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Lehman Brothers Holdings Inc v. Gateway Funding Diversified Mortgage Services

April 25, 2013

LEHMAN BROTHERS HOLDINGS INC.,
PLAINTIFF
v.
GATEWAY FUNDING DIVERSIFIED MORTGAGE SERVICES, L.P. DEFENDANT



The opinion of the court was delivered by: Anita B. Brody, J.

MEMORANDUM

Plaintiff Lehman Brothers Holdings Inc. ("LBHI") brings this suit against Defendant Gateway Funding Diversified Mortgage Services, L.P. ("Gateway"), involving home mortgage loans. Both Lehman and Gateway have filed motions for summary judgment.

I.FACTUAL BACKGROUND

In August 2001, Arlington Capital Mortgage Corporation ("Arlington"), a mortgage origination company, entered into a Loan Purchase Agreement with Lehman Brothers Bank, FSB ("LBB"), a subsidiary of LBHI.*fn1 Under the agreement, LBB agreed to buy mortgage loans "from time to time" from Arlington. The agreement specifically incorporated a "Seller's Guide."*fn2 The Seller's Guide included various representations, warranties and covenants made by Arlington, the seller of the loans. See Declaration of John Baker ("Baker Decl."), Ex. B. It stated that LBB purchased the 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." Id. at § 701. Under the Seller's Guide, Arlington represented that [n]o document, report or material furnished to Purchaser in any Mortgage Loan File or related to any Mortgage Loan (including, with limitation, the Mortgagor's application for the Mortgage Loan executed by the Mortgagor), was falsified or contains any untrue statement of facts or omits to state a fact necessary to make the statements contained therein not misleading.

Id. at § 703 ¶ 1. The Seller's Guide further provided that in the event of a breach of any of the representations, warranties or covenants resulting in damage to LBB, LBB may require Arlington to "repurchase the related Mortgage Loan (in the case of a breach of the representations, warranties or covenants contained in Section 703 hereof or an Early Payment Default) at the Repurchase Price." Id. at § 710. In addition, the Guide stated that Arlington shall indemnify [LBB] . . . 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 [LBB] 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 in or made pursuant to this Seller's Guide or the Loan Purchase Agreement . . .

Id. at § 711.

Under this Loan Purchase Agreement, LBB bought the four mortgage loans from Arlington that form the basis of this suit. These loans are referred to as ****2680 (Pimentel), ****2672 (Pimentel), ****2995 (Steinhouse), and ****3522 (McNair) (hereinafter referred to as the Pimentel, Steinhouse, and McNair loans, respectively).

LBB later sold these four loans to LBHI, the Plaintiff in this suit and of which LBB is a subsidiary, and assigned to LBHI the rights it had under the Loan Purchase Agreement. For purposes of this opinion, I will refer to LBHI and LBB as "Lehman" where the distinction between the two is irrelevant.

Lehman claims that the four loans it purchased from Arlington contained various errors and misrepresentations. In 2007, Arlington acknowledged misrepresentations in the Pimentel and Steinhouse loans, and signed Indemnification Agreements with Lehman. In those Agreements, Lehman and Arlington agreed that rather than require Arlington to repurchase the loans, as required under the Loan Purchase Agreement and Seller's Guide, Lehman would keep the loans but would obligate Arlington to indemnify Lehman against all losses and damages that it may suffer on those three loans. The Indemnification Agreements also tolled the statute of limitations and provided that Arlington's indemnification obligation would remain in full force until the loan "has been paid in full, foreclosed, liquidated or otherwise retired." Lehman now claims that it never received the indemnification payments it was owed.

As to the fourth loan, the McNair loan, Lehman claims that Arlington breached the Loan Purchase Agreement and Seller's Guide, because the borrower's loan application contained material misrepresentations regarding the borrower's existing debt. The borrower represented in his loan application, dated August 21, 2006, that his debt on the property was $158,471, and that he owed monthly payments of $1,360. However, Lehman points to the borrower's refinance document, dated June 26, 2006, which shows that the borrower actually owed $328,800 on the property, with monthly payments of $2,603. Lehman argues that this is proof of a material misrepresentation in the loan application-and thus proof that Arlington violated the Loan Purchase Agreement and the Seller's Guide.

In early 2008, Arlington and Gateway entered into an Asset Purchase Agreement, under which Gateway agreed to "purchase, acquire and take possession of all of [Arlington's] right, title and interest in and to the personal, tangible, intangible and other properties, rights and assets used in the operation of or held for use or useable in the Business." Declaration of Matthew Spohn ("Spohn Decl."), Ex. F § 2.01. Under the Asset Purchase Agreement, Gateway assumed certain specified liabilities of Arlington, including among other debts a loan and a line of credit from Wilmington Trust, all accounts payable, and all accrued payroll. Id. at § 2.03(a). The Asset Purchase Agreement excluded all liabilities not specifically listed, including "claims for indemnification, repurchase or make-whole by Morgan Stanley, Credit Suisse, EMC or any other secondary market investor." Id. at §2.03(b).

