Phx. Light SF Ltd. v. Bank of N.Y. Mellon
| Decision Date | 20 March 2020 |
| Docket Number | 14-CV-10104 (VEC) |
| Parties | PHOENIX LIGHT SF LIMITED, et al., Plaintiffs, v. THE BANK OF NEW YORK MELLON, as Trustee, Defendant. |
| Court | U.S. District Court — Southern District of New York |
In 2014, investors in a number of Residential Mortgage Backed Securities ("RMBS") trusts sued Defendant-Trustee ("BNYM") for breach of contract, breach of fiduciary obligations, negligence, and violations of the Trust Indenture Act ("TIA"). On September 7, 2017, the Court granted BNYM's motion for summary judgment in part and denied it in part. Mot. Summ. J. Op. & Order (Dkt. 201). Plaintiffs later voluntarily dismissed claims as to seven trusts. Stip. & Order (Dkt. 236). Both parties have now moved in limine to exclude the opinions of the other party's experts. Mots. (Dkts. 291, 294). On November 13, 2019, the Court denied in large part BNYM's motion to strike Plaintiffs' experts' declarations submitted in opposition to BNYM's motion in limine. Mot. Strike Op. & Order (Dkt. 319).1 On March 9, 2020, the Court held oral argument on both sides' motions and ruled orally on the vast majority of Plaintiffs' motions.2For the following reasons, BNYM's motion in limine is GRANTED in part and DENIED in part.3
The Court presumes familiarity with its summary judgment decision, but a brief canvass of the remaining ten claims will be helpful to the reader. Those claims—for breach of contract and TIA violations—fall into three groups of trusts.
Of the trusts still at issue in this case, six (the CWALT and CWL trusts) were sponsored by Countrywide Home Loans, Inc. (the "Countrywide Trusts"). Plaintiffs claim that, as to those trusts, BNYM breached the pooling and servicing agreements ("PSAs") by failing to disclose that complete mortgage files had not been delivered for some loans. As such, it failed to make accurate Regulation AB ("Reg AB") disclosures. Plaintiffs assert that BNYM should have ensured that Countrywide repurchased the affected loans. As to CWALT 2006-OA3 only, Plaintiffs claim that BNYM breached the contract by failing to provide notice of breaches of representations and warranties ("R&W") that materially and adversely affected the interests of certificateholders and by failing to enforce loan repurchases when BNYM received written notice of R&W breaches in a letter from a certificateholder (the Baupost Letter).4
An additional three trusts still at issue were sponsored by Credit-Based Asset Servicing and Securitization LLC (the "CBASS Trusts"). Plaintiffs claim that BNYM breached their PSAs by failing to ensure that the servicer for the CBASS Trusts improved its loss mitigation practices.
The final trust still at issue was sponsored by ECC Capital Credit Corp. and was structured using an Indenture and Servicing Agreement (the "ECR 2005-1 Trust"). Plaintiffs claim that BNYM violated Section 315(b) of the TIA by failing to give certificateholders notice of a default under the indenture within 90 days of learning of the default.
Federal Rule of Evidence 702 governs the admissibility of expert testimony. It provides that a person "qualified as an expert by knowledge, skill, experience, training, or education" may offer opinion testimony so long as:
The party offering expert testimony bears the burden of establishing by a preponderance of the evidence that the testimony satisfies Rule 702. The district court is, however, the "ultimate gatekeeper." United States v. Williams, 506 F.3d 151, 160 (2d Cir. 2007). Rule 702 tasks the trial judge with "ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand." Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 597 (1993). This gatekeeping obligation "applies not only to testimony based on 'scientific' knowledge, but also to testimony based on 'technical' and 'other specialized' knowledge." Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999).
The threshold question for the Court is whether the "proffered expert testimony is relevant." Amorgianos v. Nat'l R.R. Passenger Corp., 303 F.3d 256, 265 (2d Cir. 2002). If it is, the Court must then determine whether it has "a sufficiently reliable foundation to permit it to be considered." Id. (quotations omitted). The Supreme Court has laid down several factors pertinent to this inquiry, including "whether a theory or technique . . . can be (and has been) tested"; "whether the theory or technique has been subjected to peer review and publication"; whether uniform "standards controlling the technique's operation" exist; and whether the theory or technique enjoys "general acceptance" within an identifiable relevant scientific or professional community. Daubert, 509 U.S. at 593-94. The Court's ultimate objective is to "to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field." Kumho Tire Co., 526 U.S. at 152.
