Table of Contents
I. Introduction...1116
II. Background...1117
A. Securitization...1117
B. Historical Background...1117
C. The Client Contract and the Client Guide...1118
1. Section 113: General Rules of Interpretation...1119
2. Section A200: Knowledge, Reliance and Waiver...1120
3. Section A202: Representations and Warranties...1120
4. Sections A208 and A209: Events of Default and Non-Exclusive, Cumulative Remedies...1120
5. Section A210: Repurchase...1121
6. Section A212: Indemnification...1121
D. Bankruptcy...1122
E. Procedural History...1126
III. Discussion...1127
A. Standard of Review...1127
B. Summary Judgment Motions...1127
C. Principles of the Law of Contractual Indemnity...1128
D. Principles of Contract Interpretation...1130
E. Cross Motions for Summary Judgment...1132
1. Misconduct Defense against Indemnification...1132
2. Whether Plaintiffs Can Recover Losses and Liabilities Incurred from "Expired" Loans...1137
3. Recovery for Claims Released in Bankruptcy...1141
4. Sampling...1145
F. Plaintiffs' Motions for Summary Judgment...1151
1. The Scope of Plaintiffs' Sole Discretion under the Client Guide...1151
a. The Scope of Plaintiffs' Sole Discretion to Determine Breaches...1151b. The Scope of Plaintiffs' Sole Discretion to Make All Settlement Decisions...1154
2. The Scope of Plaintiffs' Potential Recovery in Indemnity...1157
a. Recovery in Indemnity for RFC's Losses and Liabilities (the Allowed Claims), Not Just Actual Losses Incurred...1158
b. Recovery for All Losses...1162
3. Causation...1162
a. Applicable Legal Standard...1163
b. Genuine Issues of Material Fact Preclude a Finding of Causation as a Matter of Law...1166
c. Causation Defenses...1169
4. Affirmative Defenses...1172
a. Estoppel...1172
i. HLC...1172
ii. Standard Pacific and CTX...1173
iii. Analysis...1174
b. Waiver Defense Based on "Assetwise"...1175
c. Knowledge- and Reliance-Based Defenses...1178
i. Breach of Contract Claim...1180
ii. Indemnity Claim...1180
d. Good Faith and Fair Dealing...1184
G. Defendants' Motions for Summary Judgment...1186
1. Statute of Limitations for Loans Sold Before May 14, 2006...1186
2. Whether RFC's Expert Opinions Foreclose Relief...1191
3. Plaintiffs' Damages Models...1191
a. Breaching Loss Approach...1192
i. Whether RFC May Recover Repurchase Damages under Section A210...1192
ii. Whether RFC May Recover Repurchase Damages under the Indemnification Provisions in Section A212...1195
iii. Analysis...1197
b. Allocated Breaching Loss Approach...1198
i. Whether the Allocated Breaching Loss Approach Offers Non-Speculative Bases to Allocate the Trust Settlement...1199
(1) Allocation under UnitedHealth ...1199
(2) Defendants' Criticisms of the Methodology of the Allocated Breaching Loss Approach...1200
ii. Analysis...1203
c. Allocated Loss Approach...1204
i. Whether the Allocated Loss Approach Offers Non-Speculative Bases to Allocate the Settlements...1204
ii. Analysis...1205
IV. Conclusion...1205
I. INTRODUCTION
Before the Court are the parties' cross motions for summary judgment on common issues in the first-wave actions.
II. BACKGROUND
A. Securitization
The majority of U.S. mortgages are financed through the securitization process. Adam J. Levitin & Susan M. Wachter, Explaining the Housing Bubble , 100 GEO. L.J. 1177, 1182, 1187 (2012). "Securitization" involves pooling large numbers of housing loans, then selling them to a trust. Baker v. CitiMortgage, Inc. , No. 17-cv-2271 (SRN/KMM),
B. Historical Background
In the early- to mid-2000s, a rise in home prices in the U.S. was "driven by increased demand, low interest rates, and easy credit access."
A second mortgage boom ensued after 2003, but "[b]ecause the prime borrowing pool was exhausted, it was necessary to lower underwriting standards and look more to marginal borrowers to support origination volume levels." Id. During this time period, "[l]enders provided mortgage loans to many high-risk borrowers with questionable ability to repay, fueled in large part by the opportunity to package and sell those mortgages into the growing market for [residential] mortgage-backed securities ("[R]MBSs")." In re Barclays Bank,
In the mid-2000s, the "explosion in the market for [RMBS]" resulted in a securitization market frenzy. Fed. Hous. Fin. Agency for Fed. Nat'l Mortgage Ass'n v. Nomura Holding Am., Inc. ,
[l]ate 2006 and 2007 saw a dramatic rise in mortgage loan defaults, causing the value of the related securities, whose income depended on borrower payments, to deteriorate. Banks and other investors began to experience substantial losses; and many monoline insurers could not accommodate such loss, given its quick pace and dramatic size.
In re Barclays Bank,
Plaintiffs
Second, in its middleman role, RFC then sold the pooled loans into residential mortgage-backed securitization ("RMBS") trusts ("the Trusts"). (See
While both parts of RFC's business model are factually relevant in this consolidated action, the legal focus of this litigation concerns Defendants' potential liability at the first step of selling residential mortgage loans to RFC. To sell their loans, Defendants each separately entered into a "Client Contract" with RFC. (Decl. of Deanna Horst ("Horst Decl.") [Doc. No. 3244], Exs. 2-9 (Defs.' Client Contracts).) Along with the Client Contract, a longer, more detailed document called "the Client Guide" governed the business relationship
The contractual language most relevant to the parties' summary judgment motions-and discussed in further detail throughout this opinion-is found in Sections 113(A) & (B), A200, A202, A208, A209, A210, and A212 of the Client Guide.
1. Section 113: General Rules of Interpretation
Section 113 provides "General Rules of Interpretation" applicable to all provisions of the Client Guide. Two subsections are most pertinent here-the first, Section 113(A) addresses the word "knowledge," as used in the Client Guide, and the second, Section 113(B) addresses RFC's "sole discretion." (Id. § 113(A) & (B).) In Section 113(A), "knowledge," as used throughout the Client Guide, holds an originating lender/Client to a strict standard of both actual and constructive knowledge:
(A) "Knowledge" Standard
Whenever any representation, warranty, or other statement contained in this Client Guide is qualified by reference to a Client's "knowledge" or "to the best of" a party's "knowledge", such "knowledge" shall be deemed to include knowledge of facts or conditions of which Client, including (without limitation) any of its directors, officers, agents, or employees, either is actually aware or should have been aware under the circumstances with the exercise of reasonable care, due diligence, and competence in discharging its duties under this Client Guide and the Program Documents. All matters of public record shall be deemed to be known by the Client. Any representation or warranty that is inaccurate or incomplete in any material respect is presumed to be made with the knowledge of Client, unless Client demonstrates otherwise. "Due diligence" means that care which Client would exercise in obtaining and verifying information for a Loan in which Client would be entirely dependent on the Mortgaged Property or Mortgagor's credit as security to protect its investment.
(Id. § 113(A).)
The other relevant interpretative language in Section 113(B) vests RFC with broad authority to make determinations of fact and decisions to act, stating:
Whenever any provision of this Client Guide contract requires [ ]RFC to makea determination of fact or a decision to act, or to permit, approve or deny another party's action such determination or decision shall be made in [ ]RFC's sole discretion.
(Id. § 113(B).)
2. Section A200: Knowledge, Reliance and Waiver
The originating lenders' general R & Ws and covenants are set forth in Section A200. In that provision, the originating lenders acknowledge that RFC purchases the loans in reliance on the originating lenders' R & Ws, and the originating lenders agree to assume liability for any misrepresentations for breaches, regardless of their knowledge or RFC's knowledge. (Id. § A200).) Moreover, it explicitly provides that there can be no waiver of the provisions of the Client Guide unless RFC expressly makes such a waiver in writing:
The Client acknowledges that [ ]RFC purchases Loans in reliance upon the accuracy and truth of the Client's warranties and representations and upon the Client's compliance with the agreements, requirements, terms and conditions set forth in the Client Contract and this Client Guide.
All such representations and warranties are absolute, and the Client is fully liable for any misrepresentation or breach of warranty regardless of whether it or [ ]RFC actually had, or reasonably could have been expected to obtain, knowledge of the facts giving rise to such misrepresentation or breach of warranty.
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. )
3. Section A202: Representations and Warranties
Section A202 requires originating lenders to make certain R & Ws to RFC regarding "individual loans," including information about the loans' eligibility and accuracy. (Decl. of Jesse T. Smallwood ("Smallwood Decl.") [Doc. No. 3257], Ex. 4 (Client Guide § A202, Version 1-06-G01, Effective Mar. 13, 2006) [Doc. No. 3260].)
4. Sections A208 and A209: Events of Default and Non-Exclusive, Cumulative Remedies
Should any of the originating lenders breach these R & Ws by committing an "Event of Default," the Client Guide grants RFC wide-ranging discretion and recourse. (See
5. Section A210: Repurchase
The Client Guide remedies most relevant here are "Repurchase," in Section A210, and "Indemnification," in Section A212. Under the repurchase provision, if RFC determines that an Event of Default has occurred with respect to a particular loan, the originating lender can be required to repurchase a loan within 30 days of receiving notification from RFC.
6. Section A212: Indemnification
The Client Guide's provision for the remedy of indemnification, Section A212, also provides RFC with wide-ranging indemnification in the event of an originating lender's default. The indemnification provision
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 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.
(Scheck Decl., App. 1 (Evolution of Client Guide § A212).)
D. Bankruptcy
As this Court previously noted, Plaintiffs and the originating-lender Defendants were active participants in the RMBS market frenzy. During its heyday, they undoubtedly reaped considerable financial benefits from their relationships with each other. But beginning in 2007, and consistent with events throughout the RMBS industry, the loans in the RFC-sponsored and serviced securitizations experienced a high rate of default. (Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 19).) The Trusts consequently sustained significant financial losses. (Id. ) Multiple entities, including the RMBS Trustees, demanded repurchase and/or filed lawsuits against RFC, alleging that their losses were caused by the poor quality of the loans in RFC's securitizations. (Id. ¶ 20.)
Other securitizations that RFC sponsored or serviced, or securitizations into which it sold loans, carried financial guaranty insurance furnished by monoline insurers.
Beginning in approximately 2008, the RMBS Trustees and Monolines filed lawsuits against Plaintiffs alleging claims for breach of representation and warranty, fraud, and servicing-related claims arising from Plaintiffs' sale of the allegedly defective mortgage loans. (Id. ¶¶ 21-22; Scheck Decl., Ex. 28 (Bankr. Findings of Fact ¶¶ 98-108, 124-25).)
On May 13, 2012, Plaintiffs entered into a proposed $8.7 billion settlement ("Original RMBS Settlement") with two groups of RMBS Trust investors that had holdings in approximately 392 securitization trusts. (Scheck Decl., Ex. 19 (Corr. Hawthorne Rpt. ¶ 23);
The following day, and as contemplated by the Original RMBS Settlement, Plaintiffs filed for Chapter 11 relief in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court").
Multiple entities filed RMBS-related proofs of claim with the Bankruptcy Court in order to obtain damages. (See
Additionally, several Monolines filed 32 proofs of claim with the Bankruptcy Court, asserting claims for tens of billions of dollars in actual and potential losses. (Id. ¶ 104.) Like the RMBS Trustees' claims, the Monolines' claims generally alleged breaches of R & Ws. (See id. ¶¶ 105-13.)
Upon filing for bankruptcy, Plaintiffs sought the approval of the Original RMBS Settlement pursuant to Federal Rule of Bankruptcy Procedure 9019. (Scheck Decl., Ex. 20 (Debtors' 9019 Mot. ¶ 57).) However, some stakeholders opposed the Original RMBS Settlement, including the Official Committee of Unsecured Creditors, a committee appointed to represent all general unsecured creditors. ( Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 24); id. , Ex. 28 (Bankr. Findings of Fact ¶ 102); id. , Ex. 29 (Comm. Obj. at 10-11).) Some objectors found the proposed settlement amount unreasonably high, ( id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 124), while others found it too low. (Id. ¶ 125.) The parties engaged in substantial discovery and extensively litigated issues concerning the approval of the Original RMBS Settlement. (Id. ¶¶ 115-30.)
In light of the objections, the Bankruptcy Court encouraged a new round of comprehensive settlement negotiations. (Scheck Decl., Ex. 28 (Bankr. Findings of Fact ¶ 102).) Bankruptcy Judge Martin Glenn, who oversaw the 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 Plaintiffs. ( Id., Ex. 30 (Mediator Order); id. , Ex. 31 (Kruger Direct Testimony ¶¶ 11-12).)
On May 13, 2013, Plaintiffs 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 settlement reflects a reasonable balance between the litigation's possibility of success and the settlement's future benefits. Each party to the negotiations that led to the settlement had access to a wealth of information gathered over the course of months-long investigations conducted by the Committee and the voluminous materials made available from the Examiner's investigation. To facilitate settlement negotiations, the parties reviewed extensive document discovery, briefed the merits of the claims, and exchanged written and oral presentations regarding their legal positions.
(Id. ¶ 239) (citations omitted).
He further noted that the parties found the Settlements reasonable, stating, "With the knowledge accumulated in this process, each party independently determined that the settlement of the Estates' claims against the Ally Released Parties reflected a reasonable resolution of the claims." (Id. ) Moreover, Judge Glenn found that "each [individual] settlement was reasonable, (id. ¶ 178), that the Plan proponents had exercised reasonable business judgment in entering into the Plan Documents, which he also deemed "fair and reasonable," (id. ¶ 51 & n.11), and that the agreed-upon allocations embodied in the Plan were likewise "reasonable and appropriate." (Id. ¶ 201.)
As to the individual settlements comprising the global Settlements, he found that the new RMBS Settlement resolved: "(1) alleged and potential claims for breaches of R & Ws held by all RMBS Trusts; (2) all alleged and potential claims for damages arising from servicing; and (3) any cure claims ...." (Id. ¶ 103).) Absent settlement, Judge Glenn recognized the significant financial risks in litigating the parties' claims:
The potential losses for RMBS Trusts asserting breaches of representations and warranties range from $42.4 billion to $43.2 billion, excluding losses that are insured by a Monoline. Of that amount, $32.9 billion are historical losses to Debtor-sponsored trusts, and $1.45 billion represent historical losses in non-Debtor sponsored trusts that correspond to the percentage of loans in those trusts sold by the Debtors. The additional forecasted losses range from $7.76 billion to $8.4 billion for the Debtor-sponsored RMBS Trusts, and $300 to $400 million for the portion of non-Debtor-sponsored RMBS Trusts corresponding to the portion of loans sold by the Debtors. Absent settlement, the likely amount of recoverable damages for the RMBS Trusts' representation and warranty claims, after consideration of legal defenses and litigation costs, ranges from $7.38 billion to $8.6 billion. This range does not account for servicing claims and cure claims.
(Id. ¶ 106) (internal citations omitted). Judge Glenn further stated that but for the approval of the RMBS Settlement, the R & W claims "would have to be asserted, litigated and liquidated on an individual basis." (Id. ¶ 118.) And if these claims were litigated individually, Judge Glenn found that they "would be subject to significant litigation risks and factual and legal defenses." (Id. ) Additionally, because litigating these claims would be an expensive and time-consuming undertaking, he concluded
In addition to the RMBS Trusts' R & W claims, the mediation also included the RMBS Trusts' Servicing Claims. (Id. ¶ 119.) Certain RMBS Trustees retained the financial advisory firm of Duff & Phelps, LLC ("Duff & Phelps") to identify and quantify their claims. (Id. ¶¶ 113-14).) Duff & Phelps sought to quantify Plaintiffs' liability as a servicer with respect to: (1) misapplied and miscalculated payments; (2) wrongful foreclosure and improper loss mitigation practices; and (3) extended foreclosure timing issues caused by improper or inefficient servicing conduct such as falsified affidavits, improper documentation, and improper collection practices. (Id. ¶ 119.) Judge Glenn noted Duff & Phelps' finding that Plaintiffs' potential liability as a servicer under these three bases could be as high as $1.1 billion, but that asserting such claims would involve "significant risk and uncertainty." (Id. ) Under the Plan, the servicing-related claims, settled as "RMBS Cure Claims," were allowed in an aggregate amount of $96 million. (Id. )
Judge Glenn made similar findings regarding Plaintiffs' financial exposure for the Monolines' claims. (Id. ¶¶ 126-37, 143-54, 213-15.) He stated that absent a settlement, Plaintiffs were "almost certain to become embroiled in additional, complex litigation with the Monolines over the validity, amount and possible subordination of their asserted claims." (Id. ¶ 213.)
Judge Glenn found that the Settlements resulted from good faith, arms-length negotiations, were in the best interests of the parties and claimholders, (id. ¶¶ 51), were proposed in good faith and in conformity with the Bankruptcy Code, (id. ¶¶ 18-26, 27, 51, 121-22), and, as noted, were reasonable. (Id. ¶¶ 51, 178, 201, 239.) The Bankruptcy Settlements also contemplated further recovery for the investors who acquired RFC's rights against the correspondent lenders. (See Scheck Decl., Ex. 32 (Bankr. Confirm. Order ¶ 48) (authorizing the creation of a "Liquidating Trust," into which RFC was to transfer and assign its assets, and preserving the Liquidating Trust's (and Estates') causes of action); id. , App. 1 (Bankr. Plan at 75).)
In light of his findings, in December 2013, Judge Glenn approved the Plan. ( Id., Ex. 28 (Bankr. Findings of Fact at 1).)
E. Procedural History
Beginning in December 2013, Plaintiffs commenced this litigation, filing numerous individual lawsuits against Defendants, asserting claims of breach of contract and indemnification. (See, e.g., Residential Funding Co., LLC v. Home Loan Center, Inc. , 14-cv-1716 (SRN/HB), First Am. Compl. ¶¶ 78-85; 86-89; Rescap Liquidating Trust v. Freedom Mortg. Corp. , 14-cv-5101 (SRN/HB), Compl. ¶¶ 87-95; 96-100 [Doc. No. 1]; Residential Funding Co., LLC v. CTX Mortg. Co., LLC , 14-cv-1710 (SRN/HB) Am. Compl. ¶¶ 84-91; 92-95 [Doc. No. 30]; Residential Funding Co., LLC v. iServe Residential Lending, LLC , 13-cv-3531 (SRN/HB), First Am. Compl. ¶¶ 71-78; 79-82 [Doc. No. 39]; Residential Funding Co., LLC v. Standard Pacific Mortg., Inc. , 13-cv-3526 (SRN/HB), Am. Compl. ¶¶ 78-85; 86-89 [Doc. No. 35]; Residential Funding Co., LLC v. Impac Funding Corp. , 13-cv-3506 (SRN/HB), First Am. Compl. ¶¶ 88-96; 97-101 [Doc. No. 34].)
In its breach of contract claims, RFC alleges that Defendants breached their R & Ws regarding the quality and characteristics of the residential mortgage loans that they sold to RFC. (See, e.g.,
Similarly, with respect to indemnification, RFC alleges that under the parties' agreements and the Client Guide, Defendants expressly agreed to indemnify RFC for all liabilities, losses, and damages, including attorneys' fees and costs incurred by RFC. (Id. ¶ 88.) It contends that it has incurred such liabilities, losses, and damages arising from the alleged material defects in Defendants' 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 from the Defendants' allegedly defective loans. (Id. )
In January 2015, to promote the just and efficient conduct of the litigation, this Court consolidated for pretrial purposes 68 of the then-pending first-wave suits. (See Jan. 29, 2015 Am. Admin. Order at 3 [Doc. No. 100].) Throughout the discovery period, many of the lawsuits were resolved through mediation. After extensive discovery, Plaintiffs and Defendants now move for dispositive relief. The first of the individual trials between Plaintiffs and Defendants is set to begin on October 15, 2018. (See Apr. 19, 2018 Minutes at 2 [Doc. No. 3486].)
III. DISCUSSION
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. ,
B. Summary Judgment Motions
Plaintiffs seek summary judgment on the following issues: (1) the Client Guide confers Plaintiffs with sole discretion to (a) determine breaches of Defendants' R & Ws, and (b) enter into, and determine the amounts of, the Settlements, such that Defendants may not challenge the Settlements
Defendants move for summary judgment on the following issues, some of which overlap with Plaintiffs' affirmative motions: (1) RFC cannot recover damages under its Breaching Loss damages methodology because (a) Residential Funding Co., LLC v. Quicken Loans, Inc. ,
C. Principles of the Law of Contractual Indemnity
Under the common law indemnity doctrine, "[a] right of indemnity arises when a party seeking indemnity has incurred liability due to a breach of a duty owed to it by the one sought to be charged, and such a duty may arise by reason of a contractual obligation."
"In the contractual context," however, "a claim based on an express indemnification provision is a legal, rather than equitable, claim." Johnson v. Johnson ,
Under Minnesota law, and as more specifically described throughout this Order, "[a]n indemnity agreement is a contract, which is to be construed according to the principles generally applied in the construction or interpretation of other contracts." Buchwald v. Univ. of Minn. ,
In these claims of contractual indemnity, which Plaintiffs assert here, the threshold question is whether that for which the indemnitee seeks indemnification-whether it be losses, damages, or liabilities-falls within the language of the
Assuming that the facts fall within the indemnity contract, particular issues arise when a party seeks indemnity for a settlement, as is the case here.
D. Principles of Contract Interpretation
There is no dispute that Minnesota law applies to the interpretation of the Client Guide, as well as to RFC's breach of contract and indemnity claims.
