MSR Trust v. Nationstar Mortgage LLC

Background

MSR Trust sued Nationstar Mortgage LLC, doing business as Mr. Cooper, for breach of contract and sought damages and a declaration of the parties’ rights. The case was removed from New York state court to federal court. Nationstar then asserted its own contract and declaratory-judgment claims against MSR.

The dispute concerned a January 31, 2014 agreement under which Nationstar purchased from MSR the right to service and collect payments on residential loans guaranteed by Freddie Mac. The agreement included MSR’s representations about the loans and an indemnification provision. That provision required MSR to reimburse Nationstar for specified losses arising from, among other things, breaches of representations or warranties, failures to fulfill contractual obligations, earlier servicing errors, and earlier loan-origination errors. The agreement also included a $4 million indemnification holdback from which Nationstar could set off covered losses after giving written notice.

Nationstar sent MSR notices seeking indemnification for five categories of losses. MSR disputed those claims and refused to reimburse Nationstar. Nationstar retained the $4 million holdback based on its asserted right of setoff.

Motion and Review of the Recommendation

MSR moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a pleading does not state a legally sufficient claim. Magistrate Judge Robert W. Lehrburger recommended granting the motion as to the contract claims for Categories A, B, C, and E; granting it as to Nationstar’s declaratory-judgment claim; and denying it as to the Category D contract claim. No party objected. Judge Daniels reviewed the recommendation for clear error and found none, then adopted it in full.

Categories A, B, C, and E

The court held that Nationstar did not plead enough facts to show that its losses in Categories A, B, C, and E resulted from a breach by MSR covered by the indemnification provision. Nationstar generally alleged that the losses arose from MSR’s breaches, but the allegations and attached schedules did not identify when the losses occurred or what conduct by MSR plausibly caused them. The schedules listed loan numbers, amounts, and short descriptions, but did not provide sufficient supporting facts. The court therefore granted MSR’s motion to dismiss the breach-of-contract claims for Categories A, B, C, and E.

Category D

The court held that Nationstar sufficiently pleaded its Category D indemnification claim. That category included previously noticed claims involving alleged unrecorded liens, deficiencies in the chain of assignment, and tax liabilities. Although the notices and schedules had factual shortcomings, additional allegations plausibly connected some losses to MSR’s responsibilities as an originator or prior servicer. The allegations concerning tax liabilities also plausibly involved loans that MSR had previously said incurred those liabilities before Nationstar acquired them. The court therefore denied MSR’s motion to dismiss the Category D breach-of-contract claim.

Declaratory-Judgment Claim

The court granted MSR’s motion to dismiss Nationstar’s declaratory-judgment counterclaim. Nationstar sought a declaration that MSR was required to indemnify it under the agreement, while also seeking damages for the alleged failure to provide that indemnification. The court found the declaration duplicative because the contract claims would resolve the same legal issues. It also found that the requested declaration would not provide additional relief from uncertainty and was directed primarily at past conduct.

Disposition

Judge Daniels adopted Magistrate Judge Lehrburger’s Report and Recommendation in full. The court granted MSR’s motion to dismiss the breach-of-contract counterclaims concerning Categories A, B, C, and E and granted the motion as to Nationstar’s declaratory-judgment counterclaim. The court denied the motion as to Nationstar’s breach-of-contract counterclaim concerning Category D. The Clerk of Court was directed to close MSR’s motion.