In Re: RFC and RESCAP Liquidating Trust Litigation

Filing 4641

Order re: Admissibility of HLC's "RFC Sole Responsibility" Argument and Related Evidence. Signed by Judge Susan Richard Nelson on 10/22/2018. (ACT)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

In Re: RFC and RESCAP Liquidating
Trust Action
This document relates to:
ResCap Liquidating Trust v. Home Loan
Center, Inc., Case No. 14-cv-1716
(SRN/HB)

Case No. 0:13-cv-3451 (SRN/HB)

ORDER RE: ADMISSIBILITY OF
HLC’s “RFC SOLE
RESPONSIBILITY” CAUSATION
ARGUMENT AND RELATED
EVIDENCE

SUSAN RICHARD NELSON, United States District Judge
In this Order, the Court addresses the admissibility, at trial, of HLC’s “sole
responsibility” argument, as well as the evidence offered by HLC in support of this argument.1
I.

Background
A. The Origins of HLC’s “Sole Responsibility” Argument
In late 2013, ResCap sued HLC for, inter alia, contractual indemnification. (See

Residential Funding Ctr., LLC, v. Home Loan Center, Inc., 14-cv-1716 (SRN/HB), Compl.
[Doc. No. 1-1].) When HLC answered this complaint in July 2015, it asserted various
causation defenses, including that “the harm or damages [ResCap] complains of or seeks were
caused by [RFC’s] own acts or omissions.” (HLC Answer [Doc. No. 601] at 20.) As best the

On Friday October 12, 2018, the Court advised the parties that it was “likely” to
“entirely foreclose HLC’s ‘sole responsibility’ line of argument due to a lack of nonspeculative, competent fact evidence, and no competent expert evidence, to support its
position,” that HLC “shall refrain from referencing” this argument in its opening statement,
and that “a more detailed Order” would be issued “forthwith.” (Oct. 12, 2018 Text-Only
Order [Doc. No. 4594].)
1

Court can tell, the only expert evidence HLC (and the other similarly situated originator
defendants) developed during discovery directly in support of this “RFC sole cause” defense
was that of Steven Schwarcz, a professor at Duke Law School.
In one section of his expert report, Professor Schwarcz opined that “some of RFC’s
breaches of the R&Ws [representations and warranties] it made to the Trusts and Monoline
[Insurers] do not overlap with Defendants’ breaches of the R&Ws they made to RFC,” and
that ResCap’s damages expert, Dr. Karl Snow, did not take this “gap” into consideration when
allocating originator liability for the Bankruptcy Settlements. (Summ J. Order [Doc. No.
4307] at 111 (citing Schwarcz Rpt. [Doc. No. 3358] ¶¶ 114-27).) In other words, if a “gap”
existed between the R&Ws HLC made to RFC, and the R&Ws RFC made to the Trusts or
Monoline Insurers, HLC’s R&Ws could not be considered “even a contributing cause of” that
portion of “RFC’s losses and liabilities.” (Id.)2
At the summary judgment stage, ResCap moved for summary judgment on causation,
arguing in part that “[t]here is not credible evidence that any of the Trusts’ damages were
caused by R&W breaches that cannot be attributed to Defendants’ own breaches.” (ResCap
Summ. J. Br. [Doc. No. 3243] at 43 n.11.) Similarly, in its Daubert motion, ResCap moved

Although Professor Schwarcz primarily focused on an alleged “gap” between
“RFC’s trust-level underwriting-guidelines” and HLC’s R&Ws, Professor Schwarcz also
opined that “sole cause” liability may arise when either (a) RFC’s breaches of its R&Ws
to its investors “concern[ed] RFC’s own legal status, i.e., authorization or corporate
capacity, rather than the characteristics of the loans,” or (b) when RFC’s loss was “due to
events that occurred (e.g., borrower loses his job) after the effective date of the
originating bank’s R&Ws (i.e., after RFC’s purchase of the loan). (See Summ. J. Order at
108-109.) However, because HLC does not appear to defend either of these two theories
of “sole cause” liability anymore, the Court will not discuss them further.
2

