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

United States District Court, D. Utah, Central Division

August 24, 2017

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

          AMENDED MEMORANDUM DECISION AND ORDER [1]

          TENA CAMPBELL, U.S. District Court Judge

         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.

         LBHI 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.

         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. 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.

         LBHI 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”).

         Since 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.

         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, LBHI settled the dispute with Fannie Mae and Freddie Mac. The Bankruptcy Court approved the settlement.

         LBHI 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.

         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 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 *3.

         In the 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.

         IV. The Adversary Action and ...


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