Plaintiff s Amended Complaint for lack of personal jurisdiction pursuant to 735 ILCS 5/2 301.

Transcription

1 IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT, CHANCERY DIVISION Sep :52PM FEDERAL HOME LOAN BANK OF ) CHICAGO, ) ) Plaintiff, ) No. 10 CH ) v. ) ) Hon. Kathleen M. Pantle BANC OF AMERICA FUNDING ) CORPORATION, et al., ) ) ) Defendants. ) ORDER This matter comes before the Court on Defendants Redwood Trust, Inc., Sequoia Residential Funding Inc., and RWT Holdings, Inc. ( Redwood Defendants ) Motion to Dismiss Plaintiff s Amended Complaint for lack of personal jurisdiction pursuant to 735 ILCS 5/ The Plaintiff, the Federal Home Loan Bank of Chicago ( FHLBC ), sued 56 financial institutions variously involved in the securitization and issuance of 37 different mortgage backed securities seeking rescission and damages. FHLBC alleges that this Court has jurisdiction pursuant to the Illinois long arm statute, 735 ILCS 5/ (Compl. 23). The Plaintiff is a bank created by the Federal Home Loan Bank Act, with its headquarters located in Chicago, Illinois. (Compl. 26). The public policy mission of the Federal Home Loan Bank system is to support residential mortgage lending and related community investment. This role is fulfilled by providing their member financial institutions with access to reliable funding, technical assistance, and special affordable housing programs so that they can provide affordable housing and economic development within their communities. (Compl. 27). Defendants Sequoia Residential Funding, Inc. and RWT Holdings, Inc. are Delaware corporations. Defendant Redwood Trust, Inc. is a Maryland Corporation and the controlling 1

2 parent company with 100% indirect ownership of both Sequoia and RWT. (Compl. 51). The Redwood Defendants are based in California, with the exception of a Redwood Trust office in New York. The Redwood Defendants do not have offices, agents or business licenses in Illinois. (Def. Motion to Dismiss p. 2). RWT and Sequoia are affiliates of Redwood Trust and both were involved in the securitization of mortgage loans into SEMT As Sponsor of the Trust, RWT acquired mortgage loans from third party originators and then sold its interest in the loans to Sequoia. As the Depositor, Sequoia securitized the loans and then assigned its interest to the Trust. Sequoia entered into a Pooling and Service Agreement ( PSA ) with the Trustee and the Servicer of the Trust establishing the rights and responsibilities these parties owed to the Trust and to future investors, such as the Plaintiff. (Def. Motion to Dismiss p. 2). The Trust was formed under New York Law, and the PSA is controlled by New York law. (Def. Motion to Dismiss p. 2). Defendants entered into a contract with Banc of America Securities, LLC and Countrywide Securities Corporation to underwrite the certificates issued by the Trust. (Def. Motion to Dismiss p. 3). Pursuant to this agreement, the underwriters purchased the Certificates from the Trust as a firm commitment, meaning there was no right to resell or otherwise return the Certificates should the underwriters be unable to effectuate sales of the Certificates. The Redwood Defendants are not licensed to sell Certificates in Illinois. (Def. Motion to Dismiss p. 3). Illinois courts traditionally have employed a two pronged analysis to determine whether the exercise of jurisdiction meets the requirements of both the Illinois long arm statute and due process under the United States and Illinois constitutions. Hanson v. Ahmed, 382 Ill.App.3d 941, 943 (1 st Dist. 2008). The plaintiff bears the burden of establishing a prima facie case for the assertion of personal jurisdiction over the defendant; however, un contradicted evidence may 2