In construing a contract, courts attempt to harmonize all of the contract's provisions. Chergosky ,
"A contract is ambiguous if, based on the language alone, it is reasonably susceptible of more than one interpretation." Art Goebel,
As a general matter, Minnesota upholds principles of freedom of contract, in which "parties are generally free to allocate rights, duties, and risks," Lyon Fin. Servs. v. Ill. Paper & Copier Co.,
Respectively, the parties move for summary judgment on several identical bases. These include whether RFC's alleged "misconduct" precludes recovery on its claims for indemnification, whether RFC can recover losses and liabilities incurred from "expired" loans, whether RFC's liabilities were extinguished in bankruptcy, and whether RFC may use statistical sampling as a means of establishing liability and damages.
1. Misconduct Defense Against Indemnification
Defendants contend that underlying claims of fraud and negligent misrepresentation are non-indemnifiable under Minnesota law. (Defs.' Mem. at 57-59.) Because the Settlements resolved underlying claims asserting RFC's misconduct, Defendants assert that Plaintiffs may not allocate any value to these claims. In addition, Defendants argue that the Client Guide does not provide for indemnification for RFC's own misconduct, (id. at 59-61), and permitting indemnification under these circumstances would violate public policy. (Id. at 61-62.) Defendants therefore argue, "Summary judgment on RFC's allocation approaches is warranted because RFC has failed to account for the value of these non-indemnifiable claims based on its own alleged misconduct." (Id. at 57.)
Plaintiffs also move for summary judgment on this issue, arguing that Defendants cannot avoid liability based on unproven underlying allegations of "negligence" and "fraud" against RFC. (Pls.' Mem. at 44-46.) They assert that there has never been a finding that RFC engaged in wrongdoing with respect to the settled claims. (Id. at 45; Pls.' Opp'n at 40.) While Plaintiffs find this lack of evidence dispositive, they also assert that the Client Guide's plain language required Defendants to indemnify RFC for its own alleged misconduct and negligence, (Pls.' Opp'n at 37-39), and that those Client Guide provisions are enforceable and not violative of public policy. (Id. at 40-41.)
Defendants identify underlying claims of fraud and negligent misrepresentation against RFC, grouping them together under the general label of "misconduct." (Defs.' Mem. at 57-58.) Under Minnesota law, "negligent misrepresentation constitutes fraud." Hardin Cty. Sav. Bank v. Housing & Redevelopment Auth. of Brainerd ,
As to claims of negligence, Minnesota law generally disfavors agreements that seek to indemnify the indemnitee for its own negligence. DeWitt v. London Rd. Rental Ctr., Inc. ,
As the Court will explain later in this Order, the Client Guide allows RFC to seek indemnification of its actual losses and liabilities incurred in the Settlements under Section A212 and A202(II). Section A212 requires Defendants to indemnify RFC for "all losses ... resulting from any Event of Default." (Client Guide § A212.) Defendants argue that the phrase "resulting from any Event of Default" limits the scope of this indemnification provision to breaches caused by the Client or third parties. (Defs.' Mem. at 59.) Because "Event of Default" is a specifically defined term that does not include the actions of RFC, they contend that any obligations to indemnify arising from an "Event of Default" do not extend to RFC's own underlying actions. (Id. )
The Court does not read the Client Guide so narrowly. While it does not use the specific word "negligence," it nevertheless makes clear the parties' intent to indemnify RFC for its own negligent acts. Under Section A202(II), Defendants 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." (Client Guide § A202(II) ) (emphasis added). Similarly, Section A212 requires indemnification for liabilities resulting from "any breach of any representation, warranty or obligation made by [ ]RFC in reliance upon any warranty, obligation or representation made by the Client contained in the Client Contract[.]" (Id. § A212) (emphasis added). These provisions expressly apprised Defendants of their indemnification obligations for RFC's own negligent conduct. See McGough Constr. Co. ,
Moreover, the Client Guide provisions are unlike those in National Hydro Systems v. M.A. Mortenson Co. ,
Defendants further argue that the indemnification provisions are limited to underlying claims for breach of contract, but not for claims for negligence, because the Client Guide refers to indemnity for RFC's "breaches." The Court disagrees, finding that the obligations in Sections A202(II) and A212 to indemnify for "any breach of any representation, warranty or obligation made by [ ]RFC," (Client Guide § A212), and for "any" claim against RFC "based on or grounded upon, or resulting from [Defendants'] misstatement or omission or a breach of any representation, warranty or obligation made by [ ]RFC in reliance upon such misstatement or omission," (id. § A202(II) ), extend to claims for negligent representation. See Abu Dhabi Commercial Bank. ,
Turning to the allegations of Plaintiffs' intentional underlying conduct, courts may void an indemnification provision on public policy grounds where the indemnitor shows that the indemnitee's underlying conduct was intentional, willful, or wanton. ACLU of Minn. v. Tarek ibn Ziyad Acad. ,
The parties apparently disagree about who bears the evidentiary burden of establishing the finding of intentional misconduct. (Compare Defs.' Mem. in Opp'n to Pls.' Mot. for Summ. J. ("Defs.' Opp'n") [Doc. No. 3602] at 48 (stating that RFC must show that its losses did not result from its own intentional torts or deliberate acts) with Pls.' Mem. at 34 ("Defendants fail to offer any evidence that any of the settlements resulted from RFC's alleged misconduct").) The question is essentially moot, however, because there is no fact question as to whether Plaintiffs were found liable for intentional misconduct with respect to the underlying claims. As discussed below, the claims were settled without adjudication on the merits. Defendants do not argue to the contrary.
Defendants instead highlight allegations of RFC's intentional misconduct. (Defs.' Mem. at 57-58.) Specifically, they refer to fraud and negligent misrepresentation claims filed by Allstate, MBIA, BNYM, and U.S. Bank as illustrative examples, and cite testimony of Plaintiff's expert Donald Hawthorne in support of their position. (Id. )
As to the underlying Allstate claims, Defendants state that Allstate sued RFC for defrauding investors into accepting risks based on RFC's "shoddy lending and underwriting practices." (Id. at 57) (citing Smallwood Decl., Ex. 50 (Ex. A to Allstate PoC # 4499 ¶ 57).) But Plaintiffs do not seek indemnity for the Allstate claims, (Pls.' Opp'n at 36), making any allegations of fraud in Allstate's proof of claim irrelevant.
Regarding the RMBS Trustees for BNYM and U.S. Bank, Defendants assert that these Trustees filed underlying misrepresentation claims against RFC. (Defs.' Mem. at 58) (citing Smallwood Decl., Ex. 15 (BNYM PoC # 6773 ¶ 49);
The Claimant alleges that, to the extent a Seller of mortgage loans to the RMBS Trusts ... knew or should have known of certain breaches of [R & Ws], including that, at the time the Seller transferred the mortgage loans to certain of the RMBS Trusts ..., it knew that the mortgage loans did not comply with the [R & Ws], the Claimant has a claim for common law fraud and/or negligent misrepresentation....
(Smallwood Decl., Ex. 15 (BNYM PoC # 6773 ¶ 49) (emphasis added);
As to the MBIA claims, Defendants cite one legal decision, MBIA Ins. Co. v. Residential Funding Co., LLC , No. 603552/08,
Defendants also cite MBIA's fraud and negligent misrepresentation pleadings, which alleged that RFC engaged in three improper underwriting practices not permitted under the Client Guide, making its representations false by: (1) agreeing that loan originators could originate mortgage loans that failed to comply with the Client Guide; (2) knowingly purchasing loans in bulk whether or not they complied with the Client Guide; and (3) buying loans using RFC's automated electronic loan underwriting program Assetwise, even if the loans did not comply with the Client Guide. (Defs.' Mem. at 57-58) (citing Smallwood Decl., Ex. 51 (MBIA Second Am. Compl. ¶¶ 40, 59-60, 62, 64, 78).) Again, there is no evidence that Plaintiffs were adjudged liable for this alleged conduct.
While Defendants do not point to any such findings, they assert that MBIA's allegations of fraud are supported by evidence in the record. (Defs.' Mem. at 58.) They cite RFC employee testimony about RFC's exception agreements that allowed clients to deliver a loan to RFC outside of the normal program guidelines, (id. ) (citing Smallwood Decl., Ex. 53 (Jackman Dep. at 55);
But the RFC employee testimony regarding the MBIA Settlement neither supports
Finally, as their last evidence of RFC's misconduct, Defendants point to statements of Plaintiffs' expert Donald Hawthorne, in which he admitted that it was reasonable for RFC to consider the significant risk that a Monoline's fraud claim could expose it to damages. (Defs.' Mem. at 58) (citing Smallwood Decl., Ex. 39 (Corr. Hawthorne Rpt. ¶ 237).) But an acknowledgement of potential risk is hardly evidence of fraud, nor is it even an admission of liability. Fireman's Fund Ins. Co. v. W. Nat'l Mut. Grp. ,
In sum, there has not been a threshold finding that RFC engaged in fraud or other misconduct with respect to the claims underlying the Settlements, and the Client Guide expressly permitted RFC to seek indemnification for its own negligence. Given the lack of any evidence of intentional wrongdoing, the Court finds no public policy violation in permitting Plaintiffs to seek indemnification for these claims. While the indemnification provisions remain enforceable, Plaintiffs still bear the burden of establishing causation and damages. As to Defendants' misconduct defenses, however, Plaintiffs are entitled to summary judgment on this ground, and Defendants' summary judgment motion on this ground is denied.
2. Whether Plaintiffs Can Recover Losses and Liabilities Incurred from "Expired" Loans
Another common basis on which the parties move for relief concerns whether Plaintiffs may recover for certain foreclosed upon and liquidated loans. Defendants seek partial summary judgment as to Plaintiffs' claims for loans sold to RFC that were subsequently foreclosed upon, or as Defendants call them, "expired" loans. (Defs.' Mem. at 65-71.) They point to the provision for the survival of remedies in Section A209(C) of the Client Guide, which states:
[ ]RFC's remedies for breach of the [R & Ws] and covenants shall survive the sale and delivery of the Loan to [ ]RFC and funding of the related purchase price by [ ]RFC, and will continue in full force and effect for the remaining life of the Loans , notwithstanding any termination of this Client Guide and the related Funding Documents, or any restrictive or qualified endorsement on any mortgage Note or assignment of mortgage or Loan approval or other examinationof or failure to examine any related mortgage Loan file by [ ]RFC.
(Client Guide § A209(C) ) (emphasis added).
Defendants argue that this provision controls the time period in which RFC could file lawsuits arising from a breach of the R & Ws. (Defs.' Mem. at 66.) They claim that it provided a "discrete survival period" for RFC to assert a remedy beyond the date of sale, at which point, they argue, RFC's right to seek recovery would have otherwise "expire[d] as a matter of law." (Id. at 66-70.) Defendants contend that once the "life of the Loans" ceased to exist, which Defendants argue was upon foreclosure, RFC's right to assert a claim related to these loans also ceased to exist. (Id. at 67-70.)
Plaintiffs argue that Defendants completely misconstrue the meaning of Section A209(C). In fact, they maintain that the Court should not only deny Defendants' motion for partial summary judgment, but grant summary judgment to Plaintiffs and rule that their right to assert claims for remedies extends to losses and liabilities on foreclosed and liquidated loans. (Pls.' Opp'n at 55) (citing March 21, 2018 Order) (permitting Plaintiffs to move for partial summary judgment on this issue). Plaintiffs do not interpret "for the remaining life of the loans" as a limitations period, and assert that the Court "need not even reach the meaning of the phrase." (Id. at 60.) In addition, they assert that Defendants' interpretation of Section 209(C) cannot be reconciled with other provisions of the Client Guide that expressly preserve RFC's remedies with respect to foreclosed and liquidated loans. (Id. at 55.) Further, they assert that Defendants' interpretation would produce absurd results, as it would permit Defendants to avoid liability merely by waiting for the liquidation of breaching loans, and would effectively nullify Defendants' contractual duty, in Section A210, to notify RFC of breaches. (Id. at 59.)
As noted, where the parties' intention is ascertainable from the written contract, construction is for the court. Chergosky ,
The crux of this particular dispute concerns Defendants' misunderstanding about the operative effect of Section A209(C). Defendants are correct that as a general matter, under Minnesota law, the life of a loan typically ends upon foreclosure. (Defs.' Mem. at 69) (citing Bestrom v. Bankers Tr. Co. ,
Fully consistent with that authority, Section A209(C) provides that for the entire "life of the loan"-from the date of sale to, generally, foreclosure-RFC is entitled to remedies for any related losses and liabilities it incurs during that period. But Section A209(C) merely addresses the scope of Plaintiffs' remedies-it does not impose on RFC any limitations period different than the six-year statutory period for making a claim. It does not vitiate RFC's right to seek relief simply because a loan ended in foreclosure prior to the Settlements.
Defendants' cited legal authority does not dictate a different result, nor is it persuasive. Defendants cite MASTR Asset Backed Sec. Tr. 2006-HE3 ex rel. U.S. Bank Nat'l Ass'n v. WMC Mortg. Corp., No. 11-cv-2542 JRT/TNL,
Defendants rely on other non-Minnesota authority, arguing that "for the remaining life of the Loans" is similar to language in Capstead Mortgage Corp. v. Sun America Mortgage Corp. ,
Defendants' other authorities are similarly distinguishable because unlike here, the contractual language expressly limited the period for the survival of remedies and/or representations to a certain number
Defendants' interpretation of Section A209(C) is also inconsistent with other provisions of the Client Guide that suggest the availability of remedies for as long as a loan exists. As such, Defendants' interpretation conflicts with the principle that contracts are to be construed as a whole, and with harmonization of all of the provisions in mind. See Chergosky ,
Other language extends remedies to the latest of several events, including the date on which the loans are "paid in full." Pursuant to Section 205(C) ("Survival of Representations, Warranties, Covenants and Remedies"), RFC's remedies survive under the following circumstances:
Client's representations, warranties and covenants with respect to each Loan, and [ ]RFC's remedies for Client's breach of such representations, warranties and covenants with respect to each Loan will continue in full force and effect until the latest of: (i) the date such Loan has been irrevocably paid in full , (ii) the date the last limitations period for bringing claims against [ ]RFC or its successors or assigns concerning the subject matter of Client's representations and warranties with respect to such Loan expire under all applicable law, and (iii) the date any claim, suit or other proceeding against [ ]RFC or its successors or assigns concerning the subject matter of Client's representations, warranties and covenants with respect to such Loan have been conclusively determined or settled and all applicable appeals have been exhausted.
(Id. § 205(C) ) (emphasis added). Plaintiffs contend that because foreclosed loans have not been paid in full, RFC's remedies for losses related to these loans are not precluded. (Pls.' Opp'n at 55) (citing Client Guide § 205(C).) While Defendants assert that Section 205(C) is not uniformly applicable, and only addresses the consequences of a client's disqualification, suspension, or inactivation, (Defs.' Mem. at 70-71), even so, the provision contemplates RFC's available remedies in different ways.
Finally, the Court agrees with Plaintiffs that Defendants' interpretation of Section A209(C) would be nonsensical, as it would require RFC to anticipate breaches, and could potentially allow Defendants to escape liability for the most defective loans. In response, Defendants argue that RFC could simply give notice of a potential breach during "a loan's life" and if the originator did not repurchase the loan, RFC could pursue its remedies after foreclosure. (Defs.' Reply at 32 [Doc. No. 3894].) The Court rejects this argument, which is at variance with Defendants' position that Plaintiffs' right to seek relief is precluded upon foreclosure. Furthermore, the Client Guide does not require RFC to anticipate breaches or, as discussed earlier, demand repurchase within any particular time period, if at all. (Client Guide § A210.) Instead, the Client Guide requires Defendants to notify RFC of breaches, (id. )-a provision that would be nullified under Defendants' reading of Section A209(C). Again, courts are to avoid any contract interpretation that would render a provision meaningless. Chergosky ,
The Court therefore finds that Section A209(C) provides that Plaintiffs' remedies, and their right to damages, extend to liquidated or foreclosed loans, subject to the applicable statutory limitations periods. Section A209(C) does not function as a contractually-agreed upon limitations period, nor does it preclude recovery for RFC's losses and liabilities on foreclosed or liquidated loans. The Court therefore denies Defendants' motion for summary judgment on this issue and grants summary judgment to Plaintiffs that their remedies extend to foreclosed and liquidated loans.
3. Recovery for Claims Released in Bankruptcy
Both parties move for summary judgment regarding whether Plaintiffs may recover for claims that RFC released in bankruptcy. Defendants argue that RFC's indemnity claim is barred to the extent that it seeks recovery for more than its actual losses, claiming that RFC and its bankruptcy estate were released from all liabilities through bankruptcy. (Defs.' Mem. at 87; Defs.' Opp'n at 14-16.) They acknowledge that certain Defendants previously raised this argument in a motion to dismiss, which the Court denied. (Defs.' Mem. at 87-88.) But, they contend that (1) this Court was wrong, and (2) new evidence further supports their position. (Id. at 88.)
Plaintiffs argue that this Court has already rejected Defendants' argument, finding instead that " 'the plain language of the Bankruptcy Court's Confirmation Order and the Chapter 11 Plan demonstrates that the claims at issue were not extinguished upon confirmation of the Plan.' " (Pls.' Opp'n at 50) (quoting June 16, 2015 Am. Order at 18 [Doc. No. 537] ). They contend that there is no "new evidence" warranting a departure from the prior ruling, (id. at 51-52), and that Defendants
As the parties correctly observe, in June 2015, the Court ruled on this very issue, in response to a motion to dismiss filed by Home Loan Center, one of the remaining Defendants, and Decision One Mortgage, which is no longer a party. (See June 16, 2015 Am. Order at 16-22.) The Court incorporates that ruling herein by reference. In the June 2015 Order, the Court noted that although the estate of a debtor normally ceases to exist once a Chapter 11 plan is confirmed, this is not always true. (Id. at 18-19) (citing United States v. Unger ,
In the June 2015 Order, this Court found that the express language of the Bankruptcy Court's Confirmation Order and Chapter 11 Plan demonstrated that the claims at issue were not extinguished upon confirmation of the Plan. (Id. at 16-22.) Because "[p]rinciples of contract interpretation apply to the interpretation of a reorganization plan," courts consider the legal implications from the face of the plan. OneBeacon Am. Ins. Co. v. A.P.I., Inc., No. 06-cv-167 (JNE),
48. Preservation of Causes of Action. Unless any Causes of Action against an Entity are expressly waived , relinquished, exculpated, released, compromised, or settled in the Plan ... the Borrower Claims Trust with respect to Borrower-Related Causes of Action, and the Liquidating Trust with respect to all other Causes of Action, shall retain and may enforce all rights to commence and pursue, as appropriate, any and all Causes of Action of the Debtors or the Debtors' Estates .... The Liquidating Trustees and the Borrower Claims Trustee, as applicable, are deemed representatives of the Estates for the purpose of prosecuting, as applicable, the Liquidating Trust Causes of Action , Borrower-Related Causes of Action and any objections to Claims pursuant to section 1123(b)(3)(B) of the Bankruptcy Code.
Although cited, but not quoted, in the June 2015 Order, the language of the Plan contains additional language-in bold-face type-that unequivocally preserves Rescap's right to indemnification for the claims at issue here:
The Liquidating Trust and the Borrower Claims Trust may pursue their respective Causes of Action, as appropriate, in accordance with the best interests of the respective Trust. No Entity may rely on the absence of a specific reference in the Plan or the Disclosure Statement to any Cause of Action against such Entity as any indication that the Liquidating Trust or Borrower Claims Trust, as the case may be, will not pursue any and all available Causes of Action against such Entity. The Liquidating Trust and the Borrower Claims Trust expressly reserve all rights to prosecute any and all Causes of Action against any Entity, except as otherwise expressly provided in the Plan. Unless any Causes of Action against an Entity are expressly waived, relinquished, exculpated, released, compromised, or settled in the Plan or a Bankruptcy Court order, the Liquidating Trust expressly reserves all Causes of Action other than Borrower-Related Causes of Action, and the Borrower Claims Trust expressly reserves all Borrower-Related Causes of Action, for later adjudication, and, therefore, no preclusion doctrine, including the doctrines of res judicata, collateral estoppel, issue preclusion, claim preclusion, estoppel (judicial, equitable, or otherwise), or laches, shall apply to such Causes of Action upon, after, or as a consequence of the Confirmation or Consummation. For the avoidance of doubt, the Plan does not release any Causes of Action that the Plan Proponents or the Liquidating Trust or Borrower Claims Trust have or may have now or in the future against any Entity other than the Released Parties (and only in their capacity as Released Parties). The Liquidating Trustees and the Borrower Claims Trustee, as applicable, are deemed representatives of the Estates for the purpose of prosecuting, as applicable, the Liquidating Trust Causes of Action, Borrower-Related Causes of Action and any objections to Claims pursuant to section 1123(b)(3)(B) of the Bankruptcy Code.
