In a repurchase and indemnification action involving mortgage loan liabilities, the U.S. Court of Appeals for the Eighth Circuit recently a trial court's $5.4 Million compensatory damages judgment and over $14 Million attorney fee award in favor of the plaintiff, while overturning the trial court's award of post-judgment interest.
A copy of the opinion is available at: Link to Opinion
This dispute involves litigation from the fallout of the 2008 financial crisis. Here, a mortgage lender ("Lender") sold and assigned a number of mortgage loans to another company which then securitized the loans. The intermediate company ("Funding Company") then sold and assigned the loans to various trusts.
Generally, the process involved the Funding Company entering into an Assignment and Assumption Agreement with a depositor entity in where the Funding Company made representations and warranties concerning the individual loans in the pool. The depositor then sold the loans to RMBS Trusts in Pooling and Servicing Agreements that assigned Funding Company's representations to the trusts and often contained additional loan-level representations.
Funding Company also contracted with four "monoline" insurers ("Monolines") to insure principal and interest payments on some of the RMBS certificates in contracts in which Funding Company warranted that representations made to the RMBS Trusts were true. When the loans began to default during the collapse of the housing market in 2008, the trusts that bought the securities filed various lawsuits.
In 2012, the Lender filed Chapter 11 bankruptcy. As part of the bankruptcy resolution a Liquidating Trust ("Liquidating Trust") for the Funding Company was established to pursue indemnification claims against lenders such as the defendant Lender here, and to distribute any recoveries as assets of the Chapter 11 estate to RMBS Trusts, insurers, and other creditors.
In 2013, the Liquidating Trust began to file a series of lawsuits which were consolidated in a Minnesota federal court. In this matter, the Liquidating Trust brought claims for breach of contract and indemnification, seeking to recover a portion of the allowed bankruptcy claims for those holding units in the Liquidating Trust. After numerous settlements from other co-defendants, the defendant Lender was the final remaining defendant.
After a 13-day bench trial occurred in February and March of 2020, the trial court later issued a 210 page opinion holding that the Liquidating Trust had established by a preponderance of the evidence each element of its contractual indemnification claim. The trial court further concluded that and the amount of reasonably certain and non-speculative damages Liquidating Trust is entitled to recover was $5.4 million. After further briefing, the trial court awarded the liquidating trust $10.6 million in attorney's fees, $3.5 million in costs, $2 million in prejudgment interest, and $520,212 in post-award prejudgment interest for the period between entry of judgment and the order awarding attorney's fees, costs, and prejudgment interest.
The defendant Lender appealed the trial court's judgment, raising essentially three (3) issues on appeal. First, the defendant Lender disputed the trial court's the interpretation of the underlying contracts between the defendant Lender, Funding Company, the Trusts, and the Monolines. Second, the defendant Lender disputed the allocation of multi-party damages to the defendant Lender. Lastly, the defendant Lender disputed the post-trial award of fees, costs, and interest.
Contractual Issues
On summary judgment, the Liquidating Trust argued that a provision in the Funding Company's purchase guide required the defendant Lender to indemnify the Funding Company for "all losses, damages ... resulting from any Event of Default" and that as a result of this provision the Liquidating Trust had sole discretion to determine whether an "Event of Default" occurred. The defendant Lender argued that the Funding Company's purchase guide did not afford the Liquidating Trust an independent grant of power, and the indemnification provision did not allow the exercise of this power.
The Eighth Circuit did not agree with the defendant Lender's textual argument. The Appellate Court cited precedent under Minnesota law that a party "cannot contract away judicial review by granting the exclusive right to determine an Event of Default has occurred, only to later ask a court to independently review the determination." Residential Funding Co., LLC v. Terrace Mortgage Co., 725 F.3d 910 (8th Cir. 2013) at 915-16.
The defendant Lender further argued the trial court misinterpreted the indemnification provision and misapplied Minnesota law when an indemnitee seeks to recover for its own negligence. The Liquidating Trust argued that the Defendant is contractually obligated to indemnify the Chapter 11 claimant's claims allowed in the bankruptcy settlements.
Here, the Eighth Circuit agreed with the trial court that the relevant contractual provisions clearly and unequivocally state that the defendant Lender agreed to indemnify the Funding Company for any claim based on "a breach of any representation, warranty or obligation made by funding company in reliance" on the defendant Lender's misstatement or omission. The Court of Appeals agreed with the trial court, and held that the bankruptcy settlements resulted from breaches of representations that Funding Company made in securitizing mortgage loans, which in turn were made in reliance upon representations and warranties made by the defendant lender when it sold the loans to Funding Company knowing the Funding Company's intent to securitize.
As a result, the Eighth Circuit held, the claims were incurred as a result of an Event of Default.
The Appellate Court noted that due to the Funding Company's role in the securitization process it was foreseeable to the defendant Lender that downstream losses resulting from the Funding Company acting in reliance on the defendant Lender's misrepresentations would include negligence claims that Funding Company knew or should have known of Defendant's default, and breach of contract and warranty claims. Furthermore, the Eighth Circuit noted, the indemnification provisions should have fairly apprised the defendant Lender of its obligation to indemnify Funding Company for all of its resulting losses.