3 overcome the prima facie case and defeat jurisdiction. Morecambe Maritime, Inc. v. National Bank of Greece, S.A., 354 Ill. App. 3d 707, 710 (1 st Dist. 2004). General jurisdiction can be found when a defendant has continuous and systematic general business contacts with the forum. Compass Envtl., Inc. v. Polu Kai Servs., L.L.C., 379 Ill. App. 3d 549, 558 (1 st Dist. 2008). A court may exercise jurisdiction in any action arising within or without this State against any person who is a natural person or corporation doing business within this State. 735 ILCS 5/2 209(b)(4). Under the "doing business" theory, a corporation becomes subject to the state's jurisdiction if the corporation engages in a continuous and systematic course of business in the State, even if the subject lawsuit has no relationship to that business. Kostal v. Pinkus Dermatopathology Lab., P.C., 357 Ill.App.3d 381, 385 (1 st Dist. 2005). This "doing business" standard requires the nonresident corporation's business activity in Illinois to be carried on, not casually or occasionally, but with a fair measure of permanence and continuity. Rosier v. Cascade Mt., Inc., 367 Ill.App.3d 559, 562 (1 st Dist. 2006). Whether a corporate defendant is doing business in Illinois varies based on the facts of the case, with the focus on the corporation s contacts purposefully directed towards Illinois. Morecambe Maritime, 354 Ill. App.3d at 711. The physical presence of the corporation in Illinois is not required. McNally v. Morrison, 408 Ill. App.3d 248, 257 (1st Dist. 2011). The "doing business" standard is quite high, but once satisfied, a corporation is considered a resident of Illinois and may be sued on any cause of action, regardless of whether it arose out of the corporation's contacts with the state. This is known as general jurisdiction. Kostal, 357 Ill.App.3d at

4 In this case, the Court finds the Redwood Defendants numerous contacts with the State of Illinois are sufficient to support a finding that the Defendants are engaging in a continuous and systematic course of business within the state. The Redwood Defendants did not originate residential loans securing property in Illinois, however they did hold, for varying lengths of time, a total of 1,439 residential mortgages encumbering real property located within the state from (Derry Dec., Exhibit 7). The Redwood Defendants purchased the loans from the lender or another third party and the mortgages are secured by Illinois property. These mortgages were not held for anyone else s benefit; the Redwood Defendants owned them outright and for significant periods of time. Of the 1,439 residential mortgages, 629 of these loans were held by the Defendants for longer than 30 days for a total of 48,659 days and an overall average of 77 days. (Derry Dec., Exhibit 7). The length of time in which these loans were held by the Defendants is relevant because the holder of each loan is entitled to a legal right to payment of principal or interest from residents in Illinois for the holding period. The evidence shows that in 2006 the Defendants held loans secured by Illinois property for an average of 128 days. (Derry Dec., Exhibit 7). In 2007 the Defendants held loans secured by Illinois property for an average of 81 days. (Derry Dec., Exhibit 7). In 2010 the Defendants held loans secured by Illinois property for an average of 102 days. (Derry Dec., Exhibit 7). By holding these loans for a period of at least two payment cycles (60 days or longer), the Defendants would have the legal right to begin the foreclosure process on Illinois property securing the loans should any of the Illinois borrowers have defaulted under the Illinois Mortgage Foreclosure Law. Ultimately, the Defendants had the legal right to avail themselves of Illinois law in order to secure their mortgages and protect their security interests. Further, the 4

5 Defendants practice of this process of buying and holding residential mortgages secured by real property located in the forum state from represents continuous and systematic contact with the forum state. Even if the Defendants had no intention of keeping the loans for investment purposes, there is nothing casual or occasional about the practice of buying and selling mortgage loans securing property in Illinois over a period of at least seven years. The case law cited by the Defendants is unpersuasive and distinguishable from the present case. The various outside federal district cases cited by the Defendants held that the holding of mortgages secured by property, without more, is insufficient to confer general personal jurisdiction over defendants. See e.g. Frazier v. Preferred Credit, 2002 U.S. Dist. LEXIS 19416, at *20 (W.D. Tenn. 2002). As discussed below, Plaintiff alleges, and evidence shows, that the Defendants had a multitude of continuous and systematic contacts with the forum state outside of the holding and securitizing residential Illinois mortgages. In only considering evidence under the relevant time period up until the date of the filing of the Complaint, the Court finds the evidence to be sufficient to support a finding that Defendants had substantial business contacts with Illinois business entities. Reimer v. KSL Recreation Corp., 348 Ill.App.3d 26, 36 (1 st Dist. 2004) (holding that the relevant time period to be reviewed begins approximately when the claim against the corporation arose and it extends to when suit was filed and service of process was attempted). Based on Defendants interrogatory responses, evidence shows that the Defendants have engaged in, and continue to engage in, a continuous and systematic course of business with Illinois residents in addition to buying and holding mortgages on Illinois property. The Defendants actively participated in conversations regarding business deals with 10 different Illinois residents from 2007 to 2010 regarding investment, financing, purchase and sale 5

