The Bank of New York Mellon v. WMC Mortgage, LLC et al
Filing
290
OPINION & ORDER....Defendants July 31, 2015 motion to limit the testimony of Ira Holt is granted in part. Holts testimony regarding 1,255 loans is stricken. The parties shall confer regarding the effect of this ruling on the defendants motion in limine to exclude the testimony of Kristina Cmorey. In addition, any opinions by defendants expert David Abshire in connection with the opinions stricken here are excluded as irrelevant. (Signed by Judge Denise L. Cote on 8/17/2015) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------- X
:
THE BANK OF NEW YORK MELLON, solely as :
Trustee for GE-WMC Mortgage Securities :
:
Trust 2006-1,
:
:
Plaintiff,
:
:
-v:
WMC MORTGAGE, LLC, and GE MORTGAGE
:
:
HOLDING, L.L.C.,
:
Defendants.
:
:
--------------------------------------- X
APPEARANCES
For Plaintiff Bank of New York Mellon:
William S. Ohlemeyer
Robin A. Henry
Motty Shulman
Ian M. Dumain
Nathan A. Holcomb
BOIES, SCHILLER & FLEXNER LLP
333 Main St.
New York, NY 10503
For Defendant WMC Mortgage, LLC:
Stephen L. Ascher
JENNER & BLOCK LLP
919 Third Ave.
New York, NY 10022
Paul M. Smith
Matthew S. Hellman
JENNER & BLOCK LLP
1099 New York Ave., NW
Washington, DC 20001
Barbara S. Steiner
Megan B. Poetzel
JENNER & BLOCK LLP
353 N. Clark St.
Chicago, IL 60654
1
12cv7096 (DLC)
OPINION & ORDER
For Defendant GE Mortgage Holding, LLC:
William Christopher Carmody
Shawn J. Rabin
Stephen Shackleford, Jr.
SUSMAN GODFREY L.L.P.
560 Lexington Act., 15th Floor
New York, NY 10022
Greg A. Danilow
Stacy Nettleton
WEIL, GOTSHAL & MANGES LLP
767 Fifth Ave.
New York, NY 10153
DENISE COTE, District Judge:
Defendants WMC Mortgage, LLC (“WMC”) and GE Mortgage
Holding, L.C.C. (“GEMH”; collectively “defendants”) have moved
under Federal Rule of Evidence 702 and Daubert v. Merrell Dow
Pharms., Inc., 509 U.S. 579 (1993), to exclude testimony by Ira
Holt (“Holt”), a reunderwriting expert retained by plaintiff
Bank of New York Mellon (“BoNY,” or “plaintiff”), concerning
1,511 mortgage loans.
The reunderwriting of these loans was
performed by Digital Risk, LLC (“Digital Risk”), a nonparty
engaged by BoNY’s directing certificate-holder to perform the
reunderwriting prior to this litigation.
Defendants have also
moved in limine to exclude the testimony of Kristina Cmorey
(“Cmorey”), the Federal Rule of Civil Procedure 30(b)(6) witness
for Digital Risk.
Holt provides opinions regarding material defects in the
origination of a total of 2,274 mortgage loans.
While Holt
supervised the reunderwriting of 763 of these loans, he relied
2
on the results of the Digital Risk reunderwriting project as the
basis for his opinions regarding 1,511 loans.
Because the
defendants were denied the opportunity to take discovery of
Digital Risk regarding its reunderwriting of the 1,511 loans,
and with one exception, Holt has not identified an alternative
basis to conclude that he was entitled to rely on the Digital
Risk reunderwriting, his opinion regarding all but 256 of those
1,511 loans will be excluded.
Since Holt’s own team
reunderwrote 256 of the Digital Risk loans, the defendants’
motion will be denied as to those loans.
The parties will be
given a further opportunity to address the effect of this ruling
on the motion addressed to Cmorey.
BACKGROUND
I. History
This action involves a breach of contract claim brought by
BoNY as the trustee (“Trustee”) of a residential mortgage backed
securities (“RMBS”) trust.
Defendant WMC, the sponsor of the
securitization, sold the loans at issue to co-defendant GEMH.
GEMH then sold the loans to the depositor, GE-WMC Mortgage
Securities, L.L.C. (“GE Securities”), who placed the loans into
the trust.
As part of the transfer of loans to the trust, the
defendants made a number of contractual representations and
warranties (“R&Ws”) regarding the underlying mortgage loans.
