Phoenix Light SF Limited v. The Bank of New York Mellon Corporation

Background

Investors in residential mortgage-backed securities trusts sued The Bank of New York Mellon, as trustee, alleging breach of contract, breach of fiduciary obligations, negligence, and violations of the Trust Indenture Act. After an earlier summary-judgment ruling and the voluntary dismissal of claims involving seven trusts, ten claims remained. The parties filed motions asking the Court to exclude the opposing side’s expert opinions under Federal Rule of Evidence 702, which governs when expert testimony is sufficiently qualified, relevant, and reliable to be heard by a jury.

The opinion addresses The Bank of New York Mellon’s motion in limine. The Court had already ruled orally on most aspects of the plaintiffs’ motions, and a separate order addressed the remainder of one plaintiffs’ motion. Two aspects of the parties’ motions concerning Ingrid Beckles’s report were stayed pending an evidentiary hearing.

Legal Standard

The Court explained that the party offering expert testimony must show by a preponderance of the evidence that the testimony satisfies Rule 702. The Court’s role is to act as the gatekeeper: it must determine whether the testimony will help the factfinder and rests on sufficient facts, reliable methods, and a reliable application of those methods. Minor weaknesses generally affect the weight of testimony rather than its admissibility; serious flaws, speculation, or conjecture may require exclusion.

Richard Bitner

The Court found Richard Bitner’s opinions admissible. Bitner reviewed 196 loans identified in a certificateholder’s letter to determine whether they contained material breaches of representations and warranties, and he estimated how long a reunderwriting review would take.

The Court rejected challenges to Bitner’s use of Bureau of Labor Statistics income data. The applicable underwriting guidelines did not specify a particular data set, and Bitner did not rely solely on that data. The Court also found that Bitner’s underwriting experience qualified him to offer opinions about title-insurance defects, incomplete loan files, and the materiality of alleged breaches. Challenges concerning the chain of custody of loan files, particular breach determinations, and the estimated duration of reunderwriting went to the weight of his testimony rather than its admissibility.

Mark Adelson

The Court found Mark Adelson’s report admissible in part and inadmissible in part. Adelson could testify about actions a residential mortgage-backed securities trustee could take after loan defaults, including reviewing defaulted loans and demanding repurchase of loans with breaches. His industry experience and supporting examples provided a sufficient basis for that opinion.

The Court excluded Adelson’s opinion that a prudent trustee should independently review and demand repurchase of loans without direction from certificateholders. The Court found that opinion lacked a sufficient factual basis because Adelson did not adequately connect his experience and examples to the specific conclusion that waiting for certificateholder direction was imprudent.

The Court also excluded Adelson’s opinion that public disclosure of servicing noncompliance would have created market pressure leading to loan repurchases. The examples he relied on involved different events and did not adequately support the proposed connection between the specific disclosures at issue, market pressure, and repurchases.

Ingrid Beckles

The Court found Beckles’s opinions about prudent servicing and improved servicing admissible. Beckles could use standards associated with government-sponsored entities as an external benchmark for prudent servicing because the agreements referred to the usual standards of prudent mortgage servicers. Her experience overseeing servicing supported her opinion that greater trustee oversight would have improved servicing within three to six months.

The Court stayed the challenge to Beckles’s opinion that 18,939 loans had uncured document exceptions pending an evidentiary hearing.

Bruce Spencer

The Court found Bruce Spencer’s challenged opinions admissible. Spencer, a statistician, could criticize the opposing damages expert’s analysis without having specialized experience in mortgage-servicer oversight. The Court also accepted his use of a control group and his statistical matching of loans based on specific characteristics affecting loss severity.

The Court further held that the case law requiring proof of misconduct loan-by-loan and trust-by-trust did not bar the use of statistical sampling to prove damages. Although The Bank of New York Mellon identified possible weaknesses in Spencer’s control group and his extrapolation to unmatched loans, the Court found those issues appropriate for cross-examination and contrary evidence rather than exclusion.

Joseph Mason

The Court found Joseph Mason’s damages opinions admissible. Mason calculated damages by comparing what investors allegedly would have received if the trustee had performed the duties asserted by the plaintiffs with what investors actually received.

The Court rejected challenges to Mason’s treatment of settlement proceeds and his assumptions about when loan repurchases would have occurred. The Court treated those challenges as disputes about the plaintiffs’ liability theory or the model’s inputs, not as grounds to exclude the model. If Mason’s opinions relied on opinions the Court excluded, the inputs to his damages model would have to change, but his testimony remained admissible.

Disposition

Judge Valerie Caproni’s conclusion states that The Bank of New York Mellon’s motion in limine was granted in part and denied in part. The parties were ordered to submit a joint letter by April 3, 2020, proposing next steps, including a schedule for summary judgment on four issues raised at oral argument and, if no second summary-judgment motion was allowed, a trial schedule. The Clerk was directed to close the open motion at docket entry 291.