2

to exclude the “sole responsibility” portion of Professor Schwarcz’s expert opinion,
contending that, despite his ultimate conclusion about the salience of “sole responsibility”
liability, Professor Schwarcz “fails to identify a single instance where a loan breached a Trust
R&W, but did not also breach a Correspondent R&W.” (ResCap Daubert Br. [Doc. No. 3253]
at 34.) Indeed, ResCap argued, Professor Schwarcz’s only loan-level evidence came from
Defendants’ re-underwriting expert Mr. Broeksmit, who “reviewed only those loans that were
already found to have breached a Correspondent R&W to determine whether they also
breached a Trust R&W,” and hence “could not possibly identify loans that had Trust R&W
breaches, but not Correspondent R&W breaches.” (Id. at 34-35.)
For its part, HLC moved for summary judgment on allocation (among other issues),
arguing that, under the UnitedHealth Group decisions, ResCap’s Allocated Breaching Loss
damages model did not provide a “non-speculative basis” for allocating the Bankruptcy
Settlements. (See Defs. Summ. J. Br. [Doc. No. 3251] at 32-36.) In making this argument,
HLC relied partly on Professor Schwarcz’s expert report. “Dr. Snow’s approach fails,” HLC
argued, “because he does not account for the value of several non-indemnifiable claims
covered by the trust settlement, including claims based on breaches of RFC’s representations
to trusts for which RFC is solely responsible.” (Id. at 32.)
In its Summary Judgment opinion, issued on August 15, 2018,3 the Court found that
“the Client Guide gives RFC considerable discretion to act and wide-ranging remedies”
(Summ. J. Order at 74), and accordingly ruled that RFC maintained the sole discretion to

3

This order may also be found at In re RFC and RESCAP Liquidating Trust Action,
--- F. Supp. 3d ---, 2018 WL 3911424 (D. Minn. 2018).
3

determine breaches of the Client Guide (id.), that RFC could seek indemnification even for
losses arising out of its own negligence and (mere allegations of) intentional wrongdoing (id.
at 42), and that originators like HLC were fully liable for any misrepresentation or breach of
warranty regardless of whether RFC had any knowledge of the misrepresentation or breach
(id. at 130). Moreover, the Court held that ResCap need only “show that an individual
Defendant’s breaches were a contributing cause of [its] losses and liabilities.” (Id. at 95.)
However, with respect to Professor Schwarcz and his opinion on RFC’s “sole
responsibility,” the Court held that, “[o]n this record,” “summary judgment as to Defendants’
‘sole cause’ defense . . . would be premature,” as there may be instances in which a Defendant
was not even a contributing cause of RFC’s losses and liabilities. (Id. at 109.) Accordingly,
the Court chose to “defer ruling as to the admissibility of Schwarcz’s testimony on these
issues, pending the development of the factual record, to evaluate whether there is evidence
in the record, presumably supplied by fact witnesses, to support his hypothetical argument.”
(Id.)
Shortly after the Court issued its Summary Judgment decision, at the August 23
motions in limine hearing, HLC’s counsel argued that, despite the Court’s rulings about the
indemnifiability of mere allegations of fraud and other issues, substantial evidence pertaining
to RFC’s alleged misconduct remained relevant to HLC’s “sole responsibility defense.” (See,
e.g., Aug. 23, 2018 Hr’g Tr. [Doc. No. 4338] at 145.)
Following this hearing, the Court asked the parties to submit letter briefs and scheduled
a hearing for September 14, 2018. (See Sept. 4, 2018 Order [Doc. No. 4343].) In its letter
brief, filed September 11, 2018, HLC argued that 11 discrete categories of evidence pertained
4