Except as otherwise provided in the Plan or in a Final Order, the Liquidating Trust reserves and shall retain Causes of Action notwithstanding the rejection of any Executory Contract or Unexpired Lease during the Chapter 11 Cases or pursuant to the Plan. In accordance with section 1123(b)(3) of the Bankruptcy Code, any Causes of Action that the Debtors may hold against any Entity that is not released under the Plan or a separate settlement approved by Final Order shall vest in the Borrower Claims Trust with respect to Borrower-Related Causes of Action and in the Liquidating Trust with respect to all other Causes of Action. The Liquidating Trust and Borrower Claims Trust, as the case may be, through their respective authorized agents or representatives, shall retain and may exclusively enforce any and all such Causes of Action. The Liquidating Trust has the exclusive right, authority, and discretion to determine and to initiate, file, prosecute, enforce, abandon, settle, compromise, release, withdraw, or litigate to judgment any Causes of Action other than Borrower-Related Causes of Action, or to decline to do any of the foregoing, without the consent or approval of any third party or any further notice to oraction, order, or approval of the Bankruptcy Court. The Borrower Claims Trust has the exclusive right, authority, and discretion to determine and to initiate, file, prosecute, enforce, abandon, settle, compromise, release, withdraw, or litigate to judgment any Borrower-Related Causes of Action, or to decline to do any of the foregoing, without the consent or approval of any third party or any further notice to or action, order, or approval of the Bankruptcy Court.
(Id. , App. 1 (Bankr. Plan at 75) ) (emphases in original). Claims against the originating lenders were not waived or otherwise excepted from these provisions of the Confirmation Order and Plan.
In the Court's prior decision, it found that only the debtors' personal liability was discharged, citing the Confirmation Order's discharge provision:
42. Discharge. Except as expressly provided in the Plan or the Confirmation Order, (a) each holder (as well as any trustees and agents on behalf of each holder) of a Claim against or Equity Interest in a Debtor shall be deemed to have forever waived, released and discharged the Debtors , to the fullest extent permitted by section 1141 of the Bankruptcy Code, of and from any and all Claims, Equity Interests, rights and liabilities that arose prior to the Effective Date and (b) all such holders shall be forever precluded and enjoined, pursuant to section 524 of the Bankruptcy Code, from prosecuting or asserting any discharged Claim against or terminated Equity Interest in the Debtors .
(June 16, 2015 Am. Order at 19) (quoting Bankr. Confirm. Order ¶ 42) (emphases added).
While Defendants argued then, as now, that the Allowed Claims were discharged, the creditors received "Units" in exchange for the allowed claims, which entitle them to receive a pro rata share of recoveries that the Liquidating Trust obtains on their claims, and the Liquidating Trust is obligated to maximize those recoveries. (Id. at 20) (referring to the Plan and the Liquidating Trust Agreement). Thus, the Court concluded in its prior decision that the liabilities underlying RFC's indemnity claims were not extinguished by virtue of RFC's bankruptcy. (Id. )
Now, three years later, Defendants seek to "revisit" this ruling, arguing that the Court was "in error." (Defs.' Mem. at 88.) Defendants refer to "new evidence," and invoke previously cited legal authority in support of their position. (Id. at 87-89.) The Court finds no basis to alter its prior decision. Given the clear language of the Confirmation Order and Plan, there is no need to consult extrinsic evidence.
As to legal authority, Defendants again rely on some of the same cases that this Court distinguished in its earlier ruling. (See Defs.' Mem. at 89) (citing Trapp v. R-Vec Corp ,
Again, while the estate of a debtor typically ceases to exist once a Chapter 11 plan is confirmed, the termination of a bankruptcy estate is subject to the terms and provisions of the confirmed plan. The language of confirmation orders and bankruptcy plans will obviously differ from case to case. As this Court has again explained, the applicable language in this case did not extinguish the Allowed Claims themselves or Defendants' obligation to indemnify Plaintiffs for them. Accordingly, the Court reaffirms its June 2015 decision and grants summary judgment to Plaintiffs and denies summary judgment to Defendants.
4. Sampling
Earlier in this consolidated action, the Court issued a preliminary ruling on the use of loan sampling as a means for Plaintiff to initially make their case for liability and damages. (April 16, 2015 Order [Doc. No. 374].) Plaintiffs had sought an order in limine approving their proposed sampling methodology to determine a breach rate for a group of loans sold by Defendants in 23 cases where the total number of loans exceeded 500 in an individual case. (Id. at 3.) Plaintiffs described the sampling protocol that their expert, Dr. Karl Snow, proposed to utilize in order to extrapolate breach rates to the population from which a given sample was drawn. (Id. ) (citing Snow Decl. ¶¶ 37-41 [Doc. No. 157-11] ).)
Because the Court found that early decisions on sampling issues would streamline the administration of these complex cases, it granted the motion in part and denied it without prejudice in part, holding that: (1) Dr. Snow was a qualified expert witness with respect to the selection and construction of RFC's proposed samples, and the extrapolation of a breach rate from those samples to the populations from which they were drawn; (2) subject to the reservation of Defendants' rights, the sampling
Plaintiffs and Defendants have also filed cross summary judgment motions on the question of whether Plaintiffs may use loan sampling as a method of proof. Defendants seek to preclude the use of statistical sampling to establish liability for loans outside of the sample population. (Defs.' Mem. at 85.) They assert that Client Guide Sections A202 and A212 require RFC to establish liability on a loan-by-loan basis, (id. ), consistent with a "judicial tide" of RMBS case law against the use of sampling, (id. at 86-87; Defs.' Reply at 39). In addition, Defendants take issue with the methodology of Plaintiffs' expert Dr. Karl Snow, arguing that his opinion is impermissibly speculative. (Id. at 86-87.)
Plaintiffs disagree. In their affirmative motion, they ask that the Court enter summary judgment holding that RFC may prove its breach of contract and indemnification claims using statistical sampling and need not re-underwrite each at-issue loan. (Pls.' Mem. at 46.) They argue that the Client Guide does not limit how they may prove breaches. (Pls.' Opp'n at 63.) Rather, they argue, it permits them to exercise any remedy outlined in the Client Guide or permitted by law. (Id. ) (citing Client Guide § A209(A).) Plaintiffs also cite legal authority approving the use of sampling as a means of establishing liability in RMBS litigation. (Id. ) Furthermore, they argue that as a practical matter, sampling is necessary, because re-underwriting each at-issue loan and offering loan-by-loan proof would be unmanageable, if not impossible, for the parties, the jury, and the Court. (Pls.' Mem. at 49-51.)
As a general matter, statistical sampling is a commonly used and accepted means of assembling and analyzing data, particularly in complex litigation. The U.S. Supreme Court has noted, "A representative or statistical sample, like all evidence, is a means to establish or defend against liability," and "is used in various substantive realms of the law." Tyson Foods, Inc. v. Bouaphakeo , --- U.S. ----,
Defendants cite legal authority for the proposition that there is a "clear trend" against permitting the use of statistical sampling in RMBS cases. (Defs.' Opp'n at 51-52.) The Court disagrees with the notion that there is any such "trend." Rather, the question of whether sampling
Moreover, as Plaintiffs observe, statistical sampling has been approved in numerous cases involving large numbers of mortgage loans. See, e.g., Deutsche Bank Nat'l Tr. Co. v. Morgan Stanley Mortg. Capital Holdings LLC ,
Even in one of Defendants' cited cases, BlackRock Allocation Target Shares v. Wells Fargo Bank, N.A , No. 14-cv-9371 (KPF) (SN),
Defendants criticize Plaintiffs' legal authority as "easily distinguished"-referring simply to "certain RMBS cases in which sampling was allowed," without actually identifying the purportedly inapposite cases by name. (Defs.' Opp'n at 51.) They contend that unlike the facts here, certain of Plaintiffs' cited cases concerned pool-wide claims against aggregators and sponsors of RMBS, in which the plaintiffs asserted misrepresentations of the overall characteristics of entire pools. (Id. ) Defendants appear to argue this case does not involve such broad claims, therefore, statistical sampling is ill-suited and improper. (See
But Plaintiffs assert that many of their cited cases approved the use of sampling where the claims were not pool-wide claims against RMBS aggregators or sponsors.
[ ]RFC may exercise any remedy outlined in this Client Guide or as allowed by law or in equity. [ ]RFC's exercise of one or more remedies in connection with a particular Event of Default will not prevent it from exercising:
• One or more other remedies in connection with the same Event of Default
• Any other rights which it may have at law or in equity.
(Id. § A209.)
Defendants highlight certain singular nouns in Sections A202 and A212 as evidence that the Client Guide requires loan-by-loan proof to establish liability. (Defs.' Mem. at 85-86.) For example, they point to references to "each Loan" in A202:
Each of the Loans delivered and sold to [ ]RFC meets the applicable program terms and criteria set forth in this Client Guide. All information relating to each Loan delivered and sold to [ ]RFC is true, complete and accurate .... The Client is in compliance with, and has taken all necessary actions to ensure that each Loan is in compliance with all representations, warranties and requirements contained in this Client Guide.
(Client Guide § A202) (emphases added). Although other Courts have found that the usage of singular nouns requires loan-by-loan proof, see, e.g., Homeward Residential ,
The Court in Deutsche Bank ,
Moreover, as Plaintiffs note, even if Plaintiffs were required to prove liability
The very purpose of creating a representative sample of sufficient size is so that, despite the unique characteristics of the individual members populating the underlying pool, the sample is nonetheless reflective of the proportion of the individual members in the entire pool exhibiting any given characteristic.
The use of sampling evidence here is particularly important for another reason. Establishing liability and damages in this case without the use of sampling would be unmanageable. As noted in Tyson Foods , "[i]n many cases, a representative sample is 'the only practicable means to collect and present relevant data' establishing a defendant's liability."
The repurchase protocol is a low-powered sanction for bad mortgages that slip through the cracks. It is a narrow remedy ("onesies and twosies") that is appropriate for individualized breaches and designed to facilitate an ongoing information exchange among the parties. This is not what is alleged here. Here, Syncora alleges massive misleading and disruption of any meaningful change by distorting the truth. The futility of applying an individualized remedy to allegedly widespread misrepresentations is evident in the fact that, of the 1,300 loans actually submitted under the repurchase protocol, EMC has remedied only 20. This .015% success rate does not bode well for the efficiency of employing the repurchase protocol for a generalized claim of breach. Accordingly, EMC cannot reasonably expect the Court to examine each of the 9,871 transactions to determine whether there has been a breach, with the sole remedy of putting them back one by one. This transaction was put together in days and months. It is now in its second year of litigation.
Plaintiffs note that when they initially moved to approve the use of statistical sampling in February 2015, the at-issue loan population consisted of nearly 90,000 loans. (Pls.' Reply at 28.) Although sampling reduced that number by almost 85%, Plaintiffs claim that re-underwriting the remaining 14,000 loans "required multiple vendors, experts, and attorneys, and hundreds of subpoenas, over a period of years." (Id. ) Defendants minimize the proof required for the approximately 7,000 loans pending as of June 2018, claiming that Plaintiffs "exaggerate[ ]" the difficulties of re-underwriting them. (Defs.' Opp'n at 52.) They argue that the sample sizes here "pale in comparison" to sample sizes in some RMBS cases. (Id. ) (citing Fed. Hous. Fin. Agency v. JPMorgan Chase , No. 11-cv-6188(DLC),
Finally, Defendants argue that they are entitled to summary judgment because Dr. Snow's sampling methodology is merely speculative. (Defs.' Mem. at 85; Defs.' Opp'n at 49.) But "statistical sampling is not guesswork," and it is "not a shot in the dark." Deutsche Bank ,
For the reasons set forth above, Plaintiffs' motion for summary judgment on the issue of sampling is granted and Defendants' motion is denied.
F. Plaintiffs' Motions for Summary Judgment
Having addressed several of the common bases on which the parties seek dispositive relief, the Court now turns to Plaintiffs' remaining arguments for summary judgment, which include that (1) under the Client Guide, (a) they have sole discretion to determine breaches of Defendants' R & Ws, and (b) RFC has sole discretion to enter into, and determine the amounts of, the Settlements, such that Defendants may not challenge the Settlements as unreasonable; (2) Plaintiffs can recover RFC's liabilities, not just its actual losses; (3) Defendants' breaches caused RFC's origination-based losses and liabilities; and (4) Defendants' affirmative defenses, as well as their claim that RFC's actions or other "superseding and intervening factors" may have contributed to RFC's liabilities, fail.
1. The Scope of Plaintiffs' Sole Discretion under the Client Guide
a. The Scope of Plaintiffs' Sole Discretion to Determine Breaches
Plaintiffs argue that, as a matter of law, the plain language of the Client Guide grants them the power to determine, in their sole discretion, whether any of the loans that Defendants sold to RFC breached the R & Ws of the Client Guide. (Pls.' Mem. at 9.) Plaintiffs argue that Defendants, as sophisticated business entities, well understood that they were bound by these determinations. (Id. ) Plaintiffs primarily ground their arguments in the plain language of several provisions of the Client Guide. Most importantly, they point to Section 113(B), a provision that governs every section of the Client Guide:
Whenever any provision of this Client Guide contract requires [ ]RFC to make a determination of fact or a decision to act , or to permit, approve or deny another party's action such determination or decision shall be made in [ ]RFC's sole discretion .
(Client Guide § 113(B) (emphasis added).) Plaintiffs next point to Section A210, which envisions RFC's exercise of its sole discretion and provides inter alia , that
If [ ]RFC determines that an Event of Default has occurred with respect to a specific Loan, the Client agrees to repurchase the Loan and its servicing (if the Loan was sold servicing released) within 30 days of receiving a repurchase letter or other written notification from [ ]RFC.
...
Where [ ]RFC determines that repurchase of a Loan and/or the servicing is not appropriate, the Client shall pay [ ]RFC all losses, costs, and expenses incurred by [ ]RFC and/or the Loan's Servicer as a result of an Event of Default . This includes all reasonable attorneys' fees and other costs and expenses incurred in connection with enforcement efforts undertaken.
(Id. § A210(A) (emphasis added).) Section A208, in turn, provides that an "Event of Default" occurs, for instance, when
(2) The Client has breached any agreement outlined or incorporated by reference in the Client Contract or any other agreement between the Client and [ ]RFC.
(3) The Client breaches any of the representations, warranties or covenants set forth in this Client Guide , fails to perform its obligations under this Client Guide or the Program Documents, makes one or more misleading representations, warranties or covenants to [ ]RFC, or has failed to provide [RFC] with information in a timely manner, including information required under Regulation AB or any successor regulation, that is true, complete and accurate.
(Id. § A208) (emphasis added). Finally, Plaintiffs point to Section A212, which provides that
The Client shall indemnify [ ]RFC from all losses, damages, penalties, fines, forfeitures, court costs and reasonable attorneys' fees, judgments, and any other costs, 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; [and] (iii) any claim, demand, defense or assertion against or involving [ ]RFC based on or resulting from such breach ....
(Id. § A212 (emphasis added).)
Plaintiffs argue that the plain meaning of these provisions grants them sole discretion to determine whether Events of Default, i.e., breaches, have occurred. More specifically, Plaintiffs argue that Section 113(B), titled "[ ]RFC's Sole Discretion," plainly grants them sole discretion to make a determination of fact, and that "Events of Default" are such determination of facts. Sections A210 and A212, Plaintiffs argue, then speak simply to the remedies that RFC is entitled to exercise once it makes a determination that an Event of Default has occurred. Plaintiffs
Plaintiffs buttress their plain language argument with this Court's opinion in Residential Funding Co. v. Terrace Mortgage Co. (Terrace ),
Defendants disagree. They contend that the Client Guide only grants RFC the sole discretion to determine breaches when exercising a particular remedy-repurchase under Section A210. According to Defendants, " Terrace makes clear that Section A210 grants RFC discretion for a particular purpose: namely, 'to determine if a particular loan must be repurchased because it failed to meet the underwriting criteria provided in the Client Guides.' " (Defs.' Opp'n at 3) (quoting Terrace ,
This Court disagrees with Defendants' strained reading of the Client Guide and the Terrace decisions. Based on the plain language of the contract the parties willingly signed, the Court concludes that the Client Guide grants RFC sole discretion to determine Events of Default in all circumstances, and that that discretion is derived from Section 113(B). In clear, unambiguous language, Section 113(B) grants RFC sole, unreviewable discretion to make determinations of fact. And as this Court held in Terrace , one such determination of fact involves declaring Events of Default. Indeed, in affirming this Court's Terrace decision, the Eighth Circuit held that "[t]he Client Guide gives [RFC] 'sole discretion' to determine whether an Event of Default has occurred." Terrace II ,
Once that determination of fact has occurred, i.e., once RFC determines that an Event of Default has occurred, Sections A210 and A212 simply speak of remedies that RFC may exercise under the contract. For instance, Section A210 simply states that "If [ ]RFC determines that an Event of Default has occurred with respect to a specific Loan, the Client agrees to repurchase the Loan ...." (Client Guide § A210 (emphasis added).) Contrary to Defendants' contention, this section does not empower RFC with sole discretion. Rather, Section A210 presupposes that RFC has such power and then simply sets forth the clients' obligations once that discretion has been exercised. The source of the power is Section 113(B). Similarly, Section A212 speaks of a remedy that RFC may utilize after it has determined that an Event of
Dispelling any doubt about this interpretation, the Eighth Circuit essentially held as much in Terrace II . In a particularly relevant passage, the Eighth Circuit noted:
The Client Guide gives Residential "sole discretion" to determine whether an Event of Default has occurred, and Terrace agreed to buy back the loan if Residential determined as much. There is nothing ambiguous about this language.
Terrace II ,
Admittedly, the Client Guide gives RFC considerable discretion to act and wide-ranging remedies. But as the Eighth Circuit has stated, Defendants here have "identifie[d] no ambiguity in the language of the contract which would permit us to look beyond its plain language."
b. The Scope of Plaintiffs' Sole Discretion to Make All Settlement Decisions
Plaintiffs next urge this Court to hold, as a matter of law, that the Client Guide "confer[s] upon RFC sole discretion to enter into the Settlements," such that "RFC's exercise of that discretion is not reviewable absent a showing [of] fraud, bad faith, or a grossly mistaken exercise of judgment," which they argue Defendants have failed to show. (Pls.' Mem. at 11.) They point out that Section A212 of the Client Guide provides that RFC "has the right to control any litigation or governmental proceeding related to a Loan, including but not limited to .... making settlement decisions ." (Client Guide § A212 (emphasis added).) And "making settlement decisions," according to Plaintiffs, is a "determination of fact or a decision to act" that Section 113(B) of the Client Guide empowers RFC to make in its "sole discretion." (Pls.' Mem. at 12.) Thus, Plaintiffs argue, Defendants may not challenge RFC's settlement decisions at all and Plaintiffs need not show that the Settlements were reasonable. (Id. )
Defendants disagree. They contend that Plaintiffs misread the Client Guide, as the language of Section A212 merely "gives RFC 'the right to control' the litigation, including 'choosing defense counsel and making settlement decisions,' " (Defs.' Opp'n at 9), but in no way precludes Defendants
This Court agrees with Defendants. The issue Plaintiffs present is again one of contract interpretation-a question of law-unless ambiguity exists. Trondson v. Janikula ,
Except for notices for reimbursement, [ ]RFC is not required to give Client notice of any litigation ... that may trigger indemnification obligations.... [ ]RFC has the right to control any litigation ... related to a Loan, including but not limited to choosing defense counsel and making settlement decisions .
(Client Guide § A212 (emphasis added) ). As relevant here, the import of this language is twofold. First, as Plaintiffs point out, (see Pls.' Reply at 8-9), Defendants waived notice of any litigation that could trigger indemnification obligations of the type asserted here. Although no Minnesota precedent addressing notice in these precise circumstances has been called to this Court's attention, the general rule is that an indemnitee's duty, if any, to provide notice to an indemnitor is discerned from the express language of the indemnity provision. See United States v. Schwartz ,
Second, the indemnity provision on which RFC relies gives RFC the sole discretion to enter into settlements that would trigger Defendants' duty to indemnify. The relevant language of Section A212 gave RFC the "right to control any litigation ... related to a Loan, including ... making settlement decisions." Interpreted in tandem with Section 113(B), this clause unambiguously gives RFC the power, and discretion, to control litigation, such that RFC need not consult with Defendants when making any litigation-related decisions, including whether to settle or actually litigate any claims related to a loan.
It is well-established in Minnesota, however, that a party seeking indemnity for a settlement must show that the settlement was reasonable. See, e.g., Brownsdale Coop. Ass'n v. Home Ins. Co. ,
Plaintiffs argue that, even if they do not have sole discretion to determine the reasonableness of the Settlements, this Court should hold that no reasonable juror could find otherwise and that, therefore, the Settlements were reasonable as a matter of law. (See Pls.' Mem. at 15.) Plaintiffs argue that the Settlements "meet the standard for approval under Minnesota law, which asks whether a reasonably prudent person would have entered into the settlements based upon the strengths and weaknesses of the underlying merits." (Id. ) Defendants disagree, contending that their rebuttal of Plaintiffs' experts "raise triable issues of fact as to whether RFC can meet its burden of proving reasonableness." (Defs.' Opp'n at 11.)
In his opinion on the reasonableness of RFC's Settlements, Plaintiffs' expert Donald Hawthorne describes RFC's business model, the underlying litigation, the Settlements, and RFC's bankruptcy. (Scheck Decl., Ex. 19 (Corr. Hawthorne Rpt. ¶¶ 16-29, 463).) Among other things, in formulating his opinion, Hawthorne evaluates RFC's representations that gave rise to liability, the relative strengths and weaknesses of the underlying claims and defenses, the cost of litigating the underlying claims, various settlement benchmarks in similar cases, and the settling parties' good faith in reaching the Settlements. (See id. ¶¶ 164-462.) Hawthorne notes that the Settlements for which RFC seeks recovery here were "the product of arms-length negotiation and mediation," and were "approved as reasonable by the Bankruptcy Court." (Id. ¶ 463.) Ultimately, he concludes at the end of his 236-page report that the Settlements were reasonable. (Id. )
Defendants disagree. They dispute Hawthorne's opinion on reasonableness, pointing in particular to RFC's settlement with MBIA. This settlement was "facially unreasonable," Defendants contend, because RFC settled with MBIA for allowed claims that exceeded MBIA's losses by over one billion dollars. (Defs.' Opp'n at 10-11; see also Defs.' Mem. at 78-85.) In addition to singling out the MBIA Settlement as one basis for denying summary judgment to Plaintiffs, Defendants affirmatively seek summary judgment that the MBIA Settlement was unreasonable and therefore not indemnifiable. (Defs.' Mem. at 78-85.)
