JOHN R. TUNHEIM, District Judge.
Each of these cases arises from a mortgage-backed securities trust with U.S. Bank National Association ("Trustee") as the trustee. WMC Mortgage, LLC ("WMC") and EquiFirst Corporation ("EquiFirst") are mortgage originators that sold mortgages to a trust managed by the Trustee. The Trustee alleges at least some of the mortgages sold to the trust were defective and that the originators should bear the costs to the trust of those defective mortgages.
In WMC Mortgage, LLC v. U.S. Bank National Association (Civ. No. 12-1372), WMC moves to dismiss Counts II through VI of the Trustee's Fourth Amended Counterclaims. The Trustee brings identical claims (except for the loans at issue) in its Second Amended Complaint in MASTR Asset Backed Securities Trust 2007-WMC1 v. WMC Mortgage, LLC (Civ. No. 12-1831), and WMC moves to dismiss those claims.
In MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage, LLC and EquiFirst Corp. (Civ. No. 12-2149), the Trustee brings claims that are identical to those in Case Numbers 12-1372 and 12-1831, except for the trust and loans at issue. WMC moves to dismiss Counts II through VI, and EquiFirst moves to dismiss all of the Trustee's claims.
In MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage, LLC and EquiFirst Corp. (Civ. No. 11-2542), WMC moves for summary judgment on the Trustee's claims that remain after WMC's motion to dismiss and previous motion for summary judgment. The Trustee moves to amend its complaint, proposing the same claims asserted in Case Numbers 12-1372, 12-1831, and 12-2149 against WMC and EquiFirst. For the reasons explained below, the Court will grant in part and deny in part the parties' motions.
"Securitization" is a financing technique which turns the right to receive money ("receivables") into present cash. Claire A. Hill, Securitization: A Low-Cost Sweetener for Lemons, 74 Wash. U.L.Q. 1061, 1067-68 (1996). The receivables — in this case mortgages — are sold into a "pool" — in this case a trust. See id. The pool can then sell interests to investors.
The loans at issue in these cases were sold to UBS Real Estate Securities Inc. ("UBS") subject to a purchase agreement between either WMC and UBS or EquiFirst and UBS. MASTR Asset Backed Sec. Trust 2006-HE3 v. WMC Mortg. Corp. ("HE3-I"), 843 F.Supp.2d 996, 998 (D.Minn.2012). UBS then assigned its rights in the loans to Mortgage Asset Securitization Transactions ("MASTR"). MASTR Asset Backed Sec. Trust 2006-HE3 v. WMC Mortg. Corp. ("HE3-II"), Civ. No. 11-2542, 2012 WL 4511065, at *1 n. 1 (D.Minn. Oct. 1, 2012). MASTR, along with various other entities, entered into a Pooling Services Agreement which created the trust. See id. Two trusts are at issue in these cases: (1) MASTR Asset Backed Securities Trust 2006-HE3 and (2) MASTR Asset Backed Securities Trust 2007-WMC1. Both EquiFirst and WMC sold mortgages that were pooled in MASTR Asset Backed Securities Trust 2006-HE3; EquiFirst did not sell any mortgages that were pooled into MASTR Asset Backed Securities Trust 2007-WMC1.
This Court has previously held that the purchase agreements control WMC's and EquiFirst's obligations in these cases.
The purchase agreements signed by WMC and EquiFirst were not identical. See id. at 999; (Civ. No. 11-2542, Decl. of Rosie Nguyencuu, Ex. 2 ("WMC Purchase Agreement"), Dec. 28, 2012, Docket No. 106; Civ. No. 12-2149, Compl., Ex. B ("EquiFirst Purchase Agreement"), Aug. 30, 2012, Docket No. 1.) The EquiFirst Purchase Agreement required the party discovering an alleged breach of representations and warranties to give notice of the breach no later than sixty days after the discovery of the alleged breach. (EquiFirst Purchase Agreement § 3.03.) The WMC Purchase Agreement required the party discovering an alleged breach of representations and warranties to give "prompt notice" of the breach but did not specify a number of days. (WMC Purchase Agreement § 3.03.)
