Free Brief in Support of Motion - District Court of Colorado - Colorado

Case 1:01-cv-01644-REB-CBS

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 01-cv-1644-REB-CBS CARTEL ASSET MANAGEMENT, a Colorado corporation, Plaintiff, v. OCWEN FINANCIAL CORPORATION, a Florida corporation; and OCWEN FEDERAL BANK FSB, a subsidiary of OCWEN FINANCIAL CORPORATION Defendants. OCWEN FEDERAL BANK FSB'S REPLY TO SUPPLEMENTAL RESPONSE IN OPPOSITION TO MOTION FOR SUBSTITUTION AND CROSS-MOTION FOR JOINDER Defendant Ocwen Federal Bank FSB (the "Bank") respectfully submits the following reply in support of its Motion for Substitution of Party and for Amendment of Caption (docket no. 442) (the "Motion"). PROCEDURAL HISTORY On December 21, 2007, the Bank moved for substitution of Ocwen Loan Servicing, LLC ("OLS") for the Bank, pursuant to Fed. R. Civ. P. 25(c), on the grounds that the Bank had been dissolved; OLS is the assignee of the Bank's remaining assets, liabilities, and businesses; and OLS is the sole successor-in-interest of the Bank. See Motion at 2 ¶¶ 1, 3. Cartel concurred that OLS should be substituted for the Bank. See Response to "Defendant Ocwen Federal Bank FSB's Motion for Substitution of Party and for Amendment of Caption" (docket no. 443) at 2 ¶ 4. Cartel asserted, however,

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that OLS's corporate parent, Ocwen Financial Corporation ("OFC"), should also be substituted for the Bank, because OFC guaranteed the Bank's obligations. Id. Cartel did not cite a single case in support of its contention that a guarantor may be substituted for a party pursuant to Rule 25(c). The Bank filed its reply (the "Reply") in support of the Motion on December 31, 2007, at docket no. 444. At the scheduling conference conducted in this matter on January 31, 2008, the Court entertained argument on the Motion. The Court asked counsel for Cartel what legal authorities supported Cartel's position that an entity other than a successor-ininterest to a party may be substituted for that party pursuant to Rule 25(c). Counsel for Cartel conceded he was aware of no such authorities. In response to Cartel's inability to present any legal support for its argument that OFC, as well as OLS, should be substituted for the Bank, the Court took the unusual step of granting Cartel a second opportunity to respond to the Motion. On February 5, 2008, Cartel submitted a combined supplemental response to the Motion and a crossmotion for joinder of both OLC and OFC as parties. See Supplemental Response in Opposition to "Defendant Ocwen Federal Bank FSB's Motion for Substitution of Party" and Cross-Motion for Joinder of Ocwen Loan Servicing, LLC and Ocwen Financial Corp. (the "Second Response") (docket no. 452). The next day, Cartel submitted a stand-alone motion to join OFC as a defendant, pursuant to Rules 18(b) and 20(a) (docket no. 453). See Motion to Join Ocwen Financial Corp. as a Party Defendant Under Fed. R. Civ. P. 18(b) and 20(a) (docket no. 453) (the "Cartel Motion"). (The Bank

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will file a discrete response to the Cartel Motion within the time set forth in D.C.COLO.LCivR 5.1(C).) ARGUMENT I. THIS COURT SHOULD DISREGARD THE PURPORTED CROSS-MOTION INCLUDED IN THE SECOND RESPONSE, BECAUSE IT WAS SUBMITTED IN VIOLATION OF THE LOCAL RULES. Cartel submitted its cross-motion in violation of two of this Court's local rules. D.C.COLO.LCivR 7.1(A) provides that [t]he court will not consider any motion . . . unless counsel for the moving party . . . , before filing the motion, has conferred or made reasonable, good-faith efforts to confer with opposing counsel . . . to resolve the disputed matter. The moving party shall state in the motion, or in a certificate attached to the motion, the specific efforts to comply with this rule. Cartel failed to confer with counsel for the Bank prior to filing its cross-motion and did not include the required Rule 7.1(A) certification in the Second Response. More significantly in light of the Bank's opposition to substitution or joinder of OFC, Cartel filed the cross-motion in violation of D.C.COLO.LCivR 7.1(C), which states that "[a] motion shall not be included in a response or reply to the original motion. A motion shall be made in a separate paper." See D.C.COLO.LCivR 7.1(C). For these reasons, Cartel's cross-motion included in the Second Response is improper and this Court should disregard it.

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II.

THE AUTHORITIES CITED IN THE SECOND RESPONSE CONFIRM THAT A GUARANTOR MAY NOT BE SUBSTITUTED FOR A PARTY PURSUANT TO RULE 25(C). The language of Rule 25(c) could not be clearer as to the only types of entities

that may be substituted for a party: If an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party. Fed. R. Civ. P. 25(c) (emphases added). The Rule, by its very terms, permits substitution or joinder only "[i]f an interest is transferred," and requires that the new party be the "transferee" of the "original party." See id. The cases cited in the Second Response confirm that the Rule means what it says, and cannot serve as the predicate for substitution of a guarantor for a party. "Rule 25(c) of the Federal Rules of Civil Procedure allows a district court to join a corporation that succeeds to the interest of a party with, or substitute it for, its predecessor in a lawsuit." Luxliner P.L. Export, Co. v. RDI/Luxliner, Inc., 13 F.3d 69, 70 (3d Cir. 1993) (emphasis added). The Third Circuit further explained that "[a] `transfer of interest' in a corporate context occurs when one corporation becomes the successor to another by merger or other acquisition of the interest the original corporate party had in the lawsuit." Id. at 71. Luxliner does not support substitution of OFC for the Bank, or joinder of OFC as a party, because OFC is not a successor-in-interest to the Bank. OFC did not acquire any interest of the Bank "by merger or other acquisition." See Reply at 2 ¶ 3. The Bank is the predecessor-in-interest of OLS, but not of OFC. See id.

