In Re: RFC and RESCAP Liquidating Trust Litigation

Filing 485

ORDER overrruling #406 Defendants' Joint Objection to Plaintiffs' Employer Subpoena Program and denying request for protective order. (Written Opinion). Signed by Judge Susan Richard Nelson on 05/27/15. (SMD)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

In Re: RFC and RESCAP Liquidating
Trust Actions

Civil File No. 13-3451 (SRN/JJK/HB)

ORDER

Order Regarding Plaintiffs’ Proposed Employer Subpoenas
________________________________________________________________________
SUSAN RICHARD NELSON
Before the Court is Defendants’ Joint Objection to Plaintiffs’ Employer Subpoena
Program [Doc. No. 406], to which Plaintiffs filed an opposition memorandum [Doc. No.
420]. The Court has considered this matter on the papers. For the reasons set forth below,
Defendants’ Objection is overruled and their request for a protective order is denied.
I.

BACKGROUND
The lawsuits in this consolidated action arise out of Defendants’ sale of allegedly

defective mortgage loans to RFC. Plaintiffs assert breach of contract and indemnification
claims, seeking to recover damages based on Plaintiffs’ Chapter 11 bankruptcy losses and
liabilities that Plaintiffs allege were caused by Defendants. (See, e.g., Second Am.
Compl., Residential Funding Co., LLC v. DB Structured Products, Inc., 14-cv-143
(ADM/TNL) [Doc. No. 405].) Among the loans at issue, Plaintiff RFC purchased
numerous “stated income” or “stated income/stated asset” loans from certain Defendants.
As part of the discovery in this action, Plaintiffs propose to issue a series of subpoenas to
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the third-party employers of borrowers of stated income loans. The proposed subpoenas
request documents relating to the borrowers’ employment and income for an 18-month
period around the time of the origination of the borrowers’ loans. (See Pls.’ Opp’n Mem.
at 1 [Doc. No. 420].)
Defendants oppose the issuance of these subpoenas on several grounds. First,
Defendants contest the relevance of the discovery, arguing that, as stated income loans,
only verbal verification of employment was required and no documentation of income was
necessary. (Defs’ Obj. at 3, 8-9 [Doc. No. 406].) Second, Defendants argue that the
discovery is also irrelevant because none of this information was known to RFC at the
time of its bankruptcy, therefore none of it factored into the settlements for which
Plaintiffs seek indemnification in this consolidated action. (Id. at 12-13.) Third,
Defendants assert that the requested information is harassing, unduly burdensome, and
could potentially harm the borrowers by creating an inference that the borrowers
committed mortgage fraud. (Id. at 5-8.) Finally, if the Court allows Plaintiffs to issue the
proposed subpoenas, Defendants request additional time in which to rebut Plaintiffs’
breach allegations for any stated income loan that is subject to the subpoenas until
Plaintiffs first revise the breach allegations based on the subpoena production or confirm
that they do not intend to do so. (Id. at 13, 15.)
In response to Defendants’ arguments, Plaintiffs contend that Defendants have no
standing to quash these third-party subpoenas and they fail to show good cause to prohibit
them. (Pls.’ Opp’n Mem. at 5 [Doc. No. 420].) Plaintiffs contend that the subpoenas seek
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information relevant to claims and defenses in this action, are typical of subpoenas served
in actions involving many mortgage loans, and will not unduly burden employers or harass
borrowers. (Id. at 7-9.) To that last point, Plaintiffs propose submitting a cover letter to
accompany the subpoenas, explaining to employers that the borrower employees are not
involved in this litigation. (Pls.’ Opp’n Mem. at 19 [Doc. No. 420].) Finally, Plaintiffs
urge the Court to reject Defendants’ alternative request for a delayed production of
reunderwriting rebuttal discovery if the Court permits the subpoenas to issue. (Id. at 3.)
II.

DISCUSSION
A.

Relevance

Federal Rule of Civil Procedure 26(b) provides for the discovery of non-privileged
matter relevant to any party’s claim or defense. This standard is liberal in scope and
interpretation, “extending to those matters which are relevant and reasonably calculated to
lead to the discovery of admissible evidence.” Hofer v. Mack Trucks, Inc., 981 F.2d 377,
380 (8th Cir. 1991). “[A]ny unprivileged matter that is relevant to a party’s claim or
defense is generally discoverable.” Gov’t of Ghana v. ProEnergy Servs., LLC, 677 F.3d
340, 344 (8th Cir. 2012). The Court finds that the information sought in Plaintiffs’
proposed subpoenas meets the relevance standard.1 Defendants argue that the requested
information is not relevant because, as set forth in the RFC Client Guide (the “Client
Guide”), only verbal verification of employment was required for the stated income loans.

