1 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA BEAL BANK, S.S.B. ) ) Plaintiff, ) ) v. ) Civil Action No. ) 1:02CV 02146 (RJL) FEDERAL DEPOSIT INSURANCE ) CORPORATION, as RECEIVER for ) SUPERIOR FEDERAL BANK, FSB, ) and in its CORPORATE CAPACITY, ) ) Defendant. ) ____________________________________) DEFENDANT FDIC RECEIVER'S MOTION FOR PARTIAL SUMMARY JUDGMENT Defendant, the Federal Deposit Insurance Corporation, as Receiver for Superior Federal Bank, FSB (“FDIC-Receiver”), by its undersigned counsel, hereby moves this Court for partial summary judgment as to Counts One, Two, Three, Six, and Seven of the First Amended Complaint. With regard to Count One, FDIC Receiver is entitled to summary judgment because Count One constitutes a tort claim which is barred by the Federal Tort Claims Act. Also with regard to Count One, even if Beal's claim was not barred by the FTCA, FDIC Receiver is entitled to summary judgment because under the Purchase Agreements, the only remedies available to Beal are cure or repurchase. The contract makes no provision for the “macro theory” of damages. With regard to Count Two, FDIC Receiver is entitled to summary judgment with regard to how the Repurchase Price is calculated under the Purchase Agreements. There are only three Case 1:02-cv-02146-RJL Document 75 Filed 04/23/2008 Page 1 of 44
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
BEAL BANK, S.S.B. ) ) Plaintiff, ) ) v. ) Civil Action No. ) 1:02CV 02146 (RJL) FEDERAL DEPOSIT INSURANCE ) CORPORATION, as RECEIVER for ) SUPERIOR FEDERAL BANK, FSB, ) and in its CORPORATE CAPACITY, ) ) Defendant. ) ____________________________________)
DEFENDANT FDIC RECEIVER'S MOTION FOR PARTIAL SUMMARY JUDGMENT
Defendant, the Federal Deposit Insurance Corporation, as Receiver for Superior Federal
Bank, FSB (“FDIC-Receiver”), by its undersigned counsel, hereby moves this Court for partial
summary judgment as to Counts One, Two, Three, Six, and Seven of the First Amended
Complaint.
With regard to Count One, FDIC Receiver is entitled to summary judgment because
Count One constitutes a tort claim which is barred by the Federal Tort Claims Act.
Also with regard to Count One, even if Beal's claim was not barred by the FTCA, FDIC
Receiver is entitled to summary judgment because under the Purchase Agreements, the only
remedies available to Beal are cure or repurchase. The contract makes no provision for the
“macro theory” of damages.
With regard to Count Two, FDIC Receiver is entitled to summary judgment with regard
to how the Repurchase Price is calculated under the Purchase Agreements. There are only three
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proper formulas for computing the Repurchase Price, and those formulas are correctly set out in
the Raburn Exhibits to the FDIC’s memorandum in support of this motion.
With regard to Count Three, FDIC Receiver is entitled to summary judgment because the
general indemnification clause of the Purchase Agreements (Section 19) does not provide Beal
with a separate and independent remedy against FDIC Receiver for breaches of representations
and warranties that are subject to the specific provisions of Section 5 of the Purchase
Agreements.
With regard to Count Six, FDIC Receiver is entitled to summary judgment because the
Purchase Agreements which govern the terms of the loan sales transactions between Beal and the
FDIC do not provide for any recovery of lost use of funds opportunity.
With regard to Count Seven, FDIC Receiver is entitled to summary judgment to the
extent that legal issues listed in Count Seven -- which merely restate the same legal issues
involved in the other Counts and raise no separate controversy -- are determined in FDIC
Receiver's favor in the resolution of Counts One, Two, Three, and Six.
In support of this motion, FDIC Receiver submits its Statement of Undisputed Facts, its
Memorandum of Points and Authorities and accompanying exhibits, and a proposed order.
Accordingly, this Court should grant partial summary judgment to FDIC Receiver with
respect to Counts One, Two, Three, Six, and Seven of the First Amended Complaint.
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Respectfully submitted this 23rd day of April, 2008.
FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR SUPERIOR FEDERAL BANK, F.S.B.
__/s/ Tom M. Reeves_________ Tom M. Reeves, Counsel KS Sup. Ct. No. 7259 Federal Deposit Insurance Corporation Legal Division 3501 Fairfax Drive, Room D- 7068 Arlington, VA 22226 Phone: (703) 562-2433 (direct dial) (703) 562-2475 (fax) Email: [email protected] Claire L. McGuire, Senior Counsel D.C. Bar No. 247924 Susan Kantor Bank, Counsel D.C. Bar No. 363769
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
BEAL BANK, S.S.B. ) ) Plaintiff, ) ) v. ) Civil Action No. ) 1:02CV 02146 (RJL) FEDERAL DEPOSIT INSURANCE ) CORPORATION, as RECEIVER for ) SUPERIOR FEDERAL BANK, FSB, ) and in its CORPORATE CAPACITY, ) ) Defendant. ) ____________________________________)
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEFENDANT FDIC RECEIVER'S MOTION FOR
PARTIAL SUMMARY JUDGMENT
TABLE OF AUTHORITIES
Federal Cases
FDIC v. diStefano, 839 F. Supp. 110, 120-21 (D.R.I. 1993) 8
West, Weir & Bartel, Inc. v. Mary Carter Paint Co., 307 N.Y.S.2d 449 (1969) 4
Williams Press v. State of New York, 373 N.Y.S.2d 72 (1975) 4
X.L.O. Concrete Corp. v. John T. Brady and Co., 482 N.Y.S. 2d 476 (N.Y. App. Div. 1984) 15
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Federal Statutes
12 U.S.C. § 1819 8
28 U.S.C. § 1345 9
28 U.S.C. § 1346 5, 7, 8
28 U.S.C. § 2679 8
28 U.S.C. § 2680 9, 10
Federal Rules
Fed. R. Civ. P. 56(c) 1
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ARGUMENT
I. STANDARD FOR SUMMARY JUDGMENT
This Court has concisely set out the standard for granting summary judgment under Fed.
R. Civ. P. 56(c):
Summary judgment is appropriate when the pleadings and the record demonstrate that “there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c). The party seeking summary judgment may support its motion by “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.” See Celotex v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed. R. Civ. P. 56(c)). In opposing summary judgment, the “nonmoving party [must] go beyond the pleadings and by [its] own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts showing that there is a genuine issue for trial.’” Id. at 324, 106 S.Ct. 2548 (quoting Fed. R. Civ. P. 56(c), (e)). The Court must view the facts in the light most favorable to the non-movant, giving the non-movant the benefit of all justifiable inferences derived from the evidence in the record. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). .
Henderson v. Rice, 407 F.Supp.2d 47, 50 (D.D.C. 2005); accord Galvin v. Eli Lilly and Co., 488
F.3d 1026, 1031 (D.C. Cir. 2007).
Summary judgment should be granted in favor of the FDIC Receiver because the
pleadings and evidence “show that there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c); see Shepley v.
New Coleman Holdings Inc., 174 F.3d 65, 72 (2d Cir. 1999); Topps Co. v. Cadbury Stani
S.A.I.C., 454 F. Supp. 2d. 89, 100 (S.D.N.Y. 2006). Except with respect to Count Two, for
which FDIC Receiver has submitted affidavits in support of its factual contentions, this motion
seeks summary judgment based on the legal issues presented by Beal's various claims. The
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majority of those legal issues1 involve construction of the contracts at issue here. FDIC Receiver
believes that, as a matter of law, all or part of Beal's claims under Counts One, Three, and Six
should be dismissed,2 and the Court should adopt the damages templates offered by FDIC
Receiver as the appropriate methods for calculating the Repurchase Price under Count Two.
II. GOVERNING LAW
A. New York Law, Not Federal Law, Governs This Case.
Section 16 of each of the Purchase Agreements provides that “this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the State of New
York,” unless federal law provides the rule of decision. The use of a general federal law of
contract is “limited to situations where there is a significant conflict between some federal policy
or interest and the use of state law.” O’Melveny & Myers v. FDIC, 512 U.S. 79, 87 (1994).
It is clear now, under O'Melveny and other cases, that there is no "federal rule of
decision" applicable here. Under earlier views, federal law may have provided the rule of
decision. See, e.g., Clearfield Trust Co. v. United States, 318 U.S. 363, 366 (1943) ("The rights
and duties of the United States on commercial paper which it issues are governed by federal
rather than local law.") However, the United States Supreme Court has recently explained that,
over time, the rather expansive view of federal common law under the Clearfield Trust case has
evolved:
In post-Clearfield decisions and with the benefit of enlightened commentary, the Court has "made clear that uniform federal law need not be applied to all questions in federal government litigation, even in cases involving government contracts." . . . [T]he appeals court determined that Empire has not demonstrated a "significant conflict . . . between an
1 The principal issue not requiring construction of the Purchase Agreements is Beal's Count One claim that FDIC Receiver intentionally or negligently misled Beal into purchasing the loans for a price much higher than they were actually worth. That issue involves application of the Federal Tort Claims Act to Beal's First Amended Complaint. 2 Count Seven of the First Amended Complaint seeks a declaratory judgment as to the same legal issues underlying the other counts of the First Amended Complaint. Accordingly, to the extent those issues are resolved in the substantive counts, those issues should be resolved for purposes of Count Seven.
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identifiable federal policy or interest and the operation of state law." Unless and until that showing is made, there is no cause to displace state law . . . .
Empire HealthChoice Assurance, Inc. v. McVeigh, 126 S.Ct. 2121, 2131-2133 (2006) (citations
and footnotes omitted.) In this case, as in Empire, there is no identifiable federal policy or
interest in conflict with the operation of state law. Thus, the applicable federal law here is that
"there is no cause to displace state law." Accordingly, New York law governs the construction
and enforcement of the Purchase Agreements.
B. New York Contract Law
New York courts repeatedly and consistently hold that “if a contract is unambiguous on
its face, the parties’ rights under such a contract should be determined solely by the terms
expressed in the instrument itself rather than from extrinsic evidence as to terms that were not
expressed or judicial views as to what terms might be preferable.” Waldman v. Riedinger, 423
F.3d 145, 149 (2d Cir. 2005) (internal quotations omitted). “Contract language is unambiguous
when it has a definite and precise meaning, unattended by danger of misconception in the purport
of the contract itself, and concerning which there is no reasonable basis for a difference of
opinion.” Id. (internal quotations omitted); Care Travel Co. v. Pan American World Airways,
Inc., 944 F.2d 983, 988 (2d Cir. 1991). If unambiguous, the court ordinarily accords the term its
ordinary meaning, deferring to its normal usage. See id.; United States v. Broadcast Music, Inc.,
275 F.3d 168, 175 (2d Cir. 2001).
Likewise, New York law holds that, in determining the meaning of a particular provision,
the contract must be looked at as a whole:
Whether an agreement is ambiguous is a question of law for the courts (see Van Wagner Adv. Corp. v. S & M Enters., 67 N.Y.2d 186, 191, 501 N.Y.S.2d 628, 492 N.E.2d 756). Ambiguity is determined by looking within the four corners of the document, not to outside sources (see W.W.W. Assocs. v. Giancontieri, 77 N.Y.2d
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157, 162-163, 565 N.Y.S.2d 440, 566 N.E.2d 639). And in deciding whether an agreement is ambiguous courts
“should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties as manifested thereby. Form should not prevail over substance and a sensible meaning of words should be sought” (Atwater & Co. v. Panama R.R. Co., 246 N.Y. 519, 524, 159 N.E. 418).
