ResCap Liquidating Tr. v. LendingTree, LLC

Decision Date20 March 2020
Docket NumberCase No. 19-cv-2360 (SRN/HB)
PartiesResCap Liquidating Trust, Plaintiff, v. LendingTree, LLC, and LendingTree, Inc. Defendants.
CourtU.S. District Court — District of Minnesota

ResCap Liquidating Trust, Plaintiff,
LendingTree, LLC, and LendingTree, Inc.

Case No. 19-cv-2360 (SRN/HB)


March 20, 2020


Isaac Nesser, Peter Evan Calamari, and Manisha M. Sheth, Quinn Emanuel Urquhart & Sullivan, LLP, 51 Madison Ave., 22nd Floor, New York, NY 10010; Matthew R. Scheck and Kenneth John Shaffer, Quinn Emanuel Urquhart & Sullivan, LLP, 865 S. Figueroa St., 10th Floor, Los Angeles, CA 90017; Donald G. Heeman, Jessica J. Nelson, and Randi J. Winter, Spencer Fane, 150 S. 5th St., Suite 1900, Minneapolis, MN 55402, for Plaintiff

Brandy Hutton Ranjan and Matthew Corcoran, Jones Day, 325 John H. McConnell Blvd., Ste. 600, Columbus, OH 43215; Carl E. Black, Jones Day, 901 Lakeside Ave., North Point, Cleveland, OH 44114; Kelly G. Laudon and Matthew Enriquez, Jones Day, 90 S. 7th St., Ste. 4950, Minneapolis, MN 55402, for Defendants

SUSAN RICHARD NELSON, United States District Judge

Before the Court is Defendants' Motion to Dismiss for Lack of Jurisdiction, Failure to State a Claim, or in the Alternative, to Compel Arbitration [Doc. No. 29]. For the reasons set forth below, Defendants' motion is denied.

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A. Underlying Litigation

This case arises from an underlying contractual indemnification action filed in this District, Residential Funding Co. v. Home Loan Ctr., Inc., 14-cv-1716 (SRN/HB). ResCap's predecessor in interest, Residential Funding Company ("RFC"), was a Delaware limited liability company, with its principal place of business in Minneapolis, Minnesota. (Compl. [Doc. No. 1] ¶ 11.) RFC was in the business of buying residential mortgage loans from "correspondent lenders," such as HLC, and distributing them by pooling them together with other mortgage loans to sell into residential mortgage backed securities ("RMBS") trusts or selling them to whole loan purchasers. (Id. ¶ 41.)

HLC is a California corporation with its principal place of business located in Charlotte, North Carolina. (Id. ¶¶ 16, 21.) It is a "second-generation Internet-based direct mortgage lender" that was incorporated in September 2000 under the name, Inc. (Id. ¶ 16.) In 2002, it changed its name to Home Loan Center, Inc. (Id. ¶¶ 16, 21.)

As a secondary market mortgage loan purchaser, ResCap asserts that the quality of the loans that it purchased from correspondent lenders was critical to its business success. (Id. ¶ 42.) Thus, in RFC's "Client Contract," corresponding Client Guide, and related documents with correspondent lenders, including HLC, it required the lenders to adhere to "stringent loan-level contractual representations and warranties designed to protect RFC from the risks of borrower fraud, appraisal fraud, failure to comply with state and federal law, and other credit and compliance factors that could negatively impact the performance

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and value of the loans it purchased." (Id.) ResCap contends that the failure of correspondent lenders, such as HLC, to satisfy their representations and warranties led to the filing of numerous suits brought against RFC by investors in its RMBS, based on claims that the loans contained multiple defects, and suffered from fraud and compliance problems. (Id.)

Ultimately, RFC filed for chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court"). (Id. ¶ 43.) Numerous claimants, including investors, class action plaintiffs, monoline insurers, RMBS holders, and trustees, filed proofs of claim in Bankruptcy Court, alleging "tens of billions of dollars of damages stemming from defective loans, including those sold to RFC by HLC." (Id. ¶ 44.) After a long and intensive mediation, RFC settled its RMBS-related liabilities in Bankruptcy Court for over $10 billion of allowed claims. (Id. ¶ 45.) After a five-day confirmation trial, the Bankruptcy Court approved the settlements on December 11, 2013, and confirmed the Second Amended Joint Chapter 11 Plan. (Id.) As contemplated in the Plan and the Bankruptcy Court's confirmation order, ResCap was authorized to pursue litigation, including ResCap's underlying suit against HLC, and to distribute the proceeds to the debtors' creditors. (Id.)

To that end, in late 2013, RFC initiated the underlying lawsuit against HLC in Minnesota state court, asserting claims for breach of contract and contractual indemnification. (Id. ¶ 8.) Plaintiff removed the matter to this Court in 2014, and ResCap was ultimately substituted for RFC as the Plaintiff. (Id.) The ResCap litigation in the District of Minnesota, which included ResCap's lawsuits against numerous other loan

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originators, lasted over five-and-a-half years. (Id. ¶ 46.) ResCap contends that during this time, it responded to over 1,000 written discovery requests, produced over three million documents (consisting of nearly 24 million pages), defended over 150 fact depositions noticed in the HLC case, and reviewed hundreds of thousands of third-party documents. (Id.) ResCap and HLC also engaged in three unsuccessful, court-supervised mediations. (Id.)

