to resolve the
Indemnification Claims proceedings. See LBHI v. iFreedom, Adv. Pro. No. 1501426, Order Granting Mot. to Bind iFreedom to Existing Case Management
Order, Dkt. No 47. The Bankruptcy Court has also emphasized its belief that
“[t]he most efficient thing is for [all the adversary proceedings] to be decided
together by [the Bankruptcy Court].” (Reply in Support of Mot. to Dismiss or
Stay the Proceedings, Tr. of Hr’g, Ex. L., 19:1–3, ECF No. 53.)
Bankruptcy Court criticized what it viewed as iFreedom’s attempts to collaterally
attack its statute-of-limitations ruling by seeking a ruling from this court. (Id.)
LBHI moves the court to dismiss the Declaratory Action without prejudice.
LBHI argues that because iFreedom’s request for “declaratory relief involves the
same parties and same issues pending before the Bankruptcy Court,” the
Bankruptcy Court would serve as a more effective forum for resolving the
(Mot. to Dismiss or Stay the Proceedings vii–viii, ECF No. 47.)
Moreover, LBHI argues that the Declaratory Action is iFreedom’s attempt “to
collaterally attack the Bankruptcy Court” which “has rejected iFreedom’s statute
of limitations defense.” (Id. at viii.)
iFreedom responds that the Declaratory Action “has virtually no relation to
LBHI’s bankruptcy case” and, consequently, the Bankruptcy Court is not better
positioned. (Mem. in Opp’n to Mot. to Dismiss 1, ECF No. 51.) It also maintains
that because it filed the Declaratory Action a few days before LBHI filed the
Adversary Action, this court should apply the first-filed rule and deny LBHI’s
motion to dismiss.
The Declaratory Judgment Act states that “[i]n a case of actual controversy
within its jurisdiction . . . any court of the United States, upon the filing of an
appropriate pleading, may declare the rights and other legal relations of any
interested party seeking such declaration, whether or not further relief is or could
be sought.” 28 U.S.C. § 2201(a) (2012). If the court makes such a declaration it
“shall have the force and effect of a final judgment.” Id.
Federal courts have “unique and substantial discretion in deciding whether
to declare the rights of litigants” under the Declaratory Judgment Act. Wilton v.
Seven Falls Co., 515 U.S. 277, 286 (1995). “On its face, the statute provides that
a court ‘may declare the rights and other legal relations of any interested party
seeking such declaration.’” Id. (quoting 28 U.S.C. § 2201(a)). The statute’s
textual commitment to discretion clarifies that the Declaratory Judgment Act is
meant to “confer a discretion on the courts rather than an absolute right on the
litigant.” Id. (citation and internal quotation marks omitted). A district court has
the discretion to dismiss an action seeking a declaratory judgment based on the
“considerations of practicality and wise judicial administration.” Id.
The Tenth Circuit has adopted five factors that district courts should
consider in determining whether to exercise jurisdiction over a declaratory action.
These factors are:
 whether a declaratory action would settle the controversy; 
whether it would serve a useful purpose in clarifying the legal
relations at issue;  whether the declaratory remedy is being
used merely for the purpose of procedural fencing or to provide an
arena for a race to res judicata;  whether use of declaratory
action would increase friction between our federal and state courts
and improperly encroach upon state jurisdiction; and  whether
there is an alternative remedy which is better or more effective.
United States v. City of Las Cruces, 289 F.3d 1170, 1187 (10th Cir. 2002)
(alterations in original).
When duplicative lawsuits are pending in separate federal courts, the firstfiled suit typically has priority. However, a district court “may decline to follow
the first-to-file rule and dismiss a declaratory judgment action if that action was
filed for the purpose of anticipating a trial of the same issues in a court of
coordinate jurisdiction.” See Buzas Baseball, Inc. v. Bd. of Regents of Univ. of
Ga, No. 98-4049, 1999 WL 682883 at *3 (10th Cir. Sept. 2, 1999). The third
factor for determining whether to exercise jurisdiction over a declaratory action—
“whether the declaratory remedy is being used for the purpose of procedural
fencing or for a race to res judicata”—incorporates this exception to the first-filed
rule. See City of Las Cruces, 289 F.3d at 1187; see also Covington Specialty Ins.