Both purchase agreements provided that "[u]pon discovery" by the originator of "a breach of any of the foregoing representations and warranties" the originator shall give prompt written notice to the Trustee. (WMC Purchase Agreement § 3.03; EquiFirst Purchase Agreement § 3.03.) Both agreements also provide that the originator will cure the breach within sixty days of its discovery of the breach or will repurchase the defective mortgage loan. (WMC Purchase Agreement § 3.03; EquiFirst Purchase Agreement § 3.03.) The WMC Purchase Agreement provides that if a breach of the representations and warranties is not cured within sixty days of "the earlier of either discovery by or notice to" WMC of the breach, WMC must, at the Trustee's option, repurchase "all of the affected Mortgage Loans." (WMC Purchase Agreement § 3.03.) The EquiFirst Purchase Agreement provides that if a breach of the representations and warranties is not cured within sixty days of "the earlier of either discovery by or notice to" EquiFirst of the breach, EquiFirst must, at the Trustee's option, repurchase "all Mortgage Loans." (EquiFirst Purchase Agreement § 3.03.) Both purchase agreements limited the remedies "respecting a breach" to "cure, substitute, or repurchase" of an allegedly defective mortgage. HE3-I, 843 F.Supp.2d at 1001.
Each purchase agreement included an indemnification clause. The WMC Purchase Agreement provided that
(WMC Purchase Agreement at § 3.03.) The EquiFirst Purchase Agreement included a separate section with the heading "Indemnification; Third Party Claims" which provided that
(EquiFirst Purchase Agreement § 5.01.)
The Trustee contends that the mortgages WMC and EquiFirst sold to the trusts violated their respective representations
WMC subsequently moved for partial summary judgment with respect to eighty of the loans at issue. HE3-II, 2012 WL 4511065, at *4. The Court granted WMC's motion and dismissed the loans because it found that the Trustee had liquidated the loans and "the only remaining remedy — specific performance" — was no longer available to the Trustee. Id. at *6.
WMC now moves for summary judgment on the remaining nineteen loans because it has determined that the Trustee also liquidated those loans. The Trustee admits that its existing claims would be subject to an adverse judgment under the Court's prior rulings but seeks leave to amend its complaint before final judgment is entered. The Trustee also seeks to amend its claims with respect to EquiFirst for the first time since its claims against EquiFirst were dismissed in February 2012.
MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage, LLC and EquiFirst Corp. (Civ. No. 12-2149) concerns the same trust, the same pool of loans, the same contract, and the same parties as Case Number 11-2542. Although Case Number 12-2149 was originally filed with the same claims as Case Number 11-2542, after the Court's ruling in HE3-II, the Trustee amended its complaint. (Civ. No. 12-2149, First Am. Compl., Nov. 30, 2012, Docket No. 27.) WMC now seeks to dismiss the Trustee's amended complaint.
Following this Court's decision in HE3-II, the Trustee brought claims against WMC in the Southern District of New York arising from a different trust. That court transferred the case to this Court and is now MASTR Asset Backed Securities Trust 2007-WMC1 v. WMC Mortgage, LLC (Civ. No. 12-1831). After the Court's ruling in HE3-II, the Trustee amended its complaint (Civ. No. 12-1831, Second Am. Compl., Nov. 30, 2012, Docket No. 54), and WMC now seeks to dismiss the amended complaint.
In June 2012 (after HE3-I was decided and the Trustee brought its claims in New York), WMC filed three declaratory judgment actions against the Trustee in this District regarding three different trusts (Civ. Nos. 12-1370, 12-1371, 12-1372). One of these three actions is currently before the Court, WMC Mortgage, LLC v. U.S. Bank National Association (Civ. No. 12-1372), and concerns the same trust as
The claims now pled by the Trustee in Case Numbers 12-2149, 12-1372, and 12-1831 are practically identical. In Case Number 11-2542, the Trustee seeks to amend its complaint to recite the same claims as in the other three cases.