to “RFC-only liability,” and included representative exhibits for each category. (See Sept. 11,
2018 Letter [Doc. No. 4351] at 6-8.) HLC argued that its representative exhibits provided
competent fact evidence from which a jury could find that ResCap had failed to meet its
burden on causation and allocation. HLC’s “RFC-only liability” evidence primarily consisted
of internal e-mails and other documents showing that RFC, at times, allowed HLC to originate
loans to third-party underwriting criteria, as well as other documents in which RFC appeared
to represent to its investors that its loans were underwritten in substantial conformance with
the Client Guide. To HLC, this evidence showed “that a portion of the settled liabilities must
be allocated to RFC because [they] resulted from RFC’s decision to acquire loans – from
many originators – that were not underwritten in compliance with the Client Guide.” (Id. at
2.)
In its responsive letter, ResCap argued that these categories of documents were not
evidence from which a jury could infer that RFC bore “sole responsibility” for some of its
losses and liabilities. (See ResCap’s Sept. 12, 2018 Letter [Doc. No. 4440] at 4-5.) Indeed,
ResCap argued, for HLC to show that it was not even a contributing cause to RFC’s losses
on any loan, HLC would have to adduce evidence, not just that, “(1) [a] loan was not
underwritten to the Client Guide’s unmodified underwriting criteria,” but that “(2) RFC
represented to an RMBS trust or monoline insurer that the loan was underwritten to the
Guide’s unmodified underwriting criteria, (3) each and every one of RFC’s other
representations regarding the loan was true, to the extent the representations could be
construed as overlapping with the originator’s representations to RFC, and (4) the loan
incurred an actual or expected loss.” (Id. at 3.)
5

The Court heard extended argument on this issue at the September 14 hearing. (See
generally Sept. 14, 2018 Hr’g Tr. [Doc. No 4470].) Shortly after that hearing, on September
19, 2018, the Court issued its Daubert opinion.4 In addressing ResCap’s motion to exclude
the “sole responsibility” opinions offered by Professor Schwarcz, the Court re-affirmed its
Summary Judgment ruling. The Court ruled that Professor Schwarcz’s expert testimony
“lacks support” because “[h]e identifies no actual loans for which RFC breached
representations and warranties and originating banks did not.” (Daubert Order [Doc. No.
4471] at 56-57.) Because Professor Schwarcz’s opinion was “purely hypothetical,” the Court
ruled that it “does little to assist the finder of fact.” (Id. at 57.) However, the Court again
declined to preemptively bar Schwarcz’s expert opinion, and HLC’s accordant “sole
responsibility” argument, as it recognized that “competent fact evidence may be introduced
at trial to support [Schwarcz’s] opinion.” (Id.) The Court, in turn, advised the parties that it
would “entertain a proffer at the appropriate time to reconsider whether Schwarcz’s testimony
is admissible.” (Id.)5
Two weeks later, the Court ruled on the evidence presented in HLC’s September 11
letter, as argued at the September 14 hearing, relating to “sole responsibility.” (See Oct. 1,
2018 Order [Doc. No. 4497].) The Court began by noting that “ResCap unquestionably bears
the burden of establishing its damages and allocation,” especially through the testimony of its

4

This order may also be found at In re RFC and RESCAP Liquidating Trust Action,
2018 WL 4489684 (D. Minn. Sept. 19, 2018).
The Court also held that Professor Schwarcz “may not supplement his report with
additional support for these opinions.” (Id.)
5

