In Re: RFC and RESCAP Liquidating Trust Litigation

Background

ResCap Liquidating Trust sued Home Loan Center, Inc. (HLC) for, among other things, contractual indemnification. HLC asserted that some of the losses and liabilities at issue were caused solely by RFC’s conduct, rather than by any breach by HLC. HLC initially supported this theory in part through an expert opinion by Professor Steven Schwarcz, who described a possible gap between HLC’s representations and warranties to RFC and RFC’s representations and warranties to trusts or monoline insurers.

The court had previously held that ResCap needed to show that HLC’s breaches were a contributing cause of its losses and liabilities. But the court deferred ruling on the admissibility of the “sole cause” defense because a factual record might show that HLC was not even a contributing cause of some losses. The court later found that Schwarcz’s opinion was purely hypothetical because he identified no actual loans on which RFC had breached its representations and warranties while the originating banks had not. The court nevertheless allowed HLC an opportunity to present additional factual support before trial.

At a pretrial hearing, HLC relied on documents, repurchase correspondence, individual loan examples, and proposed testimony from re-underwriting expert Robert Broeksmit and RFC repurchase witnesses. HLC argued that this material showed RFC-only liability or showed that ResCap’s damages expert, Dr. Karl Snow, had failed to account for potentially non-indemnifiable RFC losses. ResCap argued that the evidence was speculative, that HLC had not developed the necessary expert analysis, and that the evidence would confuse the jury.

Court’s Analysis

The court gave two independent reasons for excluding the evidence. First, HLC’s proposed argument required complex analysis of loan-level breaches, representations, settlements, causation, and allocation. HLC acknowledged that neither Schwarcz nor Broeksmit had performed an analysis addressing the sole-responsibility issue. The court concluded that asking the jury to perform that analysis from documents and loan files, without competent expert guidance, would invite speculation.

Second, the court applied Federal Rule of Evidence 403, which permits exclusion when evidence’s usefulness is substantially outweighed by dangers such as unfair prejudice or jury confusion. The court found those dangers especially serious because HLC’s evidence concerning RFC’s alleged misrepresentations could lead the jury to decide the allocation issue based on alleged fraud or other conduct that was not the issue being tried. The court also noted that distinguishing HLC’s sole-responsibility theory from arguments that had not survived summary judgment would be difficult for a jury.

Disposition

The court precluded Professor Schwarcz from speculating about “RFC-only” liability. It further ruled that HLC was precluded from arguing to the jury that RFC sole-responsibility claims were a significant potential source of non-indemnifiable liability. The evidence HLC offered to support that argument was ruled inadmissible, and the testimony of the factual and expert witnesses HLC identified as relevant solely to RFC-only liability was also ruled inadmissible. The order addressed trial admissibility and did not decide the ultimate damages or indemnification liability in the underlying lawsuit.