Co. v. Charles A. Shadid, L.L.C., No. CIV-13-0183, 2013 WL 3923764, at *6
(W.D. Okla. July 29, 2013) (stating that the five-factor test “already takes into
account” exceptions to the first-filed rule, like whether the declaratory action was
filed in anticipation of another filing). And district courts are “afforded discretion
when deciding whether the first-to-file rule or an exception to that rule applies to
the case at hand.” ICON Health & Fitness, Inc. v. Beachbody, LLC, No. 1:11CV-00024, 2011 WL 1899390, at *2 (D. Utah May 19, 2011).
Here, the balance of all five factors weighs in favor of dismissing the
Declaratory Action in favor of the Adversary Action, and because the Declaratory
Action was filed as an anticipatory action for procedural fencing, the first-filed
rule does not apply.
The Declaratory Action may not Settle the Controversy.
The first factor the court should consider asks whether the “declaratory
action would settle the controversy.” See City of Las Cruces, 289 F.3d at 1187.
Courts favor dismissal of a declaratory action for another action when the
declaratory action “w[ould] not completely settle the controversy between the
parties.” CW Onset LLC v. Allied Ctr. For Special Surgery, San Antonio, LLC,
No. 2:14–CV–34, 2014 WL 2462547, at *3 (D. Utah June 2, 2014).
In Graceland College v. Intellectual Equities, Inc., Intellectual Equities
approached Graceland College and alleged that Graceland College was infringing
on its registered trademark. See 942 F. Supp. 1404 (D. Kan. 1996). After
receiving a “cease and desist letter,” Graceland College filed a declaratory action
in the United States District Court for the District of Kansas, asking the court to
declare that it had not infringed on Intellectual Equities’ trademark. Id. at 1405.
Three days later, Intellectual Equities sued in another district, demanding
equitable and monetary relief for Graceland College’s infringement. Id. The
District of Kansas dismissed the first-filed declaratory action in favor of the
second-filed action because the “declaratory action [would not] necessarily settle
the controversy.” Id. It explained that because the second-filed action sought
“equitable and monetary relief,” whereas the declaratory action sought only a
declaration on whether infringement had occurred, the second-filed action
“offer[ed] a better and more effective remedy . . . because that action [could]
resolve both liability and damages.” Id. at 1405–06.
Here, as in Graceland College, the Declaratory Action might not resolve
the entire controversy. Id. In the Adversary Action, LBHI seeks monetary relief
for its Indemnification Claim against iFreedom. But in the Declaratory Action
iFreedom seeks only a declaration that LBHI’s claim is time-barred and meritless.
LBHI has not filed its Indemnification Claims as counterclaims. If the court were
to disagree with iFreedom, the issue of monetary relief would not be settled.
Managing both actions simultaneously in different courts not only wastes
valuable judicial resources but also increases the potential for friction between the
Dismissing the Declaratory Action does not deprive iFreedom its
opportunity to assert its rights in court. In fact, iFreedom has made the exact
same arguments in the Adversary Action as it makes here, only in the Adversary
Action iFreedom’s arguments appear in their more natural form: as defenses.
iFreedom contends that this factor cuts the other way. It claims that this
court should exercise jurisdiction because it has requested a jury trial in the
Adversary Action, a request the Bankruptcy Court cannot grant.
argument fails for a couple of reasons. First, it says nothing about whether the
Declaratory Action will settle the controversy. Rather, it focuses only on whether
the Adversary Action will settle the controversy.
So although iFreedom’s
argument theoretically supports its conclusion that the Bankruptcy Court might
not be able to settle the entire controversy without a final order from a district
court, it says nothing about whether the Declaratory Action could settle the
controversy. Second, iFreedom already made this argument to the United States
District Court for the Southern District of New York when it sought to withdraw
the Adversary Action from the Bankruptcy Court. That court rejected iFreedom’s
argument, stating that “experience strongly suggest[s] that having the benefit of
[a] report and recommendation will save the district court and the parties an
immense amount of time.” LBHI v. iFreedom, 1:16-cv-00423, Order, ECF No.
29. The court agrees.
The Declaratory Action Might not Clarify the Legal Relations at
The second factor focuses on whether the action “would serve a useful
purpose in clarifying the legal relations at issue.” City of Las Cruces, 289 F.3d at
For the same reason described above, the court finds that this factor weighs
in favor of dismissal.
If the court were to find in LBHI’s favor, LBHI’s
Indemnification Claims would not be resolved. The court could only declare
iFreedom’s rights, which are really affirmative defenses refashioned as claims
here. It could not grant monetary relief.
The Declaratory Action Was Filed For the Purpose of Providing an
Arena for a Race to Res Judicata.