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There is no claim here that the requested information is subject to a claim of
privilege or that Defendants have standing to assert such a claim.
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(Client Guide §§ E405, E407, Ex. A to Nesser Decl. [Doc. No. 422-1].) However, the
Client Guide also required the loan underwriter to verify two years of employment history
and, based on other factors in the file, confirm that the borrower’s stated income was
reasonable and in accordance with available information about the borrower’s credit and
assets. (Id.) And, as Plaintiffs note, in many instances, the loan application, mortgage
deed of trust, and other loan file documents signed by the borrower, provided that the loan
would be in default or subject to acceleration if the borrower made any misrepresentations
in the loan application. (Nesser Decl. [Doc. No. 422], Exs. B at RTE_1RC_00040984; C
at RTE_1RC_00041007; D at RTE_1RC_00041070; E at RTE_1RC_00041044.)
Plaintiffs thus contend that they
expect to use the Subpoenas to establish breaches of many other
representations and warranties, including Defendants’ representations that
the loans were not subject to borrower misrepresentations; that all
information relating to the loans, including income information, was
accurate; that the loans were not subject to acceleration due to an ‘event of
default’ relating to the note or mortgage (which can be triggered by a
borrower misrepresentation); and that the loans were originated in
compliance with the RFC Client Guide.
(Pls.’ Opp’n Mem. at 2 [Doc. No. 420].) Moreover, as Plaintiffs also note, the information
requested in the subpoenas may assist the fact finder in evaluating “the reliability of the
data and methodology used by the parties’ reunderwriting experts in assessing the
reasonableness of any borrower’s stated income, a separate inquiry that goes to expert
credibility.” (Id.) The Court finds that the proposed discovery, particularly as it relates to
representations and warranties, falls under the broad definition of relevance as

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contemplated by Rule 26(b).
As to Defendants’ other relevance argument that the information in the proposed
subpoenas was not considered in Plaintiffs’ bankruptcy settlement, Plaintiffs identify two
reasons for the relevance of the information: (1) the claims subject to the bankruptcy
settlement – and the litigation that preceded it – involved the same issues as the subpoenas,
i.e., the existence of contractual breaches, and compliance with the underwriting
guidelines; and (2) the subpoenaed information is relevant to the elements of breach and
causation in Plaintiffs’ breach of contract claim. (Id. at 2-3.) Again, given the broad
scope of relevance in the Federal Rules, the Court finds that the proposed discovery is
relevant.
B. Good Cause
As to whether the issuance of the proposed subpoenas would create harassment,
undue burden, and potential harm to the borrowers, Fed. R. Civ. P. 26(c) permits the
Court, for good cause shown, to “issue an order to protect a party or person from
annoyance, embarrassment, oppression, or undue burden or expense. . . .”2

In order to

satisfy the burden of establishing good cause, the moving party must make “a particular
and specific demonstration of fact, as distinguished from stereotype and conclusory

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Plaintiffs argue that Defendants lack standing to quash the subpoenas, as the
subpoenas are not directed to Defendants, but to third parties. (Pls.’ Opp’n at 5 [Doc. No.
420]) (citing Shukh v. Seagate Tech., LLC, 295 F.R.D. 228, 235-36 (D. Minn. 2013)).
While Defendants lack the necessary standing to quash, Defendants have the right to seek
a protective order under Rule 26(c), which is what they request.
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statements.” Gulf Oil Co. v. Bernard, 452 U.S. 89, 102 n.16 (1981) (quoting 8 C. Wright
& A. Miller, Federal Practice & Procedure § 2035, p. 265 (1970)). In determining whether
a protective order is warranted, courts have broad discretion. Roberts v. Shawnee Mission
Ford, Inc., 352 F.3d 358, 362 (8th Cir. 2002).
Although Defendants contend that the subpoenas will be harassing, unduly
burdensome, and potentially harmful, these arguments are conclusory and speculative, and
are not sufficiently particularized to establish good cause. Defendants fail to provide any
factual support for their concerns about retribution against employee-borrowers. As
Plaintiffs also note, the issuance of an employer subpoena has been accepted by courts in
many actions involving numerous mortgage loans. See, e.g., Assured Guar. Mun. Corp. v.
DB Structured Prods. Inc., No. 650705/2010, Doc. Nos. 154 at 2, 155 at 9-21 (N.Y. Sup.
Ct. Dec. 20, 2011) (permitting numerous subpoenas on borrowers’ employers), Ex. G to
Nesser Decl. [Doc. No. 422-7]; MBIA Corp. v. Countrywide Home Loans, Inc., No.
602825/2008, Doc. No. 1543 at 2, 3743 at 79 (N.Y. Sup. Ct. Jan. 5, 2012, Nov. 28, 2012)
(permitting subpoenas to employers, borrowers, and accountants), Ex. I to Nesser Decl.
[Doc. No. 422-9]; Syncora Guar. Inc. v. EMC Mortg. Corp., No. 09-03106, Doc. No. 31 at
1 (S.D.N.Y. Mar. 23, 2010) (permitting discovery of borrowers), Ex. K to Nesser Decl.
[Doc. No. 422-11]; Assured Guar. Corp. v. EMC Mortg. Corp., No. 10-5367, Doc. No. 15
at 1 (S.D.N.Y. Mar. 14, 2011) (permitting third-party borrower discovery), Ex. L to Nesser
Decl. [Doc. No. 422-12]; MBIA Ins. Corp. v. Residential Funding Co., LLC, No.
603552/2008, Doc. No. 115, slip op. at 2-3 (N.Y. Sup. Ct. May 10, 2011) (finding “no
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question” as to the relevance of borrowers’ employment status and income to the
plaintiff’s claim of breach, and permitting the issuance of numerous subpoenas), Ex. M to
Nesser Decl. [Doc. No. 422-13]).3
In addition, the Court must balance Defendants’ arguments for a protective order
against Plaintiffs’ arguments for the relevance of and need for the requested information.
Gen. Dynamics Corp. v. Selb Mfg. Co., 481 F.2d 1204, 1212 (8th Cir. 1973) (noting that
in evaluating good cause, courts must also weigh the comparative hardship to the nonmoving party should the protective order be granted). The Court finds that the balance
weighs in favor of permitting the issuance of the subpoenas, given the broad scope of
discovery and the narrowly-tailored scope of the subpoenas, which are to be issued to the
employers of borrowers of stated income loans where no verified income information is
present in the loan file, and which are within Plaintiffs’ proposed statistical samples (as
applicable). The loans request verification of employment and income, limited to an 18month period around the time of the origination of the loan. (See Proposed Subpoena, Ex.
F to Nesser Decl. [Doc. No. 422-6].) Given this limited scope, the burden on third-party
employers appears to be relatively minimal.

