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iFreedom Direct Corp. v. Lehman Brothers Holdings, Inc.

United States District Court, D. Utah, Central Division

June 23, 2017

iFREEDOM DIRECT CORPORATION fka New Freedom Mortgage Corp., Plaintiff,
v.
LEHMAN BROTHERS HOLDINGS, INC., Defendant.

          MEMORANDUM DECISION AND ORDER

          TENA CAMPBELL U.S. District Court Judge.

         Ushering in a world-wide economic collapse, Lehman Brothers Bank (Lehman) declared bankruptcy in the fall of 2008. A few years before Lehman's bankruptcy, iFreedom Direct Corporation (iFreedom) sold and brokered mortgage loans to Lehman which then sold the loans to Lehman Brothers Holdings, Inc. (LBHI). As part of the transaction, iFreedom agreed to indemnify Lehman and its assignees for any defects in the loans.

         Lehman asserts that many of the loans it bought, including those from iFreedom, were defective and lead to its downfall. After Lehman declared bankruptcy, LBHI and iFreedom engaged in court-ordered mediation to resolve LBHI's claims for indemnification. The mediation failed. Expecting LBHI to sue, iFreedom filed a declaratory-judgment action in this court, asking for a declaration that LBHI's indemnification claims are time-barred. Only a few days later, LBHI sued iFreedom and over 100 other loan sellers for indemnification in the United States Bankruptcy Court for the Southern District of New York (Bankruptcy Court)-the court managing Lehman's bankruptcy. With litigation ongoing in the Bankruptcy Court, LBHI has moved to dismiss iFreedom's declaratory action so the parties can litigate the issues in the Bankruptcy Court. Because the Bankruptcy Court provides a more effective forum for resolving this dispute, the court grants LBHI's motion.

         BACKGROUND

         I. The Loans and the Bankruptcy

         In 2004 and 2005, iFreedom sold and brokered six mortgage loans to Lehman which Lehman then assigned to LBHI. iFreedom agreed to indemnify Lehman and its assigns for any defects in the mortgages. LBHI packaged these mortgages with mortgages originated by other lenders and sold them to investors, including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Many of the mortgages sold in this way ended in foreclosure, causing one of the largest economic collapses in history.

         Lehman filed bankruptcy in 2008. Lehman's bankruptcy has been described as “the largest in American history.” Michael J. de la Merced & Andrew Ross Sorkin, Report Details How Lehman Hid Its Woes, N.Y. Times, Mar. 11, 2010, at ¶ 1. And though bankruptcies commonly present thorny and complex issues, the complexities of Lehman's bankruptcy are possibly unmatched. See In re LBHI, 480 B.R. 179, 185 (S.D.N.Y. 2012) (describing the Lehman bankruptcy as “the most complex in United States history”).

         Since 2008, the Bankruptcy Court has carried the heavy burden of managing the intricacies of the Lehman bankruptcy. LBHI, in its role as the Plan Administrator for the Lehman bankruptcy, must liquidate the estate in a streamlined and cost-effective manner.

         II. The Bankruptcy's Offshoots, Indemnification Claims, and Pre- Litigation Mediation

         In 2009 Fannie Mae and Freddie Mac filed proofs of claim with the Bankruptcy Court, seeking payment for losses incurred on defective mortgages sold to them by LBHI, including the loans from iFreedom. In 2014, Lehman settled the dispute with Fannie Mae and Freddie Mac. The Bankruptcy Court approved the settlement.

         LBHI believes its possession valuable claims against parties that sold defective mortgage loans into LBHI's “loan sale and securitization channels.” (Mot. to Dismiss or Stay the Proceedings vi, ECF No. 47.) LBHI contends that these parties must indemnify the Lehman estate for its liability to subsequent purchasers like Fannie Mae and Freddie Mac. LBHI calls these claims “Indemnification Claims” and maintains that it possesses thousands of them. LBHI argues that it has several valid Indemnification Claims against iFreedom which were triggered when it settled with Fannie Mae and Freddie Mac.

         To manage the overwhelming volume of the Indemnification Claims the Bankruptcy Court entered an alternative-dispute-resolution order, compelling loan sellers like iFreedom to engage in pre-litigation mediation on LBHI's Indemnification Claims.

         III. Statute-of-Limitations Litigation by Other Parties

         While LBHI and iFreedom mediated, several loan sellers moved to dismiss LBHI's Indemnification Claims against them, arguing that the Indemnification Claims were time-barred. The Bankruptcy Court rejected their statute-of-limitations argument. See LBHI v. LHM Fin. Corp., Adv. Pro. No. 14-2393-SCC, Mem. Decision Den. Mot. to Dismiss, Dkt. No. 29. It found that the statute of limitations began to run in 2014 when LBHI settled with Fannie Mae and Freddie Mac, making the Indemnification Claims timely. Id. The loan sellers sought leave to appeal which the United States District Court for the Southern District of New York denied. See Hometrust Mortg. Co. v. LBHI, No.15CV4060, 2015 WL 5674899 (S.D.N.Y. Sept. 25, 2015). That court ...


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