The claims currently at issue in Case Number 11-2542 are different; however, the Trustee agrees that WMC's motion for summary judgment on the remaining non-amended claims should be granted under the Court's prior rulings.
In contrast to the original complaint filed in Case Number 11-2542, the Trustee now alleges additional facts to support its breach of contract claims, asserting that WMC and EquiFirst ("the Originators") agreed to notify the Trustee of any breaches (see, e.g., Civ. No. 12-2149, Nov. 30, 2012, First Am. Compl. ¶ 34, Docket No. 27); the Originators agreed to indemnify the Trust for the loans (see, e.g., id. ¶¶ 35-36); and that the Originators knew of breaches of their representations and warranties before the Trust provided them with notice of breach (see, e.g., id. ¶¶ 88-91).
WMC moves to dismiss Counts II through VI of Trustee's complaint in Case Numbers 12-1831 and 12-2149 and of the Trustee's counterclaims in Case Number 12-1372. EquiFirst moves to dismiss the Trustee's entire complaint in Case Number 12-2149.
Reviewing a complaint under a Rule 12(b)(6) motion to dismiss, the Court considers all facts alleged in the complaint as true and construes the pleadings in a light most favorable to the non-moving party. See, e.g., Turner v. Holbrook, 278 F.3d 754, 757 (8th Cir.2002). To survive a motion to dismiss, however, a complaint must provide more than "`labels and conclusions' or `a formulaic recitation of the elements of a
WMC's and the Trustee's arguments for and against dismissal are virtually identical in Case Numbers 12-1831, 12-2149 (motions to dismiss the complaint) and 12-1372 (motion to dismiss the counterclaims). The Court will address the three cases together.
The Trustee brings four different breach of contract claims. Count I, which is not the subject of WMC's motions to dismiss, requests specific performance, and the Court has previously addressed the availability of this claim. See HE3-II, 2012 WL 4511065 (limiting specific performance remedy to situations where proper notice was given and loans have not been foreclosed on and liquidated). Counts II, III, and V seek monetary damages for failure to repurchase and indemnify, failure to notify, and failure to make whole. In each case, the Trustee contends that monetary remedies should be available and WMC argues that the sole remedies clause precludes remedies other than repurchase, cure, or substitution. Importantly, this Court has previously held that, on the theories previously pled, "the Trustee is limited to its claim for specific performance of the repurchase remedy." Id. at *1 (citing HE3-I, 843 F.Supp.2d at 1001).
The Trustee argues that it is entitled to damages for WMC's failure to honor its cure, repurchase, or indemnification
Because New York law applies, this Court must predict if the New York Court of Appeals would find that the failure to provide a contractual repurchase remedy constitutes a separate breach, independent of the underlying breach of representations and warranties. This Court finds that it would not. Although some courts applying New York law have concluded that a breach of the underlying representations and warranties merits monetary damages when specific performance is not possible, these cases are not dispositive.
For example, in Resolution Trust Corp. v. Key Financial Services, Inc., the court, applying New York law, concluded that Key Financial Services was obligated to pay damages after it rebuffed a demand that the disputed mortgages be repurchased. 280 F.3d 12, 14, 18 (1st Cir.2002). In contrast, nothing in the record here suggests that the Trustee demanded repurchase before it sold the mortgages. In Assured Guaranty Municipal Corp. v. Flagstar Bank, FSB, the court concluded
Additionally, even the Trustee cites to cases addressing contracts which expressly envisioned that failure to repurchase would constitute a separate breach. See, e.g., La Salle Bank Nat'l Ass'n v. CIBC, Inc., No. 08 Civ. 8426, 2012 WL 112208, at *1 (S.D.N.Y. Jan. 12, 2012) (noting that the purchase agreement provides a sole remedies provision but states "no limitation of remedy is implied with respect to the Seller's breach of its obligation to cure, repurchase or substitute in accordance with the terms and conditions of this Agreement"). That is, the parties could have expressly provided in their contract that failure to repurchase is a different breach and that a remedy exists for that failure — but did not. Because these were sophisticated parties that knew how to provide an exception to the sole remedies provision and yet did not do so, the Court will grant WMC's motion to dismiss Count II.
