SUSAN RICHARD NELSON, United States District Judge.
I. Introduction ...1116
II. Background ...1117
A. Securitization ...1117
B. Historical Background ...1117
C. The Client Contract and the Client Guide ...1118
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
F. Plaintiffs' Motions for Summary Judgment ...1151
G. Defendants' Motions for Summary Judgment ...1186
IV. Conclusion...1205
Before the Court are the parties' cross motions for summary judgment on common issues in the first-wave actions.
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), 2017 WL 6886712, at *4 (D. Minn. Dec. 21, 2017) (citing Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 648 (8th Cir. 2001)). A mortgage lender raises funds for new mortgages through this process. Id. (citing BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assur. Corp., 673 F.3d 169, 173 (2d Cir. 2012)). The trust pays for the loans by issuing securities for which the loans serve as collateral. Id. "The right to receive trust income is parceled into certificates and sold to investors, called certificateholders." Id. Purchasers of the securities often require that they be insured by monoline insurers as a hedge against investment risk. In re Barclays Bank PLC Securities Litig., No. 09 Civ. 1989 (PAC), 2017 WL 4082305, at *4 (S.D.N.Y. Sept. 13, 2017), appeal docketed, No. 17-3293 (2d Cir. Oct. 16, 2017).
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." Id. While an initial mortgage refinancing boom from 2001 to 2003 led to increased earnings for mortgage originators and securitizers, when long-term interest rates began to rise, the mortgage industry sought other ways to maintain origination volumes. Levitin & Wachter, supra, at 1193-94). The solution required industry players "to find more product to move in order to maintain origination volumes and, hence, earnings." Id. at 1194.
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, 2017 WL 4082305, at *4.
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., 873 F.3d 85, 96 (2d Cir. 2017) (citing Levitin & Wachter, supra, at 1192-202). It was not to last. Among other things, housing prices fell and
In re Barclays Bank, 2017 WL 4082305, at *4. The global economy experienced an unprecedented downturn in 2008 "that had a profoundly negative effect on the real estate and credit markets." S.E.C. v. True North Fin. Corp., 909 F.Supp.2d 1073, 1083 (D. Minn. 2012) (citations omitted).
Plaintiffs
Second, in its middleman role, RFC then sold the pooled loans into residential mortgage-backed securitization ("RMBS") trusts ("the Trusts"). (See id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 17).) In the contracts that governed the relationships between RFC and the Trusts, RFC made representations and warranties ("R & Ws") concerning the underwriting quality and credit characteristics of the mortgage loans. (Id.) The Trusts issued notes or certificates, supported by the loans' performance, which investors purchased. (Id.) RFC additionally functioned as a "master servicer" for many of the securitizations, overseeing the work of the primary servicers. (Id. ¶ 18.)
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.
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:
(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:
(Id. § 113(B).)
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:
(Id.)
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].)
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 id. § A208) (listing the types of "Events of Default"). Under Section A209, "Non-Exclusive, Cumulative
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.
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
(Id. § A212.)
Versions of the Client Guide from July 1, 2002 forward contain additional language regarding the loan originators' broad indemnification obligations to RFC:
(Scheck Decl., App. 1 (Evolution of Client Guide § A212).)
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); id., Ex. 20 (Debtors' 9019 Mot. ¶¶ 17-20).) Absent settlement, Plaintiffs' then-expert Frank Sillman estimated that lifetime losses for these trusts could have ranged between $45.6 billion to $49.8 billion. (Id., Ex. 28 (Bankr. Findings of Fact ¶ 101).)
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 id., Exs. 22 to 26 (Proofs of Claim 6767, 6605, 6656, 6451, 5130).) This included six RMBS Trustees with proofs of claim covering 1,000 trusts with a combined original principal balance of over $226 billion. (Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 97).) Their most significant claims concerned alleged breaches of the R & Ws that Plaintiffs had made in the Governing Agreements for the securitizations. (Id. ¶ 98.) Among their other claims, RMBS Trustees also asserted common-law fraud or negligent misrepresentation claims against Plaintiffs to the extent that they had actual or imputed knowledge that the mortgage loans failed to comply with Plaintiffs' R & Ws. (Id. ¶ 101.)
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").
(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:
(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).)
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., Residential Funding Co., LLC v. Home Loan Center,
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].)
Summary judgment is appropriate if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A fact is `material'" only if it may affect the outcome of the lawsuit. TCF Nat'l Bank v. Mkt. Intelligence, Inc., 812 F.3d 701, 707 (8th Cir. 2016). Likewise, an issue of material fact is "genuine" only if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party bears the burden of establishing a lack of genuine issue of fact, Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), and the Court must view the evidence and any reasonable inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In responding to a motion for summary judgment, however, the nonmoving party may not "`rest on mere allegations or denials,' but must demonstrate on the record the existence of specific facts which create a genuine issue for trial." Krenik v. Cty. of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995).
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., 2017 WL 5571222 (Minn. Dist. Ct. Feb. 1, 2017), precludes such damages, (b) repurchase damages are unavailable under RFC's "guise" of seeking indemnity for losses or liabilities under Section A212 of the Client Guide, and (c) RFC fails to prove that Defendants' alleged R & W breaches caused loan-level losses; (2) RFC cannot recover damages under its Allocated Breaching Loss damages approach because it fails to provide a non-speculative basis for allocating the RMBS Trust Settlements and Monoline Settlements; (3) RFC's Allocated Loss approach to calculating damages fails; (4) RFC is not entitled to indemnity for its own misconduct (a) as evidenced by allegations of fraud and negligence against RFC, (b) because the Client Guide does not permit indemnity for RFC's own misconduct, and (c) because even if the Client Guide permitted such recovery, it would be unenforceable; (5) RFC's claims for loans sold before May 14, 2006 are time-barred; (6) RFC is barred from recovering damages on "expired" loans; (7) RFC cannot recover damages resulting from alleged breaches of pool-wide representations; (8) RFC's indemnity claim related to the MBIA Settlement fails; (9) RFC cannot use sampling to establish liability for loans outside its samples; (10) damages for indemnity are limited to RFC's actual losses; and (11) RFC's expert opinions are inadmissible and foreclose its claims. (See generally Defs.' Mem. Supp. Mot. for Summ. J. ("Defs.' Mem.") at 1-2, 10-11 [Doc. No. 3251].)
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." Rice Lake Contracting Corp. v. Rust Env't & Infrastructure, Inc., 616 N.W.2d 288, 291
"In the contractual context," however, "a claim based on an express indemnification provision is a legal, rather than equitable, claim." Johnson v. Johnson, 902 N.W.2d 79, 85 (Minn. Ct. App. 2017); see also Hendrickson, 104 N.W.2d at 848 (expressly recognizing that a duty to indemnify can arise "[w]here there is an express contract between the parties containing an explicit undertaking to reimburse for liability of the character involved"). "Indeed, when the duty to indemnify arises from contractual language, it generally is not subject to equitable considerations; rather, it is enforced in accordance with the terms of the contracting parties' agreement." 41 Am. Jur. 2d Indemnity § 13.
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., 573 N.W.2d 723, 726 (Minn. Ct. App. 1998); see also Grand Trunk W. R.R., Inc. v. Auto Warehousing Co., 262 Mich.App. 345, 686 N.W.2d 756, 761 (2004) ("Contractual indemnity is an area of law guided by well-settled general principles. Nonetheless, each case must ultimately be determined by the contract terms to which the parties have agreed."). An indemnity contract is "to be given `a fair construction that will accomplish its stated purpose.'" Sorenson v. Safety Flate, Inc., 306 Minn. 300, 235 N.W.2d 848, 852 (1975) (quoting N.P. Ry. Co. v. Thornton Bros. Co., 206 Minn. 193, 288 N.W. 226, 227 (1939)).
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.
