Sand Canyon Corporation v. The Bank of New York Mellon

SAND CANYON CORPORATION f/k/a OPTION ONE MORTGAGE CORPORATION, Plaintiff/Counter-Defendant, v. THE BANK OF NEW YORK MELLON, et al., Defendants/Counter-Plaintiffs.

Civil Action No. GLR-19-2815

United States District Court, D. Maryland

July 27, 2021

MEMORANDUM OPINION

George L. Russell, III United States District Judge

THIS MATTER is before the Court on the Motion to Dismiss Amended Counterclaim and Motion for Entry of Final Declaratory Judgment by Plaintiff/Counter-Defendant Sand Canyon Corporation, formerly known as Option One Mortgage Corporation (“Option One”) (ECF No. 28). The Motion is ripe for disposition, and no hearing is necessary. See Local Rule 105.6 (D.Md. 2021). For the reasons outlined below, the Court will grant in part and deny in part the Motion.

I. BACKGROUND^[1]

A. Factual Background

Defendant/Counter-Plaintiff The Bank of New York Mellon, as Trustee for AMRESCO Residential Securities Mortgage Loan Trust 1997-3's (“BNYM as Trustee”), Option One, and others entered into a Pooling and Servicing Agreement (“PSA”) dated September 1, 1997. (Am. Countercl. ¶ 8, ECF No. 25).^[2] The PSA created the AMRESCO Residential Securities Corporation Mortgage Loan Trust 1997-3 (the “Trust”) and established the rights and responsibilities of the contracting parties, including the right to indemnification. (Id.). The PSA also appointed Option One as one of the Trust's mortgage loan servicers (“Servicers”), a role Option One fulfilled until April 2008 when it exercised its right under the PSA to assign its contractual obligations to a new mortgage servicer, AH Mortgage Acquisition Co., Inc. (“AH Mortgage”). (Id. ¶ 64). The Bank of New York Mellon in its individual capacity (“BNYM”) has never been a party to the PSA. (Id. ¶ 8).

In 1977, non-party Raymond T. Berry (“Berry”) became the owner of a property located at 3420 Berwyn Avenue in Baltimore, Maryland (the “Property”). (Id. ¶ 10). On March 21, 1997, Berry borrowed $53, 950 from the Summit Mortgage Group, secured by the Property and evidenced by a note and deed of trust (the “Mortgage”). (Id.). Option One purchased the Mortgage on April 29, 1997 and sold it on June 17, 1997. (Compl. Declaratory J. [“Compl.”] ¶ 7, ECF No. 1). It was later securitized as part of the Trust on September 17, 1997. (Id.). The Mortgage is one of hundreds of mortgage loans that were sold to the Trust. (Am. Countercl. ¶ 11). In 1998, Berry defaulted on the Mortgage. (Id. ¶ 12). On June 18, 1999, the Trust purchased the Property at a foreclosure auction. (Id. ¶ 39). The Property thus became a Trust asset that Option One, as one of the Servicers, was responsible for maintaining under the terms of the PSA. (Id. ¶¶ 39, 95). In March 2001, the Trust sold the Property to Winston Calloway. (Id. ¶ 44).

Dwight Raney, a former tenant of a unit located at the Property, claims that during the period between June 1999 and 2001, he was injured through exposure to lead paint at the Property. (Id. ¶¶ 51-54). On November 9, 2015, Raney sued Berry, Calloway, and The Bank of New York Mellon in its individual capacity (“BNYM”) in the Circuit Court for Baltimore City, Maryland (the “Raney Case”), seeking compensation for those injuries. (Id. ¶ 54); see also Raney v. Berry, No.: 24-C-15-005604 LP (Cir.Ct.Balt.Cnty.Md. filed Nov. 9, 2015). Raney alleged the Property was owned and/or operated by BNYM during the relevant time frame. (Id. ¶ 55).

During the litigation, BNYM denied all liability to Raney, arguing that it never owned, operated, maintained, or otherwise controlled the Property in its individual capacity. (Id. ¶ 56). BNYM further argued that the correct legal entity was BNYM as Trustee. (Id. ¶ 59). BNYM subsequently filed a third-party complaint against Option One for common law indemnification, contractual indemnification, and contribution. (Id. ¶ 69). Option One moved for summary judgment, but the Circuit Court denied its motion. (Id. ¶¶ 71-72). With trial approaching and Option One refusing to indemnify BNYM, BNYM and BNYM as Trustee resolved the Raney Case, but not before incurring attorneys' fees and litigation costs.^[3] (Id. ¶¶ 70, 74).