Where the document makes clear the parties' over-all intention, courts examining isolated provisions “should then choose that construction which will carry out the plain purpose and object of the [agreement]” ( Williams Press v. State of New York, 37 N.Y.2d 434, 440, 373 N.Y.S.2d 72, 335 N.E.2d 299, quoting Empire Props. Corp. v. Manufacturers Trust Co., 288 N.Y. 242, 249, 43 N.E.2d 25).
Kass v. Kass, 696 N.E.2d 174, 180-181 (N.Y. 1998).
In Laneuville v. General Motors Corp., 93 F.Supp.2d 272, 275 (N.D.N.Y. 2000), the
court found that:
[T]he construction of that [contract] provision is a matter of law for the Court. See Terwilliger v. Terwilliger, 206 F.3d 240, 244 (2d Cir.2000) (“A court may neither rewrite, under the guise of interpretation, a term of the contract when the term is clear and unambiguous, nor redraft a contract to accord with its instinct for the dispensation of equity upon the facts of a given case.”) (internal citations omitted); Wald v. Marine Midland Bus. Loans, Inc., 704 N.Y.S.2d 564, 565 (1st Dep't 2000) (citing West, Weir & Bartel, Inc. v. Mary Carter Paint Co., 25 N.Y.2d 535, 540, 307 N.Y.S.2d 449, 255 N.E.2d 709 (1969) ( “The rule ... is well settled that the construction of a plain and unambiguous contract is for the court to pass on, and that circumstances extrinsic to the agreement will not be considered when the intention of the parties can be gathered from the instrument itself.”));
Id.
III. THE "MACRO THEORY" IS A TORT CLAIM, NOT A CONTRACT CLAIM.
In an apparent effort to avoid the consequences of the damage limits that Beal agreed to
in the respective loan purchase agreements at issue in this action, Beal has inserted a tort theory
of recovery into what was purely a contract case. The contracts at issue provide an express
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damage remedy for claims for breach of representations and warranties of the nature made by
Beal in the instant case. Beal’s amendment to the Complaint added a so-called “macro theory”
to their claims. This "macro theory" is actually a tort claim alleging that FDIC falsely and
fraudulently included representations and warranties in the contracts for the purpose of duping
Beal into paying more for the loan portfolios than they were actually worth. As damages for this
alleged fraud, deceit, and misrepresentation, Beal seeks the difference between what it actually
paid for the loan portfolios and what it alleges the portfolios were worth at the time of the sale,
plus consequential damages, such as the lost use of those funds.
This Court is without jurisdiction to proceed on the "macro theory." As shown below,
such claims are governed by the Federal Tort Claims Act (“FTCA”), 28 U.S.C. §§ 1346(b), 2671
et seq. By the FTCA’s express terms, these claims are barred for lack of subject matter
jurisdiction. Most importantly, the FTCA specifically excludes any claims against the United
States or its agencies, including the FDIC, from claims for money damages arising out of
misrepresentation or deceit. As such, Counts One and Six, and that portion of Count Seven
(paragraph 70(a)) concerning remedies for tort claims, must be dismissed. 3
A. The Substance Of The "Macro Theory" Is That FDIC Receiver Misrepresented The Loan Portfolios To Induce Beal To Buy Them At An Inflated Price
With the filing of the First Amended Complaint, Beal now alleges that "FDIC Receiver
negligently and/or fraudulently sold the loans with willful misrepresentations and that FDIC
Receiver has acted with no intention to honor its repurchase obligations." (First Amended
Complaint, ¶ 15.) While Beal makes a pretense of describing the "macro theory" as a breach of
contract claim, the bald statement quoted above makes clear that Beal is asserting deceit and
3
FDIC Receiver does not believe that plaintiff has alleged that FDIC Corporate took any action that would arguably
give rise to claims in tort, but FDIC Corporate adopts this Motion to Dismiss and Memorandum addressing the defects in any tort claim alleged in the First Amended Complaint.
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misrepresentation by FDIC Receiver in the sale of the loan portfolios. Further, under the "macro
theory," Beal is plainly not seeking damages based on the contracts, but instead is seeking
damages in the amount it supposedly was induced to overpay as a result of FDIC Receiver's
alleged misrepresentations. The "macro theory" is, in reality, the "macro tort theory."
Allegations of fraud, deceit, dishonesty, and negligent and intentional misrepresentation
appeared for the first time in Beal’s First Amended Complaint and can be found throughout that
document. See, for example:
Among other things, FDIC Receiver represented and warranted (falsely) that all loans possessed certain qualities and that there was no fraud, dishonesty, misrepresentation or negligence in the origination or sale of the loans to Beal.
(¶ 8) (Emphasis added.) [O]ne of FDIC Receiver's representations and warranties was that there was no negligence or fraud in the process of selling the loans themselves to Beal. That representation and warranty was breached because FDIC Receiver knew [of defects].
(¶9) (Emphasis added.)
FDIC Receiver forces Beal to choose between writing off the material losses caused by FDIC Receiver's negligent and/or fraudulent acts . . . or seeking redress from this Court . . .
(¶ 15) (Emphasis added.)
FDIC Receiver's representations and warranties were not true.
(¶ 36) (Emphasis added.)
FDIC Receiver's representation, warranty, and covenant as to its ability to perform its obligations under the Purchase Agreement was wrong when made.
(¶ 43) (Emphasis added.)
The First Amended Complaint asserts, among other things, that FDIC Receiver made
false representations and warranties about the loans that added substantially to the loans’ value (¶
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8); FDIC Receiver knew it was making false representations and warranties (¶ 9); Beal relied on
FDIC Receiver’s false representations and warranties in assessing the value of the loans, and for
that reason Beal paid substantially more for them than it otherwise would have (¶¶ 9, 11, 27, 29,
38, 39, 45); and that Beal is entitled to recover not only its alleged overpayment --which is
claimed to be the direct result of FDIC Receiver’s alleged misrepresentations – but also the lost
profits Beal claims it would have realized had it been able to use those funds differently and its
attorney fees (¶¶ 54, 55, 66, 67, 68).
Although Beal’s so-called “macro theory” is advertised as a contract claim, it clearly
sounds in tort. See, e.g., Restatement (Second) of Torts, ch. 22, §525 (1977) (liability for
fraudulent misrepresentation); id. at § 549 (measure of damages for fraudulent
misrepresentation); id. at §552 (elements of negligent misrepresentation); id. at §552B (measure
of damages for negligent misrepresentation). These claims, based on alleged misrepresentations,
fraud, and/or negligence by FDIC Receiver in its marketing and sale of the loan pools, are clearly
torts, and as such, fall exclusively within the purview of the Federal Tort Claims Act.
B. A Claim Against The United States Under The FTCA Is The Exclusive Remedy for Alleged Torts By The FDIC
The law is well-settled that the United States and its agencies are immune from suit for
money damages except to the extent the United States waives its sovereign immunity and
consents to be sued. See, e.g., United States v. Mitchell, 445 U.S. 535, 538 (1980); United States
v. Orleans, 425 U.S. 807, 813 (1976); Bernard v. United States Dep’t of Defense, 362 F.Supp.2d
272, 282 (D.D.C. 2005) The United States may define the terms and conditions under which it
may be sued. Lehman v. Nakshian, 453 U.S. 156, 160 (1981); Mitchell, 445 U.S. 535, at 538.
Consent to sue must clearly and explicitly be given and such consent cannot be inferred. Id.;
United States v. King, 395 U.S. 1 (1969); United States v. Shaw, 309 U.S. 495 (1940); Garcia v.
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United States, 666 F.2d 960, 966 (5th Cir.), cert. denied, 459 U.S. 832 (1982). The exclusive
remedy for a claim in tort seeking money damages (Counts One and Six in this case) is the
Federal Tort Claims Act, 28 U.S.C. §§ 1346 (b), 2671, et seq.4
Under the FTCA, the agency cannot be sued eo nomine; the only allowable defendant is
the United States. 28 U.S.C. § 2679 (a).5 Galvin v. Occupational Safety & Health Admin., 860
F.2d 181 (5th Cir. 1988). When the FDIC is sued in tort, the only proper party is the United
States. Emch v. United States, 474 F. Supp. 99 (E.D. Wis. 1979), aff'd, 630 F.2d 523 (7th Cir.
1980), cert. denied, 450 U.S. 966 (1981).
The FDIC is clearly a federal agency and within the coverage of the FTCA. Davis v.
FDIC, 369 F. Supp. 277, 279 (D. Colo. 1974); Freeling v. FDIC, 221 F. Supp. 955, 956 (W.D.
Okla. 1962), aff'd per curiam, 326 F.2d 971 (10th Cir. 1963). . . . The FTCA should therefore be
the exclusive remedy for tort claims against it. Safeway Portland Employees' Federal Credit
Union v. FDIC, 506 F.2d 1213, 1215 (9th Cir. 1974). Accord FDIC v. Citizens Bank and Trust
Co., 592 F.2d 364, 370 (7th Cir.), cert. denied, 444 U.S. 829 (1979); FDIC v. diStefano, 839 F.
Supp. 110, 120–21 (D.R.I. 1993) (the rule that tort claims must be brought against the United
States and not the agency applies to the FDIC whether in its corporate or receivership capacity);
Santoni v. FDIC, 508 F. Supp. 1012, 1014 (D.P.R. 1981), aff’d, 677 F.2d 174 (1st Cir. 1982)
(claims sounding in tort must be brought against the United States, not against the FDIC.)
The FDIC's sue and be sued clause, 12 U.S.C. § 1819, does not waive sovereign
immunity for claims in tort. See, 28 U.S.C. § 2679 (a); FDIC v. Meyer, 510 U.S. 471, 476 4 Paragraph (a) of Count VI appears to request a declaratory judgment declaring that Plaintiff is entitled to an award of tort damages under its macro case. As this brief demonstrates, the FTCA precludes such damages. 5 Title 28 U.S.C. § 2679(a) states:
The authority of any federal agency to sue and be sued in its own name shall not be construed to authorize suits against such federal agency on claims which are cognizable under section 1346(b) of this title, and the remedies provided by this title in such cases shall be exclusive.
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(1994); FDIC v. FSSS, 829 F.Supp. 317 (D. Alaska 1993). Beal erroneously named FDIC in
both of its capacities as a party in this lawsuit, not the United States, which is recognized as
having a separate and distinct nature from a federal agency. 28 U.S.C. § 1345. "Government
agencies do not merge into a monolith; the United States is an altogether different party . . ."
Hughes v. United States, 701 F.2d 56, 58 (7th Cir. 1982); see also EEOC v. First National Bank
of Jackson, 614 F.2d 1004, 1008 (5th Cir. 1980), cert. denied, 450 U.S. 917 (1981).
As a federal agency, the FDIC, acting in its corporate or receivership capacities, may not
be sued in its own name for tort claims. The only proper party is the United States. Because Beal
did not name the United States as a party, the claims in Counts One, Six, and Seven of the First
Amended Complaint must be dismissed with prejudice from this action for lack of subject matter
jurisdiction.
C. Beal’s Tort Claims Are Barred by the Exceptions to the Waiver of Sovereign Immunity found in FTCA’s 2680(h)
Finally, and most importantly, even if Beal had filed a claim under the FTCA, Beal’s tort
claim would still have to be dismissed. The FTCA expressly excludes “any claim arising out of .