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, 463 N.W.2d at 525. Also, "[b]ecause of the presumption that the parties intended the language used to have effect," courts "attempt to avoid an interpretation of the contract that would render a provision meaningless." Id. at 526.
"A contract is ambiguous if, based on the language alone, it is reasonably susceptible of more than one interpretation." Art Goebel, 567 N.W.2d at 515. "If there is ambiguity, extrinsic evidence may be used, and construction of the contract is a question of fact for the jury unless such evidence is conclusive." Hickman v. SAFECO Ins. Co. of Am., 695 N.W.2d 365, 369 (Minn. 2005) (citing Donnay v. Boulware, 275 Minn. 37, 144 N.W.2d 711, 716 (1966)). While ambiguity in a contract can be construed against the drafter, see, e.g., Premier Bank v. Becker Dev., LLC, 767 N.W.2d 691, 698 (Minn. App. 2009), courts should do so only after attempting to "determine the parties' intent behind an ambiguous term, using extrinsic evidence if available." Staffing Specifix, Inc. v. TempWorks Mgmt. Servs., 913 N.W.2d 687, 694 (Minn. 2018). Moreover, "this rule has less application as between parties of equal bargaining power or sophistication," Re-Sols. Intermediaries, LLC v. Heartland Fin. Grp., Inc., No. A09-1440, 2010 WL 1192030, at *3 (Minn. Ct. App. Mar. 30, 2010), and where both parties are represented by sophisticated legal counsel during the formation of the contract. Porous Media Corp. v. Midland Brake, Inc., 220 F.3d 954, 960 (8th Cir. 2000).
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., 848 N.W.2d 539, 545 (Minn. 2014), and "[c]ourts are not warranted in interfering with the contract rights of parties as evidenced by their writings which purport to express their full agreement," Cady v. Bush, 283 Minn. 105, 166 N.W.2d 358, 362 (1969). Indeed, "[w]here the parties have contracted to create duties that differ or extend beyond those established by general principles of law, and the terms of the contract are not otherwise unenforceable, the parties must abide by the contractual duties created." Grand Trunk W. R.R., 686 N.W.2d at 761. Terms of those contract provisions must "be given their ordinary meaning, as well as the interpretations adopted in prior cases." Ritrama, Inc. v. HDI-Gerling Am. Ins. Co., 796 F.3d 962, 969 (8th Cir. 2015) (quoting Boedigheimer v. Taylor, 287 Minn. 323, 178 N.W.2d 610, 613 (1970)).
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.
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, 821 N.W.2d 184, 191 (Minn. 2012). Under New York law, however, where many of the underlying claims were filed, negligent misrepresentation is considered a form of negligence, Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 257 F.Supp.3d 348, 359 (S.D.N.Y. 2017) (finding negligent misrepresentation claim duplicative of negligence claim), for which intent is not a required element.
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., 910 N.W.2d 412, 416 (Minn. 2018). Such provisions are therefore strictly construed against the indemnitee. Id. The word "negligence" is not required in the indemnification provision, but the clause must contain "specific, express language that `clearly and unequivocally' states the contracting parties' intent for the indemnitor to indemnify the indemnitee for the indemnitee's own negligence." Id. at 417 (quoting Johnson v. McGough Constr. Co., 294 N.W.2d 286, 288 (Minn. 1980), superseded by statute on other grounds, Minn. Stat. § 337.02, as recognized in Katzner v. Kelleher Constr., 545 N.W.2d 378, 381 (Minn. 1996)). In short, such clauses must "fairly apprise" the indemnitor of the transfer of liability for the indemnitee's acts of negligence. Id. (citing Yang v. Voyagaire Houseboats, Inc., 701 N.W.2d 783, 791 n.5 (Minn. 2005)).
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., 294 N.W.2d at 288 (finding coverage for claims of indemnitee's negligence based on coverage for
Moreover, the Client Guide provisions are unlike those in National Hydro Systems v. M.A. Mortenson Co., 529 N.W.2d 690 (Minn. 1995), and Servais v. T.J. Management of Minneapolis, Inc., 973 F.Supp. 885 (D. Minn. 1997), cited by Defendants. The indemnification provisions in those cases required indemnification for claims related to the indemnitor's conduct. Nat'l Hydro, 529 N.W.2d at 692 (requiring a contractor to indemnify for claims arising out of his own work); Servais, 973 F.Supp. at 892 (finding that while a broad indemnification clause conceivably covered the indemnitee's own negligence, it was instead limited to the indemnitor's actions by additional language requiring indemnification for "any liabilities ... resulting from injury... to employees injured while utilizing the services of [the indemnitor]"). Likewise, the provisions here are unlike those in DeWitt, in which the Minnesota Supreme Court found that broad indemnification language for "any and all liabilities" was not unequivocally linked to the indemnitee's own negligence. 910 N.W.2d at 418-20. The indemnitee had argued that because the provision included an exception for the indemnitee's own intentional misconduct, the provision must be construed to cover all other acts of the indemnitee, including torts. Id. The court rejected this argument, finding that the language failed to expressly inform the indemnitor of its obligation for such coverage. Id. In contrast, the language here specifically provides for indemnification based on RFC's own representations, warranties, or obligations, as discussed above.
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., 910 F.Supp.2d at 547 (stating that under New York law, claims for negligent misrepresentation may be based on a breach of the defendant's duty to provide a plaintiff with accurate information). The Court thus finds that Sections A202(II) and A212 clearly and unequivocally express the parties' intent to transfer liability to Defendants for RFC's own acts of negligence. Moreover, because RFC and Defendants were sophisticated business parties, there can be no claim that Defendants lacked either understanding or notice of their obligation to indemnify RFC for such claims. Harleysville Ins. Co. v. Physical Distrib. Servs., Inc., 716 F.3d 451, 457-58 (8th Cir. 2013) (finding, under Minnesota law, no public policy violation rendering indemnification provision unenforceable where parties to the agreement were sophisticated businesses who fully understood the agreement's terms and had clear notice of the obligation to indemnify for the indemnitee's negligence).
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., 788 F.Supp.2d 950, 967-68 (D. Minn. 2011) (stating that an indemnification
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); id., Ex. 52 (U.S. Bank PoC #6655 ¶ 50).) However, the allegations of misrepresentation in the BNYM and U.S. Bank proofs of claim were merely allegations — and conditional allegations, at that:
(Smallwood Decl., Ex. 15 (BNYM PoC #6773 ¶ 49) (emphasis added); id., Ex. 52 (U.S. Bank PoC #6655 ¶ 50).) These allegations do not constitute a finding of misrepresentation, In re Residential Capital, 524 B.R. at 597, and may not even satisfy the heightened pleading standard for such a claim.
As to the MBIA claims, Defendants cite one legal decision, MBIA Ins. Co. v. Residential Funding Co., LLC, No. 603552/08, 26 Misc.3d 1204(A), 2009 WL 5178337, at *1 (N.Y. Sup. Ct. Dec. 22, 2009), noting that the court there denied RFC's motion to dismiss the plaintiff's fraud claims.
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); id., Ex. 54 (Ex. 108-004 to Jackman Dep.)), and testimony that it was "common" for RFC to buy bulk loans that were "not originated to RFC's guidelines. (Id.) (citing Smallwood Decl., Ex. 55 (Forget Dep. at 52-53, 95-100); id., Ex. 56 (Ex. 262-0002 to Forget Dep.); id., Ex. 57 (Ex. 262-0013 to Forget Dep.).) They further cite deposition testimony for the proposition that RFC used Assetwise to buy loans that were not in compliance with the Client Guide, (id.) (citing Smallwood Decl., Ex. 58 (Ex. 145-0011 to Maki Dep. at 3); id, Ex. 59 (Maki Dep. at 154-55)), and that the purchases of such loans represented RFC's "business decision[s]." (Id.) (citing Smallwood Decl., Ex. 60 (1/10/18 Payne Dep. at 38-41, 59, 83-84, 117-20).)