In this present action, Lehman asserts three claims for relief: (i) breach of the Loan Purchase Agreement and Seller's Guide with respect to the McNair loan; (ii) breach of the express warranties in the Loan Purchase Agreement and Seller's Guide; and (iii) breach of the Indemnification Agreements with respect to the Pimentel and Steinhouse loans. The contracts Lehman is suing under were all executed between Lehman and Arlington. But Lehman has brought suit against Gateway, not Arlington, claiming that Gateway is a successor in interest to Arlington. Lehman contends that the transaction between Gateway and Arlington constituted a de facto mergerthat renders Gateway liable for Arlington's debts.*fn3

In its motion for summary judgment, Lehman argues that Gateway is Arlington's successor as a matter of law, that the breaches and the damages from those breaches are not in dispute, and that Gateway should therefore be held liable to Lehman. See Pl.'s Mot. for Summ. J. ("Lehman Motion"). In its motion for summary judgment, Gateway argues that the de facto mergerdoctrine was abolished by statute, and thus it cannot be liable for Arlington's breaches. It also claims that Lehman's suit is barred by the statute of limitations, res judicata, and the statute of frauds. See Def.'s Mot. for Summ. J ("Gateway Motion").

I will examine the issues raised in the two motions individually. For the reasons explained below, I deny Gateway's motion, and partially grant Lehman's motion. I find that a genuine dispute of fact exists with respect to whether a de facto mergeroccurred between Arlington and Gateway. I also find that a genuine dispute of fact exists with respect to whether Arlington breached its contracts with Lehman.

II.LEGAL STANDARD

Summary judgment will be granted "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). A fact is "material" if it "might affect the outcome of the suit under the governing law . . . ." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is "genuine" if the evidence would permit a reasonable jury to return a verdict for the nonmoving party. Id.

The moving party bears the initial burden of demonstrating that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The nonmoving party must then "make a showing sufficient to establish the existence of [every] element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322. In ruling on a motion for summary judgment, the court must draw all inferences from the facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). However, the nonmoving party may not "rely merely upon bare assertions, conclusory allegations or suspicions" to support its claims. Fireman's Ins. Co. of Newark, N.J. v. DuFresne, 676 F.2d 965, 969 (3d Cir. 1982).

"The rule is no different where there are cross-motions for summary judgment." Lawrence v. City of Phila., 527 F.3d 299, 310 (3d Cir.2008).

Cross-motions are no more than a claim by each side that it alone is entitled to summary judgment, and the making of such inherently contradictory claims does not constitute an agreement that if one is rejected the other is necessarily justified or that the losing party waives judicial consideration and determination whether genuine issues of material fact exist.

Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir.1968)). "The court must rule on each party's motion on an individual and separate basis, determining, for each side, whether a judgment may be entered in accordance with the Rule 56 standard." 10A Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2720 (1998).

In essence, the inquiry at summary judgment is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52.

III.DISCUSSION

Lehman moves for summary judgment on the grounds that there is no dispute regarding the breach of contracts, and that Gateway is Arlington's successor-in-interest under the de facto merger doctrine. Gateway moves for summary judgment on the grounds that the de facto merger doctrine has been abolished by law, and that Lehman's suit violates the statute of limitations, res judicata, and the statute of frauds. Assuming arguendo that there was a breach of contract, I must determine whether Gateway is the proper defendant in this case. Therefore, I will address the de facto merger question first, followed by the breach of contract issue. Finally, I will address the arguments in Gateway's motion that this suit is barred by the statute of limitations, res judicata, and the statute of frauds.

A.De facto Merger

Lehman moves for summary judgment, in part, on its contention that Gateway is Arlington's successor in interest under the de facto merger doctrine and therefore is responsible for Arlington's liabilities. Gateway moves for summary judgment, in part, on its contention that the de facto merger doctrine was abolished by Pennsylvania statute and that it therefore cannot be Arlington's successor in interest. As I analyze these cross motions, I will regard the facts relevant to each argument in the light most favorable to the non-moving party.

As a general rule, under Pennsylvania law,*fn4 "when one company sells or transfers all its assets to another, the successor company does not embrace the liabilities of the predecessor simply because it succeeded to the predecessor's assets." Phila. Elec. Co. v. Hercules, Inc., 762 F.2d 303, 308 (3d Cir. 1985) (quoting McClinton v. Rockford Punch Press & Mfg. Co., 549 F. Supp. 835, 837 (E.D. Pa. 1982)). There are four exceptions to this rule:

[W]here (1) the purchaser of assets expressly or impliedly agrees to assume obligations of the transferor; (2) the transaction amounts to a consolidation or de facto merger; (3) the purchasing corporation is merely a continuation of the transferor corporation; or (4) the transaction is fraudulently entered into to escape liability, a successor corporation may be held responsible for the debts and liabilities of its predecessor.

Id. at 308-09.*fn5 Lehman points to the second exception and argues that the Asset Purchase Agreement between Arlington and ...


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