Citations
- 332 F. Supp. 3d 1101
Full opinion text
SUSAN RICHARD NELSON, United States District Judge
Table of Contents
I. Introduction...1116
II. Background...1117
A. Securitization...1117
B. Historical Background...1117
C. The Client Contract and the Client Guide...1118
1. Section 113: General Rules of Interpretation...1119
2. Section A200: Knowledge, Reliance and Waiver...1120
3. Section A202: Representations and Warranties...1120
4. Sections A208 and A209: Events of Default and Non-Exclusive, Cumulative Remedies...1120
5. Section A210: Repurchase...1121
6. Section A212: Indemnification...1121
D. Bankruptcy...1122
E. Procedural History...1126
III. Discussion...1127
A. Standard of Review...1127
B. Summary Judgment Motions...1127
C. Principles of the Law of Contractual Indemnity...1128
D. Principles of Contract Interpretation...1130
E. Cross Motions for Summary Judgment...1132
1. Misconduct Defense against Indemnification...1132
2. Whether Plaintiffs Can Recover Losses and Liabilities Incurred from "Expired" Loans...1137
3. Recovery for Claims Released in Bankruptcy...1141
4. Sampling...1145
F. Plaintiffs' Motions for Summary Judgment...1151
1. The Scope of Plaintiffs' Sole Discretion under the Client Guide...1151
a. The Scope of Plaintiffs' Sole Discretion to Determine Breaches...1151 b. The Scope of Plaintiffs' Sole Discretion to Make All Settlement Decisions...1154
2. The Scope of Plaintiffs' Potential Recovery in Indemnity...1157
a. Recovery in Indemnity for RFC's Losses and Liabilities (the Allowed Claims), Not Just Actual Losses Incurred...1158
b. Recovery for All Losses...1162
3. Causation...1162
a. Applicable Legal Standard...1163
b. Genuine Issues of Material Fact Preclude a Finding of Causation as a Matter of Law...1166
c. Causation Defenses...1169
4. Affirmative Defenses...1172
a. Estoppel...1172
i. HLC...1172
ii. Standard Pacific and CTX...1173
iii. Analysis...1174
b. Waiver Defense Based on "Assetwise"...1175
c. Knowledge- and Reliance-Based Defenses...1178
i. Breach of Contract Claim...1180
ii. Indemnity Claim...1180
d. Good Faith and Fair Dealing...1184
G. Defendants' Motions for Summary Judgment...1186
1. Statute of Limitations for Loans Sold Before May 14, 2006...1186
2. Whether RFC's Expert Opinions Foreclose Relief...1191
3. Plaintiffs' Damages Models...1191
a. Breaching Loss Approach...1192
i. Whether RFC May Recover Repurchase Damages under Section A210...1192
ii. Whether RFC May Recover Repurchase Damages under the Indemnification Provisions in Section A212...1195
iii. Analysis...1197
b. Allocated Breaching Loss Approach...1198
i. Whether the Allocated Breaching Loss Approach Offers Non-Speculative Bases to Allocate the Trust Settlement...1199
(1) Allocation under UnitedHealth ...1199
(2) Defendants' Criticisms of the Methodology of the Allocated Breaching Loss Approach...1200
ii. Analysis...1203
c. Allocated Loss Approach...1204
i. Whether the Allocated Loss Approach Offers Non-Speculative Bases to Allocate the Settlements...1204
ii. Analysis...1205
IV. Conclusion...1205
I. INTRODUCTION
Before the Court are the parties' cross motions for summary judgment on common issues in the first-wave actions. On June 19 and 20, 2018, the Court heard oral argument on the parties' motions. For the reasons set forth below, Plaintiffs' Motion for Summary Judgment on Common Issues [Doc. No. 3241] is granted in part, denied in part, and denied without prejudice in part, and Defendants' Motion for Summary Judgment on Common Issues [Doc. No. 3247] is granted in part and denied in part.