The Trustee has pled that WMC knew or should have known of breaches of its representations and warranties (see, e.g., Civ. No. 12-2149, Nov. 30, 2012, First Am. Compl. ¶¶ 88-91, Docket No. 27) and failed to notify the Trustee of that breach, as required by the WMC Purchase Agreement. The Trustee seeks monetary damages for WMC's failure to notify. This Court has previously concluded that the WMC Purchase Agreement bars any money damages from a claim "respecting a breach of [those] representations and warranties" for which the sole remedy is repurchase. HE3-I, 843 F.Supp.2d at 1001 (citing (WMC Purchase Agreement § 3.03)). Nevertheless, this Court finds that the Trustee's failure to notify claim is not a claim "respecting a breach" of the representations and warranties. If, as the Trustee pleads, WMC knew of a breach of the representations and warranties and the Trustee did not, then the Trustee did not have an opportunity to request WMC to cure or repurchase the defective mortgage, as provided by the sole remedies clause. Indeed, if failure to notify was not a breach of the contract, then WMC would have had no incentive to notify the Trustee of any breach it discovered, preventing the
Because the Court finds that the Trustee should be given the opportunity to prove that WMC knew of a breach and failed to notify the Trustee as required by the WMC Purchase Agreement (see WMC Purchase Agreement § 3.03.), the Court will deny WMC's motion to dismiss Count III. The Court notes, however, that to be entitled to damages, the Trustee must show that WMC knew of the breach and that the Trustee itself did not have knowledge of a breach of the representations and warranties.
Should the Court deny it damages for WMC's failure to repurchase or indemnify under Count II, the Trustee argues that it should still be made whole (Count V). The Trustee argues that the sole remedies claim should not apply because the clause protects WMC from gross negligence — and WMC was grossly negligent in failing to determine that the loans were defective. (See, e.g., Civ. No. 12-2149, Nov. 30, 2012, First Am. Compl. ¶¶ 89-91, Docket No. 27.) Although New York law generally enforces contractual provisions absolving a party from its own negligence, "a party may not insulate itself from damages caused by grossly negligent conduct." Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 583 N.Y.S.2d 957, 593 N.E.2d 1365, 1370 (1992); see also Lenoci v. Secure Alarm Installations, LLC, 97 A.D.3d 800, 949 N.Y.S.2d 122, 123 (N.Y.App.Div.2012). "The gross negligence exception applies even to contracts between sophisticated commercial parties, although a more exacting standard of gross negligence must be satisfied." Baidu, Inc. v. Register.com, Inc., 760 F.Supp.2d 312, 318 (S.D.N.Y.2010) (internal quotation marks omitted). "In these circumstances, the defendant's conduct must amount to intentional wrongdoing, willful conduct that is fraudulent, malicious or prompted ... by one acting in bad faith, or conduct constituting gross negligence or reckless indifference to the rights of others." Id. (internal quotation marks omitted).
WMC does not argue that the Trustee failed to adequately plead gross negligence or recklessness,
The Trustee argues that the indemnification clause in the WMC Purchase Agreement provides that WMC will indemnify the Trustee against direct losses resulting from misrepresented loans. But under New York law, "the intention to cover first-party losses must be `unmistakably clear.'" BNP Paribas Mortg. Corp v. Bank of Am., N.A., 778 F.Supp.2d 375, 417 (S.D.N.Y.2011) (quoting Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 549 N.Y.S.2d 365, 548 N.E.2d 903, 905 (1989)). The relevant language states that WMC will indemnify the Trustee "
The Trustee argues that this clause must encompass its demands because otherwise the second "resulting from" clause would be redundant. That is, the Trustee argues, the clause must cover (1) losses "resulting from any claim demand, defense or assertion based on or grounded upon" a breach of the representations or warranties;
In the alternative, the Trustee argues that the case does involve third-party demands or assertions because the Trustee is acting "`at the direction of' certain Certificateholders."
