Residential Funding Company, LLC v. Universal American Mortgage Company, LLC

Background

Residential Funding Company, LLC and ResCap Liquidating Trust, referred to together as RFC, sought contractual indemnification from Universal American Mortgage Company, LLC. Universal had sold mortgage loans to RFC, and RFC later placed many of them into mortgage-backed securities trusts. After the housing-market collapse, the trusts sued RFC, and RFC paid more than $8.5 billion to settle claims in bankruptcy. RFC sought to recover some of those amounts from Universal. The case involved 1,186 loans according to the court’s count, although the parties used different numbers in their filings.

Universal’s Summary-Judgment Motion

The court dismissed Residential Funding Company, LLC because it had transferred its rights under the contracts to ResCap Liquidating Trust and therefore had no interest in the litigation. The court continued to refer to the remaining plaintiff as RFC.

The court ruled that RFC could use statistical sampling to prove liability and damages for the large group of loans. It granted RFC’s motion on that issue and denied Universal’s contrary request. The court interpreted the Client Guide’s requirement that losses result from or arise from a breach as requiring a causal connection, rather than requiring Universal’s breaches to be the sole or closest cause of RFC’s losses. The court nevertheless found conflicting expert evidence about whether the underlying claims against RFC were based on Universal’s alleged breaches or on RFC’s own representations. Those factual disputes could not be resolved on summary judgment.

The court held that the statute of limitations barred RFC’s breach-of-contract claims for loans funded before May 14, 2006. It granted Universal’s motion on that issue and dismissed those contract claims with prejudice. The court rejected Universal’s argument that RFC’s indemnification claims were subject to the same limitation period, stating that those claims did not accrue until RFC’s liability was fixed through settlement.

The court excluded RFC’s Breaching Loss and Allocated Loss damages approaches. The Breaching Loss approach failed to account for the discount RFC obtained in the bankruptcy settlements, while the Allocated Loss approach did not tie Universal’s responsibility to losses caused by Universal’s alleged breaches. The court allowed the Allocated Breaching Loss approach, which allocates settlement amounts based on Universal’s share of breaching losses, to be presented to the jury. The court also denied Universal’s general request to exclude RFC’s challenged experts, subject to the specific rulings on damages methods and expert witnesses.

RFC’s Summary-Judgment Motion

The court held that the Client Guide gave RFC discretion to determine whether events of default occurred and granted RFC’s motion on that issue. The court also ruled that the bankruptcy settlements were reasonable as a matter of law, so the parties could not present evidence to the jury challenging their reasonableness.

The court ruled that Universal’s indemnification obligations covered RFC’s liabilities, not merely amounts RFC actually paid, under both the later and earlier versions of the Client Guide. It denied RFC’s request to recover all losses on Universal’s allegedly breaching loans without allocating for the settlement discounts because that request relied on the excluded Breaching Loss approach.

The court denied RFC’s request for summary judgment on causation because the parties offered conflicting expert evidence about whether Universal’s alleged breaches caused RFC’s losses and liabilities. The court granted RFC’s motion concerning Universal’s reliance defense, holding that the contract made RFC’s reliance presumed and not subject to dispute. It also granted RFC’s motion concerning Universal’s good-faith-and-fair-dealing defense, finding no evidence that RFC acted dishonestly, maliciously, or in subjective bad faith. The court granted RFC’s motion concerning Universal’s waiver-and-estoppel defense because the Client Guide’s written-waiver provision barred those defenses based on RFC’s knowledge or conduct absent a written waiver.

The court rejected Universal’s arguments that the bankruptcy plan extinguished RFC’s indemnification claims or that RFC’s own alleged negligence, fraud, or misconduct barred indemnification. The court stated that the confirmed bankruptcy plan preserved RFC’s claims against lenders and that the Client Guide transferred liability for RFC’s own negligence; it also found no evidence that RFC had been found liable for intentional misconduct or fraud.

Expert-Testimony Motions

Under the federal evidence rule governing expert testimony, the court considered whether the opinions were relevant and reliable. It denied most of Universal’s challenges to RFC’s experts. It allowed Dr. Karl Snow’s sampling methodology and Allocated Breaching Loss opinions, but excluded his two previously rejected loss approaches. It also denied Universal’s challenges based on Snow’s use of loan-origination evidence and his loan population, treating those issues as matters for the jury or cross-examination.

The court excluded the opinions of Judge Richard Solum and Donald Hawthorne. Solum’s testimony about the reasonableness of Snow’s damages methods was unnecessary, and Hawthorne’s testimony about the reasonableness of the bankruptcy settlements was unnecessary because the court had already decided that issue. The court denied Universal’s motion concerning Steven Albert, Dr. John Kilpatrick, and Dr. Albert Lee, but stated that Universal could make specific objections at trial.

As to RFC’s expert challenges, the court granted RFC’s motion in part concerning William Berliner. It excluded Berliner’s testimony about reliance and would not allow testimony asserting that proximate cause, rather than contributing cause, was the governing standard. The court granted RFC’s motion concerning Professor David Skeel because his testimony about settlement reasonableness was unnecessary. It limited Kenneth Feinberg’s testimony by excluding opinions about settlement reasonableness while allowing opinions about the Allocated Breaching Loss approach. The court denied RFC’s motion concerning Brian Lin, while noting that inadmissible hearsay sources could not themselves be admitted.

Disposition

The court ordered that Universal’s summary-judgment motion, Universal’s motion to exclude RFC’s experts, RFC’s partial summary-judgment motion, and RFC’s motion to exclude expert testimony were each granted in part and denied in part.