II. BACKGROUND
A. Securitization
The majority of U.S. mortgages are financed through the securitization process. Adam J. Levitin & Susan M. Wachter, Explaining the Housing Bubble , 100 GEO. L.J. 1177, 1182, 1187 (2012). "Securitization" involves pooling large numbers of housing loans, then selling them to a trust. Baker v. CitiMortgage, Inc. , No. 17-cv-2271 (SRN/KMM), 2017 WL 6886712, at *4 (D. Minn. Dec. 21, 2017) (citing Fla. State Bd. of Admin. v. Green Tree Fin. Corp. , 270 F.3d 645, 648 (8th Cir. 2001) ). A mortgage lender raises funds for new mortgages through this process. Id. (citing BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assur. Corp., 673 F.3d 169, 173 (2d Cir. 2012) ). The trust pays for the loans by issuing securities for which the loans serve as collateral. Id. "The right to receive trust income is parceled into certificates and sold to investors, called certificateholders." Id. Purchasers of the securities often require that they be insured by monoline insurers as a hedge against investment risk. In re Barclays Bank PLC Securities Litig. , No. 09 Civ. 1989 (PAC), 2017 WL 4082305, at *4 (S.D.N.Y. Sept. 13, 2017), appeal docketed , No. 17-3293 (2d Cir. Oct. 16, 2017).
B. Historical Background
In the early- to mid-2000s, a rise in home prices in the U.S. was "driven by increased demand, low interest rates, and easy credit access." Id. While an initial mortgage refinancing boom from 2001 to 2003 led to increased earnings for mortgage originators and securitizers, when long-term interest rates began to rise, the mortgage industry sought other ways to maintain origination volumes. Levitin & Wachter, supra, at 1193-94). The solution required industry players "to find more product to move in order to maintain origination volumes and, hence, earnings." Id. at 1194.
A second mortgage boom ensued after 2003, but "[b]ecause the prime borrowing pool was exhausted, it was necessary to lower underwriting standards and look more to marginal borrowers to support origination volume levels." Id. During this time period, "[l]enders provided mortgage loans to many high-risk borrowers with questionable ability to repay, fueled in large part by the opportunity to package and sell those mortgages into the growing market for [residential] mortgage-backed securities ("[R]MBSs")." In re Barclays Bank, 2017 WL 4082305, at *4.
In the mid-2000s, the "explosion in the market for [RMBS]" resulted in a securitization market frenzy. Fed. Hous. Fin. Agency for Fed. Nat'l Mortgage Ass'n v. Nomura Holding Am., Inc. , 873 F.3d 85, 96 (2d Cir. 2017) (citing Levitin & Wachter, supra , at 1192-202). It was not to last. Among other things, housing prices fell and
[l]ate 2006 and 2007 saw a dramatic rise in mortgage loan defaults, causing the value of the related securities, whose income depended on borrower payments, to deteriorate. Banks and other investors began to experience substantial losses; and many monoline insurers could not accommodate such loss, given its quick pace and dramatic size.
In re Barclays Bank, 2017 WL 4082305, at *4. The global economy experienced an unprecedented downturn in 2008 "that had a profoundly negative effect on the real estate and credit markets." S.E.C. v. True North Fin. Corp. , 909 F.Supp.2d 1073, 1083 (D. Minn. 2012) (citations omitted).
C. The Client Contract and the Client Guide
Plaintiffs and Defendants here were all participants in the RMBS market frenzy and its ultimate collapse. Prior to RFC's May 2012 bankruptcy, it served as a middleman in the RMBS industry, both acquiring and securitizing residential mortgage loans. First, RFC purchased residential mortgage loans from numerous originating financial lenders, including Defendants Home Loan Center, Inc., CTX Mortgage Co., LLC, Standard Pacific Mortgage, Inc., Impac Funding Corp., iServe Residential Lending, LLC, and Freedom Mortgage Corporation (collectively, "Defendants"), and bundled them into securitization pools of thousands of loans. (See Decl. of Matthew R. Scheck ("Scheck Decl.") [Doc. No. 3258], Ex. 10 (Horst Dep. at 620-23); id. , Ex. 36 (Ruckdaschel Dep. at 40-41); id. , Ex. 19 (Corr. Hawthorne Rpt. ¶ 17).) RFC did not underwrite the loans; rather, it understood that the originating lenders "[were] responsible for ... underwriting prudently [and] ensuring that the loan met all of [RFC's contractual and underwriting] requirements ...." (Id. , Ex. 10 (Horst Dep. at 620-21).)