3
The trust, GE-WMC Mortgage Securities Trust 2006-I
(“Trust”), contains residential mortgage loans originated or
acquired by WMC. 1
As discussed below, these mortgage loans were
to be originated in accordance with WMC’s Underwriting
Guidelines (“Guidelines”), which assisted in determining both a
borrower’s ability and willingness to make timely payments and
the value of the underlying property.
For example, at
origination of the mortgage loan, underwriters are required to
follow prescribed parameters for acceptable LTV/CLTV 2 and debtto-income (“DTI”) ratios, to examine a borrower’s employment
status and credit history, and to ensure that certain crucial
documents were present.
Applications are to be reviewed “with a
level-of-risk approach based on facts derived from credit
reports and the assessment of multiple risk factors.”
The
Guidelines also permitted underwriters to grant exceptions to
specific requirements in the presence of “compensating factors”
such as a “potentially liquid asset base” and “potential for
increased earnings.”
The loans were divided into two Groups: Group 1, which
contained 1,609 loans, and Group 2, which contained 3,045 loans.
Only a subset of loans from Group 2 remain at issue in this
litigation.
1
LTV (loan-to-value) ratios represent the amount of a loan
against the value of its collateral. CLTV (combined loan-tovalue) ratios are used when the same collateral is used to
support more than one loan
2
4
The securitization of the loans placed into the Trust was
accomplished through the execution of three documents in August
2006.
First, WMC, the sponsor of the securitization, sold these
loans to GEMH on August 10, pursuant to a Mortgage Loan Purchase
Agreement (“MLPA”).
GEMH then transferred the mortgage loans to
GE Securities, the depositor, pursuant to a second contract,
also dated August 10.
The depositor conveyed the mortgage loans
to the Trust, with BoNY as the Trustee, pursuant to a Pooling
and Servicing Agreement (“PSA”) dated as of August 1.
The
closing date for the PSA was August 21, 2006.
The PSA and MLPA grant the right to enforce the R&Ws in the
event the R&Ws are materially breached.
Upon discovery or
receipt of notice of a breach of the R&Ws, the PSA requires the
Trustee to notify WMC, who must then cure the breach,
“substitute for” the defective loan, or repurchase the defective
loan from the Trust within 90 days of receiving the notice.
This remedy constitutes the “sole remedy . . . available to the
Trustee.”
The MLPA also requires WMC to cure, repurchase, or
substitute for a defective loan if it discovers a breach of the
R&Ws.
BoNY commenced this suit on August 21, 2012 in state court,
alleging, among other things, numerous breaches of the R&Ws and
seeking to enforce the remedies it asserts it is owed under the
MLPA.
WMC removed the case to federal court on September 20,
5
2012, and BoNY amended its complaint on May 29, 2013.
Fact
discovery closed on January 30, 2015, and expert discovery
closed on June 23.
The parties filed a joint pretrial order on
July 31st, along with the instant motions.
A bench trial is
scheduled for September 21.
II. Representations and Warranties
Section 6(a) of the MLPA contains more than 80 R&Ws
concerning the mortgage loans in the Trust.
The R&Ws are
express assurances regarding various loan characteristics,
including loan quality, insurance, compliance with relevant law
and industry standards, and repayment schedules.
In this
litigation, BoNY relies on six R&Ws allegedly breached by WMC.
They are:
•
§ 6(a)(1). The information set forth in the related
Mortgage Loan Schedule [“MLS”] is complete, true and
correct.
•
§ 6(a)(21). The origination and collection practices used
with respect to each Mortgage Note and Mortgage have been
in all respects legal, proper, prudent and customary in
the mortgage origination industry . . . .
•
§ 6(a)(24). The Mortgage Loan was underwritten in
accordance with the [WMC] Underwriting Guidelines; and
the Mortgage Note and Mortgage are on forms acceptable to
prudent mortgage lenders in the secondary mortgage
market.
•
§ 6(a)(31). No Mortgage Loan had an LTV or CLTV at
origination in excess of 100% . . . .
•
§ 6(a)(33). No misrepresentation, fraud or similar
occurrence with respect to a Mortgage Loan has taken
6
place on the part of any person, including without
limitation the Mortgagor, any appraiser, any builder or
developer, or any other party involved in the origination
of the Mortgage or in the application of any insurance in
relation to such Mortgage Loan.
•
§ 6(a)(44). The debt-to-income ratio of the related
Mortgagor was not greater than the limits set forth in
the Underwriting Guidelines (including the Seller’s
standard exception practices).