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., 851 F.Supp. 1361, 1368-69 (D. Minn. 1994) (noting that even if "fear of an adverse judgment was a factor in the antitrust defendants' decision settle, that would not be enough to fit within the willful misconduct exception," as "it ha[d] never been adjudged that the antitrust plaintiffs were liable by reason of willful misconduct."). Because RFC settled its claims with the Monolines without admitting liability for alleged fraud or misrepresentation claims, the indemnification provisions between RFC and Defendants remain enforceable.
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.
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:
(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, 463 N.W.2d at 525. Courts are to construe a contract as a whole and attempt to harmonize all of the contract's provisions. Id. at 525-26. In addition, "[b]ecause of the presumption that the parties intended the language used to have effect," courts "attempt to avoid an interpretation of the contract that would render a provision meaningless." Id. at 526.
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., 114 F.3d 741, 744 (8th Cir. 1997) (noting "long-settled" Minnesota law that "foreclosure extinguishes the mortgage); In re Stacy, 9 F.Supp. 61, 64 (D. Minn. 1934) (stating that upon foreclosure, a mortgage becomes "functus officio," or, without further legal effect)).
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, 2012 WL 4511065, at *4 (D. Minn. Oct. 1, 2012), for the proposition that this Court has rejected any argument that loans survive beyond foreclosure. (Defs.' Mem. at 69-70.) The Court does not disagree with this generally applicable principle, although Defendants correctly note that even in MASTR Asset, the Court observed that some states provide deficiency periods that permit a mortgagee to sue a borrower if the foreclosure proceeds fail to satisfy the underlying debt. Id. at *5 n.7. In any event, unlike the Client Guide, the contract in MASTR Asset designated repurchase as the sole contractual remedy for breaches — in other words, the contract only permitted the remedy of specific performance. Id. at *5-6. Because foreclosed loans could not be repurchased, the sole remedy was unavailable, so the Court granted summary judgment to the defendant. Similarly, in Nationwide Advantage Mortgage Co. v. Mortgage Services III, LLC, No. 13 C 83, 2013 WL 1787551, at *2 (N.D. Ill. April 25, 2013), the court dismissed the plaintiff's claims for breach of contract predicated on a repurchase provision where the loans had been foreclosed upon, but denied the motion to dismiss as to indemnification, noting the language of that provision obliged the defendant to indemnify the plaintiff.
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., 45 S.W.3d 233, 237 (Tex. Ct. App. 2001), where the R & Ws were to continue "for the full remaining life of each Mortgage Loan." The court in Capstead granted summary judgment as to loans foreclosed upon before the suit was filed, finding that "the mortgage loan ceased to exist upon foreclosure." Id. at 238. But Capstead is inapposite because the basis for that court's decision was the plaintiff's own admission that the mortgage note was extinguished upon foreclosure, since the plaintiff itself had initiated foreclosure proceedings. Id. In essence, the plaintiff had elected a different remedy. Id. That is not the case here.
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, 463 N.W.2d at 525-26. While a loan's existence typically ends upon foreclosure, RFC's remedies are not so strictly limited. For example, with respect to the right to repurchase, Section A210(B) states, "[]RFC may demand that a Client repurchase, and Client must repurchase, a Loan after foreclosure...." (Client Guide § A201(B)) (emphasis added). In addition, liquidation proceeds are one element factored into the calculation of a repurchase price, which is equal to the sum of: (1) the actual principal balance of the loan at the time of repurchase; (2) all interest and fees incurred in recovering on the loan; (3) a buy-out fee; (4) RFC's potential additional purchase amounts; (5) minus the amount of any proceeds realized by the owner of the loan upon the final liquidation of the loan. (Id. § A210(B)) (emphasis added).
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:
(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, 463 N.W.2d at 526.
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.
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, 949 F.2d 231, 233 (8th Cir. 1991)). Courts have recognized that termination of a bankruptcy estate "`is expressly subject to the terms and provisions of the confirmed plan, and that the confirmed plan need not state in explicit terms that the bankruptcy estate is to continue in existence.'" (Id.) (quoting In re Canton Jubilee, Inc., 253 B.R. 770, 776 (Bankr. E.D. Tex. 2000) (internal citations omitted); also citing Hillis Motors, Inc. v. Haw. Auto. Dealers' Ass'n, 997 F.2d 581, 587 (9th Cir. 1993) ("The reversion of property from the estate to the debtor upon confirmation contained in 11 U.S.C. § 1141(b) is explicitly subject to the provisions of the plan."); In re Ernst, 45 B.R. 700, 702 (Bankr. D. Minn. 1985) ("All estate property is vested in the debtor at confirmation, except as the plan specifically provides otherwise. Accordingly, in the absence of a plan provision retaining property in an estate, the estate ceases to exist.")).)
In the 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), 2006 WL 1473004, at *5 (D. Minn. May 25, 2006) (citation omitted). Here, the Confirmation Order and the Plan contemplated the very relief that Plaintiffs seek in this consolidated action. It authorized the creation of a "Liquidating Trust," i.e., the Rescap Liquidating Trust, into which RFC was to transfer and assign its assets, and they preserved the Liquidating Trust's (and Estates') causes of action:
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:
(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:
(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, 359 N.W.2d 323, 328 (Minn. Ct. App. 1984); Bank of India v. Trendi Sportswear, Inc., No. 89 CIV.5996 JSM, 2002 WL 84631, at *1-4 (S.D.N.Y. Jan. 18, 2002)). The Court previously found Trapp distinguishable because the claims in that case were not discharged by the Bankruptcy Court's Confirmation Order. (June 16, 2015 Am. Order at 19-20) (citing 359 N.W.2d at 328). And the Court distinguished Bank of India because, unlike here, there was no contractual indemnification agreement. (Id. at 20) (citing 2002 WL 84631, at *1-4). Defendants now also cite Mid-Hudson Catskill Rural Migrant Ministry, Inc. v. Fine Host Corp., 418 F.3d 168, 179-80 (2d Cir. 2005), but there, the court found against the plaintiff because it had not incurred the fees for which it claimed indemnification.
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.
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. ___, 136 S.Ct. 1036, 1046, 194 L.Ed.2d 124 (2016). The Eighth Circuit has likewise approved the use of sampling methodology as a means of establishing breach and causation in breach of contract litigation. See Marvin Lumber & Cedar Co. v. PPG Indus., Inc., 401 F.3d 901, 916 (8th Cir. 2005). In litigation involving excess insurance indemnification, this Court has stated that the question of the reasonableness of underlying settlements could also be demonstrated by expert sampling of a statistically significant number of claims files. UnitedHealth Group Inc. v. Columbia Cas. Co., No. 05-cv-1289 (PJS/SRN), 2010 WL 11537514, at *25 (D. Minn. Aug. 10, 2010).
