In re RFC & Rescap Liquidating Trust Action
| Decision Date | 15 August 2018 |
| Docket Number | Case No. 13-cv-3351 (SRN/HB) |
| Citation | 332 F.Supp.3d 1101 |
| Parties | IN RE: RFC AND RESCAP LIQUIDATING TRUST ACTION |
| Court | U.S. District Court — District of Minnesota |
Table of Contents
III. Discussion...1127
I. INTRODUCTION
Before the Court are the parties' cross motions for summary judgment on common issues in the first-wave actions.1 On June 19 and 20, 2018, the Court heard oral argument on the parties' motions. For the reasons set forth below, Plaintiffs' Motion for Summary Judgment on Common Issues [Doc. No. 3241] is granted in part, denied in part, and denied without prejudice in part, and Defendants' Motion for Summary Judgment on Common Issues [Doc. No. 3247] is granted in part and denied in part.
II. BACKGROUND
The majority of U.S. mortgages are financed through the securitization process. Adam J. Levitin & Susan M. Wachter, Explaining the Housing Bubble , 100 GEO. L.J. 1177, 1182, 1187 (2012). "Securitization" involves pooling large numbers of housing loans, then selling them to a trust. Baker v. CitiMortgage, Inc. , No. 17-cv-2271 (SRN/KMM), 2017 WL 6886712, at *4 (D. Minn. Dec. 21, 2017) (citing Fla. State Bd. of Admin. v. Green Tree Fin. Corp. , 270 F.3d 645, 648 (8th Cir. 2001) ). A mortgage lender raises funds for new mortgages through this process. Id. (citing BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assur. Corp., 673 F.3d 169, 173 (2d Cir. 2012) ). The trust pays for the loans by issuing securities for which the loans serve as collateral. Id. "The right to receive trust income is parceled into certificates and sold to investors, called certificateholders." Id. Purchasers of the securities often require that they be insured by monoline insurers as a hedge against investment risk. In re Barclays Bank PLC Securities Litig. , No. 09 Civ. 1989 (PAC), 2017 WL 4082305, at *4 (S.D.N.Y. Sept. 13, 2017), appeal docketed , No. 17-3293 (2d Cir. Oct. 16, 2017).
In the early- to mid-2000s, a rise in home prices in the U.S. was "driven by increased demand, low interest rates, and easy credit access." Id. While an initial mortgage refinancing boom from 2001 to 2003 led to increased earnings for mortgage originators and securitizers, when long-term interest rates began to rise, the mortgage industry sought other ways to maintain origination volumes. Levitin & Wachter, supra, at 1193–94). The solution required industry players "to find more product to move in order to maintain origination volumes and, hence, earnings." Id. at 1194.
A second mortgage boom ensued after 2003, but "[b]ecause the prime borrowing pool was exhausted, it was necessary to lower underwriting standards and look more to marginal borrowers to support origination volume levels." Id. During this time period, "[l]enders provided mortgage loans to many high-risk borrowers with questionable ability to repay, fueled in large part by the opportunity to package and sell those mortgages into the growing market for [residential] mortgage-backed securities ("[R]MBSs")." In re Barclays Bank, 2017 WL 4082305, at *4.
In re Barclays Bank, 2017 WL 4082305, at *4. The global economy experienced an unprecedented downturn in 2008 "that had a profoundly negative effect on the real estate and credit markets." S.E.C. v. True North Fin. Corp. , 909 F.Supp.2d 1073, 1083 (D. Minn. 2012) (citations omitted).
Plaintiffs2 and Defendants here were all participants in the RMBS market frenzy and its ultimate collapse. Prior to RFC's May 2012 bankruptcy, it served as a middleman in the RMBS industry, both acquiring and securitizing residential mortgage loans. First, RFC purchased residential mortgage loans from numerous originating financial lenders,3 including Defendants Home Loan Center, Inc., CTX Mortgage Co., LLC, Standard Pacific Mortgage, Inc., Impac Funding Corp., iServe Residential Lending, LLC, and Freedom Mortgage Corporation (collectively, "Defendants"), and bundled them into securitization pools of thousands of loans. .)4 RFC did not underwrite the loans; rather, it understood that the originating lenders "[were] responsible for ... underwriting prudently [and] ensuring that the loan met all of [RFC's contractual and underwriting] requirements ...." (Id. , Ex. 10 (Horst Dep. at 620–21).)
Second, in its middleman role, RFC then sold the pooled loans into residential mortgage-backed securitization ("RMBS") trusts ("the Trusts"). .) In the contracts that governed the relationships between RFC and the Trusts, RFC made representations and warranties ("R & Ws") concerning the underwriting quality and credit characteristics of the mortgage loans. (Id. ) The Trusts issued notes or certificates, supported by the loans' performance, which investors purchased. (Id. ) RFC additionally functioned as a "master servicer" for many of the securitizations, overseeing the work of the primary servicers. (Id. ¶ 18.)
While both parts of RFC's business model are factually relevant in this consolidated action, the legal focus of this litigation concerns Defendants' potential liability at the first step of selling residential mortgage loans to RFC. To sell their loans, Defendants each separately entered into a "Client Contract" with RFC. (Decl. of Deanna Horst ("Horst Decl.") [Doc. No. 3244], Exs. 2–9 (Defs.' Client Contracts).) Along with the Client Contract, a longer, more detailed document called "the Client Guide" governed the business relationship between RFC and Defendants.5 (Id., Ex. 1 (Client Guide § 100, Version 1-06-G01, Effective Mar. 13, 2006).)6 The Client Guide "set[ ] forth the terms and conditions for selling Loans to [ ]RFC." (Id. ) Specifically, it provided that the originating lender, or "Client," was "bound by all provisions" of the Client Guide, "including but not limited to the [R & Ws] of Client and Remedies of [ ]RFC Sections of this Client Guide [sic ]." (Id. § 101.)
The contractual language most relevant to the parties' summary judgment motions—and discussed in further detail throughout this opinion—is found in Sections 113(A) & (B), A200, A202, A208, A209, A210, and A212 of the Client...
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