Second, in its middleman role, RFC then sold the pooled loans into residential mortgage-backed securitization ("RMBS") trusts ("the Trusts"). (See id. , Ex. 19 (Corr. Hawthorne Rpt. ¶ 17).) In the contracts that governed the relationships between RFC and the Trusts, RFC made representations and warranties ("R & Ws") concerning the underwriting quality and credit characteristics of the mortgage loans. (Id. ) The Trusts issued notes or certificates, supported by the loans' performance, which investors purchased. (Id. ) RFC additionally functioned as a "master servicer" for many of the securitizations, overseeing the work of the primary servicers. (Id. ¶ 18.)
While both parts of RFC's business model are factually relevant in this consolidated action, the legal focus of this litigation concerns Defendants' potential liability at the first step of selling residential mortgage loans to RFC. To sell their loans, Defendants each separately entered into a "Client Contract" with RFC. (Decl. of Deanna Horst ("Horst Decl.") [Doc. No. 3244], Exs. 2-9 (Defs.' Client Contracts).) Along with the Client Contract, a longer, more detailed document called "the Client Guide" governed the business relationship between RFC and Defendants. (Id., Ex. 1 (Client Guide § 100, Version 1-06-G01, Effective Mar. 13, 2006).) The Client Guide "set[ ] forth the terms and conditions for selling Loans to [ ]RFC." (Id. ) Specifically, it provided that the originating lender, or "Client," was "bound by all provisions" of the Client Guide, "including but not limited to the [R & Ws] of Client and Remedies of [ ]RFC Sections of this Client Guide [sic ]." (Id. § 101.)
The contractual language most relevant to the parties' summary judgment motions-and discussed in further detail throughout this opinion-is found in Sections 113(A) & (B), A200, A202, A208, A209, A210, and A212 of the Client Guide.
1. Section 113: General Rules of Interpretation
Section 113 provides "General Rules of Interpretation" applicable to all provisions of the Client Guide. Two subsections are most pertinent here-the first, Section 113(A) addresses the word "knowledge," as used in the Client Guide, and the second, Section 113(B) addresses RFC's "sole discretion." (Id. § 113(A) & (B).) In Section 113(A), "knowledge," as used throughout the Client Guide, 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.
(Id. § 113(A).)
The other relevant interpretative language in Section 113(B) vests RFC with broad authority to make determinations of fact and decisions to act, stating:
Whenever any provision of this Client Guide contract requires [ ]RFC to make a determination of fact or a decision to act, or to permit, approve or deny another party's action such determination or decision shall be made in [ ]RFC's sole discretion.
(Id. § 113(B).)
2. Section A200: Knowledge, Reliance and Waiver
The originating lenders' general R & Ws and covenants are set forth in Section A200. In that provision, the originating lenders acknowledge that RFC purchases the loans in reliance on the originating lenders' R & Ws, and the originating lenders agree to assume liability for any misrepresentations for breaches, regardless of their knowledge or RFC's knowledge. (Id. § A200).) Moreover, it explicitly provides that there can be no waiver of the provisions of the Client Guide unless RFC expressly makes such a waiver in writing:
The Client acknowledges that [ ]RFC purchases Loans in reliance upon the accuracy and truth of the Client's warranties and representations and upon the Client's compliance with the agreements, requirements, terms and conditions set forth in the Client Contract and this Client Guide.
All such representations and warranties are absolute, and the Client is fully liable for any misrepresentation or breach of warranty regardless of whether it or [ ]RFC actually had, or reasonably could have been expected to obtain, knowledge of the facts giving rise to such misrepresentation or breach of warranty.
The representations and warranties pertaining to each Loan purchased by [ ]RFC survive the Funding Date, any simultaneous or post-purchase sale of servicing with respect to the Loan and any termination of the Client Contract, and are not affected by any investigation or review made by, or on behalf of, [ ]RFC except when expressly waived in writing by [ ]RFC.
(Id. )
3. Section A202: Representations and Warranties
Section A202 requires originating lenders to make certain R & Ws to RFC regarding "individual loans," including information about the loans' eligibility and accuracy. (Decl. of Jesse T. Smallwood ("Smallwood Decl.") [Doc. No. 3257], Ex. 4 (Client Guide § A202, Version 1-06-G01, Effective Mar. 13, 2006) [Doc. No. 3260].) Among other things, the originating lenders represent that they have: verified the accuracy of information used by borrowers to obtain the loans, (id. § A202(A) ); ensured the proper completion and execution of loan forms, (id. § A202(D) ); complied with applicable laws, (id. ); ensured that no default or other breach of loan terms existed in any loan, (id . § A202(G) ); confirmed the market value of the mortgaged property, (id. § A202(T) ); and not sold any "high risk" loans to RFC. (Id. § A202(J)(1)(d).)
