In Re: RFC and RESCAP Liquidating Trust Litigation

Background

The order concerns a related trial action, ResCap Liquidating Trust v. Home Loan Center, Inc., Case No. 14-cv-1716 (SRN/HB). The case involved ResCap’s contractual indemnification claims against Home Loan Center, which the opinion calls “HLC.” ResCap sought indemnification for liabilities and losses arising from settlements that RFC reached with residential mortgage-backed securities trusts and monoline insurers during RFC’s bankruptcy.

The parties tried the case to a jury from October 15 through November 7, 2018. The jury heard 29 witnesses, including seven experts, and received more than 75 exhibits. After about two and a half hours of deliberation, the jury returned a $28.7 million verdict for ResCap.

Before closing arguments, both sides made motions for judgment as a matter of law under Federal Rule of Civil Procedure 50(a). Such a motion asks the court to decide an issue because, viewing the evidence favorably to the opposing party, no reasonable jury could legally find for that party on the issue.

Rulings on the Motions

HLC’s allocation motion. HLC argued that ResCap had not provided a non-speculative way to divide the MBIA settlement between indemnifiable and non-indemnifiable claims. HLC had also raised the argument regarding the FGIC settlement, but withdrew that portion because the FGIC proof of claim had not been introduced into evidence. The court denied HLC’s motion concerning allocation of the MBIA settlement. It found that the evidence HLC relied on did not support the argument and that no trial evidence showed that MBIA’s aiding-and-abetting claim was material or even considered when the settlement was reached.

The court also stated that it had denied from the bench HLC’s separate oral motions concerning allocation of damages to the Ambac and Syncora settlements and the certainty of damages. The court did not address those motions further in the written order, except to state that HLC preserved its appellate rights concerning them.

ResCap’s reasonableness and good-faith motion. ResCap argued that no reasonable juror could find that the bankruptcy settlements were not made in good faith or for reasonable amounts. HLC disputed that conclusion, particularly regarding the MBIA settlement and the difference between the settlement rates for MBIA and the RMBS Trusts.

The court granted ResCap’s motion. Applying Minnesota law, the court explained that a party seeking indemnification for a settlement must show that the settlement was reached in good faith and was reasonable and prudent. The court considered the parties’ knowledge at the time of settlement, potential trial exposure, the strengths and weaknesses of the claims and defenses, litigation risks, and the costs and burdens of litigation.

The court relied on evidence that the settlements followed lengthy mediation conducted by a federal bankruptcy judge; that an independent chief restructuring officer approved them; that experts involved in the bankruptcy considered them reasonable; that the bankruptcy constituencies supported them; that ResCap’s trial expert testified without effective contradiction that they were reasonable and made in good faith; and that the bankruptcy judge approved them after rejecting an earlier proposed settlement. The court concluded that no reasonable juror could find the settlements unreasonable or made in bad faith on this record.

ResCap’s servicing-claims allocation motion. ResCap argued that it was reasonable to assign $96 million to servicing claims in the RMBS Trust settlement and little or no value to servicing claims in the monoline settlements. HLC argued that a jury could find that some value should have been assigned to the monoline servicing claims.

The court granted ResCap’s motion. It relied on expert testimony about the legal and factual difficulties of proving servicing claims, including loss causation, RFC’s discretion as master servicer, contractual limits on RFC’s liability, and the requirement to prove gross negligence. The court found that HLC’s evidence did not allow a reasonable jury to conclude that assigning de minimis value to the monoline servicing claims was unreasonable in light of litigation risks and the law at the time.

ResCap’s causation motion. ResCap argued that the evidence established that HLC’s breaches contributed to the liabilities and losses settled in RFC’s bankruptcy. The court’s governing standard required ResCap to show a cause-and-result relationship or causal connection; HLC’s breaches did not need to be the only cause.

The court granted ResCap’s motion. It found that the uncontradicted evidence established that RFC identified loans involving both HLC and RFC representation-and-warranty breaches; particular HLC breaches directly caused particular RFC breaches; the trusts and monoline insurers asserted loan-level breach claims in the bankruptcy; professionals involved in the bankruptcy considered those claims a substantial source of RFC’s liability; and RFC incurred losses and liabilities when it settled those claims.

The court rejected HLC’s arguments concerning the Ambac and Syncora settlements and two categories of alleged breaches involving mortgage-loan schedules and documentation programs. It concluded that the evidence HLC identified concerned damages or allocation, or did not provide a basis for a reasonable jury to reject ResCap’s causation showing.

ResCap’s Client Guide motion. ResCap argued that the Client Guide, including its representations, warranties, and indemnification remedies, governed all loans at issue, including bulk loans and pay-option adjustable-rate mortgage loans. HLC relied primarily on testimony from Rian Furey that, in his view, those loan categories were not covered by the Client Guide.

The court denied ResCap’s motion. Although the court described the evidence supporting ResCap’s position as overwhelming, it found that Furey’s testimony created a factual dispute. A reasonable juror could draw inferences about how the loans were handled and could find that RFC purchased some loans outside the Client Guide. The court therefore left the Client Guide’s applicability to the jury.

ResCap’s Assetwise Direct Criteria Agreement motion. ResCap argued that the Assetwise Direct Criteria Agreement did not replace the Client Guide’s representations and warranties. HLC argued that the Assetwise agreement superseded the Client Guide or that a related licensing agreement replaced the Client Guide’s indemnification provision.

The court granted ResCap’s motion. It relied on testimony that the Assetwise agreement’s provisions were additional requirements, not replacements for the Client Guide, and on the agreement’s text, which required reference to the Client Guide. The court also noted that HLC’s witness described the Assetwise provisions as vague and agreed that they could be understood as referring to the Client Guide. The court found no adequate evidentiary basis for concluding that the related licensing agreement superseded the Client Guide’s indemnification provision.

ResCap’s equitable-estoppel and waiver motion. ResCap argued that HLC could not prove that RFC had induced HLC to sell loans on the understanding that the Client Guide’s representations, warranties, or remedies would not apply. HLC relied mainly on a 2006 dinner meeting at which RFC agreed to purchase bulk loans under competitor underwriting guidelines.

The court granted ResCap’s motion as to equitable estoppel and waiver. It explained that HLC had to prove that RFC made promises or inducements, that HLC reasonably relied on them, and that HLC would be harmed without estoppel. The court found that no one at the dinner mentioned the Client Guide or discussed waiving its provisions. The evidence therefore did not permit a reasonable juror to find that RFC promised or induced HLC to sell loans wholly outside the Client Guide, or that RFC waived its contractual rights. The court also stated that, because the Client Guide expressly required a written waiver and given the facts of the case, it treated the waiver and estoppel defenses as essentially the same for the relevant loans.

Disposition

The order states that the court denied HLC’s motion and granted five of ResCap’s six motions. The court denied ResCap’s motion concerning whether the Client Guide governed HLC’s loans at issue. It granted ResCap’s motions concerning settlement reasonableness and good faith, allocation of servicing claims, causation, the Assetwise agreement, and equitable estoppel and waiver. The order was signed by Judge Susan Richard Nelson on June 12, 2019.