"To warrant admissibility . . . it is critical that an expert's analysis be reliable at every step." Amorgianos, 303 F.3d at 267. "A minor flaw in an expert's reasoning or a slightmodification of an otherwise reliable method will not render an expert's opinion per se inadmissible," but the "district court should undertake a rigorous examination of the facts on which the expert relies, the method by which the expert draws an opinion from those facts, and how the expert applies the facts and methods to the case at hand." Id. Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997); see also, e.g., Zerega Ave. Realty Corp. v. Hornbeck Offshore Transp., LLC, 571 F.3d 206, 213-14 (2d Cir. 2009) ().
BNYM moves to exclude Richard Bitner's Report and his Damages Report. Both relate to the CWALT 2006-OA3 trust. Bitner, who is Plaintiffs' reunderwriting expert: (a) reviewed the 196 loans that had been identified in the Baupost letter to determine whether there were material breaches of R&Ws associated with those loans; and (b) opined how long it would have taken BNYM to confirm whether the loans identified by Baupost, in fact, had breaches of their R&Ws. The Court finds that the opinions of Bitner are admissible.
Bitner opined that 21 loans identified in the Baupost Letter had material defects due to borrowers' misrepresentations of their incomes. Bitner Report ¶ 99. The loans in question were "stated income" loans, i.e., loans that did not require verification of a borrower's actual income. Id. ¶ 97. In lieu of verification, the underwriter was obligated to determine the "reasonableness" of the stated income. Id. ¶ 36.
BNYM argues that Bitner's opinion is not reliable because he compared the borrowers' stated incomes to average-income data from the Bureau of Labor Statistics ("BLS"). In particular, BNYM advances four critiques of Bitner's reliance on BLS data: (1) the applicable Countrywide underwriting guidelines did not require comparison of the stated income to BLS data; (2) Bitner's analysis wrongfully assumed no borrower's income was above the 90th percentile of a particular job category; (3) Bitner lacks sufficient experience with BLS data to utilize it for underwriting; and (4) BLS data is not an objectively reliable source of information for income verification. BNYM's Mem. of Law 5-8.
The fact that the Countrywide guidelines did not require use of BLS data as an appropriate benchmark does not make Bitner's use of BLS data improper. The guidelines identified no particular data set that an underwriter should use to assess the reasonableness of a borrower's stated income. The guidelines stated only that a borrower's stated income "must be deemed reasonable and consistent with the borrower's occupation." Houpt Decl. Ex. 6 at *793-94. BNYM does not argue that this instruction precluded use of BLS data, or even that using BLS data as the sole benchmark would have contradicted the guidelines. Indeed, BNYM admits that the guidelines did "not specify how the underwriter should make th[e] assessment" about a borrower's stated income. BNYM's Mem. of Law at 6.
BNYM's singular focus on Bitner's use of BLS data is similarly misguided. Bitner concluded that income was unreasonable only if the income exceeded the 90th percentile by a substantial margin6 and only if other objective information signaled that the stated income wasunreasonable, such as the borrower's assets and credit history. Houpt Decl. Ex. 4 at 347:2-18; Bitner Decl. ¶¶ 11-19. This use of BLS data is consistent with the methodology deemed admissible in U.S. Bank, National Ass'n v. UBS Real Estate Security Inc., in which the court noted that the "underwriting process draws heavily on judgment and takes into consideration the different qualities of each loan and borrower." 205 F. Supp. 3d 386, 405, 444, (S.D.N.Y. 2016).
BNYM relies upon Ruggiero v. Warner-Lambert Co. to argue that Bitner needed to rule out alternatives before concluding that the borrower had misstated his income. 424 F.3d 249 (2d Cir. 2005). In Ruggiero, it was unreliable for an expert to use a differential medical diagnosis method to...
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