In making their calculations challenging the reasonableness of the MBIA Settlement, Defendants include MBIA's separate settlements with GMAC Mortgage and ResCap LLC, in the total amount, arguing that they are related to MBIA's claims on the RFC-sponsored trusts. (Id. at 80.) Asserting that Plaintiffs' experts "ignore that the MBIA [S]ettlement provided MBIA with allowed claims against ResCap and GMACM on the same RFC-sponsored trusts," Defendants contend that the total amount of allowed claims that MBIA obtained for RFC-sponsored trusts exceeded MBIA's total losses on those trusts. (Id. at 81.) They maintain that MBIA essentially obtained a double recovery, rendering the MBIA Settlement facially unreasonable. (Id. at 82) (citing Wirig v. Kinney Shoe Corp. ,
But Plaintiffs argue that MBIA's separate settlements with GMAC Mortgage and ResCap LLC are irrelevant to the
Defendants' critique of the reasonableness of the Settlements is not limited to the MBIA Settlement. They further contend that their experts raise several issues of fact as to whether the rest of the Settlements were reasonable. (Defs.' Opp'n at 11.)
"The test as to whether the settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant would have settled for on the merits of plaintiff's claim." Miller ,
On this record, the Court is unable to rule that the Settlements were reasonable as a matter of law. At oral argument, counsel for Defendants suggested that the parties could, before trial, submit evidence to the Court on the issue of reasonableness such that the question would not need to be decided by a jury. (See June 19 Hr'g Tr. at 55-56 ("There is Minnesota authority saying that that factual decision can be made by the Court rather than by the jury. So I don't necessarily think it will be made by the jury, but we can brief that issue at a later time.").) While Plaintiffs' counsel expressed a willingness to "explore [that]," she raised potential Seventh Amendment issues with "having a sudden bench trial where we siphon off an issue that affects damages." (Id. at 68.) The Court has asked for supplemental briefing on this issue. (See Order for Suppl. Briefing [Doc. No. 4128].) Accordingly, the Court denies Plaintiffs' summary judgment motion on the reasonableness of the Settlements and denies Defendants' motion for summary judgment as to indemnification for the MBIA Settlement. The reasonableness of the MBIA Settlement and the Settlements generally is a fact issue and genuine issues of material fact remain in dispute.
2. The Scope of Plaintiffs' Potential Recovery in Indemnity
Plaintiffs next argue that this Court should grant summary judgment interpreting the Client Guide, as a matter of law, to provide that Plaintiffs may recover "(a) indemnity for RFC's liabilities, not just [its out-of-pocket] losses," or, in the alternative, "(b) all losses on breaching loans." (Pls.' Mem. at 15; see also Pls.' Reply at 9-15.) Each issue is addressed in turn.
Plaintiffs first urge this Court to interpret the Client Guide to require Defendants to indemnify RFC for its "liabilities," which Plaintiffs define as "the claims agreed upon in the Settlements and allowed by the Bankruptcy Court," or the so-called "Allowed Claims," rather than only its out-of-pocket losses, i.e., what RFC distributed to its creditors. (Pls.' Mem. at 16.) Specifically, Plaintiffs contend that Section A212 expressly provides for indemnification from all "judgments," "liabilities," and "claim[s]" against or involving RFC-terms that all encompass the Allowed Claims. (Id. at 16-18; see Pls.' Reply at 10-12.)
Defendants concede that the version of Section A212 that took effect in December of 2005 would require them to indemnify RFC for liabilities.
At the outset, this Court concludes, as a matter of law, that the post-December 2005 Client Guide requires Defendants to indemnify RFC for the liabilities as well as for out-of-pocket losses. In Minnesota, parties may contract for indemnity against losses suffered as well as for indemnity against liabilities incurred. See Johnson ,
The Client shall indemnify [ ]RFC from all losses , damages, penalties, fines, forfeitures, court costs and reasonable attorneys' fees, judgments , and any other costs, 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; [and] (iii) any claim, demand, defense or assertion against or involving [ ]RFC based on or resulting from such breach .....
(Client Guide § A212 (emphasis added).)
This language provides for indemnification for the Allowed Claims in at least three ways. First, it expressly provides for indemnification "from all ... judgments."
Second, eliminating any doubt as to whether the post-December 2005 Client Guide provided for indemnity against liabilities, it expressly states that Defendants' obligation to indemnify RFC from "all losses, ... [and] judgments" includes, "without limitation, liabilities arising from ... (ii) any breach of warranty, obligation or representation contained the Client Contract Guide." (Client Guide § A212.) As described above, the Allowed Claims include, by definition, liabilities incurred.
And finally, the Client Guide provides that Defendants' indemnity obligations also extend to "liabilities arising from ... (iii) any claim , demand, defense or assertion against or involving [ ]RFC based on or resulting from such breach." (Id. ) Under Minnesota law, where a contract provides for indemnification from a "claim" rather than just "loss" or "damage," it is one for indemnification against liabilities rather than simply losses. See Trapp ,
The Court reaches the same conclusion as to the pre-December 2005 Client Guide. In relevant part, Section A212 read as follows before the December 2005 amendment:
The Client shall indemnify [ ]RFC from all losses, damages, penalties, fines, forfeitures, court costs and reasonable attorneys' fees, judgments , and any other costs, fees and expenses resulting from any Event of Default. This includes anyact or failure to act or any breach of warranty, obligation or representation contained in the Client Contract; or from any claim , demand, defense or assertion against or involving [ ]RFC based on or resulting from such breach or a breach of any representation, warranty or obligation made by [ ]RFC in reliance upon any warranty, obligation or representation made by the Client contained in the Client Contract.
(Scheck Decl., App. 1 (Evolution of Client Guide § A212).)
Plaintiffs argue that the above language covers indemnification for liabilities in two ways. (Pls.' Reply at 10-12.) First, they contend that the only grammatical reading of the clause is that Defendants would indemnify RFC "from all losses , damages ..., judgments ...; or from any claim ." (Id. at 10-11.) And this reading, Plaintiffs contend, clearly distinguishes "losses" from "claims," i.e., liabilities. (Id. ) Second, they argue, even the pre-December 2005 language included indemnification for "judgments," a term, as described above, that includes liabilities. (Id. at 11-12.)
Defendants take a contrary view. First, they disagree with Plaintiffs' contention that the term "any claim" is distinct from the term "losses." (Defs.' Opp'n at 13.) Rather, they argue, "any claim" is merely a subset of "losses." (Id. ) Second, and relatedly, they contend that Section A212 was amended in December of 2005 precisely to add indemnity for "liabilities," a term that is notably absent from the pre-December 2005 Client Guide, although they cite no factual evidence to support that contention. (Id. at 12-14.)
In the beginning of this case, the Court considered the same arguments that the parties advance now, but in the context of a motion to dismiss. (See June 16, 2015 Am. Order at 17.) At that juncture, the Court found the pre-December 2005 language to be "sufficiently ambiguous to prevent resolution of th[e] issue on a motion to dismiss" and thus permitted the parties to conduct discovery. (See id. at 18.) Now, at the summary judgment stage, the parties again raise the issue, but alert the Court that they have no extrinsic evidence to present. (See June 19 Hr'g Tr. at 156 (counsel for Defendants indicating that there was no extrinsic evidence); id. at 186 (same) ). Accordingly, the issue is one for the Court to determine as a matter of law. See Mervin v. Magney Const. Co. ,
The Court now concludes, as a matter of law, that the pre-December 2005 language includes indemnity for liabilities as well as for actual losses. First, Section A212 has always included indemnity for judgments as well as actual losses. As described above, indemnity for judgments necessarily encompasses the Allowed Claims in this case. Second, the language "the Client shall indemnify ... from all losses ...; or from any claim " seems clearly to distinguish losses from claims. Defendants' contrary interpretation-that "claim" is a subset of "losses"-is simply an ungrammatical construction, which this Court declines to adopt. See Brookfield Trade Ctr., Inc. v. Cty. of Ramsey ,
This Court is similarly unpersuaded by Defendants' contention that the pre-December 2005 Guide did not cover liabilities because it did not expressly include that term. As described, the pre-December 2005 Guide included claims , which denote
Likewise, this Court is unpersuaded by Defendants' argument that it must construe the provision against Plaintiffs because RFC drafted the contract. "[T]his rule has less application as between parties of equal bargaining power or sophistication." Re-Sols. Intermediaries,
Here, it is beyond dispute that Plaintiffs and Defendants are sophisticated parties that enjoyed the benefit of counsel. See Terrace II ,
Accordingly, this Court concludes, as a matter of law, that Section A212 of the Client Guide, both before and after the December 2005 amendment, covered indemnity from liabilities. Accordingly, it grants Plaintiffs' Motion for Summary Judgment on this issue.
Alternatively, this Court also holds that Plaintiffs are entitled to indemnity for liabilities under Section A202(II) of the Client Guide. Section A202(II), titled "Loan Securitization," provides that Defendants "recognize[d] that it [wa]s [ ]RFC's intent to securitize some or all of the Loans sold to [ ]RFC by [Defendants]," and "agree[d] to provide [ ]RFC with all such information concerning the [Defendants] generally ... as may be reasonably requested by [ ]RFC for inclusion in a prospectus or private placement memorandum published in connection with such securitization." (Client Guide § A202(II).) This provision further states that Defendants would "cooperate in a similar manner with [ ]RFC in connection with any whole Loan sale or other disposition of any Loan sold to [ ]RFC by [Defendants]." (Id. ) Immediately after these provisions, Section A202(II) provides that Defendants "agree[d]" to
indemnify and hold [ ]RFC harmless from and against any loss, damage, ... reasonable attorneys' fees, judgment, ... or liability incurred by [ ]RFC as a result of any material misstatement in or omission from any information provided by the Client to [ ]RFC; or from any claim, demand, defense or assertion against or involving [ ]RFC based on or grounded upon, or resulting from such misstatement or omission or a breach of any representation, warranty or obligation made by [ ]RFC in reliance upon such misstatement or omission.
(Id. (emphases added).)
Plaintiffs argue that this provision has two separate clauses obligating Defendants
Defendants do not dispute Plaintiffs' textual arguments. They dispute, however, that Section A202(II) applies to the facts of this case. (Defs.' Opp'n at 14.) Defendants contend that Plaintiffs' reliance on Section A202(II) is altogether misplaced, as that clause does not apply to indemnity for alleged breaches of loan-level R & Ws, but rather deals exclusively with Defendants' obligation to indemnify RFC for losses or liabilities associated with any misrepresentation/omission of information that Defendants were required to provide to RFC about themselves . (Id. )
Defendants read Section A202(II) too narrowly. Here, the unambiguous language of Section A202(II) states that Defendants agreed to indemnify RFC for "any ... liability incurred by [ ]RFC as a result of any material misstatement in or omission from any information provided by [Defendants] to [ ]RFC." (Client Guide § A202(II).) Simply, the limitation Defendants advocate for is not present in the language of the contract. As Plaintiffs contend, " '[a]ny' is the broadest possible term." (Pls.' Reply at 10.) Indeed, as the Eighth Circuit has reasoned, "[u]nless 'any' does not mean any ... we see nothing equivocal about this provision." Harleysville ,
b. Recovery for All Losses
To avoid redundancy, the Court addresses this issue in the context of its discussion of Dr. Snow's proposed Breaching Loss Approach, infra , Section III.G.3. In accordance with that reasoning, Plaintiffs' summary judgment motion as to recovery of all losses resulting from Defendants' breaches is denied.
3. Causation
Plaintiffs next move for summary judgment on three issues related to causation. First, they ask this Court to "grant summary judgment interpreting the [Client] Guide , as a matter of law, to provide that Plaintiffs need only establish 'a causal connection' between Defendants' breaches and the liabilities and losses that RFC incurred in the Settlements"-or, in other words, that the legal standard for causation for indemnification under the Client Guide is "but for" cause rather than "proximate cause." (Pls.' Mem. at 27 (emphasis added).) Second, they ask this Court to hold, as a matter of law, that they have met their burden of proving "but for" causation, as "there is no genuine dispute that RFC's potential liability to the RMBS Trusts and Monolines, and thus the resulting Settlements, were caused by Defendants' underwriting breaches."
a. Applicable Legal Standard
As described, the Client Guide requires Defendants to indemnify RFC against, inter alia , losses and liabilities: "resulting from any Event of Default" or "arising from ... any breach of [R & Ws]," (see Client Guide § A212 (emphasis added) ), or "incurred ... as a result of any material misstatement in or omission from any information provided by [Defendants] to [ ]RFC," (id. , § A202(II) ). Plaintiffs argue that under Minnesota law, "each of these formulations-'as a result of,' 'resulting from,' and 'arising from'-is synonymous," and denotes a "but-for causal connection, not a proximate cause." (Pls.' Mem. at 28.) Accordingly, Plaintiffs argue, they need not prove that Defendants' breaches were the sole cause of RFC's losses and liabilities; rather, they need only prove that "Defendants' breaches were a contributing cause." (Id. at 29.)
Defendants contend that "[i]n Minnesota, as elsewhere, it is black-letter law that a contract plaintiff must prove the defendant's breach proximately caused its damages," and that "nothing in the Client Guide displaces this bedrock rule." (Defs.' Opp'n at 31.) In the alternative, they contend that even if only a "causal connection" is needed under the contract, "something more than literal but-for causation is necessary to find that an injury 'arose out of' a particular event." (Id. (quoting Capitol Indem. Corp. v. Ashanti ,
At the outset, the Court underscores that its focus is on the narrow issue on which Plaintiffs moved for summary judgment-the causation standard under the Client Guide's indemnity provisions . Accordingly, as a preliminary matter, the Court rejects Defendants' contention that the common law breach of contract standard of proximate cause applies. Defendants generally conflate the causation requirement required for a breach of contract claim with the causation standard under the Client Guide's indemnity provisions.
The phrase "arising out of," in turn, has been broadly construed by Minnesota courts to "mean causally connected with, not 'proximately caused by.' " Faber v. Roelofs ,
Turning to the contract terms, the Court holds, as a matter of law, that to prevail on its contractual indemnity claim, Plaintiffs must show that the losses and liabilities for which they seek indemnity have a "cause and result relationship" with, Faber ,
Although Defendants concede that this standard "does not require a plaintiff to show the defendant's conduct was the 'sole cause' of its losses, it necessitates proof that such conduct was a 'necessary condition,' " meaning that "the harm would not have occurred in the absence of-that is, but for-defendant's conduct." (Defs.' Opp'n at 32 (citations omitted).) Accordingly, Defendants argue, under this standard, a factfinder could conclude that "no individual Defendant here was a 'but for' cause of the settlement as a whole," as "RFC
In essence, Defendants argue that, even if they breached, no single breach was material. Defendants rely on Burrage v. United States ,
Defendants' reliance on Burrage is misplaced in this case of contractual indemnity. As Plaintiffs succinctly point out, under the terms of the Client Guide, Defendants "cannot argue that their loans caused no harm because other loans also caused harm." (Pls.' Reply at 20.) A contrary conclusion would, in effect, entirely absolve Defendants of their contracted-for obligation to indemnify Plaintiffs for losses and liabilities that resulted from their breaches because no breach allegedly would be material. Defendants understood and expressly acknowledged that their loans would be bundled with other originators' loans, so they may not now claim that they could breach the contract with impunity, with no consequence, because any given loan is not material, rendering this important remedy under the Client Guide superfluous and meaningless.
Nevertheless, Defendants do highlight a potential issue with allocation and calculation of damages. To be sure, an individual Defendant may only be held liable for the portion of the Settlements reasonably calculated as "flowing from" or "originating from" its own breaches. But this inquiry is analytically distinct from causation. See Mastercraft Furniture, Inc. v. Saba N. Am., LLC , Civ. No. 6:14-01303-AA,
Accordingly, this court grants Plaintiffs' Summary Judgment Motion interpreting the Client Guide's indemnity provisions, as a matter of law, as imposing a "contributing cause" causation standard consistent with Minnesota law interpreting the relevant contract language. But, as described below, the Court finds that causation is a fact issue and therefore denies Plaintiffs'
b. Genuine Issues of Material Fact Preclude a Finding of Causation as a Matter of Law
Plaintiffs urge this Court to hold, as a matter of law, that Defendants' underwriting breaches were a contributing cause of RFC's potential liability to the RMBS Trusts and Monolines, and thus of the resulting Settlements. (Pls.' Mem. at 27.) They contend that the undisputed evidence confirms that the claims that the RMBS Trusts and Monolines asserted against RFC were all "based on defects in the loans that Defendants originated and sold to RFC." (Id. at 30-31.) In support of that assertion, Plaintiffs point to:
(1) the re-underwriting analysis that the RMBS Trustees' financial advisor, Duff & Phelps, conducted to "determine" the "RMBS R+W Claims,"32 and which was intended to "identify breaches of representations and warranties made by the Debtors," (Scheck Decl., Ex. 46 (Pfeiffer Decl. ¶ 18) );
(2) the testimony of Lewis Kruger, RFC's Chief Restructuring Officer who bound RFC to the Settlements, that his "impression"-based on "extensive review of the claims asserted in RFC's bankruptcy case, the litigation over the Original RMBS Settlement, and RFC's own expert's analysis of the claims," (Pls.' Mem. at 31-32)-was that "the claims [of the RMBS Trusts] were primarily related to breach of contract claims for [R & Ws]," (Scheck Decl., Ex. 47 (Kruger Dep. at 160, 225-26) );
(3) the testimony of the Debtors' lead bankruptcy counsel, Gary Lee, who purportedly shared Kruger's view that the R & W claims "were primarily at issue," (Pls.' Mem. at 32); (see Scheck Decl., Ex. 49 (Lee Dep. at 145) ); and
(4) the bankruptcy court's assessing the reasonableness of the bankruptcy settlement by "comparing it to 'the likely amount of recoverable damages for the RMBS Trusts' representation and warranty claims, after consideration of legal defenses and litigation costs.' " (Pls.' Mem. at 32) (quoting Scheck Decl., Ex. 28 (Bankr. Findings of Fact ¶ 106).)
Defendants counter that genuine issues of material fact preclude a ruling on summary judgment on causation. First, they argue that RFC's causation theory is fundamentally flawed, as it "improperly treats unaffiliated 'Defendants' as if they were joint actors and implies that each should be held liable if, as a group, they collectively caused RFC's aggregate losses or liabilities." (Defs.' Opp'n at 28.)
Here, as a preliminary matter, the Court disagrees with Defendants' contention that RFC impermissibly "lumps" all Defendants together under a joint liability theory, warranting denial of summary judgment on causation for that reason alone. The Court does not understand Plaintiffs to be attempting to hold Defendants "jointly liable." (See id. at 29.) As the Court discussed in the context of the applicable causation standard under the Client Guide, (see supra , Section III.F.3.a), each Defendant agreed to indemnify RFC for losses
Nevertheless, this Court agrees with Defendants that the parties' experts raise genuine issues of material fact precluding summary judgment on causation. See Ingram v. Syverson ,
Plaintiffs contend that the claims that the RMBS Trusts and Monolines asserted against RFC were all based on Defendants' breaches of underwriting guidelines. (Pls.' Mem. at 30-31.) Defendants counter, however, that an originator could breach a representation to RFC without that breach resulting in any breach of RFC's separate trust representations. (See, e.g. , Defs.' Opp'n at 35.) As a result of this "gap," Defendants argue, they cannot be found to be a contributing cause of some of the claims asserted against RFC. (See
Moreover, Defendant Home Loan Center's expert, Steven Schwarcz, opines that RFC gave "trust-level underwriting representations," i.e., represented that the loans were underwritten in substantial compliance with the Client Guide, to only 17 out of the more than 500 Trusts. (Decl. of Sascha N. Rand ("Rand Decl.") [Doc. No. 3256], Ex. 22 (Schwarcz Rpt. ¶ 63).)
RFC responds that although only 17 Trusts may have received "explicit" underwriting representations, "there were other important representations that were dependent on Defendants' compliance with the Guide," including the pool-wide representations. (See Pls.' Reply at 22.) In such instances, instead of giving explicit underwriting representations, RFC represented to settling Trusts that RFC's pooled loans met particular "Credit Grade" requirements, and classified these loans, by percentages of the pool, into specific Credit Grades ("Credit Grade R & Ws").