In addition, § 6(a)(53) states that “[t]he Seller has complied
with all applicable anti-money laundering laws and regulations,
including without limitation the USA Patriot Act of 2001 . . .
.” 3
Section 6(a)(1) refers to the MLS.
The MLS is a
comprehensive document containing key information about each
loan in a securitized loan pool, including LTV/CLTV ratios, DTI
ratio, and the value of the underlying property.
III. Holt’s Expert Report
Defendants challenge Holt’s proposed testimony contained in
his amended expert report 4 dated February 25, 2015. 5
BoNY
The specific provision referred to is 31 U.S.C. § 5318(l),
which prescribes minimum procedures for verifying and
maintaining records of a borrower’s identity.
3
Holt produced an initial expert report dated December 23, 2014;
he produced an amended report on February 25, 2015, replacing
the initial report in its entirety. References herein to the
“report” refer to this amended report.
4
The defendants also challenged Holt’s proposed testimony
contained in a document dated January 30, 2015, that has been
re-designated a “supplemental report.” In response to this
motion, BoNY has withdrawn that proposed testimony.
5
7
retained Holt to opine on whether 2,274 mortgage loans
underlying the Certificate “have material defects” in violation
of the six contractual R&Ws that WMC made to the Trust.
Material defects, Holt explains, are those that “increase[] the
risk of loss” or have a “material impact on the risk associated
with the loan.”
Holt’s report purports to describe in detail the criteria
he used, and sources he consulted, in evaluating each loan’s
compliance with WMC’s guidelines and in determining whether the
loan was tainted by fraud or misrepresentation.
He explains
that the reunderwriting looked to key borrower characteristics - income, employment, debt, DTI ratio, credit history, and
assets -- as well as key property characteristics such as
LTV/CLTV ratio, property type, whether the property was insured,
occupancy of the property, and the borrower’s purpose in
obtaining the loan.
These characteristics were then compared to
the requirements set forth in WMC’s Guidelines and, to assess
the accuracy of the information, the reunderwriting consulted a
limited variety of information not contained in the loan file,
including subsequent bankruptcy filings and income data from the
Bureau of Labor Statistics (“BLS”) and commercial salary
databases.
In addition, the reunderwriting looked for missing
key documents or other “red flags” in the loan file, and
considered whether any compensating factors might counterweigh
8
the risks presented by the defects, whether those compensating
factors were recorded in the loan file or not.
According to
Holt, for those loans that did not comply with the WMC
Guidelines, he personally reviewed the loan file to determine
whether there were any compensating factors that would offset
the risk created by the guideline violation, even though, in
these instances, the original underwriter did not identify any.
He explained, that if “I could identify such factors, I did not
consider there to be a Material Defect.”
He also noted “red
flags” in the loan file that should have, in his view, alerted
the original underwriter of the loan to the potential risk of
borrower fraud.
According to Holt, based on this extensive and personal
review, he concluded that 2,274 loans were materially defective.
His conclusions about those loans are set forth in two large
appendices to his report, which he states contain “my analysis”
and “were prepared at my direction or adopted by me based on my
review and analysis of the quality and integrity of the
reunderwriting analysis performed by others.”
In a footnote
following this latter statement, Holt explains that he
supervised a team “of over twenty reunderwriters,” each of whom
had “at least six years of underwriting experience.”
Holt’s report, which is forty-four pages, does not explain
that the detailed and careful process he describes in it,
9
including his personal review of loan files, only applied to 763
of the 2,274 loans for which he purports to find a material
defect in the origination process.
At no point does the report
mention Digital Risk, much less Digital’s Risk standards and
procedures for reunderwriting or the qualifications of Digital
Risk’s underwriting personnel.
Digital Risk is mentioned,
however, in an exhibit to the report and in Appendix 2 to the
report.
The exhibit lists, among the materials Holt considered
in rendering his report, “Digital Risk breach data and other
information relating to the loans listed in Appendix 2.”
Appendix 2 follows Appendix 1.
Appendix 1 contains the conclusions reached by Holt about
763 loans after his team re-underwrote 1,022 loans in accordance
with the procedures outlined in the report. 6
Appendix 1 is a
lengthy spreadsheet that lists each loan, a tally of which, if
any, of the six R&Ws it was found to breach, and a description
of the breaches Holt’s team identified.
Appendix 1 represents
that all of the loans contain one or more breaches and material
defects. 7
BoNY withdrew its claims as to three loans in early 2015, and
Holt later revised Appendix 1 to eliminate several loans whose
defect findings were erroneous. The final tally of materially
defective loans in Holt’s revised Appendix 1 is 751.