6 of loans, and credit transfers. (Galland Dec., Exhibit C at 4 5). Two of these potential deals were with the Plaintiff. While one of the deals did not materialize, and the other has been submitted to the Bank s regulator for review, the combination of these deals involved multiple s, telephonic conferences and at least three in person meetings in 2010 that were attended by high ranking officers and employees of the Defendants at FHLB s headquarters in Chicago over a two year period. (Schambow Dec., at 2, 5). These two specific potential deals were subject to confidentiality agreements that were governed by Illinois law and designed to facilitate discussions and the exchange of sensitive information between the parties. (Schambow Dec., at 4). Whether or not these deals eventually materialized is not the focus of the inquiry. Rather, the focus is on the nature and quality of the contacts, and here, there is clear evidence of negotiation regarding complex business deals, including the Defendants traveling to Chicago for these negotiations. Furthermore, the Defendants have existing business relationships with at least 10 Illinois residents that includes the securitization of loans, originating mortgages, and selling investments that result in the payment of management fees to the Defendants. (Galland Dec., Exhibit C at 6 7). One of these existing relationships included the origination of a $12 million loan to a non Illinois resident in order to develop commercial property located in Illinois. (Galland Dec., Exhibit C at 7). This loan has generated $1.2 million in interest income since its origination. (Galland Dec., Exhibit C at 7). Defendants are essentially deriving revenue as a result of successful solicitation. In their reply, the Defendants do their best to minimize each of the business transactions and relationships they have with Illinois residents. Yet, given the nature of proposed business deals, the substantial amount of money involved and the numerous potential 6

7 and ongoing business deals with various Illinois residents, it is clear that the Redwood Defendants are present and doing business in Illinois. During the fourth quarter of 2010 the Redwood Defendants began investing in commercial loans through its origination of three commercial loans with an outstanding principle balance of $30.5 million. (Williams Derry Dec., Exhibit 1 at F 33). By the Defendants own characterization on their Annual Report to SEC, 41% of the Redwood Defendants commercial loans held for investment purposes were secured by property in Illinois as of December 31, Additionally, 29% of the Redwood Defendants commercial loans held for investment purposes were secured by property in Illinois in Each of these figures represents the largest component of the commercial mortgage loans owned for investment by the Defendants in 2010 and (Pl. Opp. to Motion, p. 1; Galland Dec., Exhibit B). The Defendants focus heavily on the type of loans involved in these transactions. Mezzanine loans are secured by a borrower s ownership percentage in a single purpose entity that owns commercial property, rather than a lien on the commercial property. Yet, the very purpose of a mezzanine loan is to develop properties, and in this case, substantially develop real property located in Illinois. The Defendants decision to invest in commercial loans through the origination of sizeable commercial loans to third parties in order to develop property located in Illinois is significant when coupled with the continuous and systematic nature of the Defendants investment in residential loans in Illinois and their strong business relationships with Illinois residents. The Defendants are correct that the relevant time period to be reviewed begins approximately when the claim arose and it extends to when suit was filed and service of process was attempted. Reimer v. KSL Recreation Corp., 348 Ill.App.3d 26, 36 (1 st Dist. 2004). As 7