6

damages expert, Dr. Snow. (Id. at 8.) However, the Court continued, “[i]f HLC wishes to
cross-examine [Dr.] Snow with respect to RFC-only liability based on a ‘gap or mismatch’
[between HLC’s R&Ws to RFC and RFC’s R&Ws to the Trusts and Monolines],” “HLC
must present non-speculative, admissible evidence in support of this defense.” (Id.) With
respect to the categories of documents proffered with the September 11 letter, the Court held
that documents showing that RFC had represented to some Trusts on some occasions that its
loans “were underwritten in ‘substantial’ compliance with the Client Guide,” and that “RFC
occasionally bought loans that were underwritten pursuant to non-RFC underwriting
standards,” “do not support HLC’s defense of RFC-only liability.” (Id. at 9.) Still, the Court
offered HLC the opportunity to proffer further evidence “regarding sole responsibility” at a
pre-trial hearing scheduled for October 9. (Id.)
B. HLC Proffers Its “Sole Responsibility” Evidence at the October 9 Pre-Trial
Hearing
At the October 9 hearing, HLC’s counsel proffered the factual evidence it planned to
introduce in support of its “sole responsibility” argument, by way of a PowerPoint
presentation. (See Oct. 9, 2018 Hr’g Tr. [Doc. No. 4610] at 45-76 (HLC’s Proffer), 77-92
(ResCap’s Response), 92-107 (HLC’s Rebuttal); see also PowerPoint Presentation Re: Sole
Responsibility [Doc. No. 4573].) At this hearing, HLC primarily described “sole
responsibility” as an allocation argument, rather than as a causation argument. Specifically,
HLC argued that ResCap’s damages expert, Dr. Snow, does not attempt to analyze what
portion of RFC’s settlements with the Trusts and Monolines were solely caused by RFC’s
own breaches. Therefore, HLC argued, it should be allowed to present evidence to the jury
7

that, in performing his allocation analysis, Dr. Snow overlooked a major source of potentially
non-indemnifiable liability.
As for “evidence,” HLC pointed to (1) MBIA’s pre-petition allegations that RFC
breached its representation of substantial compliance with the Client Guide by purchasing
loans through “negotiated commitments” and “bulk purchases,” and RFC’s response that such
purchases did not breach its representation; (2) repurchase correspondence between MBIA
and RFC in which RFC acknowledged that it allowed clients like HLC to underwrite to
different Loan-to-Value ratios than those stated in the Client Guide; (3) one particular at-issue
HLC loan, No. 11339503, in which (i) HLC sold RFC the loan pursuant to an underwriting
exception, and (ii) RFC included the loan in a securitization in which RFC represented that
“all of the Mortgage Loans have been underwritten in substantial compliance with the criteria
set forth in the Program Guide”; and (4) analogous loans from two other originators.6 (See
generally PowerPoint Presentation.)
In its October 10, 2018 letter, HLC supplemented these facts by noting that Mr.
Broeksmit’s analysis purportedly identifies “7 of the 59 HLC sample loans for which
[ResCap] alleges a Client Guide breach where (1) the loans, in fact, were sold outside the
Client Guide pursuant to the Assetwise Direct Criteria Agreement or a bulk transaction or
sold pursuant to a documented exception, but (2) the loans reasonably could be understood to

6

The fourth criteria is relevant, HLC argued, as evidence that Dr. Snow incorrectly
formulated the global sample (and correspondent breach rate) he used as his base for HLC’s
proposed allocation (i.e., HLC argued that he relied on the “wrong denominator”). (See Oct.
9 Hr’g Tr. at 69.)
8

have breached RFC’s trust-level representations that the loans were underwritten in
substantial compliance with the Client Guide.” (HLC’s Oct. 10, 2018 Letter [Doc. No. 4572]
at 1; see also Broeksmit Analysis [Doc. No. 4575] (identifying the seven loans).) HLC also
noted that it had identified “47 letters from Dorian Whealdon, the director of RFC’s investor
repurchase department, to MBIA that reflect loan-level examples of RFC’s sole
responsibility.” (HLC’s Oct. 10 Letter at 1-2.)
HLC argued that it should be permitted to present these facts to the jury through its reunderwriting expert Robert Broeksmit and through “RFC repurchase witnesses, people who
worked at RFC in the repurchase group who are on this correspondence as evidence of the
existence of this RFC-only liability, not just with respect to HLC loans but also in the broader
MBIA population.” (Oct. 9 H’rg Tr. at 72.) HLC then acknowledged that “this was not an
exercise our expert [i.e., Professor Schwarcz] undertook,” but that the evidence was
nonetheless admissible because it is simply “responding to the nature of the analysis that
[ResCap’s] expert [i.e., Dr. Snow] did.” (Id. at 73-74.)
C. ResCap Responds to HLC’s Proffer
In a letter submitted October 11, 2018 [Doc. No. 4582], ResCap argued that the Court
should exclude the “sole responsibility” evidence offered in HLC’s proffer for at least four
reasons.
First, ResCap argued that HLC cannot, at this late date, rely on its re-underwriting
expert, Mr. Broeksmit, to provide factual testimony about loans it now alleges are RFC’s
“sole responsibility,” much less expert testimony, because he never analyzed these loans with

