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Aurora Commercial Corp. v. Lenox Financial Mortgage Corp.

United States District Court, E.D. California

September 19, 2014



ANTHONY W. ISHII, Senior District Judge.

I. Introduction

Defendant Lenox Financial Mortgage Corporation ("Defendant"), and Plaintiffs Aurora Commercial Corporation, et al., ("Plaintiffs") have filed competing motions for summary judgment. The case surrounds the residential refinance loan (the "Loan") made to borrower, Samuel Gonzales ("Borrower"), and secured by a deed of trust against the real property commonly known as 3100 Greenbriar Way in Rosamond, California ("Subject Property"). In that transaction, Defendant was the loan originator, underwriter, and seller. Plaintiffs purchased the residential refinance loan. Plaintiffs allege that Defendant breached its contract and warranty under which it was obliged, as a loan originator, to ensure accuracy of representations regarding the loan it underwrote and repurchase the loan or indemnify Plaintiffs in the event of a defective or non-conforming loan. Plaintiffs contend that the loan contained misrepresentations regarding Borrower's gross personal income and the property's intended use and that Seller's employees were non-compliant with underwriting requirements. Defendant rebuts that Borrower provided truthful information on his loan application because he reported the gross income earned by his sole proprietorship which is effectively his personal income and Borrower did not misrepresent his intended use because he occupied the Subject Property a major portion of each year for four years prior to seeking the Loan and had intended to continue to do so. Further Defendant contends that no underwriting violation took place because a stated income loan does not require that an underwriter verify the monthly income amount of a loan applicant. Both parties seek summary judgment. For the following reasons, Defendant's motion for summary judgment will be denied and Plaintiffs' motion for summary judgment will be granted.

II. Background

Borrower is a commercial truck driver. In 1991, Borrower purchased a mobile home located at 1949 South Manchester Ave. in Anaheim, California. (Plaintiffs' Statement of Undisputed Facts ("PSUF") at ¶ 45.) In 2003, Borrower and his employees began making deliveries for a DHL contractor by the name of Velocity. (PSUF at ¶ 28.) While making deliveries for Velocity, Borrower used the unregistered business name "Mule Transport." (PSUF at ¶ 29.) In the same year, Borrower purchased the Subject Property, financed by a loan and secured by a deed of trust against the Subject Property. (PSUF at ¶ 46.) Borrower divided his time between the Subject Property and Anaheim property depending on where he was required to drive for Velocity. (Deposition of Samuel Gonzales, Doc. 53-2, Exhibit B ("Gonzales Depo.") at 40:2-20.)

On March 30, 2006, Lenox and LLB (predecessor in interest to Plaintiff Aurora Bank) entered into a loan purchase agreement by which Lenox was granted authority to underwrite loans for LBB. (PSUF at ¶ 12; see Doc. 13 ("Loan Purchase Agreement").) The agreement provided that Lenox would underwrite all loans for LBB in compliance with the LBB guidelines, specifically the "Seller's Guide." ( See Doc. 54-2 ("Seller's Guide").)

In May of 2007, Borrower refinanced his home through Lenox with a "stated income" loan. (Stipulated Facts ("SF") at ¶ 4.) The loan amount was set at $231, 300 and was secured against a deed of trust recorded against the Subject Property. (PSUF at ¶¶ 14-15; Doc. 47-9 at p. 5.) The loan application reflected that the Subject Property was Borrower's primary residence and that his gross monthly income was $12, 000. (PSUF at ¶¶ 15, 21.) Aurora purchased the loan from Lenox for $228, 039.71. (SF at ¶ 5.) The purchase was pursuant to the terms of the Agreements and Seller's Guide. (SF at ¶ 6.) The Program Profile is a companion piece to the Seller's Guide (both refer to and rely upon each other) which contains a consolidated list of requirements for each loan type and the corresponding ratios and requirements. ( See Doc. 54-11 ("Program Profile").)

The Seller's guide at Section 7 contains multiple representations, warranties, and covenants made by Defendant. The Seller's Guide indicates Defendant's acknowledgement that Plaintiffs purchased loans in reliance upon "the truth and accuracy of Seller's representations and warranties set forth in the Loan Purchase Agreement and this Seller's Guide, each of which representations and warranties relates to a matter material to such purchase...." (Seller's Guide at § 701.) The terms of the Seller's Guide also indicate Defendant's agreement that, as to each mortgage loan, "[n]o document, report or material furnished to Purchaser in any Mortgage Loan File or related to any Mortgage Loan (including, without limitation, the Mortgagor's application for the Mortgage Loan executed by the Mortgagor), was falsified or contains any untrue statement of fact or omits to state a fact necessary to make the statements contained therein not misleading." (Seller's Guide at § 703(1).) In the event of a breach of the representations, warranties, or covenants, Defendant was under the obligation to repurchase the Mortgage Loan. (Seller's Guide at § 710.)

Borrower defaulted on the Loan on March 1, 2010. (Doc. 54 at p. 9.) The remaining principal on the loan at the time of default was $230, 444.77. (Doc. 54 at p. 16; Doc. 54-9 at p. 1.) On April 21, 2011, Plaintiffs recovered a net $71, 909 from the sale of subject property after foreclosure. ( See Doc. 54-12 at p. 1.) In a letter dated June 15, 2012, Plaintiffs demanded indemnification for their loss in the amount of $187, 750.23. ( See Doc 54-10; PSUF at ¶ 64.) Defendant refused to do so. (PSUF at ¶ 65.)

