Lehman Brothers Holding Inc. v. Hometrust Mortgage Company

FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re
LEHMAN BROTHERS HOLDINGS INC., et al.,
Debtors.
Chapter 11
Case No. 08-13555 (SCC)
LEHMAN BROTHERS HOLDINGS INC.,
Plaintiff,
- against -
HOMETRUST MORTGAGE COMPANY,
Defendant.
Adversary Proceeding
No. 14-02392
MEMORANDUM DECISION DENYING MOTION TO DISMISS
A P P E A R A N C E S:
WOLLMUTH MAHER & DEUTSCH LLP
500 Fifth Avenue
New York, NY 10110
By: 	William A. Maher, Esq.
Adam M. Bialek, Esq.
Attorneys for Lehman Brothers Holdings Inc.
FOLEY & LARDNER LLP
90 Park Avenue
New York, NY 10016
By: 	Derek L. Wright, Esq.
AMERICAN MORTGAGE LAW GROUP
75 Rowland Way
Suite 350
Novato, CA 94945
By: 	Tracy L. Henderson, Esq.
Attorneys for Hometrust Mortgage Company
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SHELLEY C. CHAPMAN
UNITED STATES BANKRUPTCY JUDGE
Before the Court is the motion (the “Motion”) of Hometrust Mortgage Company
(“Hometrust”) to dismiss the complaint (the “Complaint”) of plaintiff Lehman Brothers Holdings
Inc. (“LBHI”) for failure to state a claim on which relief may be granted. By the Complaint,
LBHI requests a declaratory judgment that LBHI’s claim for contractual indemnification accrued
upon settlement of LBHI’s liability to the Federal National Home Mortgage Association
(“Fannie Mae”) on or about January 22, 2014. Hometrust argues that the Complaint should be
dismissed because LBHI’s claim for contractual indemnification is time-barred as a matter of
law.
By the Complaint, LBHI seeks a declaratory judgment that its claim to recover losses it
incurred as a result of two allegedly defective mortgage loans (together, the “Loans”) originated
and sold by Hometrust to LBHI affiliate Lehman Brothers Bank, FSB (“LBB”) at various times
in 2006 and 2007 is timely. The Loans were sold pursuant to a written agreement, dated
February 14, 2005, between Hometrust and LBB entitled “Loan Purchase Agreement (Servicing
Related Transactions)” (the “LPA”), which LPA incorporates the terms and conditions of the
Seller’s Guide of Aurora Loan Services LLC (the “Seller’s Guide” and, together with the LPA,
the “Agreement”). LBB assigned its rights under the Agreement to LBHI, which, in turn, sold
the Loans to Fannie Mae. Fannie Mae later discovered that the Loans allegedly breached certain
of the representations and warranties made by Hometrust within the Agreement and filed a claim
against LBHI for losses it suffered on the Loans. LBHI settled Fannie Mae’s claim, which
settlement was approved by the Court on January 31, 2014, [Case No., 08-13555 ECF No.
42420], and is effective as of January 22, 2014. LBHI contends that the settlement triggered its
right to assert a contractual indemnification claim against Hometrust under the Agreement.
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Hometrust asserts that LBHI’s claim is simply a breach of contract claim based on
Hometrust’s alleged breaches of the representations and warranties of the Agreement, and is not
a separate claim for contractual indemnification. Hometrust therefore argues that LBHI’s claim
accrued at the time of Hometrust’s alleged breach of the representations and warranties -- that is,
in 2006 and 2007, when Hometrust sold the Loans to LBB. Accordingly, Hometrust argues that
because the Complaint was not filed until October 31, 2014, more than seven years after the
Loans were sold to LBB, LBHI’s claim is time-barred by New York’s six-year statute of
limitations for breach of contract actions.
On January 12, 2015, Hometrust filed a motion to withdraw the reference with the United
States District Court for the Southern District of New York, arguing that this matter is a non-core
state law contract dispute. The motion to withdraw the reference was assigned to Judge Paul A.
Englemayer as Case No. 15-cv-304. Judge Engelmayer denied the motion to withdraw the
reference by an order dated February 13, 2015. The matter has been fully briefed and the Court
heard extensive oral argument on February 17, 2015.1
The Court entered an order denying the Motion on March 31, 2015 [ECF No. 28]. The
order noted that this written decision explaining the Court’s reasoning would follow.
STANDARD
Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, which incorporates Federal
Rule of Civil Procedure 12(b)(6) (“Rule 12(b)(6)”), permits a bankruptcy court to dismiss an
adversary proceeding if a plaintiff’s complaint fails to state a claim upon which relief may be
granted. See FED . R. BANKR. P. 7012(b). In reviewing a motion to dismiss under Rule 12(b)(6),
1 Concurrent with oral argument on this matter, the Court also heard oral argument on defendant LHM Financial
Corporation’s motion to dismiss the complaint in LBHI v. LHM Financial Corp., Adv. Proc. No. 14-02393 (SCC).
