Residential Funding Company, LLC v. First Mortgage Corporation
Filing
180
ORDER denying as moot in part and denying in part 85 Defendant First Mortgage's Motion for Summary Judgment; granting in part, denying without prejudice in part, and denying in part 110 Plaintiff's Motion for Summary Judgment (Written Opinion). Signed by Judge Susan Richard Nelson on 12/21/2018. (MJC)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Residential Funding Company, LLC
Case No. 13-cv-3490 (SRN/HB)
Plaintiff,
v.
First Mortgage Corporation,
Defendant.
Matthew Scheck, Quinn Emanuel Urquhart & Sullivan, LLP, 865 S. Figueroa St., 10th Floor,
Los Angeles, CA 90017; Donald Heeman, Jessica Nelson, and Randy Winter, Felhaber
Larson, 220 S. 6th St., Suite 2200, Minneapolis, MN 55402, for Plaintiff.
Thomas Sullivan, Thomas M. Sullivan, Jr., 191 Sylvestor Place, Highlands Ranch, CO
80129; Michael J. Minenko, Minenko & Hoff, P.A., 5200 Willson Rd., Suite 150 Edina, MN
55424, for Defendant.
SUSAN RICHARD NELSON, United States District Judge
I.
INTRODUCTION
Before the Court are the parties’ cross motions for summary judgment.
On
November 16, 2018, the Court heard oral argument on the parties’ motions. For the reasons
set forth below, Plaintiff’s Motion for Partial Summary Judgment [Doc. No. 110] is granted
in part, denied without prejudice in part, and denied in part, and Defendant’s Motion for
Partial Summary Judgment [Doc. No. 85] is denied as moot in part and denied in part.
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II.
BACKGROUND
In December 2013, Plaintiff Residential Funding Company, LLC (“RFC”)
commenced this lawsuit against First Mortgage Corporation (“First Mortgage), as well as
numerous other individual lawsuits against other loan originators, asserting claims of breach
of contract and indemnification. In January 2015, this Court consolidated 68 of RFC’s thenpending suits for pretrial purposes (hereafter, the “Consolidated Action”). (See Consol.
Action (“CA”), Jan. 29, 2015 Am. Admin. Order at 3 [Doc. No. 100].)1 Defendant First
Mortgage participated in the Consolidated Action until June 2018, when it resumed its prior
status as a non-consolidated case.2
In recent months in the Consolidated Action, the Court issued rulings on the parties’
motions for summary judgment (CA, “Consolidated Summary Judgment Order” [Doc. No.
4307]), motions to exclude experts (CA, “Daubert Order” [Doc. No. 4471]; and motions in
limine (CA, “Motions in Limine Order” [Doc. No. 4551]). In addition, in a related, nonconsolidated case, Residential Funding Co., LLC v. Universal American Mortgage Co., LLC,
1
The Court’s internal citations to documents filed in ResCap Liquidating Trust v. Home
Loan Center, Inc., 13-cv-3451 (SRN/HB), the Consolidated Action, are preceded by “CA,”
to distinguish them from documents filed in the instant action, 13-cv-3490 (SRN/HB).
Citations to documents filed in Residential Funding Co., LLC v. Universal American
Mortgage Co., LLC, 13-cv-3519 (PAM/HB), are prefaced with “UAM.”
At various times during discovery in the Consolidated Action, First Mortgage sought to
be removed from the proceedings and proceed instead on an individual basis. At summary
judgment in the Consolidated Action, when the Consolidated Defendants refused to include
certain arguments that First Mortgage wished to assert in the joint defense memorandum,
First Mortgage renewed its request to be removed from the consolidated proceedings. In
light of the apparently irreconcilable differences between counsel for First Mortgage and
all other defense counsel, the Court granted First Mortgage’s request. (June 5, 2018 Order
at 3 [Doc. No. 81].)
2
2
13-cv-3519 (PAM/HB), Judge Magnuson issued a ruling on the parties’ cross motions for
summary judgment. (UAM Summ. J. Order [Doc. No. 931].)
Even more recently, the undersigned judge presided over the first trial against one of
the remaining defendants in the Consolidated Action, Home Loan Center (hereafter, “the
HLC trial”). Plaintiff proceeded to trial on its claim of contractual indemnity. In the course
of the seventeen-day HLC trial, the Court ruled on several motions for judgment as a matter
of law which are addressed in this Order, as applicable. On November 8, 2018, the jury found
for the Plaintiff and awarded damages of $28,700,000 against Home Loan Center.3 (CA,
HLC Trial, Redacted Special Verdict Form [Doc. No. 4705].)
The Court assumes familiarity with the detailed facts and legal issues addressed in its
prior rulings and findings. Because most of the facts and issues contained in these other
rulings are identical to those raised by the parties here, they are incorporated by reference.
In brief, RFC alleges that First Mortgage breached its agreements with RFC and must
indemnify it for allegedly defective mortgage loans that First Mortgage sold to RFC, and
which RFC then aggregated and sold as residential mortgage-backed securities to various
securitized trusts (the “RMBS Trusts”). (See First Am. Compl. ¶¶ 78–89 [Doc. No. 24].) In
addition, certain securitizations that RFC sponsored or serviced, or securitizations into which
it sold loans, carried financial guaranty insurance furnished by monoline insurers (the
“Monolines”). (See id. ¶¶ 39, 66, 72.) Under the insurance policies, the Monolines generally
3
Currently pending before the Court in the Consolidated Action is Plaintiff’s Motion for
Prejudgment Interest [Doc. No. 4739].
3
guaranteed that investors would receive timely payments of principal and interest on their
notes or certificates.
Following the 2008 housing market collapse, the RMBS Trusts experienced
significant losses. Similarly, due to the high rate of default in the RFC-sponsored and serviced
securitizations, the Monolines also made payments to their insureds under their policies and
were likely to incur future payments. Several RMBS Trusts and Monolines sued RFC for the
breach of its representations and warranties, eventually causing RFC to file for bankruptcy in
the U.S. Bankruptcy Court for the Southern District of New York. (Id. ¶ 71.) The RMBS
Trusts and Monolines then filed RMBS-related proofs of claim with the Bankruptcy Court in
order to obtain damages. (Id. ¶ 72.)
Bankruptcy Judge Martin Glenn, who oversaw RFC’s bankruptcy proceedings,
appointed another sitting federal bankruptcy judge, Judge James Peck, as mediator, and
additionally authorized Lewis Kruger as the Chief Restructuring Officer to negotiate a
settlement of the claims against Plaintiff. (CA, Scheck Decl., Ex. 30 (Mediator Order) [Doc.
No. 3303]); id., Ex. 31 (Kruger Direct Testimony ¶¶ 11–12) [Doc. No. 3258-9].) In May
2013, after lengthy discovery, RFC entered into settlement agreements with the RMBS
Trustees and Monolines MBIA, FGIC, Ambac, and Syncora, which were incorporated into
the parties’ proposed Chapter 11 Bankruptcy Plan (“the Plan”). The Plan reflected that the
parties had resolved the RMBS Trustees’ claims against RFC for $7.091 billion (the “RMBS
Settlement”), and the Monolines’ claims against RFC as follows: MBIA ($1.45 billion),
FGIC ($415 million), Ambac ($22.8 million), and Syncora ($7 million) (collectively, the
4
“Monoline Settlements,” and collectively with the RMBS Settlement, the “Settlements”).
Judge Glenn approved the Plan and found that the Settlements were reasonable. (CA, Scheck
Decl. [Doc. No. 3258], Ex. 28 (Bankr. Findings of Fact ¶¶ 51, 178, 201.)
The Bankruptcy Court’s Confirmation Order and the Plan authorized the creation of a
“Liquidating Trust,” i.e., the Rescap Liquidating Trust, into which RFC was to transfer and
assign its assets, and preserved the Liquidating Trust’s (and Estates’) causes of action. (Id.,
Ex. 32 (Bankr. Confirm. Order ¶ 48); id., App. 1 (Bankr. Plan at 74–75).)
Exercising that authority, Plaintiff filed the instant suit, originally alleging claims for
breach of contract and contractual indemnification. The Court assumes that Plaintiff will
pursue only its contractual indemnification claim at trial.
Specifically, with respect to indemnification, RFC alleges that under the parties’
agreements and the Client Guide, First Mortgage expressly agreed to indemnify RFC for all
liabilities, losses, and damages, including attorneys’ fees and costs incurred by RFC
attributable to First Mortgage’s breaching loans. (First Am. Compl. ¶ 88.) It contends that it
has incurred such liabilities, losses, and damages arising from the alleged material defects in
First Mortgage’s loans. (Id. ¶ 87.) Specifically, RFC points to over $10 billion in allowed
claims approved by the Bankruptcy Court, as well attorneys’ fees, litigation-related expenses,
and other costs associated with defending numerous lawsuits and proofs of claim against RFC
stemming, in part, from the Defendant’s allegedly defective loans. (Id.)