9

respect to this particular issue in his expert report. Nowhere in Mr. Broeksmit’s report,
ResCap emphasizes, is any opinion about “sole cause” liability. (Id. at 2.)7
Moreover, to the extent Mr. Broeksmit could provide factual information about the
seven purportedly “sole cause” loans, ResCap contends, his testimony could not lay sufficient
foundation for “sole cause” liability because none of these loans actually give rise to the kind
of non-indemnifiable “sole responsibility” liability contemplated in Professor Schwarcz’s
report (i.e., RFC liability to the Trusts and Monolines that does not, in any way, flow back to
HLC’s breaches of its R&Ws to RFC). (Id. at 3 and n.2.) “It is telling that HLC cannot identify
even one loan where it is undisputed that there is no breach of HLC’s representations to RFC,”
ResCap notes. (Id. at n.2.) 8

7

For instance, ResCap notes that Mr. Broeksmit never reviewed loans for which
there had been a breach of RFC’s R&Ws to investors, but not a breach of HLC’s R&Ws
to RFC, citing Mr. Broeksmit’s deposition testimony that, “if there was no [originator
breach] alleged or found by me through the affirmative review breach of the lender rep,
then I did not look at whether there had been a breach of the securitization rep.” (Id.
(citing 12/1/2017 Broeksmit Tr. 168:24-22).)
8

Specifically, ResCap argued that, for four of the seven loans, Mr. Broeksmit
opined that “the loans contained no Client Guide breaches at all,” or that the breach was
immaterial, which would preclude him from contending that there was any breach for
which RFC could be solely responsible. Moreover, finding RFC solely responsible for the
other loans would require HLC to prove that “the Assetwise Direct Criteria Agreement
supersed[ed] the Client Guide, or that “RFC cannot recover for breaches of which it
purportedly received notice in bid tapes,” both of which constitute “mistaken and
unsupported” contentions. Finally, with respect to Loan No. 11339053, which HLC
featured in its proffer, RFC argued that (a) the Client Guide’s underwriting criteria
applied (based on evidence submitted with the letter); (b) RFC’s re-underwriting experts
already found that the loan breached HLC and Trust R&Ws; and (c) even if the Client
Guide didn’t apply because of the bid tape’s underwriting exception, that argument was
never made in the underlying MBIA litigation and, hence, could not relate to RFC’s
allocation at the time of settlement.
10

Second, ResCap argues that the Court already considered representative samples of
the 47 repurchase correspondence documents identified in HLC’s follow-up letter in its
October 1 Order, and found that they did not support HLC’s sole responsibility argument
because the Client Guide “expressly contemplated that RFC would purchase loans that did
not comply with ‘one or more criteria stated in the standard Loan Program Chapters of the
Guide.’” (Id. at 4 (quoting Oct. 1 Order at 5.).) Moreover, even if “sole cause” liability could
be inferred from modified underwriting guidelines (as evidence that the Client Guide did not
apply to a group of loans), “HLC must also demonstrate that the loan is otherwise ‘clean’ –
i.e., that there was not another breach for which the originator could be held liable and that
could have been construed as a breach of RFC’s own representations.” (Id. at 5.) ResCap
notes that, although the repurchase letters cited by HLC suggest that the only breach on the
loan was that of underwriting criteria, closer inspection reveals that the Monoline’s reunderwriting expert also found other breaches. (Id. at 5-6.) Further, even if a loan contained
both “sole responsibility” breaches and HLC-responsible breaches, HLC would still have to
indemnify RFC for the entirety of the loss under the Client Guide’s “contributing cause”
standard. (See Summ. J. Order at 95.)
Third, ResCap argues that, to the extent HLC relies on “sole responsibility” liability
as an affirmative defense to causation, HLC bears the burden of proof. “Because HLC has
not adduced evidence supporting its affirmative sole-cause defense as to any of the HLC atissue loans for which Plaintiff is seeking indemnity,” ResCap asserts, “that defense should be
dismissed with prejudice.” (ResCap’s Oct. 11 Letter at 6.)