LHM Financial Corporation’s motion to dismiss was based on the same theory as the Motion in this matter and the
parties in this matter and LBHI v. LHM Financial Corp. were represented by the same counsel.
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the Court accepts the factual allegations of the complaint as true and draws all reasonable
inferences in the plaintiff’s favor. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555-56 (2007); E.E.O.C. v. Staten Island Sav. Bank, 207 F.3d
144, 148 (2d Cir. 2000). To survive a challenge to the adequacy of a complaint under Rule
12(b)(6), the factual allegations in a complaint must be supported by more than mere conclusory
statements. Twombly, 550 U.S. at 555. The allegations must be sufficient “to raise a right to
relief above the speculative level” and provide more than a “formulaic recitation of the elements
of a cause of action.” Id. (citations omitted).
A court may dismiss a complaint unless a plaintiff pleads “enough facts to state a claim to
relief that is plausible on its face.” Twombly, 550 U.S. at 570. “[O]nly a complaint that states a
plausible claim for relief survives a motion to dismiss.” Iqbal, 556 U.S. at 679 (citing Twombly,
550 U.S. at 556). Therefore, the appropriate inquiry “is not whether a plaintiff is likely to
prevail, but whether [he] is entitled to offer evidence to support [his] claims.” Chance v.
Armstrong, 143 F.3d 698, 701 (2d Cir. 1998) (citations omitted).
BACKGROUND
Hometrust Originates the Loans and Sells the Loans to LBB
Prior to its bankruptcy, and at all relevant times, LBHI engaged in the purchase and sale
of mortgage loans directly or through affiliates, including LBB, and then sold the loans to third
parties, including Fannie Mae. Complaint ¶ 11. Hometrust engages, and at all relevant times
engaged, in the origination and sale of mortgage loans. Id. ¶ 12. Over the course of the years
2006 and 2007, Hometrust sold the Loans to LBB pursuant to the terms of the Agreement. The
Loans are:
 	Loan ****9647, sold on May 31, 2006; and
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 	Loan ****4238, sold on February 26, 2007. Id. ¶¶ 17-18.
LBB assigned to LBHI all of its rights and remedies under the Agreement pertaining to the
Loans. Id. ¶ 19. LBHI subsequently sold the Loans to Fannie Mae. Id. ¶ 2
Fannie Mae’s Claim against LBHI for Breach of
Hometrust’s Representations under the Agreement
Pursuant to the Agreement, Hometrust made a number of representations, warranties, and
covenants concerning the accuracy and preparation of the loan documentation and Hometrust’s
origination and processing of the Loans. See e.g., Seller’s Guide [ECF No. 1, Ex. B] §§ 703(1),
703(8), 703(12), 703(21). In instances in which Hometrust served as underwriter of loans,
Hometrust made additional representations that such underwriting would be in strict compliance
with the underwriting guidelines in the Seller’s Guide and would be performed with the same
care and diligence as an experienced underwriter performing such duties in the industry and, in
any event, with no less care and diligence than if Hometrust was performing underwriting for its
own account. See Seller’s Guide [ECF No. 1, Ex. B] § 717.
The Complaint alleges that Fannie Mae discovered breaches of the representations,
warranties, and/or covenants in the Loans. Complaint ¶ 29. The Complaint further alleges that
LBHI confirmed that Hometrust breached its representations, warranties, and/or covenants under
the Agreement, causing LBHI’s loss. Id. ¶ 30. Finally, the Complaint specifically alleges
breaches by Hometrust with respect to each of the Loans:
 	With respect to Loan ****9647, the Complaint alleges misrepresentations in the loan
documents related to the borrower’s other debt obligations that purportedly constituted
breaches of the representations, warranties, and/or covenants of sections 703(1) and
703(12) of the Seller’s Guide. See id. ¶¶ 31-32.
 	With respect to Loan ****4238, the Complaint alleges misrepresentations in the loan
documents related to the borrower’s income and employment that purportedly constituted
breaches of the representations, warranties, and/or covenants of sections 703(1) and
703(12) of the Seller’s Guide, and failure to comply with proper underwriting procedures
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and the loan program profile that purportedly constituted breaches of the representations,
warranties, and/or covenants of sections 703(8), 703(21), and 717(1) of the Seller’s
Guide. See id. ¶¶ 33-36.
On September 22, 2009, Fannie Mae filed proofs of claim in LBHI’s bankruptcy proceeding
to recover losses on the allegedly defective mortgage loans sold to it by LBHI. Complaint ¶ 37.
