ResCap Liquidating Trust v. First Mortgage Corporation

Background

Residential Funding Company, LLC (RFC) sued First Mortgage Corporation over mortgage loans that First Mortgage sold to RFC. RFC alleged that First Mortgage breached its representations and warranties and had to indemnify RFC for liabilities, losses, damages, attorneys’ fees, and costs connected to allegedly defective loans. RFC later filed for bankruptcy. The bankruptcy proceedings produced settlements with mortgage-backed-securities trustees and monoline insurers, and the Bankruptcy Court approved the settlements as reasonable. The bankruptcy plan preserved RFC’s causes of action and transferred them to the ResCap Liquidating Trust. The court stated that it assumed RFC would pursue only its contractual-indemnification claim at trial.

Both parties moved for partial summary judgment under Federal Rule of Civil Procedure 56. Summary judgment is a ruling without a trial when the evidence shows no genuine dispute over a fact that could affect the outcome and the moving party is entitled to judgment under the law.

Rulings on RFC’s motion

The court granted RFC summary judgment on several uncontested issues. First Mortgage did not contest that the Client Guide applied to all of the loans at issue, that RFC had sole discretion to determine breaches of First Mortgage’s representations and warranties and to settle disputes, or that First Mortgage’s accord-and-satisfaction defense should be dismissed.

The court granted RFC summary judgment on the reasonableness and good faith of the settlements. It relied on evidence that the settlements followed lengthy mediation, involved an independent chief restructuring officer and advisers, were supported by bankruptcy constituencies and the relevant trustees, were endorsed by experts, and were approved by Bankruptcy Judge Martin Glenn. The court found that First Mortgage presented no admissible, nonspeculative evidence creating a genuine factual dispute on either issue.

The court held that the Client Guide required First Mortgage to indemnify RFC for liabilities incurred in the settlements and allowed by the Bankruptcy Court, not merely RFC’s actual out-of-pocket payments. RFC therefore could seek indemnification for all claims allowed by the Bankruptcy Court. But the court refused to reconsider its prior rejection of RFC’s request to recover all losses on breaching loans, reasoning that such recovery could give RFC an improper windfall. RFC’s motion was granted in part on liabilities and denied in part on recovery for all losses.

The court granted RFC’s motion concerning its “Allocated Breaching Loss Approach,” an expert damages model that allocated settlement liabilities based on each defendant’s share of the relevant liabilities. The court found the model provided a reasonable, non-speculative basis for allocating the settlements. First Mortgage offered no expert opinion or other evidence challenging the model’s validity.

The court also granted RFC’s motion allowing it to use statistical sampling to prove damages and rejected First Mortgage’s request for loan-by-loan proof. The court held that statistical sampling was a permissible method of proof, although RFC’s evidence would still have to satisfy the Federal Rules of Evidence at trial.

On causation, the court held that RFC needed to show that First Mortgage’s breaches were a contributing cause of RFC’s liabilities and losses, rather than a proximate cause or a “substantial factor.” The court granted RFC’s motion on that legal standard and denied First Mortgage’s contrary request. However, the court denied without prejudice RFC’s separate oral request for a ruling that RFC had already proved causation as a matter of law, because First Mortgage had not had an opportunity to respond in writing. The court stated that RFC could renew that argument at trial.

The court granted RFC’s motion barring First Mortgage from relying on a superseding-cause defense. It held that superseding cause is a proximate-cause concept that does not apply to this contractual-indemnification claim. The court also granted RFC’s motion regarding the “sole cause” defense and denied First Mortgage’s motion on that issue, finding that First Mortgage offered no supporting fact or expert evidence. The court further rejected First Mortgage’s argument that alleged RFC misconduct barred indemnification.

The court granted RFC summary judgment on the effect of RFC’s bankruptcy. It held that the bankruptcy discharged RFC’s obligation to pay a debt but did not extinguish the debt itself, and that the confirmed plan preserved the claims and transferred them to the Trust. RFC could therefore seek indemnification for liabilities allowed by the Bankruptcy Court.

The court granted RFC summary judgment on First Mortgage’s waiver and estoppel defenses. The Client Guide required a written waiver, and First Mortgage identified no such waiver. The court also found no competent evidence that RFC communicated that First Mortgage could depart from the Client Guide and that First Mortgage reasonably relied on such communication.

Rulings on First Mortgage’s motion

The court denied First Mortgage’s request for summary judgment based on the statute of limitations. It held that RFC asserted a stand-alone contractual-indemnification claim, which accrued when RFC’s liability to third parties became fixed through the settlements, rather than when the loans were sold. The court therefore rejected First Mortgage’s argument that claims involving loans purchased before May 14, 2006 were time-barred.

The court denied as moot First Mortgage’s request concerning 35 loans allegedly lacking evidence of a material breach, because RFC was not seeking indemnification for those loans. The court stated that 88 First Mortgage loans for which RFC’s expert found at least one material breach remained in the case. First Mortgage’s other causation-related requests, including arguments involving loan sales, loan modifications, borrowers’ explanations for defaults, failure to mitigate damages, and servicer underbids, were denied.

The court denied First Mortgage’s request that RFC be limited to actual out-of-pocket losses rather than allowed liabilities. It also denied First Mortgage’s request to require loan-by-loan proof and its challenge to the Allocated Breaching Loss Approach. First Mortgage’s request for relief or summary judgment based on the alleged discovery “data dump” was denied because First Mortgage had not raised the issue during the years of consolidated discovery and acknowledged that it intentionally waited to raise it.

Disposition

The order states that RFC’s Motion for Partial Summary Judgment was granted in part, denied without prejudice in part, and denied in part. First Mortgage’s Motion for Partial Summary Judgment was denied as moot in part and denied in part. The order did not enter a final damages award.