CMFG Life Insurance Company et al v. Credit Suisse Securities (USA) LLC
OPINION and ORDER granting in part and denying in part 94 Motion for Partial Summary Judgment. Signed by District Judge William M. Conley on 10/12/2017. (kwf)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN
CMFG LIFE INSURANCE COMPANY,
MEMBERS LIFE INSURANCE COMPANY,
OPINION and ORDER
CREDIT SUISSE SECURITIES (USA) LLC,
Having lost millions of dollars in transactions related to residential mortgage
backed securities (“RMBS”), the plaintiffs here seek to rescind purchases of twelve
separate RMBS certificates from defendant Credit Suisse Securities (USA) LLC (“Credit
Suisse”).1 Before the court is defendant’s motion for partial summary judgment, seeking
judgment in its favor as to: (1) an RMBS certificate that Credit Suisse sold to plaintiffs
but did not issue or underwrite; (2) any rescission claim based on statements that
aggregated loan data is “actually false”; and (3) the appropriate method for calculating
prejudgment interest. For the reasons explained below, the court will grant in part and
deny in part the motion.2
The court previously granted defendant’s motion to dismiss plaintiff’s rescission claim as to one
other RMBS certificate. (Dkt. #79.)
The cover page of defendant’s motion and of its supporting briefs each include the phrase “oral
argument requested,” but in light of the parties’ briefs and supporting submissions, the court finds
oral argument unnecessary.
Plaintiffs CMFG Life Insurance Company, CUMIS Insurance Society and
MEMBERS Life Insurance Company (collectively, “CUNA Mutual”), are all insurance
companies organized under Iowa law. Each maintain their headquarters in Madison,
Wisconsin. Defendant Credit Suisse is an SEC-registered broker-dealer. Defendant and
its sole member, Credit Suisse (USA) Inc., are Delaware companies with their principal
place of business in New York.4
CUNA Mutual purchased all twelve RMBS certificates at issue in this lawsuit from
Generally speaking, each consisted of securitized residential mortgage
loans packaged into certificates that investors can purchase.5
CUNA Mutual purchased the twelve RMBS certificates from Credit Suisse in
seven separate RMBS offerings.6 Only one of these certificates, BSMF 2006-SL1, was not
The following facts are material and undisputed, unless otherwise noted.
Because the parties are completely diverse and the amount in controversy exceeds $75,000, this
court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332(a).
The RMBS market is obviously complicated, and since its collapse in 2007, the market has been
the subject of scholarly articles and books, as well as myriad exposés and news articles, to say
nothing of detailed explanations in various legal decisions. Accordingly, the following is a brief,
general overview of the mechanics surrounding the RMBS transactions at issue this lawsuit.
Specifically, the certificates at issue are as follows: BSMF 2006-SL1 (CUSIP 07400WAB6),
CSFB 2005-FIX1 (CUSIP 22541S5V6), CSFB 2005- FIX1 (CUSIP 22541S5W4), CSFB 2005FIX1 (CUSIP 22541S6C7), CSFB 2005-8 (CUSIP 2254583K2), CSFB 2005-8 (CUSIP
2254583L0), HEMT 2005-4 (CUSIP 2254584N5), CSFB 2005-9 (CUSIP 2254586R4), CSFB
2005-9 (CUSIP 2254586X1), CSFB 2005-3 (CUSIP 225458LU0), HEMT 2006-3 (CUSIP
436944AG7) and HEMT 2006-3 (CUSIP 436944AJ1).
issued or underwritten by Credit Suisse.7
All of the certificates that CUNA Mutual
purchased from Credit Suisse were from mezzanine or other subordinated tranches,
which were essentially stratified classes of RMBS certificates that are differentiated by
priority of principal and interest payments from the underlying loan pools. Importantly,
subordinated tranches absorbed losses from defaulting loans before more senior tranches.
The offering documents for the RMBS certificates at issue included prospectuses,
term sheets, free writing prospectuses, preliminary prospectus supplements and final
prospectus supplements. Again generally speaking, prospectus supplements described the
characteristics of the tranches in the securitization, including the designated payments to
be distributed from the trust or issuing entity that owns the pool of mortgages. Still, the
parties agree for purposes of summary judgment that prospective investors in RMBS
certificates like CUNA Mutual were generally unable to perform their own due diligence
with respect to the quality of the securitized loans, unlike the issuers and underwriters.