6
Appendix 3 contains these findings, but also records findings
for the loans Holt re-underwrote that were not found materially
defective.
7
10
An example of Appendix 1’s findings for a single loan is
below.
(The example has been separated into two lines for ease
of presentation.)
#
Appendix 2, by contrast, contains conclusions reached by
the third-party underwriter, Digital Risk, based on its own
reunderwriting and analysis in 2012 of the remainder of the
2,274 defective loans, that is, 1,511 loans.
In addition to the
six R&Ws on which Holt and his team focused, Digital Risk also
analyzed a number of other loan characteristics for guideline
compliance and fraud.
These included, inter alia, breaches of §
5 of the MLPA, which contains general R&Ws about WMC and its
obligations; the presence of “payment shock,” which refers to
11
the degree to which a borrower's monthly housing payments will
increase with a new loan; and each loan’s compliance with §
6(a)(53), which states that WMC complied with the anti-money
laundering provisions of the Patriot Act.
Appendix 2 is also a
lengthy spreadsheet, but has a different layout and structure
than Appendix 1.
It contains almost 13,000 descriptions of
defects reflecting Digital Risk’s conclusions about each loan’s
compliance with Holt’s six R&Ws and the additional
characteristics Digital Risk examined.
An example of a defect finding from Appendix 2 is below.
(Again, it has been split into two for ease of presentation.)
As noted, in his report, Holt represents that the information
contained in Appendix 2 represents his analysis.
#
12
As has since become apparent, Digital Risk’s reunderwriting
methodology differed from Holt’s.
In addition to Digital Risk’s
review of other R&Ws and potential breaches than the six Holt
examined, Digital Risk used third-party documentation to a
greater extent than Holt’s team and did not search for
compensating factors; it only considered those compensating
factors that were explicitly noted in a loan file.
Accordingly,
Digital Risk’s reunderwriting was less conservative than Holt’s.
It is undisputed that the version of Appendix 2 dated
February 25, 2015, adopted by Holt and attached to his report,
contains a number of errors.
Appendix 2 initially reported over
1,000 breaches of § 6(a)(1) on the ground that loan information
in the MLS did not match the information in the corresponding
loan files.
Digital Risk had, in fact, been referring to an MLS
with “bad data.”
When BoNY sent defendants information about
the MLS used by Digital Risk, it was apparent that the MLS used
13
by Digital Risk had identified the loans as associated with
Washington Mutual Bank, not WMC.
Holt’s understanding is that
Digital Risk was provided this incorrect MLS by its client for
the 2012 reunderwriting, the directing certificateholder here. 8
And, at least one loan in Appendix 2 was identified as
having the following fill-in-the-blank MLS defect:
[T]he Mortgage Loan Schedule failed to disclose the
correct (state and zip code of the subject)
(occupancy) (property type) (maturity date) (LTV)
(CLTV) (payment) (principal loan amount) (loan
purpose) (appraised value) (purchase price) (credit
score) (prepayment terms) (loan type - balloon I ARM
etc.) (rate) (ARM terms). The Mortgage Loan Schedule
indicates a () of () however, a review of the loan
file reveals the actual () is ().
In addition, according to the rebuttal report of
defendants’ expert David E. Abshire, a number of Digital Risk’s
findings regarding missing documents were wrong.
Upon Abshier’s
review of the identical loan files, the documents reported
missing were in fact present in the file.
On June 9, after defendants mentioned these and other
errors at Digital Risk’s 30(b)(6) deposition, BoNY provided
defendants with a revised Appendix 2, withdrawing 1,071 MLS
defect claims and six loans in their entirety because of a “data
At the time of his deposition, Holt did not know whether
Digital Risk was provided the wrong MLS or whether it obtained
the irrelevant MLS itself. He states his new understanding in
his Declaration.
8
14
error in the MLS used by the underwriters in reunderwriting the
mortgage loans.”
Although he does not describe this process in the report,
Holt represented at deposition and in his trial Declaration
(“Declaration”) that he and his team validated the information
in Appendix 2 before “adopting” its findings in toto.
First,
Holt explains that he reviewed the “data points” and read the
“narrative” supplied by Digital Risk for each of the 1,511 loans
analyzed.
The data points and narrative refer to Digital Risk’s
detailed descriptions of defects as provided in Appendix 2 and
any numerical figures in those narratives.
