In Re: RFC and RESCAP Liquidating Trust Litigation

Background

The order addressed the admissibility of five categories of exhibits in the indemnification trial involving ResCap Liquidating Trust v. Home Loan Center, Inc., Case No. 14-cv-1716. The exhibits consisted of evidence available to RFC when the underlying settlements occurred. The case was to be tried to a jury, which would consider, among other issues, whether the settlements were reasonable and how losses should be allocated between indemnifiable and non-indemnifiable matters.

The court emphasized that the case differed from ordinary settlement-indemnification litigation because it involved several settlements, billions of dollars in claimed losses and liabilities, numerous mortgage originators, and settlements previously considered and approved as reasonable by a federal bankruptcy judge. Because the matter would be tried to a jury, the court focused on Federal Rule of Evidence 403, which permits exclusion when evidence’s value is substantially outweighed by risks such as unfair prejudice, confusion, misleading the jury, undue delay, or needless cumulative presentation.

Rulings on Claims, Complaints, and Annexes

The parties agreed that the Proofs of Claim filed against RFC were admissible. The court ruled that those documents could be considered only for their legal effect or their effect on the listener, if the parties requested a limiting instruction.

The court also ruled that annexes to the Proofs of Claim would be admissible as non-prejudicial evidence of the claims RFC faced when the settlements occurred, subject to an appropriate limiting instruction. Because it was unclear which attachments qualified as annexes rather than underlying complaints, the court directed the parties to meet and confer and propose an instruction.

The court ruled that the pre-petition complaints were essentially irrelevant to allocation for the purposes HLC identified. The court had already ruled that the fraud allegations were indemnifiable, and it concluded that the complaints’ lengthy fraud allegations posed a substantial risk that the jury would unfairly prejudice ResCap. HLC could rely on the annex to the MBIA Proof of Claim regarding servicing claims and could use the complaints during cross-examination of ResCap’s experts, but it could not publish the complaints to the jury as exhibits for the described allocation purposes. The court reserved the issue of whether the complaints could provide a foundation for RFC-only liability for a forthcoming order addressing HLC’s sole-cause defense.

Unsworn Expert Reports

HLC sought to introduce six Rule 26 expert disclosure documents from the earlier MBIA litigation. The reports were unsworn, their authors had no connection to the present trial, and the witnesses had not been deposed in this case. HLC said it would use them during cross-examination and argued that they were admissible as part of the information available to the settling parties.

The court ruled that the reports’ probative value was substantially outweighed by their prejudicial effect and the risk of confusing the jury. The jury was not being asked to retry the underlying MBIA litigation or review its entire record. HLC could use the reports during cross-examination of the identified witnesses, subject to further objections, but could not publish the unsworn reports to the jury.

The court also addressed a declaration supporting the bankruptcy plan that ResCap intended to introduce. The court stated that the declaration, standing alone, was hearsay. Unless ResCap explained that it was not offering the declaration for the truth of its contents and addressed the Rule 403 concerns, ResCap could not publish it to the jury. The court further stated that it was unclear whether the declaration qualified under the former-testimony exception to the hearsay rule.

Legal Briefs and Advocacy Documents

The court ruled that legal briefs and similar advocacy documents would generally be excluded, regardless of which party offered them. Beyond hearsay concerns, the court found that the risk of unfair prejudice and confusion substantially outweighed their value. The documents were not necessary to determine allocation or reasonableness and could introduce an attorney’s uncross-examined opinions to the jury.

The court would consider such documents individually if they were closely connected to a testifying witness, could be introduced without the identified hearsay and prejudice problems, or did not contain legal advocacy. Expert witnesses could also be cross-examined about documents on which they relied in preparing their reports.

As to repurchase requests, the court agreed in principle that ResCap should not be allowed to use hearsay documents for a non-hearsay purpose if HLC could not do the same with similar documents. The court noted that short repurchase correspondence appeared to raise fewer prejudice concerns than the complaints, expert reports, and briefs, but deferred ruling and directed the parties to continue meeting and conferring.

Internal Analyses and Ally Financial Materials

The court declined to issue a categorical ruling on RFC’s internal analyses of defect rates and pre-petition settlement expert modeling because the parties disagreed about which exhibits belonged in that category. As a general matter, emails and attached documents would not be admitted unless a testifying witness laid a foundation for the specific message or document. The court also retained its Rule 403 concerns and would not allow a document to be shown to the jury merely because an RFC employee may have seen it before settlement.

The court likewise declined to issue a categorical ruling on Ally Financial Securities and Exchange Commission filings and related memoranda. The dispute appeared to concern whether HLC could establish a proper foundation, including necessary context and testimony from an author or contributor. The court again emphasized that relevant documents still required proper foundation before being shown to the jury.

Further Argument

The court stated that, if HLC wanted to present further argument on an issue covered by the order, it would consider that argument on October 15, 2018, after jury selection.

Judge Susan Richard Nelson signed the order on October 11, 2018.