LBHI settled Fannie Mae’s claim, which settlement the Court approved on January 22, 2014
[Case No., 08-13555 ECF No. 42153] (the “Fannie Mae Settlement”). Pursuant to the Fannie
Mae Settlement, Fannie Mae received an allowed general unsecured claim against LBHI in the
amount of $2.15 billion. The Complaint alleges that it was Hometrust’s breaches of the
representations, warranties, and/or covenants made under the Agreement that caused LBHI to
compensate Fannie Mae, pursuant to separate agreements between LBHI and Fannie Mae that
were co-extensive with the representations, warranties, and/or covenants contained in the
Agreement, and, ultimately, pursuant to the Fannie Mae Settlement. See Complaint ¶¶ 29, 37.
The ADR Procedures and Hometrust’s Refusal to Reimburse LBHI
On June 24, 2014, the Court entered Alternative Dispute Resolution Procedures Order for
Indemnification Claims of The Debtors Against Mortgage Loan Sellers [Case No., 08-13555
ECF Nos. 44846 & 45277] (the “ADR Order”). On July 17, 2014, LBHI sent a letter to
Hometrust seeking indemnification for losses suffered by LBHI in connection with the Fannie
Mae Settlement. See [ECF No.1, Ex. C]. Hometrust responded to the letter with a refusal to
indemnify LBHI, asserting that LBHI’s claim is barred in its entirety by the applicable statute of
limitations. Complaint ¶ 41. LBHI states in its opposition to the Motion that numerous
originators and other third parties have refused or may refuse to engage in the substantive
negotiations envisioned by the ADR Order on the basis that such parties are joining Hometrust in
asserting that LBHI’s claims for indemnification are time-barred.
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DISCUSSION
LBHI argues that its claim is for contractual indemnification under the Agreement; LBHI
asserts that, under New York law, and, specifically, under McDermott v. City of New York, 406
N.E.2d 460 (N.Y. 1980) and its progeny, such a claim for indemnification does not accrue until
liability to a third party is fixed or payment is made. See McDermott, 406 N.E.2d at 462
(citations omitted) (“since the cause of action [for indemnification] is not complete until loss is
suffered, familiar Statute of Limitations principles dictate that accrual occurs upon payment by
the party seeking indemnity”); Sompo Japan Ins. Co. of Am. v. Norfolk S. Ry. Co., 762 F.3d 165,
188 (2d Cir. 2014) (citations omitted) (“a claim for contractual indemnification only accrues
once the indemnitee has suffered a loss, i.e., made a payment”). Accordingly, LBHI argues that
the six-year statute of limitations on its claim did not begin running until January 22, 2014, the
date of the Fannie Mae Settlement.
In response, Hometrust argues that the Agreement does not provide for a separate claim
for contractual indemnification, but makes indemnification but one of a suite of available
“remedies” for a breach of the Agreement’s representations and warranties. Hometrust submits
that McDermott and its progeny are inapposite because, while such cases found an implied
indemnification right in a tort context, there can be no implied indemnification right in a contract
context. Hometrust thus argues that, notwithstanding LBHI’s label of its claim as one for
“contractual indemnification,” there is no such right under the Agreement and the Court cannot
read such a right into the Agreement. If Hometrust’s interpretation of the Agreement is correct,
and indemnification is simply a remedy under the Agreement, indemnification cannot serve as a
basis for LBHI’s claim. See Lehman XS Trust, Series 2006-4N ex rel. U.S. Bank Nat’l Ass’n v.
Greenpoint Mortg. Funding, Inc., 991 F. Supp. 2d 472, 476-77 (S.D.N.Y. 2014) (citations
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omitted) (holding that New York law “does not recognize pre-suit remedial provisions in
contracts as constituting separate promises which can serve as the basis for independent causes
of action.”). LBHI’s claim would thus be a simple breach of contract claim based on
Hometrust’s alleged breach of the Agreement’s representations and warranties, which claim
would have accrued, under New York law, when LBHI had a legal right to demand payment, as
of the date the Agreement was breached. See e.g., Hahn Auto. Warehouse, Inc. v. Am. Zurich
Ins. Co., 967 N.E.2d 1187, 1190 (N.Y. 2012); Wells Fargo Bank, N.A. v. JPMorgan Chase Bank,
N.A., No. 12 Civ. 6168 (MGC), 2014 WL 1259630 at *2 (S.D.N.Y. Mar. 27, 2014) (“[I]t is well
settled that the statute of limitation for breach of contract begins to run from the day the contract
was breached, not from the day the breach was discovered, or should have been discovered.”