Plaintiffs now move for summary judgment on the grounds that the loan documents contained various misrepresentations which triggered Defendant's obligation to repurchase the Loan and Defendant's failure to do so constitutes a breach of contract.

III. Legal Standard

"A party may move for summary judgment, identifying each claim or defense - or the part of each claim or defense - on which summary judgment is sought. The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party bears the initial burden of "informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, ' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); see Fed.R.Civ.P. 56(c)(1)(A). "Where the non-moving party bears the burden of proof at trial, the moving party need only prove that there is an absence of evidence to support the non-moving party's case." In re Oracle Corp. Securities Litigation, 627 F.3d 376, 387 (9th Cir. 2010) (citing Celotex, supra, 477 U.S. at p. 325). If the moving party meets its initial burden, the burden shifts to the non-moving party to present evidence establishing the existence of a genuine dispute as to any material fact. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-86 (1986). To overcome summary judgment, the opposing party must demonstrate a factual dispute that is both material, i.e., it affects the outcome of the claim under the governing law, see Anderson, 477 U.S. at 248; T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.1987), and genuine, i.e., the evidence is such that a reasonable jury could return a verdict for the nonmoving party. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1436 (9th Cir.1987). In order to demonstrate a genuine issue, the opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts.... Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.'" Matsushita, supra, 475 U.S. at p. 587 (citation omitted). A court ruling on a motion for summary judgment must construe all facts and inferences in the light most favorable to the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Nevertheless, inferences are not drawn out of the air, and it is the opposing party's obligation to produce a factual predicate from which the inference may be drawn. See Richards v. Nielsen Freight Lines, 602 F.Supp. 1224, 1244-45 (E.D.Cal.1985), aff'd, 810 F.2d 898 , 902 (9th Cir.1987).

IV. Discussion

Breach of Contract Claim

The Court evaluates Plaintiffs' claims for breach of contract under New York law pursuant to the choice-of-law provision in the parties' agreement. (Loan Purchase Agreement § 8 ("This Agreement and the Seller's Guide shall be construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of New York.").)

Under New York law, the elements of a breach of contract claim are (1) the existence of a valid contract, (2) performance by the plaintiff, (3) the defendant's failure to perform, and (4) resulting damage. Aurora Commercial Corp. v. Approved Funding Corp., 2014 WL 1386633, 3 (S.D. N.Y. 2014) ( citing Clearmont Prop., LLC v. Eisner, 872 N.Y.S.2d 725, 728 (N.Y. App.Div. 2009).) Furthermore, "[u]nder New York law, a loan seller's failure to repurchase non-conforming loans upon demand as required by a contract is an independent breach of the contract entitling the plaintiff to pursue general contract remedies for breach of contract." Lehman Brother Holdings, Inc. v. PMC Bancorp, 2013 WL 1095458, *4 (C.D. Cal. 2013) (citing, inter alia, LaSalle Bank Nat'l Ass'n v. Lehman Bros. Holding, Inc., 237 F.Supp.2d 618, 638 (D. Md. 2002).)

There is no dispute as to the first element of the breach of contract claim; a valid contract existed between the parties. (SF at ¶¶ 5, 6; see PSUF at ¶¶ 6, 12; see generally Loan Purchase Agreement.) There is similarly no dispute as to the second element; Plaintiffs performed their obligations under the contract. (SF at ¶ 5 ("Aurora purchased the loan from Lenox for $228, 09.71").)

A dispute arises as to the third element of the breach of contract claim. Plaintiffs claim that Defendant breached the agreement when it failed to repurchase the defective or non-conforming loan. Defendant alleges that it complied with all underwriting requirements applicable to a stated income loan and Borrower did not misrepresent his income, employment or occupancy, thus it was not in breach. Plaintiffs have identified four material defects which trigger Defendant's repurchase obligations: (1) underwriting violations, (2) income misrepresentation, (3) occupancy misrepresentation, and (4) misrepresentation regarding Borrower's compliance with the deed of trust. The Court only addresses the first two.

As a preliminary matter, this Court notes that whether or not Borrower knowingly misrepresented his income or employment is not at issue in this suit. Similarly, whether or not Defendant knew that misrepresentations or other defects existed in the loan is without consequence. If misrepresentations or defects existed in the loan documents, regardless of whether the fault rests with Borrower or Defendant, then Defendant is in breach. ( See Seller's Guide § 703(1) (where the Defendant warrants that "[n]either the Seller Application Package, the Loan Purchase Agreement, nor any statement, report or other document furnished or to be furnished by Seller... contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained therein not misleading."); § 703(12) (where the Defendant also warrants that "[n]o fraud was committed in connection with the origination of the Mortgage Loan. The Seller has reviewed all of the documents constituting the Mortgage Loan File and has made such inquiries as it deems necessary to make and confirm the accuracy of the representations...."); see also, Doc. 55 ("Defendant's Reply") at p. 11 ("If the borrower lies, the shift is allocated to Lenox. If the borrower tells the truth but later defaults, that risk is allocated to Aurora.").) As a result, whether or not Defendant had an obligation to verify Borrower's income is not of consequence to this action (except insofar as it may be required under Seller's Guide § 502 to determine the reasonableness of the borrower's ability to repay the mortgage debt) since the risk of fraud or misstatement during origination was ...

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