Residential Funding Co. v. Ark-La-Tex Fin. Servs., LLC (In re RFC & Rescap Liquidating Trust Litig.)

In Re: RFC and ResCap Liquidating Trust Litigation

This document relates to:

Residential Funding Company, LLC v. Ark-La-Tex Financial Services, LLC

Residential Funding Company, LLC v. Academy Mortgage Corporation

Residential Funding Company, LLC v. First California Mortgage Company

Residential Funding Company, LLC v. Community West Bank, N.A.

Residential Funding Company, LLC and ResCap Liquidating Trust v. Provident Funding Associates, L.P.

Residential Funding Company, LLC v. E*Trade Bank

Residential Funding Company, LLC v. PNC Bank, N.A.

Residential Funding Company, LLC v. Branch Banking & Trust Company

Residential Funding Company, LLC v. T.J. Financial, Inc.

Residential Funding Company, LLC v. Universal American Mortgage Company, LLC

Residential Funding Company, LLC v. BMO Harris Bank, N.A. d/b/a M&I Bank, FSB

Residential Funding Company, LLC v. Wells Fargo Financial Retail Credit, Inc.

Residential Funding Company, LLC and ResCap Liquidating Trust v. Standard Pacific Mortgage, Inc.

Residential Funding Company, LLC v. iServe Residential Lending, LLC

Residential Funding Company, LLC v. CTX Mortgage Company, LLC

Residential Funding Company, LLC v. American Mortgage Network, LLC.

ResCap Liquidating Trust v. Freedom Mortgage Corporation

Residential Funding Company, LLC v. Homestead Funding Corp.

No. 13-cv-3448 (DWF/TNL)

No. 13-cv-3451 (SRN/BRT)

No. 13-cv-3453 (SRN/JJK)

No. 13-cv-3468 (JRT/JJK)

No. 13-cv-3485 (SRN/TNL)

No. 13-cv-3496 (JNE/HB)

No. 13-cv-3498 (JRT/BRT)

No. 13-cv-3513 (PJS/BRT)

Civ. No. 13-3451 (SRN/JJK/HB)

No. 13-cv-3515 (SRN/SER)

No. 13-cv-3519 (SRN/JSM)

No. 13-cv-3523 (JNE/FLN)

No. 13-cv-3525 (SRN/JSM)

No. 13-cv-3526 (JRT/JJK)

No. 13- cv-3531 (PJS/TNL)

No. 14-cv-1710 (DSD/TNL)

No. 14- cv-1760 (PJS/TNL)

No. 14-cv-5101 (MJD/HB)

No. 13-cv-3520 (JRT/HB)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

April 28, 2015

MEMORANDUM OPINION AND ORDER

SUSAN RICHARD NELSON, United States District Judge

Before the Court is the Motion to Strike, or in the alternative, for Judgment on the Pleadings as to Ten of Defendants' Affirmative Defenses [Doc. No. 148] filed by Residential Funding Company, LLC ("RFC") and ResCap Liquidating Trust ("the Trust") (collectively, "Plaintiffs"). This motion was brought against the above-captioned Defendants (collectively, "Defendants").¹ For the reasons stated herein, Plaintiffs' motion is granted in part and denied without prejudice in part.

I. BACKGROUND

These lawsuits arise out of Defendants' sale of allegedly defective mortgage loans to RFC. (First Am. Compl. ¶ 1.)² Prior to May 2012, RFC was "in the business ofacquiring and securitizing residential mortgage loans." (Id. ¶ 2.) RFC acquired the loans from "correspondent lenders," such as Defendants, who were responsible for collecting and verifying information from the borrower and underwriting the loans. (Id. ¶¶ 3, 20.)

RFC alleges that its relationship with each Defendant was governed by a Seller Contract that incorporated the terms and conditions of the RFC Client Guide (collectively, "the Agreements"). (Id. ¶¶ 17-18 & Exs. A, B; Citation App'x ¶¶ 7-8, Ex. A to Alden Decl. [Doc. No. 151-1].) Those Agreements, or excerpts thereof, are attached to the First Amended Complaint as Exhibits A and B, respectively. (See also GMAC RFC Client Guide, Version 1-06-G01, 3/13/06, Ex. B to Alden Decl. [Doc. No. 151-2].) Pursuant to the Agreements, Defendants made many representations and warranties regarding the loans, including: (1) Defendants' origination and servicing of the loans were "legal, proper, prudent and customary;" (2) Defendants would "promptly notify" RFC of any material acts or omissions regarding the loans; (3) all loan-related information that Defendants provided to RFC was "true, complete and accurate;" (4) all loan documents were "genuine" and "in recordable form;" (5) all loan documents were in compliance with local and state laws; (6) there was "no default, breach, violation or event of acceleration" under any note transferred to RFC; (7) each loan was "originated, closed, and transferred" in compliance with all applicable laws; (8) none of the loans were "high-cost" or "high-risk;" (9) there were no existing circumstances that could render the loans an "unacceptable investment," cause the loans to become "delinquent," or "adversely affect" the value of the loans; (10) the loans were underwritten in compliance with the Client Guide; (11) appropriate appraisals were conducted when necessary; (12) the market value of the premises was at least equal to the appraised value stated on the loan appraisals; and (13) there was no fraud or misrepresentation by the borrower or Defendants regarding the origination or underwriting of the loans. (First Am. Compl. ¶ 24.)