In April 2018, ResCap, HLC, and several other defendants filed cross motions for summary judgment and motions to exclude expert witnesses. (Id. ¶ 47.) The summary judgment briefing totaled nearly 600 pages, and, in addition to the "consolidated" briefing, HLC filed a defendant-specific memorandum, to which ResCap responded. (Id.) The Court heard approximately 15 hours of argument on the summary judgment and Daubert motions, after which it issued a 182-page opinion, granting some motions in favor of ResCap, some in favor of the defendants, and reserving a number of issues for trial. (Id.)

During the three-week trial, from October 15, 2018 to November 7, 2018, ResCap offered 15 fact witnesses, five expert witnesses, and approximately 55 exhibits. (Id. ¶ 50.) HLC cross-examined ResCap's witnesses and offered six fact witnesses, two expert witnesses, and approximately 40 exhibits. (Id.) At the end of trial, the Court granted judgment as a matter of law to ResCap on several issues, including the reasonableness of the Bankruptcy settlements, and HLC's equitable estoppel defense, but left several other issues for the jury to determine. (Id.) After two-and-a-half hours of deliberation, the jury returned a verdict of $28.7 million for ResCap. (Id.)

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Post-trial, the Court granted ResCap's motions for pre-judgment and post-judgment interest and attorneys' fees. (Id. ¶ 51.) On June 21, 2019, the Court entered judgment in favor of ResCap, and against HLC, in the amount of $68,484,502.06. (Id.)

On July 19, 2019, HLC filed a notice of appeal with the Eighth Circuit Court of Appeals. (Id.) Two days later, HLC filed a chapter 11 bankruptcy petition in the Northern District of California. (Id.) At that time, HLC disclosed that it had approximately $11 million in assets, consisting of $5.4 million in cash, and the rest consisting of retainers paid to various restructuring professionals, an ownership interest in HLC Escrow, Inc., and certain tax attributes. (Id.) ResCap alleges that "[a]t no time during the pendency of the litigation did Defendants or HLC ever inform ResCap or the Court that HLC was insolvent or would be unable to pay any judgment entered." (Id.)

ResCap then filed this action for declaratory relief, asserting that Defendants LendingTree Parent and LendingTree Sub1 are liable for the underlying judgment against HLC, as Defendants controlled HLC at all relevant times. (Id. ¶ 1.) ResCap alleges that LendingTree Parent expressly assumed HLC's relevant liabilities and is therefore liable as its successor, and that Defendants are both liable as alter egos of HLC under California law. (Id.)

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B. HLC's Relationship with Defendants

ResCap alleges that in 2003, LendingTree Sub (then known as LendingTree, Inc.), entered into an Agreement and Plan of Merger with IAC/InterActiveCorp (then known as USA Interactive) ("IAC") and Forest Merger Corp. (Id. ¶ 3.) Pursuant to this Agreement, IAC acquired full ownership of LendingTree Sub, which changed its name to Tree, LLC in December 2004. (Id.)

ResCap further alleges that in 2004, LendingTree Sub acquired HLC. (Id. ¶ 4.) ResCap asserts that HLC functioned as a wholly-owned subsidiary of LendingTree Sub, which, in turn, is now a wholly-owned subsidiary of LendingTree Parent. (Id.) After the acquisition, ResCap alleges, LendingTree Sub operated its lending business through HLC. (Id. ¶ 22.) That business involved originating mortgage loans and selling the loans to secondary market purchasers, such as RFC. (Id.)

Douglas Lebda is the founder of the "LendingTree" business, and the chairman and chief executive officer of LendingTree Parent. (Id. ¶ 4.) ResCap alleges that at all relevant times, Lebda controlled both LendingTree Sub and HLC.2 (Id.) Moreover, it alleges that following HLC's acquisition, "LendingTree Sub controlled every aspect of HLC's business."3 (Id. ¶ 5.) In particular, ResCap asserts that LendingTree Sub caused HLC to

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continue selling loans to the secondary mortgage market, including to RFC, and also "guaranteed the funding critical to the LendingTree Loans business." (Id. ¶ 5.)

In August 2008, pursuant to a written agreement, (the "Spin Agreement"), LendingTree Sub "spun off" from IAC, at which time Defendant LendingTree Parent (then, Inc.) was incorporated and became the parent of LendingTree Sub. (Id. ¶ 6; Compl., Ex. 2 (Spin Agmt) [Doc. No. 1-2]) ResCap alleges that LendingTree Parent expressly agreed to assume HLC's liabilities, including liabilities related to "LendingTree Loans." (Compl. ¶ 6.)

ResCap alleges that in 2012, HLC sold almost all of its operating assets to Discovery Bank. (Id. ¶ 16.) However, it asserts,, Inc. (now LendingTree Parent) retained all pre-closing liabilities, as well as repurchase, warranty, and indemnification liabilities associated with any HLC loans. (Id.) ResCap...

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