The Trustee also seeks declaratory relief including (1) "an order declaring that the Originators are obligated to repurchase, indemnify, or otherwise make appropriate (i.e.non-$0) make-whole payments to the Trust for loans that are identified as being in breach of the Representations and Warranties, regardless of whether such loans have been foreclosed on or otherwise liquidated"
"When a request for a declaratory judgment alleges ... duties and obligations under the terms of a contract and asks the court to declare those terms breached[, it] is nothing more than a petition claiming breach of contract." Daum v. Planit Solutions, Inc., 619 F.Supp.2d 652, 657 (D.Minn.2009) (internal quotation marks omitted). Count VI seeks, in part, a declaration that liquidation of a Loan does not extinguish the trust's remedial rights. The Court concludes that this claim is duplicative with Trustee's breach of contract claims, see HE3-I, 843 F.Supp.2d at 1001, especially its claim based on WMC's failure to repurchase (Count II). The Trustee also requests that the Court order that "prompt notice" is not a condition precedent to repurchase of the loans.
In Case Number 12-2149, the Trustee brings the same four breach of contract claims against EquiFirst that it brings against WMC, and EquiFirst moves to dismiss the complaint. Count I requests specific performance. In HE3-I, the Court granted EquiFirst's motion to dismiss this claim because the Trustee did not give timely notice of the breach. 843 F.Supp.2d at 1000. Counts II, III, and V seek monetary damages for failure to repurchase and indemnify, failure to notify, and failure to make whole. In addition to the claims made against WMC, the Trustee seeks damages against EquiFirst for its failure to repurchase
EquiFirst argues that all of the Trustee's claims must be dismissed because the Court held in HE3-I that timely notice is a condition precedent, yet in this case the Trustee did not plead that it provided timely notice. In HE3-I, the Trustee had not pled that EquiFirst knew of the breaches and failed to notify the Trustee
The EquiFirst Purchase Agreement provides that
(EquiFirst Purchase Agreement § 3.03 (emphasis added).) That is, if EquiFirst discovered the breach, it had sixty days from its discovery of a breach of the representations and warranties to cure the breach. If the breach was not cured within sixty days, EquiFirst was required to "at the Purchaser's option ... repurchase such Mortgage." (Id.) Because EquiFirst was still obligated to cure without notice if it discovered a breach, the Court finds that timely notice is
EquiFirst argues that the Trustee should be barred from bringing Count I (Breach of Contract — Specific Performance) and Count II (Breach of Contract — Failure to Repurchase and Indemnify) under the doctrines of res judicata or claim splitting.
Id.
HE3-I was a final judgment on the merits regarding the Trustee's specific performance and failure to repurchase claims against EquiFirst. Although considering a motion to dismiss, the Court examined the merits of the case when it determined whether the notice to EquiFirst was timely and concluded that the Trustee had failed to satisfy the timely notice requirements of the EquiFirst Purchase Agreement. See HE3-I, 843 F.Supp.2d at 1000. Moreover, a Rule 12(b)(6) dismissal is a "judgment on the merits" for res judicata purposes unless the plaintiff is granted leave to amend his complaint or the dismissal is reversed on appeal.
The Trustee seeks to recover damages from EquiFirst because of its breaches of the representations and warranties it made regarding the loans. The relevant factual contentions made by the Trustee against WMC and EquiFirst are identical, and the arguments made by both parties are very similar to those made by WMC and the Trustee in Part I.B.1.b, supra. For the reasons stated above (see Part I.B.1.b), the Court will not dismiss the Failure to Make Whole Claim (Count V). The Court again emphasizes that the language of the contract would limit the Trustee's remedies but for the gross negligence exception. Although the Court is dubious the claim would survive a motion for summary judgment, it will nevertheless allow the Trustee the opportunity to collect facts that prove EquiFirst's gross negligence or recklessness.
