360 Mortg. Grp. v. Fortress Inv. Grp.
| Decision Date | 30 March 2022 |
| Docket Number | 19 Civ. 8760 (LGS) |
| Parties | 360 MORTGAGE GROUP, LLC, Plaintiff, v. FORTRESS INVESTMENT GROUP LLC, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff 360 Mortgage Group, LLC brings this action against Defendant Fortress Investment Group LLC, alleging tortious interference with Plaintiff's contract with the Government National Mortgage Association (“GNMA”) following GNMA's termination of Plaintiff's issuer license. Defendant moves for summary judgment. For the reasons stated below, the motion is denied.
The background facts are drawn from the parties' Rule 56.1 statements and other submissions on this motion. The facts are either undisputed or based on evidence in the record drawing all reasonable inferences in favor of Plaintiff as the non-moving party. See Torcivia v. Suffolk Cty., 17 F.4th 342, 354 (2d Cir. 2021).
Plaintiff was a privately-owned mortgage bank, licensed by GNMA in 2011 to service and originate mortgage loans that would be packaged and sold through GNMA's mortgage-backed securities (“MBS”) programs. GNMA is a wholly owned government association with the Department of Housing and Urban Development (“HUD”). In 2011, Plaintiff and GNMA entered into a Guaranty Agreement in which GNMA, in exchange for a fee, agreed to guarantee to the security holders payment of principal and interest on Plaintiff's underlying mortgages in the event that Plaintiff did not ensure such payment. All issuers participating in any GNMA MBS program must comply with the terms of GNMA's Guaranty Agreements and the GNMA MBS Guide (the “Guide”).
Defendant is a New York-based global investment manager with a portfolio of assets in the billions of dollars. Defendant manages a publicly traded company called New Residential Investment Corp. (“NRZ”), which in 2018 described itself as “a leading capital provider to the U.S. mortgage industry.” NRZ, through its division Shellpoint, also has a mortgage servicing business, which in 2018 had over $500 billion in unpaid principal balance of mortgage servicing rights (“MSRs”).
The Guarantee Agreement provides for two types of defaults, an immediate default and a 30-day default. An immediate default occurs immediately and automatically upon the occurrence of certain specified acts not relevant here. A 30-day default occurs when an issuer otherwise fails to perform and fails to cure within 30 days of receiving notice from GNMA. The 30-day default provision states:
Any failure of the Issuer to observe or comply with any terms or provisions of this Agreement or the Guide, or any breach of any warranty set forth in this Agreement, other than [an immediate event of default] shall constitute an event of default if it has not been remedied or corrected to Ginnie Mae's satisfaction within 30 days of notification by Ginnie Mae to the issuer.
But this provision further states, “Ginnie Mae reserves the right in its discretion to declare an immediate default if the Issuer receives three or more notices under this subsection (b).” Accordingly, GNMA issues two types of Notices of Violation (“NOVs”) immediate default and 30-day default.
Between September 18, 2017 and May 3, 2018, Plaintiff received three letters entitled “Notice of Violation - Thirty-Day Default.” The notices respectively charged Plaintiff with insufficient liquidity, high mortgage pre-payment speeds, and a violation of GNMA's pooling requirements, i.e. misplacing loans in pools designated as having particular characteristics. In each instance, Plaintiff, through counsel, submitted a response that, at least in part, challenged GNMA's grounds for issuing the NOV. Each of the NOVs was timely cured to GNMA's satisfaction within the 30-day cure period.
In April and May 2018, New Penn, an affiliate of Defendant, entered into two transactions with Plaintiff through which Plaintiff sold approximately $5 billion of its GNMA servicing portfolio to New Penn.