Having said that, the prospectus supplements did include aggregated loan data
presented in “collateral stratification tables,” which classified loans in particular statistical
ranges or by characteristics. This aggregated data was derived from “loan tapes,” also
referred to as “Mortgage Loan Schedules” (“MLSs”), that contained detailed loan-level
data for those loans securitized into the RMBS. Among characteristics generally used to
evaluate credit risk of the collateral loans described in MLSs were FICO score, loan-tovalue (“LTV”) and combined loan-to-value (“CLTV”) ratio, debt-to-income (“DTI”)
ratio, owner-occupancy status and loan documentation type.
Bear Stearns was the issuer and underwriter of BSMF 2006-SL1 (for purposes of this opinion,
also referred to as “the Bear Stearns certificate”).
supplements also disclosed “Pooling and Servicing Agreements” (“PSAs”). In the PSAs,
the sponsors of a securitization made representations and warranties regarding the loans
underlying that securitization.
The PSAs supporting each of the twelve RMBS
certificates at issue in this case included the specific representation and warranty that the
information in the accompanying MLS was “complete, true and correct in all material
respects” or was “true and correct in all material respects.” Other than for the BSMF
2006-SL1 certificate that Credit Suisse sold but did not issue or underwrite, these
representations and warranties were made by “a Credit Suisse affiliate” as to each
certificate at issue.8
Federal Rule of Civil Procedure 56(c) directs that the court grant summary
judgment “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.” In ruling on a motion for
summary judgment, the court views all facts and draws all inferences in the light most
favorable to the non-moving party. Anderson v. Liberty Lobby, 477 U.S. 242, 255 (1986).
Summary judgment is appropriate only “[w]here the record taken as a whole could not
lead a rational trier of fact to find for the non-moving party[.]” Sarver v. Experian Info.
Sols., 390 F.3d 969, 970 (7th Cir. 2004) (quoting Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 586-87 (1986)). Applying this standard, the court addresses
It does not appear that Credit Suisse disputes that DLJMC was a Credit Suisse affiliate, though
it is not entirely clear. (Def.’s Resp. to Pls.’ Add’l PFOFs (dkt. #141) ¶ 76.) Regardless, the court
considers this undisputed for purposes of summary judgment.
each of the three separate grounds defendant advances for entry of partial summary
The BSMF 2006-SL1 Certificate
With respect to BSMF 2006-SL1 certificate issued and underwritten by Bear
Stearns, rather than Credit Suisse, plaintiffs assert a claim for rescission based on mutual
mistake. At least for summary judgment purposes, the parties focus on a single element
on which plaintiffs must prevail to rescind this transaction: could a rational trier of fact
find that it would be more equitable to allocate CUNA Mutual’s losses as to BSMF
2006-SL1 to Credit Suisse? (Def.’s Opening Br. (dkt. #95) at 1; Pls.’ Resp. Br. (dkt.
#133) at 1.)
Defendant Credit Suisse argues that it cannot be found culpable for these losses
because it only acted as a “market maker” for that certificate, purchasing it on the
secondary market on April 24, 2007, before selling it to plaintiffs that same day “in
exchange for a small spread between the buy and sell prices as its payment for providing
that service.” (Def.’s Opening Br. (dkt. #95) at 3.) In this role, defendant contends, it
had no responsibility with respect to acquiring any of the underlying loans, securitizing
them or making any representations in the offering documents.
contends that plaintiffs were aware that it had no other involvement in the Bear Stearns
certificate. In particular, defendant points to deposition testimony from Mark Prusha,
the sole individual responsible for CUNA Mutual’s RMBS purchases during the time
period relevant to this lawsuit.
As to BSMF 2006-SL1, Prusha admitted having no
“expectation . . . that Credit Suisse was performing any due diligence on that certificate
given that it neither issued nor underwrote that deal.”
(Dep. of Mark Prusha (dkt.
