Emc Mortgage Llc v. Century Mortgage Company

MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM for Indemnification for Losses Incurred under the Agreement Against Century

W.D. Ky.November 14, 2016

(ELECTRONICALLY FILED) UNITED STATES DISTRICT COURT WESTERN DISTRICT OF KENTUCKY LOUISVILLE DIVISION CASE NO. 3:16-CV-00416-GNS-JWM EMC MORTGAGE, LLC ) ) PLAINTIFF ) ) V. ) ) CENTURY MORTGAGE COMPANY ) ) DEFENDANT ) MOTION TO DISMISS ***** ***** ***** Defendant, Century Mortgage Company, by counsel, moves for an Order of Dismissal pursuant to Fed. R. Civ. P. 12(b)(6), as to Plaintiff’s Complaint. As stated fully in the accompanying Memorandum in Support, Century Mortgage Company requests that this Court dismiss EMC Mortgage, LLC’s Complaint with prejudice for failure to state a claim upon which relief can be granted. Defendant submits a Memorandum in Support of Motion to Dismiss contemporaneously herewith. Respectfully submitted, November 14, 2016 /s/ E. Page Allinson E. Page Allinson Admitted Pro Hac Vice AMERICAN MORTGAGE LAW GROUP, P.C. 75 Rowland Way, Suite 350 Novato, CA 94945 (415) 878-0030 (415) 878-0035 (fax) Case 3:16-cv-00416-GNS Document 20 Filed 11/14/16 Page 1 of 3 PageID #: 89 Elisabeth S. Gray MIDDLETON REUTLINGER 401 South Fourth Street, Ste 2600 Louisville, Kentucky 40202 Telephone: (502) 625-7848 Facsimile: (502) 588-1980 Counsel for Defendant Century Mortgage Company Case 3:16-cv-00416-GNS Document 20 Filed 11/14/16 Page 2 of 3 PageID #: 90 CERTIFICATE OF SERVICE I hereby certify that on November 14, 2016 I electronically filed the foregoing with the clerk of the court by using the CM/ECF system, which will send a notice of electronic filing to: Jeffrey A. Fuisz Aaron F. Miner Stephanna Szotkowski Eric N. Whitney Kaye Scholer LLP - New York 250 West 55th Street New York, NY 10019-9710 212-836-8000 Counsel for Plaintiff EMC Mortgage, LLC Dustin E. Meek Adam K. Neel Tachau Meek PLC 101 S. Fifth Street, Suite 3600 Louisville, KY 40202-3120 502-238-9900 502-238-9910 (fax) dmeek@tachaulaw.com aneel@tachaulaw.com Counsel for Plaintiff EMC Mortgage, LLC /s/ E. Page Allinson Counsel for Defendant Century Mortgage Company Case 3:16-cv-00416-GNS Document 20 Filed 11/14/16 Page 3 of 3 PageID #: 91 1 (Electronically Filed) UNITED STATES DISTRICT COURT WESTERN DISTRICT OF KENTUCKY LOUISVILLE DIVISION CASE NO. 3:16-CV-00416-GNS-JWM EMC MORTGAGE, LLC ) ) PLAINTIFF ) ) v. ) ) CENTURY MORTGAGE COMPANY ) ) DEFENDANT ) MEMORANDUM IN SUPPORT OF CENTURY MORTGAGE COMPANY’S MOTION TO DISMISS ***** ***** ***** Defendant Century Mortgage Company (“Century”), by and through its counsel of record, and pursuant to Federal Rule of Civil Procedure Rule 12(b)(6), submits the following Memorandum in Support of its Motion to Dismiss Plaintiff EMC Mortgage, LLC’s (“Plaintiff” or “EMC”) Complaint based on EMC’s failure to state a claim upon which relief can be granted. EMC’s sole cause of action is time-barred by the applicable four-year statute of limitations under Texas law. While this action is pending in the United States District Court for the Western District of Kentucky, the actions giving rise to EMC’s contractual indemnification claim occurred in Texas and, by way of Kentucky’s borrowing statute, KRS § 413.320, should be governed by Tex. Civ. Prac. & Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 1 of 24 PageID #: 92 2 Rem. Code § 16.051, which requires that such a cause of action be brought within four years of accrual. As the sole cause of action against Century is time-barred and stems from alleged breaches of certain representations and warranties pursuant to a contract entered into between the parties, Plaintiff’s Complaint should be dismissed, in its entirety, without leave to amend. STATEMENT OF MATERIAL FACTS Century is a privately held mortgage bank and Kentucky corporation headquartered in Louisville, Kentucky. (Plaintiff’s Complaint, DN 1, (“Compl.”), ¶ 10.) Century’s primary business at all times in question involved the origination and sale of residential mortgage loans. (Id.) EMC is a Delaware a limited liability company with its principal place of business in Lewisville, Texas. (Id. at ¶ 9.) Century and EMC entered into a Mortgage Loan Purchase Agreement (the “MLPA”) on February 1, 2005. (Id. at ¶ 2.) Pursuant to the terms of the MLPA, Century sold EMC a number of loans-including the eleven loans at issue in the Complaint-between 2005 and 20061. (Id. at ¶¶ 2, 7, 30; Ex. B, DN 5.) The MLPA, along with an accompanying EMC Seller Guide (“Seller Guide”), set forth the terms by which Century sold loans to EMC. (Id. at ¶ 2; Ex. A-1, DN 1-2, at p. 5, § 13.) 1 EMC has alleged that “[w]hen it sold the loans to EMC, Century was fully aware that EMC intended to securitize some or all of the loans or sell them to third parties, including RMBS trusts and the GSEs.” (Compl. at ¶ 18; Ex. B, DN 5.) As Exhibit B indicates, all eleven at-issue loans were securitized in RMBS trusts or sold to GSEs in 2005 or 2006 as is indicated by the security or GSE name in the column “Securitization/GSE.” (Id. at Ex. B, DN 5.) Furthermore, EMC admits in paragraph 30 of the complaint that four of the loans were “funded” in 2005 or 2006. (Id. at ¶ 30.) Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 2 of 24 PageID #: 93 3 EMC alleges that, pursuant to the terms of the MLPA, Century made numerous representations and warranties to EMC upon the sale and delivery of the eleven at-issue loans. (Id. at ¶ 3; Ex. A-1, DN 1-2, at p. 1 § 4, p. 2 § 6; Ex. A-2, DN 1-3, at p. 1 § 11.02.) This included the representations and warranties that the origination and characteristics of the loans complied with applicable underwriting guidelines and trade stipulations, that information relating to the loans provided by Century was accurate, and that there was no fraud, error, omission, misrepresentation, negligence, or similar occurrence on the part of any party involved in the origination of the loans. (Id.) EMC further alleges that Century agreed, under Section 11.03.02 of the Seller Guide, to indemnify EMC for any losses suffered by EMC “in any way related to any breaches of the representations and warranties it made to EMC.” (Id. at ¶ 16.) (Emphasis added.) The representations and warranties Century made to EMC pertaining to each loan sold under the MLPA were made on the “Settlement Date,” which is the date Century delivered the loan to EMC. (Id., Ex. A-1, DN 1-2, p. 1 § 4, p. 2 § 6; Ex. A-2, DN 1-3, at p. 1 § 11.02.) Allegedly in reliance on the representations and warranties made by Century regarding the sale and delivery of all eleven loans at issue in the Complaint and the “promise” to indemnify EMC for any breaches of the representations and warranties in the MLPA and Seller Guide, EMC purchased the at-issue loans from Century and in turn either securitized or sold the loans to third parties, including RMBS trusts and government-sponsored entities such as Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively, the “GSEs”). (Compl., DN-1 at ¶ 17.) EMC allegedly sold the loans at-issue in this Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 3 of 24 PageID #: 94 4 Complaint to the following RMBS trusts: the Bear Stearns Asset Backed Securities Trust 2005-AC8 transaction; the Bear Stearns ALT-A Trust 2006-4 transaction; the Bear Stearns ALT-A Trust 2006-5 transaction; and the Bear Stearns Asset Backed Securities Trust 2005-AC7 Transaction (collectively, the “Trusts”). (Id. at ¶ 24.) Any loans that were not sold to one of the Trusts were allegedly sold to the GSEs. (Id. at ¶ 25.) EMC alleges that it made the same representations to the Trusts and GSEs that Century made to EMC but that EMC learned that those representations and warranties had allegedly been breached. (Id. at ¶ 29.) EMC alleges it became aware of these alleged breaches by way of repurchase demands from the Trusts or GSEs or by way of notifications from mortgage insurance companies that coverage had been rescinded or denied. (Id.) EMC alleges it ultimately determined that the eleven at-issue loans in the Complaint contained one or more alleged breaches of representations and warranties under both EMC’s agreements with the Trusts and the GSEs as well as under the MLPA and Seller Guide entered into between EMC and Century in 2005. (Id. at ¶¶ 31, 34.) Section 11.03.3 of the Seller Guide discusses certain procedure related to causes of action arising out of the MLPA or Seller Guide. (Id. at Ex. A-2, DN 1-3 at § 11.03.3.) EMC alleges it demanded, between January 2013 and August 2015, that Century repurchase the loans or indemnify EMC for its alleged losses and that Century failed to honor those demands. (Compl., DN 1 at ¶ 34.) Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 4 of 24 PageID #: 95 5 ARGUMENT I. Rule 12(b)(6) Standard To survive a motion to dismiss for failure to state a claim upon which relief may be granted, a complaint must contain a short and plain statement of the facts and allegations showing that the pleader is entitled to relief. Fed. R. Civ. P. 8(a)(2); see Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009). The pleading standard under Rule 8(a)(2) does not require detailed factual allegations; however, a pleading that offers only “labels and conclusions” or “a formulaic recitation of the elements of a cause of action” will not suffice. Id. at 678 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “When considering a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the district court must accept all of the allegations in the complaint as true, and construe the complaint liberally in favor of the plaintiff.” Lawrence v. Chancery Court of Tenn., 188 F.3d 687, 691 (6th Cir. 1999) (citing Miller v. Currie, 50 F.3d 373, 377 (6th Cir. 1995)). The court may consider the Complaint and any exhibits attached thereto, so long as they are referred to in the Complaint and are central to the claims contained therein. Bassett v. National Collegiate Athletic Ass’n, 528 F.3d 426, 430 (6th Cir. 2008). Denial of the motion is proper “unless it can be established beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Achterhof v. Selvaggio, 886 F.2d 826, 831 (6th Cir. 1989) (citing Conley v. Gibson, 355 U.S. 41 45-46 (1957)). Nonetheless, unwarranted factual inferences or legal conclusions masquerading as fact will not prevent a motion to dismiss. Blakely v. United Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 5 of 24 PageID #: 96 6 States, 276 F.3d 853, 863 (6th Cir. 2002). A “complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.” Andrew v. Ohio, 104 F.3d 803, 806 (6th Cir. 1997) (citing In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993)). Here, even if all of EMC’s allegations are taken as true, it is clear, as set forth below, under Kentucky’s borrowing statute that EMC’s claims are time-barred by the four year Texas statute of limitation for asserting a cause of action based on breaches of representations and warranties in a