First Mortgage denies the allegations in Plaintiff’s Second Amended Complaint and
asserts several defenses, including, among others, defenses concerning the statute of
5
limitations, waiver and estoppel, and that RFC’s losses were caused by its own actions or
omissions. (See generally Ans. to First Am. Compl. [Doc. No. 49].)
A.
Standard of Review
Summary judgment is appropriate if “the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a). “A fact is ‘material’” only if it may affect the outcome of the lawsuit.
TCF Nat’l Bank v. Mkt. Intelligence, Inc., 812 F.3d 701, 707 (8th Cir. 2016). Likewise, an
issue of material fact is “genuine” only if “the evidence is such that a reasonable jury could
return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986). The moving party bears the burden of establishing a lack of genuine issue of
fact, Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986), and the Court must view the
evidence and any reasonable inferences in the light most favorable to the nonmoving party.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
In
responding to a motion for summary judgment, however, the nonmoving party may not
“‘rest on mere allegations or denials,’ but must demonstrate on the record the existence of
specific facts which create a genuine issue for trial.” Krenik v. Cnty. of Le Sueur, 47 F.3d
953, 957 (8th Cir. 1995).
B.
Summary Judgment Motions
Plaintiff seeks summary judgment on the following issues: (1) the Client Guide
applies to all of First Mortgage’s At-Issue Loans; (2) the Client Guide confers upon
Plaintiff the sole discretion to (a) determine breaches of Defendant’s R&Ws, and (b) settle
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claims; (3) the Settlements were reasonable and made in good faith; (4) the Client Guide
should be broadly interpreted to permit recovery for (a) all liabilities, not just losses, or,
alternatively, (b) all losses on breaching loans; (5) Plaintiff’s Allocated Breaching Loss
Approach provides a reasonable, non-speculative basis to allocate the Settlements; (6) to
establish liability, Plaintiff need only establish that First Mortgage’s breaches were a “but
for” cause of Plaintiff’s origination-related losses and liabilities; (7) Defendant’s
affirmative defenses that contradict the Client Guide fail; (8) Defendant’s liability for
indemnity is not extinguished by (a) RFC’s bankruptcy or (b) RFC’s alleged wrongdoing;
and (9) Plaintiff may use statistical sampling to prove their claims and need not reunderwrite each at-issue loan. (See generally Pl’s. Mem. Supp. Mot. for Summ. J. (“Pl’s.
Mem.”) [Doc. No. 112].)
In response, First Mortgage does not contest Plaintiff’s motion with respect to the
applicability of the Client Guide and RFC’s discretion to determine instances of breach and
to settle disputes. (Def.’s Mem. in Opp’n (“Def.’s Opp’n”) at 1–2 [Doc. No. 131].) Nor
does it contest the dismissal of its defense of accord and satisfaction.
(Id. at 23.)
Accordingly, Plaintiff’s motion is granted on these bases.
In all other respects, First Mortgage opposes Plaintiff’s motion. It also argues that
during discovery, RFC subjected it to a “data dump,” making many of its defenses difficult
to develop. (Id. at 28–32.) First Mortgage acknowledges, however, that “[w]e have
knowingly and intentionally not raised this issue previously.” (Id. at 32.)
In its affirmative motion for summary judgment, First Mortgage seeks judgment in
7
its favor on several issues, which the Court categorizes as follows 5: (1) the dismissal of 93
loans on statute of limitations grounds; (2) the dismissal of 35 loans because there was no
material breach; (3) RFC was itself the “sole cause” of its losses and liabilities; (4) the
dismissal of 35 additional loans on several causation bases 6; (5) Plaintiff must prove its
damages on a loan-by-loan basis, using the best evidence; (6) Plaintiff’s damages model is
speculative; and (7) Plaintiff is only entitled to indemnity for its losses, not liabilities. (See
generally Def.’s Mem. Supp. Mot. for Summ. J. (“Def.’s Mem.”) [Doc. No. 87]; see also
Def.’s Ex. L (Oral Argument Slides at DF-MPSJ-EX-L-4) [Doc. No. 142].)
In response, Plaintiff argues that this Court has rejected the argument that Plaintiff’s
claims are time-barred, the “material breach” arguments are inapplicable to Plaintiff’s
claims, Defendant’s causation arguments misapply the law, Plaintiff may be indemnified
for its losses and liabilities, and Plaintiff may use statistical sampling to determine
damages. (Pl.’s Mem. in Opp’n (“Pl.’s Opp’n”) at 4–20 [Doc. No. 130].)
5
While Defendant has enumerated and articulated its grounds for relief slightly differently,
the Court attempts to address these arguments in its discussion of the broader
categorizations listed above. The Court has considered all of First Mortgage’s grounds for
summary judgment.
6
Specifically, First Mortgage seeks the dismissal of claims related to seven loans in which
loan servicers agreed to short sales, six loans in which the loan servicers agreed to loan
modifications, 13 loans in which the borrowers provided loan servicers an explanation and
superseding causes of default, seven loans in which the servicers failed to mitigate
damages, and two loans in which servicers under-bid the amount the borrower owed.
(Def.’s Mem. at 17–31.)
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1. Reasonableness and Good Faith of the Settlements (Plaintiff’s
Motion)
As noted, Plaintiff moves for a ruling from this Court that the Settlements were
reasonable and made in good faith. (Pl.’s Mem. at 9-10.) First Mortgage opposes
Plaintiff’s motion, arguing that the Court has previously found reasonableness and good
faith to be fact questions for the jury. (Def.’s Opp’n at 2.)
First Mortgage is correct that in the August 15, 2018 Consolidated Summary
Judgment Order, the Court denied Plaintiff’s motion on theses issues. (CA, Consol. Summ.
J. Order at 80.) The Court cited the need for a full record on such a fact-intensive inquiry.
(Id. at 80–81.)
Subsequently, in the HLC trial, prior to the submission of the case to the jury,
Plaintiff moved for judgment as a matter of law on the good faith and reasonableness of
the Settlements. (See CA, HLC Trial Tr. at 2972–90 [Doc. No. 4724].) Under Federal
Rule of Civil Procedure 50(a), when “a party has been fully heard on an issue,” and the
court “finds that a reasonable jury would not have a legally sufficient evidentiary basis to
find for the party on that issue,” the court may “resolve the issue against the party,” and
“grant a motion for judgment as a matter of law against the party on a claim or defense
that, under the controlling law, can be maintained or defeated only with a favorable finding
on that issue.” Fed. R. Civ. P. 50(a). After receiving written and oral argument from the
parties, the Court found no triable issue as to reasonableness and good faith and granted
Plaintiff’s motion under Rule 50(a). (CA, HLC Trial Tr. at 2984.)
As the Court noted, under Minnesota law, the analysis of good faith and
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reasonableness requires evidence concerning what the parties knew or could have known
at the time of the settlement. (Id. at 2974); see Miller v. Shugart, 316 N.W.2d 729, 735
(Minn. 1982). Subsequent knowledge of new facts and law is irrelevant to the question of
whether a settlement was reasonable at the time it was made. (CA, HLC Trial Tr. at 2974.)
Instead, the fact finder must consider whether a reasonable, prudent person would have
entered into the settlement based on an analysis of the defendant’s potential exposure at
trial, the factual and legal strengths and weaknesses of the claims and defenses, the risks
of proceeding to trial, and the burden of litigation. (Id.); Miller, 316 N.W.2d at 735; see
also Glass v. IDS Fin. Servs., Inc., 778 F. Supp. 1029, 1084 (D. Minn. 1981). The focus
is on whether the settlement falls within a reasonable range of potential recoveries, not
whether it is an ideal settlement. (CA, HLC Trial Tr. at 2974); see, e.g., Nelson v. Am.
Home Assur. Co., 824 F. Supp. 2d 909, 917 (D. Minn. 2011), aff’d, 702 F.3d 1038 (8th Cir.
2012). Particularly relevant to this analysis is the consideration of the law that governed
the claims and defenses at the time of the settlement. (CA, HLC Trial Tr. at 2974.)
In ruling that the Settlements were reasonable and made in good faith, the Court
considered the record evidence. Regarding reasonableness, the Court first found that the
Settlements were entered into after a lengthy mediation, conducted by a federal bankruptcy
judge. (Id. at 2976; see CA, Pl.’s Tr. Exs. 15 (Order Appointing Mediator) & 6 (Hawthorne
Rpt. ¶¶ 24, 131–32, 170–86).)
Second, the Court noted that an independent Chief
Restructuring Officer, Lewis Krueger, participated in the mediation and testified at trial
that he sought to achieve consensus and that his decision to enter into the Settlements was
10
informed by his discussions with his advisors and all of RFC’s principal creditors. (CA,
HLC Trial Tr. at 2976; see CA, Pl.’s Tr. Ex. 19 (Krueger Dep. at 32, 67, 88, 168).) Third,
RFC’s bankruptcy expert, Frank Sillman, testified to the reasonableness of the Settlements.