11

Finally, to the extent HLC’s argument actually functions as a counterargument to
ResCap’s allocation case (for which ResCap bears the burden of proof), HLC should still be
precluded from presenting its “sole responsibility” evidence because “this Court has already
concluded that [ResCap’s] Allocated Breaching Loss Approach ‘offers a highly sophisticated
methodology to provide a basis for the factfinder to determine a Defendant’s damages, if any,’
and a ‘reliable, non-speculative basis for calculating damages in this case.’” (Id. (quoting
Summ. J. Order at 175-76).) Even if HLC finds it “remarkable” that Dr. Snow did not allocate
any liability to non-indemnifiable “sole cause” claims, ResCap argues that its experts were
“under no obligation to anticipate and disprove every mistaken hypothetical argument for
which there is no evidence of materiality.” (Id. (citing Zurich Reinsurance (UK) Ltd. v.
Canadian Pac. Ltd., 613 N.W.2d 760, 765 (Minn. Ct. App. 2000)).) After all, ResCap adds,
its burden is merely to provide the jury “a non-speculative basis to allocate” the settlements,
not a precise mathematical accounting of every conceivable claim it faced at the time of
settlement. (Id. (citing Summ. J. Order at 165 and UnitedHealth Grp., Inc. v. Exec. Risk
Speciality Ins. Co., 870 F.3d 856, 863 (8th Cir. 2017)).)
In sum, ResCap concludes by calling HLC’s entire “sole responsibility” argument
“speculative.” Despite “being granted eight opportunities to make a proffer,”9 ResCap argues,
“HLC cannot credibly contend there exist a meaningful number of ‘unicorn’ loans that (a) are

ResCap points to (1) Professor Schwarcz’s expert report; (2) HLC’s summary
judgment briefing; (3) HLC’s opposition to ResCap’s Daubert motion; (4) the August 23
pre-trial conference; (5) HLC’s September 11 letter; (6) the September 14 pre-trial
conference; (7) the October 8 proffer and accompanying PowerPoint; and (8) HLC’s
October 10 letter.
9

12

noncompliant with the Client Guide due to a breach that cannot be traced back to an
originator, (b) have no other breach that could be traced back to the originator, and (c)
happened to have been included in one of the 16 out of 506 RMBS Trusts to which RFC had
given a ‘substantial compliance’ representation.” (Id. at 6-7.)
II.

DISCUSSION
The Court finds that, regardless of whether HLC’s “sole responsibility” argument is

considered an affirmative defense on causation, or a rebuttal to ResCap’s allocation case,
HLC cannot present the evidence raised in its proffer for two, independent reasons. First,
introducing complex evidence to the jury about such an important issue in the case, without
competent expert testimony to guide them in analyzing this evidence, would improperly invite
speculation. Second, in the absence of such expert analysis, the probative value of this
evidence is far outweighed by the risk of unfair prejudice and juror confusion. See Fed. R.
Evid. 403. This is especially so when the underlying factual evidence does not, in fact, show
that “sole responsibility” claims constitute a “substantial” source of non-indemnifiable
liability.
A. Lack of Expert Guidance
As HLC conceded at its “sole responsibility” proffer, its argument is not based on an
analysis undertaken by either Professor Schwarcz or Mr. Broeksmit. (See Oct. 9 Hr’g Tr. at
73.) It is sheer speculation, therefore, that such an analysis would support a challenge to the
integrity of Dr. Snow’s damages model.
Judge Schiltz’s decision in UnitedHealth is instructive on this point. See UnitedHealth
Grp., Inc. v. Columbia Cas. Co., 47 F. Supp. 3d 863, 882-83 (D. Minn. 2014). Although Judge
13