As noted, Section A212 provides for indemnification for RFC's breaches if they are "based on or resulting from" Defendants' breaches. (Client Guide § A212.) The Client Guide required that Defendants' loans meet RFC's quality standards, which required the "credit, character, capacity and collateral" to be "consistent with the Loan Program and credit grade" under which the loan was sold to RFC. (
RFC's experts opine that each breach by a Defendant of the applicable underwriting guidelines constitutes or could be construed to constitute a breach of the pool-wide Documentation Program R & W. (Smallwood Decl., Ex. 43 (Butler Rpt. at 132-33);
The parties present a classic battle of the experts that cannot be resolved on summary judgment. See ADC Telecomms., Inc. v. Panduit Corp. , No. CIV. 01-477 (ADM/JGL),
c. Causation Defenses
Finally, Plaintiffs move for summary judgment on Defendants' causation-related defenses. Specifically, they urge this Court to dismiss any defense arguing that RFC's actions or other "superseding and intervening factors" were the proximate cause of RFC's liabilities, because RFC need only show that Defendants' breaches were a "but for" cause of those liabilities. (Pls.' Mem. at 27-28.) The defenses RFC identifies, (see Pls.' Mem. at 28 n.8), are:
(1) Defendant CTX Mortgage Co., LLC ("CTX"): Affirmative Defenses 4 (Plaintiffs' claims are barred because "RFC has not sustained any ... damages as a consequence of CTX's alleged breaches. To the extent RFC suffered any losses, such losses were caused by RFC's own acts or omissions ...."), and 6 ("To the extent RFC suffered any losses, such losses were caused by unforeseen circumstances and intervening factors, including market forces, over which CTX has no control"), (CTX Ans. at 11 [Doc. No. 141] );
(2) Freedom Mortgage Corp. ("Freedom"): Affirmative Defense 6 (Plaintiffs' claims are barred "because RFC has not suffered any injury proximately caused by any conduct of [Defendant] because any injury complained of was the direct and proximate result of the actions or omissions of RFC ...."), (Freedom Ans. at 20, Case No. 14-cv-5101 [Doc. No. 18] );
(3) Home Loan Center, Inc. ("HLC"): Affirmative Defenses 11 (Plaintiffs' claims are barred "on the grounds or to the extent that the harm or damages Plaintiff complains of or seeks were caused by Plaintiff's own acts or omissions ..."), and 13 (Plaintiffs' claims are barred on the grounds or to the extent that its damages "were caused by unforeseen circumstances, and/or superseding and intervening factors, including market forces, over which Defendant has no control"), (HLC Ans. at 20-21 [Doc. No. 601] );
(4) iServe Residential Lending, LLC ("iServe"): Affirmative Defenses 6 ("RFC has not suffered any injury proximately caused by any conduct of iServe because any injury complained of is the direct and proximate result of the actions or omissions of RFC ..."), 16 ("[A]ny alleged damages were the result of alternative, superseding, or intervening causes over which iServe had no control, such as the actions or omissions of third parties and/or RFC's own agents, employees, or affiliates; market forces; and RFC's pursuit of high-risk mortgage loans from originators other than iServe"), and 23 (Plaintiffs' claims are barred "to the extent they seek recovery for losses stemming from Plaintiffs' own fraud, misrepresentations, or fraud-in-the-inducement"), (iServe Ans. at 19, 21, 22 [Doc. No. 1188] ); and
(5) Standard Pacific Mortgage, Inc. ("Standard Pacific"): AffirmativeDefense 6 (Plaintiffs' claims are barred "because any injury complained of was the direct and proximate result of the actions or omissions of RFC ..."), (Standard Pacific Ans. at 12 [Doc. No. 1191] ).
Defendants' causation-related defenses, then, generally fit into two categories: (1) that Plaintiffs may not recover because their losses and liabilities were proximately or solely caused by "unforeseen circumstances and intervening factors, including market forces," over which Defendants had no control, (CTX Affirmative Defense 6, HLC Affirmative Defense 13, and iServe Affirmative Defense 16); and (2) that Plaintiffs' claims are barred because their losses and liabilities "were caused by RFC's own acts or omissions," (CTX Affirmative Defense 4, Freedom Affirmative Defense 6, HLC Affirmative Defense 11, iServe Affirmative Defenses 6 and 23, and Standard Pacific Affirmative Defense 6).
Here, the Court concludes that several of Defendants' causation-related defenses should be dismissed. At the outset, the Court underscores that it reads Plaintiffs' motion for summary judgment on this issue as necessarily pertaining only to its indemnity claim. (See Pls.' Mem. at 27-28) (discussing RFC's "liabilities" and the "but-for" causation standard under the Guide's indemnity provisions). Accordingly, the Court's rulings do not apply to Plaintiffs' breach of contract claim.
As to the first category of defenses-that unforeseen circumstances and intervening factors proximately caused RFC's losses and liabilities-Defendants argue that they must be allowed to present evidence that RFC's losses were caused by other factors, such as "the broader collapse of the housing market." (Defs.' Opp'n at 37.) Relying on breach-of-warranty cases, Defendants argue that "[w]here the record shows that there are several possible causes of an injury, for one or more of which the defendant was not responsible, and it is just as reasonable and probable that the injury was the result of the latter, the plaintiff may not recover." (Defs.' Mem. at 24 (quoting Heil v. Standard Chem. Mfg. Co. ,
This Court disagrees. As this Court has explained, proximate cause is not the causation standard agreed to by the parties in Section A212 of the Client Guide. 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,"
Next, Defendants argue that the second category of defenses-that RFC's claims are barred because their losses and damages "were caused by RFC's own acts or omissions"-should not be dismissed because Defendants have identified "claims based on breaches of RFC's representations to [T]rusts for which RFC was solely responsible." (Defs.' Mem. at 32; see also Defs.' Opp'n at 37.)
On this record, the Court finds that summary judgment as to Defendants' "sole cause" defense at this stage would be premature. The Court will defer ruling as to the admissibility of Schwarcz's testimony on these issues, pending the development of the factual record, to evaluate whether there is evidence in the record, presumably supplied by fact witnesses to support his hypothetical argument. Accordingly, at
4. Affirmative Defenses
Plaintiffs next move for summary judgment on certain "affirmative" defenses. They argue that this Court should interpret the Client Guide, as a matter of law, as requiring dismissal of Defendants': (1) defense of estoppel; (2) "knowledge- and reliance-based defenses"; (3) waiver defenses based on RFC's "Assetwise" system; and (4) defense of good faith and fair dealing. (Pls.' Mem. at 33.)
a. Estoppel
Plaintiffs contend that the defense of equitable estoppel fails as a matter of law because their "actions and statements have always complied with their rights under the Guide," and that Defendants have never articulated a basis for an equitable estoppel defense.
Defendants HLC, Standard Pacific, and CTX filed Defendant-specific briefing in opposition to Plaintiffs' motion for summary judgment. For ease of analysis, the Court addresses these Defendants' arguments separately.
i. HLC
HLC argues that RFC, in order to effectuate its goal of buying an increasing number of HLC loans, sidestepped the requirements of the Client Guide using "three principal strategies." (HLC Opp'n at 1.) First, HLC argues, RFC agreed to purchase loans approved by Assetwise, RFC's " 'black box' automated underwriting system, ... which offered advantageous variations from the Client Guide." (Id. ) According to HLC, although its initial "Client Contracts" with RFC required it to sell loans to RFC underwritten to the Client Guide, a subsequent agreement-the Assetwise Direct Criteria Agreement ("AW Agreement")-allowed and encouraged HLC to sell RFC more loans by underwriting them utilizing RFC's automated underwriting program, Assetwise. (Id. at 2.) This agreement, according to HLC,
Second, according to HLC, RFC bought loans that HLC originated for RFC competitors in "bulk" packages that RFC knew were prepared for other buyers and per those buyers' underwriting guidelines. (Id. at 5.) As just one example, HLC asserts that after RFC bought its first "bulk" pool from HLC, RFC asked: "Can you send me the current underwriting guidelines that were used for the Home Equity deal we just purchased?" (Id. ) (citing Smallwood HLC Decl., Ex. 16 (Dep. Ex. 262-0014 to Forget Dep.).) HLC contends that it did not send the Client Guide, but rather sent the Countrywide-based guidelines. (Id. ) (citing Smallwood HLC Decl., Ex. 18 (Weiler Dep. at 364).)
And finally, HLC argues, RFC bought loans that HLC originated through "Clues," the automated underwriting system of RFC's competitor, Countrywide. (See
Plaintiffs argue that HLC's evidence is insufficient to create a triable issue of fact on equitable estoppel, which requires a showing that RFC " 'misrepresented a material fact or was silent when it had a duty to speak,' " and that "Defendants 'reasonably relied' on it." (Pls.' Reply at 43-45) (quoting Slidell, Inc. v. Millenium Inorganic Chems., Inc. ,
ii. Standard Pacific and CTX
For their part, Standard Pacific and CTX jointly argue that RFC should not be permitted to hold them to the requirements of the Client Guide "when the parties' course of business dealings makes crystal clear that the Client Guide does not apply to the at-issue loans." (Standard Pac.-CTX Opp'n at 1.) As to the parties' course of business dealings, Standard Pacific and CTX point to, inter alia , RFC's
Moreover, Standard Pacific and CTX argue, "the loan files in RFC's possession contained loan approvals that often underscored again the guidelines used to underwrite the loan." (Id. at 6.) These loan approvals included "Automated Underwriting System" ("AUS") approvals "showing that a loan had been approved under another company's AUS after that loan's characteristics had been entered into the system." (Id. ) In sum, Standard Pacific and CTX argue that "[RFC] is now seeking to enforce remedies under the Client Guide despite years of acknowledgment-in deposition testimony, in AUS approvals in the loan files, and in RFC worksheets in the loan files-that Client Guide guidelines did not apply." (Id. at 7.)
Plaintiffs argue that, at most, Standard Pacific and CTX's evidence-evidence that Plaintiffs argue is inadmissible and mischaracterized-shows RFC's knowledge or acknowledgement that the loans were not underwritten to the Client Guide, but that knowledge or acknowledgment are insufficient for equitable estoppel. (Pls.' Reply at 43-44.) For instance, RFC argues that the "bid tapes" and "AUS approvals" that Standard Pacific and CTX reference were contained in RFC's internal deliberations that Defendants have not shown RFC communicated to them. (Id. at 44.) Moreover, Plaintiffs offer evidence to refute Standard Pacific and CTX's contention that RFC knew the Client Guide did not apply to bulk loans. (See id. at 45) (citing Boderone Decl., Ex. 2 (Siats Dep. at 58) (stating that "in agreeing to submit a bid for [bulk] loans," RFC was "[n ]ot necessarily " "agreeing to purchase the loans pursuant to the underwriting guidelines to which those loans had been underwritten.") ) (emphasis added).
iii. Analysis
"A party seeking to invoke the doctrine of equitable estoppel has the burden of proving three elements: (1) that promises or inducements were made; (2) that it reasonably relied upon the promises; and, (3) that it will be harmed if estoppel is not applied." Hydra-Mac, Inc. v. Onan Corp. ,
On this record, and viewing the evidence in the light most favorable to Defendants, see Leonetti's Frozen Foods, Inc. v. Rew Mktg., Inc. ,
b. Waiver Defense Based on "Assetwise"
Plaintiffs argue that this Court should enter summary judgment holding, as a matter of law, that RFC may recover on breaches that Defendants claim were "approved" by RFC's Assetwise system. (Pls.' Mem. at 35.) Plaintiffs point to Defendants' expert Robert Broeksmit, who opines that "RFC generated business by 'standing by' Assetwise approvals, even when the loans did not comply with the requirements of the Client Guide," (Rand Decl., Ex. 24 (Broeksmit Rpt. ¶ 104) ), thus suggesting that RFC's use of Assetwise may have "waive[d] Defendants' obligation to comply with the Guide requirements." (Pls.' Mem. at 35.)
As Plaintiffs describe it, "Assetwise was a tool that [RFC's] seller clients used ... to grade and slot their loans for eligibility to submit to RFC for sale."
After clients entered particular loan data into Assetwise, the program would produce an "Assetwise Findings Report." (See, e.g. , Scheck Decl., Ex. 51 (Example Assetwise Findings Rpt. at 1).) This report contained a "Recommendation" as to whether RFC should approve the loan. (See also
Plaintiffs argue that "[t]o the extent Defendants rely on Assetwise reports as supposed
Plaintiffs further contend that these Client Guide provisions "were reinforced" by the fact that the Assetwise Findings Reports indicated only a "recommendation" as to whether the loan would be approved, rather than an express waiver of Client Guide requirements or a promise to purchase. (Id. at 37.) Moreover, they contend that in Terrace II , the Eighth Circuit "affirmed enforcement of the Guide provision stating that breaches may be waived only in writing, and rejected a course of conduct argument to the contrary." (Id. ) They urge this Court to reach the same conclusion as to Defendants' Assetwise waiver defense.
Defendants argue that RFC is not entitled to judgment as a matter of law on this defense because its use of Assetwise constitutes a waiver of enforcing the Client Guide as to certain loans. Defendants first argue that the Client Guide's requirement that all waivers be in writing is not dispositive, because, as recognized by the Eighth Circuit, "Minnesota courts have held that despite a contract's requirement that a waiver be in writing, certain provisions of the contract may be waived even if they are not in writing." (Defs.' Opp'n at 41) (quoting Slidell ,
HLC filed a Defendant-specific response addressing Assetwise.
Second, HLC argues that even assuming, arguendo , that the parties had not entered into the AW Agreement, the parties' course of conduct, i.e., RFC's "acceptance of Assetwise approvals," was inconsistent with the Client Guide and therefore constitutes waiver of breaches. (Id. at 10.) In support of this argument, HLC claims that: (1) RFC represented to HLC that it could rely on Assetwise approvals, which HLC characterizes as wholly synonymous with RFC's agreement to buy a loan; (2) RFC's policy was that Assetwise approvals were valid even though certain loan parameters contained in the Client Guide were not met; and (3) RFC's own loan-level "due diligence" shows that it manually approved loans that deviated from the Client Guide if those loans were approved by Assetwise. (Id. at 3-4.)
On this record, the Court denies in part and grants in part Plaintiffs' motion for summary judgment on Defendants' waiver defense based on Assetwise. Although the Court notes that it does not view it as an issue of "waiver" per se, but rather estoppel, it concludes that HLC has raised a triable issue of fact as to whether the AW Agreement superseded the Client Guide. While HLC contends that the AW Agreement controls with respect to the representations and warranties for which HLC was responsible, RFC's expert Richard Payne opines that the AW Agreement was "purely a licensing agreement" that in no way "waive[d] RFC's rights under the Client Guide." (Smallwood HLC Decl., Ex. 43 (Payne Dep. at 108-09).) The Court cannot resolve that dispute on summary judgment. Accordingly, it will be a fact question for the jury whether the AW Agreement between HLC and RFC superseded the Client Guide.
The Court, however, finds that HLC has failed to raise a triable issue of fact that Plaintiffs' use of Assetwise constitutes a blanket waiver of the requirements of the Client Guide. As the parties point out, under Minnesota law, "[w]aiver is the intentional relinquishment of a known right." Frandsen v. Ford Motor Co. ,
Here, HLC points to evidence it claims shows that RFC waived the right to enforce the Client Guide by accepting Assetwise-approved loans. First, it relies heavily on a document labeled "Revised Credit Policy Issue # 10" that describes RFC's internal practice of accepting loans approved by Assetwise. (Smallwood HLC Decl., Ex. 9 (Ex. 145-0011 to Maki Dep.).) This document states, for instance, that "[a]n Assetwise approval IS valid even though certain loan parameters outlined in the Client Guide are not met." (Id. at 2.) Second, it relies on the testimony of Sharon Maki, a former RFC Credit Risk Associate. Maki testified that if Assetwise "produced
HLC also points to the testimony of Julie Hessel, a former RFC underwriter. When asked about the "Revised Credit Policy Issue # 10," and if "it [wa]s fair to say that an Assetwise approval was valid even though certain loan parameters outlined in the Client Guide were not met," Hessel testified that that would be "depending on which loan parameters we're talking about," as it was "not a blanket statement that all loan parameters would be acceptable." (Smallwood HLC Decl., Ex. 10 (Hessel Dep. at 245-46).) Hessel, however, also testified that an Assetwise Findings Report included certain pre-closing conditions and requirements "[t]o remind the seller that the loan had to be in compliance with our Client Guide." (Scheck Decl., Ex. 81 (Hessel Dep. at 224).)
HLC also identifies evidence surrounding RFC's "loan level diligence" that it argues "reflects [RFC's] pact to buy HLC loans pursuant to Assetwise approvals whether or not they complied with the Client Guide." (HLC Opp'n at 4.) It relies on RFC's process of utilizing an internal loan boarding and funding system-Café 2.2-that HLC claims RFC used to evaluate whether loans met the Client Guide. (Id. ) Christine Trenholm, a former RFC employee, testified that she would enter loan data into Café 2.2, and that it would sometimes generate a "pend" for the loan if certain criteria were not met. (Smallwood HLC Decl., Ex. 11 (Trenholm Dep. at 39-41).) Trenholm indicated that she could clear "pends" if the information on the Assetwise report matched up with the documents in the loan file and there was an Assetwise approval. (Id. at 55.) According to HLC, "[f]or at-issue HLC loans, Café 2.2 reflects hundreds of 'pended' loans that failed to meet Client Guide requirements but were cleared based on Assetwise approvals." (HLC Opp'n at 4.)
This anecdotal evidence is insufficient to raise a triable issue as to whether RFC intended a blanket waiver of its remedies or the provisions of the Client Guide when utilizing Assetwise. And nor could it, as Section G401 of the Client Guide expressly anticipates RFC's use of Assetwise and gives notice to Defendants that they would still be "bound by the representations and warranties as set forth in th[e] Client Guide," even if the parties used Assetwise. (Client Guide § G401(B).) In no uncertain terms, this provision states that "use of Assetwise does not relieve Clients of Loan eligibility and underwriting requirements set forth in this Client Guide." (Id. ) As such, as Plaintiffs point out, "RFC's purported knowing purchase of Assetwise-approved loans that deviate from the Guide is not inconsistent with RFC's rights-it is what RFC bargained for." (Pls.' Reply at 35.) Accordingly, Defendants are barred-by the contract that the parties signed-from arguing that RFC's purchase of Assetwise-approved loans constitutes a blanket waiver of RFC's rights to enforce the Client Guide and its remedies.
c. Knowledge- and Reliance-Based Defenses
Plaintiffs next argue that they are entitled to summary judgment on the following
At the motion to strike stage, this Court denied without prejudice Plaintiffs' motion to strike, or in the alternative, for judgment on the pleadings as to some of the same knowledge- and reliance-base defenses that are at issue here. (See May 21, 2015 Am. Mem. & Order [Doc. No. 469] at 15.) Specifically, the Court denied without prejudice Plaintiffs' motion with respect to the following defenses: "(1) because [RFC] would have purchased the loans ... even if it knew the alleged deficiencies in the loan documents, and any alleged deficiencies were not material; (2) because [RFC] did not rely on the representations and warranties on which Plaintiff[s] [are] suing, and to the extent [RFC] did rely on such representations and warranties, [RFC]'s reliance was not reasonable or justified." (Id. at 14-15 n.5 (alterations in original) (internal quotation marks and citations omitted).) Although the Court did not expressly consider the fourth defense now at issue-that RFC knew of defects prior to sale and purchased loans anyway-the Court did consider and denied without prejudice Plaintiffs' motion to strike three defenses that each generally require "the element of full knowledge of the party against whom the doctrines are to be applied": consent, acquiescence, and ratification. (See id. at 17-20.)
Plaintiffs argued that the Court should strike these defenses because they were precluded by Section A200 of the Client Guide. In that section, Plaintiffs argued, Defendants agreed to be fully liable for any misrepresentation or breach of warranty regardless of whether RFC actually had, or reasonably could have been expected to have, knowledge of the facts giving rise to misrepresentations or breaches of warranty, and further acknowledged that RFC purchased loans in reliance of the accuracy and truth of Defendant's R & Ws. (Id. at 13 (quoting Client Guide § A200).)
This Court found, however, that questions of fact precluded relief on a motion to strike under Federal Rule of Civil Procedure 12(f). (Id. at 14.) The Court reasoned that not all of the relevant contracts were before the Court, and that due to the limited record, it could not rule out, for instance, whether the terms of the Client Guide had been altered or superseded by any conflicting terms in the parties' seller contracts or commitment letters, as Defendants asserted. (Id. at 15.) With respect to the knowledge-based defenses of consent, acquiescence, and ratification, the Court similarly found that "[g]iven the limited development of the record at this point, particularly with respect to the applicable versions of the Client Guide and any other documents that might impact the Client Guide, the Court is unable to rule that no genuine issues of fact remain in dispute" as to those defenses. (Id. at 20.) Plaintiffs
i. Breach of Contract Claim
Plaintiffs first argue that knowledge and reliance are not defenses to their breach of contract claims as a matter of law and should be dismissed. (Pls.' Mem. at 34; Pls.' Reply at 29.) They point to the unpublished decision in Krause v. City of Elk River , No. A14-1575,
In their memorandum opposing Plaintiffs' summary judgment motion, Defendants do not explicitly address Krause , Midland , or Peterson . They do, however, state that "[u]nlike a warranty claim, the Guide's indemnity provision expressly requires proof of reliance." (Defs.' Opp'n at 52.) At oral argument, Plaintiffs' counsel suggested that it "appear[ed] to be conceded that knowledge[-] and reliance-based defenses are not defenses to breach of contract," requiring dismissal. (June 19 Hr'g Tr. at 202.) Defendants' counsel, however, responded that although Defendants "agree that [they] have the strongest argument with respect to [Plaintiffs'] indemnification claims," reliance and knowledge may still be relevant to Plaintiffs' ability to prove the elements of their breach of contract claim. (Id. at 220-21.)