(quoting ABB Indus. Sys., Inc. v. Prime Tech., Inc., 120 F.3d 351, 360 (2d Cir. 1997)). Simply
stated, under Hometrust’s theory, the Agreement would have been breached with respect to each
allegedly defective Loan when Hometrust sold it to LBB, LBHI’s assignor, (i.e., in 2006 and
2007), and thus LBHI’s claim is time-barred. See N.Y. C.P.L.R. § 213(2) (statute of limitations
for breach of contract claims is six years).
The disposition of the Motion turns on an interpretation of the Agreement and,
specifically, whether the Agreement gives LBHI, as assignee of LBB’s rights under the
Agreement, a contractual indemnification claim against Hometrust, as seller of the Loans, that is
separate from a time-barred claim for a breach of the Agreement’s representations and
warranties.
The Parties’ Textual Interpretations of the Agreement
Not surprisingly, LBHI and Hometrust each strenuously argue that a plain reading of the
relevant portions of the Agreement mandates a finding in its favor. LBHI argues that a right to a
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separate claim for indemnification is explicitly set forth in section 711 of the Seller’s Guide,
which is entitled “Indemnification and Third Party Claims” and provides, in relevant part:
In addition to any repurchase and cure obligations of Seller, and any and all other
remedies available to Purchaser under this Seller’s Guide and the Loan Purchase
Agreement, Seller shall indemnify Purchaser and Purchaser’s designee (including,
without limitation, any subsequent holder of any Note) from and hold them
harmless against all claims, losses, damages, penalties, fines, claims, forfeitures,
lawsuits, court costs, reasonable attorney’s fees, judgments and any other costs,
fees and expenses that the Purchaser may sustain in any way related to or
resulting from any act or failure to act or any breach of any warranty, obligation,
representation or covenant contained in or made pursuant to this Seller’s Guide or
the Loan Purchase Agreement by any agent, employee, representative or officer
of Seller or Seller’s correspondent.
Seller’s Guide [ECF No. 1, Ex. B] § 711.
LBHI argues that the introductory language makes clear that the rights delineated in section 711
are “in addition to” all other remedies given to the Purchaser under the Agreement in the event of
a breach of the Seller’s representations and warranties, including the remedies granted to the
Purchaser pursuant to section 710 of the Seller’s Guide, entitled “Repurchase Obligation.”
By contrast, Hometrust argues that the Agreement makes clear that indemnification is a
“remedy” under the Agreement, and not a separate right of action. With respect to section 711 of
the Seller’s Guide, Hometrust’s interpretation is that the introductory language of section 711 --
“[i]n addition to any repurchase and cure obligations of Seller, and any and all other remedies
available to Purchaser under this Seller’s Guide and the Loan Purchase Agreement” -- means that
Purchaser’s rights under section 711 are grouped with, and therefore the same as, “all other
remedies available to Purchaser.” Hometrust also asserts that indemnification is a remedy under
the Agreement, making much of the fact that indemnification is included in the list of remedies
set forth in section 710 of the Seller’s Guide, which section provides, in relevant part, that “all of
Purchaser’s remedies hereunder, including, without limitation, the repurchase obligation with
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respect to the Mortgage Loan, the purchase obligation with respect to the Mortgaged Property,
and the indemnification with respect to any breach of a representation, warranty or covenant…”.2
DECISION
“The objective of contract interpretation is to give effect to the expressed intentions of the
parties.” Record Club of America, Inc. v. United Artists Records, Inc., 890 F.2d 1264, 1271 (2d
Cir. 1989) (citations omitted). Courts should, where possible, interpret a contract in a way that
does not place undue emphasis upon particular words or phrases and gives effect to all words
chosen by the parties. See In re MF Global Inc., 496 B.R. 315, 319 (S.D.N.Y. 2013) (“Courts
should read the integrated contract ‘as a whole to ensure that undue emphasis is not placed upon
particular words and phrases and to safeguard against adopting an interpretation that would
render any individual provision superfluous.’”) (quoting Law Debenture Trust Co. of N.Y. v.
Maverick Tube Corp., 595 F.3d 458, 467 (2d Cir. 2010)).
Hometrust’s interpretation of the Agreement is at odds with these fundamental principles
of contract interpretation in several respects. It does not give effect to all of the Agreement’s
provisions, specifically section 711 of the Seller’s Guide, and it places undue emphasis on the
inclusion of the word “indemnification” in section 710 of the Seller’s Guide, a section that
otherwise is addressed to the remedies of the contracting parties and not third parties.3 As
Hometrust points out, “indemnification” is listed as a “remedy” in section 710 of the Seller’s
2 The full text of the last paragraph of section 710 of the Seller’s Guide provides:
All of Purchaser’s remedies hereunder, including, without limitation, the repurchase obligation with respect
to the Mortgage Loan, the purchase obligation with respect to the Mortgaged Property, and the
indemnification with respect to any breach of a representation, warranty or covenant (or any other Event of
Default), shall exist regardless of (i) the dates of Purchaser’s discovery and notice to Seller of the breach
and Purchaser’s demand for any remedy and (ii) any limitation or qualification of a representation or
warranty as being made “to Seller’s knowledge” or “to the best of Seller’s knowledge” or any similar
qualification relating to the knowledge of Seller. Notwithstanding any other provision of the Seller’s Guide
or Loan Purchase Agreement to the contrary, Seller shall remain liable for all remedies hereunder, even if
Purchaser discovers a breach after the Mortgage Loan is liquidated in foreclosure.