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Defendants argue that Plaintiffs took a contrary position with respect to
employer subpoenas when RFC was defending litigation against MBIA in MBIA Ins.
Corp. v. Residential Funding Co., LLC, No. 603552 (N.Y. Sup. Ct.). (Def.’s Objection at
9-10 [Doc. No. 406].) In that litigation, Plaintiffs opposed the issuance of such
subpoenas. Plaintiffs acknowledge that they lost that argument in the MBIA litigation –
making it persuasive authority here for the issuance of the subpoenas. Defendants cite no
authority that would bar Plaintiffs from relying upon that ruling as authority for the
issuance of similar subpoenas here. (Pl.’s Opp’n at 11 [Doc. No. 420].)
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Moreover, as to concerns about the private nature of the requested information,
Plaintiffs aver that the subpoenas will be issued in accordance with the Court’s February
26, 2015 Protective Order which designates “Non-Party Borrower Information,” including
financial, credit, or personal identifiers, as confidential, and establishes protocols for the
use and disclosure of such information. (Protective Order ¶¶ 3, 5-6 [Doc. No. 179].)
These protections will ensure that the information is not subject to public disclosure. In
addition, as Plaintiffs also observe, the subpoenas do not represent an unreasonable
intrusion into the borrowers’ privacy because nearly all borrowers signed a Form 1003
Uniform Residential Loan Application, which authorized any owner of the loan to verify
or re-verify any information contained in the application or to obtain any information or
data relating to the loan through any source. (See, e.g., Nesser Decl. [Doc. No. 422], Ex.
B at TRE_1RC_00040984.) Furthermore, to address the concerns of potential harm to the
borrower-employees, Plaintiffs also propose sending a cover letter with the subpoenas that
expressly states that the borrower-employees are not named in this lawsuit, are not parties
to this lawsuit, and that Plaintiffs assert no claims against them. (Pls.’ Opp’n Mem. at 19
[Doc. No. 420].)
C.

Request for Additional Time for Reunderwriting Disclosures

Finally, Defendants request a delay for the production of their reunderwriting
rebuttal disclosures for the loans at issue in the subpoenas, if the Court permits the
employer subpoenas to go forward. (Def.’s Objection at 13-15 [Doc. No. 406].) The
Court has previously considered and rejected this argument in connection with the timing
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of reunderwriting disclosures and will not revisit it now. (See Consolidated Case
Management Order/Pretrial Order No. 5 at 2 [Doc. No. 277].) As this Court has
previously ruled, if newly acquired information comes into a either party’s possession, or
for good cause shown, the parties may seek leave of Court to amend their earlier
disclosures. Accordingly, Defendants’ request for a modification to the Scheduling Order
is denied.
THEREFORE IT IS HEREBY ORDERED THAT:
Defendants’ Joint Objection to Plaintiffs’ Employer Subpoena Program [Doc. No.
406] is OVERRULED and their request for a protective order is DENIED.

Dated: May 27, 2015

s/Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge

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