. . misrepresentation [or] deceit.” See, 28 U.S.C. § 2680 (h). As explained by the Supreme Court
in United States v. Neustadt, 366 U.S. 696, 702 (1961), the set of exclusions from the FTCA’s
partial waiver of sovereign immunity, contained in § 2680 (h), “comprehends claims arising out
of negligent, as well as willful, misrepresentation.” As the Court taught in Block v. Neal, 460
U.S. 289, 296-297 (1983), the essence of an action for misrepresentation, whether negligent or
intentional, is the communication of misinformation on which the recipient relies. Block v. Neal,
(distinguishing Neustadt).
Beal's "macro theory" set out in the First Amended Complaint is based on alleged
intentional and/or negligent misrepresentations by FDIC Receiver, which communicated
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allegedly false representations and warranties and the allegedly false intent to honor the
provisions of the contract, and on which Beal relied in making its bids for the loan portfolios.
This is a category of claims for which the United States expressly did not waive sovereign
immunity pursuant to 28 U.S.C. § 2680(h). The Court has no jurisdiction to award any damages
for the "macro theory" claims made by Beal in Counts One, Six, and Seven (a). U.S. v. Neustadt,
366 U.S. 696 at 702; Wells v. U.S., 655 F. Supp. 715, 724 (D.D.C. 1987), aff'd,851 F.2d 1471
(D.C. Cir. 1988), cert. denied, 488 U.S. 1029 (1989) (§ 2680(h) bars negligent as well as willful
misrepresentation claims).
Discussing the application of § 2680 (h), the court in Mill Creek Group, Inc. v. FDIC,
136 F.Supp.2d 36 (D. Conn. 2001), states, “[I]f the Plaintiff’s causal chain depends upon the
transmission of misinformation by the government, then [§ 2680 (h)] applies and there is no
waiver of sovereign immunity under the FTCA.” See, 136 F. Supp. 2d 36, 44. Here, Beal’s
macro theory sets out precisely this kind of “causal chain” and thus is expressly barred by the
exceptions to the FTCA under § 2680(h). In Dorking Genetics v. United States, 76 F.3d 1261 (2d
Cir. 1996), the Second Circuit Court of Appeals ruled that the “misrepresentation exception [of §
2680(h)] bars not only claims of negligence in the misrepresentation, but in the conduct
underlying the misrepresentation.” Id. at 1264. Cf. Chen v. United States, 674 F. Supp. 1078,
1089 (S.D.N.Y. 1987), aff’d, 854 F.2d 622 (2d Cir. 1988) (claims arising out of the same
essential facts as a claim barred by the misrepresentation exception to the FTCA are also barred).
D. Conclusion
In short, because Beal’s tort claim under Count One of the First Amended Complaint is
based upon alleged misrepresentations by FDIC Receiver, it must be dismissed by this Court for
lack of subject matter jurisdiction.
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IV. THE "MACRO THEORY" FOR “DIMINISHED VALUE” IS NOT A REMEDY AVAILABLE UNDER THE PURCHASE AGREEMENTS
A. The Parties Voluntarily Limited Their Remedies Under The Purchase
Agreements To "Cure Or Repurchase." Under New York law, when the parties to a contract agree to limit the remedies for its
breach, the courts will enforce that limitation. In re Hale Desk Co., 97 F.2d 372, 373 (2d Cir.
1938) “When the parties by their contract provide for the consequences of a breach, lay down a
rule to admeasure the damages, and agree when they are to be paid, the remedy thus provided
must be exclusively followed” (citing Hunt v. Detroit Sulphite Pulp & Paper Co., 15 F. Supp.
established principles, when parties by their contract specifically provide for the consequences of
a breach, the remedy thus provided is exclusive."
Section 5 of each of the Loan Purchase Agreements between Beal and FDIC Receiver
sets forth the parties’ representations and warranties. The final paragraph of Section 5
(hereinafter, “the remedy paragraph”) sets forth a specific remedy – cure or repurchase – for
breaches of the Seller’s (FDIC Receiver’s) representations and warranties that materially and
adversely affect the value of the mortgage loans or Beal’s interest in a mortgage loan:
Upon discovery by Purchaser [Beal] of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of the Mortgage Loans or the interest of Purchaser (or which materially and adversely affects the interests of Purchaser in the Mortgage Loan in the case of a representation or warranty relating to a particular Mortgage Loan), Purchaser shall give prompt notice to Seller [FDIC Receiver]. Within sixty (60) days of its receipt of notice of any such breach of a representation or warranty containing Buyer’s request for Seller [to] act thereon, Seller shall, at Seller’s option (i) cure such breach in all material respects or (ii) repurchase the ownership interest in such Mortgage Loan at [the] repurchase price . . .”
This specific remedy is followed by the very specific repurchase price formula, set out in detail
in Section V of this memorandum.
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This carefully crafted language says nothing at all about the availability of damages
based upon a "portfolio's diminished value" or about calculating such fictional damages using
"fair market value" of the portfolio "on the day of sale." The Section 5 remedy paragraph does
specifically refer to a breach "which materially and adversely affects the value of the Mortgage
Loans or the interest of Purchaser"; however, the remedy for such a breach is not the lost value
or lost interest. Rather, the specific remedies for such a breach are only (a) cure the breach, or
(b) repurchase the affected loan or loans in accordance with the repurchase formula. Thus the
contract specifically contemplates a breach of a representation or warranty that causes a
diminution in value of the loan portfolio -- and declines to provide damages for that diminished
value. Section 5 provides only a loan-by-loan (or breach-by-breach) remedy.6
Under New York law, whether a provision in a contract should be treated as an exclusive
remedy is to be determined by the intent of the parties as revealed in all the facts of the particular
case. Detroit Sulphite Co., 15 F. Supp. at 701. To determine this intent, courts look to the
language that the parties used in the contract. Bolt Elec., Inc. v. City of New York, 223 F.3d 146,
150 (2d Cir. 2000). The Second Circuit has explained that “[i]n interpreting a written contract, a
trial court's primary goal is to effectuate the intent of the parties as manifested by the language
used in the contract.” Aetna Cas. & Sur. Co. v. Aniero Concrete Co., 404 F.3d 566, 598 (2d Cir.
2005) (emphasis added). “[W]here the terms of an agreement are unambiguous, the parties’
intent must be drawn only from the contract language.” Lansing Research Corp. v. Sybron Corp.,
530 N.Y.S.2d 698, 701 (N.Y. App. Div. 1988). To decide whether a contract is ambiguous, the
6The cure or repurchase remedy for material breaches of representations and warranties concerning the mortgage loans is common in contracts for the sale of mortgage loans and has been enforced under New York law. See e.g., Resolution Trust Corp. v. Key Fin. Servs., Inc., 280 F.3d 12 (1st Cir. 2002); Morgan Guar. Trust Co. of N.Y. v. Bay View Franchise Mortgage Acceptance Co., No. 1:00cv08613, 2002 WL 818082 (S.D.N.Y. 2002); LaSalle Bank Nat’l Ass’n v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618 (D. Md. 2002).
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court looks only at the contract language. Kass v. Kass, 673 N.Y.S.2d 350 (1998) (“[a]mbiguity
is determined by looking within the four corners of the document, not to outside sources”).
Here, the contract language is specific and unambiguous. The Purchase Agreements
provide a limited selection of remedies for breaches of representations and warranties. The
remedies are not couched in broad or general language, but rather include specific conditions and
limitations. Nothing in those provisions suggests that the parties ever contemplated a remedy for
"diminished portfolio values" measured by the difference between the price paid by Beal and the
unknown, unmentioned, entirely speculative "fair market value" on the day of sale.
Parties to a contract are free to limit the type and scope of any remedies that may be
recoverable for breaches of specific terms of the contract. Limitations of remedies reflect the
parties’ agreement to allocate economic risk and are enforceable under New York law. The clear
language used in the remedy paragraph of Section 5 unambiguously manifests the parties’ intent
that the remedies set forth there are the exclusive remedies for breaches of FDIC Receiver’s
representations and warranties in the Purchase Agreements.
Courts have found, construing New York law, that the purpose of a provision in a
contract requiring the seller of a mortgage loan portfolio to repurchase, on demand, mortgages
that do not conform to the seller's representations and warranties is to shift risk to the seller in the
event that a dispute arises. RTC v. Key Fin. Services, 280 F.3d 12, 18 (1st Cir. 2002). Therefore,
an effective way to limit damages is to control the amount of risk shifted through strict
interpretation of the contractual language.
B. The Repurchase Provision Of Section 5 Of The Purchase Agreements Is A Liquidated Damages Provision.
New York courts find that the repurchase provision of a mortgage loan purchase
agreement is effectively a liquidated damages provision. See LaSalle Bank N.A. v. Capco
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American Securitization Corp., No. 02-CV-9916, 2005 WL 3046292, *5 (S.D.N.Y. 2005). A
liquidated damages provision “constitute[s] the compensation which, the parties have agreed,
should be paid in order to satisfy any loss or injury flowing from a breach of their contract.”
Truck Rent-A-Center v. Puritan Farms, 393 N.Y.S.2d 365 (1977). For this reason, the presence
of a liquidated damages provision precludes actual damages when the predicate for an award of
damages is the same because the two are mutually exclusive remedies. Wechsler v. Hunt Health
Systems, 330 F. Supp. 2d 383, 426 (S.D.N.Y. 2004).
In order for the receivership to limit the amount of risk that it assumed under the
agreements at issue here, it limited Beal’s remedy “at Seller’s option to (i) cure such breach in all
material respects or (ii) repurchase the ownership interest in such Mortgage Loan.” The
receivership continued to further restrict the amount of risk it assumed by amending the language
in the Mortgage Loan Purchase Agreements over time, both limiting the representations and
warranties granted and limiting the time for which interest was paid on the repurchase price. For
example, when Beal’s claims arising out of the November 2001 sale exceeded all expectations of
the receivership, the subsequent Mortgage Loan Purchase Agreements were amended to limit the
payment of interest on the unpaid repurchase price to a period “not to exceed sixty (60) days.”
Beal continued to buy loans and to accept the circumscribed terms of the proffered
agreements. Beal’s exclusive remedy is for the loans to be repurchased. Beal is bound by the
damage limitations in the Purchase Agreements.
C. Neither Lost Profits Nor Expectancy Damages Are Available Under The Purchase Agreements
In Paragraph 55 of Count One, Paragraph 57 of Count Two, and Count Six of its First
Amended Complaint, Plaintiff sets forth claims for lost use of funds opportunity. Specifically in
Count Six, Plaintiff contends that when it paid $340 million to FDIC Receiver for three loan
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portfolios, it forewent other opportunities, and now seeks compensation from Defendant for
“returns it would have earned but for” Defendant’s purported breaches of representations,
warranties and covenants on the loan portfolios at issue. These “lost opportunity” damages are
outside those afforded by the express language of the contractual Agreements between Plaintiff
and Defendant.
When parties enter into a contract, damages arising from a purported breach of that
contract are governed by the terms of any liquidated damages provision contained in that
contract. Mosler Safe Co. v. Maiden Lane Safe Deposit Co., 199 N.Y 479, 93 N.E. 81, 83 (N.Y.
1910) (“[p]arties to contracts have the right to insert any stipulations [as to damages] that may be
agreed to . . . [n]o rule of law forbids them from agreeing between themselves with respect to the
anticipatory damages.”); New York Dock Co. v. New York City, 283 N.Y.S. 2 (N.Y. App. Div.