Seller’s Guide [ECF No. 1, Ex. B] § 710.
3 See e.g., Aurora Commercial Corp. v. Standard Pac. Mortg., No. 12-cv-3138-WJM-KLM, 2014 WL1056383 (D.
Colo. March 19, 2014).
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Guide. If, as Hometrust urges, section 711 provides a second identical remedy, albeit under the
heading “Indemnification and Third-Party Claims,” it is difficult to articulate a distinction
between the remedy of indemnification in section 710 of the Seller’s Guide and the remedy of
indemnification in section 711 of the Seller’s Guide. If there is no distinction, section 711 of the
Seller’s Guide adds nothing to the rights and obligations the parties have assumed pursuant to
section 710 of the Seller’s Guide; accordingly, it is wholly superfluous and without effect.
Hometrust made no attempt to draw such a distinction in its papers; moreover, counsel to
Hometrust was unable to articulate a distinction at oral argument. See February 17, 2015 H’rg
Tr. 34:5-35:8.
Hometrust’s interpretation of the Agreement requires that the Court find that the
inclusion of the word “remedies” in section 711 of the Seller’s Guide transforms section 711 into
a section 710 pre-suit remedial provision. As noted by LBHI, Hometrust’s interpretation of
section 711 of the Seller’s Guide places undue emphasis on the word “remedies,” and ignores the
fact that the sentence containing the word “remedies” is introducing the rights of the Purchaser
under section 711 of the Seller’s Guide as “in addition to…any and all other remedies available
to Purchaser under this [Agreement].” This context suggests that the rights under section 711 of
the Seller’s Guide are of a different character than the other remedies under the Agreement.
Sections 710 and 711 of the Seller’s Guide must be read together to provide the Purchaser (i)
rights under section 710, which rights include indemnification, and (ii) additional rights under
section 711, of a different character than those given under section 710, including rights
exercisable by third parties who were not parties to the Agreement in the first instance.4
4 Hometrust’s interpretation of the Agreement also runs counter to market expectations and practices, as evidenced
by market behavior. Specifically, Hometrust’s interpretation of the Agreement would require the Court to find that
sophisticated market participants did not, and could not, contract to account for the real risk that a loan re-seller’s
right to indemnification from a loan originator could become time-barred. At oral argument, Hometrust’s counsel
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Hometrust invites the Court to view (i) the failure of LBB and LBHI to “draft around” the
statute of limitations risk when it drafted the Agreement, (ii) the failure of LBHI to preserve its
rights in its disposition of the Fannie Mae claims, and (iii) the failure of the sophisticated
participants in the broader securitization market to account for this risk in loan re-sale
agreements similar to the Agreement as “bad business decisions.” See February 17, 2015 H’rg
Tr. 26:19-28:2. Far more likely is that LBB and LBHI behaved in accordance with the broader
market’s practice and expectations; namely, that the statute of limitations on a loan re-seller’s
right to indemnification from a loan originator is part of a package of bargained-for rights and
should be available when the re-seller makes a payment to a third party. Otherwise, the detailed
and extensive documents that comprise the Agreement and countless others like it are replete
with indemnification rights that are, at best, fleeting, and at worst, illusory. See generally
February 17, 2015 H’rg Tr. 15:15-16:19; 23:5-23:16; 26:19-28:2; 39:4-42:15.