In their Amended Counterclaim, Defendants add a host of allegations regarding Option One's alleged negligence. For example, Defendants first allege that Option One ought to have worked with Berry, in accordance with its authority under the PSA, to develop a payment plan to cure the delinquencies on the Mortgage. (Am. Countercl. ¶ 13). According to Defendants, “Option One could, and should, have developed a loss mitigation plan with Berry allowing him to cure the delinquency, in part through the rental income he was receiving.” (Id. ¶ 15). This would have prevented the Trust from purchasing the Property at all, which in turn would have prevented it from incurring liability to Raney. (Id. ¶¶ 15, 27). Defendants allege that Option One's failure to pursue loss mitigation options with Berry was negligent and inconsistent with the requirements of the PSA and with mortgage servicing industry standards. (Id. ¶¶ 26-30).

Defendants next allege that Option One negligently failed to seek possession of, secure, and inspect the Property for environmental hazards, including lead-based paint, prior to the Trust purchasing the property at the foreclosure sale. (Id. ¶¶ 33-38). As Defendants explain, the Property was built in 1920, and Option One therefore should have known that there was a substantial likelihood that it would contain lead-based paint. (Id. ¶ 33). According to Defendants, despite this known risk, “Option One never conducted a visual inspection of the Property or ordered an environmental inspection of the Property, despite being required to do so under the PSA and mortgage servicing industry standards.” (Id. ¶ 36). In sum, “Option One negligently failed to act in the best interest of the [Trust]” by failing to “inspect the Property, test the Property for the presence of lead-based paint, nor conduct any environmental remediation of lead-based paint after the [Trust] purchased the Property, as required by the PSA.” (Id. ¶ 49).

Defendants assert that following Option One's negligent omissions, the Trust purchased the Property without the benefit of an inspection. (Id. ¶ 39). As a result of the purchase, BNYM as Trustee gained equitable ownership of the Property, a status that later prompted “the Circuit Court for Baltimore City [to deem] BNYM as Trustee to be ‘owner' of the Property under the Baltimore City Housing Code at the time of the foreclosure sale, and therefore responsible for the abatement of lead paint at the Property.” (Id. ¶ 40). Thereafter, during the period Option One continued to be responsible for maintaining the Property, “Raney ingested and consumed paint and dust containing lead and lead pigment while residing at and/or visiting the Property[.]” (Id. ¶ 51).

B. Procedural History

On September 24, 2019, Option One filed the present action against BNYM in its individual capacity and as Trustee. (ECF No. 1). Option One seeks a declaration that it has no duty or obligation to indemnify BNYM in its individual capacity or as Trustee for fees incurred in defending the Raney Case. (Compl. ¶¶ 28-39; Id. at 11).

On November 11, 2019, Defendants filed an Answer and Counterclaim against Option One. (ECF No. 8). On December 9, 2019, Option One filed its Motion to Dismiss Counterclaim. (ECF No. 11). Defendants filed an Opposition on December 30, 2019. (ECF No. 14). On January 14, 2020, Option One filed a Reply. (ECF No. 15).

On September 3, 2020, the Court granted Option One's Motion to Dismiss Defendants' original Counterclaim. (ECF Nos. 16, 17). The Court rejected Option One's argument that it was not subject to contractual indemnification because it is no longer a Servicer under the PSA and was not a Servicer at the time the Raney Case was filed. (See Sept. 3, 2020 Mem. Op. [“Mem. Op.”] at 5-9, ECF No. 16). The Court further rejected Option One's argument that it was not subject to tort-based indemnification because Raney sued BYNM individually, rather than BNYM as Trustee, and BNYM therefore ought to have extricated itself from the litigation. (Id. at 11). The Court nevertheless granted Option One's Motion as to all three counts of Defendants' Counterclaim upon finding that Defendants had failed to adequately allege that Option One was negligent and that its negligence led to the Raney Case and Defendants' eventual settlement with Raney. (Id. at 9-13).

On November 6, 2020, Defendants moved for leave to file an amended counterclaim. (ECF No. 22). The Court granted Defendants' Motion and docketed the Amended Counterclaim on November 23, 2020. (ECF Nos. 24, 25). The Amended Counterclaim alleges: contractual indemnification to BNYM as Trustee (Count I); common law indemnification as to BNYM in its individual capacity (Count II); and common law indemnification as to BNYM as Trustee (Count III). (Am. Countercl. ¶¶ 76-143). BNYM requests all damages, costs, expenses, and attorneys' fees incurred in the Raney Case, plus interest, along with its costs, expenses, and attorneys' fees in the instant case. (Id. at 24, 29, 34).

On December 18, 2020, Option One filed its Motion to Dismiss Amended Counterclaim and Motion for Entry of Final Declaratory Judgment (ECF No. 28). Defendants filed an Opposition on January 15, 2021. (ECF No. 29). On February 12, 2021, Option One filed a Reply. (ECF No. 34).

II. DISCUSSION

A. Standard of Review

The purpose of a Rule 12(b)(6) motion is to “test[ ] the sufficiency of a complaint, ” not to “resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.” King v Rubenstein, 825 F.3d 206, 214 (4th Cir. 2016) (quoting Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999)). When reviewing a ...