After trial, the trial court held that the Liquidating Trust only needed only to show that Defendant's breaches increased Funding Company's risk of liability on the RMBS Trust and Monoline Claims that were settled in Bankruptcy. The defendant Lender argued this was error because a claim for indemnification of "a breach of any representation, warranty or obligation made by Funding Company" required Liquidating Trust to prove an actual breach, not just an increased risk of liability. The Court of Appeals disagreed with this argument noting that accepting defendant Lender's argument would have required Liquidating Trust to prove a breach of each individual loan which would have been unmanageable and contrary to the settlements the parties agreed upon during the bankruptcy proceedings.
Damages
One of the most difficult aspects of the Liquidating Trusts claims was proving the defendant Lender's share of the indemnifiable liabilities Funding Company incurred in its settlements with the RMBS Trusts and the Monolines.
The Liquidating Trust through its expert witness and relevant data opined that the "most likely and conservative estimate" of the defendant Lender's fair share of the Funding Company's bankruptcy settlement liability is $5.4 million. The trial court found that expert witnesses' calculation of damages was reasonable and nonspeculative.
The defendant Lender raised several arguments to attempt to overturn the trial court's ruling on this issue. First, it argued that the because the bankruptcy court's confirmation order discharged Funding Company from prior claims and liabilities, the bankruptcy court "extinguished" the claims. The Eighth Circuit disagreed and noted that the purchase guide's indemnification provisions applied to Funding Company's liabilities, not just its actual losses, and thus Liquidating Trust could pursue indemnity on the allowed claims.
The defendant Lender also argued that the trial court erred in allocating a share of Funding Company's total liability to the defendant Lender without requiring Liquidating Trust to account for the "relative value" of the various claims by RMBS Trusts and Monolines against Funding Company. The defendant Lender argued that the Liquidating Trust's expert witness should have been required to account for the "relative value" of each individual RMBS Trust and Monoline claim in the bankruptcy settlements and in particular, the relative strength of a statute of limitations defense that Funding Company could have asserted against the earlier RMBS Trusts that were not a part of a pre-bankruptcy settlement, when most of the defendant Lender's loans were sold to Funding Company.
In support of this argument, the defendant Lender relied upon the cases of UnitedHealth Group Inc. v. Executive Risk Specialty Ins. Co., 870 F.3d 856 (8th Cir. 2017) and King's Cove Marina, LLC v. Lambert Com. Construction LLC, 958 N.W.2d 310 (Minn. 2021). The Eighth Circuit disagreed with the Defendant and noted that these two opinions involved unallocated and uncovered claims whereas here the trial court determined that every claim in the present action was indemnifiable under the applicable contracts. Accordingly, the Appellate Court affirmed the trial court's ruling on this issue.
Attorney's Fees, Costs, and Interest
After the trial, the Liquidating Trust petitioned the trial court for an award of over $14 Million attorney's fees and costs from December 2014 to July 2020. The defendant Lender raised numerous arguments attempting to overrule and/or reduce the fee award.
First, the Lender argued the trial court violated its constitutional right to due process by refusing to compel Liquidating Trust to provide unredacted copies of the Liquidating Trust's law firm invoices underlying the requested fee award. The Appellate Court considered this a discovery issue and under an abuse of discretion standard held that since the defendant Lender failed to explain why redacted invoices hindered their ability to assess the invoices the trial court did not abuse its discretion.
Next, the defendant Lender argued that the over $14 Million award in attorney's fees was grossly disproportionate to the $5.4 Million dollars in damages. The Appellate Court noted that the trial court conducted a thorough lodestar analysis under Minnesota law and did not abuse its discretion in awarding attorney's fees that exceeded the damages award. In addition, the Eighth Circuit noted the law in Minnesota that "to consider the amount involved and the results obtained when awarding reasonable attorney fees does not amount to a 'dollar value proportionality rule.'" Green v. BMW of North America, LLC, 826 N.W.2d 530, 538 (Minn. 2013).
The trial court awarded an additional $520,212 in interest for the time period between the initial judgment in favor of Liquidating Trust and the final judgment. For this period, the trial court relied on the Minnesota prejudgment interest statute, which allows an interest rate of 10% "from the time of the verdict, award, or report until judgment is finally entered."
On appeal, the defendant Lender argued the trial court erred in refusing to apply the lower interest rate prescribed for post-judgment interest under U.S.C. § 1961. The Appellate Court agreed noting that Eighth Circuit precedent holds that "federal law governs the award of post-judgment interest . . . while state law governs the award of prejudgment interest." Weitz Co., Inc. v. Mo-Kan Carpet, Inc., 723 F.2d 1382, 1385 (8th Cir. 1983). The Appellate Court held that the trial court erred in applying Minnesota law to calculate interest after final judgment rather than 28 U.S.C. § 1961(a).
Accordingly, the judgment of the trial court was vacated and remanded on the issue of post-judgment interest, but was affirmed in all other respects.
Ralph T. Wutscher
Maurice Wutscher LLP
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