contract. II. EMC’s Claims are Time-Barred Under Kentucky’s Borrowing Statute EMC’s Complaint should be dismissed, in its entirety, with prejudice, and without leave to amend because the allegations, even if accepted as true, affirmatively establish that EMC’s claims are time-barred under Texas’s four year statute of limitation, which should be applied pursuant to Kentucky’s borrowing statute. KRS § 413.320. While the MLPA at issue in this litigation is to be construed under the laws of the State of New York (see, Compl., Ex. A-1, DN 1-2 at § 13), as a general matter, federal courts sitting in diversity must apply the procedural choice of law rules of the forum state regardless of any choice of law provision within a contract. See, Cole v. Mileti, 133 F.3d 433, 437 (6th Cir. 1998) (holding “contractual choice-of-law clauses incorporate only substantive law, not procedural provisions such as statutes of limitations.”). See also, Conway v. Portfolio Recovery Assocs., LLC, 13 F.Supp.3d 711, 716 (E.D. Ky. 2014). Thus, unless the choice of law provision in the parties’ agreement expressly provides Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 6 of 24 PageID #: 97 7 otherwise, the procedural law of the forum state will determine issues concerning which state’s statute of limitations applies. Id. While the MLPA at issue contains a choice of law provision stating that any controversies arising out of the agreement are to be governed by New York law, the provision contains no language regarding choice of law with respect to procedure. (see, Compl., Ex. A-1, DN 1-2 at § 13) Therefore, the procedural law of the forum state applies. Kentucky Revised Statutes § 413.090(2) requires that any action upon a written contract shall be commenced within fifteen (15) years after the cause of action first accrued. KRS § 413.090(2). However, Kentucky’s borrowing statute provides: When a cause of action has arisen in another state or country, and by the laws of this state or country where the cause of action accrued the time for commencement of an action thereon is limited to a shorter period of time than the period of limitation prescribed by the laws of this state for a like cause of action, then said action shall be barred in this state at the expiration of said shorter period. KRS § 413.320. “A borrowing statute is a legislative exception from the general rule that the forum always applies its statute of limitation” and is meant to “impede forum shopping” by plaintiffs seeking relief. Combs v. International Ins. Co., 354 F.3d 568, 578, 588-589 (6th Cir. 2004) (citing Miller v. Stauffer Chem. Co., 581 P.2d 345, 348 (Idaho 1978)). “[T]he purpose of [a] borrowing statute-preventing forum shopping by plaintiffs seeking the holy grail of the longer period-is best served by applying the period of the foreign state, regardless of how it is denominated.” Combs, 354 F.3d at 589 (quoting, Faigin v. Doubleday Dell Publ’g Group, Inc., 98 F.3d 268, 272 (7th Cir. 1996). Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 7 of 24 PageID #: 98 8 See also, Conway, 13 F.Supp.3d at 722 (Indicating that the prevention of cherry picking the laws of various jurisdictions is “one of the primary purposes for which borrowing statutes are enacted”). It is of note that while the present suit could have theoretically been filed in any of several jurisdictions (arguably including New York, Texas, Delaware and Kentucky), EMC chose the jurisdiction with the longest limitations period. Thus, if a cause of action arises in another jurisdiction that has a shorter statute of limitations than Kentucky for the same cause of action, Kentucky courts must “borrow” the foreign jurisdiction’s statute of limitation. Id. A. The Statute of Limitation of the Forum in which the Cause of Action Accrued Should Apply. When determining whether a Kentucky court should utilize Kentucky’s borrowing statute, this Court must determine where the cause of action accrued. Combs, 354 F.3d at 589, 597. “An accrual-based approach makes forum shopping impossible because the statute of limitations that governs the forum where the cause of action accrued will apply no matter where the plaintiff files suit.” Id. Therefore, the Kentucky borrowing statute requires a three step analysis: (1) a court must determine whether the cause of action accrued in another state; (2) if the cause of action did accrue in another state, the court must determine whether that state’s statute of limitations for the particular cause of action is shorter than Kentucky’s; and (3) if the accrual state’s statute of limitations is shorter than Kentucky’s statute, a court will apply the statute of limitations of the accrual state; however, if the statute of limitations for the cause of action in that state is longer than Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 8 of 24 PageID #: 99 9 Kentucky’s statute, the court should apply Kentucky’s shorter statute. Willits v. Peabody Coal Co., 188 F.3d 510, 1999 WL 701916 (6th Cir. 1999). 