Holt states that
this review coupled with his general knowledge of Digital Risk’s
methods made him “extremely familiar” and “comfortable” with its
conclusions.
Second, Holt’s team performed a “spot check” of Digital
Risk’s analysis and conclusions by independently reunderwriting
256 of the 1,511 loans that Digital Risk previously reunderwrote, without reference to Digital Risk’s conclusions. 9
Holt’s team confined its review of the 256 loans to breaches of
the six R&Ws Holt identified.
Neither Holt nor his team ever
checked the substantive accuracy of Digital Risk’s analysis as
The sample was selected by “a colleague of [Holt’s] at Analytic
Focus,” his firm, but Holt does not know what, if any,
methodology the colleague used to select the sample.
9
15
to the other R&Ws and factors Digital Risk examined.
For
example, Holt’s team did not independently assess whether
Digital Risk’s findings of defects based on “payment shock,”
compliance with § 5 of the MPLP, and Patriot Act violations were
correct.
Accordingly, Holt never checked the accuracy of those
defects either.
Holt explained that his team was “not looking
at what was done prior to” the spot check because Digital Risk’s
was “not a comparable analysis.”
The spot check therefore only
determined whether the spot-checked loans from Appendix 2 were
materially defective according to Holt’s methodology and
criteria.
Holt states that his team followed similar quality control
procedures for the 256 Digital Risk loans as for those that they
underwrote.
For both groups of loans, Holt’s reunderwriters
first reunderwrote the loans from scratch, after which a senior
underwriter and then an assistant director reviewed the accuracy
of the initial reunderwriting. 10
reviewed by Holt himself.
These findings were ultimately
In the case of the 256 Digital Risk
loans, Holt compared his team’s factual findings to Digital
Risk’s factual findings and concluded they “were consistent.”
Holt’s teams followed an additional step for the non-Digital
Risk loans: a “double-blind” review whereby a new underwriter
reunderwrote a loan from scratch to compare the findings to the
initial reunderwriter’s.
10
16
In its review, Holt’s reunderwriting team identified as
non-defective over 50 of the 256 loans that Digital Risk found
defective.
Holt explained that his team “focused on guidelines
compliance only, while [Digital Risk] analyzed breaches of
multiple [R&Ws] with more third-party data at hand.”
Despite
the disagreement in standards, methodology and conclusions, Holt
has adopted Digital Risk’s findings in full.
His trial
Declaration continues to opine that those 50-plus loans are
materially defective.
Holt testified at deposition that he is unfamiliar with the
specific reunderwriting methodology used by Digital Risk.
Before beginning his reunderwriting, he participated in a brief
telephone call with Digital Risk during which he got “a broad
summary of what they typically do” but he does not know the
identities or experience of the individuals who conducted the
analyses, the process they used, the degree of care they took,
or how they actually used information not contained in the loan
file.
IV. Testimony of Kristina Cmorey
In addition to Holt’s report, BoNY seeks to introduce
testimony by Kristina Cmorey, the Federal Rule of Evidence
30(b)(6) designee for Digital Risk.
17
BoNY seeks to introduce
Cmorey’s deposition testimony relating to Digital Risk’s general
reunderwriting practices. 11
Cmorey stated at her deposition that she had no personal
involvement in Digital Risk’s reunderwriting of the loans at
issue here.
And while she answered detailed questions about
Digital Risk’s general practices, she declined to answer similar
or identical questions regarding the reunderwriting process for
the specific loans at issue here, including whether underwriters
were instructed to focus on certain issues; whether they applied
“industry standard guidelines”; whether they used information
outside the loan file or publicly available information, and if
so, how; whether they analyzed the reasonableness of borrowers’
stated incomes; and whether they considered compensating
factors.
Each time such questions were asked, counsel asserted
attorney-client privilege. 12
Accordingly, Cmorey’s deposition
testimony does not specifically address the practices and
procedures used during Digital Risk’s reunderwriting of the
loans at issue here.
BoNY initially indicated that it might call Cmorey as a live
witness, but has withdrawn that proposal.
11
The privilege asserted is that between Digital Risk and
Glenview Master Fund II, L.L.C., the Trust’s directing
certificateholder. Privilege was also asserted as to thousands
of documents relating to the re-underwriting of these loans.
12
18
DISCUSSION
Federal Rule of Evidence 702 grants an expert witness
testimonial latitude unavailable to other witnesses, provided
that (1) “the testimony is based on sufficient facts or data,”
(2) “the testimony is the product of reliable principles and
methods,” and (3) “the expert has reliably applied the
principles and methods to the facts of the case.”