In early July 2018, a disagreement arose between New Penn and Plaintiff regarding an alleged $11 million overpayment that New Penn had made in connection with the transaction. Beginning on July 11, 2018, Defendant's representatives began repeatedly calling Plaintiff demanding that Plaintiff pay the disputed $11 million. During one of the phone calls, a Fortress representative warned that “MSRs is a relatively small industry, ” and threatened, “I would have to advise anybody who brings up 360 Mortgage and saying that's not someone I would recommend that you work with.” On July 16, 2018, Defendant's in-house counsel called Plaintiff's counsel and threatened to put Plaintiff out of business if it did not pay the disputed amount, and warned that Defendant had a close relationship with GNMA and that it was meeting with GNMA the next day. On July 17, 2018, Defendant's Managing Executive Director sent an email to Plaintiff's President, stating that On July 23, 2018, New Penn filed a lawsuit against Plaintiff in New York state court.
During and following the period that Defendant was threatening Plaintiff, Defendant was in contact with GNMA executives about New Penn's dispute with Plaintiff. On July 23, 2018 -the same day New Penn filed the lawsuit against Plaintiff -- two of Defendant's employees spoke with GNMA executive Leslie Pordzik on the phone about the contractual dispute between the parties. Later that day, Defendant's representative sent an email to Pordzik and the director of GNMA's single family program, notifying them of the parties' inability to resolve the dispute and attaching a copy of the lawsuit that had been filed that day. Notwithstanding the fact that both GNMA witnesses testified that private contractual disputes are outside GNMA's purview, Defendant promised to “keep [GNMA] posted” about the contractual dispute and GNMA's single family program director thanked Defendant for the update. Between July 16, and July 18, 2018, Defendant's Managing Executive Director exchanged a number of emails with GNMA's senior vice president to schedule a call.
Following the issuance of the third NOV, GNMA conducted a specialized review to determine if what had been Plaintiff's portfolio had any additional pooling violations and in August, found that it did. The specialized review included loans that had been subject to a previous on-site audit conducted by GNMA, after which GNMA had assured Plaintiff that the pooling satisfied GNMA requirements. Plaintiff learned of the investigation and its results for the first time during this litigation.
On October 9, 2018, approximately twenty-five GNMA representatives appeared without warning at Plaintiff's offices in Austin, Texas to hand-deliver a letter to Plaintiff, which stated that it was terminating its issuer license based on the three NOVs, the most recent of which had been issued five months earlier in May 2018. Although GNMA representatives testified that GNMA ultimately decided to exercise its discretion to terminate the license after discovering the additional violation during the specialized review, the specialized review was not mentioned in the termination letter. Among those present were GNMA's then Vice President, Chief Operating Officer and HUD special agents. GNMA's witnesses testified that it was standard practice for GNMA, along with counsel and agents, to hand deliver the default letter to an issuer, but could not recall special agents participating in a “raid” in any other instance since 2014 and stated that it was unusual for “higher up” GNMA executives be in attendance as was the case here. The letter stated that GNMA was declaring an immediate default pursuant to § 10.01(b) of the Guaranty Agreement based on the NOVs issued to Plaintiff on September 18, 2017, May 2, 2018 and May 3, 2018. The letter further stated that “Ginnie Mae has authority to negotiate with the issuer to remedy and correct the default, ” and “[c]onsistent with such authority, Ginnie Mae will forbear from immediately effectuating the Termination and Extinguishment of 360 Mortgage to allow for 360 Mortgage's Secured Party, Texas Capital Bank (TCB), to cure 360 Mortgage's breach as described in the AA.” There apparently was no uncured breach when the letter was delivered. Plaintiff's executives met with GNMA representatives on-site to explain that there had been a misunderstanding. In referencing the transfer to New Penn, one GNMA representative stated, “Oh, we're aware.” Following the termination, Plaintiff's representatives repeatedly reached out to the President and others at GNMA to negotiate, as referenced in the letter, and urge them to reconsider the termination but were unsuccessful.
Following the New York state court's issuance of a temporary restraining order against Plaintiff forbidding Plaintiff to dissipate its assets (i.e., make any payments) in September 2019, Plaintiff filed for bankruptcy on October 7, 2019.
Michael Bright was President of GNMA when the decision was made to terminate Plaintiff's license. He and other GNMA senior executives made the decision to terminate based on the recommendation of lower-level managers, specifically Rene Mondonedo and his staff in the GNMA Monitoring and Asset Management Division. Shortly after the decision to terminate Plaintiff, Mr. Bright left GNMA to become president and...
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