8 such, this court does not consider the $21.5 million mezzanine loan for the Xerox Center in 2011 to be relevant, as the Complaint was filed in October, Additionally, there is no evidence that the Redwood Defendants were servicing commercial loans during the relevant period discussed above. The Court finds that because the Defendants engaged in the systematic and continuous course of business within the state of Illinois, this Court has personal jurisdiction. Lastly, for the reasons stated above, the Court finds it also has personal jurisdiction under the catch all provision of the Illinois long arm statute. A court may also exercise jurisdiction on any other basis now or hereafter permitted by the Illinois Constitution and the Constitution of the United States. 735 ILCS 5/2 209 (c) (West 2002). Illinois courts now treat subsection (c) as an independent basis for exercising personal jurisdiction over a defendant. Kostal v. Pinkus Dermatopathology Lab., P.C., 357 Ill. App. 3d 381,386 (1 st Dist. 2005). When considering the extent of the Redwood Defendants current and previous business contacts with the forum state and the considerable effect on the interests of Illinois investors and residents with whom the Defendants do business with, the Court finds that it is fair and reasonable to require this action to be defended in Illinois. Under federal due process standards, a court may exercise personal jurisdiction over a nonresident defendant if the defendant has had sufficient "minimum contacts" with the forum state such that maintenance of the suit in the forum does not to offend traditional notions of fair play and substantial justice. Int'l Shoe Co. v. Wash., 326 U.S. 310, 316 (1945). A nonresident defendant can only be subjected to the authority of the forum state if the defendant's conduct and connections with the forum are such that it is reasonably foreseeable that it would be haled into court there. World Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 296 (1980). By 8

9 requiring that individuals have fair warning that a particular activity may subject them to the jurisdiction of a foreign sovereign, the Due Process Clause gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit. Id.; see also Kostal, 357 Ill. App. 3d 381, (1 st Dist. 2005). Under the Illinois Constitution's due process guarantee, a court may exercise jurisdiction only when it is fair, just, and reasonable to require a nonresident defendant to defend an action in Illinois, considering the quality and nature of the defendant's acts which occur in Illinois or which affect interests located in Illinois. Rollins v. Ellwood, 141 Ill. 2d 244, 275 (1990). For the reasons discussed above, the Defendants have sufficient minimum contacts such that it is reasonably foreseeable that they could be haled into court in Illinois. The practice of buying and holding residential mortgage loans secured by Illinois property, coupled with the origination of a substantial commercial investment loan to develop commercial property in Illinois and the multitude of potential and actual business deals with Illinois residents, the Defendants clearly meet the standard for minimum contacts. Jurisdiction over these entities also comports with fair play and substantial justice. Five factors guide the inquiry into whether it is reasonable to require a nonresident defendant to litigate in the forum state: (1) the burden on the defendant to defend the action in the forum state; (2) the forum state's interest in adjudicating the dispute; (3) the plaintiff's interest in obtaining effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of the action; (5) the shared interests of the several states in advancing fundamental social policies. Once a plaintiff has established that the defendant purposely directed his activities at the forum state, the defendant must present a compelling case that litigating the 9

10 dispute there would be unreasonable. Commerce Trust Co. v. Air 1st Aviation Cos., 366 Ill. App. 3d 135, 146 (1 st Dist. 2006). Both the Plaintiff and the State of Illinois have a strong interest in adjudicating the dispute in Illinois. The Bank is headquartered in Chicago and has asserted multiple causes of action under Illinois statutory and common law. Furthermore, the Redwood Defendants are potentially jointly and severally liable under the Underwriting Agreement. (Galland Dec., Exhibit E). As such, litigating in one forum favors the Plaintiff s interest in obtaining convenient and effective relief by litigating against multiple parties who are jointly and severally liable. The burden on the foreign Redwood Defendants in litigating in Illinois is also slight in comparison to the other factors, especially when considering that the Defendants would still be subject to thirdparty discovery in Illinois since the other claims against other parties on the same SEMT bonds will still be proceeding in Illinois. For these same reasons, The Court finds that under the United States Constitution and the Illinois Constitution's due process guarantee, it would be fair, just, and reasonable to require the nonresident Defendants to defend this action in Illinois. Defendants Motion to Dismiss is denied. DATE: September 19, 2012 Kathleen M. Pantle 10