The Court agrees with Plaintiffs that the knowledge- and reliance-based defenses on which they move for summary judgment are not applicable to their breach of contract claim, and therefore it grants their motion for summary judgment in that respect. The Court notes, however, that it need not opine at this time whether reliance is a required element of a breach of warranty claim. Although Plaintiffs point to Krause , an unpublished and therefore nonprecedential decision, the Minnesota Supreme Court has not definitively addressed whether reliance is required in a breach of warranty claim. In Lyon Financial Services, Inc. v. Illinois Paper & Copier Co. , the Minnesota Supreme Court acknowledged the disagreement between its decisions regarding reliance, but declined to resolve it.
Resolving this apparent conflict now is unnecessary because, as described below in the context of Plaintiffs' indemnity claim, even if proof of reliance were required generally, Section A200 precludes any arguments regarding knowledge and reliance.
ii. Indemnity Claim
Plaintiffs argue that Section A200 of the Client Guide precludes the reliance- and knowledge-based defenses as a matter of law because it sets forth "what is essentially a strict liability regime under which
The Client acknowledges that [ ]RFC purchases Loans in reliance upon the accuracy and truth of the Client's warranties and representations and upon the Client's compliance with the agreements, requirements, terms and conditions set forth in the Client Contract and this Client Guide .
All such representations and warranties are absolute, and the Client is fully liable for any misrepresentation or breach of warranty regardless of whether it or [ ]RFC actually had , or reasonably could have been expected to obtain, knowledge of the facts giving rise to such misrepresentation or breach of warranty.
The representations and warranties pertaining to each Loan purchased by [ ]RFC ... are not affected by any investigation or review made by, or on behalf of, [ ]RFC except when expressly waived in writing by [ ]RFC.
(Client Guide § A200) (emphasis added). According to Plaintiffs, Section A200 was a critical component of the parties' contract, which shifted the risk of liability for defective loans to correspondent lenders. Such risk-shifting scheme, Plaintiffs contend, was previously recognized by this Court in Terrace I ,
Defendants disagree, and argue that Section A200 does not preclude their reliance- and knowledge-based defenses for two primary reasons. First, they argue that although Section A200 states that RFC purchased loans in reliance on Defendants' R & Ws, it does not provide that RFC in turn made representations to the Trusts in reliance on Defendants' R & Ws. (Defs.' Opp'n at 39.) In fact, Defendants argue, Section A212 expressly requires reliance, as it provides that "Defendants will indemnify RFC for liabilities arising from, inter alia , 'any breach of any representation ... or representation made by [ ]RFC in reliance upon any ... representation made by the Client contained in the Client Contract.' " (Id. at 40 (quoting the Client Guide § A212); id. at n.27 (arguing the same as to Section A202(II) ).) Second, they argue that even if Section A200 facially precluded reliance- and knowledge-based defenses, they are nevertheless "entitled to present evidence that RFC waived or is estopped by its words and deeds from enforcing these Guide provisions, including the non-waiver language." (Id. at 39.)
This Court agrees with Plaintiffs that the plain language of Section A200, especially when read in context of the entire contract, precludes Defendants' knowledge- and reliance-based defenses. Furthermore, the Court concludes that Defendants have not raised a triable issue of fact that RFC waived or is estopped from enforcing this particular provision. If the threshold determination is made that the Client Guide applies, Defendants are precluded, as a matter of law, from asserting the reliance- and knowledge-based defenses at issue here.
First, this Court finds that the unambiguous language of the Client Guide allocated certain risks to Defendants that they may not now dispute. "Under freedom of contract principles, parties are generally free to allocate rights, duties, and risks," Lyon Fin. Servs.,
Furthermore, the Court is unpersuaded by Defendants' contention that, even if they stipulated that RFC purchased loans in reliance on the accuracy and truth of Defendants' R & Ws, they did not stipulate that RFC necessarily relied on that same accuracy and truth of Defendants' R & Ws when making its own R & Ws to the Trusts. Defendants' interpretation would run afoul of several provisions of the Client Guide and its structure as a whole. First, it would contradict the explicit risk-shifting scheme of Section A200 if Defendants could dispute RFC's securitization-related reliance on Defendants' R & Ws, especially because the Client Guide alerted Defendants at various turns that RFC intended to securitize the loans it bought from them. (See, e.g. , Client Guide § A202(II) ("Client recognizes that it is [ ]RFC's intent to securitize some or all of the Loans ....").) Additionally, Defendants' interpretation would render Section A200 superfluous, as it would require RFC to prove the same reliance that Section A200 presumes. Finally, Defendants' interpretation of Section A200 ignores some of that same section's provisions. As Plaintiffs point out,
To prove a reliance defense to indemnification, Defendants would have to prove that RFC learned of Defendants' R & W breaches after RFC bought the loans but before it made R & Ws to Trusts. But Section A200 forecloses that defense by stating that Defendants' R & Ws "are not affected by any investigation or review made by, or on behalf of, [RFC] except when expressly waived in writing by [RFC]."
(Pls.' Reply at 30) (quoting Client Guide § A200).)
Moreover, Defendants may not repackage what is essentially a causation argument as one of reliance. Standard Pacific and CTX argue that "RFC could never rely only on Defendants' alleged representations because there was always a time lag (often a substantial one) between the purported representations made by Defendants to RFC and the very different, subsequent representations made by RFC to other parties." (Standard Pac.-CTX Opp'n at 9-10.) They also argue that "RFC could not rely upon Defendants' alleged representations in making its own subsequent representations because the substance of the two types of representations differed fundamentally." (Id. at 10.) As this Court explained in its discussion of causation, Defendants are free to argue that RFC is solely responsible for some Trust-level breaches. But these arguments have no bearing on whether Section A200, a contractual provision to which the parties willingly agreed, forecloses the reliance- and knowledge-based defenses on which Plaintiffs move for summary judgment. (See supra , Section III.F.4.c.)
Finally, the Court finds that Defendants have failed to raise a triable issue of fact as to whether "RFC waived or is estopped by its words and deeds" from enforcing Section A200. (See Defs.' Opp'n at 39.) Under Minnesota law, "[w]aiver is the intentional relinquishment of a known right."
Here, Defendants do not cite to any evidence indicating that RFC waived or should be estopped from enforcing Section A200. (Defs.' Opp'n at 40-42.) Rather, Defendants rely on the same generalized arguments they made in support of their general estoppel defense, described supra, Section III.F.4.a. In their common memorandum in opposition, Defendants make the cursory assertion that "RFC's repeated, intentional conduct over many years-where it deliberately sought to acquire loans from Defendants in greater volume knowing they were not underwritten to the Client Guide-creates a triable issue on whether RFC waived or is estopped from enforcing" Section A200. (Id. at 39-40.)
Their Defendant-specific memorandums fare no better. HLC simply alleges that there is "voluminous record evidence that RFC deliberately chose to buy HLC loans that did not comply with the Client Guide through Assetwise approvals, bulk purchases, and buying loans to competitor guidelines." (HLC Opp'n at 9.) Standard Pacific and CTX similarly point to no evidence indicating that RFC expressed the intent to waive Section A200, or that it made any promises or inducements indicating that it was specifically abandoning or modifying that clause. Rather, the section of their brief devoted to waiver and estoppel seems only to address their general estoppel argument that the Client Guide did not apply in the first instance. (See Standard Pac.-CTX Opp'n at 2) (as to waiver and estoppel, arguing that RFC "knew the loans it purchased were not underwritten to the Client Guide and it cannot now claim that alleged failures to conform to the Guide's underwriting guidelines mark those loans as 'defective' or 'breaching' ").) Tellingly, both Defendant-specific responses opposing summary judgment do not mention or cite to Section A200.
As Plaintiffs argue, these generalized assertions are simply insufficient to survive summary judgment as to whether RFC waived or should be estopped from enforcing Section A200. In fact, it would render Section A200 entirely meaningless if Defendants could claim that RFC waived that provision, or should be estopped from enforcing it, because it purchased loans it knew were defective or without relying on R & Ws. As Plaintiffs point out, "[e]ven if RFC bought loans knowing they did not comply with the Guide and without relying on Defendants' R & Ws, doing so would not waive A200 or estop RFC from enforcing it. Indeed, the very purpose of A200 was to enable RFC to buy loans under those circumstances." (Pls.' Reply at 34.) In sum, for loans governed by the Client Guide, Section A200 is unambiguous in rendering RFC's knowledge and reliance irrelevant, and Defendants have not produced sufficient evidence to raise a triable issue of fact that RFC waived or is estopped from enforcing this particular provision. Accordingly, this Court grants Plaintiffs' summary judgment motion as to these reliance- and knowledge-based defenses.
Plaintiffs next argue that this Court should enter summary judgment dismissing defenses based on the covenant of good faith and fair dealing. (See Pls.' Mem. at 37-39.) They argue that Defendants cannot demonstrate RFC has acted in bad faith, as it has only ever asserted its legal and contractual rights. (Id. ) Defendants disagree, and argue that they must be permitted to present to the jury evidence that RFC has breached the covenant of good faith and fair dealing. In a general sense, all Defendants argue that the covenant of good faith and fair dealing operates here to limit the "sole discretion" that the Client Guide grants to RFC. (Defs.' Opp'n at 43.) They argue that, "[i]mportantly, '[t]he implied covenant of good faith and fair dealing applies when one party exercises discretion, thereby controlling the other party's benefit.' " (Id. (second alteration in original) (quoting Cardot v. Synesi Grp., Inc. , No. A07-1868,
"Under Minnesota law, every contract includes an implied covenant of good faith and fair dealing requiring that one party not 'unjustifiably hinder' the other party's performance of the contract." In re Hennepin Cty. 1986 Recycling Bond Litig. ,
In contracts where one party bargains for contractual discretion, "[t]he implied covenant of good faith and fair dealing prevents the party with control from abusing its discretion in a manner that would inflict harm on the vulnerable party and undermine the purpose of the contract."
Applying these principles to the case at hand, this Court concludes that Defendants have not raised a triable issue of fact as to whether Plaintiffs have breached the covenant of good faith and fair dealing. Defendants primarily take issue with what they term RFC's "en masse " declaration of Events of Default. (See Defs.' Opp'n at 44 ("[A] triable issue
This Court is unpersuaded. Stated simply, Defendants present no evidence that in bringing this lawsuit, exercising its sole discretion, and engaging in extensive re-underwriting of the at-issue loans, RFC acted "dishonestly, maliciously, or otherwise in subjective bad faith." BP Prods. N. Am. ,
Defendants' case-specific arguments fare no better. HLC argues that it was not "reasonably understood" that RFC "would induce HLC to sell it loans pursuant to Assetwise approval, bulk bid tapes, and other loan purchasers' underwriting guidelines-which RFC and HLC knew were not intended to meet the Client Guide-but that RFC could put loans back to HLC at any time based on the loans' known non-compliance with the Client Guide." (HLC Opp'n at 11.) Similarly, Standard Pacific and CTX contend that it was not "reasonably understood" that RFC would agree to purchase their loans "in bulk at auctions-loans openly and notoriously underwritten to third party guidelines-and then, many years later, fault these Defendants for not having underwritten them to the RFC Client Guide." (Standard Pac.-CTX Opp'n at 11.) These two Defendants also argue that, even if the Client Guide applied, it was not reasonably understood that "RFC could demand that Defendants indemnify them for 'failures' to do things not called for even under the Client Guide." (Id. )
As explained above, Defendants have raised triable issues of fact as to whether the Client Guide governed their sale of loans to RFC. However, if the Guide applies, to the extent they argue that Plaintiffs have breached the covenant of good faith and fair dealing by holding them to the requirements of the Guide, the argument fails. As Plaintiffs point out, the covenant of good faith and fair dealing is implied in every contract . This Court agrees with Plaintiffs that, definitionally, then, the covenant presupposes an applicable
Therefore, this Court grants Plaintiffs' motion for summary judgment on the defense of good faith and fair dealing.
G. Defendants' Motions for Summary Judgment
Earlier in this ruling, the Court addressed certain of Defendants' bases for summary judgment that are identical to the grounds asserted by Plaintiffs in their affirmative motion.
1. Statute of Limitations for Loans Sold Before May 14, 2006
Defendants argue that Plaintiffs' claims for breach of contract and indemnification for loans sold before May 14, 2006 are time-barred, and accordingly, they are entitled to summary judgment for all such loans. (Defs.' Mem. at 62-65.)
Under Minnesota law, a statute of limitations begins to run when "the cause of action accrues." Park Nicollet Clinic v. Hamann ,
Under Section 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."
Defendants previously asserted this argument at the outset of these cases in their motions to dismiss. At that early stage of litigation, this Court found that the breach of contract claims were not time barred as to loans sold to RFC on or after May 14, 2006, because, at the time RFC filed its bankruptcy petition on May 14, 2012, the claims had not expired. See, e.g., Residential Funding Co., LLC v. Acad. Mortg. Corp. ,
As to loans sold to RFC before May 14, 2006, the Court also denied Defendants' motions.
Regarding Plaintiffs' indemnification claims, the Court determined that they did not accrue until the underlying liability was fixed,
As noted, the six-year limitations period for breach of contract claims begins to run
Now, at summary judgment, Defendants argue that "there is no evidence that [they] learned of any information that would trigger a 'continuing obligation' to notify [ ]RFC," particularly as they did not service the loans. (Defs.' Mem. at 63) (citing Smallwood Decl., Ex. 61 (HLC-RFC Client Strategy Memo at RFCCORR-COM00907489) (stating that HLC does not service loans).)
In response, Plaintiffs contend that Defendants have failed to carry their evidentiary burden to establish this affirmative defense. (Pls.' Opp'n at 52-53.) They assert that it is not RFC's burden to establish that its claims are timely. (Id. ) Again, Plaintiffs point to Section A201(M) of the Client Guide which states that the Client will "promptly notify [ ]RFC of any occurrence, act, or omission regarding Client, the Loan, the Mortgaged Property or the Mortgagor of which the Client has knowledge, which occurrence, act, or omission may materially affect Client, the Loan, the Mortgaged Property, or the Mortgagor." (Client Guide § A201(M).) They note that Defendants fail to provide a citation or support for their statement that "there is no evidence" that Defendants learned information that would trigger a continuing obligation. (Pls.' Opp'n at 53.) Also, Plaintiffs assert that this Court has already held that Defendants' obligations under Section A201(M) provided a basis for timely breach of contract claims as to loans purchased before May 14, 2006, and that the Client Guide establishes a presumption of Defendants' knowledge as to materially inaccurate or incomplete representations regarding the loans. (Id. at 52.)
As noted earlier, Section 113(A) of the Client Guide provides that whenever any R & W in the Client Guide is qualified by reference to the Client's "knowledge," "such knowledge will be deemed to include knowledge of facts or conditions of which Client ... either is actually aware or should have been aware under the circumstances with the exercise of reasonable care, due diligence and competence...." (Client Guide § 113(A).) It further states that "[a]ny representation or warranty that is inaccurate or incomplete in any material respect is presumed to be made with the knowledge of the Client, unless Client demonstrates otherwise." (Id. ) Because of this presumptive knowledge, Plaintiffs contend that Defendants bear the burden on this summary judgment motion to "demonstrate otherwise," by presenting sufficient evidence that none of their employees ever had actual or constructive notice of the breaches in question. (Pls.' Opp'n at 52-53.)
In their Reply, Defendants counter that: (1) Plaintiffs bear the burden of establishing breaches of the Client Guide, which requires them to submit evidence that Defendants learned and failed to notify RFC of information under Section A201(M) after May 14, 2006 concerning a loan sold prior to that date; (2) Plaintiffs' re-underwriting experts do not opine that Defendants' failures to notify RFC of a defect under Section A201(A) caused a corresponding breach to the Trusts or Monolines; and (3) the requirements of Section A201 are limited to the date of sale and do not create an indefinite "continuing obligation." (Defs.' Reply at 29 n.25 & n.26.)
The Court agrees with certain of the arguments advanced by Defendants regarding the breach of contract claims sold before May 14, 2006. While Defendants
The Court also referred to Sections A201(M) and 113 of the Client Guide in the context of Impac's Motion for Summary Judgment.
The Court also understands Plaintiffs' argument concerning Defendants' presumptive knowledge and their burden to rebut such knowledge pursuant to the language of Section 113.
As to Plaintiffs' indemnification claims for loans sold prior to May 14, 2006, Defendants argue that they are merely breach of contract claims-to which the six-year limitations period applies-"repackaged" as stand-alone indemnification claims in order to circumvent the statute of limitations. (Defs.' Mem. at 63-64.) Plaintiffs, however, note that this Court has already rejected this argument on Defendants' motions to dismiss, along with every other judge in the District to have considered it, finding instead that Plaintiffs' indemnity claims did not accrue until RFC's liability was fully fixed or ascertained.
Under Minnesota law, final and actual liability is required for the accrual of an indemnification claim. Metro. Prop. ,
In support of their position that the indemnification claims here accrued at the time of the sale of the loans, Defendants primarily rely on two cases applying New York and Delaware law, Lehman Brothers Holdings v. Universal American Mortgage Co., LLC ,
Lehman XS Trust also involved the refusal of the defendant to repurchase the allegedly defective loans, and the court relied on similar authority in the context of implied or equitable indemnity. Lehman XS Trust ,
Here, however, Plaintiffs expressly assert a stand-alone cause of action for contractual indemnity that does not allege a refusal to indemnify or breach of the indemnification provision. Unlike Lehman Brothers , the pleadings here reference Plaintiffs' liabilities to third parties, (see, e.g., Acad. Mortg. , 13-cv-3451, Compl. [Doc. No. 1] ¶¶ 36-61), and the payments made by Plaintiffs pursuant to the Settlements. (Id. ¶¶ 56-61). And unlike L.E. Talcott , the pleadings contain sufficient information regarding the Client Guide's indemnity provision. (Id. ¶¶ 27-29.)
2. Whether RFC's Expert Opinions Foreclose Relief
Defendants further seek summary judgment on the grounds that RFC's inadmissible expert opinions foreclose its claims. As explained in the Court's forthcoming opinion on the parties' cross motions to exclude expert opinions, this Court has not wholly excluded Plaintiffs' expert opinions such that Plaintiffs' claims entirely fail. Accordingly, Defendants' motion for summary judgment in this regard is denied.
3. Plaintiffs' Damages Models
Defendants argue that summary judgment should be granted precluding Plaintiffs from introducing expert testimony regarding each of Plaintiffs' three approaches to assessing and allocating damages on the grounds that they either advance non-viable theories of recovery or offer speculative bases for measuring damages.
A plaintiff in a breach of contract action bears the burden of proving damages to a reasonable degree of certainty. Everyday Learning Corp. v. Larson ,
a. Breaching Loss Approach
As previously stated, the Breaching Loss Approach measures damages based on the economic losses incurred from breaching loans that Defendants sold to RFC that were later securitized into the RMBS Trusts. (See Scheck Decl., Ex. 38 (Corr. Snow Rpt. ¶¶ 69-78).) To do so, the Breaching Loss Approach calculates the total losses from a defendant's at-issue loans based on monthly loan-level data. (Id. ¶ 50.) The model then multiplies the total losses by a defendant's Trust Breach Rate, which is the rate at which the loans a Defendant sold to RFC are estimated to have breached the representations and warranties in both the Client Guide and Trust Agreements based on a sampling protocol. (Id. ¶ 72.) The resulting number, i.e . the Trust Breaching Loss, is the total measure of economic loss attributable to a particular defendant.
i. Whether RFC May Recover Repurchase Damages Under Section A210
Defendants argue that the Breaching Loss Approach advances a non-viable theory of recovery because RFC may not recover damages for loan-level losses it did not actually incur. (Defs.' Mem. at 12-24.) More specifically, Defendants contend that the Breaching Loss Approach seeks to improperly recover the entirety of "repurchase damages" as provided by Section A210 of the Client Guide. (Id. ) That provision enables RFC to demand that an originating bank repurchase a mortgage it sold to RFC whenever RFC determines the originating bank breached the representations and warranties it made with respect to that particular mortgage. Again, in relevant part, Section A210(A) provides that:
If [ ]RFC determines that an Event of Default has occurred with respect to a specific Loan, the Client agrees to repurchase the Loan and its servicing (if the Loan was sold servicing released) within 30 days of receiving a repurchase letter or other written notification from [ ]RFC.
If the Client discovers an Event of Default, it should give [ ]RFC promptwritten notice... If [ ]RFC decides to require repurchase, the Client shall repurchase the loan ... within 30 days after [ ]RFC's decision is communicated to the Client in writing.
... [ ]RFC is not required to demand repurchase within any particular period of time, and may elect not to require immediate repurchase. However, any delay in making this demand does not constitute a waiver by [ ]RFC of any of its right or remedies ...
Where [ ]RFC determines that repurchase of a Loan ... is not appropriate, the Client shall pay [ ]RFC all losses, costs and expenses incurred ... as a result of an Event of Default.
(Client Guide § A210(A).)
Section A210(B) of the Client Guide then sets the repurchase price as equal to the sum of the unpaid principal, unpaid interest, and related expenses for a particular loan while subtracting any proceeds realized by the liquidation of that loan. (Id. § A210(B).) In other words, the repurchase remedy, like the Breaching Loss Approach, calculates damages based on the deficient performance of individual loans.
Here, Defendants argue that RFC cannot recover repurchase damages under the Client Guide because RFC never suffered the losses that the repurchase remedy is intended to address-outside investors did.
As support, Defendants point to a recent decision in a similar RMBS action, Quicken Loans, where the state court granted partial summary judgment to originating banks and dismissed RFC's claims for repurchase damages under the Client Guide.