1. The Alleged Breaches of Representations and Warranties by Century Accrued Upon Delivery of the Loans to EMC in Texas. The court in Combs ultimately determined that a cause of action “accrues” in the place of breach in a breach of contract action. Swanson v. Wilson, 423 Fed.Appx. 587, 594 (6th Cir. 2011). Furthermore courts in Kentucky have held that, in the context of a breach of contract claim, “a cause of action accrues when and where the breach occurs and the injured party holds the right to sue.” Willits, 188 F.3d at *12. In Willits, the court held that the defendant breached a royalty agreement in Missouri, which is where the defendant improperly calculated royalty checks, and not in Kentucky where the royalty checks were delivered to the Plaintiffs. Id. at *13. The Willits court reached this conclusion because the only obligation of the defendant in that action was to properly calculate royalty checks and deliver the payments to plaintiffs, regardless of where the plaintiffs were located at the time the payments were due. Id. The court in Willits made a point to state it would be irrational and unworkable in that specific instance to determine “where” the breached accrued based upon where the plaintiff was located when receiving the royalty checks because payments were due to the plaintiff over the course of several years and was not dependent upon where the plaintiff was located. Id. “In a continuing injury case such as this, if a Plaintiff moved several times over the course of the years, she would have separate causes of action in each state in which she lived.” Id. Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 9 of 24 PageID #: 100 10 While Century underwrote the eleven at-issue loans in this litigation at its offices in Kentucky and it is anticipated that EMC will attempt to argue that Kentucky is the “location” in which the alleged breaches occurred and the cause of action accrued, the representations and warranties made by Century to EMC pertaining to each individual loan were made only upon delivery of each loan from Century to EMC. (Compl., Ex. A- 1, DN-2, p. 1 § 4, p. 2 § 6.) EMC has clearly pled that Century was “fully aware that EMC intended to securitize some or all of the loans or sell them to third parties, including RMBS trusts and the GSEs” and that EMC would be doing so “in reliance on the representations and warranties that Century made in the Agreement” and upon delivery of each loan. (Compl., DN 1 at ¶¶ 18, 19.) The delivery and alleged reliance upon each representation and warranty occurred in Texas upon EMC’s acceptance and receipt of each the eleven at-issue loans. EMC, throughout the life of the MLPA, was located in one static location and the MLPA governed the sale of individual loans-unlike the continual delivery of royalty payments over a number years as in Willits. Furthermore, it must be pointed out that Century was not originating loans solely for the purpose of delivering them to EMC. Any of the given loans could have been sold and/or securitized to another investor or entity. Any representation and warranty made by Century to EMC could only have been made upon delivery of the loan and not during origination or underwriting as it was unknown at that time to whom the loan might be delivered. As such, this Court should determine that the “breach” occurred or accrued in Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 10 of 24 PageID #: 101 11 Texas, when Century delivered and EMC accepted the eleven at-issue loans in Texas and when EMC began “relying” on the representations and warranties related to each loan. 2. The Texas Statute of Limitations for Indemnification Based on Breach of Contract is Shorter than Kentucky’s. The second prong of the borrowing statute analysis is whether the borrowing state’s statute of limitation for the particular cause of action is shorter than Kentucky’s statute. Under Texas law, indemnity and breach of contract claims are subject to a four- year statute of limitations. Smith Intern., Inc. v. Egle Group, LLC, 490 F.3d 380, 386 (5th Cir. 2007) (citing Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a)(3); Ingersoll-Rand Co. v. Valero Energy Corp., 997 S.W.2d 203, 206 (Texas 1999)). Kentucky Revised Statute § 413.090(2) requires that any action upon a written contract shall be commenced within fifteen (15) years after the cause of action first accrued. KRS § 413.090(2). Here, EMC is seeking indemnification for alleged breaches of representations and warranties contained in a contract and based upon a clause within the MLPA and Seller’s Guide. Texas’ statute of limitation (4 years) is shorter than Kentucky’s (15 years) for such a cause of action. 3. This Court Should Apply the Shorter Texas Statute of Limitations. Under the third prong of Kentucky’s borrowing statute analysis, if the accrual state’s statute of limitations is shorter than Kentucky’s statute, a court will apply the statute of limitations of the accrual state. As it is clear that EMC’s cause of action Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 11 of 24 PageID #: 102 12 accrued in Texas and Texas has a shorter limitations period than Kentucky (4 years vs. 15 years), this Court should apply Texas’ four year statute of limitations. B. EMC’s Cause of Action for Indemnity Based on Century’s Alleged Breaches of Representations and Warranties under the MLPA is Time-Barred. As stated above, indemnity and breach of contract claims are subject to a four year statute of limitations under Texas law. Smith Intern., Inc. v. Egle Group, LLC, 490 F.3d 380, 386 (5th Cir. 2007) (citing Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a)(3); Ingersoll-Rand Co. v. Valero Energy Corp., 997 S.W.2d 203, 206 (Texas 1999)). Texas courts have held that it is a well-settled principle that a claim based on a breach of contract accrues when the contract is breached. Stine v. Stewart, 80 S.W.3d 586, 592 (Texas 2002). Here, it is undisputed that the Texas four year