CMFG Life Ins. Co. v. RBS Sec. Inc.

• Decision Date: 23 July 2014
• Docket Number: 12-cv-037-wmc
• Citation: CMFG Life Ins. Co. v. RBS Sec. Inc., 12-cv-037-wmc (W.D. Wis. Jul 23, 2014)
• Parties: CMFG LIFE INSURANCE COMPANY, CUMIS INSURANCE SOCIETY, INC. and MEMBERS LIFE INSURANCE COMPANY, Plaintiffs, v. RBS SECURITIES INC., Defendant.
• Court: U.S. District Court — Western District of Wisconsin

CMFG LIFE INSURANCE COMPANY, CUMIS INSURANCE SOCIETY, INC.and MEMBERS LIFE INSURANCE COMPANY, Plaintiffs, v. RBS SECURITIES INC., Defendant.

12-cv-037-wmc

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WISCONSIN

Entered: July 23, 2014

OPINION & ORDER

In this civil action, plaintiffsCMFG Life Insurance Company and its subsidiaries (collectively, "CUNA Mutual") seek to rescind the purchase of fifteen residential mortgage-backed securities (RMBS) certificates sold to it by defendant RBS Securities ("RBS").In August of 2013, this court ruled on various motions filed by both parties.Most important for purposes of this opinion, the court dismissed CUNA Mutual's claim for unjust enrichment and narrowed its rescission claim.The court also granted RBS's motion to strike CUNA Mutual's late expert disclosure of a "to-be-identified" CoreLogic employee, holding that CUNA Mutual (1) could not offer expert opinion testimony from a CoreLogic representative and (2) could not use anyone other than Jacqueline Doty(CoreLogic's Rule 30(b)(6) designee) as a non-expert witness for CoreLogic.(SeeAug. 19, 2013 Opinion & Order (dkt. #245).)

Now before the court are the parties' latest volleys in what has become a markedly contentious case.RBS first sought clarification of the sanctions imposed upon CUNA Mutual.(Dkt. #266.)Soon thereafter, CUNA Mutual moved to vacate those sanctions and to assess sanctions against RBS for alleged improper ex parte contacts with CoreLogicand interference with the relationship between CoreLogic and CUNA Mutual.(Dkt. #287.)Additionally, RBS has filed a new motion to dismiss CUNA Mutual's second amended complaint, arguing primarily that based on newly-disclosed trade confirmations, the court must apply New York law to this case and that under New York law, CUNA Mutual has failed to state a claim for rescission.(Dkt. #296.)Finally, the parties have filed cross-motions for summary judgment.(Dkt. ##343, 381.)¹

For the reasons that follow, the court finds that New York law does not apply in this action.The court will also deny CUNA Mutual's motion to vacate its earlier opinion and order, both because the court sees nothing "improper" in RBS's alleged conduct and because that conduct does not justify (or even begin to explain) CUNA Mutual's violation of Rule 26(a)(2).That being said, the court also finds that its previous order did not foreclose CUNA Mutual from seeking to introduce the AVM values indirectly pursuant to Federal Rule of Evidence 703, through the testimony of expert Dr. Charles Cowan.Finally, the court will grant in part RBS' motion for summary judgment, eliminating CUNA Mutual's claims based on misrepresentation of compliance with underwriting guidelines and owner-occupancy rates.In light of these rulings, a status conference will be held on Tuesday, July 29, 2014, at 2:00 p.m. to discuss what remains to be tried in this matter.

BACKGROUND²

RBS is a Delaware corporation with its principal place of business in Connecticut.All of the CUNA Mutual plaintiffs are incorporated in Iowa and maintain their principal places of business in Wisconsin.

Between 2004 and 2007, CUNA Mutual purchased from RBS fifteen certificates representing the right to receive income from ten separate residential mortgage-backed securities, fixed-income securities that are backed by pools of residential mortgage loans.For each deal, RBS presented CUNA Mutual with various "offering documents" summarizing the characteristics of the securitized mortgage loans and describing the underwriting procedures the third-party loan originators used.Specifically, the offering documents disclosed the owner-occupancy rate; the loan-to-value ratio ("LTV"), which is calculated by dividing the loan amount by the market value of the property; a credit rating for each certificate; the combined loan-to-value ratio ("CLTV"), calculated by dividing the outstanding principal balance of all loans on the property by the market value; and the underwriting guidelines to which the originators adhered in approving the underlying mortgages.