Case Law Interpreting the Agreement
confirmed that, under its interpretation of the Agreement, a party that subsequently sold the Loans and assigned its
rights under the Agreement to a third-party (i) would be barred from making a claim against Hometrust for
indemnification before the statute of limitations had run unless such party had actually made a payment to the third
party, and (ii) could not assert a claim against Hometrust for indemnification if payment to the third party was made
after the statute of limitations had run. Counsel for Hometrust thus confirmed that, if LBHI wanted to assert an
indemnification claim against Hometrust one day before the statute of limitations had run but prior to LBHI making
payment to Fannie Mae, such suit would be premature and, if such payment were made two days later, after the
statute of limitations had run, LBHI’s claim for indemnification would be time-barred. See February 17, 2015 H’rg
Tr. 26:19-27:15. If the Agreement, and similar loan purchase agreements that incorporate similar seller’s guides
were interpreted this way, it would create a risk in re-selling purchased loans to the extent that a re-seller would be
forced to rely on its counterparty identifying and demanding payment for any breaches of the representations and
warranties made by the loan originator prior to the expiration of the statute of limitations if the re-seller’s
indemnification rights against the loan originator were to have any meaning. Given the relevance of such a risk to
the securitization industry, the market might expect to see provisions accounting for this risk in sale agreements
between re-sellers and parties like Fannie Mae, or perhaps see re-sellers making different representations,
warranties, and covenants in such agreements than an originator would make in a sale agreement between an
originator and a re-seller. Instead, a re-seller generally, and, as is the case here, makes representations, warranties,
and covenants that are coextensive with the representations, warranties, and covenants made by the originator, and
there is no separate provision dealing with the risk that an indemnification right held by the re-seller could be
meaningless if the counterparty does not identify and demand payment for any breaches of the representations and
warranties made by the loan originator prior to the expiration of the statute of limitations. The parties could have
added an outside indemnification date but did not. See infra, n. 8.
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While the parties have cited a number of cases in support of their arguments, relatively
few of those cases actually consider whether a third-party claim for contractual indemnification
exists under the Agreement and fewer still consider the issue in the amount of depth required to
dispose of the issues raised by the instant Motion.
With respect to decisions interpreting the Agreement, Hometrust principally relies upon
three cases from the District of Colorado -- Lehman Bros. Holdings, Inc. v. Universal Am.
Mortg. Co., LLC, No. 13-cv-0092-WJM-BNB, 2014 WL 4269118 (D. Colo. Aug. 28, 2014)
(“Universal IV”)5 ; Lehman Bros. Holdings, Inc. v. First Calif. Mortg. Corp., No. 13-cv-02113-
CMA-KMT, 2014 WL 3843803 (D. Colo. Aug. 5, 2014) (“First California”); and Lehman Bros.
Holdings, Inc. v. Universal Am. Mortg. Co., LLC, No. 13-cv-00093-CMA-MJW, 2014 WL
3843797 (D. Colo. Aug. 5, 2014) (“Universal III”). Hometrust urges that these decisions have
interpreted the Agreement and have determined that there is no separate cause of action for
indemnification contained therein. Hometrust also placed great emphasis, particularly at oral
argument, on Lehman Bros. Holdings Inc. v. Evergreen Moneysource Mortg. Co., 793 F. Supp.
2d 1189 (W.D. Wash. 2011) (“Evergreen”). None of these cases is persuasive, let alone
dispositive, here.
None of Universal IV, First California, and Universal III mentions, let alone analyzes,
section 711 of the Seller’s Guide or attempts to determine whether it confers a right of action for
indemnification separate from “indemnification” under section 710 of the Seller’s Guide for
breaches of representations, warranties, and/or covenants. Rather, each of these cases contains a
conclusory statement that LBHI’s claim for indemnification is time-barred. See, Universal IV,
5 The District Court of Colorado considered a number of cases entitled Lehman Bros. Holdings Inc. v. Universal Am.
Mortg. Co., LLC over the course of 2014, five of which are relevant here. To attempt to avoid confusion, the Court
will refer to them herein as “Universal [Roman numeral]” with the Roman numeral determined by the chronological
order in which the decisions were issued. For example, Universal I (defined below) was issued on January 27, 2014
and Universal V (defined below) was issued on October 9, 2014.
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2014 WL 4269118 at *3 (“Defendant’s alleged failure to repurchase the Storemski Loan and to
indemnify [LBHI] for its losses from its payment to Freddie Mac are merely pre-suit contractual
remedies.”); First California 2014 WL 3843803 at *2 (“[LBHI]’s argument that the statute of
limitations accrual date was not triggered until it indemnified Fannie Mae has been rejected by
this Court.”); Universal III, 2014 WL 384397 at *1 (“[LBHI]’s argument that the statute of
limitations accrual date was not triggered until it indemnified Freddie Mac has been rejected by
this Court.”). In support of these conclusions, each decision refers to other cases in which the
court, or another court in the District of Colorado, had considered a “similar” fact pattern. See
e.g., Universal IV, 2014 WL 4269118 at *4 (“The Court has previously considered a similar
argument in a related case, wherein the same Plaintiff alleged that the defendant's subsequent
failure to repurchase the loan constituted a second breach that triggered a new limitations
period.”) (citing Aurora Commercial Corp. v. Standard Pac. Mortg., No. 12-cv-3138-WJM-
KLM, 2014 WL1056383 (D. Colo. March 19, 2014)); First California, 2014 WL 3843803 at *1
n.2 (“Moreover, facing a similar fact pattern, another court in this district likewise determined
that Plaintiff's claims are barred by [the applicable] statute of limitation” (citing Lehman Bros.
