In Re: RFC and RESCAP Liquidating Trust Litigation

Background

Residential Funding Company, LLC (RFC) and ResCap Liquidating Trust sued Hometown Mortgage Services, Inc., alleging that Hometown breached its contractual representations and warranties by selling defective residential mortgage loans to RFC. They also sought indemnification for losses connected to RFC’s bankruptcy settlements.

The plaintiffs later sued InterLinc Mortgage Services, LLC, Douglas Rohm, and Edward Danielczyk. They alleged that InterLinc and the individual defendants transferred Hometown’s operations and assets to InterLinc to leave Hometown unable to satisfy its debts. The plaintiffs asserted breach-of-contract, indemnification, actual fraudulent-transfer, and constructive fraudulent-transfer claims. InterLinc purchased certain Hometown assets for $124,806.70 under an asset purchase agreement.

InterLinc moved under Federal Rule of Civil Procedure 42(b) to bifurcate, or divide, the claims into separate trials. It asked the court to try the fraudulent-transfer claims first and pause discovery on the loan-related claims while those claims were resolved. The plaintiffs opposed the motion. The individual defendants did not join the motion but did not oppose it.

Arguments and analysis

Rule 42(b) allows a court to order separate trials for convenience, to avoid prejudice, or to promote speed and efficiency. The court explained that the party seeking bifurcation bears a heavy burden and that separate trials are generally the exception because piecemeal litigation can be inefficient.

InterLinc argued that the fraudulent-transfer claims were suitable for earlier resolution because its potential liability might be limited to either the amount needed to satisfy the plaintiffs’ claims or the value of the transferred assets. The plaintiffs disputed that position and argued that the claims were interconnected because Hometown’s alleged insolvency depended largely on the disputed contract and indemnification liability.

The court agreed with the plaintiffs that the claims were intertwined. It found that determining whether Hometown was insolvent would involve issues connected to Hometown’s alleged liability for breach of contract and indemnification. The court also noted that the plaintiffs intended to use many of the same witnesses to prove damages, Hometown’s liability, and Hometown’s alleged insolvency. If the case were divided, some witnesses could be required to testify twice.

The court further found that InterLinc had not identified the prejudice that bifurcation would prevent. By contrast, separating the claims could prejudice the plaintiffs through overlapping evidence and witnesses and could delay their contract and indemnification claims. The court did not decide the limits of InterLinc’s liability or whether Minnesota or Alabama law governed those issues.

Disposition

The court held that InterLinc had not met the burden required for separate trials and denied InterLinc’s Motion to Bifurcate [Doc. No. 5070]. The opinion did not resolve the underlying liability claims.