1935) (plaintiff was precluded from recovering actual damages by liquidated damages clause);
X.L.O. Concrete Corp. v. John T. Brady and Co., 482 N.Y.S. 2d 476 (N.Y. App. Div. 1984)
(“[p]arties to a contract may provide for anticipatory damages in the event of failure . . . as long
as such agreement is neither unconscionable nor contrary to public policy.”); see also District of
Columbia v. Harlan & Hollingsworth Co., 30 App. D.C. 270 (App. D.C. 1908) (“[t]here is
nothing to prevent the parties from stipulating in advance that a certain sum shall be the
damages. . . It is not our province, in the absence of fraud or mistake, to set aside the plain terms
of this contract.”).
This contract situation is no different. The Mortgage Loan Purchase Agreements
(“Agreements”) govern the rights and remedies of the parties. Just as in the cases cited above,
the parties here saw fit to provide in the contracts for damages in the event of failure. The
Agreements expressly provide a remedy to redress a breach of their terms: cure or repurchase by
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the FDIC of any defective loans. Remedies conferred by contractual agreement are limited in
their scope – they encompass only those elements enumerated in the Agreements, which do not
include “lost use of funds opportunity.” Thus, Plaintiff’s purported injury -- the lost use of its
funds for business opportunities other than where it chose to invest them, in Superior Bank’s
loan portfolios – is not recoverable under the terms of the Agreements.
D. Conclusion
In sum, while inventive, Beal's "macro theory" has no basis in the language of the
Purchase Agreements, and indeed is excluded by the specificity of the remedies provisions of
those contracts. Even if Count One of the First Amended Complaint were not barred by the
Federal Tort Claims Act, it would have to be dismissed as a claim that has no basis in the
Purchase Agreements.
V. BEAL'S DAMAGES ARE LIMITED TO THE REPURCHASE PRICE CALCULATED ACCORDING TO THE CONTRACTS, AND ONLY FOR NON-PERFORMING LOANS WITH A MATERIAL BREACH OF REPRESENTATIONS AND WARRANTIES
At the heart of this case is the determination of FDIC Receiver's liability for alleged
breaches of representations and warranties contained in three contracts. Under those contracts,
Beal purchased 5,315 mortgage loans. The scope of the FDIC Receiver's potential liability will
depend largely upon a detailed, loan-by-loan review to determine which of those loans contained
material breaches of representations and warranties, making them subject to repurchase under the
Purchase Agreements. Once that determination is made, the calculation of monetary damages
can be a relatively simple, mechanical process following the specific calculations set out in the
contracts.
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A. Beal Is Entitled To Contractual Damages Only For Loans With Material Breaches Of Representations And Warranties.
The number of loans which must be examined for breaches of representations and
warranties are far fewer than the total number of 5,315. Four large categories of loans must be
excluded up front:
(1) All 379 loans sold under the fourth Purchase Agreement, dated April 23, 2002
(Exhibit D to FDIC Receiver's Answer to the First Amended Complaint). See Exhibit 1
(Declaration of David K. Hall regarding the number of loans sold under the Fourth Purchase
Agreement) attached to this motion. That portfolio was sold to Beal without any representations
or warranties. The specific language of the contract provides as follows (emphasis in original):
b. Mortgage Loans Sold “As Is.” THE MORTGAGE LOANS ARE BEING SOLD “AS IS” AND “WITH ALL FAULTS” WITHOUT ANY REPRESENTATION, WARRANTY OR RECOURSE WHATSOEVER AS TO EITHER CONDITION, FITNESS FOR ANY PARTICULAR PURPOSE, MERCHANTABILITY OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. SELLER SPECIFICALLY DISCLAIMS ANY WARRANTY, GUARANTY OR REPRESENTATION, ORAL OR WRITTEN, PAST OR PRESENT, EXPRESS OR IMPLIED, CONCERNING THE MORTGAGE LOANS, THE STRATIFICATION OR PACKAGING OF THE MORTGAGE LOANS, THE COLLATERAL OR THE MORTGAGE LOAN DOCUMENTS.
Where there were no representations and warranties, there can be no breaches of representations
and warranties. Therefore, any claims involving these loans must be dismissed.
(2) All 247 loans where the FDIC fully performed its contractual duties by repurchasing
defective loans. For a list of all loans repurchased by the FDIC Receiver, see the attachment to
Exhibit 2 (Declaration of David K. Hall regarding repurchased loans) attached to this motion.
FDIC Receiver's obligations to “cure or repurchase” under the Purchase Agreements have been
fully satisfied because Beal has accepted payment and returned the loan documents to the FDIC
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Receiver; there can be no claim for material breaches of representations and warranties with
respect to these loans. Therefore, any claims involving these loans must be dismissed.
(3) All loans that have fully performed by being paid off by the borrower. The number of
fully paid-off loans has not yet been determined, but FDIC Receiver estimates that
approximately 2,600 of the loans fall into this category. If a borrower pays the loan in full, then
Beal has received the full benefit of its bargain; Beal can expect no more from a loan than full
payment in accordance with the loan's terms. Therefore, any claims involving these loans must
be dismissed.
(4) All loans that are still performing. Again, the exact number of loans in this category
is not known, but the FDIC Receiver estimates that some 600 current and performing loans may
remain on Beal's books. If Beal continues to hold any of those loans, and the borrower is paying
what is due, and paying on time, then Beal is getting the full benefit of its bargain and can expect
no more. Therefore, any claims involving these loans must be dismissed.
After removing the loans in those four categories, what are left are approximately 1,400
to 1,500 non-performing loans or loans in default. Of those, there will be a substantial number
that do not have material breaches of representations and warranties, but are non-performing for
other reasons. FDIC Receiver acknowledges that there will also be some loans that, upon
review, will be found to have material breaches of representations and warranties. FDIC
Receiver stands ready to repurchase those loans in which it agrees that there is a material breach
under the Purchase Agreements.7 Thus, of the 1,400 or so non-performing loans, it is likely that
several hundred will be quickly disposed of, leaving substantially less than a thousand that are
actually in dispute in this case.
7 Of the approximately 50 loans for which Beal has submitted claims that identify and substantiate alleged breaches, FDIC Receiver has already agreed that 16 loans must be repurchased.
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Accordingly, as a matter of law, the Court should dismiss any of Beal's claims that
involve loans in any of the four categories described above.
B. The Repurchase Price Can Be Readily Calculated In Accordance With The Specific Terms Of the Purchase Agreements.
Once liability is determined, the repurchase price under the contracts can be calculated.
The FDIC moves for summary judgment with respect to such repurchase price calculation,
offering three "damages templates" that correctly implement the repurchase provision (Section 5)
of the contracts. When the Court concurs that these formulas constitute the appropriate method
for calculating the repurchase price, damages for each defective loan can be quickly calculated.8
1. Elements of the Repurchase Price
Liquidated damages under the Purchase Agreements are limited to the elements of the
Repurchase Price as specified in Section 5. The New York courts repeatedly and consistently
hold that “if a contract is unambiguous on its face, the parties’ rights under such a contract
should be determined solely by the terms expressed in the instrument itself rather than from
extrinsic evidence as to terms that were not expressed or judicial views as to what terms might be
omitted). “Contract language is unambiguous when it has a definite and precise meaning,
unattended by danger of misconception in the purport of the contract itself, and concerning
which there is no reasonable basis for a difference of opinion.” Id. (internal quotations omitted);
Care Travel Co. v. Pan American World Airways, Inc., 944 F.2d 983, 988 (2d Cir. 1991). If
unambiguous, the court ordinarily accords the term its ordinary meaning, deferring to its normal
usage. See id.; United States v. Broadcast Music, Inc., 275 F.3d 168, 175 (2d Cir. 2001).
8 FDIC Receiver has already repurchased 247 loans using the Repurchase Price calculation set out in the Purchase Agreements.
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The first element of the Repurchase Price under the three Purchase Agreements is a
mathematical formula that multiplies the outstanding principal balance of the defective loan by
the Bid Percentage.9 The term “outstanding principal” has a definite and precise meaning, of
which there is no reasonable basis for a difference of opinion. There was no quarrel about the
“outstanding principal balance” when the loans were purchased by Beal. The plain meaning of
“outstanding” is unpaid or uncollected. Black’s Law Dictionary (8th ed. 2004). The plain
meaning of “principal” is the “capital sum of a debt or obligation, as distinguished from interest
or other additions to it.” Black’s Law Dictionary (8th ed. 2004).
Case law supports distinguishing between the concepts of “outstanding principal,” which
refers exclusively to the unpaid portion of the original amount borrowed, and “outstanding
balance” or a “payoff rate,” which includes items such as accrued interest and late fees. Beal is
quite familiar with the concept of “outstanding balance” in the context of collection actions. In
Beal Bank S.S.B. v. Scelza, No. 96-9324, 1997 WL 244350, *3 (2d Cir. Conn. 1997), an action to
collect on a non-performing loan, Beal Bank submitted an itemized statement of the amounts due
under the loan, which the Second Circuit characterized as a “clear statement of the total amount .
. . claimed, along with a breakdown of the amounts attributable to principal, interest, late fees,
and attorneys’ fees.” The itemized statement clearly distinguished between amounts necessary
to bring the loan current, which included interest, late fees and attorneys’ fees, and the principal
amount outstanding and due on the loan. Id. at *2. Amounts that may be collectable from the
debtor, such as interest, late fees and attorneys’ fees, are not part of the outstanding principal for
purposes of repurchase.
9 Beal, and all other buyers of loans, purchased these loans based on bids that were a percentage of each loan’s outstanding principal balance. See, Mortgage Loan Purchase Agreement Section 5.
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There is no dispute about this calculation. The “outstanding principal amount” referred
to in the contracts is the unpaid principal amount excluding interest, late fees and other collection
fees. Interest and attorneys’ fees are provided for in the repurchase formula discussed below.
The second element of Section 5's liquidated damages calculation is “Purchaser’s
reasonable and customary out-of-pocket expenses (emphasis added) incurred by Purchaser in
transferring and servicing such Mortgage Loan, including, without limitation, expenses incurred
for maintenance and repairs, assessments, taxes and similar items…” An out-of-pocket expense
is an expense paid from one’s own funds, in this case by Beal. FDIC v. Bernstein, 786 F. Supp.
App. 1984); see also, Black’s Law Dictionary (8th ed. 2004).
Whether a contract providing for the reimbursement of out-of-pocket expenses
encompasses a particular transfer or service expense will depend upon the critical language in the
contract provision. Bernstein, 786 F. Supp. at 178. The determination of whether an expense is
reasonable and customary will depend solely upon the terms of the contract as construed to give
effect to what the parties intended those terms to encompass, unless ambiguous. Id.; Curry Road
v. K Mart Corp., 893 F.2d 509, 511 (2d Cir. 1990).
The critical language in the Mortgage Loan Purchase Agreements at issue here reference
out-of-pocket expenses that are “reasonable and customary” and gives specific examples of the
types of expenses contemplated by the parties, such as “expenses incurred for maintenance and
repairs, assessments, taxes and similar items...” There can be no ambiguity in this element of the
repurchase price.
The third element of the repurchase price is “attorney’s fees and expenses incurred by
Purchaser in connection with any enforcement proceedings or otherwise with respect to such
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Mortgage Loan or the transfer of such Mortgage Loan to Seller or Purchaser” (emphasis added).
