CMFG Life Insurance Company v. UBS Securities, LLC
Filing
57
ORDER granting 42 Motion to Alter or Amend Judgment and for Leave to Amend the Complaint; granting 50 Motion for Judicial Notice; denying 55 Motion to Stay. Signed by District Judge William M. Conley on 8/5/15. (jat)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN
CMFG LIFE INSURANCE COMPANY,
Plaintiff,
OPINION & ORDER
v.
13-cv-576-wmc
UBS SECURITIES, LLC,
Defendant.
CMFG Life Insurance Company (“CUNA Mutual”) brought this lawsuit to rescind
its purchase of a single, residential mortgage-backed security (“RMBS”) from defendant
UBS Securities, LLC (“UBS”). UBS responded with a motion to dismiss the rescission
claim as untimely under Wisconsin’s six-year statute of limitations for actions upon
contract. See Wis. Stat. § 893.43. In reply, CUNA Mutual argues that this court should
apply the six-year statute of limitations for actions grounded in fraud, which would give
plaintiff the benefit of a discovery rule. See Wis. Stat. § 893.93(1)(b).
On July 1, 2014, the court granted UBS’s motion, holding first that CUNA Mutual
had only sought rescission based on negligent or strict responsibility misrepresentation. The
court further held that although Wisconsin case law surrounding the question was less than
clear and even inconsistent, claims for relief “on the grounds of fraud” did not encompass
claims
for
contractual
rescission
based
on
negligent
or
strict
responsibility
misrepresentations, but rather required allegations of intentional misrepresentation. (See July
1, 2014 Opinion & Order (dkt. #40) 2-12.)
In so holding, the court rejected CUNA
Mutual’s attempt to pursue a so-called “miscellaneous” action that might benefit from the
discovery rule as a “tort,” while simultaneously evading the economic loss doctrine. (Id. at
11 n.11.) In a footnote, however, the court observed that perhaps CUNA Mutual could
amend its complaint to allege claims for rescission on the grounds of intentional
misrepresentation, since at least some case law supported the application of Wis. Stat.
§ 893.93(1)(b) -- and its corresponding discovery rule -- to such claims. (Id. at 12 n.13.)
The court then entered judgment and closed this case. (Dkt. #41.)
Predictably enough, CUNA Mutual has since moved to alter or amend the judgment
and seeks leave to amend its complaint to assert claims for rescission on the ground of
intentional misrepresentation. (Dkt. #42.) “Leave to amend a complaint should ‘be freely
given when justice so requires.’”
Barry Aviation Inc. v. Land O’Lakes Municipal Airport
Comm’n, 377 F.3d 682, 687 (7th Cir. 2004) (quoting Fed. R. Civ. P. 15(a)). “Unless it is
certain from the face of the complaint that any amendment would be futile or otherwise
unwarranted, the district court should grant leave to amend after granting a motion to
dismiss.” Id.; see also Bausch v. Stryker Corp., 630 F.3d 546, 562 (7th Cir. 2010) (“[W]hile a
court may deny a motion for leave to file an amended complaint, such denials are
disfavored.”). For this reason, “[d]istrict courts routinely do not terminate a case at the
same time that they grant a defendant’s motion to dismiss; rather, they generally dismiss
the plaintiff’s complaint without prejudice and give the plaintiff at least one opportunity to
amend[.]” Foster v. DeLuca, 545 F.3d 582, 584 (7th Cir. 2008).
Here, the court terminated the case the same day that it dismissed CUNA Mutual’s
complaint as time-barred, but failed to make any finding that amendment would be “futile
or otherwise unwarranted.” Since Seventh Circuit case law suggests that the court should
instead have given CUNA Mutual an opportunity to cure the deficiencies under these
circumstances, its failure to do so constitutes grounds for relief under Rule 59(e). See Foster,
2
545 F.3d at 584. Nevertheless, UBS opposes the motion, arguing that CUNA Mutual has
not met its “heavy burden” under Rule 59(e) for a variety of reasons, each of which the
court addresses below.