Schiltz was considering the question from the opposite vantage point (i.e., whether the
plaintiff had met its burden of providing the jury a “reliable, non-speculative” basis for
allocating a settlement between indemnifiable and non-indemnifiable claims), his remarks on
the need for competent expert testimony in complex allocation cases rings true here. In that
case, Judge Schiltz noted that there were three kinds of evidence a party could introduce to a
fact finder to convince them that a settlement was properly allocated between indemnifiable
and non-indemnifiable claims:
(1) a party may introduce evidence of how the settling parties and their attorneys
valued the claims at the time of settlement; (2) a party may introduce evidence of what
was known to the parties and their attorneys at the time of settlement and ask the jury
to assess the settlement value of each of the claims based on that information; or (3) a
party may introduce expert testimony about the settlement value of the settled claims.
Id. at 882.
Judge Schiltz then added that the appropriate evidentiary approach turns on the complexity
of the case. For instance, a lay jury may be able to deduce the proper allocation of a settlement
from merely looking at the record available to the parties at the time of settlement if the
underlying facts are “uncomplicated,” such as in a “simple slip-and-fall case.” Id. However,
in a complex case like the one in UnitedHealth, which involved allocating settled ERISA and
antitrust class action claims, “the jury would need the assistance of the expert testimony of an
attorney who participated in litigating the underlying cases or an attorney who is hired to give
expert testimony.” Id. at 883 (emphasis added); see also Walstad v. Univ. of Minn. Hosps.,
442 F.3d 634, 639 (8th Cir. 1971) (“when the causal relation issue is not one within the
common knowledge of laymen, causation in fact cannot be determined without expert
testimony”). And if a party does not have an expert that can present testimony on this issue
14

(which the plaintiff did not have in UnitedHealth), it cannot “fix this problem by handing the
[evidence from the underlying record] to the jury and asking the jury to perform the
[allocation] analysis that it failed to ask [its expert] to perform.” UnitedHeath, 47 F. Supp. 3d
at 881. To do so would be to leave a “jury of farmers and mechanics and nurses and factory
workers” to return a verdict “based on speculation.” Id. at 883.
Here, the Court has already held that one of ResCap’s proposed damages analyses –
the Allocated Breaching Loss Model – survived summary judgment because it offered the
jury a “reasonably certain basis for assessing and allocating damages that is not ‘speculative,
remote, or conjectural.’” (Summ. J. Order at 174.) Thus, although ResCap still must convince
the jury that the liability it allocates to HLC is, in fact, “reasonably certain,” the Court will
not allow HLC to respond at this late date, during trial, with what is effectively an alternative
damages model based on attorney argument and conjecture.
To paraphrase Judge Schiltz, HLC cannot make up for the fact that it never developed
a factual record to support Professor Schwarcz’s assertion that “sole responsibility” claims
constituted a “significant potential source of non-indemnifiable liability,” by “handing”
dozens of repurchase letters and a handful of loan files “to the jury” in a complex
securitization case and “asking the jury to perform the [allocation] analysis that it failed to
ask [its expert] to perform.” UnitedHeath, 47 F. Supp. 3d at 881.10

The Court acknowledges Judge Schiltz’s statement that the defendant in an
allocation case, at least at the summary judgment phase, may simply “point[] out the flaws
in [the plaintiff’s] position,” without adducing “any evidence” to support its own position.
Id. at 882 n.15. However, the Court does not invoke Judge Schiltz’s decision for its holdings
on the burden of proof. Rather, the Court invokes his decision for its thoughtful discussion
on the challenges of presenting complex allocation evidence to a lay jury.
10