(CA, HLC Trial Tr. at 2976–77); see CA, Pl.’s Tr. Exs. 29 (Sillman Reply Decl. at 12) &
19 (Krueger Dep. at 168).) Fourth, the RMBS Trustees’ expert, Allen Pfeiffer, testified
that the Settlements were reasonable. (CA, HLC Trial Tr. at 2977.) Fifth, all of the
constituencies to RFC’s bankruptcy supported the Settlements, including the Creditors’
Committee—a group that had opposed an earlier settlement. (Id. at 2976–77; see CA, Pl.’s
Tr. Exs. 17 (Order confirming Second Am. Joint Chapter 11 Plan), 19 (Krueger Dep. at
168) & 6 (Hawthorne Rpt. ¶ 144).) Sixth, the RMBS Trustees supported the Settlements.
(CA, HLC Trial Tr. at 2977; CA, Pl.’s Trial Ex. 16 (Krueger Decl. ¶ 3).) Seventh,
Plaintiff’s expert on the RMBS litigation, Donald Hawthorne, an experienced RMBS
litigator, opined that the Settlements were reasonable and made in good faith. 7 (CA, HLC
Trial Tr. at 2977; CA, Pl.’s Trial Ex. 6 (Hawthorne Rpt.).) Mr. Hawthorne testified about
the complexity of the law at that time concerning certain defenses, the legal burden of
causation, and the unique causes of action available to monoline insurers at the time of the
7
The only witness that HLC offered to challenge Hawthorne’s testimony, Dr. Phillip
Burnaman, conceded that he was not an expert on reasonableness and could not fault
Hawthorne’s assessment of litigation risk, as Burnaman did not have training in the law.
(See CA, HLC Trial Tr. at 2980.) As such, the Court found his testimony was not probative
of reasonableness. (Id.) First Mortgage offers no witness to rebut Mr. Hawthorne’s
opinion.
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settlements by virtue of their contracts and certain applicable insurance law. 8 (CA, HLC
Trial Tr. at 2974–75.) Eighth, U.S. Bankruptcy Court Judge Martin Glenn, who presided
over the bankruptcy proceedings, approved the Settlements, finding them reasonable. (Id.
at 2977.) These facts and findings were uncontroverted—no fact or expert witness testified
to the contrary. These same facts are equally applicable here. First Mortgage has identified
no evidence that raises a disputed question of material fact on reasonableness. First
Mortgage offers no expert opinion to the contrary.
As to good faith, the Court found in the HLC trial that “[n]o fact witness, no expert
at the time of the bankruptcy nor any expert in this case has ever testified that the
settlements were entered into in bad faith. There is no indicia of bad faith in the record and
the defense cites to none.” (Id.) This is equally true here, as First Mortgage has failed to
identify any facts giving rise to a disputed issue of fact concerning good faith.
In addition, after this Court ruled on summary judgment in the consolidated cases,
Judge Paul Magnuson, who presided over a small group of non-consolidated RFC cases,
ruled that the Settlements were made in good faith and were reasonable, as a matter of law.
Universal Am. Mortg. Co., No. 13-cv-3519 (PAM/HB) (D. Minn. Oct. 12, 2018 [UAM
Doc. No. 931 at 12–13]. While Judge Magnuson acknowledged that reasonableness may
in some instances be a question of fact, he found that the facts before him allowed a
Moreover, shortly before the Settlements were entered into, the monoline insurer-plaintiff
in Assured Guaranty Municipal Corp. v. Flagstar Bank, FSB, 892 F. Supp. 2d 596
(S.D.N.Y. 2012), obtained a judgment for 100 percent of its losses, plus interest. Mr.
Hawthorne testified that that case would have loomed large in the minds of the mediating
parties. (See CA, HLC Trial Tr. at 2978.)
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8
reasonable factfinder to draw only one conclusion—that the Settlements were reasonable
and made in good faith. Id. at 13.
In opposition to Plaintiff’s motion, First Mortgage argues here that the Court has
already decided that the questions of reasonableness and good faith are disputed factual
issues that must go to the jury. (Def.’s Opp’n at 2.) Granted, Defendant made this
argument prior to the Court’s ruling on judgment as a matter of law in the HLC trial. But
First Mortgage reiterates this position in its Revised Proposed Order and Order on
Summary Judgment, submitted to the Court via email on November 14, 2018—after the
Court’s ruling on reasonableness and good faith in the HLC trial. First Mortgage appears
to argue that the Settlements were unreasonable because they were made based on
incomplete facts. (Id. at 39.) For instance, it asserts that a statistical analysis performed
by the financial advisory firm of Duff & Phelps failed to consider causation. (Id.)
The Court finds First Mortgage’s argument unpersuasive. Duff & Phelps was not
retained by RFC. Rather, it was hired by certain RMBS Trustees to identify and quantify
their claims. Mr. Sillman was Plaintiff’s bankruptcy expert. Further, Alan Pfeiffer, of Duff
& Phelps, testified that his firm considered causation but did not find it to be particularly
important because the underlying claims were “put-back” claims, which did not have the
causality requirement that the RMBS defendants were seeking. (See CA, Pl.’s Trial Ex. 22
(Pfeiffer Dep. at 167–68).)
Beyond mere speculation and inapposite facts, First Mortgage does not identify any
non-speculative, admissible evidence to rebut the overwhelming evidence that the
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Settlements were reasonable and made in good faith.
The Court therefore rejects
Defendant’s argument that the Settlements were based on incomplete facts. The evidence
on which the Court based its prior ruling remains unchanged and uncontroverted.
Accordingly, the Court grants summary judgment to Plaintiff on the issue of the
reasonableness and good faith of the Settlements.
2. Recovery for All Liabilities or, Alternatively, All Losses on Breaching
Loans (Cross Motions)
Plaintiff moves for a summary judgment ruling that the Client Guide provides broad
remedies, including recovery for all liabilities and all losses on breaching loans. (Pl.’s
Mem. at 10.) It asks the Court to reconsider its consolidated summary judgment ruling
limiting Plaintiff’s remedies to its actual out-of-pocket losses and liabilities it incurred, as
reflected in the Allowed Claims. (Id. at 12.) Essentially, it seeks to recover all losses that
resulted from Defendant’s breaching loans. (Id. at 12–13.)
Conversely, First Mortgage seeks a summary judgment ruling that RFC may only
seek indemnity for its actual, out-of-pocket losses, not all losses, nor for its incurred
liabilities. (Def.’s Mem. at 33–34.) It argues that RFC is entitled to no more than the
bankruptcy-settled out-of-pocket amounts for any individual loan. (Def.’s Opp’n at 24–
25.) It seeks clarification that the Court’s ruling in the Consolidated Summary Judgment
Order ruling was consistent with its understanding. (Id. at 24.)
“Actual losses” refer to the amounts that RFC paid out of pocket in the settlements,
“liabilities” refer to liabilities that were incurred in the Settlements and allowed by the
Bankruptcy Court, and “all losses on breaching loans” refers to all losses that RFC
14
incurred on First Mortgage’s breaching loans. For the reasons set forth in the Consolidated
Summary Judgment Order, (see CA, Consol. Summ. J. Order at 81–90), the Court finds
that, as a matter of law, First Mortgage must indemnify RFC’s incurred liabilities, as
reflected in the Allowed Claims, not merely its actual, out-of-pocket losses. Section A212
of the Client Guide, including earlier versions and post-December 2005 versions, provides
for indemnity for such liabilities. (Horst Decl., Ex. 1 (Client Guide § A212) [Doc. No.
113-1].) Alternatively, § A202(II) of the Client Guide also provides for indemnity for
liabilities. (Id., § A212.) This means that RFC may seek indemnification for all claims
that were allowed by the Bankruptcy Court. Accordingly, the Court grants Plaintiff’s
motion for summary judgment in part on this basis, and denies Defendant’s motion.
The Court will not, however, reconsider its prior ruling—as Plaintiff requests—
concerning recovery of all losses. 9 As the Court explained in the Consolidated Summary
Judgment Order, this approach would result in a windfall to RFC. (CA, Consol. Summ.
J. Order at 162–63.) RFC’s damages ultimately sound in indemnity and are fixed by the
Allowed Claims for the losses and liabilities that RFC incurred in the Settlements.
Accordingly, to the extent that Plaintiff seeks summary judgment permitting it to obtain
damages for all losses on breaching loans, its motion is denied in part on this basis.
3. Allocated Breaching Loss Damages Model (Cross Motions)
Plaintiff moves for summary judgment on the question of whether its Allocated
9
Such damages would fall under Plaintiff’s Breaching Loss Damages model, described in
the following section, which the Summary Judgment Order precluded. (CA, Consol.
Summ. J. Order at 149–57.)
15
Breaching Loss damages model provides a reasonable, non-speculative basis to allocate
the Settlements. (Pl.’s Mem. at 14–15.) Defendant also moves for summary judgment on
this basis, seeking a ruling that this damages model is speculative. (Def.’s Mem. at 31–
41.)