At various times after CUNA Mutual purchased the RMBS certificates, the loans backing them began to default at high rates.Eventually, all ten RMBS either drastically underperformed or collapsed entirely.CUNA Mutual commissioned a forensic investigation of the loan pools to determine whether the offering documents RBS provided had been accurate.Specifically, CUNA Mutual conducted a retroactive valuation using an automatedvaluation model ("AVM") to test the represented LTV and CLTV ratios.CUNA Mutual alleges that (1) the results revealed that RBS's representations in the offering documents were false or misleading, even at the time they were made, and (2) the actual quantitative characteristics of the loan pools would have shown they were far more likely to experience high default rates and high loss severities in foreclosure sales.CUNA Mutual also alleges that its own "re-underwriting" of a random sample of the subject loans reveals that the third-party originators had systematically abandoned their underwriting standards when issuing the loans backing the RMBS that CUNA Mutual purchased.CUNA Mutual alleges that but for these misrepresentations in the offering documents, it would not have purchased the certificates.

OPINION

I. RBS's Motion to Dismiss³

A.The Previous Motion to Dismiss

CUNA Mutual originally brought suit in state court, seeking to rescind its purchase of the RMBS certificates on the grounds of misrepresentation.RBS removed the action to this court.CUNA Mutual eventually amended its complaint to add a claim for unjust enrichment, as an alternative basis for the equitable relief it sought.

On March 30, 2012, RBS moved to dismiss the case pursuant to Federal Rule of Civil Procedure 12(b)(6).(See dkt. #32.)For purposes of that motion, RBS "assume[d] without conceding that Wisconsin law applie[d]" to CUNA Mutual's claims.(See Def.'s Br.(dkt. #33) 8.)Accordingly, the parties briefed the question of whether CUNA Mutual had stated a claim upon which relief could be granted applying Wisconsin law, with RBS itself advocating for the application of Wis. Stat. § 893.93(1)(b), the six-year statute of limitations for actions on the ground of fraud.On August 19, 2013, the court granted in part and denied in part RBS's motion.Specifically, it allowed CUNA Mutual to proceed with claims for rescission based on misrepresentation, but dismissed CUNA Mutual's claim for unjust enrichment given the contractual relationship between the parties.Additionally, the court permitted CUNA Mutual to file a second amended complaint with respect to new factual allegations supporting its claim of rescission based on misrepresentation, including securities MMLT 2005-3, RAMC 2004-4andRAMC 2005-4.

B.The Trade Confirmations and the Present Motion to Dismiss

In June of 2012, RBS requested that CUNA Mutual produce trade confirmations from its purchases of the certificates from RBS.CUNA agreed to produce responsive documents, but did not do so until September of 2013.The confirmations it eventually produced were originally created by RBS and sent to CUNA Mutual describing the transactions into which the parties had entered.Each confirmation also contained a list entitled "Terms of Agreement."The list began:

It is agreed by and between you ("Customer" or "you") and Greenwich Capital Markets, Inc.("RBS Greenwich Capital,""we", or "us") that each transaction as described on the face hereof (a "Transaction") is subject to the following terms and conditions:

(See, e.g., HorowitzDecl. Ex. 4(dkt. #299-4) 3.)Term number 23 on the list read:

This confirmation and all Transactions hereunder shall be governed by and construed in accordance with the laws of theState of New York (excluding choice or conflict of law doctrine) and all applicable federal laws and regulations.

(E.g.id.)These same Terms of Agreement appear on all of the trade confirmations produced by CUNA Mutual thus far.(Seeid. at 2-79.)

Accordingly, on October 22, 2013, RBS filed a renewed motion to dismiss pursuant to Rule 12(b)(6).(Dkt. #297.)Unlike its previous motion, in which RBS assumed Wisconsin law applied, RBS now argues that the trade confirmations CUNA Mutual recently produced as part of discovery establish that New York law governs the contracts between the parties.RBS further asserts that under New York law: (1) CUNA Mutual failed to plead that it lacked an adequate remedy at law; and (2) New York's statute of limitations renders CUNA Mutual's claims time-barred.Additionally, RBS contends that CUNA Mutual has pled itself out of a rescission claim with respect to some of the certificates in this case because it could not have relied on documents it did not have.Finally, RBS seeks dismissal of CUNA Mutual's claims based on the alleged underwriting misrepresentations with respect to the RAMC 2004-4andRAMC 2005-4 offerings, arguing that CUNA Mutual's second amended complaint ("SAC") still does not state plausible claims with respect to those offerings.

i. Application of New York Law

The majority of RBS's arguments in support of dismissal focus on the trade confirmations and the choice-of-law provision they contain.RBS contends that these provisions make clear that New York law applies to this action, and that under New York law, a plaintiff must plead lack of adequate legal remedy in order to state a claim for equitable rescission.CUNA Mutual disagrees, arguing that New York law permits rescissionclaims even when a plaintiff has an adequate remedy at law.The language of trade confirmations notwithstanding, there is little reason to delve deeply into New York law to resolve this dispute, since the court finds that New York law does not apply in this case,.

To begin with, it seems unlikely that Wisconsin choice-of-law rules would provide for the use of New York law in a financial transaction of this type, where Wisconsin...