The remaining claims the Trustee brings against EquiFirst are identical to the
In Case Number 11-2542, the Trustee seeks to amend its complaint to include the six counts at issue in the other three cases. Moreover, the Trustee seeks to reintroduce claims against EquiFirst despite its early dismissal from the case.
Under Federal Rule of Civil Procedure 15(a)(2), once a responsive pleading has been served, "a party may amend its pleading only with the opposing party's written consent or the court's leave." The Court "should freely give leave [to amend] when justice so requires." Fed.R.Civ.P. 15(a)(2). "A district court may appropriately deny leave to amend where there are compelling reasons such as undue delay, bad faith, or dilatory motive, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the non-moving party, or futility of the amendment." Moses.com. Sec., Inc. v. Comprehensive Software Sys., Inc., 406 F.3d 1052, 1065 (8th Cir.2005) (internal quotation marks omitted). "In most cases, delay alone is insufficient justification; prejudice to the nonmovant must also be shown." Id. (alteration and internal quotation marks omitted). When a party seeks to amend the pleadings
The majority of the claims the Trustee seeks to assert against WMC are the same as those discussed at length above. The Court will, therefore, tailor its order as to Counts II through VI to be consistent with the other three cases, permitting amendment only of Count III (Failure to Notify) and Count V (Failure to Make Whole). The Trustee also seeks to amend Count I, seeking specific performance for breach of the representations and warranties of the Purchase Agreement. Yet the Trustee admits that under the Court's prior rulings WMC has no obligation to repurchase the mortgages. (Civ. No. 11-2542, Pl.'s Mem. in Opp. to WMC's Mot. for Summ. J. at 2, Jan. 25, 2013, Docket No. 119.) Because the Trustee has failed to show that it is entitled to repurchase for any of the mortgages at issue, leave to amend Count I will be denied in Case Number 11-2542.
In its amendment, the Trustee seeks to reintroduce claims against EquiFirst despite its early dismissal from the case. The claims against EquiFirst were dismissed in February 2012, and the Trustee did not move to amend the complaint until January 2013, after WMC moved for summary judgment on the remaining claims. The Court will therefore deny the Trustee's motion to amend the complaint as it applies to EquiFirst. See, e.g., Briehl v. Gen. Motors Corp., 172 F.3d 623, 629 (8th Cir.1999) ("A district court does not abuse its discretion in denying a plaintiff leave to amend the pleadings to change the theory of their case after the complaint has been dismissed under Rule 12(b)(6)."). The Trustee has not demonstrated why it could not have brought these additional
WMC moves for summary judgment on the remaining 19 loans in the original case (Civ. No. 11-2542). The Trustee admits that the existing claims relating to the 19 loans would be subject to an adverse judgment under the Court's prior rulings. The Court will, therefore, grant WMC's motion with respect to Counts I, II, IV, and VI. Because the Court finds that partial amendment is warranted, see Part II, supra, this motion will be denied as to Counts III and V.
Based on the foregoing, and all the files, records, and proceedings herein,
1. WMC Mortgage LLC's Motion to Dismiss Defendant's Fourth Amended Counterclaims [Civ. No. 12-1372, Docket No. 56], Motion to Dismiss the Second Amended Complaint [Civ. No. 12-1831, Docket No. 57], and Motion to Dismiss [Civ. No. 12-2149, Docket No. 39] are
2. EquiFirst Corporation's Motion to Dismiss [Civ. No. 12-2149, Docket No. 34] is
3. U.S. Bank National Association's Motion to Amend the Complaint [11-2542, Docket No. 114] is
4. WMC's Motion for Summary Judgment as to the 19 Remaining Loans [11-2542, Docket No. 103] is