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, 289 F.Supp.3d 484, 504 (S.D.N.Y. 2018) ("Here, Deutsche Bank is permitted to seek damages on both the R & W and Notice Claims, and statistical sampling is an entirely appropriate method of attempting to prove both liability and damages."); Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 920 F.Supp.2d 475, 512 (S.D.N.Y. 2013) ("Sampling is a widely accepted method of proof in cases brought under New York law, including cases relating to RMBS and involving repurchase claims"); Order Granting Pls.' Mot. in Limine Permitting Use of Statistical Sampling, In re Residential Capital, LLC, No. 14-07900-mg. [Bankr. Doc. No. 56 at 3-4] (Bankr. S.D.N.Y. Jan. 13, 2015) (Glenn, B.J.) (stating that statistical sampling and calculation of breach rates are commonly used methodologies in RMBS litigation, as sampling followed by extrapolation "permits cases like these to be efficiently litigated in a cost-effective manner without compromising the fairness of the results"); Nat'l Credit Union Admin Bd. v. RBS Sec. Inc., No. 11-2340-JWL, 2014 WL 1745448, at *5 (D. Kan. Apr. 30, 2014) (approving the use of expert sampling methodology); Syncora Guarantee Inc. v. EMC Mortg. Corp., No. 09 Civ. 3106 (PAC), 2011 WL 1135007, at *1, *6 n.4 (S.D.N.Y. Mar. 25, 2011) (permitting plaintiff to seek pool-wide remedy using sampling and extrapolation for repurchase claims); see also Nomura Holding, 873 F.3d 85 (upholding an $806 million bench trial judgment involving use of statistical sampling in RMBS case); Deutsche Bank Nat'l Tr. Co. v. WMC Mortg., LLC, No. 3:12-cv-933 (CSH), 2014 WL 3824333, at *9 (D. Conn. Aug. 4, 2014) (stating that statistical sampling, in principle, "is an acceptable way of proving liability and damages in an RMBS case").
Even in one of Defendants' cited cases, BlackRock Allocation Target Shares v. Wells Fargo Bank, N.A, No. 14-cv-9371 (KPF) (SN), 2017 WL 953550, at *5 (S.D.N.Y. Mar. 10, 2017), although the court decided that the expense and burden of sampling was not proportional to the
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 id.)
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.
(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:
(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, 2017 WL 5256760, at *7, this Court is not persuaded. The "each Loan" language in the Client Guide does not state that Plaintiffs must prove breaches loan by loan. Rather, the Section A202 language quoted above, for example, requires Defendants to make their representations loan by loan. Defendants identify no Client Guide provisions that expressly require Plaintiffs to prove liability loan by loan.
The Court in Deutsche Bank, 289 F.Supp.3d at 506, rejected this same argument based on the use of singular nouns in the parties' contract. There, as here, the governing contract contained no language requiring the party providing notice to specifically identify or offer proof as to each and every loan subject to repurchase. Id. Moreover, here, Defendants' actual knowledge of breaches is irrelevant because the Client Guide obliged originating lenders to assume liability for any misrepresentations or breaches, regardless of their knowledge or RFC's knowledge. (Client Guide § A200.)
Moreover, as Plaintiffs note, even if Plaintiffs were required to prove liability
920 F.Supp.2d at 512.
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." 136 S.Ct. at 1046 (quoting Complex Litigation § 11.493, p. 102 (4th ed. 2004)). Discussing the repurchase protocol and whether individualized proof was required in a case involving numerous loans, the court in Syncora stated:
2011 WL 1135007, at *6 n.4.
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), 2012 WL 6000885, at *5 (S.D.N.Y. Dec. 3, 2012) (sample size included more than 40,000 loans, with 100
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, 289 F.Supp.3d at 496, 505. Rather, "it is a well-established and scientifically sound method of inferring (to varying degrees of certainty) how many individual loans in the pool contain material breaches." Id. In their opposition to Plaintiffs' motion, Defendants point out alleged "flaws" in Dr. Snow's methodology which, they assert, render his opinion unreliable. (Defs.' Opp'n at 51.) Whether Dr. Snow's opinion is sufficiently reliable under Daubert is a different question, which will be addressed in the Court's separate ruling on Daubert motions.
For the reasons set forth above, Plaintiffs' motion for summary judgment on the issue of sampling is granted and Defendants' motion is denied.
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.
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:
(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
(Id. § A210(A) (emphasis added).) Section A208, in turn, provides that an "Event of Default" occurs, for instance, when
(Id. § A208) (emphasis added). Finally, Plaintiffs point to Section A212, which provides that
(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), 850 F.Supp.2d 961 (D. Minn. 2012), aff'd, 725 F.3d 910 (Terrace II) (8th Cir. 2013), as affirmed by the Eighth Circuit. In Terrace, this Court held that the plain language of the Client Guide — which had identical language to the relevant provisions here — gave RFC "the sole and essentially unreviewable authority to determine if a particular loan must be repurchased because it failed to meet the underwriting criteria in the Client Guide[]." 850 F.Supp.2d at 969. The Eighth Circuit affirmed. Terrace II, 725 F.3d at 916-18. Thus, Plaintiffs argue, the plain language of the Client Guide, as already interpreted by this Court in Terrace, compels summary judgment in their favor on this issue.
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, 850 F.Supp.2d at 969). In other words, they concede that RFC has the power to determine, in its sole discretion, if a loan is in breach of a R & W, but only insofar as RFC seeks to have the originating bank repurchase that loan. (See Defs.' Mem. at 2 ("Terrace affirmed RFC's discretion in a specific context (applying the Client Guide's repurchase protocol) to make a specific determination (whether loans breached the Guide) in connection with a specific remedy (repurchase).").) In all other circumstances, Defendants contend, RFC does not have sole discretion to determine breaches. (Defs.' Opp'n at 2-8.)
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, 725 F.3d at 916.
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:
Terrace II, 725 F.3d at 916 (internal citations omitted). In other words, as just described, Section 113(B) gives RFC sole discretion to determine breaches, and Defendants contractually agreed to certain remedies in the event that RFC made such determinations.
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." Id. The court in Syncora, 2011 WL 1135007, at *5, addressed a similarly expansive contract, explaining that "[t]he Operative Documents grant especially broad rights and remedies to Syncora because, as the financial guarantor under an unconditional and irrevocable insurance policy, it bears the greatest loss if the loans underperform and the other parties break their contractual obligations." The contract here was one that several sophisticated entities willingly signed. And as poignantly stated by the Second Circuit, "in commercial transactions it does not in the end promote justice to seek strained interpretations in aid of those who do not protect themselves." James Baird Co. v. Gimbel Bros., 64 F.2d 344, 346 (2d Cir. 1933).
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, 458 N.W.2d 679, 681 (Minn. 1990). The contract language on which Plaintiffs rely provides that
(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, 90 F.3d 1388, 1392-93 (8th Cir. 1996) (applying Minnesota law and holding that indemnitee did not need to provide notice where contract language did not unambiguously require it); see also Fontenot v. Mesa Petroleum Co., 791 F.2d 1207, 1221 (5th Cir. 1986) ("Where the indemnity agreement does not require notice, the courts will not infer a notice requirement as a condition precedent to a right to recover on the indemnity contract."); Premier Corp. v. Econ. Research Analysts, Inc., 578 F.2d 551, 554 (4th Cir. 1978) (applying "the general rule that notice is unnecessary unless the contract of indemnity requires it"); Smithson v. Wolfe, No. C94-1015 MJM, 1999 WL 33656866, at *4 (N.D. Iowa July 19, 1999) ("[T]he general rule is that an indemnitee is not required to provide notice ... to the indemnitor under an indemnification contract, unless the contract itself requires notification...."). Here, the unambiguous terms of the indemnity contract provide that RFC did not need to notify Defendants of any litigation or proceeding that may trigger indemnification.
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., 473 N.W.2d 339, 342 (Minn. Ct. App. 1991) ("Although notice was not required, the settlement must be reasonable and entered in good faith to be enforceable."). Nothing in the Client Guide — and certainly nothing in the provision on which Plaintiffs rely — overrides this principle. While this Court finds that the Client Guide grants RFC
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., 461 N.W.2d 374, 379 (Minn. 1990); Gronquist v. Olson, 242 Minn. 119, 64 N.W.2d 159, 164 (1954); Toyota-Lift of Minn., Inc. v. Am. Warehouse Sys., LLC, 868 N.W.2d 689, 696 (Minn. Ct. App. 2015)).
