Bass, Berry & Sims attorney Chris Lazarini examined a case in which a mortgage company sued a bank under the indemnity clause of the parties loan purchase agreement.  The bank sought dismissal on statute of limitations grounds. Applying common law indemnity provisions, the court explains the agreement’s indemnity provision created a separate and distinct obligation, the breach of which did not arise until  the mortgage company actually suffered a loss and paid a third party. In its decision, the court found the cause of action against the indemnitor did not accrue until the indemnitee actually paid an obligation for which the indemnitee has been found liable.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

Franklin American Mortgage Co. vs. The Univ. Nat’l Bank of Lawrence, No. 18-5035 (6th Cir., 12/6/18)

The liability of an indemnitor does not accrue until the indemnitee has actually paid an obligation for which the indemnitee has been found liable.

At issue is the parties’ Correspondent Loan Purchase Agreement (“Agreement”) through which Defendant (“UNB”) sold mortgage loans it originated to Plaintiff (“FAMC”). UNB warranted that its loans would be free from origination defects allowing a subsequent purchaser from demanding re-purchase of the loans by FAMC and agreed to indemnify FAMC for any warranty breach that caused FAMC a loss. After FAMC re-purchased two defective UNB loans from Wells Fargo, and upon UNB’s refusal to indemnify it, FAMC sued. UNB’s primary defense was that Kansas’ five-year statute of limitations had run on the breach of contract claims. Both sides moved for summary judgment and the trial court found for FAMC.

On appeal, UNB argued that FAMC’s claims were time-barred because they accrued in 2006 and 2007, when FAMC purchased the defective loans from UNB, and suit was not filed until 2013. FAMC countered that its causes of action accrued in 2010 and 2011, when it re-purchased the loans from Wells Fargo. The Court finds for FAMC, stating that, even though the warranty breaches occurred in 2006 and 2007, the breach of the indemnity provision did not occur until years later. Applying common law indemnity provisions, the Court explains the Agreement’s indemnity provision created a separate and distinct obligation, the breach of which did not arise until FAMC actually suffered a loss and paid Wells Fargo.

The Court also rejects UNB’s argument that FAMC failed to mitigate its damages when it re-sold one loan at a significant discount. The Court finds UNB failed to submit evidence showing a genuine issue of material fact on the reasonableness of FAMC’s mitigation efforts. UNB established that FAMC did not have the loan appraised and pointed out other things FAMC might have done before re-selling the loan. The Court describes this as merely casting “metaphysical doubt” about FAMC’s process and finds it insufficient to create genuine issues of material fact. The Court explains that UNB might have carried its burden had it presented expert testimony of industry customs and what the appraised loan value would have been.

Although the Agreement stated it was governed by Tennessee law, UNB argued that Tennessee’s borrowing statute (Tenn. Code Ann. §28-1-112) required use of Kansas’ shorter five-year statute, because it was a resident of Kansas, the cause of action was barred by the Kansas statute, and the cause of action accrued in Kansas. The district court rejected this argument, applied Tennessee’s six-year statute of limitations and determined the case was timely filed because Tennessee law tolled the running of the statute of limitations until FAMC “discovered” the breach. The Court’s ruling making the claims timely under either limitations period made it unnecessary for the Court to determine if Tennessee law recognizes a discovery rule that would toll the limitations period for breach of contract claims.