Holdings Inc. v. Universal Am. Mortg. Co., LLC, 12 F. Supp. 3d 1355 (D. Colo. 2014)
(“Universal I”)); Universal III, 2014 WL 384397 at n. 2 (“Moreover, facing a similar fact
pattern, another court in this district likewise determined that Plaintiff's claims are barred by [the
applicable] statute of limitation”) (citing Lehman Bros. Holdings Inc. v. Universal Am. Mortg.
Co., LLC, No. 13-cv-00090-PAB-MJW, 2014 WL 3258409 (D. Colo. July 8, 2014) (“Universal
II”)).
However, the facts of the cases relied upon in Universal IV, First California, and
Universal III cases are not similar to the facts presented to this Court:
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 	In Aurora Commercial, relied upon in Universal IV, the court rejected the
plaintiff’s argument that a loan seller’s failure to repurchase non-conforming
loans on demand was a separate and independent breach of the Agreement that
reset the statute of limitations, reasoning that because the plaintiff’s right to
demand repurchase under section 710 of the Seller’s Guide had accrued at
origination, the post-origination refusal to repurchase did not have any impact on
the statute of limitations. See Aurora Commercial, 2014 WL 1056383 at *4-5
(“[T]he statute of limitations begins to run when a cause of action accrues…[t]he
first alleged breach of a representation or warranty occurred in December 2006
when the first Subject Loan was originated, thus triggering both Plaintiff's duty to
repurchase the Subject Loans and the running of the statute of limitations.”)
(citing section 710 of the Seller’s Guide)). In other words, Aurora Commercial
(and Universal IV) dealt only with the exercise of remedies under section 710 of
the Seller’s Guide by a party to the original documents; it did not touch upon
third-party indemnification rights potentially exercisable under section 711 of the
Seller’s Guide.
 	Universal I, relied upon in First California, only addressed whether New York’s
borrowing statute applied for purposes of determining the relevant statute of
limitations applicable to LBHI’s claims for breaches of contract under the
Agreement, and did not analyze or determine whether and when a claim for
indemnification accrues under the Agreement. See generally, Universal I, 12 F.
Supp. 3d 1355.
 	Universal II (Brimmer, J.), which was cited in Universal III (Arguello, J.), did in
fact consider a claim for indemnification under section 711 of the Seller’s Guide
and held that LBHI’s claim for indemnification under section 711 of the Seller’s
Guide did not accrue until it made payment to a third party. Universal II, 2014
WL 3258409 at *10 (“[a]s a threshold matter, the Court finds that plaintiff’s
indemnification claim is not time-barred because it did not accrue until August 7,
2008 when plaintiff made Freddie Mac whole for Loan 5128.” (citing
McDermott)).
Accordingly, the cases that underlie the reasoning in Universal IV, First California, and
Universal III are either factually distinguishable from the instant case, or are based on an
erroneous reading of a prior case. Thus, the Court does not find the conclusions reached in
Universal IV, First California, and Universal III persuasive.6
Nor does Hometrust fare better in its reliance on Evergreen. In Evergreen, LBHI
asserted that its claim against a loan seller did not accrue until 30 days after LBHI demanded
6 Nor indeed are such cases binding on this Court as a matter of stare decisis.
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payment because LBHI had demanded that the loan seller “indemnify” it for losses stemming
from breaches of the representations, warranties, and/or covenants in the Agreement. See
Evergreen, 793 F. Supp. 2d at 1193. The Evergreen court rejected LBHI’s argument because it
found that LBHI’s claim could not be for indemnity because it did not allege it suffered any
liability to a third party. Evergreen, 793 F. Supp. 2d at 1194 n.2 (“However, despite LBHI's
characterization of its claim as one for “indemnity,” and despite the imprecise use of this term in
the Seller's Guide, LBHI has not alleged it suffered any liability to a third-party. Rather, LBHI's
allegations comprise a straightforward claim for damages pertaining to its predecessor's purchase
of the Stiffler loan.”). Thus, because LBHI had failed to allege liability to a third party and
therefore failed to state a claim for indemnification, the Evergreen court did not need to analyze
the issue presented here, namely whether there is a separate right of action for indemnification
under the Agreement that accrues at a later date than a claim for breach of the representations,
warranties, and/or covenants in the Agreement. Indeed, under the “consistent line” of New York
authority cited by Hometrust, see e.g., Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 967
N.E.2d 1187 (N.Y. 2012), a cause of action for indemnification accrues when a party possesses a
legal right to demand payment; here, LBHI possessed no such right until it paid Fannie Mae.
Prior to that time, the right belonged only to Fannie Mae.