statute of limitation began to run in 2005 and 2006 upon the delivery of the loans to EMC from Century. (Compl., DN 1 at ¶ 2, 7, 30; Ex. B, DN 5.) For all eleven at-issue loans, EMC has alleged that Century breached certain loan- level representations and warranties related to, for example, appraisals of the properties that were used to secure payment of the loans, that each loan file contains all the correct and appropriate documentation, that all information related to the origination package is true, accurate, and complete, and that each loan was originated pursuant to the Seller Guide. (Compl., DN 1, at ¶ 21.) All of the at-issue loans were sold and funded in either 2005 or 2006. (Id. at ¶¶ 1-2, 7, 30; see also Compl. Ex. B, DN 5.) EMC, as purchaser of the loans, was clearly in a position to discover or investigate whether the information in the loan files was incomplete, untrue, or incorrect upon receipt of each loan package or Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 12 of 24 PageID #: 103 13 loan file and could have determined, at that time, whether any breaches of representations or warranties existed. Therefore, the delivery date of the at-issue loans is the appropriate and proper date of accrual for the alleged breaches of representations and warranties under Texas law and is consistent with the growing body of case law around the country in the context of mortgage repurchase and indemnification actions. Upon receipt of the loans, EMC could have exercised its rights under the MLPA and Seller Guide. There is no case on point in the Sixth Circuit that considers the accrual of a cause of action arising from a contract for the purchase and sale of mortgage loans or mortgage backed securities. However, in the leading case of Ace Secs. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581 (N.Y. 2015), the New York Court of Appeals held that a cause of action for breaches of contractual representations and warranties in an MLPA will accrue on the date those representations and warranties were made. Ace Secs. Corp., 25 N.Y.3d at 596. The cause of action in Ace was similar to that in the present case and concerned alleged breaches of representations and warranties contained within a mortgage loan purchase agreement that is very similar to the one at issue in this matter. Id. The representations and warranties in both this case and in Ace related to certain facts about the loans as of certain date but did not guarantee future performance of the loans. Id. The Second Circuit Court of Appeals later relied heavily on the Ace decision in its opinion in Deutsche Bank National Trust Co. v. Quicken Loans Inc. Specifically, the Deutsche court held that the representations and warranties made by the correspondent lender pursuant to a loan purchase agreement were related only to: Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 13 of 24 PageID #: 104 14 certain facts about the loans’ characteristics as of the execution date, not how the mortgage would perform in the future. . . . Further, as an “alternative remedy” to damages, the repurchase obligation there was itself “dependent on, and indeed derivative of’ the representations and thus also “could not be reasonably viewed as a distinct promise of future performance. Deutsche Bank National Trust Co. v. Quicken Loans Inc., 810 F.3d 861, 865 (2d. Cir. 2015). Therefore, the Deutsche court held that the statute of limitation for a cause of action based on alleged breaches of representations and warranties contained within a loan purchase agreement begins to run on the date the representations and warranties become effective as they were either true or false at that time. Id. at 867. As such, the “effective” date is the date upon which the loans were delivered to EMC as EMC would have been entitled to enforce its contractual remedies as to any material breach upon receipt. Id. at 866. One of the most important aspects of the Deutsche opinion is contained within footnote 2 in which the court pointed out that, like most mortgage loan purchase agreements, the agreement at issue in Deutsche contained an indemnification clause. Id. at n. 2. The court recognized that, “[t]ogether, the Repurchase Protocol and the indemnification provision constituted the ‘sole remedies’ available to the Trustee for breaches of the representations and warranties.” Id. (emphasis added). This makes it clear that a repurchase claim and a claim for indemnification under a loan purchase agreement are simply separate remedies and are one in the same as a breach of contract action for alleged breaches of representations and warranties contained within such an agreement. Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 14 of 24 PageID #: 105 15 This rationale was followed shortly thereafter by the United States Court of Appeals for Tenth Circuit in the opinion of Lehman Brothers Holdings, Inc. v. Universal American Mortgage Company, LLC. The court in Lehman held that Lehman Holdings’ claim for indemnification was time-barred and accrued upon the delivery of the loans from the correspondent lender to the investor. Lehman Brothers Holdings, Inc. v. Universal American Mortgage Company, LLC, 2016 WL 325126, **12-13 (D. Col. 2016). While the cause of action in Lehman was one for breach of contract and not explicitly indemnification, the court addressed, at length, the interplay between a claim for breach of contract and one for contractual indemnification in the context of a mortgage loan