This specific language allows attorney’s fees and expenses as a part of the repurchase price only
when those fees are “with respect to such Mortgage Loan,” and in no way includes attorneys’
fees and expenses for enforcement of the contract against the receiver. New York public policy
disfavors any award of attorneys’ fees to the prevailing party in litigation. A.G. Ship
Maintenance Corp. v. Lezak, 511 N.Y.S.2d 216, 218 (1986). For this reason such fees will not
be awarded absent an agreement, statute or court rule providing for the award. Id. Where an
agreement does allow for the recovery of attorneys’ fees, the provision must be strictly
construed. Horwitz v. 1025 Fifth Avenue, Inc., 825 N.Y.S.2d 5, 6 (N.Y. App. Div. 2006); see
Gottlieb v. Such, 740 N.Y.S.2d 44, 44 (N.Y. App. Div. 2002).
The fourth and final element in calculating the repurchase price is interest on the unpaid
balance of the repurchase price. The language of the Mortgage Loan Purchase Agreements in
the Preamble is precise in defining a non-performing loan versus a performing loan; and equally
precise in Section 5 stating the rate of interest and the time of accrual. The rate of interest to be
paid is the Mortgage Loan rate, and the accrual period is either "up to but not including the date
of repurchase" (for loans sold in the November 6, 2001, Purchase Agreement) or “not to exceed
sixty (60) days” for loans sold in the March and April 2002 Purchase Agreements. Thus, under
New York law, where FDIC Receiver and Beal contracted for a specific repurchase price plus
interest, the interest due is limited by the language of the agreements.
2. Damages Templates
Under the Section 5 repurchase provision, there are just three possible categories into
which a defective loan requiring repurchase might fall: (1) a non-performing loan as of the Cut-
off Date; (2) a performing loan as of the Cut-off Date sold under the November 6, 2001 Purchase
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Agreement; and (3) a performing loan as of the Cut-off Date sold under the March or April 2002
Purchase Agreements. These three categories lead to the three formulas for calculating the
Repurchase Price. The three possible formulas provided for in the Purchase Agreements differ
only in (a) whether or not interest is paid, and (b) if interest is paid, the period of time for which
interest is paid. All other elements of the formulas remain the same. The three formulas or
"templates" are:
1. The loan is non-performing as of the Cut-off Date as defined in the Preamble to the Purchase Agreement; as provided in Section 5 of the Purchase Agreement interest is included in the repurchase price calculation only if the loan is performing on the Cut-off Date.
2. The loan was a performing loan as of the Cut-off Date as defined in the Preamble of the November 6, 2001 Purchase Agreement; interest is included in the repurchase price calculation at the note rate up to the date of repurchase. (Section 5, November 6, 2001 Purchase Agreement.)
3. The loan was a performing loan as of the Cut-off Date as defined in the Preamble of the March or April 2002 Purchase Agreements; interest is included in the repurchase price calculation at the note rate, not to exceed sixty (60) days. (Section 5, March or April 2002 Purchase Agreements.)
Beal submitted loan files to the FDIC Receiver in the summer of 2006 for consideration
and repurchase under the agreements. Thomas J. Raburn, a Certified Public Accountant and a
contractor for the FDIC, has selected three loans from these submissions, each of which falls
within one of the three "defective loan" categories. Mr. Raburn has applied the appropriate
formula or "template" to the these actual loans at issue in this case to illustrate how the formulas
implement the repurchase price calculations specified by the Purchase Agreements.
In preparing his affidavit (Exhibit 3 to this Motion) and preparing each template, Mr.
Raburn gathered pertinent information concerning each specific loan, including which loan sale
the loan was part of, the loan number, the number of days the loan was past due on the closing
date, the bid percentage, the last paid installment and the note interest rate. The formulas then
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calculate the adjusted outstanding principal by determining the outstanding principal balance and
multiplying that number by the appropriate bid percentage. Mr. Raburn’s calculations next add
in the elements listed in the Purchase Agreements for fees and expenses, attorney’s fees and
interest (to the extent allowed by the contract), resulting in a Repurchase Price.
Many of the loans have been foreclosed by Beal and all three loans selected by Mr.
Raburn have been foreclosed. To prevent unjust enrichment because Beal has retained the
foreclosure proceeds, the proceeds of the foreclosure are subtracted from the Repurchase Price.
This subtraction of the proceeds of foreclosure from the Repurchase Price in the formulas results
in the Net Repurchase Price. The Net Repurchase Price is the amount due to Beal.
The loan file identified as Loan No. 80445935210 presents a detailed example of the
formula and how it works where the loan in question was non-performing on the Cut-off Date.
On Loan No. 804459352 Beal is not entitled to interest because the loan was non-performing on
the loan sale Cut-off Date. The proper repurchase price for this loan, applying the formula as set
forth in the Raburn declaration is $21,737.00. See Raburn Exhibit C.
Loan No. 804622421 corresponds to the second repurchase formula set out above, a
performing loan where interest is paid up to the date of repurchase. The proper repurchase price
for Loan No. 804622421 is $70,871.18 as of March 31, 2007, with interest accruing at the rate of
$12.82 per day until the loan is actually repurchased by FDIC Receiver. See Raburn Exhibit A.
Finally, the proper repurchase price for Loan No. 805501608 is calculated under formula
number three above, a performing loan with interest being paid “not to exceed sixty (60) days.”
That formula is correct and complete; the proper repurchase price for this loan is $36,592.08. See
Raburn Exhibit B.
10 The files are identified by loan number only to protect the privacy of the borrowers.
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As demonstrated by Mr. Raburn's declaration and attached calculations, these three
formulas are correct and complete templates for determining the repurchase price of loans found
to be defective. Accordingly, the Court should grant summary judgment finding that the damage
templates set out here are the appropriate methods for calculating the Repurchase Price under the
Purchase Agreements. Further, these formulas should be employed whenever the FDIC Receiver
agrees to repurchase a loan or this court determines that there is a material and adverse breach
requiring repurchase by FDIC Receiver.
VI. THE INDEMNIFICATION PROVISION OF THE PURCHASE AGREEMENTS DOES NOT APPLY TO CLAIMS FALLING WITHIN THE "CURE OR REPURCHASE" REMEDY.
Count Three of the First Amended Complaint states, in relevant part:
FDIC Receiver breached its indemnity obligations by failing and refusing to indemnify Beal for all of its losses and damages related to or arising from FDIC Receiver's representation, warranty, and covenant breaches.
First Am. Compl. ¶ 60. Plaintiff further describes its claim for "Breach of Indemnity" as
follows:
Section 19 of all three Purchase Agreements requires FDIC Receiver to indemnify Beal for its losses and damages arising from or related to FDIC Receiver's breaches of any representation, warranty, or covenant in the Purchase Agreement. FDIC Receiver's representations, warranties, and covenants, together with this indemnity, are not limited by time. Beal is entitled to be indemnified and held harmless from and against all losses or damages that are related to or arise from any such breach -- including Beal's losses and damages arising from or related to FDIC Receiver's failure to timely repurchase Defective Loans.
First Am. Compl. ¶ 32.11
By this motion for partial summary judgment, FDIC Receiver seeks a determination that,
as a matter of law, the Indemnification clause, Section 19 of the Purchase Agreements, applies
11 For purposes of this Motion for Summary Judgment the FDIC adopts Beal’s definition of “Defective Loans” as “loans for which there is a representation and warranty breach that has a material and adverse effect on the loan’s value.” First Am. Compl. p. 9, n. 1.
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only to claims other that those falling under the "cure or repurchase" provision of Section 5 of
the Purchase Agreements. Because Section 5's "cure or repurchase" provisions is intended to be
the sole and complete remedy for breaches as between Seller (FDIC Receiver) and Purchaser
(Beal), the indemnification clause of Section 19 does not provide a duplicative or alternative
remedy for those same claims. In practical effect, and as a matter of law, the Section 19
indemnification clause is designed to protect an innocent contract party from third party claims
for which the other contract party is responsible. In short, the Indemnification provision is an
indemnification provision.
A. Beal's Interpretation of Section 19 Creates An Irreconcilable Conflict Among The Terms Of the Purchase Agreements And Would Render the "Cure Or Repurchase" Provision Superfluous.
The relevant portion of the Indemnification provision in Section 19 reads as follows:
Seller agrees to indemnify Purchaser and its officers, directors, employees and agents against, and hold each of them harmless from, any liabilities, and any related expenses, losses, claims or damages that are related to or arise from (i) a breach of a representation, warranty or covenant of Seller contained in this Purchase Agreement . . .
Beal claims, in essence, that this Indemnification provision is an independent, alternative source
of damages for FDIC Receiver's alleged breaches of representations and warranties, including
breaches relating to specific mortgage loans sold under the Purchase Agreements. See, First Am.
Compl. ¶ 32 ("indemnify Beal for its losses and damages arising from or related to FDIC
Receiver's breaches of any representation, warranty, or covenant in the Purchase Agreement";
"Beal is entitled to be indemnified and held harmless from and against all losses or damages that
are related to or arise from any such breach") and ¶ 60 ("indemnify Beal for all its losses and
damages) (emphasis added).
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Beal's reading of Section 19 creates a conflict between the Indemnification clause and the
"cure or repurchase" provision of Section 5. Section 5 provides two specific remedies for
breaches of representations and warranties -- cure or repurchase -- and sets out specific formulas
for the calculation of the Repurchase Price, including strict limits on interest. Further, the Section
5 remedy, by its terms, applies only with regard to "a breach of any of the foregoing
representations and warranties which materially and adversely affects the value of the Mortgage
Loans." (Emphasis added.)
As an alternative remedy with no prerequisites and no limitations on what losses or
damages could be recovered, such a reading of Section 19 would effectively render Section 5
superfluous. If the wide-open, unrestricted "indemnification" remedy claimed by Beal were
available under the Purchase Agreements, the highly specific and detailed remedy set out in
Section 5 would never be invoked. Because Section 5 offers a specific, limited, carefully
constructed remedy, breaches falling within Section 5's purview cannot in the alternative be
subject to an unlimited, unrestricted remedy. Beal's contention that Section 19 provides them a
general entitlement to recover "all losses or damages that are related to or arise from any such
breach" would eviscerate Section 5 -- which is an untenable result under the governing law.
1095 (2d Cir.1993) ("By examining the entire contract, we safeguard against adopting an
interpretation that would render any individual provision superfluous.")
B. As The More Specific Provision, Section 5 Governs Situations Where There Is A Conflict With The More General Section 19 Indemnification Clause.
While both Section 5 and Section 19 are directed toward breaches of the representations
and warranties, Section 5 with its specificity, exclusions, and limitations must take precedence
and govern the remedies available in those circumstances that fall within its provisions. It is
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28
clear from reviewing the language of the two provisions that, with regard to breaches of the
representations and warranties, Section 19 is a general provision with boilerplate language ("any
liabilities, and any related expenses, losses, claims or damages"), while Section 5 is very specific
with regard to what kinds of breaches are covered, what remedies are available, and how the
repurchase price is calculated.
As the New York Appellate Division recently stated, quoting black letter law: "'Where
there are general and special provisions relating to the same thing, the special provisions control,
even if there is an inconsistency between the special provisions and the general provisions' (22
N.Y. Jur. 2d, Contracts § 254)." Oakgrove Const., Inc. v. Genesee Valley Nurseries, Inc., 834
N.Y.S.2d 822, 823 (N.Y. App. Div. 2007); see also County of Suffolk v. Alcorn, 266 F.3d 131,
139 (2d Cir. 2001); Oldcastle Precast, Inc. v. U.S. Fidelity & Guar. Co., 458 F. Supp. 2d 131,
142 (S.D.N.Y. 2006); Madison 52nd Corp. v. Empire Trust Co. 208 N.Y.S.2d 466, 467 (N.Y.