The third factor a court considers is “whether the declaratory remedy is
being used merely for the purpose of procedural fencing or to provide an arena
for a race to res judicata.” Id. When “a declaratory judgment action is triggered
by the impending filing of . . . [a] suit” the “action is a race to res judicata” and
the “[second] filed action” must be given priority. Sublimity Ins. Co. v. Hardy,
No. 2:13–CV–01022, 2014 WL 5513727, at *3–4 (D. Utah Oct. 31, 2014). The
Tenth Circuit has discouraged using declaratory actions “as yet another weapon in
a game of procedural warfare.” Hospah Coal Co. v. Chaco Energy Co., 673 F.2d
1161, 1164–65 (10th Cir. 1982).
Here, LBHI and iFreedom entered into pre-litigation mediation under the
Bankruptcy Court’s order. While the parties mediated, the Bankruptcy Court
rejected an argument raised by similarly situated loan sellers that the
Indemnification Claims were time-barred. A little while later, the Tenth Circuit
held that some of LBHI’s breach-of-contract claims against other parties were
time-barred. Once the mediation between LBHI and iFreedom failed, iFreedom
filed the Declaratory Action.
Only a couple of days later, LBHI filed the
Adversary Action. In fact, LBHI filed the Adversary Action before it had been
served with the Declaratory Action.
Given this history, the court is persuaded that iFreedom filed the
Declaratory Action for the purpose of procedural fencing. iFreedom did not
“need a weather man to know which way the wind blows.”
Subterranean Homesick Blues, Bringing It All Back Home (Columbia Records
It knew litigation was on the horizon: it had failed to resolve the
Indemnification Claims with LBHI through pre-litigation mediation. It knew the
Bankruptcy Court had rejected the statute-of-limitations argument it intended to
And it believed, though LBHI disagrees, that the Tenth Circuit had
accepted an analogous statute-of-limitations argument. Consequently, it filed the
Declaratory Action, at least in part, as an anticipatory suit for procedural fencing.
The Fourth Factor Does not Apply.
The fourth factor a court should consider is whether “use of declaratory
action would increase friction between . . . federal and state courts and improperly
encroach upon state jurisdiction.” City of Las Cruces, 289 F.3d at 1187.
This case involves no parallel state proceeding, so this factor does not
The Adversary Action Provides a More Effective Remedy
The fifth factor a court should consider is whether “there is an alternative
remedy which is better or more effective.” Id. When another court can provide
“a more comprehensive remedy, th[e] [fifth] factor . . . weighs in favor of
declining jurisdiction.” Schering Corp. v. Griffo, 872 F. Supp. 2d 1220, 1250 (D.
Here, the Bankruptcy Court has developed a case-management order
outlining a detailed plan for resolving the Indemnification Claims.
Bankruptcy Court has bound iFreedom to its case-management order.
Additionally, the Bankruptcy Court has shown an aptitude for managing such a
complex bankruptcy with all its correlative proceedings. And the Bankruptcy
Court is more familiar with the underlying facts and issues than any other court.
For these reasons, the Adversary Action provides a more effective forum for the
In sum, the balance of all five factors weighs in favor of dismissing the
Declaratory Action. And because the Declaratory Action was filed for procedural
fencing, the first-filed rule does apply.
Decisions from other courts support the court’s conclusion. In those cases,
similarly situated loan sellers filed declaratory actions asking for declarations that
LBHI’s Indemnification Claims are time-barred and meritless. In each of those
cases the court declined to exercise jurisdiction, concluding that the Bankruptcy
Court provided a better forum for resolution of these issues. See Guaranty Bank
v. LBHI, 2015-cv-00549, Court Minutes and Order, Dkt. No. 32 (E.D. Wis. May
20, 2016); Gateway Mortgage Group, LLC v. LBHI, 2016-cv-02123, Order of
Dismissal 1–2, Dkt. No. 32 (S.D. Tex. Sept. 13, 2016); Sec. Nat’l Mortg. Co. v.
LBHI, No. N16C-01-221 , 2016 WL 6396343, at *8–11 (Del. Super. Ct. Aug. 24,
2016). The court sees no reason to depart from these courts’ analysis.
For “considerations of practicality and wise judicial administration” the
court GRANTS LBHI’s motion to dismiss (ECF No. 47) and DISMISSES the
action without prejudice. Wilton, 515 U.S. at 286.
DATED this 23rd day of June, 2017.
BY THE COURT:
U.S. District Court Judge
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