#102) at 112:11-16.) Prusha also testified at his deposition that he “understood that
Credit Suisse was not making any representation one way or the other about the nature
or the quality of the collateral underlying” the certificate, at least not as it would have in
the capacity as an “original underwriter or co-manager.” (Id. at 123:18-124:2.)
Even more to the point for purpose of defendant’s pending motion, Prusha
acknowledged that his “assumption would be that [Credit Suisse] would have the same
information that [he] would have” with respect to the Bear Stearns certificate, although
plaintiffs would emphasize that Prusha went on to acknowledge this assumption was
based only on his “speculation.” (Id. at 129:12-22.) As for the information available to
Prusha at the time of purchase, he had analyzed BSMF 2006-SL1 on the same morning
he purchased it from Credit Suisse, and plaintiffs do not dispute that because Bear
Stearns was one of the banks with which Prusha did the most business, he was especially
familiar with their due diligence practices.
Finally, defendant emphasizes plaintiffs’
concession in response to an interrogatory that “[b]ecause Credit Suisse did not originate
the underlying loans or sponsor, issue, or underwrite the BSMF 2006-SL1 securitization,
based on the evidence adduced to date, CUNA Mutual is unable to identify any Credit
Suisse misstatements or omissions related to the BSMF 2006-SL1 Certificate.” (Decl. of
Hector J. Valdes Ex. 48 (dkt. #97-48) at 2 n.1.)
In light of all of this evidence, plaintiffs primarily responds by pointing out the
broader picture, in that Credit Suisse was one of the most significant participants in the
RMBS market during the relevant period, having touted the quality of its due diligence
practices and its unique perspective on the reliability of the loan originators. Because of
its superior knowledge, plaintiffs essentially argue that a rational trier of fact could find
Credit Suisse not only overlooked the flaws in its own diligence process, but ignored
growing evidence of material flaws in the RMBS market generally and Bear Sterns
certificates in particular.
As an initial matter, plaintiff focuses on evidence of culpability, when the basis for
rescission is mutual mistake, meaning neither party is culpable, and the question for the
trier of fact is whether it is equitable to leave CUNA Mutual holding a now worthless
certificate or transfer that loss to defendant Credit Suisse. Plaintiffs’ attempt to widen
the perspective of the relevant inquiry regarding the Bear Sterns certificate, however, runs
into at least two other obstacles.
First, plaintiffs attempt to fault defendant for
“provid[ing] no support for its implicit assertion that the facts relevant to weighing the
equities in cases of mutual mistake are limited to facts specific to the transaction at
issue,” claiming further that the Restatement (Third) of Restitution and Unjust
Enrichment does not “impose such a limitation.” (Pls.’ Resp. Br. (dkt. #133) at 13.)
But in reply, defendant rightly quotes the Restatement that when, as here, the defendant
cannot be restored to the status quo ante, rescission is available to a plaintiff only when
“the fault of the defendant or the assignment of risks in the underlying transaction makes it
equitable that the defendant bear any uncompensated loss.”
Restatement (Third) of
Restitution and Unjust Enrichment § 54(3)(b) (2011) (emphasis added). As defendant
points out, plaintiffs offer no principled stopping point for their assertion that such a
broad universe of facts should be considered relevant for determining whether rescission
of a particular transaction is appropriate.
Second, in support of several of the broader facts surrounding Credit Suisse’s
RMBS-related activities, plaintiffs cite only a settlement agreement between Credit
Suisse and the United States Department of Justice (“DOJ”). Defendant argues that the
DOJ statement of facts is likely inadmissible under Federal Rule of Evidence 408 as
constituting statements made with regard to settlement negotiations. See Mass. Mut. Life
Ins. Co. v. DLJ Mortg. Capital, Inc., Civil Action No. 11-30047-MGM, Civil Action No.
11-30048-MGM, 2017 WL 1709594, at *2 (D. Mass. May 2, 2017) (holding that the
settlement agreement between Credit Suisse and the DOJ, as well as the statement of
facts, were inadmissible under Rule 408).
