On July 22, LSI filed a motion to dismiss. In that motion, LSI argues that the FDIC’s gross negligence
claim should be dismissed based on the economic loss rule. While application of the rule varies from state to state, the economic loss rule is a judicially created doctrine holding that parties cannot sue in tort (e.g., cannot sue based on negligence) for economic losses resulting from the breach of contractual duties. Based on the rule, LSI argues that the FDIC’s negligence claim is really just a restatement of its breach of contract claim because the only duties that LSI owed WaMu were duties established in the parties’ lengthy written appraisal outsourcing agreement.
|Excerpt from LSI’s Motion to Dismiss|
Against the FDIC’s breach of contract claim — i.e., that LSI breached the various representations and warranties it made in its written appraisal outsourcing agreement with WaMu — LSI argues the claim should be dismissed because it is subject to arbitration under the terms of the contract. The gross negligence claim, however, is likely of far greater significance to LSI. Why? The reason is that LSI’s contract with WaMu contains several provisions imposing a limitation or cap on the damages that might be owed by LSI. One of those caps potentially could limit LSI’s financial exposure to the FDIC to a total of $1 million. Here is that cap from LSI’s contract with WaMu:
|Excerpt from Ex. B (Appraisal Warranty) to LSI’s Appraisal Outsourcing Agreement with WaMu|
One of the legal hurdles for LSI in successfully applying that limitation of liability is that New York law applies to the contract by its terms and under New York law, a limitation of liability will not cap LSI’s liability for gross negligence. If the gross negligence claim is not thrown out, LSI’s potential financial exposure could be the full amount of the damages to be proven by the FDIC — which the FDIC alleges exceed $150,000,000 for just 220 “grossly negligent” appraisals.
As far as my opinion as a lawyer, I will briefly offer that I believe LSI’s arguments are sound and that I believe Judge Carter may likely give them some weight. Judge Carter has dismissed similar types of tort claims by the FDIC against other mortgage service providers based on the economic loss rule (but not specifically against AMCs).
|Excerpt from FDIC’s Opposition to LSI’s Motion to Dismiss|
This argument upends the normal understanding of the legal relationship between AMCs and fee panel appraisers. Under this argument, AMCs would essentially be liable for all fee panel appraiser negligence in connection with claims by all types of parties such as lenders and borrowers. If Judge Carter rules in favor of the FDIC on its agency argument in a reasoned opinion, his ruling might open a new era for liability claims against AMCs. It would also potentially open the door for holders of mortgage backed securities to name some of the large AMCs as defendants in the pending MBS litigation cases which allege billions of dollars of mortgage losses. But . . . I don’t think Judge Carter will likely base his ruling on this point — indeed, the Court does not even have to consider it because it was asserted by the FDIC in a late-filed paper.
Judge Carter has taken LSI’s motion to dismiss under submission without oral argument.