In the Consolidated Action, Plaintiff presented three damages models offered
through its expert, Dr. Karl Snow. In its first model for measuring and allocating damages,
RFC offered a “Breaching Loss Approach” that attempted to quantify the economic harm
to the RMBS Trusts caused by breaching loans sold to RFC by each individual defendant.
(CA, Scheck Decl. [Doc. No. 3258], Ex. 38 (Corr. Snow Rpt. ¶¶ 69-78).) In its second
model for measuring damages, RFC offered an “Allocated Breaching Loss Approach” that
attempted to assess and allocate damages by measuring each defendant’s share of the
liabilities RFC incurred in the Settlements rather than the economic harm caused by
breaching loans. (Id. ¶¶ 79-86.) In the third model for measuring damages, RFC offered
an “Allocated Loss Approach” that again measured damages in relation to the liabilities
RFC incurred in the Settlements, but this time assessed damages based on each Defendant’s
share of total losses on all at-issue loans, not just breaching loans. (Id. ¶ 3.)
Ultimately, the Court found that the Allocated Breaching Loss Approach was an
appropriate method for measuring damages, and rejected the Breaching Loss Approach and
the Allocated Loss Approach. (CA, Consol. Summ. J. Order at 173–76.) Again, the
Allocated Breaching Loss Approach assesses damages by measuring each defendant’s
share of the liabilities RFC incurred in the Settlements, and does not provide a windfall to
16
RFC.
First Mortgage does not present any expert opinion or other evidence to challenge
the validity of this damages model. However, First Mortgage apparently seeks to challenge
Dr. Snow’s opinion as speculative, via a Daubert motion. (Def.’s Mem. at 31) (“[T]here
are a couple of troubling trial issues we seek to resolve now. Significantly, the Court left
the door open for Dr. Snow to testify about a loss approach. Our position is that Dr. Snow’s
testimony is merely an estimate, and there is actually better probative and admissible
evidence to provide a more reasonably certain calculation of damages.”)
Defendant has presented no evidence that the Allocated Breaching Loss model fails
to meet Daubert standards. Under Federal Rule of Evidence 702:
A witness who is qualified as an expert by knowledge, skill, experience,
training, or education may testify in the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other specialized
knowledge will help the trier of fact to understand the
evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and
methods; and
(d) the expert has reliably applied the principles and methods
to the facts of the case.
Fed. R. Evid. 702. Thus, proposed expert testimony must satisfy three prerequisites to be
admitted. Lauzon v. Senco Prods., Inc., 270 F.3d 681, 686 (8th Cir. 2001). “First, evidence
based on scientific, technical, or other specialized knowledge must be useful to the finder
of fact in deciding the ultimate issue of fact.” Id. “Second, the proposed witness must be
qualified to assist the finder of fact.” Id. “Third, the proposed evidence must be reliable
17
or trustworthy in an evidentiary sense, so that, if the finder of fact accepts it as true, it
provides the assistance the finder of fact requires.” Id. (citation and internal quotation
marks omitted).
These requirements reflect the Supreme Court’s analysis in Daubert v. Merrell Dow
Pharmaceuticals, Inc., in which the Court emphasized the district court’s “gatekeeping”
obligation to make certain that all testimony admitted under Rule 702 “is not only relevant,
but reliable.” 509 U.S. 579, 589 (1993); see also Kumho Tire Co., Ltd. v. Carmichael, 526
U.S. 137, 146 (1999) (extending Daubert to technical and other specialized expert
testimony). The party calling an expert must demonstrate the reliability of the expert's
opinion by a preponderance of the evidence. Adams v. Toyota Motor Corp., 867 F.3d 903,
915 (8th Cir. 2017) (citing Daubert, 509 U.S. at 592 n.10).
“Rule 702 reflects an attempt to liberalize the rules governing the admission of
expert testimony,” and it favors admissibility over exclusion. Lauzon, 270 F.3d at 686
(citation and internal quotation marks omitted); Daubert, 509 U.S. at 595 (“Vigorous crossexamination, presentation of contrary evidence, and careful instruction on the burden of
proof are the traditional and appropriate means of attacking shaky but admissible
evidence.”). Doubts regarding the usefulness of an expert’s testimony should be resolved
in favor of admissibility, United States v. Finch, 630 F.3d 1057, 1062 (8th Cir. 2011), and
gaps in an expert witness’s qualifications or knowledge generally go to the weight of his
testimony and not its admissibility, Robinson v. GEICO Gen. Ins. Co., 447 F.3d 1096, 1100
(8th Cir. 2006) (citing 29 Charles Alan Wright & Victor James Gold, Federal Practice and
18
Procedure: Evidence § 6265 (1997)). Likewise, “[a]s a general rule, the factual basis of
an expert opinion goes to the credibility of the testimony, not the admissibility, and it is up
to the opposing party to examine the factual basis for the opinion in cross-examination.”
Finch, 630 F.3d at 1062 (citation and internal quotation marks omitted).
The court should focus on “principles and methodology, not on the conclusions that
they generate,” Daubert, 509 U.S. at 595, but may conclude “that there is simply too great
an analytical gap between the data and the opinion proffered” for the opinion to be useful
to the jury, Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997). The touchstone for
admissibility of expert testimony is assistance to the trier of fact. See Larson v. Kempker,
414 F.3d 936, 940–41 (8th Cir. 2005). “Only if the expert’s opinion is so fundamentally
unsupported that it can offer no assistance to the jury must such testimony be excluded.”
Bonner v. ISP Techs., Inc., 259 F.3d 924, 929–30 (8th Cir. 2001) (internal citations and
quotations omitted).
Plaintiff’s Allocated Breaching Loss approach, offered by Dr. Snow, meets these
standards. Accordingly, the Court grants Plaintiff’s motion in this regard, finding that the
Allocated Breaching Loss approach provides a reasonable, non-speculative basis to
allocate the Settlements. Defendant’s motion is denied.
4. Loan-by-Loan Proof of Damages/Sampling (Cross Motions)
First Mortgage seeks summary judgment on the question of whether Plaintiff must
prove its damages loan-by-loan, (id. at 36-37, 41), while Plaintiff moves for summary
judgment permitting it to use statistical sampling to allocate damages. (Pl.’s Mem. at 25–
19
26.) Plaintiff intends to offer the testimony of its expert Dr. Snow, who used the Allocated
Breaching Loss Approach to consider the breach rate of First Mortgage’s At-Issue Loans
and the breach rate of a random sample of loans settled in bankruptcy.
In the Consolidated Summary Judgment Order, the Court approved this method of
proof, finding that statistical sampling is a permissible method of proving damages (CA,
Consol. Summ. J. Order at 57-69), and that the Allocated Breaching Loss Approach is not
speculative, remote, or conjectural. (Id. at 174.)
While First Mortgage contends that loan-by-loan proof is required and must be
based on evidence such as the amount the borrower owes as of the foreclosure date, (Def.’s
Mem. at 36-37, 41), the Court disagrees. The Court has found that the Allocated Breaching
Loss Approach properly “measures damages in relation to the liabilities RFC incurred in
the Settlements rather than the economic harm caused by breaching mortgages.” (CA,
Consol. Summ. J. Order at 163.)
The Court also rejects Defendant’s argument that loan-by-loan evidence is required
as “best evidence” of Plaintiff’s damages. (Def.’s Mem. at 32 n.33) (citing Residential
Funding Co., LLC v. Quicken Loans, Inc., 2017 WL 5571222 (Minn. Dist. Ct. Hennepin
Cnty. Feb. 1, 2017)). As noted in the Consolidated Summary Judgment Order, statistical
sampling is a valid method of proof. Moreover, First Mortgage’s reliance on Quicken is
misplaced, as it does not address sampling methods. See Quicken, 2017 WL 5571222, at
*1–2. Certainly, Plaintiff’s evidence must meet the requirements of the Federal Rules of
Evidence in order to be admissible at trial, but the use of statistical sampling does not per
20
se violate the Rules.
Nor is the Court persuaded by Delco Electronics Corp. v. United States, 909 F.2d
1495 (Fed. Cir. 1990), another case on which First Mortgage relies. Delco does not involve
the application of Minnesota law, under which a plaintiff is only required to demonstrate a
reasonable basis on which to approximate the amount of its damages. (See CA, Consol.
Summ. J. Order at 166–67) (citing Poppler v. Wright Hennepin Coop. Elec. Ass’n, 834
N.W.2d 527, 546 (Minn. Ct. App. 2013), aff’d sub nom., 845 N.W.2d 168 (Minn. 2014)).
Delco does not dictate that a plaintiff “prove its costs using the best method possible,” as
First Mortgage asserts.
Rather, it requires the best evidence available “under the
circumstances.” Delco, 17 Cl. Ct. 302, 321 (Cl. Ct. 1989). Although the court stated that
“actual costs” should be used whenever feasible, estimates of costs were acceptable when
actual cost data is unavailable. Id.
For all of these reasons, and the reasons identified in the Consolidated Summary
Judgment Order, the Court denies Defendant’s motion as it relates to loan-by-loan proof of
damages and grants Plaintiff’s motion regarding the use of statistical sampling.