The court additionally noted that, in circumstances where a loan was sold prior to RFC exercising the repurchase remedy, the contract provides an alternative remedy to repurchase. Specifically, the contract provides that where "repurchase of a Loan ... is not appropriate, the Client shall pay [ ]RFC all losses, costs and expenses incurred by RFC ... as a result of an Event of Default."
RFC counters that Section A210 allows it to recover under the repurchase remedy, regardless of whether RFC maintains possession of the loans or experienced actual losses on them. (Pls.' Mem. at 18-25.) According to RFC, the plain terms of the contract demonstrate that the repurchase remedy in Section A210 is a liquidated damages provision that enables it to recover a fixed formulaic amount from an originating bank. Thus, RFC asserts the word "repurchase" is actually a term of art that describes the manner in which liquidated damages are assessed under the contract, not an actual requirement that originating banks repurchase a loan if the remedy is exercised. As support, RFC points to a number of different portions of Section A210.
First, RFC notes that Section A210(A) provides that if RFC determines that an Event of Default has occurred, "the Client agrees to repurchase the loan." (Client Guide § A210.) Section A210 also provides that "[i]f the Client discovers an Event of Default," it must notify RFC of the breach and "[i]f [ ]RFC decides to require repurchase, the Client shall repurchase the Loan." (Id. ) Under either scenario, the Client's obligation to repurchase is not contingent upon whether RFC incurred a loss or even owns the loan. Rather, the Client's obligation to "repurchase" is triggered solely by the determination that an Event of Default has occurred, for instance, by an originating bank's material breach of a representation or warranty contained in the Client Guide. (Id. § A208.)
Second, RFC highlights that Section A210(A) supplies it with the alternative option to demand payment for actual losses it incurred from a breaching mortgage in lieu of the fixed formula repurchase amount, which indicates that actual losses are relevant only when the alternative option is exercised by RFC. (Pls.' Mem. at 21.) Specifically, Section A210(A) provides that "[w]here [ ]RFC determines that repurchase of a Loan ... is not appropriate, the Client shall pay [ ]RFC all losses, costs and expenses incurred by [ ]RFC ... as a result of an Event of Default." (Client Guide § A210.) Thus, under the default scenario, an originating bank owes the repurchase amount for an Event of Default under the formula set out in Section A210(B). If RFC determines that recovering actual losses from a breaching mortgage is the better option, it may elect to recover them instead of a repurchase formula payment by notifying the originating bank. As such, RFC asserts the question of actual losses, i.e . losses, costs and expenses incurred as a result of an event of default, is irrelevant to the standard repurchase remedy and only comes into play when RFC exercises its alternative option to recover. Therefore, RFC argues it need
Third, RFC argues that its own obligations under Section A210 illustrate that the availability of the repurchase remedy is not contingent upon it possessing the breaching loan. (Pls.' Mem. at 21-22.) Section A210(A) provides that:
Upon the Client's satisfaction of its repurchase obligation, [ ]RFC will endorse the Note evidencing the Loan in blank and will deliver it and other Loan Documents to the Client. If [ ]RFC acquired title to any of the real property securing the Loan pursuant to a foreclosure sale and has not disposed of such property, it will transfer such property to the Client on a "quit claim" basis or ... a "warranty deed" basis. However, if [ ]RFC has disposed of the real property securing the Loan, the Loan Documents will not be returned to the Client unless requested.
(Client Guide § A210.) In other words, Plaintiffs contend, Section A210(A) provides that after RFC receives a repurchase payment from an originating bank, RFC is required to either sign over the loan to the originating bank or transfer title to it for property that collateralized the loan. If RFC has neither, it is required to do nothing unless the originating bank requests the loan documents, at which point RFC is required to provide them with the loan documents and nothing more. Hence, because Section A210 specifically envisions repurchase payments being made if a loan has been liquidated and a subject property has been foreclosed upon, RFC argues the Client Guide's own terms indicate that RFC need not possess a loan in order for the repurchase remedy to be available to it.
Fourth, RFC contends that the formula for calculating the repurchase price explicitly provides that the repurchase remedy is available even if the loan no longer exists. (Pls.' Mem. at 22-23.) Section A210(B) provides that "in the event the Client is obligated to repurchase a Loan, the Client must pay to [ ]RFC a repurchase price equal to" the borrower's outstanding principal and interest plus certain expenses incurred by RFC or its affiliates in connection with the loan. (Client Guide § A210(B).) From that sum, the formula then subtracts any liquidation proceeds realized by the "owner of the loan" to arrive at the repurchase price. (Id. )
RFC argues the repurchase price formula is illuminating for two reasons. First, RFC notes that the repurchase price is based on the loan's losses, not RFC's losses, which demonstrates that the repurchase remedy is available regardless of whether RFC actually experienced losses on the loan. Second, RFC highlights that the repurchase formula specifically envisions repurchase payments will be made after a loan is liquidated, either by RFC itself or by a third-party, because liquidation proceeds realized by the "owner of the loan" are subtracted from the repurchase price. Therefore, RFC argues it need not possess a loan in order to exercise its repurchase remedy related to it.
ii. Whether RFC May Recover Repurchase Damages Under the Indemnification Provisions in Section A212
Defendants argue that RFC may not recover Breaching Loss damages under the indemnification provisions in Section A212 for three reasons. (Defs.' Mem. at 17-19.) First, Defendants argue that RFC cannot seek indemnification for losses it never incurred. Defendants note that Section A212 provides that "[t]he Client shall indemnify [ ]RFC from all losses ... resulting from any Event of Default." (Client Guide § A212.) However, Defendants argue that this provision can only relate to
Here, Defendants argue that RFC did not suffer loan-level losses on the allegedly breaching mortgages that Defendants securitized because those losses were borne by the RMBS trust investors. Consequently, Defendants assert that their indemnification responsibilities do not extend to loan-level losses incurred by the third-party RMBS Trusts because, under the basic principles of indemnity law, they are only required to indemnify RFC for losses it incurred as a result of alleged breaches in the Client Guide. Therefore, Defendants argue that the Breaching Loss Approach, which measures loan level losses in the RMBS Trusts, cannot be used to measure the extent to which Defendants are responsible for indemnifying RFC for its own losses.
Next, Defendants argue that RFC may not rely on the Breaching Loss Approach to measure the extent to which Defendants must indemnify RFC for liabilities it incurred when settling the Trusts' claims in bankruptcy, because doing so would result in a windfall to RFC. (Defs.' Mem. at 20-22.) Defendants note that RFC settled the Trusts' claims for unsecured Allowed Claims in the bankruptcy estate that were a fraction of the losses on allegedly breaching loans. (See Smallwood Decl., Ex. 30 (Corr. Snow Rpt. ¶ 80).)
In particular, Defendants note that RFC's own expert concluded that RFC faced claims by trusts for $23.7 billion in breaching losses, and that RFC settled those claims for $6.749 billion, i.e . roughly 29 cents on the dollar. (See id. ¶ 91.) Nevertheless, Defendants argue that RFC would use the Breaching Loss Approach to measure each Defendant's share of the indemnification liability as equal to 100% of the losses on the Defendant's allegedly breaching loans, despite the steep discount agreed to in the Settlements. Therefore, Defendants assert that applying the Breaching Loss Approach to measure indemnification damages for liabilities incurred in bankruptcy would produce a manifestly unfair result in violation of basic contract law principles.
Defendants additionally argue the Breaching Loss Approach is flawed with respect to measuring indemnification liability for a different reason-it assigns individual Defendants with more than their proportional share of RFC's alleged liabilities. (Defs.' Mem. at 22.) The Client Guide requires a Client to indemnify RFC for "liabilities ... resulting from any Event of Default." (Client Guide § A212.) Furthermore the Client Guide specifies that an Event of Default occurs where "[t]he Client breaches any of the representation, warranties, or covenants set forth in this Client Guide." (Id. § A208(3).) Thus, under the plain terms of the Client Guide, Defendants assert that a Client may only be held accountable for the liabilities resulting from its own breaches, not the breaches of other originating banks selling loans to RFC. Yet Defendants contend that RFC aims to do just that by saddling Defendants with liability owed by other originating banks that RFC never sued. As support, Defendants point to Dr. Snow's testimony in which he estimated that Defendants would have accounted for about 20 percent of the breaching loss damages across all originators. (Smallwood Decl., Ex. 27 (Snow Dep. at 114).) However, under the Breaching Loss Approach, Dr.
Finally, Defendants argue that the Breaching Loss Approach fails to demonstrate that loan-level losses were proximately caused by Defendants' alleged breaches of representations. (Defs.' Mem. 23-24.) Here, Defendants contend that no facts have been submitted to show that loan-level losses were more probably caused by material breaches in the Client Guide rather than other factors such as poor servicing practices, after-the-fact changes in the economic circumstances of borrowers, or macroeconomic factors attendant to the housing market collapse. Therefore, Defendants assert summary judgment is appropriate to preclude RFC from offering the Breaching Loss Approach on the issue of indemnification, because the Breaching Loss Approach fails to supply a basis for concluding that the losses were proximately caused by the breaches.
RFC argues that Defendants err in arguing that Section A212 prevents RFC from seeking indemnification for losses it never incurred. (Pls.' Opp'n at 7.) RFC notes that Section A212's first sentence requires Defendants to "indemnify all losses" resulting from any breach, with no limitation that indemnifiable losses are limited to those actually borne by RFC. RFC concedes that indemnity language later in Section A212 explicitly applies losses "incurred by ... RFC," but argues that language does not negate the overall principle stated at the outset of the section. At most, RFC contends that the conflicting language creates an ambiguity that precludes summary judgment.
RFC additionally argues that Defendants err in arguing that breaching losses are unavailable as an indemnity remedy because they may exceed the liability that RFC incurred to the trusts, because disputed issues of fact concerning the amount of RFC's losses do not supply a basis for summary judgment. For instance, RFC argues that Defendants do not account for the fact that RFC is also entitled to indemnification for the Monoline Settlements and fees and expenses before, during, and after the bankruptcy case in addition to the payments made to the Trusts. Altogether, RFC contends that amount might exceed loan-level losses. Furthermore, RFC argues that no Defendant has demonstrated that RFC incurred liability that was less than loan losses on the specific at-issue loans. And although RFC concedes that RFC settled claims in its bankruptcy at a discount, RFC contends that fact does not establish that RFC settled claims at a discount with respect to any specific loan.
iii. Analysis
The material flaw in the Breaching Loss Approach is that it results in a windfall for RFC because RFC's damages ultimately sound in indemnity-they are fixed by the Allowed Claims-for the losses and liabilities RFC actually incurred in the Settlements. When a party seeks "compensat[ion] for loss or damage sustained," it seeks indemnification. State Farm Mut. Auto. Ins. Co. v. Lennartson ,
Although perhaps academic, given the Court's ruling limiting RFC's damages to its losses and liabilities incurred in the Settlements, the Court does nonetheless respectfully take exception with the holding in Quicken Loans ,
Here, however, those potential consequences are realized. RFC's exposure is fixed and hence its damages are likewise limited to the losses and liabilities it actually incurred.
b. Allocated Breaching Loss Approach
In its second model for measuring damages, RFC offers an "Allocated Breaching Loss Approach" that measures damages in relation to the liabilities RFC incurred in the Settlements rather than the economic harm caused by breaching mortgages. (Scheck Decl., Ex. 38 (Corr. Snow Rpt. ¶¶ 79-86).) To do so, RFC attempts to divide and allocate RFC's bankruptcy liabilities associated with the Trust Claims and Monoline Claims among the loans that Defendants and non-defendants sold to RFC.
i. Whether the Allocated Breaching Loss Approach Offers Non-Speculative Bases to Allocate the Trust Settlement
(1) Allocation under UnitedHealth
Defendants argue that the Allocated Breaching Loss Approach offers a speculative basis for measuring damages under UnitedHealth Group Inc. v. Executive Risk Specialty Insurance Co.,
In UnitedHealth , the court considered a settlement that UnitedHealth Group ("UHG") had entered into to resolve claims from two previous lawsuits under a single agreement.
The District Court granted summary judgment in the insurers' favor and the Eighth Circuit affirmed, finding, inter alia , that UHG did not meet its burden to show how the settlement was allocated between the claims potentially covered by its insurance policy and those that were not.
Here, Defendants argue that UnitedHealth is binding because RFC, like UHG, seeks indemnity for a settlement covering both indemnifiable and non-indemnifiable claims. (Defs.' Mem. at 25-30.) Similarly, in the instant action, Defendants argue that RFC may seek indemnity only for the portion of the bankruptcy settlement attributable to RFC's breaches of representations to the RMBS Trusts that stem from its reliance on Defendants' allegedly faulty Client Guide representations. They argue that RFC may not seek indemnity for settled claims for which Defendants bear no responsibility. Those non-indemnifiable claims, according to Defendants, include breaches by non-defendant originating banks, breaches that RFC is solely responsible for, fraud and negligence claims against RFC, defective servicing claims against RFC, and claims based on RFC's sale of loans to Non-Defendant Sponsored ("NDS") Trusts.
Plaintiffs counter that UnitedHealth arises under insurance law and that Defendants have incorrectly construed the case as having imposed enhanced requirements under Minnesota law for proving contract damages. (Pls.' Opp'n at 11-16.) "Under Minnesota law, damages for breach of contract must be proved to a reasonable certainty, and a party cannot recover speculative, remote, or conjectural damages." Children's Broad. Corp. v. Walt Disney Co. ,
To the extent that UnitedHealth does impose additional requirements for allocating responsibility for sums awarded in a settlement, Plaintiffs further argue that those requirements do not apply here. (Pls.' Opp'n at 15-16.) Unlike UnitedHealth, Plaintiffs assert that their allocation of damages is supported by substantial fact and expert evidence to allow the factfinder to make a non-speculative allocation. (Id. at 15.) Furthermore, Plaintiffs point out that UnitedHealth was not decided in the context of allocating damages among culpable defendants, as is the case here. Instead, that case involved allocating the portion of a settlement potentially covered by an insurer who was innocent of the wrongdoing that gave rise to the liability. Furthermore, the court's reasoning in UnitedHealth turned on insurance law as opposed to the law of contractual indemnity. Given these significant differences, Plaintiffs argue UnitedHealth does not support the exclusion of Dr. Snow's opinion.
(2) Defendants' Criticisms of the Methodology of the Allocated Breaching Loss Approach
Defendants argue that RFC's Allocated Breaching Loss Approach fails for six reasons. In essence, Defendants argue that each of these alleged shortcomings fail in one way or another to measure the relative strength or value of the claims that were settled in bankruptcy, which makes it impossible to assess their indemnification damages on a non-speculative basis. RFC responds to each of Defendants' six arguments in turn, and argues that, at most, Defendants raise triable issues of fact not appropriate for summary judgment.
First, Defendants assert that the Allocated Breaching Loss Approach is speculative because it does not value the indemnifiable claims and should therefore be excluded. (Defs.' Mem. at 30-32.) Instead, Defendants assert that RFC expert Dr. Snow simply deducts values attributed to certain non-indemnifiable claims from the overall settlement amount to arrive at "Net Trust Allowed Claims." Using that figure, he then parses out each Defendant's share of damages based on the remaining indemnifiable claims.
RFC counters that neither Minnesota law nor UnitedHealth require such mathematical precision because proving damages only requires " 'a reasonable basis upon which to approximate the amount [of damages].' " Poppler ,
Second, Defendants assert that the Allocated Breaching Loss Approach is speculative because it fails to analyze the value of claims based on breaches of representations for which RFC is solely responsible. (Defs.' Mem. at 32-36.) These include circumstances where, Defendants argue, RFC agreed to purchase loans pursuant to an originator's own underwriting guidelines, or made exceptions to purchase loans that did not comply with the Client Guide. (Id. ) These also include circumstances where changes in a borrower's circumstances occurred between the sale of the mortgage and the closing of the securitization, whereby representations made in the Client Guide were true at the time originators sold the loans, but were no longer true by the time that RFC entered into the Trust Agreements. (See Smallwood Decl., Ex. 34 (Schwarcz Rpt. ¶ 124).)
But RFC responds that it has presented strong evidence that defects in the loans Defendants sold to them were the primary driver of the settlements. (Pls.' Opp'n at 21-24, 34-40.) RFC argues that Defendants, on the other hand, have presented no evidence to show that the Settlements were based "on breaches for which RFC is solely responsible." Instead, RFC contends that Defendants merely posit that RFC's own actions could have incurred liability to RMBS investors, and therefore the Settlements must have accounted for that possibility. Moreover, Plaintiffs assert, the model targets its assessment of damages toward only those loans that it estimates contained material breaches by the Defendants.
Third, Defendants argue that the Allocated Breaching Loss Approach is speculative because it fails to analyze the value of the Trusts' fraud claims. (Defs.' Mem. at 36-39.) Even though the fraud claims alleged against RFC were explicitly settled for value in the bankruptcy, Defendants note that RFC expert Dr. Snow treated those claims as if they had effectively no value. (Smallwood Decl., Ex. 27 (Snow Dep. at 212).) Without assessing the weight assigned to those fraud claims, Defendants contend it is impossible to know what portion of the settlement can be attributed to their own alleged wrongdoing.
RFC rejoins that Dr. Snow did properly consider the value of the fraud claims when crafting the Allocated Breaching Loss Approach and, based on an RMBS litigation expert's conclusions, determined the fraud claims had no particular value. (Pls.' Mem. at 21-23; Smallwood Decl., Ex. 31 (Hawthorne Dep. at 158).) At oral argument, RFC further contended that assigning little value to the fraud claims made good sense given that the fraud claims overlapped the breach of contract claims, yet are significantly more difficult to prove-a plaintiff must show scienter and justifiable reliance, which are not elements of a breach of contract claim. (June 19 Hr'g Tr. at 123.)
Fourth, Defendants argue that RFC expert Dr. Snow improperly relies on post-settlement evidence in order to value servicing claims, and his opinion is therefore unreliable. (Defs.' Mem. at 39-42.) UnitedHealth provides that, when allocating a settlement, the parties must rely on what the parties knew at the time of the settlement.
RFC counters that the Settlements did establish the value of the servicing claims, and thus no post-settlement allocation is necessary. (Pls.' Opp'n at 21-24; Scheck Decl., Ex. 28 (Bankr. Findings of Fact ¶ 119).) Furthermore, UnitedHealth provides guidance only when "the settlement did not allocate the amount paid among the various claims."
Fifth, Defendants argue the Allocated Breaching Loss Approach is speculative because it offers no valid basis for valuing claims by NDS Trusts. (Defs.' Mem. at 42-43.) In particular, Defendants note that Dr. Snow allocates only $269 million to the NDS Trust claims out of the total $7.091 billion in aggregate allowed claims. (Smallwood Decl., Ex. 30 (Corr. Snow Rpt. ¶ 21).) To reach that figure, Dr. Snow multiplies the "Trust Allowed Claim by the ratio of Total Losses in the 33 NDS Trusts relative to the combined Total Losses of the RFC and NDS Trusts." (Id. ) According to Defendants, such an approach neither accounts for the full value of the NDS claims nor the likelihood they would prevail in violation of the UnitedHealth standard. Furthermore, Defendants assert that Dr. Snow's method for deducting the NDS Trust claims is arbitrary, because he did not sample the breach rates for NDS Trusts. Instead, he assumed without basis that the NDS Trusts have the same global breach rate as RFC-sponsored trusts.
RFC agrees that Dr. Snow relied on the global breach rate to assess the value of the NDS Trusts, but argues that his methodological approach was entirely appropriate because, again, mathematical precision is not required. (Pls.' Opp'n at 27-28); see also Poppler ,
Sixth, Defendants contend that the Allocated Breaching Loss Approach is speculative because it does not value the relative strength of any of the claims, i.e. , the relative likelihood that claims would prevail at trial. (Defs.' Mem. at 43-46.) In particular, Defendants note the Allocated Breaching Loss Approach deducts non-indemnifiable claims from the total amount of allowed claims in the bankruptcy settlement to arrive at the Net Trust Allowed Claim of $6.748 billion. (See Smallwood Decl., Ex. 30 (Corr. Snow Rpt. ¶ 79).) The Allocated Breaching Loss Approach then calculates a settlement factor to reflect the discount at which RFC settled claims relative to its potential exposure. (Id. ¶¶ 93-94.) Then, it multiplies the settlement factor by the losses on each Defendant's allegedly breaching loans. (Id. ¶ 95.) At no point in that process, Defendants argue, does RFC take into account the strength of one Defendant's claims relative to another. Thus, Defendants contend the Allocated Breaching Loss Approach is speculative as a matter of law under UnitedHealth , because it provides no way of assessing the relative strength of the claims in allocating damages related to them.
RFC again avers that Defendants seek to impose requirements for proving contractual damages beyond those imposed by Minnesota law. (Pls.' Opp'n at 28-30.) Assessing the relative strength of claims among individual Defendants would require RFC to conduct a loan-by-loan and trust-by-trust analysis that, according to
ii. Analysis
UnitedHealth does not impose as rigid a standard for assessing contract damages or mandate that a specific formula be applied to allocate them among multiple parties, as Defendants argue. Rather, UnitedHealth stands for the proposition that an "insured ... must present a non-speculative basis to allocate a settlement between covered and non-covered claims," but "need not prove allocation with precision."