702; Daubert, 509 U.S. at 592.
Fed. R. Evid.
“[T]he proponent of expert
testimony has the burden of establishing by a preponderance of
the evidence that the admissibility requirements of Rule 702 are
satisfied.”
United States v. Williams, 506 F.3d 151, 160 (2d
Cir. 2007).
The district court performs the role of gatekeeper
-- ensuring that the proponent has made the necessary showing
and that the expert's testimony “both rests on a reliable
foundation and is relevant to the task at hand.”
Daubert, 509
U.S. at 597.
In all events, an expert must “assist the trier of fact to
understand the evidence or to determine a fact in issue.”
R. Evid. 702.
Fed.
“This condition goes primarily to relevance,”
because “[e]xpert testimony which does not relate to any issue
in the case is not relevant and, ergo, non-helpful.”
Daubert,
509 U.S. at 591 (citation omitted); see id. at 587 (quoting Fed.
R. Evid. 402) (“Relevant evidence is defined as that which has
‘any tendency to make the existence of any fact that is of
19
consequence to the determination of the action more probably or
less probable than it would be without the evidence.’”).
Testimony that “will usurp either the role of the trial judge in
instructing the jury as to the applicable law or the role of the
jury in applying that law to the facts before it,” however, must
be excluded.
United States v. Lumpkin, 192 F.3d 280, 289 (2d
Cir. 1999) (citation omitted).
“The role of an expert is not to
displace the [trier of fact] but rather to provide the
groundwork to enable the [trier of fact] to make its own
informed determination.”
In re Methyl Tertiary Butyl Ether
(MTBE) Products Liab. Litig., 725 F.3d 65, 114 (2d Cir. 2013)
(citation omitted), cert. denied sub nom. Exxon Mobil Corp. v.
City of New York, N.Y., 134 S. Ct. 1877 (2014).
In order to be admissible, a relevant expert opinion
“requires some explanation as to how the expert came to his
conclusion and what methodologies or evidence substantiate that
conclusion.”
Riegel v. Medtronic, Inc., 451 F.3d 104, 127 (2d
Cir. 2006), aff'd on other grounds, 552 U.S. 312 (2008).
An
explanation is necessary because “when an expert opinion is
based on data, a methodology, or studies that are simply
inadequate to support the conclusions reached, Daubert and Rule
702 mandate the exclusion of that unreliable opinion testimony.”
Ruggiero v. Warner–Lambert Co., 424 F.3d 249, 255 (2d Cir. 2005)
(citation omitted).
20
Experts may rely upon otherwise inadmissible facts or data
in reaching conclusions “[i]f experts in the particular field
would reasonably rely on those kinds of facts or data in forming
an opinion on the subject.”
Fed. R. Evid. 703.
Where
inadmissible evidence is relied upon by an expert, however, that
expert must still “form his own opinions by applying his
extensive experience and a reliable methodology to the
inadmissible materials.”
United States v. Mejia, 545 F.3d 179,
197 (2d Cir. 2008) (citation omitted) (emphasis added).
“[A]
party cannot call an expert simply as a conduit for introducing
hearsay under the guise that the testifying expert used the
hearsay as the basis of his testimony.”
Marvel Characters, Inc.
v. Kirby, 726 F.3d 119, 136 (2d Cir. 2013) (citation omitted),
cert. dismissed, 135 S. Ct. 42 (2014).
Defendants have moved to exclude Holt’s testimony to the
extent he purports to incorporate the results of Digital Risk’s
analysis of 1,511 loans.
They argue that Holt’s testimony in
this regard, and the related testimony of Cmorey, should be
excluded for essentially two reasons: that Holt has adopted
conclusions about the loans in Appendix 2 that do not represent
his own opinion and that he lacks the knowledge to offer
opinions regarding the loans underwritten by Digital Risk.
In opposition to this motion, BoNY does not contend that
Holt is entitled to rely on the analysis or conclusions reached
21
by Digital Risk regarding an underwriting defect.
It asserts,
however, that Holt was entitled to rely on the “factual
summaries” in Appendix 2.
These factual findings contained in
the Digital Risk narratives, BoNY contends, allowed Holt to draw
his own conclusions about the extent to which the loan conformed
to WMC’s Guidelines or contained some other defect.
Holt’s trial Declaration, which was submitted with BoNY’s
opposition to this motion, contains a description of the Digital
Risk work that did not appear in his expert report.