5. Causation (Cross Motions)
The parties have filed several cross motions concerning the legal standard of
causation applicable in this case. Plaintiff moves for a ruling that in order to establish
causation, it need only establish a causal connection between First Mortgage’s breaches
and RFC’s Settlement liabilities and losses. (Pl.’s Mem. at 15.) In addition, at the hearing
on the parties’ motions—held after the HLC trial—Plaintiff orally moved for the Court to
21
find, on the full record before it, that Plaintiff had established causation as a matter of law.
(Nov. 18, 2018 Hr’g Tr. at 36 [Doc. No. 175]).
First Mortgage opposes Plaintiff’s motion regarding causation, arguing that
disputed issues of fact regarding contributory causation precludes summary judgment.
(Def.’s Opp’n at 12–16.) Relying on Lentell v. Merrill Lynch & Co., 396 F 3d 161 (2d Cir.
2005), cert. denied, 546 U.S. 935 (2005), First Mortgage contends that causation should
not be decided on summary judgment. (Def.’s Opp’n at 15.) However, First Mortgage also
moves for summary judgment in its favor with respect to certain loans, arguing that
Plaintiff cannot meet its burden of proof with respect to causation. (Def.’s Mem. at 14–
15.)
Both parties also seek a ruling concerning whether RFC was the “sole cause” of its
losses and liabilities, whether other superseding and intervening causes contributed to the
losses and liabilities, and whether RFC waived its right to claim breaches based on certain
due diligence that RFC may have performed with respect to certain loans. (Id. at 15, 22–
23; Pl.’s Mem. at 23.) Plaintiff urges the Court to rule consistently with its prior ruling in
the HLC trial on this issue, in which the Court found no evidence that RFC was the sole
cause of its liabilities and losses, (Pl.’s Mem. at 23), and that superseding and intervening
causes are not relevant in an indemnification claim. First Mortgage seeks a ruling to the
contrary as to sole cause, citing allegations of fraud in the underlying claims, and as to
intervening and superseding cause, relying on government reports concerning the financial
crisis. (See Def.’s Mem. at 15, 22–23.)
22
Additionally, First Mortgage seeks summary judgment with respect to the following
causation-related issues: (1) seven loans in which loan servicers agreed to loan sales; (2)
six loans in which the loan servicers agreed to loan modifications; (3) thirteen loans in
which the borrowers provided loan servicers an explanation and superseding causes of
default; (4) several loans in which the servicers failed to mitigate damages; and (5) two
loans in which the servicers under-bid the amount the borrower owed. (Id. at 17–31.)
a. Contributory Cause Standard (Cross Motions)
In the Consolidated Summary Judgment Order, the Court held that language in
Client Guide §§ A212 and A202 regarding indemnification for losses and liabilities
“resulting from,” “arising from,” and “as a result of” Events of Default or breaches of the
representations and warranties did not require Plaintiff to establish proximate cause for its
indemnity claims, but instead required Plaintiff to prove that a defendant’s breaches were
a contributing cause of RFC’s liabilities and losses. (CA, Consol. Summ. J. Order at 97.)
The Court finds no basis to depart from this determination and grants Plaintiff’s motion on
this issue, finding that contributory cause is the applicable causation standard. 10 To the
extent that Defendant seeks a different interpretation of this standard, its motion is denied.
In the Consolidated Action, the Court also found on summary judgment, based on
the parties’ competing expert opinions, that genuine issues of disputed fact remained and
denied summary judgment on causation. (Id. at 99.)
10
Again, the Court assumes that here, as in the HLC trial, Plaintiff intends to proceed
under its indemnification legal theory, for which proximate cause is inapplicable.
23
During the HLC trial, however, after having received the complete record on the
issue of contributing cause, the Court granted Plaintiff’s motion for judgment as a matter
of law on causation. (CA, HLC Trial Tr. 2987–90.) Among the Court’s findings, it noted
that in contrast to Plaintiff’s expert and fact testimony on causation, HLC failed to present
rebuttal evidence, stating, “HLC introduced no evidence to the contrary, fact or expert, on
the issue of causation[.]” (Id. at 2989.)
The Court denies without prejudice Plaintiff’s motion for summary judgment on
causation, made during oral argument at the hearing on the instant motions. (See Nov. 18,
2018 Hr’g Tr. at 36.) First Mortgage did not have an opportunity to respond to this motion
in its written submissions. Plaintiff may renew this argument at trial.
b. “Substantial Cause”
As to the appropriate standard of causation applicable in this case, the Court rejects
First Mortgage’s reliance on tort and proximate cause principles, asserted in opposition to
Plaintiff’s motion. 11 (See Def.’s Opp’n at 10.) First Mortgage argues that it did not agree
to indemnify RFC for the defense of all claims arising from a breach, “but only those claims
11
First Mortgage relies on Burrage v. United States, 571 U.S. 204 (2014), in support
of its argument that Plaintiff must prove that First Mortgage’s breaches were a “substantial
factor” in RFC’s losses and liabilities in order to establish causation. (Def.’s Opp’n at 9–
10, 12.) First Mortgage also notes that the Court cited Burrage in the Consolidated
Summary Judgment Order. (Id. at 9–10.) Indeed, the Court cited Burrage—authority on
which the Consolidated Defendants relied—and distinguished it. (CA, Consol. Summ. J.
Order at 96.) The Court observed that Burrage involved the question of whether a person’s
death could be said to have “resulted from” the use of heroin, where experts merely testified
that the heroin “was a contributing factor” in the decedent’s death. (Id.) The Court noted
that reliance on it was “misplaced in this case of contractual indemnity.” (Id. at 96.) It
remains inapposite to the facts of this case.
24
arising from § A208 breaches that actually, substantially, and in fact, caused damages.”
(Id.) The Client Guide, however, does not confine Plaintiff’s indemnification rights to only
those that “substantially . . . caused” damages, nor does First Mortgage identify any such
authority to the contrary. The language in the Client Guide only requires a causal
connection to establish liability. (See CA, Consol. Summ. J. Order at 93–95.)
As Plaintiff notes, it is not seeking to hold First Mortgage responsible for the entirety
of the bankruptcy Settlements. (See Pl.’s Reply at 8 [Doc. No. 140].) Rather, Plaintiff
seeks to hold First Mortgage responsible for First Mortgage’s allocated portion of the
Settlements.
(Id.)
Plaintiff need not show that First Mortgage’s breaches were a
“substantial factor” in RFC’s losses and liabilities. To the extent that Defendant seeks
affirmative relief on this basis, it is denied.
c. Superseding Cause (Cross Motions)
First Mortgage also argues that a disputed issue of fact exists regarding
“comparative causation” and the allocation of Plaintiff’s damages to First Mortgage’s
alleged breaches. (Def.’s Opp’n at 12.) Plaintiff moves for summary judgment barring
defenses that rely on superseding or intervening cause. (Pl.s’ Mem. at 12–13.) Defendant
appears to invoke the concept of comparative negligence or comparative fault from tort
law, which has no bearing in this contractual indemnification action. See Leamington Co.
v. Nonprofits’ Ins. Ass’n, 661 N.W.2d 674, 677 (Minn. Ct. App. 2003) (“Generally, the
comparative fault statute is not intended to apply to contract claims.”)
Like the
Consolidated Defendants, First Mortgage conflates causation with allocation and damages.
25
(See CA, Consol. Summ. J. Order at 97.)
First Mortgage contends that is has “factual information showing that for about 70%
of the post-May-14-2006 loans that [it] sold to RFC, the losses . . . were actually attributable
sometimes to the borrower and other times the loan-servicers.” (Def.’s Opp’n at 14.) Such
facts are not relevant to the causation standard here. Plaintiff does not seek indemnification
in this action for any losses due to servicing claims. The Bankruptcy Court specifically
allocated as between servicing and other claims. (CA, Consol. Summ. J. Order at 19, 171.)
Again, proximate cause is not the standard agreed to by the parties in § A212 of the
Client Guide. As the Court explained in the Consolidated Summary Judgment Order,
The standard agreed to by the parties is whether Defendants’ breaches were
a contributing cause of RFC’s losses and liabilities. In that inquiry, whether
other causes—such as macroeconomic factors—were also a contributing
cause is irrelevant. In essence, Defendants seek to argue that they should be
absolved of their duty to indemnify, despite their breaches, because other
factors, including unforeseeable circumstances and market forces over which
they have no control, were superseding, intervening causes of the losses and
liabilities incurred by RFC. These arguments are barred as a matter of law,
because, as Plaintiffs point out, “intervening cause is a proximate cause
concept,” Strobel v. Chicago, Rock Island & Pac. R.R. Co., 96 N.W.2d 195,
201 (Minn. 1959)—one that has no application in this contractual indemnity
claim governed by a “contributing cause” standard. See Exxon Co., U.S.A. v.
Sofec, Inc., 517 U.S. 830, 836 (1996) (describing the doctrine of
“superseding cause” as related to “proximate causation”).