purchase agreement. In rejecting Lehman Holdings’ argument, the court held that Lehman Holdings’ position “distorted the nature of a true indemnity claim.” Lehman Brothers Holdings, Inc., 2016 WL 325126 at *12. Through five amended complaints and motions for summary judgment, Lehman Holdings presented its claims as one for breach of contract with indemnity as a remedy rather than a distinct cause of action. Id. Yet, in appealing the District of Colorado’s granting of Universal American’s motion for summary judgment and dismissing Lehman Holding’s cause of action due to the expiration of the applicable statute of limitations, Lehman Holdings attempted to “recast” its breach of contract claim as one for indemnification. Id. Ultimately, the Lehman court held that even if Lehman Holdings had plead its cause of action as one for indemnification, it still would have regarded the allegation as one for breach of contract as the defendant in that matter (Universal American) only owed a contractual duty to Lehman Holdings and not Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 15 of 24 PageID #: 106 16 to any other third party that may have suffered damages for which Lehman Holdings was seeking indemnification. Id. at *13. The Lehman court concurred with the Ace Securities and Deutsche Bank courts in that a cause of action for alleged breaches of representations under a mortgage loan purchase agreement accrues when a correspondent lender sells the allegedly defective loans to an investor and not when an investor alleges to have suffered damage from claims by third parties or makes a demand to a correspondent lender as a result of those alleged losses. Id. at 13. This is because the true nature of the claims- whether for breach of contract or indemnification under the contract-arises out of the representations and warranties made upon the delivery and sale of the loans by the correspondent lender to an investor. In reaching this conclusion, the Lehman court examined the Second Circuit opinion in Peoples’ Democratic Republic of Yemen v. Goodpasture, Inc. This matter also concerned the issue of timeliness and whether the claim at issue was for breach of contract or indemnification. Peoples’ Democratic Republic of Yemen v. Goodpasture, Inc., 782 F.2d 346, 350 (2d Cir. 1986). In Yemen, the plaintiff (Yemen) alleged that the late delivery of grain by the defendant (Goodpasture), pursuant to a contract entered into between the parties, caused Yemen to have to pay late-fees to a third party ship owner. Lehman Brothers Holdings, Inc., 2016 WL 325126 at *13. Yemen sued Goodpasture based on a claim for indemnification to recover the late fees it had to pay the ship owner due to the late delivery of the grain. Id. However, the Second Circuit ultimately characterized Yemen’s claim as one for breach of contract that accrued upon the late delivery of the grain despite the fact that Yemen had not incurred any loss until it paid Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 16 of 24 PageID #: 107 17 the additional charges to the third party ship owner. Id. The Yemen court’s reasoning was that, because Goodpasture’s alleged contractual duty ran to Yemen and not any third party, the claim was really one for breach of contract and not a “legitimate indemnity claim.” Id. As such, the Lehman court held that, even if Lehman Holding’s claims had been for indemnity, the cause of action really would have been one for breach of contract as the alleged breach arose out of the representations and warranties contained in the master loan purchase agreement: Like Yemen, Lehman Holdings had to pay third parties (Freddie Mac and Fannie Mae). But again like Yemen, Lehman Holdings had to pay these third parties only because Universal American breached its contract with Lehman Holdings. Just as Goodpasture’s contract created a duty to Yemen rather than the ship owner, Universal American’s contract created a duty to Lehman Holdings rather than Freddie Mac or Fannie Mae. Thus, Yemen would require us to base accrual of the cause of action on the date of Universal American’s breach of contract rather than the date of Lehman Holdings’ payment to a third party. Id. The Yemen court’s reasoning is directly on point and applicable to the present action. Here, EMC is seeking recovery of payments it had to make to the Trusts and GSEs as a result of alleged breaches of representations and warranties by Century. However, just like in Lehman and Yemen, EMC only had to pay these third parties as a result of Century’s alleged breach of contract with EMC (the alleged breaches of representations and warranties contained within the MLPA and Seller Guide). Century, like in Lehman and Yemen, owes a contractual duty to EMC only and not to any third parties such as the Trusts or GSEs. Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 17 of 24 PageID #: 108 18 If this Court follows the line of reasoning outlined in Ace Securities, Deutsche Bank, and Lehman, this Court must hold that EMC’s cause of action accrued on the date Century delivered the loans to EMC and allegedly breached the representations and warranties in the MLPA and Seller Guide, and not on the date EMC had to make any payments to any third parties (such as the Trusts or GSEs) as a result of those alleged breaches. Public policy also dictates the line of reasoning outlined in Ace Securities, Deutsche Bank, and Lehman. As the Supreme Court of the United States has discussed on several occasions, “[s]tatutes of limitations embody a ‘policy of repose, designed to protect defendants’ . . . and foster the ‘elimination of stale claims, and certainty about a plaintiff’s opportunity for recovery and a defendant’s potential liabilities. . . .’” Lozano v. Montoya Alvarez, 134 S. Ct. 1224, 1227 (2014) (internal citations omitted). The Sixth Circuit Court of Appeals has also recognized this key function of statutes of limitations in holding that “‘the entire purpose of statutes of limitations is to provide finitude to liability for wrongs’” and noted that “statutes of limitations ‘protect important social interests in certainty, accuracy, and repose’ and should not be trivialized by the ‘promiscuous application of tolling doctrines.’” Archer v. Sullivan County, Tenn., 129 F.3d 1263, 1997 WL 720406, *4 (6th Cir. 1997) (quoting, Beale v. District of Columbia, 789 F.Supp. 1172, 1176 (D. Columbia 1992); Cada v. Baxter Healthcare Cop., 920 F.2d 446, 453 (7th Cir. 1990)). The Ace Securities court also addressed the purpose that statutes of limitations serve in terms of certainty and finality in discussing that courts have “repeatedly ‘rejected accrual dates which cannot be ascertained with any degree of Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 18 of 24 PageID #: 109 19 certainty . . . .’” Ace Securities, 25 N.Y. 3d, 593-594 (quoting, MRI Broadway Rental v. United States Min. Prods. Co., 92 N.Y.2d 421, 428 (1998)). If the accrual date for EMC’s cause of action is only when it first suffers a loss or makes a demand, EMC (as well as the Trusts or GSEs) could presumably sit on its rights for 5, 10, 15, or even 20 years any only then issue a demand to Century after documents may have been discarded or lost and potential witnesses have moved on. Allowing EMC such control over when the statute of limitation begins to run goes directly against the underlying public policy and purpose for statutes of limitations in giving certainty and finality to liability for alleged wrongdoings. Century delivered, and EMC securitized or sold, the loans in 2005 or 2006. (Compl., DN 1, at ¶ 1-2, 7, 9, 30; Ex. B, DN 5.) As such, Century’s alleged breaches of the representations and warranties under the MLPA and Seller Guide upon which EMC is now seeking relief occurred in 2005 or 2006, which is when EMC’s cause of action accrued. As the statute of limitations for such a cause of action under Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a)(3) is four years, EMC’s claims became stale, at the very latest, as of December 31, 2011. EMC’s claims for all eleven (11) at-issue loans are now time-barred and EMC’s Complaint should be dismissed in its entirety. C. Section 11.03.3 of the Seller Guide Does not Change the Accrual Date for EMC’s Cause of Action Section 11.03.3 of the Seller Guide, entitled “Causes of Action,” relates to causes of action arising out of the alleged breach of any representations and warranties made Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 19 of 24 PageID #: 110 20 pursuant to sections 11.01 or 11.02 of the Seller Guide. (Compl. at Ex. A-2, DN 1-3, § 11.03.3.) The section, in its entirety, reads as follows: Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Sections 11.01 or 11.02 shall accrue as to any Mortgage Loan or Servicing Rights upon (1) discovery of such breach by EMC or notice thereof by the Seller to EMC, (2) failure by the Seller to cure such breach or repurchase such Mortgage Loan as specified above, and (3) demand upon the Seller by EMC for compliance with the relevant provisions of the Agreement and the Seller Guide. Id. The Deutsche Bank court considered a similar “Accrual Clause” in the context of determining when a party’s claim for alleged breaches of representations and warranties accrued under a mortgage loan purchase agreement. Deutsche Bank National Trust Co., 810 F.3d at 864. That clause read: Any cause of action against [Quicken] relating to or arising out of the Material Breach of any representations and warranties made in Sections 3.01 and 3.02 shall accrue as to any Mortgage Loan upon (i) the earlier of discovery of such breach by [Quicken] or notice thereof by the [Trustee] to [Quicken], (ii) failure by [Quicken] to cure such Material Breach or repurchase such Mortgage Loan as specified above, and (iii) demand upon [Quicken] by the [Trustee] for compliance with this Agreement. Id. In analyzing whether Deutsche Bank’s claims were time-barred, the Deutsche Bank court had to determine whether this “Accrual Clause” constitutes a substantive condition precedent that would delay the accrual of the cause of action. Id. at 866. The Deutsche Bank court found that the decision in Ace Securities dictates that a court must examine “the object of the demand, rather than merely the phrase ‘shall accrue’ as a talisman.” Id. at 866-867 (emphasis in original). Courts must ask whether a demand “‘is a condition to Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 20 of 24 PageID #: 111 21 party’s performance’ (substantive) or whether it ‘seeks a remedy for a preexisting wrong’ (procedural).” Id. (quoting Ace Secs. Corp., 25 N.Y.3d at 597). The Deutsche Bank court ultimately held that repurchase or indemnification obligations under a mortgage loan purchase agreement are merely alternative contractual remedies to damages and the relevant “performance” under the agreement is the truth or falsity of the representations and warranties upon delivery of the loans. Id. at 867. Because the performance