4. Sections A208 and A209: Events of Default and Non-Exclusive, Cumulative Remedies
Should any of the originating lenders breach these R & Ws by committing an "Event of Default," the Client Guide grants RFC wide-ranging discretion and recourse. (See id. § A208) (listing the types of "Events of Default"). Under Section A209, "Non-Exclusive, Cumulative Remedies," the Client Guide broadly provides that "RFC may exercise any remedy outlined in the Client Guide or as allowed by law or in equity." (Id. § A209.) Moreover, it states that RFC's exercise of its remedies resulting from an originating lender's default "will not prevent [ ]RFC from exercising: [o]ne or more other remedies in connection with the same Event of Default" or "[a]ny other rights which it may have at law or in equity." (Id. )
5. Section A210: Repurchase
The Client Guide remedies most relevant here are "Repurchase," in Section A210, and "Indemnification," in Section A212. Under the repurchase provision, if RFC determines that an Event of Default has occurred with respect to a particular loan, the originating lender can be required to repurchase a loan within 30 days of receiving notification from RFC. (Id. § A210(A).) The repurchase provision sets forth a specific procedure and formula for determining the repurchase price of a loan. (See id. § A210 (A)-(H).) In addition, it states, "[ ]RFC is not required to demand repurchase within any particular period of time, and may elect not to require immediate repurchase. However, any delay in making this demand does not constitute a waiver by [ ]RFC of any of its rights or remedies." (Id. § A210 (A).) Even if RFC determines that repurchase is not the appropriate remedy, the originating lender is nevertheless obliged to pay RFC "all losses, costs and expenses incurred by [ ]RFC and/or the Loan's Servicer as a result of an Event of Default," including reasonable attorneys' fees and related costs incurred in connection with any enforcement efforts. (Id. )
6. Section A212: Indemnification
The Client Guide's provision for the remedy of indemnification, Section A212, also provides RFC with wide-ranging indemnification in the event of an originating lender's default. The indemnification provision requires the originating lender to indemnify RFC from
all losses, damages, penalties, fines, forfeitures, court costs and reasonable attorneys' fees, judgments, and any other coasts, fees, and expenses resulting from any Event of Default. This includes, without limitation, liabilities arising from (i) any act or failure to act, (ii) any breach of warranty, obligation or representation contained in the Client Contract, (iii) any claim, demand, defense or assertion against or involving [ ]RFC based on or resulting from such breach, (iv) any breach of any representation, warranty or obligation made by [ ]RFC in reliance upon any warranty, obligation or representation made by the Client contained in the Client Contract and (v) any untrue statement of a material fact, omission to state a material fact, or false or misleading information provided by the Client in information required under Regulation AB or any successor regulation.
(Id. § A212.)
Versions of the Client Guide from July 1, 2002 forward contain additional language regarding the loan originators' broad indemnification obligations to RFC:
In addition, Client shall indemnify [ ]RFC against any and all losses, damages, penalties, fines, forfeitures, judgments, and any other costs, fees and expenses (including court costs and reasonable attorneys' fees) incurred by [ ]RFC in connection with any litigation or governmental proceeding that alleges any violation of local, State or federal law by Client, or any of its agents, or any originator or broker in connection with the origination or servicing of a Loan. With regard to legal fees or other expenses incurred by or on behalf of [ ]RFC in connection with any such litigation or governmental proceeding, Client shall reimburse [ ]RFC for such fees and expenses.... Except for notices for reimbursement, [ ]RFC is not required to give Client notice of any litigation or governmental proceeding that may trigger indemnification obligations. Client shall instruct its officers, directors and agents (including legal counsel) to cooperate with [ ]RFC in connection with the defense of any litigation or governmental proceeding involving a Loan. [ ]RFC has the right to control any litigation or governmental proceeding related to a Loan, including but not limited to choosing defense counsel and making settlement decisions.
(Scheck Decl., App. 1 (Evolution of Client Guide § A212).)
