In re ResCap Liquidating Trust

Case Type:
Case Status:
Affirmed in part and Reversed in part
21-2139 (8th Circuit, Feb 02,2023) Published
Given that RFC's bankruptcy settlements were reasonable and entered into in good faith, the Eighth Circuit affirmed most of the judgment. The court agreed that the Client Guide granted RFC the sole discretion to determine when an event of default occurred, and when RFC made that determination, it was entitled to seek indemnification payments from PRMI. The court vacated and remanded the judgment as it pertained to postjudgment interest because it determined the district court should have calculated interest under federal law and not Minnesota law.
Procedural context:
ResCap filed a complaint against PRMI in December 2016, asserting actions for breach of contract and claims for indemnification. ResCap argued that RFC had sole discretion to determine whether PRMI defaulted under the Client Guide for indemnification purposes. Following a bench trial, the district court determined ResCap established its burden on each of its causes of action and entered judgment in favor of ResCap for $5.4 million in damages, $10,6 million in attorneys' fees, $3,5 million in costs, $2 million in prejudgment interest, and $520,212 in post-judgment interest. PRMI appealed the judgment, arguing the district court erred (1) in interpreting the underlying Client Guide and related contracts, (2) in the allocation of multi-party damages to PRMI where RFC was also negligent, and (3) in the post-trial award of fees, costs, and interest. As to the first issue, the district court determined the Client Guide did in fact give RFC (and ResCap) the sole discretion to determine an event of default for indemnification purposes. Because ResCap determined PRMI defaulted under the Client Guide, ResCap had two potential remedies and ResCap chose to seek indemnification payments. As to the second issue, the evidence at trial showed that PRMI's breach rate on its originating loans was 50.9% and the court assigned PRMI's share of the bankruptcy settlement liability at $5.4 million. The district court looked at the indemnification provisions and determined PRMI clearly agreed to indemnify RFC for any claim in reliance on PRMI's representations and omissions. Further, the district court determined there was insufficient evidence to establish that RFC engaged in fraud or other intentional misconduct that would otherwise preclude PRMI's duty to indemnify. As to the last issue, the district court rejected PRMI's request for fully unredacted firm invoices so PRMI could adequately contest the requested fee award. The district court reviewed the unredacted invoices and determined that under the lodestar analysis, ResCap's attorneys' fees were reasonable. The district court also granted ResCap pre- and post-judgment interest at the rate provided under Minnesota law.
ResCap Liquidating Trust ("ResCap") was created pursuant to the confirmed Chapter 11 Plan in the Residential Funding Company, LLC ("RFC") bankruptcy case in the Southern District of New York. That bankruptcy stemmed from the 2008 housing crisis and the resulting thousands of lawsuits against RFC that followed. RFC was a middleman in the residential mortgage-backed securities ("RMBS") market. It purchased thousands of mortgage loans from originators and sold the loans in pools to hundreds of trusts ("RMBS trusts") for securitization, making representations and warranties concerning the individual loans. One of these originators that sold mortgage loans to RFC was Primary Residential Mortgage, Inc. ("PRMI"). The transactions between RFC and PRMI, and other loan originators, were governed by contracts, the most relevant referred to as the "Client Guide." The Client Guide required PRMI to make representations and warranties about the characteristics and underwriting of the mortgage loans and also gave RFC sole discretion to determine whether PRMI defaulted under the terms. The Client Guide also included an expansive indemnification provision that required PRMI to indemnify RFC in the event of a default. Fastforwarding to the RFC bankruptcy case, the RMBS trusts had an unallocated allowed claim of $7.091 billion, which they exchanged for units entitling them to a portion of any recovered damages by ResCap. ResCap initiated two waves of lawsuits seeking indemnification against a large number of originators. It appears that ResCap brought most of the lawsuits in the United States District Court for the District of Minnesota. The first wave of lawsuits were consolidated before Judge Nelson, and most of the second wave were also assigned to Judge Nelson. By August 2019, PRMI was the only remaining defendant against ResCap.
Loken, Colloton, Sheperd

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