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, 316 N.W.2d at 735. This inquiry "involves a consideration of the facts bearing on the liability and damage aspects of plaintiff's claim, as well as the risks of going to trial." Id.; see also Glass, 778 F.Supp. at 1084 (citing Miller, 316 N.W.2d at 735). Moreover, "[t]he party seeking indemnification need only show it could have been liable under the facts shown at trial not whether they would have been." Jackson, 803 F.Supp.2d at 1012 (emphasis removed) (citing Glass, 778 F.Supp. at 1083). Further, "in the context of a contractual duty to indemnify, ... when the parties have a written indemnity contract, `the actual liability requirement [is] superfluous.'" Id. (quoting Glass, 778 F.Supp. at 1084 n.88) (granting summary judgment to party seeking indemnity, finding that the settlement was reasonable where facts "could have triggered" party's liability (emphasis removed)).
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.
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, 902 N.W.2d at 85 ("[C]aselaw distinguishes between a `strict contract of indemnity against loss or damage' and indemnity `against mere liability.'" (quoting Trapp, 359 N.W.2d at 327)). "A party's use of certain terms can aid the determination of what type of indemnity was considered by the parties." Lindsey v. Jewels by Park Lane, Inc., 205 F.3d 1087, 1093 (8th Cir. 2000). Here, the post-December 2005 Client Guide states that:
(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, 359 N.W.2d at 327; see also Christy v. Menasha Corp., 297 Minn. 334, 211 N.W.2d 773, 777 (1973), overruled on other grounds by Farmington Plumbing & Heating Co. v. Fischer Sand & Aggregate, Inc., 281 N.W.2d 838, 842 n. 4 (Minn. 1979) ("[An] agreement ... to indemnify not just against loss or damage but also against mere claims, ... a fortiori must be construed to be an indemnity agreement against accrued liability as well as against loss or damage."); Burns & McDonnell Eng'g Co. v. Torson Constr. Co., 834 S.W.2d 755, 758 (Mo. Ct. App. 1992) (holding contract provided for indemnity against liability where indemnitor agreed to indemnify against "claims," but also provided for indemnity against loss where indemnitor agreed to indemnify against "losses").
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:
(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., 416 N.W.2d 121, 123-24 (Minn. 1987) (holding that where there is no extrinsic evidence to aid in the interpretation of an ambiguous contract, the trial court "properly treated the construction and application of [the contract] as a question of law"); Turner, 276 N.W.2d at 66 (same).
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, 584 N.W.2d 390, 394 (Minn. 1998) (courts "will not construe the terms so as to lead to a harsh and absurd result").
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, 2010 WL 1192030, at *3. In fact, the Eighth Circuit has "refused to give a contra proferentem instruction even where one party supplied the form `due to the relatively equal bargaining strengths of both parties and the fact that [the appellant] was represented by sophisticated legal counsel during the [contract formation]." Porous Media, 220 F.3d at 960 (quoting Terra Int'l, Inc. v. Miss. Chem. Corp., 119 F.3d 688, 692 (8th Cir. 1997). Although Defendants claim that the Client Guide was not a product of negotiation, (see June 19 Hr'g Tr. at 160), "[a]n agreement between parties with business experience is not the product of unequal bargaining power." Alpha Sys. Integration, Inc. v. Silicon Graphics, Inc., 646 N.W.2d 904, 910 (Minn. Ct. App. 2002) (discussing claim of a contract of adhesion).
Here, it is beyond dispute that Plaintiffs and Defendants are sophisticated parties that enjoyed the benefit of counsel. See Terrace II, 725 F.3d at 917 (emphasizing, in similar case, that the contract "was a freely negotiated agreement between two sophisticated parties" and that Terrace "acknowledged that it is experienced regarding the transactions described in the Client Guide, had the opportunity to obtain advice from able counsel, and made its own independent decision to enter into the contract.").
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
(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, 716 F.3d at 458 (citing Webster's Third New International Dictionary 97 (1993) (defining "any" as "one, no matter what one").) Section A202(II) provides that Defendants would indemnify RFC for any claims or liabilities "incurred by []RFC as a result of any material misstatement in or omission from any information provided by the Client to []RFC," and thus presents an alternative avenue through which RFC may seek indemnity.
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.
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."
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, 28 F.Supp.3d 877, 883 (D. Minn. 2014).) In any event, Defendants contend, "[t]he Court need not decide the precise test for causation, ... as RFC's motion fails under any conceivable standard." (Id. at 32.)
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, 311 Minn. 428, 250 N.W.2d 817, 822 (1977); see also Capitol Indem. Corp., 28 F.Supp.3d at 883. Indeed, the phrase "`[a]rising out of' generally means `originating from,' `growing out of,' or `flowing from.'" Dougherty v. State Farm Mut. Ins. Co., 699 N.W.2d 741, 744 (Minn. 2005). Although the Court notes that most of the cases interpreting these phrases examine insurance policies, it can glean no principled reason why this contractual indemnification language would be subject to a different interpretation. In fact, as some courts have noted, "the rules of contractual indemnity are derived primarily from insurance and construction cases." Grand Trunk W. R.R., 686 N.W.2d at 762.
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, 250 N.W.2d at 822, or a "causal connection" to, Ross v. City of Minneapolis, 408 N.W.2d 910, 912 (Minn. Ct. App. 1987), Defendants' breaches of R & Ws or Events of Default. This does not require that Plaintiffs show that any individual Defendant's breaches were the sole cause of Plaintiffs' liabilities and losses — it merely requires that Plaintiffs show that an individual Defendant's breaches were a contributing cause of those liabilities and losses. See, e.g., Bolin v. Hartford Life & Accident Ins. Co., 28 F.Supp.3d 915, 918 (D. Minn. 2014) (interpreting Minnesota law and rejecting party's argument that "if anything other than medical treatment contributes to a death," then that death did not "result[] from ... medical ... treatment").
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, 571 U.S. 204, 134 S.Ct. 881, 187 L.Ed.2d 715 (2014), where the Supreme Court considered whether someone's death could be said to have "resulted from" the use of heroin, where experts merely testified that the heroin "`was a contributing factor' in [the decedent's] death, since it interacted with other drugs to cause `respiratory and/or central nervous system depression.'" Id. at 207, 134 S.Ct. 881. Utilizing the "ordinary meaning" of the phrase "results from," as well as its use "[i]n the usual course," the Supreme Court held that the phrase required proof "`that the harm would not have occurred' in the absence of — that is, but for — the defendant's conduct." Id. at 210-11, 134 S.Ct. 881 (citation omitted). By way of analogy, the Court explained that "if poison is administered to a man debilitated by multiple diseases, it is a but-for cause of his death even if those diseases played a part in his demise, so long as, without the incremental effect of the poison, he would have lived." Id. at 211, 134 S.Ct. 881 (citation omitted); but see id. at 215, 134 S.Ct. 881 (noting a "less demanding (but also less well established) line of authority, under which an act or omission is considered a cause-in-fact if it was a `substantial' or `contributing' factor in producing a given result").
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, 2015 WL 1478443, at *3 (D. Or. Mar. 31, 2015) ("Defendant conflates proving causation of damages with proving the amount of damages; plaintiff need only show that defendant caused some amount of damages for purposes of this [summary judgment] motion and does not need to show the exact amount of damages caused."). This Court will address allocation of damages at great length, see infra, Section III.G.3 — an entirely separate inquiry than that of causation under Section A212 of the Client Guide.
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'
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:
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, 674 N.W.2d 233, 237 (Minn. Ct. App. 2004) ("Where reasonable minds can differ on the issue of causation, the [factfinder] should resolve the issue, and it would be error to grant summary judgment."). For example, one such disputed factual issue that Defendants raise in opposition to Plaintiffs' causation argument concerns liability as to RFC's underlying pool-wide representations. (See Defs.' Opp'n at 36.) Defendants also raise this issue affirmatively in their summary judgment motion, in the context of whether Plaintiffs may obtain damages for claims based on underlying breaches of pool-wide representations. (See Defs.' Mem. at 71-78.) In either context, the analysis is essentially the same, as discussed below.