Regardless, the undisputed facts suggest that Credit Suisse’s employees either
knew or should have known that at least five mortgage originators whose loans secured
the BSMF 2006-SL1 certificate -- New Century, Resource Bank, Fairmont Funding,
Alliance Mortgage and Metrocities Mortgage (Pls.’ Add’l PFOFs (dkt. #130) ¶¶ 42-48) -had a tendency to originate poor quality loans, or at least plaintiffs argue that a trier of
fact could reasonably infer. In reply, defendant argues such an inference is too much
both because: (a) Credit Suisse had only purchased and sold the certificate the same day,
without being asked to examine or warrant the bona fides of the certificate, much less the
underlying securities loans; and (b) even if it had some reason to scrutinize the
originators who contributed loans to the Bear Stearns certificate before selling it to
plaintiffs, none of those five originators even appeared in the prospectus supplement
because they supplied less than one half of one percent of the loans in the pool. (Def.’s
Reply Br. (dkt. #135) at 5-6.)
Admittedly, defendant advances any number of reasons why it should be held no
more responsible than plaintiffs, having simply brokered the sale on a single day. At the
end of the day, these arguments may well prove dispositive. Indeed, the court is hardpressed to see shy a broker should be held responsible for a mutual mistake with a
buyer.9 Still, such a finding is best made on a complete trial record, especially in light of
plaintiffs having advanced a group of acts from which the court, as the trier of fact, might
rationally infer that the defendant deliberately looked the other way at growing evidence
of the risks of RMBS certificates, particularly when secured by subordinate traunches,
but chose to buy and sell it anyway for the transaction fees. If so, the trier of fact might
find that it is more equitable for the defendant to be left “holding the bag.” As such, the
court will deny defendant’s motion for summary judgment on this claim.
Aggregated Quantitative Information
Next, defendant moves for partial “summary judgment . . . as to all of CUNA
Mutual’s claims to the extent they are based on any of the aggregated collateral
information presented in the Offering Documents.” (Def.’s Opening Br. (dkt. #95) at
15.) Defendant argues that the efforts of plaintiffs’ experts -- to identify how many loans
out of a random sample from the loan pool had incorrect data with respect to a
characteristic related to credit risk and then extrapolate that percentage to the pool as a
If anything, this claim for mutual mistake may be more appropriately applied where Credit
Suisse is the seller, assuming plaintiffs’ other theories of liability are not successful.
whole -- are insufficient to opine reliably on actual, material discrepancies in the stratified
collateral tables in the prospectus supplements that presented only aggregate loan data.
By way of example, defendant asserts that without any further analysis, plaintiffs cannot
show that any value in the tables was false: “if certain of the alleged errors overstated a
particular characteristic and others understated the characteristic, the aggregated data
could be correct notwithstanding the alleged existence of errors at the individual loan
level.” (Id. at 20.)
In response, plaintiffs stress that their expert found that of 70 sample loans from
one certificate, at least three of the thirty-one designated as full documentation loans
should have been classified as having a riskier documentation type, and at least three
loans out of five that had an incorrect FICO score should have been included in a lower
range of scores.
Plaintiffs further assert that the trier of fact can draw reasonable
inferences from the discrepancies identified by their experts in the sampled pool loans,
arguing that defendant’s mere speculation that at least some of the adverse errors would
be offset by fortuitous ones should not entitle defendant to summary judgment.
At the same time, plaintiffs acknowledge that the defendants in a case cited by
Credit Suisse, National Credit Union Administration Board v. UBS Securities, LLC, Case No.
12-2591-JWL, Case No. 12-2648-JWL, 2017 WL 235013, at *6 (D. Kan. Jan. 19,
2017), were granted summary judgment “under similar circumstances,” involving
“allegations that collateral stratification tables were false or misleading.” (Pls.’ Opp’n Br.
(dkt. #133) at 20.) Plaintiffs argue here, however, that the plaintiff in National Credit
Union presented only a truncated rebuttal in its brief, and the district court relied on an
incorrect assumption that the plaintiff could not demonstrate an error in the
stratification tables by identifying individual loan discrepancies, as plaintiff claims to do
here with respect to the loan documentation categories and FICO tables.