App. Div.1960) ("The general rule is that where there is ‘inconsistency between a specific
provision and a general provision of a contract * * * the specific provision controls.’ Muzak
Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46, 150 N.Y.S.2d 171, 174 (1956)."); Travelers
Indemnity Co. of Ill. v. F & S London Pub, Inc., 270 F. Supp. 2d 330, 334 -335 (E.D.N.Y. 2003).
The Travelers Indemnity Co. case is particularly instructive here. Plaintiff asserted that,
under the broad indemnity provisions of a lease for space occupied by a bar, the tenant was
financially responsible when the bar burned down, even though the tenant was not at fault. The
tenant asserted that a different provision of the lease, specifically covering fire damage, put the
financial burden on the landlord in such circumstances. The court agreed with the tenant:
Considering the aforementioned arguments, the main question before this Court is one of pure contractual interpretation. Travelers contends that since both parties are sophisticated business enterprises, the plain language of the indemnification clauses should govern. F & S counters that the indemnity clauses, if read as
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29
broadly as Travelers purports, conflict with the language contained in Clause 4 of the Lease, which specifically addresses loss from fire. It is black letter contract law "that where there is 'inconsistency between a specific provision of a contract and a general provision of a contract ... the specific provision controls.'" Moreover, "[t]he Court must read the indemnification provision in conjunction with all other provisions in the agreement to avoid inconsistencies or an interpretation which would render another provision superfluous or without effect." Paragraph 4 of the Lease would be rendered meaningless if the indemnity clauses were read to encompass any and all damage to the Property, regardless of fault. It is true that the Lease's language mandates indemnity by F & S "for any matter or thing growing out of the occupation of the demised premises" (Lease ¶ 2) or tenant's "use of the premises" (Lease ¶ 40) . . . The cause of the fire is undetermined, and F & S cannot be held liable for property damage that occurred based on nothing more than a broad indemnification clause when more specific language bears on the facts at hand.
Travelers Indemnity Co. of Ill. v. F & S London Pub, Inc., 270 F.Supp.2d at 334 -335 (citations
omitted).
While both Section 5 remedies and Section 19 remedies are triggered by a breach of the
Purchase Agreements' representations and warranties,12 that is where the similarities end.
Section 5 is replete with conditions and highly detailed damages calculations, whereas Section
19 contains either either broad, vague limits or no conditions or limits at all. Section 5 speaks to
breaches of representations and warranties, while Section 19 speaks not only to such breaches
but to events and actions relating to the servicing of the loans. Most tellingly, Section 5 is
directed to breaches which affect the "interest of Purchaser," while Section 19 leaves open the
question of whose interests are affected.
There can be no question that Section 5's "cure or repurchase" provision is far more
specific and limited than the Section 19 indemnification clause. To the extent they could be
construed to have the same purpose, Section 5 must control. Accordingly, the Court should
12 A breach of representations and warranties is just one of three alternative triggers for Section 19 indemnification.
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reject Beal's interpretation of the indemnification clause as an equally viable alternative basis for
damages, and enter summary judgment for FDIC Receiver on Count Three.
C. Beal Seeks A "Back Door" Solution To Section 5's Restrictions On Damages.
In contrast to Section 5's narrowly structured remedy provision, Beal asks the Court to
read Section 19 as a remedy provision with no limitations at all. Beal sees the Indemnification
clause as a means of escaping Section 5's requirement that the breach "materially and adversely"
affect the value of the mortgage loans. Beal's reading of Section 19 would also allow Beal to
avoid the structured calculation of the Repurchase Price, and the restrictive limits on interest.
Beal's characterization of the indemnification clause as a different and alternative remedy
asks the Court to read it in isolation, as if Section 5 could simply be ignored. However, the rules
of contract interpretation require that the indemnification clause be read together with the rest of
the contract:
The defendants' attempt to read sections 3.1 and 10.2 in isolation is, however, inconsistent with well established principles of contract construction, which require that all provisions of a contract be read together as a harmonious whole, if possible. See, e.g., Enercomp, Inc. v. McCorhill Publishing, 873 F.2d 536, 549 (2d Cir.1989) (rejecting appellants' construction of contracts as “somewhat at odds with the agreement as a whole”); see also Rothenberg v. Lincoln Farm Camp, 755 F.2d 1017, 1019 (2d Cir.1985); Restatement (Second) of Contracts § 202(2). Here, sections 10.2 and 3.1 are not inherently inconsistent nor mutually exclusive and can be read together harmoniously, as the district court read them.
Kinek v. Paramount Communications, Inc., 22 F.3d 503, 509 (2d Cir. 1994); see also RJE Corp.
v. Northville Industries Corp.,198 F.Supp.2d 249, 262-263 (E.D.N.Y. 2002) ("Contract
provisions should not be read in isolation; rather, 'the entire contract must be considered, and all
parts of it reconciled'”) citing Terwilliger v. Terwilliger, 206 F.3d 240, 245 (2d Cir. 2000).
Beal's "different and alternative" theory is simply an attempt to obtain a monetary
recovery through the "back door" (Section 19) that is denied to it at the "front door" (Section 5).
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31
However, "[i]ndemnification provisions give rise to restitutionary rights, and are not back-door
means to get the benefit of one's bargain." In re Adelphia Communications Corp., 342 B.R. 142,
155 (Bankr. S.D.N.Y. 2006).
A head-to-head comparison of Section 5 and Section 19 makes clear that Section 5 and
Section 19 are intended to serve entirely different purposes -- not simply be alternative methods
for assessing damages for the same conduct. The following table breaks down the two
provisions into several elements for purposes of making a direct comparison.
Element Section 5 Section 19
Location within the Purchase Agreements
In same section as the representations and warranties Between "Successors and Assigns" and "Amendments"
Remedy to Purchaser (Beal) Triggered by
a breach of any of the foregoing representations and warranties
(i) a breach of a representation, warranty or covenant of Seller contained in this Purchase Agreement or (ii) Seller's imprudent servicing of the Mortgage Loans prior to the Transfer Date or (iii) the transfer of servicing of the Mortgage Loans to the Purchaser or the Seller's inability to effect or cause the transfer of the servicing to the Purchaser
Relief to Purchaser (Beal) Conditioned on
[triggering event] which materially and adversely affects the value of the Mortgage Loans or the interest of Purchaser (or which materially and adversely affects the interests of Purchaser in the Mortgage Loan in the case of a representation or warranty relating to a particular Mortgage Loan)
No express conditions
Choice of remedies
Seller shall, at Seller's option (i) cure such breach in all material respects or (ii) repurchase the ownership interest in such Mortgage Loan
No choice of remedies
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32
Element Section 5 Section 19
Purchaser's relief equal to
the sum of: (a) the product of the outstanding principal amount thereof as of the date of such repurchase and the Bid Percentage; (b) Purchaser's reasonable and customary out-of-pocket expenses incurred by Purchaser in transferring and servicing such Mortgage Loan, including, without limitation, expenses incurred for maintenance and repairs, assessments, taxes and similar items, to the extent not paid out of an escrow account transferred by Seller to Purchaser; (c) attorney's fees and expenses incurred by Purchaser in connection with any enforcement procedures or otherwise with respect to such Mortgage Loan or the transfer of such Mortgage Loan to Seller or Purchaser; and (d) in the event such Mortgage Loan was a Performing Mortgage Loan, accrued but unpaid interest thereon
any liabilities, and any related expenses, losses, claims or damages that are related to or arise from [the triggering event]
The structure of these provisions leaves no doubt that these two provisions are not simply
alternative remedies for the same conduct. But such a detailed analysis is hardly necessary; it is
clear from the language and location of Section 19 that it is intended to be one "boilerplate"
provision among several other "boilerplate" provisions, and not have the same role and weight as
the prominent and highly specific Section 5. By its location in the same section of the Purchase
Agreements as the Representations and Warranties, the Section 5 "cure or repurchase" provision
is unequivocally tied to, and part and parcel of, the representations and warranties. By contrast,
the Indemnification clause appears much later in the Purchase Agreements, along with
provisions such as separability, counterparts, place of delivery, successors and assigns, and
amendments. Further, the carefully crafted, specific, and detailed language of the "cure or
repurchase" provision makes clear that care was used in writing it and it was intended to achieve
particular results. In contrast, the language of Section 19 is far more general and non-specific.
Sundance Cruises Corp. v. American Bureau of Shipping, 799 F. Supp. 363, 378 (S.D.N.Y.
Case 1:02-cv-02146-RJL Document 75 Filed 04/23/2008 Page 40 of 44
33
1992) ("we believe that the placement and relative isolation of the former clause . . . raise[s] a
question of fact as to the actual intention of the parties"); Creative Waste Management v. Capitol
Environmental Services, Inc., 458 F. Supp. 2d 178, 188 (S.D.N.Y. 2006) ("we decline to
interpret this boilerplate indemnification clause to apply to the highly specific situation presently
at issue.")
The structure of the Purchase Agreements, and of these specific provisions, makes clear
that Section 5 and Section 19 have very different purposes, and are not interchangeable methods
for determining damages for breach. Beal cannot avoid having to use the Section 5 "front door,"
with its conditions and limitations, as the means for determining damages for breach of
representations and warranties.
D. Indemnification Clauses Must Be Narrowly Construed.
While the Indemnification clause cannot serve the broad purpose that Beal advocates, it
does have a specific role and function:
Although defendant cites a Seventh Circuit case to the contrary (Edward E. Gillen Co. v. U.S. (7th Cir. 1987) 825 F.2d 1155), the rule in this Circuit is that "indemnity agreements are generally designed only to protect against liability for damage to third parties." Atlantic Richfield Co. v. Interstate Oil Transp. Co. (2d Cir. 1986) 784 F.2d 106 . . .
Sundance Cruises Corp. v. American Bureau of Shipping, 799 F. Supp. 363, 377-378 (S.D.N.Y.
1992) (some citations omitted). This role and function is narrowly construed. In Hooper
Associates, Ltd. v. AGS Computers, Inc., 549 N.Y.S.2d 365 (1989), the New York Court of
Appeals explained:
Words in a contract are to be construed to achieve the apparent purpose of the parties . . . This is particularly true with indemnity contracts. When a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed. The promise should not be found unless it can be clearly implied
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34
from the language and purpose of the entire agreement and the surrounding facts and circumstances.
Id. at 367 (citations omitted). The Court went on to hold that: "Construing the indemnification
clause as pertaining only to third-party suits affords a fair meaning to all of the language
employed by the parties in the contract and leaves no provision without force and effect." Id.
(citations omitted).
More recently, that same Court held: "In the case before us, as in Hooper, the language
of the parties is not clear enough to enforce an obligation to indemnify, and we are unwilling to
rewrite the contract and supply a specific obligation the parties themselves did not spell out."
Tonking v. Port Authority of New York and New Jersey, 787 N.Y.S.2d 708, 710 (2004).
Here, Section 19 uses the ordinary language of a standard indemnification clause, which
would pertain to claims by third parties. However, Beal improperly seeks to endow that same
language with a much broader meaning, turning it into a general damages provision for itself,
under the guise of "indemnification." This it cannot do. Accordingly, Beal's interpretation of
Section 19 should be rejected.
