ResCap Liquidating Trust v. Primary Residential Mortg., Inc. (In re ResCap Liquidating Trust Litig.)

• Decision Date: 20 December 2019
• Docket Number: Case No. 13-cv-3451 (SRN/HB)
• Parties: IN RE: RESCAP LIQUIDATING TRUST LITIGATION This document relates to: ResCap Liquidating Trust v. Primary Residential Mortgage, Inc., No. 16-cv-4070
• Court: U.S. District Court — District of Minnesota

428 F.Supp.3d 53

IN RE: RESCAP LIQUIDATING TRUST LITIGATION This document relates to: ResCap Liquidating Trust v. Primary Residential Mortgage, Inc., No. 16-cv-4070

Case No. 13-cv-3451 (SRN/HB)

United States District Court, D. Minnesota.

Signed December 20, 2019

MEMORANDUM OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT

SUSAN RICHARD NELSON, United States District Judge

TABLE OF CONTENTS

I. INTRODUCTION ...62

II. BACKGROUND ...62

A. Contractual Relationships ...63

1. General Rules of Interpretation...64

2. Knowledge, Reliance and Waiver...65

3. Specific Representations & Warranties...66

4. Events of Default & Remedies...66

5. Repurchase...66

6. Indemnification...67

B. Mortgage Market & Bankruptcy Proceedings ...68

1. Housing Market Trends...68

2. Proposed, Pre-Bankr. Original RMBS Settlement & Subsequent Bankr. Filing...69

3. Global Bankr. Settlement Approved by Bankruptcy Court...69

4. Plaintiff's Requested Relief...72

C. Procedural History ...73

1. First-Wave Actions...73

a. Consolidated Action Common-Issue Summary Judgment Ruling...73

b. Trial & Trial Rulings...74

c. Non-Consolidated RMBS Proceedings in this District...74

III. DISCUSSION ...75

A. Principles of Law of Contractual Indemnity ...75

B. Principles of Contract Interpretation ...77

C. Summary Judgment ...78

D. Threshold Inquiry of Plaintiff's Contractual Indemnity Claim ...79

1. Reasonableness of RFC's Bankruptcy Settlements...80

a. PRMI's New Evidence Regarding the Reasonableness of the Settlements...82

b. First-Wave Evidence Regarding the Reasonableness of the Settlements...85

2. Whether RFC's Bankruptcy Extinguished RFC's Liabilities...87

3. The Application of the Client Guide...87

a. Effect of Assetwise & Countrywide Documents on the Guides...87

4. Rights in the Guides...90

a. Sole Discretion...90

b. Indemnity for Liabilities and Losses...93

c. Effect of RFC's Alleged Wrongdoing on Recovery...97 d. Expired Loans...99

E. Causation ...101

1. Appropriate Causation Standard...102

2. ResCap's Reliance on Proxy MLS Provided by Mr. Dudney...103

3. Trust Representations...105

a. MLS Representation to Trusts...105

b. Default Representations to the Trusts...107

F. PRMI's Defenses ...109

1. PRMI's "Bad Faith" Defense...109

2. PRMI's "Sole Cause" Defense...116

3. PRMI's Knowledge and Reliance Defenses...119

4. PRMI's Statute-of-Limitations Defense...121

5. PRMI's Assetwise & Countrywide Estoppel & Waiver Defenses...122

a. Anecdotal Evidence...123

b. Assetwise-Approved Loans...125

c. Countrywide-Approved Loans...129

6. PRMI's Mitigation Defense...130

G. Damages ...131

1. Use of Statistical Sampling...131

2. Value Attributable to Servicing Claims...133

3. Allocated Breaching Loss Methodology...133

a. General Methodology...133

b. Application of the Allocated Breaching Loss Methodology...134

(1) Additional Settling Trusts/Single, Unallocated Claim...135

(a) Supplemental Term Sheet...137

(b) Judge Glenn's Findings of Fact...139

(c) Recovery Analysis...141

(d) Trustee Declarations...142

(e) Contemporaneous Evidence...142

(2) Relative Strength of Claims and Defenses...143

(a) Strength of Representations...144

(b) Strength of Defenses...145

(3) Non-Indemnifiable Claims...146

(a) Ally Claims...147

(b) Allowed Fee Claim...148

H. Liability Overall ...149

IV. CONCLUSION ...149

I. INTRODUCTION

Before the Court is the Motion for Summary Judgment [Doc. No. 5221] filed by Defendant Primary Residential Mortgage, Inc. ("PRMI"), and the Motion for Partial Summary Judgment [Doc. No. 5274] filed by Plaintiff ResCap Liquidating Trust ("ResCap").¹ For the reasons set forth below, Defendant's motion is deferred in part, denied in part, and denied in part as moot, and Plaintiff's motion is granted in part and denied in part.

II. BACKGROUND

In December 2016, ResCap commenced this lawsuit against PRMI, asserting claims of breach of contract and indemnification. This case is part of a second wave of lawsuits brought by ResCap against numerous originating mortgage lenders. ResCap filed its initial wave of such lawsuits in this District beginning in 2013.

