Rescap Liquidating Tr. v. First California Mortg. Co., No. 18-CV-03283-WHO, 2018 WL 5310795 (N.D. Cal. Oct. 25, 2018)
First Capital Mortgage Company (“FCMC”) was a mortgage loan originator. Rescap is successor in interest to Residential Funding Company (“RFC”). RFC purchased approximately 300 loans from FCMC with a face value of about $125,000,000.00. RFC repackaged the loans and sold them to securitization trusts. When the real estate mortgage market crashed, RFC sued FCMC for breach of their loan purchase and sale agreements.
The parties settled with FCMC by agreeing to pay about $6.0 million over time. FCMC defaulted and the parties entered into an amended settlement agreement allowing FCMC more time to pay, but requiring a lump sum payment. Both settlement agreements included fairly broad release language. Basically, everyone under the sun that was associated with FCMC was released from every conceivable claim, etc. “relating to the Subject Loans.”
When the lump sum came due, FCMC failed to pay and told Rescap that it had no assets with which to pay. Rescap then sued the principals of FCMC and related entities alleging that they fraudulently transferred FCMC’s assets over the four years between the filing of RFC’s initial lawsuit and the date the settlement payment was due. The principals argued that the broad releases in the settlement agreements protected all transactions that took place before they entered into the settlement agreements. The court disagreed. It found the specific qualifying language “relating to the Subject Loans” to govern over the broader language used in the release provisions. Based on that language, the court concluded that the parties did not intend to absolve the principals from any pre-agreement fraudulent transfers.
This is not a very surprising result, at least on a motion to dismiss. Practice tip: Be careful of exceedingly broad release provisions, especially when they are coupled with Civil Code Section 1542 waivers. Section 1542 only applies to general releases, not specific releases. The court in this case essentially held that the release was a specific, not a general release. The opinion does not indicate if a Section 1542 waiver was included. If it had been, the decision might have come out a different way.