(Id. at 107.) Accordingly, Defendant’s superseding cause defense fails as a matter of law,
and Defendant is not entitled to summary judgment regarding certain loans for which it
identifies issues concerning short sales, loan modifications, superseding cause of default,
non-judicial foreclosure, or the outbidding of loan servicers.
Plaintiff’s motion for
summary judgment seeking to bar First Mortgage from raising a defense based on
26
superseding cause is granted.
d. Sole Cause (Cross Motions)
As noted, one of First Mortgage’s affirmative defenses is that RFC’s actions or
omissions may have contributed to Plaintiff’s losses and liabilities. Plaintiff moves for a
finding on summary judgment that its own actions were not the “sole cause” of its liabilities
and losses, (Pl.’s Mem. at 19–23), while First Mortgage moves for summary judgment as
to certain loans for which it contends RFC was the sole cause of the losses and liabilities.
(Def.’s Mem. at 15.)
First Mortgage argues that the sole-cause defense remains viable
because, in the Consolidated Summary Judgment Order, the Court found that it remained
a disputed issue of fact. (Def.’s Opp’n at 17, 22.)
In the Consolidated Action, the Consolidated Defendants offered a hypothetical
opinion from expert Steven Schwarcz regarding circumstances in which RFC could have
breached representations and warranties to the RMBS Trusts and Monolines that did not
overlap with the Consolidated Defendants’ breaches of representations and warranties to
RFC. (CA, Consol. Summ. J. Order at 108–09.) The Court deferred ruling on the
admissibility of Schwarcz’s opinion, subject to the development of the factual record and
the Court’s determination of whether there was evidence in the record to support
Schwarcz’s argument. (Id. at 109.) Ultimately, because HLC failed to develop the facts
that would support Schwarcz’s opinion, the Court precluded his testimony. (CA, Oct. 22,
2018 Order at 15 [Doc. No. 4641].)
Here, First Mortgage offers no fact evidence nor expert evidence in support of its
27
sole-cause defense, nor has it identified any representations and warranties that RFC
allegedly breached that do not overlap with First Mortgage’s breaches. In its affirmative
brief for summary judgment, Defendant asserts that the Court cited an example of the sole
cause defense in the Consolidated Summary Judgment Order, where the loss was caused
by a borrower losing his job. (Def.’s Mem. at 15) (citing CA, Consol. Summ. J. Order at
108–09.)
The example in question was a hypothetical identified by HLC’s excluded
expert, Schwarcz, involving a borrower who was employed at the time the originating bank
sold the loan to RFC, but lost his job after the effective date of the originating bank’s
representations and warranties. (CA, Consol. Summ. J. Order at 108.) First Mortgage
points to no evidence to this effect in the record and Plaintiff’s due diligence is irrelevant
to the contributory cause analysis. Defendant’s arguments regarding non-judicial
foreclosure and loss causation are similarly irrelevant.
First Mortgage also contends that RFC cannot meet the causal standard set forth in
Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Mgt. Co., 48 N.Y.S. 3d 654
(N.Y. App. Div. 2017), Lentell, 396 F.3d at 172, and Dura Pharm. Inc. v. Broudo, 544 U.S.
336, 342 (2005). (Def.’s Mem. at 16.) These cases, however, involved proximate cause
standards and fraud claims that are inapplicable here. Plaintiff seeks indemnification for
the losses and liabilities arising from the Settlements. This does not require Plaintiff to
show that any of First Mortgage’s breaches were the sole cause of Plaintiff’s liabilities and
losses, or even that First Mortgage’s breaches caused a risk of default. (See CA, Consol.
Summ. J. Order at 95.)
28
First Mortgage also argues that the only reason that RFC settled any of the pre-May
14, 2006 loans was due to allegations of fraud in the underlying bankruptcy claims and a
different statute of limitations applicable to fraud claims versus contract claims. (Def.’s
Opp’n at 14–15.) Similarly, Plaintiff also seeks a ruling from the Court, finding that RFC’s
alleged wrongdoing, whether through negligence or fraud, does not bar First Mortgage’s
liability. (Pl.’s Mem. at 23.)
The Court granted summary judgment to Plaintiff in the Consolidated Action on the
effect of the “RFC-misconduct” allegations on the Settlements, finding that RFC could be
indemnified for unproven allegations of misconduct, including negligence and fraud. (CA,
Consol. Summ. J. Order at 31–42.) First Mortgage’s speculation about the value of the
fraud claims, without any supporting evidence, fails to create a disputed issue of fact as to
causation. Accordingly, the Court grants Plaintiff’s motion with respect to the sole-cause
defense and denies First Mortgage’s motion on this basis.
6. Effect of RFC’s Bankruptcy Filing (Plaintiff’s Motion)
Plaintiff moves for summary judgment on the question of whether First Mortgage’s
liability was extinguished by RFC’s bankruptcy.
As the Court observed in the
Consolidated Summary Judgment Order, (see id. at 51–52), although the estate of a debtor
normally ceases to exist once a Chapter 11 plan is confirmed, courts have recognized that
termination of a bankruptcy estate “‘is expressly subject to the terms and provisions of the
confirmed plan, and that the confirmed plan need not state in explicit terms that the
bankruptcy estate is to continue in existence.’” United States v. Unger, 949 F.2d 231, 233
29
(8th Cir. 1991) (quoting In re Canton Jubilee, Inc., 253 B.R. 770, 776 (Bankr. E.D. Tex.
2000) (internal citations omitted); also citing Hillis Motors, Inc. v. Haw. Auto. Dealers’
Ass’n, 997 F.2d 581, 587 (9th Cir. 1993) (“The reversion of property from the estate to the
debtor upon confirmation contained in 11 U.S.C. § 1141(b) is explicitly subject to the
provisions of the plan.”); In re Ernst, 45 B.R. 700, 702 (Bankr. D. Minn. 1985) (“All estate
property is vested in the debtor at confirmation, except as the plan specifically provides
otherwise. Accordingly, in the absence of a plan provision retaining property in an estate,
the estate ceases to exist.”)).)
In the Consolidated Summary Judgment Order, the Court examined the language of
the Bankruptcy Court’s Confirmation Order, finding that RFC’s bankruptcy discharged
RFC’s obligation to pay a debt, but did not extinguish the debt itself. (CA, Consol. Summ.
J. Order at 54–56.) Even earlier in the non-consolidated proceedings, the Court found that
“the plan expressly preserved these claims and transferred the claims to the Trust to
prosecute.” ResCap Liquidating Trust v. U.S. Bank, N.A., Nos. 16-cv-4067 (PAM/HB),
17-cv-197 (PAM/HB), 17-cv-198 (PAM/HB), 2017 WL 2437242, at *3 (D. Minn. June 5,
2017). Were it otherwise, First Mortgage would receive a windfall if it were allowed to
eschew liability due to RFC’s insolvency.
First Mortgage considers this motion similar to Plaintiff’s motion seeking to recover
both its liabilities and its losses. (Def.’s Opp’n at 26.) It contends that “while there were
Allowed Claims, such claims were discharged by RFC’s Bankruptcy settlement in
exchange for that settlement, and that RFC may only recover as its § A212 indemnification
30
right to losses and liabilities the actual amount for which it settled each individual loan.”
(Id.) For the reasons noted in the Court’s discussion of Plaintiff’s motion to recover both
its liabilities and its losses, the Court rejects Defendant’s argument. Plaintiff may seek
indemnification for all incurred liabilities that were allowed by the Bankruptcy Court.
The Court finds no disputed issue of fact with respect to the effect of RFC’s
bankruptcy on First Mortgage’s liability and grants Plaintiff summary judgment in this
regard.
7. Material Breaches (Defendant’s Motion)
First Mortgage further argues that a disputed issue of fact exists regarding whether
its breaches were “material” to RFC’s losses and liabilities. (Def.’s Opp’n at 18–20)
(citing, e.g., Blackrock Allocation Target Shares: Series S Portfolio v. Wells Fargo Bank,
2017 U.S. Dist. LEXIS 35348, at *126 (S.D.N.Y. Mar. 10, 2017) (noting that courts
distinguish between “minor and major breaches”)). As Plaintiff notes, however, there is
no such disputed fact because it only seeks damages on loans for which its reunderwriting
expert, Mr. Hunter, found at least one material breach. (Pl.’s Reply at 9.) While Plaintiff
is simply required to show that First Mortgage’s breaches increased RFC’s risk of loss to
the RMBS Trusts and Monoline, Plaintiff’s analysis accounts for materiality, and is part of
the exercise of RFC’s sole discretion to determine breaches. (See CA, Consol. Summ. J.
Order at 169.) First Mortgage points to no evidence that rebuts Mr. Hunter’s opinions that:
(1) First Mortgage’s material breaches increased the risk of loss on a loan; and (2) First
Mortgage’s breaches were or could be considered breaches of RFC’s representations and
31
warranties to the RMBS Trusts or Monolines.