RFC alleges it considered these representations and warranties to be material, and any failure to comply constituted an "Event of Default" under the Agreements (Id. ¶¶ 25-26.) It retained sole discretion to declare an Event of Default, and the available remedies include repurchase of the defective loan, substitution of another loan, or indemnification against liabilities resulting from the breach. (Id. ¶¶ 29-33.) RFC alleges that the Agreements do not, however, require that RFC provide Defendants with notice or an opportunity to cure, or demand repurchase within a particular amount of time. (Id.)

In the various operative Complaints, RFC alleges that, pursuant to these Agreements, it purchased from each Defendant hundreds or, in some cases, thousands of mortgage loans, with original principal balances ranging from several million dollars to over $8 billion. See, e.g., Am. Compl. ¶ 4, Residential Funding Co., LLC v. Ark-La-Tex Fin. Servs., LLC, No. 13-cv-3448 (DWF/TNL) [Doc. No. 29]; Am. Compl. ¶ 4. RFC then either pooled those loans to sell into residential mortgage-backed securitization ("RMBS") trusts or sold them to whole loan purchasers. (First Am. Compl. ¶¶ 3, 36.)

RFC alleges, however, that, in many instances, Defendants violated their representations and warranties. (Id.) According to RFC, many of the loans eventually defaulted or became delinquent and sustained millions of dollars in losses. (Id. ¶ 39.) After conducting an internal review, RFC determined that hundreds of loans sold by each Defendant violated the Agreements and resulted in an Event of Default. (Id. ¶ 41.) The types of alleged defects included income and employment misrepresentation, owner occupancy misrepresentation, appraisal misrepresentations or inaccuracies, undisclosed debt, insufficient credit scores, lien position, and/or missing or inaccurate documents, among others. (Id. ¶ 42.) By May 2012, RFC had spent millions of dollars repurchasing defective loans, including loans sold to it by Defendants. (Id. ¶ 61.)

On May 14, 2012, RFC filed for Chapter 11 bankruptcy in the Bankruptcy Court for the Southern District of New York. (Id. ¶ 62); In re Residential Capital, LLC, No. 12-12020 (MG) (Bankr. S.D.N.Y.). According to RFC, hundreds of proofs of claim related to allegedly defective mortgage loans, including those sold to RFC by Defendants, were filed in connection with the bankruptcy proceedings. (First Am. Compl. ¶ 63.) The Bankruptcy Court eventually approved a global settlement that provided for resolution of the RMBS-related liabilities for more than $10 billion. (Id. ¶ 67.) The Bankruptcy Court confirmed the Chapter 11 Plan on December 11, 2013, and the Plan became effective on December 17, 2013. (Id.); Findings of Fact at 1, In re Residential Capital, LLC, No. 12-12020 (MG) (Bankr. S.D.N.Y. Dec. 11, 2013) [Doc. No. 6066]. Under the Plan, the Trust succeeded to RFC's rights and interests, including its claims against Defendants. (First Am. Compl. ¶ 67.)

Accordingly, RFC and the Trust filed these lawsuits, asserting two causes of action against each Defendant. In Count One, a claim for breach of contract, based on alleged breaches of representations and warranties, RFC alleges that, although it "complied with all conditions precedent, if any, and all of its obligations under the Agreement[s]" (id. ¶ 72), Defendants materially breached the representations and warranties they made to RFC because the mortgage loans they sold to RFC did not comply with those representations and warranties (id. ¶¶ 71, 73). RFC asserts these material breaches constitute Events of Default under the Agreements and have resulted in losses and liabilities related to the defective loans, as well as losses associated with defending the lawsuits and proofs of claim that stem from those loans. (Id. ¶¶ 74-75.) In Count Two, RFC alleges it is entitled to indemnification from Defendants for those losses and liabilities. (Id. ¶¶ 77-80.)

This motion challenges ten of the affirmative defenses asserted in the Answers filed by Defendants.³ Plaintiffs seek to strike or, alternatively, dismiss the following affirmative defenses: (1) reliance- and knowledge-based defenses that RFC either knew of Defendants' breaches of representations or warranties at the time of entering into the parties' contracts or did not rely on Defendants' representations or warranties; (2) equitable defenses of unclean hands, laches, and in pari delicto; and (3) defenses based on the satisfaction of conditions precedent prior to imposing upon Defendants liability for breach of contract or indemnification. (Pls.' Mem. Supp. Mot. to Strike at 2-3 [Doc. No.150].)

Defendants assert that Plaintiffs' motion should be denied for three reasons. First, Defendants contend that the motion improperly relies on misleading excerpts from the Client Guide and information from outside the pleadings. (Defs.' Opp'n Mem. at 1 [Doc. No. 253].) Furthermore, they assert that the motion improperly discounts the allegations in Defendants' Answers and misconstrues the parties' multiple agreements (which, for some Defendants, include multiple versions of the Client Guide as well as commitment letters and certificates). (Id.) Second, Defendants argue that Plaintiffs are required to show that they would be...