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 id.)
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. (Id. at Ch. 4, p. 4.1) In addition, the Client Guide included detailed tables containing the criteria necessary to meet each credit grade and documentation program. (See id. §§ B601(H)(i), (2), 700.)
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); id., Ex. 65 (Payne Rpt. at 109-10); id., Ex. 66 (Hunter Rpt. at 101-03).) They note that the Credit Grade R & Ws state that credit grades are "as described generally" in the Prospectus Supplement. (Smallwood Decl., Ex. 43 (Butler Rpt. at 130, n.313); id., Ex. 65 (Payne Rpt. at 109 n.247); id., Ex. 66 (Hunter Rpt. at 100 n.218).)) They further contend that the Prospectus Supplements discussed the relevant underwriting standards. (Smallwood Decl., Ex. 43 (Butler Rpt. at 130 n.313); id., Ex. 65 (Payne Rpt. at 109 n.247); id., Ex. 66 (Hunter Rpt. at 100 n.218).) But Defendants' expert opines that (1) neither type of pool-wide representation nor the Prospectus Supplements asserts that all trust loans were underwritten in substantial compliance with underwriting guidelines, (Rand Decl., Ex. 22 (Schwarcz Rpt. ¶¶ 70, 80)); and (2) pool-wide Credit Grade and Documentation Program R & Ws are not representations about specific loans (i.e., "loan level" representations). (See id. ¶¶ 71-81.)
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), 2002 WL 31789473, at *3 (D. Minn. Dec. 11, 2002) ("In the context of a head to head battle of expert opinion, summary judgment is inappropriate."). Whether pool-wide Credit Grade and Documentation Program R & Ws are functionally equivalent to underwriting representations, and whether Plaintiffs are entitled to damages resulting from alleged breaches of these pool-wide representations, is a
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:
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., 301 Minn. 315, 223 N.W.2d 37, 42 (1974) (involving the sale of goods, analyzing breach-of-warranty claim under a proximate causation standard)).)
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," Strobel v. Chicago, Rock Island & Pac. R.R. Co., 255 Minn. 201, 96 N.W.2d 195,
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
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.)
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.
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 id. at 7-8.) As just one example of this practice, HLC asserts that "[a]n RFC trader e-mailed that RFC `will stand behind buying the Clues approval'" when buying loans. (Id. at 8) (citing Smallwood Decl., Ex. 35 (Dep. Ex. 262-0026 to Forget Dep.).)
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., 460 F.3d 1047, 1053 (8th Cir. 2006)). At most, RFC argues, HLC's evidence shows RFC's "knowledge" or "acknowledgement" that the Client Guide did not apply to certain loans. (Id.) Specifically, as to the evidence related to Assetwise approvals and loans underwritten to third-party loan parameters, RFC argues that it "at most suggests that RFC sometimes made internal business decisions to buy loans outside the Guide," but that "[n]one of the evidence shows an agreement by RFC that HLC did not have to comply with the Guide." (Id. at 46.) And with respect to evidence relating to bulk purchases, RFC contends that it at most shows "RFC's awareness that other loan parameters may have been used to underwrite certain loans," but that it does not suggest that RFC would refrain from exercising its rights under the Client Guide. (Id.) In fact, RFC argues, although HLC's highlights two internal RFC emails stating that some bulk purchases included loans underwritten to third-party parameters, the contracts governing those transactions "state that the variances RFC granted to HLC" were still subject to the Client Guide's terms and conditions. (Id.)
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).
"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., 450 N.W.2d 913, 919 (Minn. 1990). "Estoppel is an equitable doctrine addressed to the discretion of the court and is intended to prevent a party from taking unconscionable advantage of his own wrong by asserting his strict legal rights." N. Petrochemical Co. v. U. S. Fire Ins. Co., 277 N.W.2d 408, 410 (Minn. 1979). "Equitable estoppel" depends on the facts of each case and is ordinarily a fact question for the jury to decide." Id.; see also Slidell, 460 F.3d at 1057.
On this record, and viewing the evidence in the light most favorable to Defendants, see Leonetti's Frozen Foods, Inc. v. Rew Mktg., Inc., 887 F.3d 438, 442 (8th Cir. 2018), the Court agrees with Defendants that triable issues of fact preclude summary judgment on their defense of equitable estoppel. Although, as will be discussed infra, Section III.F.4.b, there was no blanket waiver of RFC's rights to enforce the Client Guide while utilizing
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 id., Ex. 50 (Edstrom Dep. at 149) ("My understanding [is] that the word approve meant that ... the loan that was run through the Assetwise for this particular finding report ... could be approved to be submitted for consideration of purchase by RFC.").) It also listed "Required Documentation" that the originating lender had to submit before the loan could be approved. (Id., Ex. 51 (Example Assetwise Findings Rpt. at 2).)
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, 460 F.3d at 1055). And here, Defendants argue, RFC's "documented practice of accepting Assetwise-approved loans even where the loans did not comply with certain Client Guide requirements" constitutes waiver of the Client Guide provision expressly stating that clients who use Assetwise are still bound by the representations and warranties set forth in the Client Guide. (Id. at 42.)
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., 801 N.W.2d 177, 182 (Minn. 2011). The burden of proving waiver rests on the party asserting waiver. Id. To show a valid waiver, that party must prove two elements: "(1) knowledge of the right, and (2) an intent to waive the right." Id. "Waiver may be express or implied — `knowledge may be actual or constructive and the intent to waive may be inferred from conduct.'" Id. (quoting Valspar Refinish, Inc. v. Gaylord's Inc., 764 N.W.2d 359, 367 (Minn. 2009)). However, "[a]lthough waiver can be express or implied, both types of waiver require an expression of intent to relinquish the right at issue." Id. Accordingly, mere inaction is insufficient to establish waiver. Id.
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.
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
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, 2015 WL 3823093 (Minn. Ct. App. June 22, 2015), rev. denied (Minn. Sept. 15, 2015), issued after this Court's denial of their motion to strike, where the Minnesota Court of Appeals declined to require proof of reliance as an element in a breach of warranty claim. Id. at *3. Although Krause acknowledged a 1944 decision of the Minnesota Supreme Court, Midland Loan Finance Co. v. Madsen, 217 Minn. 267, 14 N.W.2d 475 (1944), that purportedly required proof of reliance, the Krause court noted that since Midland, "the Minnesota Supreme Court has stated that, to establish a warranty claim, a party need only allege (1) the existence of warranty; (2) a breach of the warranty; and (3) causation of damages." Id. (citing Peterson v. Bendix Home Sys. Inc., 318 N.W.2d 50, 52-53 (Minn. 1982)). Accordingly, Plaintiffs argue, reliance and knowledge are irrelevant to their breach of contract claim.
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. 848 N.W.2d at 543-44 & n.6. Moreover, in Hendricks v. Callahan, the Eighth Circuit "was not persuaded" that "Minnesota would adopt the `modern view' which provides that the buyer's reliance on the warranty is `wholly irrelevant.'" 972 F.2d 190, 194 (8th Cir. 1992).
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.
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
(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, 850 F.Supp.2d at 970, where the Court emphasized that RFC "paid Terrace a premium for the loans it purchased from Terrace under this agreement.... In exchange, Terrace took the risk of [RFC] determining that particular loans did not meet the stated criteria." (See Pls.' Reply at 30.)
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., 848 N.W.2d at 545, and "[c]ourts are not warranted in interfering with the contract rights of parties as evidenced by their writings which purport to express their full agreement," Cady, 166
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,
(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, 2008 WL 4300955, at *8 (Minn. Ct. App. Sept. 23, 2008).)