Holt
describes Digital Risk’s reputation and success in providing
reunderwriting services.
Holt acknowledges that aspects of its
reunderwriting process differ from the processes employed in
this case by Holt and his team.
Holt acknowledges that Digital
Risk reunderwrote the loans with the benefit of information it
acquired from third-parties and did not do an independent search
for undocumented compensating factors.
Holt asserts that both
approaches are standard and that his own team’s work was highly
conservative and will only serve to benefit the defendants.
Holt explains that he is only relying on Appendix 2 as a
compilation of “factual summaries” prepared by Digital Risk and
that he “dr[ew] his own breach conclusions” on the basis of
those facts.
With the exception of the 256 loans that Holt’s team
reunderwrote, BoNY has not shown that it is entitled to offer
22
Holt’s opinions regarding the loans reunderwritten by Digital
Risk.
BoNY has not carried its burden of showing that the
Digital Risk fact gathering is sufficiently reliable to permit a
reunderwriting expert to use it in rendering opinions about
material defects.
Experts are, of course, permitted to rely upon facts and
data prepared or obtained by others and that would not be
otherwise admissible if “experts in the particular field would
reasonably rely on those kinds of facts or data in forming an
opinion on the subject.”
Fed. R. Evid. 703.
BoNY does not
suggest, however, that it is either reasonable or customary for
an expert in the field of mortgage loan reunderwriting to rely
upon data gathered by reunderwriters whose methodology the
expert did not design, whom he did not directly or indirectly
supervise, and over whom he did not impose quality control.
Holt’s report emphasized the experience in mortgage underwriting
that each member of his own team possessed, and the work he
personally performed by reviewing loan files and other documents
to insure that the fact finding and judgment employed in
connection with the 763 loans identified in Appendix 1 met his
own high standards.
His trial Declaration elaborates on his
extensive use of quality control to ensure reliability.
Holt
cannot make such representations regarding the Digital Risk
workers or their work.
He does not know the experience of any
23
of Digital Risk reunderwriters who worked on this project, he is
unaware of the instructions they were given or the extent to
which their work was subject to quality control.
As he admitted
in his deposition, his familiarity with the Digital Risk work on
this project was confined to a single brief telephone
conversation that was a “meet-and-greet” during which he learned
no details about Digital Risk’s methodology. 13
He maintains,
however, that Digital Risk’s practices are “industry standard.”
Nor has BoNY shown that the Digital Risk data is
sufficiently reliable to permit an expert who did not
participate in its creation to rely upon it.
Of course, careful
and thorough inquiry into the process or procedures used to
obtain the data upon which the expert relies may suffice to
establish that the data was gathered through “a reliable
methodology.”
Mejia, 545 F.3d at 197 (citation omitted).
But,
BoNY or its directing certificateholder blocked all attempts to
obtain information about the individual Digital Risk
In a footnote to his Declaration, Holt attempts to address
this gap in his understanding by referring to a recent visit
that he made to Digital Risk in connection with another matter.
He asserts that that meeting confirmed his understanding that
Digital Risk applies industry standard methodology and
procedures “including with respect to their work on this case”.
It is unclear what, if anything, Holt recently learned about the
Digital Risk work on the 1,511 loans, but as of the time he
rendered his expert report and submitted to a deposition on that
report he had no knowledge of the qualifications of the
personnel or procedures actually employed by Digital Risk on the
project for the instant case.
13
24
underwriters, the specific reunderwriting methodology that
Digital Risk used to gather the facts that appear in Appendix 2,
the circumstances under which that reunderwriting took place,
and the sources consulted by reunderwriters during that
reunderwriting.
BoNY has offered the Rule 30(b)(6) deposition testimony of
Cmorey in an attempt to show that Digital Risk’s methodology and
practices are reliable in general.
This, however, does not show
what is required to render sufficiently reliable the facts and
data in Appendix 2 -- that the Digital Risk methodology and
practices were faithfully and consistently applied here, for the
purposes of collecting the specific data upon which Holt has
relied.
BoNY principally rests on the spot checking done by Holt’s
team of 256 loans to support Holt’s reliance on the Digital Risk
data gathering for the 1,511 loans.
But, BoNY’s showing here is
inadequate as well.
BoNY has not shown that the sample was drawn in a way that
permits an extrapolation of its results to the entire data set.
Holt did not know how the sample was chosen and BoNY has offered
no other evidence in that regard.