I.
Right to Amend
Unlike the plaintiff who was denied an opportunity to amend as of right in Foster,
USB initially asserts that CUNA Mutual failed to amend within 21 days of UBS’s Rule
12(b)(6) motion, thereby waiving its right to amend without leave.
Fed. R. Civ. P.
15(a)(1)(B).1 The court is not, however, persuaded that this matters here. While CUNA
Mutual did not amend within 21 days of receiving the motion to dismiss, it still could have
amended, had the court not summarily entered judgment and closed the case, by availing
itself of Rule 15(a)(2) and seeking the court’s leave, which is to be given freely “when justice
so requires.”
Relying on the Seventh Circuit’s decision in Adams v. City of Indianapolis, 742 F.3d
720 (7th Cir. 2014), UBS also argues that CUNA Mutual has already amended its
complaint once. In Adams, the court held that the line of cases allowing one chance to
replead did not apply where the plaintiff had already amended its complaint once before. Id.
But CUNA Mutual’s initial amendment was in response to an early order from this court,
which directed CUNA Mutual to plead diversity jurisdiction properly. That amendment
1
UBS has also moved for the court to take judicial notice of a slip opinion in another RMBS case in
the Central District of California and the prospectus and prospectus supplement for the MASTR
Alternative Trust 2006-2 at issue in this action. (Dkt. #50.) CUNA Mutual does not oppose the
motion to the extent that the court takes judicial notice only of the fact that these publicly-available
documents exist. (See dkt. #52.) The court agrees with CUNA Mutual that judicial notice of the
truth of the facts asserted in those documents would be inappropriate at this stage, but will grant the
motion to the extent of taking note of and considering the non-binding RMBS decision, and
recognizing the existence of the other documents. Cf. CMFG Life Ins. Co. v. RBS Secs. Inc., No. 12cv-037-wmc, 2013 WL 4483068, at *1 & n.2 (W.D. Wis. Aug. 19, 2013).
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had nothing to do with the merits of this case, and certainly not with the statute of
limitations issues that ultimately resulted in dismissal. Indeed, the parties agreed that the
only change effected by the previous amendment was to properly allege the citizenship of
defendant UBS. (See Stipulation (dkt. #37).) It would be unjust to base a denial of relief
purely on an amendment that was limited to the issue of diversity jurisdiction per court
order.
Moreover, the plaintiffs in Adams had missed the court-imposed deadline to amend
the pleadings. Adams, 742 F.3d at 734. In contrast, CUNA Mutual may have missed the
January 31, 2014, deadline to amend its pleadings without leave of court (see Scheduling Order
(dkt. #33) 1), but it did not miss a cutoff for amendments to the pleadings made with leave.2
Finally, the Adams court separately determined that the proposed amendment would have
been futile.
II.
Timeliness
UBS next faults CUNA Mutual for its delay in bringing the motion to amend.
According to UBS, CUNA Mutual could have -- and should have -- moved to amend as soon
as it was alerted to the insufficiencies in its pleadings. While there is more merit to this
argument, the court itself recognized that the law surrounding the asserted statute of
limitations defense was tangled and difficult to parse.
CUNA Mutual arguably lacked
sufficient reason to believe that asserting a claim for contractual rescission based on
intentional misrepresentation might cure the asserted deficiencies in its complaint until the
2
This fact also undermines UBS’s argument that CUNA Mutual must demonstrate “good cause” to
modify the scheduling order under Rule 16(b)(4). A deadline for amendments without leave of court
does not apply to amendments later made with the court’s leave. See Grand River Enters. Six Nations
Ltd. v. VMR Prods. LLC, No. 13-cv-104-wmc, 2014 WL 2434517, at *1 n.2 (W.D. Wis. May 29,
2014).