Having canvassed and analyzed every case in which the Agreement or documents closely
akin to the Agreement have been at issue, the Court concludes that Universal II, and Judge
Brimmer’s subsequent decision in Lehman Bros. Holdings Inc. v. Universal Am. Mortg. Co.,
LLC, No. 13-cv-00090-PAB-MJB, 2014 WL 5069409 (D. Colo. Oct. 9, 2014) (“Universal V”)
contain the most thorough treatment of the issues here presented and finds them persuasive. In
Universal V, the defendant, Universal Mortgage Co., LLC, argued that Judge Brimmer had erred
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in finding that LBHI’s claim for contractual indemnification was not time-barred in Universal II,
arguing, as Hometrust does here, that contractual indemnification is nothing more than a remedy
under the Agreement. See 2014 WL 5069409 at *1. Judge Brimmer was not persuaded by the
argument that section 711 of the Seller’s Guide is merely a remedial provision. In interpreting
section 711 of the Seller’s Guide, he reasoned,
The indemnification provision specifically provides that it is ‘in addition to any
repurchase and cure obligations of [Universal].’ To treat the indemnity and repurchase
obligations as identical would render the indemnification provision mere surplusage. But
‘[a] reading of [a] contract should not render any portion meaningless.’ 	Given that the
terms of the indemnification provision state that indemnification is ‘in addition to any
repurchase and cure obligations,’ the indemnification language cannot be ignored by the
expedient of mischaracterizing it as a “remedial provision.
Id. at *3 (citations omitted).
So too here. The in-depth analysis of the provisions of the Agreement undertaken in
Universal V harmonizes the seemingly disparate decisions of the various courts on the accrual
issue and lays to rest any question that section 711 of the Seller’s Guide must be read to afford a
third party indemnification rights that accrue only when a payment is made.7 Moreover, the
Court agrees further with Universal V and declines to draw a distinction between the
indemnification right addressed in McDermott, which arose in a tort context, and contractual
indemnification for purposes of determining when such claims accrue. Id. at *2 (“Although
McDermott concerned implied indemnification as opposed to contractual indemnification,
federal and state courts in New York have repeatedly affirmed the general rule that a cause of
action for indemnification occurs when the indemnitee suffers a loss in the context of contractual
7 The Court also notes a string of cases from the District of Minnesota that interpreted loan purchase agreements and
seller’s guides similar to the Agreement and applied Minnesota law to such agreements. These cases found, in
accord with Judge Brimmer, that purchasers had a separate right of indemnification under such agreements that did
not accrue until liability to a third party became fixed. See e.g., Residential Funding Co. v. Embrace Home Loan,
Inc., 27 F. Supp. 3d 980, 987 (D. Minn. 2014); Residential Funding Co. v. Academy Mortgage Corp., Civ. No. 14-
3451 (SRN/JSM), 2014 WL 5860566 at *7 (D. Minn. Nov. 12, 2014).
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indemnification.”) (footnote and citations omitted). For purposes of determining when the claim
accrues, there is no distinction between a claim for implied indemnification arising in a tort
context and a claim arising in a contractual context. See Sompo Japan Ins. Co. of Am. v. Norfolk
S. Ry. Co., 762 F.3d 165, 188 (2d Cir. 2014) (“a claim for contractual indemnification only
accrues once the indemnitee has suffered a loss, i.e., made a payment”) (emphasis added).8
CONCLUSION
LBHI’s claim for indemnification under section 711 of the Seller’s Guide did not accrue
until its liability to a third party was fixed or payment was made. Accordingly, the six-year
statute of limitations on LBHI’s claim for contractual indemnification did not begin to run until
January 22, 2014, the date of the Fannie Mae Settlement. LBHI’s claim against Hometrust is not
time-barred. Hometrust’s Motion to Dismiss is denied.
Dated: May 7, 2015
New York, New York
/S/ Shelley C. Chapman
UNITED STATES BANKRUPTCY JUDGE
8 The specter raised by Hometrust of unlimited extensions of the statutory limitations period is unfounded. First,
there is no allegation that LBHI purposefully or otherwise refrained from asserting its rights in a timely fashion.
And secondly, parties are free to impose a contractual time limitation for the assertion of third-party indemnification
claims. See Cont’l Cas. Co. v. Stronghold Ins. Co., 866 F. Supp. 143, 147 n. 2 (S.D.N.Y. 1994) (Sand, J.). Further,
as LBHI concedes in its opposition papers, “once an indemnification claim has accrued as a result of the
indemnitee’s liability to a third party, the indemnitee cannot extend the statute of limitations by stalling in making a
demand on the indemnitor.” Memorandum of Law of Plaintiff Lehman Brothers Holdings Inc. in Opposition to the
Motion of Defendant Hometrust Mortgage Company to Dismiss the Complaint [ECF No. 18] at 10 n. 1; see also,
Cont’l Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16, 21 (2d Cir. 1996).
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