D. Bankruptcy
As this Court previously noted, Plaintiffs and the originating-lender Defendants were active participants in the RMBS market frenzy. During its heyday, they undoubtedly reaped considerable financial benefits from their relationships with each other. But beginning in 2007, and consistent with events throughout the RMBS industry, the loans in the RFC-sponsored and serviced securitizations experienced a high rate of default. (Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 19).) The Trusts consequently sustained significant financial losses. (Id. ) Multiple entities, including the RMBS Trustees, demanded repurchase and/or filed lawsuits against RFC, alleging that their losses were caused by the poor quality of the loans in RFC's securitizations. (Id. ¶ 20.)
Each RMBS securitization that RFC sponsored or serviced was administered by a Trustee. (Id. ) The Trustee was authorized to seek remedies against RFC to recover losses experienced by the securitization due to contractual breaches by RFC. (Id. ) Any recoveries that the Trustees obtained would be paid to the Trusts, and ultimately benefit the investors. (Id. ) The following Trustees sought relief against Plaintiffs and participated in a settlement with them ("the RMBS Trustee Settlement"): Deutsche Bank National Trust Company and Deutsche Bank Trust Company Americas ("Deutsche Bank"), Bank of New York Mellon ("BNYM"), U.S. Bank N.A. ("US Bank"), HSBC Bank USA, N.A. ("HSBC"), and Wells Fargo Bank, N.A. ("Wells Fargo") (collectively, the "RMBS Trustees"). (Id. )
Other securitizations that RFC sponsored or serviced, or securitizations into which it sold loans, carried financial guaranty insurance furnished by monoline insurers. (Id. ) The monoline insurers included MBIA Insurance Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC"), Assured Guaranty Municipal Corporation (formerly known as Financial Security Assurance, Inc.) ("Assured"), Ambac Assurance Corporation ("Ambac"), and Syncora Guarantee Inc. ("Syncora") (collectively, the "Monolines"). (Id. ¶ 21.) Under the insurance policies, the Monolines generally guaranteed that investors would receive timely payments of principal and interest on their notes or certificates. (Id. ¶ 20.) If a defaulted loan caused a trust to be unable to timely pay its investors, the Monolines were to compensate the trust for the shortfall. (Id. ) Due to the high rate of default in the RFC-sponsored and serviced securitizations in 2007, the Monolines made "substantial payments" to their insureds under their policies, and were likely to incur future payments as well. (Id. )
Beginning in approximately 2008, the RMBS Trustees and Monolines filed lawsuits against Plaintiffs alleging claims for breach of representation and warranty, fraud, and servicing-related claims arising from Plaintiffs' sale of the allegedly defective mortgage loans. (Id. ¶¶ 21-22; Scheck Decl., Ex. 28 (Bankr. Findings of Fact ¶¶ 98-108, 124-25).)
On May 13, 2012, Plaintiffs entered into a proposed $8.7 billion settlement ("Original RMBS Settlement") with two groups of RMBS Trust investors that had holdings in approximately 392 securitization trusts. (Scheck Decl., Ex. 19 (Corr. Hawthorne Rpt. ¶ 23); id. , Ex. 20 (Debtors' 9019 Mot. ¶¶ 17-20).) Absent settlement, Plaintiffs' then-expert Frank Sillman estimated that lifetime losses for these trusts could have ranged between $45.6 billion to $49.8 billion. (Id. , Ex. 28 (Bankr. Findings of Fact ¶ 101).)
The following day, and as contemplated by the Original RMBS Settlement, Plaintiffs filed for Chapter 11 relief in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court"). ( Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 20); id. , Ex. 21 (Debtor's Voluntary Pet.).) Shortly thereafter, the Bankruptcy Court appointed an examiner to investigate the Plaintiffs' pre-petition activities. ( Id. , Ex. 28 (Bankr. Findings of Fact ¶ 3).)
Multiple entities filed RMBS-related proofs of claim with the Bankruptcy Court in order to obtain damages. (See id. , Exs. 22 to 26 (Proofs of Claim 6767, 6605, 6656, 6451, 5130).) This included six RMBS Trustees with proofs of claim covering 1,000 trusts with a combined original principal balance of over $226 billion. ( Id. , Ex. 19 (Corr. Hawthorne Rpt. ¶ 97).) Their most significant claims concerned alleged breaches of the R & Ws that Plaintiffs had made in the Governing Agreements for the securitizations. (Id. ¶ 98.) Among their other claims, RMBS Trustees also asserted common-law fraud or negligent misrepresentation claims against Plaintiffs to the extent that they had actual or imputed knowledge that the mortgage loans failed to comply with Plaintiffs' R & Ws. (Id. ¶ 101.)