4
court’s order on the motion to dismiss issued. This differentiates any delay on CUNA
Mutual’s part from that in Alioto v. Town of Lisbon, 651 F.3d 715 (7th Cir. 2011), where the
complaint was deficient because it failed to state a claim -- meaning the allegedly unknown
deficiency was a “matter[] of hornbook civil procedure law.” Id. at 720. This case is also
unlike Wicke v. L & C Insulation, Inc., No. 12-cv-638-wmc, 2013 WL 5570323 (W.D. Wis.
Oct. 9, 2013), where plaintiffs twice amended their complaint without curing a deficiency
already identified by defendant. Id. at *2.
Ultimately, CUNA Mutual’s delay appears to be more a function of the current state
of the law, rather than a strategic choice to “hold back” its intentional misrepresentation
claim, particularly since at least one case cited by UBS suggested that alleging a rescission
claim based on intentional misrepresentations would not cure the deficiency. See Kindschuh
v. City of Fond du Lac, No. 09-C-214, 2010 WL 1507883, at *5-6 (E.D. Wis. Apr. 14, 2010)
(applying § 893.43).
Accordingly, CUNA Mutual was entitled to attempt to cure the
deficiency in its complaint, something the court’s simultaneous dismissal of the complaint
and entry of judgment prevented.
III.
Futility
Finally, UBS argues that an amendment to add a claim for rescission would still be
barred by the six year statute of limitation for breach of contract, including one grounded in
intentional fraud. As support, UBS cites again to Kindschuh, as well as Dairyland Power
Cooperative v. Amax Inc., 700 F. Supp. 979 (W.D. Wis. 1986).
The latter case is inapposite. The Dairyland court applied the contract statute of
limitations to a claim for rescission, but expressly noted that “[f]raud does not form the
5
gravamen of plaintiff’s complaint. Instead, plaintiff’s suggestion of fraud appears to be an
afterthought motivated by the need to rescue its unconscionability claim.” 700 F. Supp. at
992-93.
Kindschuh is more directly applicable, since it concerns the application of the contract
statute of limitations to a claim for rescission grounded on intentional misrepresentations,
2010 WL 1507883, at *6, but as Judge Randa recognized in his decision in a parallel case,
CMFG Life Insurance Company v. Morgan Stanley & Co., LLC (Notice of Supplemental
Authority Ex. A (dkt. #53-1) 3), the Kindschuh decision at best raises an inconsistency in
the way the law has been applied.
Moreover, this court agrees with Judge Randa that
§ 893.93(1)(b) applies to intentional misrepresentation claims. Judge Randa’s conclusion is
consistent with Owen v. Wangerin, 985 F.2d 312 (7th Cir. 1993), which applied the fraud
statute of limitations to “a claim that appears to have blended tort and contract by seeking
both rescission and damages,” and Koehler v. Haechler, 27 Wis. 2d 275, 276, 133 N.W.2d
730 (1965), which applied the fraud statute of limitations “to an action for contractual
rescission where the plaintiff implicitly, if not explicitly, alleged intentional ‘fraud.’”3 (July
1, 2014 Opinion & Order (dkt. #40) 6.)
As Judge Randa recognized, the pursuit of rescission as a remedy “means that the
claim doesn’t run afoul of the economic loss doctrine.” (Notice of Supplemental Authority
3
UBS suggests that Koehler actually involved a tort claim, rather than a claim for rescission, although
the case syllabus states that the plaintiff sought rescission and nothing in the remainder of the
opinion raises any reason to doubt it. See Koehler, 27 Wis. 2d at 276. UBS also suggests that the
parties did not dispute the applicable statute of limitations in Koehler, but the only case supporting
UBS’s position, Kindschuh, likewise did not involve a dispute as to the applicable statute of
limitations. UBS also argues that the Wisconsin Legislature would have expressly excluded rescission
claims based on fraud in the text of § 893.43 if they wanted a different statute of limitations to
apply, as was done for actions on consent decrees, but it would make little sense to expect crossreferencing to claims that would normally fall under a different statutes of limitations, as would
intentional fraud.