15

B. Rule 403 Concerns
Especially in the absence of any alternative expert analysis, handing the jury HLC’s
proffered “sole responsibility” evidence would raise substantial Rule 403 concerns. As the
Court elucidated in an earlier opinion, given the complex factual and legal issues before the
jury, Rule 403 is of particular importance in this trial. (See Order Re: Admissibility of Certain
Evidence Available to RFC at the Time of Settlement [Doc. No. 4592] at 1-2 (explaining why
the Court “must be more attuned” to Rule 403 concerns in this case “than were this a bench
trial or summary judgment hearing”).)11 And, as the Court repeatedly noted at pre-trial
hearings, it is very challenging to distinguish HLC’s “sole responsibility” argument, on which
summary judgment was deferred, from HLC’s arguments related to the non-indemnifiability
of fraud claims against RFC and/or HLC’s knowledge and reliance-based affirmative
defenses, both of which did not survive summary judgment. (See, e.g., Aug. 23 H’r Tr. at 142
(expressing concern that allowing sole responsibility evidence would permit HLC “to argue
to this jury early on that RFC was fraudulent here, [which] obviously has lots of 403 concerns,
when it’s not at all clear that you can establish that RFC was solely responsible for those
breaches”); Sept. 14 Hr’g Tr. at 24 (noting the “circular nature” of HLC’s attempt to
distinguish between indemnifiable fraud claims and non-indemnifiable “sole responsibility”
claims); Oct. 9 Hr’g Tr. at 49 (stating that HLC’s “sole responsibility” argument “sounds like
a motion for reconsideration of my ruling that the negligent misrepresentation and fraud

11

This order may also be found at In re RFC and RESCAP Liquidating Trust Action,
2018 WL 4929394 (D. Minn. Oct. 11, 2018).
16

claims, because they were allegations and unproven, are indemnifiable”).) If the Court has
trouble delineating these distinctions, it suspects a lay jury would as well.
As such, introducing HLC’s “sole responsibility” evidence, most of which revolves
around MBIA suing RFC for allegedly misrepresenting the underwriting standards it held its
originators to, would invite the jury to find that ResCap failed to meet its burden on allocation
and damages, not because the Allocated Breaching Loss Method does not prove allocation to
a reasonable degree of certainty, but because RFC engaged in allegedly fraudulent behavior
and should not be indemnified (wholly or in part) because of that. Cf. United States v. Hawley,
562 F. Supp. 2d 1017, 1048 (N.D. Iowa 2008) (evidence of a party’s alleged involvement in
bankruptcy fraud inadmissible under Fed. R. Evid. 403 because it “would tend to invite a jury
to punish [a party] for conduct that is not at issue in a case,” and “would also have the potential
to confuse the issues and generate a trial within a trial”). This Rule 403 concern is only
exacerbated by the absence of any factual evidence, and accompanying expert testimony, to
support this theory beyond mere speculation.
****
All told, after carefully considering HLC’s proffer in support of Professor Schwarcz’s
“purely hypothetical” expert opinion, the Court precludes Professor Schwarcz from
speculating as to “RFC-only” liability. (See Daubert Order at 56-57.)
Furthermore, for the reasons articulated in this Order, HLC is precluded from arguing
to the jury that “RFC sole responsibility” claims constitute a “significant potential source of
non-indemnifiable liability.” As for the evidence proffered by HLC in support of this
argument, that evidence is not admissible on this issue. Similarly, the testimony of the factual
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and expert witnesses which HLC identified as solely relevant to “RFC-only liability” in its
Second Amended Witness List [Doc. No. 4612] is inadmissible.

Dated: October 22, 2018

__/s/ Susan Richard Nelson__
SUSAN RICHARD NELSON
United States District Judge

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