Defendant specifically moves for summary judgment with respect to a group of 35
loans, arguing that Plaintiff is claiming damages without any allegations of material breach
supported by Mr. Hunter. 12 (Def.’s Mem. at 13.) Again, Plaintiff is not seeking indemnity
with respect to these loans. (Pl.’s Opp’n at 6 n.4.) Accordingly, as to the loans without
any allegation of material breach, identified in the footnote below, Defendant’s motion is
denied as moot. Plaintiff is seeking damages, however, for the 88 First Mortgage loans for
which Mr. Hunter found at least one material breach, which remain in the case. (Id. at 6)
(citing Scheck Decl., Ex. 31 (Corrected Snow Rpt. at 2); id., Ex. 5 (Hunter Rpt. at 3).
In sum, with the exception of the loans without any allegation of material breach,
discussed directly above, all of Defendant’s causation-related bases for summary judgment
are denied.
8. Additional Affirmative Defenses
Plaintiff also seeks summary judgment on First Mortgage’s defenses of waiver and
estoppel. First Mortgage moves for summary judgment on its statute of limitations
defense. 13
12
Plaintiff states that First Mortgage identifies only 32 loans, not 35 loans. (Pl.’s Opp’n at
6 n.4.) Defendant identifies the following 32 loan numbers: 72, 74, 77, 78, 79, 80, 81, 86,
87, 90, 91, 94, 95, 97, 99, 100, 103, 108, 110, 111, 114, 119, 122, 124, 125, 126, 134, 135,
141, 142, 143, & 146. (Def.’s Mem. at 13, n. 15) (citing Sullivan Decl., Ex. B-1 (Hunter
Expert Report, Ex. 2A) [Doc. No. 92].)
13
The Court has addressed other defenses, supra, including whether RFC’s bankruptcy
extinguished the At-Issue liability, whether RFC’s alleged wrongdoing bars First
Mortgage’s liability, and accord and satisfaction.
32
a. Waiver and Estoppel (Plaintiff’s Motion)
First Mortgage asserts the affirmative defenses of waiver and estoppel. (Ans. to
First Am. Compl. ¶ 94.) Section A200 of the Client Guide required First Mortgage to
acknowledge that RFC purchased the loans in reliance on First Mortgage’s representations
and warranties, and First Mortgage agreed to assume liability for any misrepresentations
for breaches, regardless of its knowledge or RFC’s knowledge. (Horst Decl., Ex. 1 (Client
Guide § A200).) Moreover, it explicitly provided that there could be no waiver of the
provisions of the Client Guide unless RFC expressly made such a waiver in writing:
The representations and warranties pertaining to each Loan purchased by
[]RFC survive the Funding Date, any simultaneous or post-purchase sale of
servicing with respect to the Loan and any termination of the Client Contract,
and are not affected by any investigation or review made by, or on behalf of,
[]RFC except when expressly waived in writing by []RFC.
(Id.) (emphasis added).
Similarly, Client Guide § A209(B) provided that “[RFC] may waive any default . . .
only by a written waiver specifying the nature and terms of such waiver.” (Id., § A209(B))
(emphasis added). In addition, a client’s representations and warranties survived “any due
diligence or failure to conduct due diligence,” (id., § 205(C)), and Clients that utilized RFC’s
Assetwise loan evaluation tool were still bound by the representations and warranties of
the Client Guide. (Id., § G401(B).)
Under Minnesota law, “[w]aiver is the intentional relinquishment of a known right.”
Frandsen v. Ford Motor Co., 801 N.W.2d 177, 182 (Minn. 2011). The burden of proving
waiver rests on the party asserting waiver. Id. To show a valid waiver, that party must prove
33
two elements: “(1) knowledge of the right, and (2) an intent to waive the right.” Id. “Waiver
may be express or implied—‘knowledge may be actual or constructive and the intent to waive
may be inferred from conduct.’” Id. (quoting Valspar Refinish, Inc. v. Gaylord’s Inc., 764
N.W.2d 359, 367 (Minn. 2009)). However, “[a]lthough waiver can be express or implied,
both types of waiver require an expression of intent to relinquish the right at issue.” Id.
Accordingly, mere inaction is insufficient to establish waiver. Id.
First Mortgage relies on Residential Funding Co., LLC v. Terrace Mortgage Co.,
725 F.3d 918 (8th Cir. 2013), for the proposition that the question of “whether there has
been a waiver of breach is a dispute of fact which cannot and should not be resolved by
summary judgment.” (Def.’s Opp’n at 3.) In Terrace, the court observed that “Minnesota
courts will not find waiver absent a clear intention to do so, or facts from which waiver is
necessarily implied.” 725 F.3d at 918. Based on the very same language in the Client
Guide regarding waiver, the Eighth Circuit in Terrace rejected Terrace Mortgage’s
argument that RFC had waived its right to demand repurchase through its course of
conduct. Id.
First Mortgage points to examples of RFC pre-purchase reviews, (CA, Sullivan
Decl. [Doc. No. 3764], Ex. B (RFC Pre-Purchase Reviews at 1, 3, 4)), a due diligence
review with respect to a particular loan, (Sullivan Decl. [Doc. No. 132], Ex. G (Due
Diligence Worksheet)), and loan approval of a particular loan, (id., Ex. K (Loan Documents
at 9)), arguing that this evidence creates a disputed issue of fact regarding waiver. (Def.’s
Opp’n at 5–6.) It also points to an alleged fact dispute concerning “whether the damages
34
claimed were caused by the alleged [First] Mortgage R&W breaches or RFC’s contract
origination waiver of the same alleged R&W breaches.” (Def.’s Opp’n at 11, see also id.
at 13.)
First Mortgage’s waiver defense fails. It concedes that the At-Issue Loans were
subject to the Client Guide, and points to no evidence of a written waiver, which the Guide
requires. (See Horst Decl., Ex. 1 (Client Guide § A209(B)) (“[RFC] may waive any default
. . . only by a written waiver specifying the nature and terms of such waiver.”). Moreover,
the plain language of § A200 provides that the representations and warranties survive
despite any investigation by RFC and whether RFC had actual or imputed knowledge of a
breach, and § 205(C) provides that First Mortgage’s representations and warranties survive
any due diligence efforts.
Furthermore, just as the Eighth Circuit noted in Terrace, here, RFC had no reason to
waive “a highly advantageous contractual provision,” nor was its conduct inconsistent with
the terms of the Client Guide. See 725 F.3d at 918–19. As the Eighth Circuit found in
Terrace, “[RFC’s] history of working out an informal resolution to breach of warranty issues
[was] therefore not contrary to the terms of the contract; it [was] merely declining the option
to pursue a remedy for which the contract allows.” Id. (emphasis in original).
The Court finds no disputed issue of fact with respect to waiver. Accordingly, First
Mortgage may not assert a waiver defense and Plaintiff’s motion is granted in this respect.
Turning to First Mortgage’s estoppel defense, as the Court has stated, estoppel
requires
35
non-hearsay competent evidence that, despite the fact that [First Mortgage]
signed the client contract incorporating the Client Guide, that there were
communications between a person capable of [waiving the Guide’s
requirements] at RFC and a person capable of doing that at [First Mortgage]
in which [First Mortgage] was advised that they could deviate in part or
entirely from the Client Guide and [First Mortgage] reasonably relied on that.
(Scheck Decl., Ex. 32 (CA, Sept. 14, 2018 Pretrial Hr’g Tr. at 11).) Here, there is no such
evidence. To the contrary, First Mortgage acknowledges that the Client Guide applies to
all of its loans. (Def.’s Mem. at 4.) Because no genuine issue of material fact is in dispute
regarding estoppel, Plaintiff’s motion is also granted in this regard. To the extent that
Defendant seeks summary judgment on this basis, is it denied.
b. Statute of Limitations (Defendant’s Motion)
First Mortgage argues that Plaintiff’s indemnification claim is time-barred with
respect to loans that RFC purchased before May 14, 2006. (Def.’s Mem. at 8.)
Early in the Consolidated Action, this Court rejected this argument, and noted that
“every other judge in the District to have considered it [prior to consolidation of the
individual cases]” had also rejected it. (CA, Consol. Summ. J. Order at 146) (collecting
cases). On summary judgment, the Court ruled consistently with the earlier rulings,
rejecting the statute of limitations defense on Plaintiff’s indemnification claims. (Id.)
Minnesota has a six-year statute of limitations for breach of contract and
indemnification claims. See Minn. Stat. § 541.05, subd. 1(1). Under Minnesota law, a
statute of limitations begins to run when “the cause of action accrues.” Park Nicollet Clinic
v. Hamann, 808 N.W.2d 828, 832 (Minn. 2011) (citations omitted). A cause of action is
deemed to have accrued “when all of the elements of the action have occurred, such that the
36
cause of action could be brought and would survive a motion to dismiss for failure to state a
claim.” Id. (citing Dalton v. Dow Chem. Co., 158 N.W.2d 580, 584 (Minn. 1968)). A breach
of contract claim accrues at the time of the alleged breach, regardless of whether the plaintiff
was aware of the breach.14 Levin v. C.O.M.B. Co., 441 N.W.2d 801, 803 (Minn. 1989).