E. Conclusion
FDIC Receiver asks the Court to do no more than the prevailing law of contracts
provides: interpret the Indemnification provision, Section 19 of the Purchase Agreements, by
looking at the contract as a whole. Kass v. Kass, 673 N.Y.S.2d 350 (1998); Kinek v. Paramount
Corp.,198 F.Supp.2d 249, 262-263 (E.D.N.Y. 2002) ("Contract provisions should not be read in
isolation; rather, 'the entire contract must be considered, and all parts of it reconciled,'” citing
Terwilliger v. Terwilliger, 206 F.3d 240, 245 (2d Cir. 2000)).
Case 1:02-cv-02146-RJL Document 75 Filed 04/23/2008 Page 42 of 44
35
FDIC Receiver asks that this Court read Sections 5 and 19 in context as components of an
entire agreement, read the agreement so as to give both provisions meaning, and consider the
general nature of Section 19 as compared to the specific nature of Section 5. Under the
prevailing law, the Court will find that applying these principles of contract construction will
remove any ambiguity and allow the Court to reach a definitive interpretation of the Purchase
Agreements in accordance with the FDIC's arguments.
CONCLUSION
For the reasons stated, FDIC Receiver respectfully requests that the Court grant this
motion and dismiss Counts One, Three, and Six; find that the three damages templates submitted
by FDIC Receiver are the correct methods for calculating damages under Count Two, and
dismiss those portions of Count Seven pertaining to the Court's rulings on the other Counts.
Case 1:02-cv-02146-RJL Document 75 Filed 04/23/2008 Page 43 of 44
36
Respectfully submitted this 23rd day of April, 2008.
FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR SUPERIOR FEDERAL BANK, F.S.B.
__/s/ Tom M. Reeves_________ Tom M. Reeves, Counsel KS Sup. Ct. No. 7259 Federal Deposit Insurance Corporation Legal Division 3501 Fairfax Drive, Room D- 7068 Arlington, VA 22226 Phone: (703) 562-2433 (direct dial) (703) 562-2475 (fax) Email: [email protected] Claire L. McGuire, Senior Counsel D.C. Bar No. 247924 Susan Kantor Bank, Counsel D.C. Bar No. 363769
Case 1:02-cv-02146-RJL Document 75 Filed 04/23/2008 Page 44 of 44
1
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
BEAL BANK, S.S.B. ) ) Plaintiff, ) ) v. ) Civil Action No. ) 1:02CV 02146 (RJL) FEDERAL DEPOSIT INSURANCE ) CORPORATION, as RECEIVER for ) SUPERIOR FEDERAL BANK, FSB, ) and in its CORPORATE CAPACITY, ) ) Defendant. ) ____________________________________)
DEFENDANT FDIC RECEIVER'S STATEMENT OF UNDISPUTED FACTS
1. The Federal Deposit Insurance Corporation ("FDIC") was created by Congress to
"insure the deposits of all insured depository institutions," 12 U.S.C. § 1821(a)(1)(A), to examine
certain banks and report on their condition, 12 U.S.C. § 1820(b), to "be appointed conservator of
any insured Federal depository institution," 12 U.S.C. § 1821(c)(2)(A)(ii), and to "be appointed
receiver . . . whenever a receiver is appointed for the purpose of liquidation or winding up the
affairs of an insured Federal depository institution by the appropriate Federal banking agency,"
12 U.S.C. § 1821(c)(2)(A)(ii).
2. FDIC was appointed receiver for Superior Bank, FSB (“Superior”) by the Office of
Thrift Supervision (“OTS”) on July 27, 2001, OTS Order No. 2001-56. On the same date, the
OTS chartered a new “interim” thrift institution, Superior Federal Bank, FSB (“Superior
Federal”), and appointed the FDIC as Conservator of the new institution. The Conservatorship
operated for a period from July 27, 2001, until May 31, 2002. On May 31, 2002, the OTS closed
Case 1:02-cv-02146-RJL Document 75-2 Filed 04/23/2008 Page 1 of 6
2
the interim conservatorship, Superior Federal, and appointed FDIC the receiver for Superior
Federal by OTS Order No. 2002-21. FDIC Receiver appears in that capacity as a defendant in
this litigation. 1st Am. Compl. ¶ 2; Ans. to 1st Am. Compl. ¶ 2.
3. Plaintiff Beal is a Texas State Savings Bank that has operated for 18 years as a
wholesale bank and prolific purchaser of loans from many sellers in the secondary market. 1st
Am. Compl. ¶¶ 1, 15.
4. The Superior Federal conservatorship bundled together numerous single family
residential mortgage loans in the Superior inventory and offered those portfolios for sale. Beal
was the successful bidder on four of those loan sales. 1st Am. Compl. ¶¶ 7, 8, 11; Ans. to 1st
Am. Compl. ¶¶ 7, 8, 11.
5. The four loan sale transactions are reflected in Mortgage Loan Purchase Agreements
(“Purchase Agreements”) dated November 6, 2001, March 13, 2002, April 23, 2002 (loan pools
1A and 1B), and April 23, 2002 (loan pools 2 and 3). Ex. A, B, C, and D to Ans. to 1st Am.
Compl.
6. Beal purchased a total of 5,315 loans under the four Purchase Agreements. 1st Am.
Compl. ¶ 8; Ans. to 1st Am. Compl. ¶ 8.
7. The April 23, 2002 Purchase Agreement (loan pools 2 and 3), Section 5.b., states as
follows:
b. Mortgage Loans Sold “As Is.” THE MORTGAGE LOANS ARE BEING SOLD “AS IS” AND “WITH ALL FAULTS” WITHOUT ANY REPRESENTATION, WARRANTY OR RECOURSE WHATSOEVER AS TO EITHER CONDITION, FITNESS FOR ANY PARTICULAR PURPOSE, MERCHANTABILITY OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. SELLER SPECIFICALLY DISCLAIMS ANY WARRANTY, GUARANTY OR REPRESENTATION, ORAL OR WRITTEN, PAST OR PRESENT, EXPRESS OR IMPLIED, CONCERNING THE MORTGAGE LOANS, THE STRATIFICATION OR
Case 1:02-cv-02146-RJL Document 75-2 Filed 04/23/2008 Page 2 of 6
3
PACKAGING OF THE MORTGAGE LOANS, THE COLLATERAL OR THE MORTGAGE LOAN DOCUMENTS.
Ex. D to Ans. to 1st Am. Compl. (Emphasis in original)
8. Loan pools 2 and 3, purchased by Beal pursuant to the April 23 2002 Purchase
Agreement, contained a total of 379 loans. Declaration of David K. Hall, Ex. 1 to FDIC
Receiver's Mot. for Partial Summ. J.
9. Section 5 of each of the three remaining Purchase Agreements includes a provision
allowing Beal to provide notice to FDIC Receiver of certain breaches of representations and
warranties included in the Purchase Agreements:
Upon discovery by Purchaser of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of the Mortgage Loans or the interest of Purchaser (or which materially and adversely affects the interests of Purchaser in the Mortgage Loan in the case of a representation or warranty relating to a particular Mortgage Loan), Purchaser shall give prompt written notice thereof to Seller.
Ex. A, B, and C to Ans. to 1st Am. Compl.
10. Following this procedure for reporting a material breach of representations and
warranties, Section 5 then gives FDIC Receiver the opportunity to either cure the breach or
repurchase the loan from Beal:
Within sixty (60) days of its receipt of notice of any such breach of a representation or warranty containing Buyer's request for Seller to act thereon, Seller shall, at Seller's option (i) cure such breach in all material respects or (ii) repurchase the ownership interest in such Mortgage Loan . . .
Ex. A, B, and C to Ans. to 1st Am. Compl.
11. Section 5 then sets out the following formula for calculating the repurchase price:
[T]he sum of: (a) the product of the outstanding principal amount thereof as of the date of such repurchase and the Bid Percentage; (b) Purchaser's reasonable and customary out-of pocket expenses incurred by Purchaser in transferring and servicing such Mortgage Loan, including, without limitation, expenses incurred for maintenance and repairs, assessments, taxes and similar items, to the extent
Case 1:02-cv-02146-RJL Document 75-2 Filed 04/23/2008 Page 3 of 6
4
not paid out of an escrow account transferred by Seller to Purchaser; (c) attorney's fees and expenses incurred by Purchaser in connection with any enforcement procedures or otherwise with respect to such Mortgage Loan or the transfer of such Mortgage Loan to Seller or Purchaser; and (d) in the event such Mortgage Loan was a Performing Mortgage Loan, accrued but unpaid interest thereon . . .
Ex. A, B, and C to Ans. to 1st Am. Compl.
12. There are two versions of the "accrued but unpaid interest" provision in Section 5. In
the Purchase Agreement dated November 6, 2001 (Ex. A to Ans. to 1st Am. Compl.), the
provision reads: "accrued but unpaid interest thereon up to but not including the date of
repurchase." In the Purchase Agreements dated March 31, 2002, and April 23, 2002 (Ex. B and
C to Ans. to 1st Am. Compl.), the provision reads: "accrued but unpaid interest thereon not to
exceed sixty (60) days."
13. Section 5 then provides for return of the particular mortgage loan:
Purchaser shall release its interest in the Mortgage Loan promptly upon its receipt of the Repurchase Price and shall immediately effect the reconveyance of such Mortgage Loan to Seller.
Ex. A, B, and C to Ans. to 1st Am. Compl.
14. Finally, Section 5 provides for situations where a breach is discovered by the seller:
If Seller discovers a breach of any representation or warranty, Seller may, at its option, give Buyer prompt written notice thereof and Buyer shall, within 60 days of such notice, sell its interest in such Mortgage Loan to Seller at the Repurchase Price.
Ex. A, B, and C to Ans. to 1st Am. Compl.
15. Pursuant to the provisions of Section 5 of the Purchase Agreements, FDIC Receiver
has repurchased 247 loans from Beal. Declaration of David K. Hall, Ex. 2 to FDIC Receiver's
Mot. for Partial Summ. J.
16. Section 19 of each of the three Purchase Agreements is entitled "Indemnification,"
and states as follows in its entirety:
Case 1:02-cv-02146-RJL Document 75-2 Filed 04/23/2008 Page 4 of 6
5
Purchaser agrees to indemnify Seller and its officers, directors, employees and agents against, and hold each of them harmless from, any liabilities, and any related expenses, losses, claims or damages that are related to or arise from (i) a breach of a representation, warranty or covenant of Purchaser contained in this Purchase Agreement or (ii) Purchaser's imprudent servicing of the Mortgage Loans after the Transfer Date. Seller agrees to indemnify Purchaser and its officers, directors, employees and agents against, and hold each of them harmless from, any liabilities, and any related expenses, losses, claims or damages that are related to or arise from (i) a breach of a representation, warranty or covenant of Seller contained in this Purchase Agreement or (ii) Seller's imprudent servicing of the Mortgage Loans prior to the Transfer Date or (iii) the transfer of servicing of the Mortgage Loans to the Purchaser.
Ex. A, B, and C to Ans. to 1st Am. Compl.
Case 1:02-cv-02146-RJL Document 75-2 Filed 04/23/2008 Page 5 of 6
6
Respectfully submitted this 23rd day of April, 2008.
FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR SUPERIOR FEDERAL BANK, F.S.B.