Additionally, several Monolines filed 32 proofs of claim with the Bankruptcy Court, asserting claims for tens of billions of dollars in actual and potential losses. (Id. ¶ 104.) Like the RMBS Trustees' claims, the Monolines' claims generally alleged breaches of R & Ws. (See id. ¶¶ 105-13.)
Upon filing for bankruptcy, Plaintiffs sought the approval of the Original RMBS Settlement pursuant to Federal Rule of Bankruptcy Procedure 9019. (Scheck Decl., Ex. 20 (Debtors' 9019 Mot. ¶ 57).) However, some stakeholders opposed the Original RMBS Settlement, including the Official Committee of Unsecured Creditors, a committee appointed to represent all general unsecured creditors. ( Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 24); id. , Ex. 28 (Bankr. Findings of Fact ¶ 102); id. , Ex. 29 (Comm. Obj. at 10-11).) Some objectors found the proposed settlement amount unreasonably high, ( id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 124), while others found it too low. (Id. ¶ 125.) The parties engaged in substantial discovery and extensively litigated issues concerning the approval of the Original RMBS Settlement. (Id. ¶¶ 115-30.)
In light of the objections, the Bankruptcy Court encouraged a new round of comprehensive settlement negotiations. (Scheck Decl., Ex. 28 (Bankr. Findings of Fact ¶ 102).) Bankruptcy Judge Martin Glenn, who oversaw the bankruptcy proceedings, appointed another sitting federal bankruptcy judge, Judge James Peck, as mediator, and additionally authorized Lewis Kruger as the Chief Restructuring Officer to negotiate a settlement of the claims against Plaintiffs. ( Id., Ex. 30 (Mediator Order); id. , Ex. 31 (Kruger Direct Testimony ¶¶ 11-12).)
On May 13, 2013, Plaintiffs entered into settlement agreements with the RMBS Trustees and Monolines MBIA, FGIC, Ambac, and Syncora, which were incorporated into the parties' proposed Chapter 11 Bankruptcy Plan ("the Plan"). ( Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 139).) Almost all of the creditors that voted on the Plan (95.7%) voted to accept it. ( Id., Ex. 28 (Bankr. Findings of Fact ¶¶ 1, 265).) The Plan reflected that the parties had resolved the RMBS Trustees' claims against RFC for $7.091 billion (the "RMBS Settlement"), and the Monolines' claims against RFC as follows: MBIA ($1.45 billion), FGIC ($415 million), Ambac ($22.8 million), and Syncora ($7 million) (collectively, the "Monoline Settlements," and collectively with the RMBS Settlement, the "Settlements"). ( Id., Ex. 19 (Corr. Hawthorne Rpt. ¶ 26.); id. , Ex. 32, App. 1 (Bankr. Plan, Art. IV(C), (D) ); id. , Ex. 33 (Order Granting § 365 Mot. at 12 ¶ 6).)
In December 2013, Judge Glenn issued his 134-page Findings of Fact regarding the confirmation of the proposed Chapter 11 Plan. (See id., Ex. 28 (Bankr. Findings of Fact at 1, ¶¶ 18-50).) Among the Plan's release-related provisions negotiated as part of the Settlements, Judge Glenn noted the parties' respective risks and their time-consuming efforts to reach an informed resolution:
The settlement reflects a reasonable balance between the litigation's possibility of success and the settlement's future benefits. Each party to the negotiations that led to the settlement had access to a wealth of information gathered over the course of months-long investigations conducted by the Committee and the voluminous materials made available from the Examiner's investigation. To facilitate settlement negotiations, the parties reviewed extensive document discovery, briefed the merits of the claims, and exchanged written and oral presentations regarding their legal positions.
(Id. ¶ 239) (citations omitted).
He further noted that the parties found the Settlements reasonable, stating, "With the knowledge accumulated in this process, each party independently determined that the settlement of the Estates' claims against the Ally Released Parties reflected a reasonable resolution of the claims." (Id. ) Moreover, Judge Glenn found that "each [individual] settlement was reasonable, (id. ¶ 178), that the Plan proponents had exercised reasonable business judgment in entering into the Plan Documents, which he also deemed "fair and reasonable," (id. ¶ 51 & n.11), and that the agreed-upon allocations embodied in the Plan were likewise "reasonable and appropriate." (Id. ¶ 201.)