6
Ex. A (dkt. #53-1) 3 (citing Harley-Davidson Motor Co., Inc. v. Powersports Inc., 319 F.3d 973,
987 (7th Cir. 2003)).) And Kaloti Enterprises, Inc. v. Kellogg Sales Co., 2005 WI 111, 283
Wis. 2d 555, 699 N.W.2d 205, is not to the contrary. Even if Kaloti narrowed the fraud in
the inducement exception to the economic loss doctrine further than Harley-Davidson, the
economic loss doctrine still applies only to tort claims. “[I]ts purpose is to preserve the
distinction between contract and tort by requiring transacting parties to pursue only their
contractual remedies when asserting an economic loss claim.” Kaloti, 2005 WI 111, ¶ 28.
Here, CUNA Mutual has done exactly that: it seeks to pursue rescission, a contractual
remedy, which is the outcome the economic loss doctrine is intended to encourage.
Finally, UBS contends that CUNA Mutual has not adequately pled scienter as
required by Rule 9(b).4 In particular, UBS contends that CUNA Mutual has failed to allege
facts supporting UBS’s intent to defraud with sufficient specificity. Rule 9(b)’s heightened
pleading requirement “does not extend to ‘states of mind’ which ‘may be pleaded generally’”
under the text of the rule. Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d
824, 833 (7th Cir. 2007) (citing Robin v. Arthur Young & Co., 915 F.2d 1120, 1127 (7th Cir.
1990)). However, “the complaint must still afford a basis for believing that plaintiffs could
prove scienter.” Id. (quoting Robin, 915 F.2d at 1127) (internal quotation marks omitted).
4
UBS does not otherwise contend that the proposed pleading of the “circumstances constituting
fraud” -- that is, the “who, what, when, where, and how” -- are deficient, DiLeo v. Ernst & Young, 901
F.2d 624, 627 (7th Cir. 1990), except to assert in conclusory fashion that CUNA Mutual’s proposed
pleading fails to allege any material misrepresentations, but this single-paragraph is not adequately
developed. UBS itself appears to recognize as much, stating that it will set forth this argument
“more fully in a motion to dismiss, if necessary.” (Br. Opp’n (dkt. #48) 24.) CUNA Mutual has
accordingly declined to respond. (Br. Reply (dkt. #51) 13.) Except as to scienter, the court,
therefore, defers any further discussion of the sufficiency of CUNA Mutual’s claims unless properly
raised in a later motion to dismiss.
7
CUNA Mutual’s proposed amended complaint at least meets that standard. The
complaint alleges that UBS conducted due diligence on originators of mortgage loans and
re-underwrote a random, statistically significant portion of whole-loan pools to ensure
compliance with underwriting standards. (2d Am. Compl. (dkt. #43-1) ¶ 162.) Per UBS’s
own policies, the proposed complaint further alleges that its due diligence should have
verified that the loans were issued in compliance with underwriting guidelines, as well as its
own documentation of the loans’ characteristics. (Id. at ¶ 182.) The complaint also alleges
that UBS hired and supervised Clayton Holdings LLC in re-underwriting a sample of loans
to fulfill UBS’s due diligence obligations. (Id. at ¶¶ 264-69.) Moreover, it alleges that UBS,
not Clayton, made the decision to waive non-complying loans into a final loan pool. (Id. at
¶ 271.) Finally, it alleges that ultimately UBS not only waived in 33% of non-complying
“Event 3”5 loans identified by Clayton on its behalf during the time period at issue while
declining to further assess the loan pools to identify and eliminate additional defective
loans.6 (Id. at ¶¶ 275, 277.)