However, claims for common law indemnification accrue when “the liability of the party
seeking indemnity has become finally fixed and ascertained, or until after the claimant has
settled or has paid the judgment or more than a commensurate share of it.” Metro. Prop. &
Cas. Ins. Co. v. Metro Transit Comm’n, 538 N.W.2d 692, 695 (Minn. 1995) (citation
omitted).
Under § 108(a) of the Bankruptcy Code, if the statute of limitations governing a
debtor’s claim has not expired prior to the filing of the bankruptcy petition, the trustee may
commence an action on that claim before the later of the end of the statutory limitations period
or “two years after the order for relief.” 11 U.S.C. § 108(a). RFC’s May 14, 2012 voluntary
bankruptcy filing constituted “the order for relief” and extended the limitations period for all
claims that were still timely as of that date.
11 U.S.C. § 301(b).
In the Consolidated
Summary Judgment Order, the Court found that because “the statute of limitations for loans
sold to RFC before May 14, 2006 accrued as of December 2013, . . . [Plaintiff’s]
indemnification claims for these loans are therefore timely.” (CA, Consol. Summ. J. Order
at 148.)
14
In the Consolidated Action, the Court found that Plaintiff’s breach of contract claims for
failure to notify as to loans sold prior to May 14, 2006 were time-barred. (CA, Consol.
Summ. J. Order at 145.)
37
First Mortgage contends that RFC does not assert a stand-alone indemnification
claim, but rather, it asserts a breach of contract claim disguised as an indemnification claim.
(Def.’s Mem. at 5–12.) First Mortgage relies on Lehman Brothers Holdings v. Universal
American Mortgage Co., LLC, 660 F. App’x 554 (10th Cir. 2016), in support of its position
that the claims accrued at the time of the sale of the loans because Plaintiff’s claim sounds
in contract. The Court distinguished this authority in the Consolidated Summary Judgment
Order, however. (CA, Consol. Summ. J. Order at 146–47.) In Lehman Brothers, the
plaintiff presented its claim as one for breach of contract, alleging harm based on breaches
of various representations and warranties and the defendant’s refusal to repurchase the
loans in question. 660 Fed. App’x. at 567. The complaint did not include a claim for
indemnification, nor any allegations regarding third parties Freddie Mac and Fannie Mae,
nor any allegations regarding payments by Lehman Holdings to a third party. Id. The
Tenth Circuit found that the statute of limitations accrued on the date of the breaches, citing
the plaintiff’s failure to allege a stand-alone indemnity claim. Id. at 567–68. In finding
the claim untimely, the court also relied on New York precedent involving the implied right
of indemnity, which requires allegations that the defendant owes a duty of care to a third
party rather than to the plaintiff itself. Id. at 568 (citing City of New York v. Lead Indus.
Ass’n, Inc., 644 N.Y.S.2d 919, 923 (N.Y. App. Div. 1996); Peoples’ Democratic Republic
of Yemen v. Goodpasture, Inc., 782 F.2d 346 (2d Cir. 1986)).
Here, however, Plaintiff expressly asserts a stand-alone cause of action for
contractual indemnity. Unlike Lehman Brothers, the pleadings here reference Plaintiff’s
38
liabilities to third parties, (see First Am. Compl. ¶¶ 36-74), and the payments made by
Plaintiff pursuant to the Settlements. (Id. ¶¶ 75–76). Moreover, more recently in a Lehman
Brothers bankruptcy proceeding, the bankruptcy court overseeing the claims asserted
against the correspondent lenders drew the same distinctions:
The Indemnification Claims asserted by [Lehman Brothers] in the
Complaints are contractual indemnification claims under section 711 of the
Seller’s Guide that did not accrue until [Lehman Brothers’s] liability to the
GSEs was fixed upon the approval of the GSE Settlements in 2014. Causes
of action for express contractual indemnification have not been actually
litigated and necessarily adjudicated in the prior proceedings pointed to by
the Defendants – the Colorado Actions and Universal American.
In re Lehman Bros. Holdings Inc., No. 08-13555(SCC), 2018 WL 5794436 (Bankr.
S.D.N.Y. Oct. 31, 2018).
Under § A202(II), First Mortgage agreed to indemnify RFC from “any claim, demand,
defense or assertion against or involving []RFC based on or grounded upon, or resulting from
such misstatement or omission [by Defendants] or a breach of any representation, warranty
or obligation made by []RFC in reliance upon such misstatement or omission.” (Horst Decl.,
Ex. 1 (Client Guide § A202(II).)
And § A212 provided RFC with wide-ranging
indemnification rights in the event of an originating lender’s default. The indemnification
provision requires the originating lender to indemnify RFC from
all losses, damages, penalties, fines, forfeitures, court costs and reasonable
attorneys’ fees, judgments, and any other coasts, fees, and expenses resulting
from any Event of Default. This includes, without limitation, liabilities
arising from (i) any act or failure to act, (ii) any breach of warranty,
obligation or representation contained in the Client Contract, (iii) any claim,
demand, defense or assertion against or involving []RFC based on or
resulting from such breach, (iv) any breach of any representation, warranty
or obligation made by []RFC in reliance upon any warranty, obligation or
39
representation made by the Client contained in the Client Contract and (v)
any untrue statement of a material fact, omission to state a material fact, or
false or misleading information provided by the Client in information
required under Regulation AB or any successor regulation.
(Id. § A212.)
Versions of the Client Guide from July 1, 2002 forward contain additional language
regarding the loan originators’ broad indemnification obligations to RFC:
In addition, Client shall indemnify []RFC against any and all losses,
damages, penalties, fines, forfeitures, judgments, and any other costs, fees
and expenses (including court costs and reasonable attorneys’ fees) incurred
by []RFC in connection with any litigation or governmental proceeding that
alleges any violation of local, State or federal law by Client, or any of its
agents, or any originator or broker in connection with the origination or
servicing of a Loan. With regard to legal fees or other expenses incurred by
or on behalf of []RFC in connection with any such litigation or governmental
proceeding, Client shall reimburse []RFC for such fees and expenses. . . .
Except for notices for reimbursement, []RFC is not required to give Client
notice of any litigation or governmental proceeding that may trigger
indemnification obligations. Client shall instruct its officers, directors and
agents (including legal counsel) to cooperate with []RFC in connection with
the defense of any litigation or governmental proceeding involving a Loan.
[]RFC has the right to control any litigation or governmental proceeding
related to a Loan, including but not limited to choosing defense counsel and
making settlement decisions.
(Id.)
RFC’s indemnification claim against First Mortgage in the First Amended
Complaint tracks this language, alleging that RFC “has incurred substantial liabilities,
losses and damages arising from and relating to material defects in the mortgage loans First
Mortgage sold to RFC, including over $10 billion in allowed claims approved by the
[Bankruptcy Court] . . . ,” and that First Mortgage “expressly agreed to indemnify RFC for
the liabilities, losses and damages, including attorneys’ fees and costs, which RFC has
40
incurred.” (First Am. Compl. ¶¶ 87–88.) Simply because the Client Guide’s indemnity
provisions could be triggered by breaches of contractual or common law duties does not
transform Plaintiff’s indemnity claim into a breach of contract claim. As Plaintiff notes,
indemnification provisions often cover an indemnitee’s losses and liabilities caused by the
indemnitor’s negligence. However, such provisions do not convert an indemnification claim
into a negligence claim.
For all of the forgoing reasons, Defendant’s summary judgment motion is denied
with respect to its statute of limitations defense.
9. “Data Dump” Allegations
As noted, First Mortgage alleges that Plaintiff inundated it with discovery, making
it difficult to defend against the claims in this lawsuit. (Def.’s Opp’n at 28–32.)
This lawsuit was filed in 2013. From January 2015 until June 2018, First Mortgage
was a Consolidated Defendant in the Consolidated Action. During this period of over three
years, the Court held monthly status conferences, attended by First Mortgage’s counsel. In
large part, these status conferences concerned pretrial discovery issues. Like all of the
Consolidated Defendants, First Mortgage was free to raise concerns about discovery and,
if warranted, move for relief. It failed to do so regarding this alleged “data dump.” In fact,
it acknowledges that it intentionally failed to raise the issue until now. (Id. at 32) (“We
have knowingly and intentionally not raised this issue previously.”). Any deficiency that
First Mortgage faces in mounting a defense is therefore of its own making. No other
Defendant has alleged that a “document dump” hindered its ability to defend against
41
Plaintiff’s claims. To the extent that First Mortgage seeks some form of relief or even
summary judgment based on a purported “document dump,” it is denied.
IV.
CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED THAT:
1.
Plaintiff’s Motion for Partial Summary Judgment [Doc. No. 110] is
GRANTED in part, DENIED WITHOUT PREJUDICE in part, and
DENIED in part; and
2.
Defendant’s Motion for Partial Summary Judgment [Doc. No. 85] is DENIED
AS MOOT in part and DENIED in part.
Dated: December 21, 2018
s/Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge
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