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In Prop-Jets, Inc. v. Chandler, 575 F.2d 1322, 1323-25 (10th Cir. 1978), the Tenth Circuit declined to grant a writ of mandamus or to consider an interlocutory appeal of the lower court's order joining as a party a newly-formed corporation. See id. at 1323-24. That entity had acquired all the assets of the original limited partnership defendant, which had been liquidated. See id. The plaintiff alleged that the assets had been transferred fraudulently to escape the liabilities of the original defendant. See id. at 1324. Like Luxliner, Prop-Jets is inapposite, because the Bank did not transfer any assets to OFC. FDIC v. Tisch, 89 F.R.D. 446, 448-49 (E.D.N.Y. 1981), concerned an attempt to join as a party plaintiff a trustee that had obtained an assignment of all of the original plaintiff's right, title and interest in claims against the defendants. See id. at 448. The defendants did not oppose the joinder of the trustee, but, rather, sought dismissal of the case for lack of subject matter jurisdiction. See id. at 447. The Tisch case does not support substitution of OFC for the Bank because OFC is not an assignee of any of the Bank's interests. Both Wainwright v. Kraftco Corp., 58 F.R.D. 9, 13-14 (N.D. Ga. 1973), and Moody v. Albemarle Paper Co., 50 F.R.D. 494, 496-99 (E.D.N.C. 1970), concerned motions to substitute parties following asset transfers, unlike the circumstances presented here. In Wainwright, the plaintiffs were permitted to add as a defendant an entity that had purchased all the assets of a prior defendant. See Wainwright, 58 F.R.D., at 13. The court held that the purchase constituted a "transfer of interest" within the meaning of Rule 25(c). See id. at 13-14.

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The original defendant in Moody had "transferred all of its property and assets, real, personal, tangible and intangible, located in Roanoke Rapids, North Carolina" to a new entity. Moody, 50 F.R.D. at 496. The old corporation no longer had control over "any property or person" at the facility where the plaintiffs claimed their rights had been violated. See id. In addition, other assets of the original defendant had been transferred to other entities, and the original defendant had changed its name. See id. The Moody court permitted the transferees to be joined as defendants because "all the interests originally held by [the original defendant] have been transferred out to the parties named in the motion to add or join. . . ." See id. at 499. Citibank v. Grupo Cupay, Inc., 382 F.3d 29, 30-31 (1st Cir. 2004), also does not support Cartel's argument that OFC should be substituted for the Bank or joined as a party pursuant to Rule 25(c). In Citibank, the original obligee under the subject performance bond had sold, assigned, and transferred to the third party all of its rights, claims, and causes of action in connection to the subject loan. See id. at 30. Based on such transfer, the Court substituted the third party for the original obligee. See id. at 30-31. These cases underscore why OFC cannot be substituted for the Bank or joined as a party defendant. OFC is not a "transferee" of the Bank within the meaning of Rule 25(c). Cartel's assertion that "OFC has accepted a transfer of the Bank's liability interest," see Second Response at 4 ¶ 8, would expand Rule 25(c) past the breaking point. Transfer of a "liability interest" is not the type of transfer of assets or rights that Cartel's own case authorities require for a substitution of parties under Rule 25(c).

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Once again, Cartel has not provided this Court with any authority for its creative contention that a transfer of a "liability interest" transmutes a guarantor into a transferee. Under Cartel's logic, guarantors may routinely be substituted under Rule 25(c) for the parties whose obligations they guaranteed. Yet Cartel does not and cannot cite a single case in which a court substituted a guarantor for a principal obligor pursuant to Rule 25(c). Cartel's argument, while superficially clever, is contrary to law. CONCLUSION It should not be surprising that Cartel has not cited a single case in which a court permitted a guarantor to which no assets or rights were transferred to be substituted for a party or joined pursuant to Rule 25(c). There is no support for Cartel's position. For this reason, OLS, but not OFC, should be substituted for the Bank.1

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Cartel also asserts that the Bank should remain a defendant in this action. See Second Response at 3-4 ¶ 6. As previously noted, however, the Bank has no assets, has been dissolved, and no longer conducts business. See Motion at 2 ¶ 1 and Exhibit A. The Motion was filed in the name of the Bank because no other party has standing to seek substitution of any entity for the Bank. Although no benefit would accrue to Cartel for retaining a penniless entity as a party-defendant, the Bank is agnostic on whether the Bank should remain listed in the case caption, so long as OFC is not made a party.

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Respectfully submitted this 12th day of February, 2008.

/s/Lino S. Lipinsky de Orlov_________ Lino S. Lipinsky de Orlov Sandra Wick Mulvany MCKENNA LONG & ALDRIDGE LLP 1875 Lawrence Street, Suite 200 Denver, CO 80202 (303) 634-4000 ATTORNEYS FOR DEFENDANT OCWEN FEDERAL BANK FSB

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CERTIFICATE OF SERVICE I hereby certify that on this 12th day of February, 2008, a true and correct copy of the foregoing OCWEN FEDERAL BANK FSB'S REPLY TO SUPPLEMENTAL RESPONSE IN OPPOSITION TO MOTION FOR SUBSTITUTION AND CROSSMOTION FOR JOINDER was electronically filed with the clerk of court using the CM/ECF System, which will send notification of such filing to the following: Glenn W. Merrick, Esq. G.W. Merrick & Associates, LLC 5445 DTC Parkway, Suite 912 Greenwood Village, CO 80111 [email protected] /s/Lino S. Lipinsky de Orlov_________

DN:32136262.1

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