"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., 540 N.W.2d 494, 502 (Minn. 1995) (citations omitted). "Actions are done in `good faith when done honestly, whether it be negligently or not.'" Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121, 125 (Minn. Ct. App. 1998) (quoting Minn. Stat. § 520.01, subd. 6 (1996)). On the other hand, actions are done in bad faith when "a party's refusal to fulfill some duty or contractual obligation [is] based on an ulterior motive, not an honest mistake regarding one's rights or duties." Id. (citing Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 837 (Minn. Ct. App. 1994). Indeed, "the substantial weight of authority is that the covenant is breached only by conduct that is dishonest or malicious or otherwise in subjective bad faith." BP Prods. N. Am. Inc. v. Twin Cities Stores, Inc., 534 F.Supp.2d 959, 965 (D. Minn. 2007).
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." Id. "This speaks not of objective reasonableness, but of subjective motivation." Id. Accordingly, courts have held that a party does not breach the covenant of good faith and fair dealing simply because its exercise of discretion is unreasonable, so long as that party acted honestly in exercising such discretion. Id. at 967 ("[A]lthough a party to a contract must exercise its discretion honestly, it need not necessarily exercise it reasonably."); see also White Stone Partners, LP v. Piper Jaffray Cos., 978 F.Supp. 878, 882-84 (D. Minn. 1997). Indeed, as this Court has explained in the past, it is only "where contractual discretion is being enforced or construed to deny a party the benefit of the bargain or render the contract illusory, that courts will, as a gap filler, require that the discretion be exercised reasonably." RBC Dain Rauscher, Inc. v. Fed. Ins. Co., No. 03-cv-2609 (DSD/SRN), 2003 WL 25836278, at *9 (D. Minn. Dec. 2, 2003).
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., 534 F.Supp.2d at 968. Indeed, as Plaintiffs point out, the record reflects that its only "motive" "is a fiduciary duty to pursue remedies on breaching loans, for unitholders' benefit." (Pls.' Reply at 41.) Importantly, here, RFC "did exactly what the contract allow[s] it to do — determine [that] Event[s] of Default had occurred and demand [remedies]." Terrace II, 725 F.3d at 918. And fatal to Defendants' claims, as this Court has explained, the implied covenant of good faith and fair dealing simply cannot preclude enforcement of the terms of the contract. RBC Dain Rauscher, 2003 WL 25836278, at *8. Although Defendants make much of the fact that RFC purportedly declared Events of Default "en masse" for the purposes of litigation, it can point to no contractual language prohibiting RFC from doing so, and, most critically, cannot point to any evidence that RFC did so for improper or ulterior motives or in bad faith. In sum, "[a] party to a contract `does not act in bad faith by asserting or enforcing its legal and contractual rights.'" Herzog, 575 N.W.2d at 125 (quoting Burgmeier v. Farm Credit Bank, 499 N.W.2d 43, 50 (Minn. Ct. App. 1993)).
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.
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.
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, 808 N.W.2d 828, 832 (Minn. 2011) (citations omitted). A cause of action is deemed to have accrued "when all of the elements of the action have occurred, such that the cause of action could be brought and would survive a motion to
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." 11 U.S.C. § 108(a). RFC's May 14, 2012 voluntary bankruptcy filing constituted "the order for relief" and extended the limitations period for all claims that were still timely as of that date. 11 U.S.C. § 301(b). Applying the six-year statute of limitations to Plaintiffs' claims, Defendants argue that RFC's claims are time barred for loans sold before May 14, 2006. (Defs.' Mem. at 62-63.)
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., 59 F.Supp.3d 935, 952 (D. Minn. 2014).
As to loans sold to RFC before May 14, 2006, the Court also denied Defendants' motions. Id. The Court noted that where a warranty concerns a future event that will determine the existence of a breach, the statute of limitations does not run until the future event occurs. Id. (citing City of Pipestone v. Wolverine Ins. Co., Civ. No. 4-84-634, 1985 WL 1845, 1985 U.S. Dist. LEXIS 18375 (D. Minn. June 28, 1985)). Plaintiffs had argued that one of the R & Ws on which Plaintiffs' contract claims relied was a Client Guide provision, Section A201(M), requiring Defendants to notify RFC of any material facts or omissions regarding the loans. Id. The Court found it plausible from the face of the complaints that one of the allegedly breached R & Ws related to an event that occurred, if at all, after the sale of the loan. Id. Because the Court found that the date on which any Defendant allegedly breached that R & W went beyond the pleadings and could not be resolved on a motion to dismiss, it denied Defendants' motion with respect to these breach of contract claims. Id.
Regarding Plaintiffs' indemnification claims, the Court determined that they did not accrue until the underlying liability was fixed, id. (citing Metro. Prop., 538 N.W.2d at 695), which, from the face of pleadings, appeared to be at least sometime after 2008, when RFC began to face claims and lawsuits stemming from the loans. Id. Because the instant lawsuits were all filed within six years of that date, the Court denied Defendants' motions to dismiss the indemnification claims as well. Id.
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., 538 N.W.2d at 695. The Court notes that while Metropolitan Property involved a statutory, as opposed to a contractual right to indemnity, "the Court sees no reason why the same principle should not apply to this case." Residential Funding Co., 2014 WL 4954645, at *6-7.
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, 660 F. App'x 554 (10th Cir. 2016), and Lehman XS Trust v. Greenpoint Mortgage Funding, Inc., No. 12 Civ. 7935, 2017 WL 1293773, at *9 (S.D.N.Y. Mar. 29, 2017). (Defs.' Mem. at 65.) These cases are distinguishable. In Lehman Brothers, the plaintiff presented its claim as one for breach of contract, alleging harm based on breaches of various R & Ws and the defendant's refusal to repurchase the loans in question. 660 Fed. App'x. at 567. The complaint did not include a claim for indemnification, nor any allegations regarding third parties Freddie Mac and Fannie Mae, nor any allegations regarding payments by Lehman Holdings to a third party. Id. The Tenth Circuit found that the statute of limitations accrued on the date of the breaches, citing the plaintiff's failure to allege a stand-alone indemnity claim. Id. at 567-68. In reaching its ruling, the court also relied on New York precedent involving the implied right of indemnity, which requires allegations that the defendant owes a duty of care to a third party rather than to the plaintiff itself. Id. at 568 (citing City of New York v. Lead Indus. Ass'n, Inc., 222 A.D.2d 119, 644 N.Y.S.2d 919, 923 (1996); People's Democratic Republic of Yemen v. Goodpasture, Inc., 782 F.2d 346 (2d Cir. 1986)).
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, 2017 WL 1293773, at *9. Defendants also cite L.E. Talcott & Sons, Inc. v. Aurora Corp., 176 F.Supp. 783, 786 (D. Del. 1959), but the court there found that the complaint lacked information regarding the terms of any agreement to indemnify, among other things.
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.)
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.
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, 242 F.3d 815, 819 (8th Cir. 2001) (citing N. Cent. Co. v. Phelps Aero, Inc., 272 Minn. 413, 139 N.W.2d 258, 263 (1965)); see also Barbarossa & Sons, Inc. v. Iten Chevrolet, Inc., 265 N.W.2d 655, 663 (Minn. 1978) ("A buyer who seeks damages for breach of contract has the burden of proving the extent of his damages."). "[T]he appropriate measure of damages for breach of contract is that amount which will place the plaintiff in the same situation as if the contract had been performed." Peters v. Mut. Ben. Life Ins. Co., 420 N.W.2d 908, 915 (Minn. Ct. App. 1988). In a breach of contract case, the plaintiff "is limited to damages flowing only from such breach," Eklund v. Vincent Brass & Aluminum Co., 351 N.W.2d 371, 379 (Minn. Ct. App. 1984), and "damages which are speculative, remote, or conjectural are not recoverable." Brown v. Diversified Distribution Sys., LLC, 801 F.3d 901, 910 (8th Cir. 2015) (citing Leoni v. Bemis Co., 255 N.W.2d 824, 826 (Minn. 1977)). However, "[t]he law does not require mathematical precision in proving lost profits." Poppler v. Wright Hennepin Coop. Elec. Ass'n, 834 N.W.2d 527, 546 (Minn. Ct. App. 2013), aff'd sub nom. Poppler v. Wright Hennepin Coop. Elec. Ass'n, 845 N.W.2d 168 (Minn. 2014). "Once the fact of loss has been shown, the difficulty of proving its amount will not preclude recovery so long as there is proof of a reasonable basis upon which to approximate the amount." Id. (citing Leoni, 255 N.W.2d at 826)).