CUNA Mutual has, therefore, alleged a connection between the Clayton report and
the specific loans that UBS allegedly securitized and offered for sale despite knowing, or
recklessly disregarding, the originators’ non-compliance with underwriting standards. Cf.
Republic Bank & Trust Co. v. Bear Stearns & Co., 683 F.3d 239, 256 (6th Cir. 2012)
5
“Event 3” loans are those that do not comply with underwriting standards and do not contain
sufficient compensating factors to offset the overall risk.
6
Here, unlike in some other cases, CUNA Mutual specifically alleges that Clayton graded 20% of the
loans it reviewed for UBS during this time period as Event 3 loans, and that UBS waived in 33% of
those specific loans. Thus, it is unlike cases such as Space Coast Credit Union v. Merrill Lynch, Pierce,
Fenner & Smith Inc., 295 F.R.D. 540, 547 (S.D. Fla. 2013), where the plaintiff alleged only that
Clayton had disclosed to the FDIC that investment banks in general waived in about 39% of noncomplying mortgage loans. See also Landesbank Baden-Wurttemberg v. Goldman, Sachs & Co., 478 F.
App’x 679, 681 (2d Cir. 2012) (only due diligence report identified in complaint originated after
issuance of challenged notes).
8
(dismissing claims in part because plaintiff did not “link its already-too-general allegations
to the loans underlying the certificates”). With respect to CUNA Mutual’s allegations of
misrepresented LTV ratios, the proposed amended complaint similarly alleges that UBS
“used AVMs during the due-diligence process.” (2d Am. Compl. (dkt. #43-1) ¶ 218.) The
complaint also alleges that the use of AVMs reveals significant disparities between the
percentage of loans with high LTV ratios advertised in UBS’s offering documents and the
actual percentage of loans with high LTV ratios. (Id. at ¶¶ 210-18.) Taken as a whole, this
is sufficient to afford a basis to believe that CUNA Mutual could prove UBS knew its
representations were false (or, alternatively, recklessly disregarded that possibility).7
IV.
Unjust Enrichment
UBS has better success with its argument that CUNA Mutual’s unjust enrichment
claim ought not to subject to further amendment. This court previously decided that claims
for unjust enrichment were governed by, and were untimely under, the six-year contract
statute of limitations. In response, CUNA Mutual contends that because those claims are
premised upon the same misrepresentations, they should likewise benefit from the discovery
rule. In light of precedent applying the six-year contract statute of limitations to such quasicontract claims, this court disagrees. See Servicios Especiales Al Comercio Exterior v. Johnson
Controls, Inc. No. 08-CV-1117, 2011 WL 1304922, at *2 (E.D. Wis. Apr. 1, 2011); Boldt v.
State, 101 Wis. 2d 566, 578, 305 N.W.2d 133 (1981); Stapel v. Stapel, No. 2009AP1195,
2010 WI App 120, 329 Wis. 2d 269, 789 N.W.2d 753 (per curiam) (“Recovery based on
unjust enrichment is sometimes referred to as a quasi-contract. As a claim based on
7
Whether CUNA Mutual has adequately alleged scienter with respect to the falseness of owneroccupancy statistics is less clear, but given the brevity of the parties’ arguments on that subject, the
court will defer deciding that issue for now.
9
quasicontract, a claim for unjust enrichment is subject to the six-year statute of limitations
set forth in Wis. Stat. § 893.43.”). The court also notes that CUNA Mutual failed to
address Boldt or Stapel at all in opposing the previous motion to dismiss, instead relying
entirely on its implicit argument that the fraud statute of limitations applied
indiscriminately to all its claims.
On the latter point, the court continues to find unpersuasive CUNA Mutual’s
argument that the fraud statute of limitations applies to the entire action merely because
some asserted claims turn on allegations of fraud. As UBS points out, courts routinely
apply different statutes of limitations to different claims within the same action.