25
Accordingly, there can be no
extrapolation of accuracy from the examination of the 256 loans
to the remaining 1,255. 14
It bears noting that Holt’s own team concluded that roughly
one-fifth of the Digital Risk conclusions were erroneous.
Applying Holt’s own reunderwriting standards, his team concluded
that over 50 of the 256 loans were not materially defective.
Holt has ignored his team’s analysis, and chosen instead to
apply a different standard for the Digital Risk loans.
Any
other approach would have required Holt’s team to reunderwrite
all of the 1,511 loans, but this tension underscores how
divorced the two underwriting projects were from each other.
Because BoNY has failed to show that Holt has an adequate
basis to rely on the fact-finding done by Digital Risk, the
defendants’ motion to exclude is granted in part.
Holt’s
opinions regarding the loans reunderwritten solely by Digital
BoNY also argues that the findings of defendants’ underwriting
expert, David Abshire, confirm that Digital Risk’s
reunderwriting was “more accurate” than the reunderwriting
performed by Holt’s team. BoNY makes this curious observation
based on the fact that Abshire contests 82.1% of the loans Holt
reunderwrote as compared to only 71% of the loans Digital Risk
reunderwrote. Tellingly, Holt himself never suggests that this
is significant. BoNY’s argument reflects a fundamental fallacy.
The comparison of “accuracy rates” is not meaningful because
there has been no showing that the Digital Risk loan population
and Holt’s loan population are comparable, such that a
comparison between rates of agreement with Abshire could signify
anything about the relative accuracy of Digital Risk’s and
Holt’s work product. In any event, BoNY cannot rely upon
conclusions of the defendants’ expert to patch the holes in its
own expert’s work.
14
26
Risk are excluded.
Pursuant to Rule 703 and the principles
described above, Holt’s conclusions about the loans described in
Appendix 2 are inadmissible, except with respect to the 256
loans his team re-underwrote and that he reviewed.
Only these
can be said to rest upon “data [and] a methodology . . .
[]adequate to support the conclusions reached.”
Ruggiero, 424
F.3d at 249. 15
Defendants have raised a number of other arguments
regarding the nature of the review Holt performed.
These
arguments go to the weight, not the admissibility, of Holt’s
testimony and are properly raised on cross-examination.
See,
e.g., Zerega Ave. Realty Corp. v. Hornbeck Offshore Transp.,
The Second Circuit cases BoNY has cited in support of its
position are inapposite. The circuit decisions arise in the
context of environmental damage and either involve experts who
used abstract theories on groundwater flow to explain
contamination data collected by a CERCLA defendant and a
government agency, Gussack Realty Co. v. Xerox Corp., 224 F.3d
85, 94 (2d Cir. 2000), or who opined about the effects of
hazardous substances in municipalities using “methodology and
data typically used and accepted in these sorts of cases.” B.F.
Goodrich v. Betkoski, 99 F.3d 505, 525 (2d Cir. 1996). The
other cases cited involve third parties whom the court found
“gathered data and provided research under [the expert’s]
supervision,” Bd. of Trustees of AFTRA Ret. Fund v. JPMorgan
Chase Bank, N.A., No. 09cv3020 (SAS), 2011 WL 6288415, at *10
(S.D.N.Y. Dec. 15, 2011), or obtained “reliable results from
tests . . . observed by representatives of numerous interested
parties.” Cedar Petrochemicals, Inc. v. Dongbu Hannong Chem.
Co., 769 F. Supp. 2d 269, 285 (S.D.N.Y. 2011). These
circumstances are not present in this case.
15
27
LLC, 571 F.3d 206, 214 (2d Cir. 2009); Amorgianos v. Nat'l R.R.
Passenger Corp., 303 F.3d 256, 267 (2d Cir. 2002).
CONCLUSION
Defendants’ July 31, 2015 motion to limit the testimony of
Ira Holt is granted in part.
loans is stricken.
Holt’s testimony regarding 1,255
The parties shall confer regarding the
effect of this ruling on the defendants’ motion in limine to
exclude the testimony of Kristina Cmorey.
In addition, any
opinions by defendants’ expert David Abshire in connection with
the opinions stricken here are excluded as irrelevant. 16
SO ORDERED:
Dated:
New York, New York
August 17, 2015
__________________________________
DENISE COTE
United States District Judge
The defendants shall provide a revised trial declaration of
Abshire to BoNY and the Court within seven days that accounts
for the elimination of the 1,255 loans.
16
28
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