As one last, practical argument in opposition, plaintiffs submit that granting
summary judgment would have little impact on the presentation of the evidence at trial,
as plaintiffs view inaccuracies in the collateral stratification tables as only one of “a
number of false statements or misleading omissions,” and so they “would still present
evidence of widespread MLS discrepancies to establish, among other things, that it was
false or misleading for Credit Suisse to suggest that the securitization MLSs were
‘complete, true, and correct’ and that the collateral tables and credit ratings for the
securitizations were based on accurate MLSs.” (Id. at 21.)
In reply, defendant again emphasizes that the burden of establishing falsity
belongs to plaintiffs, and it further argues that the few loans that plaintiffs demonstrate
should have been categorized differently are not enough to amount to a material
misstatement. On this much, the court tends to agree. On balance, however, plaintiffs
have offered some, albeit limited, evidence that aggregated values presented in the tables
were inaccurate, and the court is unprepared to conclude on this record that defendant is
entitled to judgment as a matter of law as to whether there were material
misrepresentations in aggregated quantitative information.10
While the court will,
therefore, deny partial summary judgment on this issue, the parties should be prepared to
The court may well have been more sympathetic had defendant at least offered examples of
actual under or overstated characteristics that may have offset some of the over valuation detected
by plaintiff’s experts.
make a proffer and counter-proffer as to the statistical reliability of plaintiff’s expert’s
extrapolations for the larger loan data, both as to sampling confidence levels and relative
size of errors to the value of the aggregated data as a whole.
Finally, defendant moves to preclude plaintiffs from offering two of the three
methods that their damages expert used to calculate prejudgment interest. Specifically,
Dr. Finnerty, plaintiffs’ damages expert, used three different methods to calculate
prejudgment interest, per the instruction of counsel. (Def.’s Reply PFOF (dkt. #140) ¶
Under the first, he calculated “prejudgment interest running on the total
consideration paid by CUNA Mutual, not reduced for any principal or interest
payments”; the second, he “reduced [that amount] only by principal payments received
(and sale proceeds, where applicable)”; and the third, he further “reduced [that amount]
by principal payments received and interest payments received (and sale proceeds, where
(Id. at ¶¶ 105-07.)
Defendant argues that only the third method, the
“interest on the balance” method, would not overcompensate plaintiffs by awarding them
interest on money that had already been returned to them.
As a general matter, plaintiffs do not dispute that rescission is meant to restore a
party to a position that it would have been in had the transaction not occurred. Indeed,
besides citing courts that have applied each of the three methods in cases applying state
blue sky laws and Section 12 of the Securities Act of 1933, essentially plaintiffs argue
that defendant’s motion is at worst premature, since the issue of prejudgment interest
“may be influenced or mooted entirely by the presentation of evidence at trial.” (Pls.’
Opp’n Br. (dkt. #133) at 22-23.) Ironically, with respect to this issue, defendant is
placed in the position of having to argue that the same court that granted summary
judgment to the defendants on the plaintiff’s claim regarding falsities in the stratification
tables wrongly denied their motion for summary judgment regarding the proper
calculation of prejudgment interest as premature. Nat’l Credit Union Admin. Bd. v. UBS
Sec., LLC, Case No. 12-2591-JWL, Case No. 12-2648-JWL, 2016 WL 7496106, at *1
(D. Kan. Dec. 30, 2016).11
Here, since “[t]he allowance of interest in equity cases is within the discretion of
the trial court,” Hauter v. Budlow, 256 Wis. 561, 572, 42 N.W.2d 261 (Wis. 1950), the
court agrees with defendant that plaintiffs have offered no persuasive reason to defer
ruling on this issue, let alone award prejudgment interest using a method that does not
account for payments already received.
Accordingly, the court will grant summary
judgment to defendant on this issue, finding that the appropriate method for calculating
prejudgment interest, if awarded at all, is Dr. Finnerty’s third method -- calculating
interest on the balance method.
IT IS ORDERED THAT defendant Credit Suisse Securities (USA) LLC’s motion
for partial summary judgment (dkt. #94) is GRANTED IN PART AND DENIED IN
PART, consistent with this opinion.
Entered this 12th day of October, 2017.
BY THE COURT:
WILLIAM M. CONLEY
Although less relevant, defendant also cites several cases in which courts decided issues
regarding the calculation of prejudgment interest under state blue sky laws and Section 12 of the
Securities Act at summary judgment.
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