Furthermore, the elements of an unjust enrichment cause of action under Wisconsin law
are: “(1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or
knowledge by the defendant of the benefit; and (3) acceptance or retention by the
defendant of the benefit under circumstances making it inequitable for the defendant to
retain the benefit without payment of its value.” Puttkammer v. Minth, 83 Wis. 2d 686, 689,
266 N.W.2d 361 (1978). Fraud is not a necessary component of such a claim, and CUNA
Mutual’s attempt to base its unjust enrichment claims on intentional misrepresentations
reads more like an endeavor to save an untimely claim. Cf. Dairyland, 700 F. Supp. at 99293. Finally, CUNA Mutual cites no case law in support of its approach -- neither a case
applying § 893.93(1)(b) to an unjust enrichment claim, nor a case applying § 893.93(1)(b)
to an entire action despite the nature of individual claims. In light of the foregoing, the
court adheres to its earlier conclusion and will deny the motion to amend with respect to
the claims for unjust enrichment.
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V.
Motion for Stay
Also pending is a motion by CUNA Mutual to stay this action pending resolution of
an appeal in a related case CMFG Life Insurance Company v. RBS Securities, No. 12-cv-037wmc. When deciding whether to stay an action, the court must “balance interests favoring
a stay against interests frustrated by the action in light of the court’s strict duty to exercise
jurisdiction in a timely manner.” Grice Eng’g, Inc. v. JG Innovations, Inc., 691 F. Supp. 2d
915, 920 (W.D. Wis. 2010) (quoting Cherokee Nation of Okla. v. United States, 124 F.3d
1413, 1416 (Fed. Cir. 1997) (internal quotation marks omitted)).
In conducting this
balancing test, courts frequently consider: (1) whether the litigation is at an early stage; (2)
whether a stay will unduly prejudice or tactically disadvantage the non-moving party; (3)
whether a stay will simplify the issues and streamline the trial; and (4) whether a stay will
reduce the burden of litigation on the court.
As CUNA Mutual contends, the eventual decision in the RBS Securities appeal may
well provide helpful guidance with respect to CUNA Mutual’s claims for rescission in this
action, which closely mirror those asserted in RBS Securities. But the court is not persuaded
that a stay is necessary at this stage of the litigation. As an initial matter, the issues on
appeal to the Seventh Circuit in RBS Securities are not likely to be dispositive of the issues in
this case at present. Indeed, CUNA Mutual does not even argue this. Furthermore, the
court will need to set a new schedule in this matter, giving the parties sufficient time for
discovery and dispositive motions, if any.
In any event, given the early stage of this
litigation, by the time many of the overlapping issues arise in this matter, the RBS Securities
decision will have already been issued.
Therefore, delaying decisions on the presently
11
pending motions would serve little purpose, while entirely preventing this matter from
progressing toward trial.
The court would certainly be willing to reconsider CUNA Mutual’s request for a stay
if: (1) an immediate issue arises that could be directly affected by the RBS Securities
decision; (2) that decision has not yet issued; and (3) that would likely streamline the issues
and reduce the burdens of litigation on the parties and court. Under those circumstances, it
may make sense to wait for the benefit of the Seventh Circuit’s direction. At present,
however, CUNA Mutual has not demonstrated that a stay is warranted. Accordingly, the
court will deny the motion, reopen this case and set it for a preliminary pretrial conference
to establish a new schedule.
ORDER
IT IS ORDERED that:
1) Plaintiff CMFG Life Insurance Company’s motion to alter or amend and for leave
to amend the complaint (dkt. #42) is GRANTED.
2) Defendant UBS Securities, LLC’s motion for judicial notice (dkt. #50) is
GRANTED.
3) Plaintiff’s motion to stay (dkt. #55) is DENIED.
4) A preliminary pretrial conference will be set to establish a new schedule in this
matter.
Entered this 5th day of August, 2015.
BY THE COURT:
/s/
________________________________________
WILLIAM M. CONLEY
District Judge
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