United States District Court, D. Utah, Central Division
iFREEDOM DIRECT CORPORATION fka New Freedom Mortgage Corp., Plaintiff,
LEHMAN BROTHERS HOLDINGS, INC., Defendant.
AMENDED MEMORANDUM DECISION AND ORDER
CAMPBELL, U.S. District Court Judge
Tena Campbell Ushering in a world-wide economic collapse,
Lehman Brothers Holdings, Inc. (LBHI), declared bankruptcy in
the fall of 2008. A few years before LBHI's bankruptcy,
iFreedom Direct Corporation (iFreedom) sold and brokered
mortgage loans to Lehman Brothers Bank (Lehman) which then
assigned the loans to LBHI. LBHI asserts that, as part of the
transaction, iFreedom agreed to indemnify Lehman and its
assignees for any defects in the loans.
asserts that many of the loans Lehman bought, including those
from iFreedom, were defective and lead to its downfall. After
LBHI 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 in the United States Bankruptcy Court for the
Southern District of New York (Bankruptcy Court)-the court
managing LBHI's bankruptcy. A little later, LBHI sued
over 100 other loan sellers for indemnification. The
Bankruptcy Court manages these suits also under a
case-management order. 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.
The Loans and the Bankruptcy
and 2005, iFreedom sold and brokered six mortgage loans to
Lehman which Lehman then assigned to LBHI. LBHI asserts that
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.
filed bankruptcy in 2008. LBHI'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 LBHI's
bankruptcy are possibly unmatched. See In re LBHI,
480 B.R. 179, 185 (S.D.N.Y. 2012) (describing the bankruptcy
as “the most complex in United States history”).
2008, the Bankruptcy Court has carried the heavy burden of
managing the intricacies of the LBHI bankruptcy. LBHI, in its
role as the Plan Administrator, must liquidate the estate in
a streamlined and cost-effective manner.
The Bankruptcy's Offshoots, Indemnification Claims, and
Pre- Litigation Mediation
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, LBHI settled the dispute with Fannie
Mae and Freddie Mac. The Bankruptcy Court approved the
believes it possesses valuable claims against parties that
sold defective mortgage loans. LBHI contends that these
parties must indemnify the Lehman estate for its liability to
subsequent purchasers. 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.
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.
Statute-of-Limitations Litigation by Other Parties
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 determined that
“[t]here can be no ‘substantial doubt' that .
. . [the] Indemnification Claims accrued only when”
LBHI settled with Fannie Mae and Freddie Mac. Id. at
United States Court of Appeals for the Tenth Circuit, other
parties litigated different statute-of-limitations issues.
LBHI v. Universal Am. Mortg. Co., LLC, 660 F.
App'x 554 (10th Cir. 2016). There, LBHI did not assert
“indemnification as a cause of action distinct from the
cause of action for breach of contract, ” unlike its
Indemnification Claims asserted in the Bankruptcy Court.
Id. at 567. Rather, LBHI asserted a
breach-of-contract cause of action seeking reimbursement for
the defective loans. Id. Because LBHI had not
asserted a cause of action for express contractual
indemnification, the Tenth Circuit relied on
implied-contractual-indemnification principles. Id.
It held that LBHI's breach-of-contract claim was
time-barred. Id. at 569.
The Adversary Action and ...