A. Contractual Relationships

As in all of these cases, this lawsuit stems from the bankruptcy of the Minnesota company formerly known as the Residential Funding Corporation ("RFC").² For several years prior to RFC's 2012 bankruptcy filing, RFC and PRMI participated in the residential mortgage backed securities ("RMBS") market. RFC functioned as a middleman. In its role as a buyer, it purchased mortgages from banks and originating lenders such as PRMI. See In re ResCap Liquidating Tr. Litig. , 332 F. Supp. 3d 1101, 1117–18 (D. Minn. 2018) (" Common SJ Order "); (Smallwood Decl. [Doc. No. 5225], Ex. 1 (Hawthorne Rpt. ¶¶ 17–18).)³ Then, as a seller, RFC pooled together its RMBS, i.e., bundles of hundreds of home mortgage loans, and sold them to securitization trusts ("the Trusts"). Common SJ Order , 332 F. Supp. at 1117–18, 1122–23 ; (Smallwood Decl. [Doc. No. 5225], Ex. 1 (Hawthorne Rpt. ¶¶ 17–18).) The Trusts paid for the loans by issuing securities to investors, for which the mortgage loans served as collateral. Common SJ Order , 332 F. Supp. at 1117. Some of these purchasers required that the securities be insured by monoline insurers (the "Monoline Insurers")⁴ as a hedge against investment risk. See id. RFC additionally functioned as a "master servicer" for many of the securitizations, overseeing the work of the primary servicers. (Smallwood Decl. [Doc. No. 5225], Ex. 1 (Hawthorne Rpt. ¶ 18).)

As a seller, RFC entered into contracts with the Trusts in which it made representations and warranties ("R&Ws") concerning the underwriting quality and credit characteristics of the mortgage loans. Common SJ Order , 332 F. Supp. at 1118 ; (Smallwood Decl., Ex. 1 (Hawthorne Rpt. ¶ 18.)

In its role as a buyer of loans from originating lenders, or "Clients," RFC and the lenders, including PRMI, entered into agreements called "Client Contracts." Common SJ Order at 1118. The Client Contracts also incorporated the terms of longer, more detailed agreements called "Guides." (See, e.g. , Nesser Decl., Ex. 1 (Mar. 30, 2000 Client Contract) at 1.) RFC and PRMI entered into a Client Contract in March 2000, and a subsequent Client Contract in June 2001. (Id. , Exs. 1 (Mar. 30, 2000 Client Contract) & 2 (June 25, 2001 Client Contract).) The Guide that the March 2000 Client Contract references is the AlterNet Guide, (Nesser Decl., Ex. 1 (Mar. 30, 2000 Client Contract) at 1), while the Guide that the June 2001 Client Contract references is the Client Guide. (Id. , Ex. 2 (June 25, 2001 Client Contract) at 1.) The March 2000 Client Contract stated that it could not be amended or modified orally, and no provision could be waived or amended "except in writing signed by the party against whom enforcement is sought." (Id. , Ex. 1 (Mar. 30, 2000 Client Contract) ¶ 2.) The June 2001 Client Contract stated that it could "only be amended in writing signed by both parties." (Id. , Exs. 1 (Mar. 30, 2000 Client Contract) at & 2 (June 25, 2001 Client Contract).)

As relevant to the parties' arguments, the Court also notes one additional type of agreement between RFC and corresponding lenders. At various times, originating lenders used RFC's automated electronic loan underwriting program, Assetwise, when submitting loans to RFC. Common SJ Order , 332 F. Supp.3d at 1136, 1175. The originating lenders who used Assetwise, such as PRMI, signed the Assetwise Direct Criteria Agreement ("Assetwise Agreement"). (Nesser Decl., Ex. 6 (Jan. 19, 2001 Assetwise Agmt.); Smallwood Decl., DX-40 (June 3, 2002 Assetwise Agmt.).)

1. General Rules of Interpretation: Client Guide §§ 141 and 113

While many of the provisions in the AlterNet Guide and Client Guide are materially identical, (see Pl.'s App'x 1 [Doc. No. 5277-1] (Spreadsheet Comparing Client & AlterNet Guide Provisions)), there are some differences. Section 141 of the January 1, 2003 Client Guide—Section 113 in later versions from January 1, 2005 forward—provides "General Rules of Interpretation" applicable to all provisions of the Client Guide. Some provisions in the Client Guide's "General Rules of Interpretation" are not present in the AlterNet Guide. (See id. § 113(A)–(C).) In particular, Client Guide Section 141(A)/Section 113(A) addresses the term "knowledge," as that term is used in the Client Guide. (Id. § 113(A); Nesser Decl., Ex. 4 (Client Guide, Version 1-03-G01) § 141(A).) Section 141(B)/Section 113(B) addresses RFC's "sole discretion." (Pl.'s App'x 1 (Spreadsheet Comparing Client & AlterNet Guide Provisions) § 113(B); Nesser Decl., Ex. 4 (Client Guide, Version 1-03-G01) § 141(B).) These provisions are not present in the AlterNet Guide.

The Client Guide's "knowledge" standard holds an originating lender/Client to a strict standard of both actual and constructive knowledge:

(A) "Knowledge" Standard

Whenever any representation, warranty, or other statement contained in this Client Guide is qualified by reference to a Client's "knowledge" or "to the best of" a party's "knowledge", such "knowledge" shall be deemed to include knowledge of facts or conditions of which Client, including (without limitation) any of its directors, officers, agents, or employees, either is actually aware or should have been aware under the circumstances with the exercise of reasonable care, due diligence, and competence in discharging its duties under this Client Guide and the Program Documents. All matters of public record shall be deemed to be known by the Client. Any representation or warranty that is inaccurate or incomplete in any material respect is presumed to be made with the knowledge of Client, unless Client demonstrates otherwise. "Due diligence" means that care which Client would exercise in obtaining and verifying information for a Loan in which Client would be entirely dependent on the Mortgaged Property or Mortgagor's credit as security to protect its investment.

(Nesser Decl., Ex. 4 (Client Guide, Version 1-03-G01) § 141(A); Pl.'s App'x 1 (Spreadsheet Comparing Client & AlterNet Guide Provisions) § 113(A).)

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