After consideration of the arguments and careful review of the record, the Court finds the Allocated Breaching Loss Approach offers a reasonably certain basis for assessing and allocating damages that is not "speculative, remote, or conjectural." Poppler ,
To arrive at the measure of damages under the Allocated Breaching Loss Approach, Dr. Snow builds upon his Breaching Loss Approach by incorporating a Settlement Factor to account for the discount the settling parties agreed to in bankruptcy. (
c. Allocated Loss Approach
In its third method of measuring damages, RFC offers an "Allocated Loss Approach" which, like the Allocated Breaching Loss Approach, measures damages in relation to the liabilities RFC incurred in the bankruptcy settlement. Under this approach, however, Dr. Snow attempts to assign each Defendant a share of RFC's bankruptcy liabilities that is proportional to the Defendant's share of total losses on all At-Issue Loans, not just breaching loans. (Scheck Decl., Ex. 38 (Corr. Snow Rpt. ¶¶ 3, 113).) Further, RFC caps each Defendant's allocated liability at the amount of its Total Breaching Losses. (Id. ) By adopting this approach, RFC asserts it is able to identify each originating bank's share of the liability incurred from the bankruptcy settlement, albeit from a different angle than provided by the Allocated Breaching Loss Approach.
i. Whether the Allocated Loss Approach Offers Non-Speculative Bases to Allocate the Settlements
Defendants argue that the Allocated Loss Approach offers a speculative basis to measure damages because it fails to consider
RFC counters that the Allocated Loss Approach provides an alternative, non-speculative method for allocating damages, and thus satisfies the requirements of Minnesota law. According to RFC, the Allocated Loss Approach's design to allocate damages pro rata based on the total losses experienced by the loans provides an objective, measurable standard that justifiably approximates each Defendant's share of the settlement liability. The resulting number, i.e . the net loss, is reliable because it correlates with a Defendant's breaches. (See Smallwood Decl., Ex. 27 (Snow Dep. at 119-120, 122); Scheck Decl., Ex. 66 (Pendley, Costello, & Kelsch Rpt.);
As support, RFC notes that large settlements of RMBS cases have allocated claims among RMBS trusts by net losses. (See Scheck Decl., Ex. 71 (Countrywide Agmt. § 3(c) );
Furthermore, RFC contends that, contrary to Defendants' assertions, the Allocated Loss Approach does account for Defendants' breaches because it caps damages at Breaching Losses. In other words, the methodology is designed such that damages attributable to a Defendant will not exceed the amount of economic losses the trusts incurred from a Defendant's breaching loans.
ii. Analysis
The Court grants Defendants' motion for summary judgment as to the Allocated Loss Approach. First, for the same reasons as the Court articulated with respect to the Breaching Loss Approach, the Allocated Loss Approach could allow RFC to recover a windfall. By setting the cap on damages at Breaching Losses, the Allocated Loss Approach does not account for the discount that the parties agreed to in the bankruptcy settlement. Thus, the approach would allow certain defendants to be charged with a greater share of indemnification liability than provided by the Settlements. Second, the Court finds that assessing damages without accounting for a Defendant's breach rate results in an inaccurate measure of damages. Therefore, the Court will enter summary judgment precluding admission of the Allocated Loss Approach.
IV. CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS HEREBY ORDERED THAT :
1. Plaintiffs' Motion for Summary Judgment on Common Issues [Doc. No. 3241] is GRANTED in part, DENIED in part, and DENIED WITHOUT PREJUDICE in part ; and
2. Defendants' Motion for Summary Judgment on Common Issues [Doc. No. 3247] is GRANTED in part and DENIED in part .
Notes
Individual Defendants' summary judgment motions on Defendant-specific issues will be addressed in separate orders. Likewise, the parties' Daubert motions will be addressed separately.
RFC, which had its principal place of business in Minneapolis, Minnesota, was an affiliate in a chain of multiple corporate entities. (See, e.g., Residential Funding Co., LLC v. Home Loan Center, Inc. , 14-cv-1716 (SRN/HB), First Am. Compl. ¶ 13 [Doc. No. 1-2].) It was a wholly owned subsidiary of GMAC Residential Holding Company, LLC, which was in turn a wholly owned subsidiary of Residential Capital, LLC. (Id. ) Residential Capital, LLC was a wholly owned subsidiary of GMAC Mortgage Group, LLC, which was in turn a wholly owned subsidiary of Ally Financial, Inc. (Id. ) Upon the approval of RFC's Chapter 11 bankruptcy plan, discussed in greater detail below, GMAC Residential Holding Company, LLC's interest in RFC was canceled and the ResCap Liquidating Trust (the "Trust") succeeded to all of RFC's rights and interests and now controls RFC. (Id. ) The Court collectively refers to RFC and the Trust as "Plaintiffs" or simply as "RFC."
The originating lenders are sometimes also referred to as "correspondent lenders" or "Clients."
Numerous exhibits submitted in support of Plaintiffs' summary judgment arguments are attached to the First and Second Declarations of Matthew R. Scheck [Doc. No. 3258 (App. 1 & Exs. 10-52) ] & [Doc. No. 3727 (Exs. 53-76) ] (collectively, "Scheck Decl."). The Court's docket citations to the parties' exhibits are to the corresponding declaration to which they are attached.
The face of the Client Contract generally shows that the Client Guide was incorporated into the parties' Client Contract as indicated by a check-off box labeled "Client Guide" or "Seller Guide," indicating its incorporation into the Client Contract by reference, (see Horst Decl., Exs. 2-1, 5-1, 6-1, 7, 9 (Defs.' Client Contracts at 1), or through express language to this effect. (See
Unless otherwise indicated, all references to the Client Guide are to the Horst Decl., Ex. 1 [Doc. No. 3244-2].
Numerous exhibits submitted by Defendants in support of their summary judgment arguments are attached to the First, Second, and Third Declarations of Jesse T. Smallwood [Doc. Nos. 3257 (Exs. 1-83), 3604 (Exs. 84-93), and 3896 (Exs. 94-107) ] (collectively, "Smallwood Decl.") The Court's docket citations to the parties' exhibits are to the corresponding declaration to which they are attached.
Section A210 provides in relevant part as follows:
If [ ]RFC determines that an Event of Default has occurred with respect to a specific Loan, the Client agrees to repurchase the Loan and its servicing (if the Loan was old servicing released) within 30 days of receiving a repurchase letter or other written notification from [ ]RFC.
If the Client discovers an Event of Default, it should give [ ]RFC prompt written notice. Such notice should include a written description of the Event of Default. Upon receipt of this notice, [ ]RFC will review these materials and any additional information or documentation that the Client believes may influence [ ]RFC'S decision to require repurchase. If [ ]RFC decides to require repurchase, the Client shall repurchase the Loan and the servicing (if the Loan was sold servicing released) within 30 days after [ ]RFC'S decision is communicated to Client in writing.
* * *
[ ]RFC is not required to demand repurchase within any particular period of time, and may elect not to require immediate repurchase. However, any delay in making this demand does not constitute a waiver by [ ]RFC of any of its rights or remedies.
Where [ ]RFC determines that repurchase of a Loan and/or servicing is not appropriate, the Client shall pay [ ]RFC all losses, costs and expenses incurred by [ ]RFC and/or the Loan's Servicer as a result of an Event of Default. This includes all reasonable attorneys' fees and other costs and expense incurred in connection with enforcement efforts undertaken.
Upon the Client's satisfaction of its repurchase obligation, [ ]RFC will endorse the Note evidencing the Loan in blank and will deliver it and other pertinent Loan Documents to the Client. If [ ]RFC acquired title to any of the real property securing the Loan pursuant to a foreclosure sale and has not disposed of such property, it will transfer such property to the Client "quit claim" basis or, if required by State law, a "warranty deed" basis. However, if [ ]RFC has disposed of the real property securing the Loan, the Loan Documents will not be returned to the Client unless requested.
(Client Guide § A210.)
Differences in the language of earlier versions of this paragraph are addressed infra, Section III.F.2.a.
A monoline insurer undertakes to pay the principal and interest on a bond in the event of a default. Monoline Insurer, Collins English Dictionary , https://www.collinsdictionary.com/us/dictionary/english/monoline-insurer (last visited Aug. 15, 2018).
Specifically, Residential Capital LLC and certain of its subsidiaries, including RFC, filed for bankruptcy. While they are properly referred to as "Debtors" in Bankruptcy Court, for consistency and ease of understanding, the Court continues to use the collective term "Plaintiffs" here in discussing their conduct in the bankruptcy proceeding.
While Plaintiffs also settled with another Monoline, Assured, they do not seek indemnity for that settlement. (See Scheck Decl., Ex. 38 (Corr. Snow Rpt. ¶ 26).)
For purposes of Plaintiffs' motion, they define "liquidated loans" as "loans that have been foreclosed upon or otherwise transferred into the servicer's possession and then sold." (Pls.' Mem. in Opp'n to Defs.' Summ. J. Motion ("Pls.' Opp'n") [Doc. No. 3720] at 55 n.37.)
The Minnesota Supreme Court draws no distinction between common law indemnity claims whether the underlying duty is established under tort principles or express contract terms. Zontelli & Sons, Inc. v. City of Nashwauk ,
As noted by the Eighth Circuit, indemnity cases involving pre-trial settlements can be particularly challenging to analyze. See Neth. Ins. Co. v. Main St. Ingredients, LLC ,
The parties' contracts provide that Minnesota law applies. (See, e.g., Horst Decl., Ex. 2-1 (CTX Client Contract ¶ 10) );
Because Defendants' motion on the question of whether RFC may recover for pool-wide representations overlaps with Plaintiffs' causation argument, the Court addresses these arguments jointly in its discussion of causation. (See infra , Section III.F.3.b.) The parties also move for summary judgment on the question of whether RFC's recovery is limited to the Allowed Claims or whether it can seek recovery for all losses. The Court addresses these arguments in its discussion of Plaintiffs' damages models. (See infra , Section III.G.3.)
The overall question of whether the Client Guide requires indemnification for Plaintiffs' liabilities and losses requires the application of Minnesota law. As discussed more fully in this section of the Order, Minnesota law appears to distinguish between indemnification for an indemnitee's own negligent acts versus indemnification for an indemnitee's own intentional acts. The Court cites New York authority only to ascertain whether the underlying allegations concerned negligent or intentional conduct, as this informs the standard for indemnification under Minnesota law.
In that same decision, MBIA's negligent misrepresentation claims were dismissed because MBIA and RFC did not have a "special relationship" giving rise to a duty to impart correct information. MBIA ,
Analogously, for example, the express expiration of a lease does not terminate the lessor's right to seek recovery for missed lease payments or liabilities related to the missed payments, simply because the lease period has "expired." The limitations period begins to run when the lessee breaches the lease, and an otherwise timely lawsuit does not become untimely because the lease period ends. Or, in a different context, a patent holder's right to seek recovery for patent infringement damages during the time in which a viable patent is infringed is not cut off simply because the patent subsequently expires.
According to the Plan, "Causes of Action" include "all Claims, actions, causes of action, ... liabilities, ... [and] indemnity claims (including those of the Debtors, and/or the bankruptcy estate of any Debtor created pursuant to sections 301 and 541 of the Bankruptcy Code upon the commencement of the Chapter 11 Cases)." (Scheck Decl., Ex. 32, App. 1 (Bankr. Plan at 7-8).)
Even if the evidence were considered, it would not lead to a different conclusion, particularly when considered in concert with the language of the Confirmation Order and Plan. Defendants cite a provision of the Liquidating Trust agreement, which states that the creditors' Units were given in " 'full and final satisfaction ... of such Allowed Claim[s].' " (Defs.' Mem. at 88) (citing Smallwood Decl., Ex. 23 (Liquidating Trust Agmt. ¶ 4.3(a) ).) But that language simply confirms that RFC's creditors received Units in satisfaction of their Allowed Claims. It does not conflict with nor extinguish the underlying liability, nor does it change the express preservation of causes of action set forth in the Confirmation Order and Plan. (Scheck Decl., Ex. 32 (Bankr. Confirm. Order ¶ 48);
See also BlackRock Balanced Capital Portfolio (FI) , No. 14-cv-9367 (JMF),
In some of Defendants' cited cases, or excerpts from hearing transcripts, the courts did not actually rule on sampling. (See Defs.' Mem. at 86-87) (citing Ret. Bd. of the Policemen's Annuity & Benefit Fund v. Bank of N.Y. Mellon ,
And two of Defendants' cases are unrelated to RMBS cases. U.S. ex rel. Michaels v. Agape Senior Cmty., Inc. , No. No. 0:12-3466-JFA,
Plaintiffs identify the following such cases involving claims brought by RMBS trusts: Deutsche Bank Nat'l Tr. Co. for Morgan Stanley Structured Tr. I 2007-1 v. Morgan Stanley Mortg. Capital Holdings LLC ,
And Plaintiffs claim that monoline insurers asserted non-pool-wide claims in the following cases: MBIA Ins. Corp v. Credit Suisse Sec. (USA) LLC , No. 603751/2009,
As discussed below in later sections, previous versions of Section A212 had different language. For the purposes of the Court's analysis here, however, such differences are not material.
As noted earlier, Defendants argue, however, that RFC presently has no liabilities for which it may seek indemnity, as all its liabilities were extinguished by the Settlements. (See Defs.' Opp'n at 14-16.) The Court disagrees with Defendants and has addressed that argument as a standalone issue in its discussion of the effect of RFC's bankruptcy on Plaintiffs' ability to recover. (See supra , Section III.E.3.)
At oral argument, Defendants suggested that Plaintiffs had waived any argument based on the term "judgments" because it was raised for the first time in a reply brief. (See June 19 Hr'g Tr. at 157-58.) Although Courts "retain the authority to decline consideration of an issue raised for the first time in a reply brief, [they] are not precluded from considering the issue." United States v. Head ,
As described below, this issue is one on which Defendants also move for summary judgment with respect to certain pool-wide representations, so the Court addresses both parties' affirmative motions at the same time. (See infra , Section III.F.3.b.)
For this reason, Defendants' reliance on, inter alia, D.H. Blattner & Sons, Inc. v. Firemen's Ins. Co. ,
And in this case, Defendants rely heavily on insurance cases such as UnitedHealth Grp. Inc. v. Exec. Risk Specialty Ins. Co. ,
"RMBS R+W Claims" are defined in the Bankruptcy Plan as "claims of the RMBS Trusts against the Debtors arising from any obligations or liability in respect of the origination and sale of mortgage loans to the RMBS Trusts." (Scheck Decl., Ex. 32, App. 1 (Bankr. Plan ¶ 264).)
For example, Schwarcz states that an explicit underwriting guidelines representation would assert that "[a]ll of the Group I ... Loans have been underwritten in substantial compliance with the criteria set forth in the Program Guide." (Rand Decl., Ex. 22 (Schwarcz Rpt., ¶ 63) ) (citation omitted). Defendants concede that for Trusts to which RFC made these explicit representations, RFC may seek damages for breaches of those representations that resulted, in turn, from Defendants' breached R & Ws. (Defs.' Mem. at 72.)
An exemplar RFC pool-wide Credit Grade R & W stated:
No more than 60.29% of the Mortgage Loans have been classified by RFC as Credit Grade A4 Mortgage Loans, no more than 27.70% of the Mortgage Loans have been classified by RFC as Credit Grade AX Mortgage Loans, no more than 10.84% of the Mortgage Loans have been classified by RFC as Credit Grade AM Mortgage Loans, no more than 1.17% of the Mortgage Loans have been classified by RFC as Credit Grade B Mortgage Loans, none of the Mortgage Loans have been classified by RFC as Credit Grade C Mortgage Loans and none of the Mortgage Loans have been classified by RFC as Credit Grade CM Mortgage Loans, in each case as described generally in the Prospectus Supplement. (Smallwood Decl., Ex. 5 (RASC 2006-EMX1Assignment & Assumption Agmt. at 6).)
And an exemplar pool-wide Documentation Program R & W stated, "No more than 45.00% of the Mortgage Loans by aggregate Cut-off Date Principal Balance were underwritten under a reduced loan documentation program." (Smallwood Decl., Ex. 70 (RFMSI 2007-S5 Pooling & Servicing Agmt. at 18).)
Although the parties did not brief this issue, Defendants cite authority that the causation standard for an ordinary breach of contract claim is proximate cause, and not the contributing cause standard under the Client Guide's indemnity provisions. See D.H. Blattner ,
Defendants also claim that these defenses cannot be dismissed because they bear on RFC's allocation theories, which they claim improperly fail to account for RFC's servicing breaches and RFC's own fraud. (Defs.' Opp'n at 37.) Issues regarding servicing breaches pertain exclusively to the reasonableness of the settlement: Did the parties in settling these claims reasonably identify the value and litigation risk of indemnifiable versus non-indemnifiable claims? As to arguments regarding RFC's own fraud and misrepresentations, Defendants' argument is moot, as this Court has held that Defendants must indemnify RFC for its own alleged , but unproven, misconduct. (See supra , Section III.E.1.)
In their moving papers, Plaintiffs also moved for dismissal of Defendants' accord and satisfaction defense, but Defendants responded that they are no longer pursuing that defense. (Standard Pac.-CTX Opp'n to Pls.' Mot. Summ. J. ("Standard Pac.-CTX Opp'n") at 2 n.1 [Doc. No. 3580]; see also June 19 Hr'g Tr. at 220 (Defendants' counsel asserting that that defense is "off the table").) Thus, that defense is dismissed.
In their opening memorandum, Plaintiffs argue that were Defendants to assert the defense of judicial estoppel, it should also be dismissed. (Pls.' Mem. at 39.) Defendants, however, are pursuing only the defense of equitable estoppel. (See Defs.' Opp'n at 45.)
An RFC employee describes the "grade and slot" process as follows: "When a loan was input into Assetwise, ... the first thing that it would do ... is that it would actually create a ... grade for the loan generally driven off of credit, and then based off the grade that was assigned to that particular Assetwise submission, it would look for loan programs that matched up with that credit as well as the other criteria on the loan." (Scheck Decl., Ex. 50 (Edstrom Dep. at 141).)
Defendants Standard Pacific and CTX did not address Assetwise in their Defendant-specific memorandum.
Both parties seem to agree that these so-called "knowledge- and reliance-based defenses" are not affirmative defenses per se , but rather are defenses that may negate elements of Plaintiffs' claims. (June 19 Hr'g Tr. at 201, 220); see Masuen v. E.L. Lien & Sons, Inc. ,
Specifically, the Court addressed Defendants' arguments regarding whether RFC's alleged misconduct precludes recovery, whether RFC is barred from recovering damages on "expired" loans, whether its bankruptcy precludes recovery, and whether RFC may use statistical sampling as a method of establishing liability and damages. (See supra , Section III.E.1-4.) In addition, in the Court's discussion regarding the determination of reasonableness, the Court addressed Defendants' related argument that RFC's indemnity claim related to the MBIA Settlement fails. (Supra , Section III.F.1.b.) Finally, in the Court's discussion of Plaintiffs' motion regarding causation, and specifically, recovery for all losses, the Court addressed Defendants' related motion regarding whether Plaintiffs could recover damages from alleged breaches of pool-wide representation. (Id. , Section III.F.3.b.)
The Impac motion referenced Sections A201(M) and 113 in the successor liability context, with the focus on whether breach of contract liabilities arose before or after the execution date of a corporate reorganization agreement. (April 27, 2016 Order at 38-39 [Doc. No. 1523].) RFC and Impac had engaged in some discovery limited to the successor liability issue, but overall, the record regarding pre-2006 loans was not well developed at that time.
The Court disagrees with Defendants' interpretation that Section A200 limits their notification obligations under Section A201(M) to the date of sale. Section A200 merely speaks to when the R & Ws commence, stating, "The [R & Ws] contained herein are made as of each Funding Date ..., unless the specific [R & W] provides to the contrary. Making these [R & Ws] does not release the Client from its obligations under the [R & Ws] contained in other Sections of this Client Guide." (Client Guide § A200.) It does not clearly address when those obligations end, nor does it indicate that Defendants' imputed knowledge, in Section 113(A), is limited to the date of sale.
At-issue loans are loans sold to RFC by Defendants or non-defendants that realized actual losses or expected losses, and underlie the claims against RFC by investors or insurers in the bankruptcy settlement. (Scheck Decl., Ex. 38 (Corr. Snow Rpt. ¶ 49).) Expected losses are losses anticipated from loans that were (1) 90 days delinquent, in foreclosure, or real-estate owned as of May 2013 or (2) active but had incurred at least $500 of modification losses as of this date. (Id. )
This issue-whether RFC can recover losses it did not incur in the Settlements-was raised affirmatively by Plaintiffs in their Motion for Summary Judgment. (See supra , Section III.F.2.) Because the viability of the Breaching Loss Approach depends upon the recoverability of these losses, that issue is addressed, for purposes of both motions, in this section of the Order.
Defendants contend that RFC is collaterally estopped from seeking repurchase damages because of Quicken Loans ' preclusive effect.
A "Trust Claim" is a claim awarded to an RMBS trust investor in the Settlements for alleged breaches made by RFC with respect to the representations and warranties in the Trust Agreement. A "Monoline Claim" is a claim awarded to a monoline insurer in the Settlements for alleged breaches made by RFC with respect to the representations and warranties in insurance contracts.
NDS Trusts are RMBS Trusts sponsored by third parties that asserted claims in the bankruptcy against RFC premised on the allegedly breaching loans that RFC sold to those trusts. (Smallwood Decl., Ex. 30 (Corr. Snow Report ¶¶ 17-22).)
In their memorandum of law in support of summary judgment, Defendants challenge the specific sampling methodology that Dr. Snow employed to assess and allocate the Monoline Settlements under the Allocated Breaching Loss Approach. Those arguments are more appropriately considered in connection with Defendants' Motion to Exclude Expert Testimony and the Court will address those arguments in its Order and Opinion responding to that motion.