__/s/ Tom M. Reeves_________ Tom M. Reeves, Counsel KS Sup. Ct. No. 7259 Federal Deposit Insurance Corporation Legal Division 3501 Fairfax Drive, Room D- 7068 Arlington, VA 22226 Phone: (703) 562-2433 (direct dial) (703) 562-2475 (fax) Email: [email protected] Claire L. McGuire, Senior Counsel D.C. Bar No. 247924 Susan Kantor Bank, Counsel D.C. Bar No. 363769
Case 1:02-cv-02146-RJL Document 75-2 Filed 04/23/2008 Page 6 of 6
EXHIBIT1
David Hall Declaration
Case 1:02-cv-02146-RJL Document 75-3 Filed 04/23/2008 Page 1 of 3
UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIA
BEAL BANK, S.S.B. ))Plaintiff, ))v. ))
FEDERAL DEPOSIT INSURANCE )CORPORATION, as RECEIVER for )SUPERIOR FEDERAL BANK, FSB, )and in its CORPORATE CAPACITY, )
)Defendant. ))
Civil Action No.1:02CV 02146 (RJL)
DECLARATION OF DAVID K. HALLRegarding the Number of Loans Sold Under the Fourth Purchase Agreement
I, David K. Hall, hereby state as follows:
1. I am employed by the Federal Deposit Insurance Corporation ("FDIC") as a
Supervisory Resolutions and Receiverships Specialist.
2. On May 31,2002, the FDIC was appointed Receiver for Superior Federal Bank, FSB
("Superior"). As part of my offcial responsibilities, I oversee certain matters arising out of
the
Superior receivership.
3. I am familiar with the four Mortgage Loan Purchase Agreements, dated November 6,
2001, March 13,2002, April 23, 2002 (loan pools 1A and 1B), and April 23, 2002 (loan pools 2
and 3). Pursuant to these four Purchase Agreements, Beal purchased 5,315 mortgage loans from
the Superior mortgage loan portfolio.
4. The April 23, 2002 Purchase Agreement containing loan pools 2 and 3 states that the
loans under that agreement were sold "as is" and "with all faults" without any representation,
Case 1:02-cv-02146-RJL Document 75-3 Filed 04/23/2008 Page 2 of 3
warranty or recourse whatsoever as to condition, fitness for any particular purpose,
merchantability or any other warranty, express or implied.
5. Loan pools 2 and 3, sold to Beal pursuant to that Purchase Agreement, contained 379
loans.
I declare under penalty of perjury that the foregoing is true and correct.
Executed on April --, 2008.
~lc//dDavid K. Hall
Case 1:02-cv-02146-RJL Document 75-3 Filed 04/23/2008 Page 3 of 3
EXHIBIT2
David Hall Declaration
Case 1:02-cv-02146-RJL Document 75-4 Filed 04/23/2008 Page 1 of 10
UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIA
BEAL BANK, S.S.B. ))Plaintiff, ))v. ))
FEDERAL DEPOSIT INSURANCE )CORPORATION, as RECEIVER for )SUPERIOR FEDERAL BANK, FSB, )and in its CORPORATE CAPACITY, )
)Defendant. ))
Civil Action No.1:02CV 02146 (RJL)
DECLARATION OF DAVID K. HALLRegarding Repurchased Loans
I, David K. Hall, hereby state as follows:
1. I am employed by the Federal Deposit Insurance Corporation ("FDIC") as a
Supervisory Resolutions and Receiverships Specialist.
2. On May 31, 2002, the FDIC was appointed Receiver for Superior Federal Bank, FSB
("Superior"). As part of my official responsibilities, I oversee certain matters arising out of the
Superior receivership.
3. I am familiar with the four Mortgage Loan Purchase Agreements, dated November 6,
2001, March 13,2002, April 23, 2002 (loan pools lA and lB), and April 23, 2002 (loan pools 2
and 3). Pursuant to these four Purchase Agreements, Beal purchased 5,315 mortgage loans from
the Superior mortgage loan portfolio.
4. Pursuant to Section 5 of the Purchase Agreements dated November 6,2001, March
13,2002, and April 23, 2002 (loan pools lA and lB), Beal gave written notice to FDIC Receiver
Case 1:02-cv-02146-RJL Document 75-4 Filed 04/23/2008 Page 2 of 10
that 247 loans contained material breaches of representations and warranties that adversely
affected the value of the loans or the interest of Bea1.
5. Between November 2001 and November 2003, FDIC Receiver repurchased those
loans in accordance with Section 5 of the Purchase Agreements.
6. A list of the 247 loans repurchased by FDIC Receiver is attached to this Declaration.
I declare under penalty of peijury that the foregoing is true and correct.
Executed on April 4,2008.
~/tlALDavid K. Hall
Case 1:02-cv-02146-RJL Document 75-4 Filed 04/23/2008 Page 3 of 10
EXHIBIT3
Tom Raburn Declaration
Case 1:02-cv-02146-RJL Document 75-5 Filed 04/23/2008 Page 1 of 7
UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIA
BEAL BANK, S.S.B. ))Plaintiff, ))v. ))
FEDERAL DEPOSIT INSURANCE )CORPORATION, As RECEIVER for )SUPERIOR FEDERAL BANK, FSB, )AND IN ITS CORPORATE CAPACITY)Defendants. )
)
Civil Action No.1:02CV 02146 (RJL)
DECLARATION OF THOMAS J. RABURN
I, Thomas J. Rabur, hereby state as follows:
1. I, Thomas 1. Rabur am a practicing Certified Public Accountant and I am
a member ofthe firm Raburn & Willamson, PLC. I have been a practicing Certified
Public Accountant since 1981 and have provided services to the Savings and Loan or
Banking industry, or to related federal agencies, continuously since that time.
2. I have been requested by the Federal Deposit Insurance Corporation
("FDIC") to review three Mortgage Loan Purchase Agreements ("Agreements"), between
Superior Federal Savings Bank FSB as seller and Beal Bank S.S.B. ("Beal") as
purchaser, dated respectively:
November 6, 2001
March 13,2002, and
April 23, 2002
The purpose of the review was to create appropriate repurchase formulas or repurchase
Case 1:02-cv-02146-RJL Document 75-5 Filed 04/23/2008 Page 2 of 7
templates to be employed in determining the correct repurchase price should it be
determined that a specific loan does not meet the representations and warranties provided
in the agreements.
3. The preamble in each of the Agreements is identical and defines a
"Penorming Mortgage Loan" and a "Non-performing Mortgage Loan" as follows:
Some of the Mortgage Loans are less than sixty (60) days past due as of the Cut-off Date (as defined in the Term Sheet) with respect to the mortgagor's paymentof principal and interest (a "Penorming Mortgage Loan"), and some of theMortgage Loan are (i) sixty (60) or more days past due as of Cut-off Date withrespect to the mortgagor's payment of principal and interest, and/or (ii) thereexists an event of default under the terms of the Mortgage Note or Mortgage (aseach such term is hereinafter defined) (a "Non-performing Mortgage Loan").
4. The "Repurchase Price" for each mortgage loan repurchased due to a
breach of representations and warranties is defined as follows in Section 5 of the
November 6, 2001 Agreement:
"the sum of
(a) the product of the outstanding principal amount thereof as of the date of suchrepurchase and the Bid Percentage,
(b) Purchaser's reasonable and customary out-of-pocket expenses incured byPurchaser in transferring and servicing such Mortgage Loan, including, withoutlimitation, expenses incurred for maintenance and repairs, assessments, taxes andsimilar items, to the extent not paid out of an escrow account transferred by Sellerto Purchaser,
(c) attorney's fees and expenses incured by Purchaser in connection with anyenforcement procedures or otherwise with respect to such Mortgage Loan or thetransfer of such Mortgage Loan to Seller or Purchaser and
(d) in the event such Mortgage Loan was a Performing Mortgage Loan, accruedbut unpaid interest thereon up to but not including the date of repurchase."
The Agreements dated March 13,2002 and April 23, 2002 differ from the Agreement
dated November 6, 2001 only with respect to accrued interest. In each case, these
Case 1:02-cv-02146-RJL Document 75-5 Filed 04/23/2008 Page 3 of 7
Agreements say:
"(d) in the event such Mortgage Loan was a Performing Mortgage Loan, accruedbut unpaid interest thereon not to exceed sixty (60) days."
5. All three Agreements are identical in that the Repurchase Prce as defined
does not include accrued interest for a Non-performing Mortgage Loan.
6. Based on the terms of the Agreements, there are three possible repurchase
formulas or repurchase templates with respect to the Repurchase Price calculation:
A Performing Mortgage Loan contained in the November 6,2001 sale,
shown in the attached Raburn Exhibit A;
A Performing Mortgage Loan contained in either the March 13,2002 or
the April 23, 2002 sale, shown as Rabur Exhibit B; and
A Non-performing Mortgage Loan contained in any of the three sales, as
shown in Raburn Exhibit C.
7. Each Exhibit is a calculation based on an actual claim submitted by Beal
in 2006.
I declare under penalty of perjury that thc forcgoing is true and corrcct. Executed
on August 3D, 2007.
:: iin ~/CPA
Case 1:02-cv-02146-RJL Document 75-5 Filed 04/23/2008 Page 4 of 7
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
BEAL BANK, S.S.B. ) ) Plaintiff, ) ) v. ) Civil Action No. ) 1:02CV 02146 (RJL) FEDERAL DEPOSIT INSURANCE ) CORPORATION, As RECEIVER for ) SUPERIOR FEDERAL BANK, FSB, ) AND IN ITS CORPORATE CAPACITY ) Defendants. ) ____________________________________)
ORDER
The Motion of Federal Deposit Insurance Corporation in its capacity as Receiver
for Superior Federal Bank ("FDIC Receiver") for Partial Summary Judgment on
Plaintiff’s Counts One, Two, Three, Six and Seven of the First Amended Complaint
having been reviewed by this Court, and this Court being fully advised in the premises,
IT IS ORDERED that the FDIC Receiver’s Motion for Partial Summary
Judgment is GRANTED.
IT IS FURTHER ORDERED that Count One be dismissed because it constitutes
a tort claim barred by the Federal Tort Claims Act, or alternatively because the Purchase
Agreements provide the remedy of "cure or repurchase," and make no provision for a
"macro theory" of damages.
IT IS FURTHER ORDERED that as to Count Two, FDIC Receiver is entitled to
summary judgment with regard to (a) all loans under the April 23, 2002 Purchase
Agreement for loan pools 2 and 3; (b) all loans repurchased by FDIC Receiver; (c) all
loans that have been paid off by the borrower or have otherwise fully performed; and (d)
Case 1:02-cv-02146-RJL Document 75-6 Filed 04/23/2008 Page 1 of 2
all loans that are currently performing. Further, FDIC Receiver is entitled to summary
judgment with regard to how the Repurchase Price is calculated under the Purchase
Agreements. There are only three possible formulas for computing the Repurchase Price,
and those formulas are correctly stated in the Raburn Exhibits to the FDIC’s
memorandum.
IT IS FURTHER ORDERED that FDIC Receiver is entitled to summary
judgment on Count Three because the general indemnification clause does not provide
plaintiff a separate and independent remedy.
IT IS FURTHER ORDERED that Count Six be dismissed because the Purchase
Agreements do not provide for any recovery of lost use of funds.
IT IS FURTHER ORDERED that Count Seven be dismissed to the extent that it
merely restates the same legal issues decided in FDIC Receiver's favor in Counts One,
Two, Three and Six.
Dated: ______________ _____________________________ Richard J. Leon United States District Judge
Case 1:02-cv-02146-RJL Document 75-6 Filed 04/23/2008 Page 2 of 2