or non-performance by Century under the MLPA and Seller Guide is not contingent upon EMC making a demand-the representations and warranties are either true or false, performed or made, at the time of delivery of the loans-the “Accrual Clause” language in the MLPA simply concerns a remedy to which EMC is already entitled. Id. This makes a demand under such an “Accrual Clause” “merely procedural and does not delay accrual of the cause of action.” Id. Therefore, Section 11.03.3 of the MLPA does not delay the accrual of EMC’s claim and its cause of action is now time barred as the alleged breaches of representations and warranties upon which EMC is now seeking indemnification occurred in 2005 or 2006 when Century delivered the loans to EMC. III. EMC Should Not be Granted Leave to Amend as any Amendment Would be Futile Federal Rule of Civil Procedure Rule 15(a)(2) encourages courts to freely give a party leave to amend “when justice so requires.” Fed. R. Civ. P. 15(a)(2). However, a court should not grant leave to amend if any such proposed amendment would not survive a motion to dismiss as such amendment would be futile. SFS Check, LLC v. First Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 21 of 24 PageID #: 112 22 Bank of Delaware, 774 F.3d 351, 355 (6th Cir. 2014) (citing Riverview Health Inst. LLC v. Med. Mut. of Ohio, 601 F.3d 505, 512 (6th Cir. 2010)). As explained above, EMC’s claims for the eleven loans at-issue have been time-barred for nearly five years-since December 31, 2011. Therefore, any attempt by EMC to amend its Complaint would be futile as any such amendment would not survive a motion to dismiss under Rule 12(b)(6). As such, any request by EMC for leave to amend should be denied. CONCLUSION Even though styled as a claim for indemnification, EMC’s Complaint is really one for breach of contract as it concerns alleged breaches of representations and warranties under the MLPA and Seller Guide that accrued upon delivery of the loans by Century to EMC. The delivery or “settlement date” is the date on which the representations and warranties to EMC became effective and on which EMC could have sought remedies under the MLPA and Seller Guide. Century delivered the eleven at-issue loans to EMC between 2005 and 2006 at EMC’s principal place of business in Texas. Therefore, even though this matter has been filed in the Western District of Kentucky, Kentucky’s borrowing statute dictates that this Court should apply Texas’ four year statute of limitation for contractual indemnification actions. The statute of limitation for EMC’s cause of action for each of the eleven at- issue loans began to accrue in 2005 or 2006. EMC’s claims became stale as of December 31, 2011 and are now time-barred. As such, Century respectfully requests that this Motion to Dismiss be granted in its entirety and without leave to amend. Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 22 of 24 PageID #: 113 23 Respectfully submitted, November 14, 2016 /s/ E. Page Allinson E. Page Allinson Admitted Pro Hac Vice AMERICAN MORTGAGE LAW GROUP, P.C. 75 Rowland Way, Suite 350 Novato, CA 94945 (415) 878-0030 (415) 878-0035 (fax) Elisabeth S. Gray MIDDLETON REUTLINGER 401 South Fourth Street, Ste 2600 Louisville, Kentucky 40202 Telephone: (502) 625-7848 Facsimile: (502) 588-1980 Counsel for Defendant Century Mortgage Company Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 23 of 24 PageID #: 114 24 CERTIFICATE OF SERVICE I hereby certify that on November 14, 2016 I electronically filed the foregoing with the clerk of the court by using the CM/ECF system, which will send a notice of electronic filing to: Jeffrey A. Fuisz Aaron F. Miner Stephanna Szotkowski Eric N. Whitney Kaye Scholer LLP - New York 250 West 55th Street New York, NY 10019-9710 212-836-8000 Counsel for Plaintiff EMC Mortgage, LLC Dustin E. Meek Adam K. Neel Tachau Meek PLC 101 S. Fifth Street, Suite 3600 Louisville, KY 40202-3120 502-238-9900 502-238-9910 (fax) dmeek@tachaulaw.com aneel@tachaulaw.com Counsel for Plaintiff EMC Mortgage, LLC /s/ E. Page Allinson Counsel for Defendant Century Mortgage Company Case 3:16-cv-00416-GNS Document 20-1 Filed 11/14/16 Page 24 of 24 PageID #: 115 (ELECTRONICALLY FILED) UNITED STATES DISTRICT COURT WESTERN DISTRICT OF KENTUCKY LOUISVILLE DIVISION CASE NO. 3:16-CV-00416-GNS-JWM EMC MORTGAGE, LLC ) ) PLAINTIFF ) ) V. ) ) CENTURY MORTGAGE COMPANY ) ) DEFENDANT ) ORDER ***** ***** ***** This matter is before the Court on Defendant’s Motion to Dismiss Plaintiff’s Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court, having heard from the parties and being sufficiently advised, is of the opinion that Plaintiff’s Complaint fails to state a claim as a matter of law and should be dismissed in its entirety. Accordingly, IT IS HEREBY ORDERED that Defendant’s Motion to Dismiss is GRANTED and Plaintiff’s Complaint is hereby dismissed with prejudice and stricken from the Court’s active docket. Case 3:16-cv-00416-GNS Document 20-2 Filed 11/14/16 Page 1 of 2 PageID #: 116 Respectfully submitted, s/ E. Page Allinson E. Page Allinson Admitted Pro Hac Vice AMERICAN MORTGAGE LAW GROUP, P.C. 75 Rowland Way, Suite 350 Novato, CA 94945 (415) 878-0030 (415) 878-0035 (fax) Elisabeth S. Gray MIDDLETON REUTLINGER 401 South Fourth Street, Ste 2600 Louisville, Kentucky 40202 Telephone: (502) 625-7848 Facsimile: (502) 588-1980 Counsel for Defendant Century Mortgage Company Case 3:16-cv-00416-GNS Document 20-2 Filed 11/14/16 Page 2 of 2 PageID #: 117