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.
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:
(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. 2017 WL 5571222, at *8. There, the court analyzed contractual language that mirrors the language at issue in the instant case, and concluded the repurchase remedy is unavailable where the subject loan is no longer in the possession of the buyer because "repurchase" requires "buying something back or again." Id. at *5 (citing Repurchase, Black's Law Dictionary (10th ed. 2014)).
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." Id. (emphasis in original). Based on that language, the court concluded that RFC's recovery for an originating bank's breaches on loans it later sold into RMBS trusts is limited to the actual losses it incurred and therefore the repurchase formula, which calculates damages based on the performance of the loan, "has no bearing on the assessment of damages that RFC may have suffered." Id. at *5, 8.
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:
(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.
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.
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, 872 N.W.2d 524, 530 (Minn. 2015). The Breaching Loss Approach employs a model that assesses each Defendant's share of the total economic losses experienced by the loans it sold into the RMBS Trusts. To do so, it measures loan-level losses based on the performance of at-issue loans. Such a measurement does not take into account
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, 2017 WL 5571222. The Court finds that, as a matter of contract interpretation, the repurchase remedy in Section A210 remains available to RFC, regardless of whether it retained possession of a loan or experienced an actual loss on a loan.
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.
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.
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., 870 F.3d 856 (8th Cir. 2017). Thus, they argue that the Court should enter summary judgment excluding this damages model as a matter of law.
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. Id. at 859. One of the settled lawsuits involved antitrust claims that were potentially covered by UHG's liability insurance policy. Id. The other lawsuit asserted ERISA claims that were not covered. Id. When UHG sought to collect on its liability insurance policy, its insurers refused to pay and UHG then sued them. Id. at 860.
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. Id. at 863, 865-66. Thus, the court concluded, UHG was not able to prove its claim under the insurance policy because it was not able to identify a non-speculative basis upon which to allocate which portion of the settlement applied to the potentially insurable antitrust claims. Id. at 865-66. The court explained that the "allocation inquiry examines how a reasonable party in [the plaintiff's] position would have valued the covered and non-covered claims... at the time of the settlement" and that in "complex lawsuits involving different legal claims and theories" a plaintiff must provide evidence about the relative value of claims in order to properly allocate them. Id. at 863-64. The court additionally noted that an insured "need not prove allocation with precision, but it must present a non-speculative basis to allocate a settlement between covered and non-covered claims." Id. at 863.
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., 245 F.3d 1008, 1016 (8th Cir. 2001). However, "`[o]nce the fact of loss has been shown, the difficulty of proving its amount will not preclude recovery so long as there is proof of a reasonable basis upon which to approximate the amount.'" Poppler, 834 N.W.2d at 546 (quoting Leoni, 255 N.W.2d at 826); see also Henning Nelson Const. Co. v. Fireman's Fund Am. Life Ins. Co., 383 N.W.2d 645, 653 (Minn. 1986). Thus, RFC asserts its only burden is to provide a reasonable basis to approximate and allocate damages and argues that, unlike the parties in UnitedHealth, it has done so via the Allocated Breaching Loss Approach and related expert testimony. RFC further contends that mathematical precision is not required by Minnesota law.
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.
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, 834 N.W.2d at 546
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. 870 F.3d at 863. Yet here, Defendants argue, Dr. Snow deducts $73 million from the aggregate amount in allowed claims based on two schedules attached to the bankruptcy court's confirmation order which was entered after the parties had
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." 870 F.3d at 862. Here, the settlement did definitively allocate the amount paid for servicing claims and thus does not raise the same doubts or uncertainties that were present in UnitedHealth.
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, 834 N.W.2d at 546. Furthermore, RFC contends that utilizing the global breach rate was a reasonable basis upon which to approximate the rate at which breaches likely occurred in NDS Trusts based on the similar circumstances of the indemnifiable trusts.
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
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." 870 F.3d at 863. Thus, UnitedHealth's holding regarding an insured's responsibility to sort covered claims from non-covered claims in a multi-party settlement is entirely consistent with the long standing requirements of Minnesota law of contract damages. To prove damages, a plaintiff must offer a reasonably certain, though not necessarily mathematically precise, basis to demonstrate who owes what for its claims. See Eklund, 351 N.W.2d at 379; Poppler, 834 N.W.2d at 546-47; Hydra-Mac, 450 N.W.2d at 921; Leoni, 255 N.W.2d at 826. With that standard in mind, the court in UnitedHealth then considered the factual circumstances of the settlement and determined that in order for UHG to provide a non-speculative basis for its damages, it needed to demonstrate how the covered antitrust claims were weighted against non-covered ERISA claims. To do so, the court determined that some assessment of the strength and value of the ERISA claims relative to the antitrust claims was necessary in order to determine the potential damages owed by the insurers.
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, 834 N.W.2d at 546 (citing Cardinal Consulting Co. v. Circo Resorts, Inc., 297 N.W.2d 260, 267 (Minn. 1980)). The instant case does not present the same uncertainty with respect to the relative strength and value of indemnifiable and non-indemnifiable claims as were present in UnitedHealth. First, the Settlements at issue here involved related claims in a single action whereas UnitedHealth predominantly involved unrelated ERISA and antitrust claims from two separate cases from different jurisdictions. Second, the claims at issue here are premised on very similar or even identical Trust Agreement contracts and, as one would expect given that commonality, investors raised similar types of arguments against RFC. Third, RFC has offered competent expert testimony to assess the relative value of the settled claims. In particular, Donald Hawthorne, a seasoned RMBS litigator with experience settling RMBS cases, offers his
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. (Id., Ex. 38 (Corr. Snow Rpt. ¶ 80).) As such, the Allocated Breaching Loss Approach cures the windfall issue that was presented by the initial approach. Furthermore, the Allocated Breaching Loss Approach offers a highly sophisticated methodology to provide a basis for the factfinder to determine a Defendant's damages, if any. The model assigns damages to a Defendant based on the number of loans it sold to RFC, which is a concrete and verifiable number. The model also assesses economic losses to at-issue mortgages based on reliable loan data. Further, the model targets its assessment of damages toward only those loans that it estimates contained breaches of the Client Guide and Trust Agreement based on a sampling protocol. Given these features, the Court finds that the Allocated Breaching Loss Approach provides a reliable, non-speculative basis for calculating damages in this case. Staffing Specifix, Inc. v. TempWorks Mgmt. Servs. Inc., 896 N.W.2d 115, 125 (Minn. Ct. App. 2017) (citing Wild v. Rarig, 302 Minn. 419,234 N.W.2d 775, 789 (1975)) (requiring breach of contract damages to flow only from the breach). Accordingly, the Court denies Defendants' Motion for Summary Judgment and will permit the Allocated Breaching Loss Approach to be presented to the jury.
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.
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.); id., Ex. 67 (Piskorski, Seru, & Witkin Article); id., Ex. 68 (Griffin & Maturana Paper).)
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)); id., Ex. 73 (Citigroup Agmt. § 3.04); id., Ex. 74 (JP Morgan Agmt. § 3.05); id., Ex. 75 (Wash. Mut. Verified Pet. ¶ 67); id., Ex. 76 (Wash. Mut. Allocation Order).)
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.
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.
Based on the foregoing, and all the files, records, and proceedings herein,