As to the individual settlements comprising the global Settlements, he found that the new RMBS Settlement resolved: "(1) alleged and potential claims for breaches of R & Ws held by all RMBS Trusts; (2) all alleged and potential claims for damages arising from servicing; and (3) any cure claims ...." (Id. ¶ 103).) Absent settlement, Judge Glenn recognized the significant financial risks in litigating the parties' claims:
The potential losses for RMBS Trusts asserting breaches of representations and warranties range from $42.4 billion to $43.2 billion, excluding losses that are insured by a Monoline. Of that amount, $32.9 billion are historical losses to Debtor-sponsored trusts, and $1.45 billion represent historical losses in non-Debtor sponsored trusts that correspond to the percentage of loans in those trusts sold by the Debtors. The additional forecasted losses range from $7.76 billion to $8.4 billion for the Debtor-sponsored RMBS Trusts, and $300 to $400 million for the portion of non-Debtor-sponsored RMBS Trusts corresponding to the portion of loans sold by the Debtors. Absent settlement, the likely amount of recoverable damages for the RMBS Trusts' representation and warranty claims, after consideration of legal defenses and litigation costs, ranges from $7.38 billion to $8.6 billion. This range does not account for servicing claims and cure claims.
(Id. ¶ 106) (internal citations omitted). Judge Glenn further stated that but for the approval of the RMBS Settlement, the R & W claims "would have to be asserted, litigated and liquidated on an individual basis." (Id. ¶ 118.) And if these claims were litigated individually, Judge Glenn found that they "would be subject to significant litigation risks and factual and legal defenses." (Id. ) Additionally, because litigating these claims would be an expensive and time-consuming undertaking, he concluded that doing so "would deplete the Debtors' estates, and might result in diminished recoveries to all creditor constituencies, including the RMBS Trusts." ( Id. )
In addition to the RMBS Trusts' R & W claims, the mediation also included the RMBS Trusts' Servicing Claims. (Id. ¶ 119.) Certain RMBS Trustees retained the financial advisory firm of Duff & Phelps, LLC ("Duff & Phelps") to identify and quantify their claims. (Id. ¶¶ 113-14).) Duff & Phelps sought to quantify Plaintiffs' liability as a servicer with respect to: (1) misapplied and miscalculated payments; (2) wrongful foreclosure and improper loss mitigation practices; and (3) extended foreclosure timing issues caused by improper or inefficient servicing conduct such as falsified affidavits, improper documentation, and improper collection practices. (Id. ¶ 119.) Judge Glenn noted Duff & Phelps' finding that Plaintiffs' potential liability as a servicer under these three bases could be as high as $1.1 billion, but that asserting such claims would involve "significant risk and uncertainty." (Id. ) Under the Plan, the servicing-related claims, settled as "RMBS Cure Claims," were allowed in an aggregate amount of $96 million. (Id. )
Judge Glenn made similar findings regarding Plaintiffs' financial exposure for the Monolines' claims. (Id. ¶¶ 126-37, 143-54, 213-15.) He stated that absent a settlement, Plaintiffs were "almost certain to become embroiled in additional, complex litigation with the Monolines over the validity, amount and possible subordination of their asserted claims." (Id. ¶ 213.)
Judge Glenn found that the Settlements resulted from good faith, arms-length negotiations, were in the best interests of the parties and claimholders, (id. ¶¶ 51), were proposed in good faith and in conformity with the Bankruptcy Code, (id. ¶¶ 18-26, 27, 51, 121-22), and, as noted, were reasonable. (Id. ¶¶ 51, 178, 201, 239.) The Bankruptcy Settlements also contemplated further recovery for the investors who acquired RFC's rights against the correspondent lenders. (See Scheck Decl., Ex. 32 (Bankr. Confirm. Order ¶ 48) (authorizing the creation of a "Liquidating Trust," into which RFC was to transfer and assign its assets, and preserving the Liquidating Trust's (and Estates') causes of action); id. , App. 1 (Bankr. Plan at 75).)
In light of his findings, in December 2013, Judge Glenn approved the Plan. ( Id., Ex. 28 (Bankr. Findings of Fact at 1).)
E. Procedural History
Beginning in December 2013, Plaintiffs commenced this litigation, filing numerous individual lawsuits against Defendants, asserting claims of breach of contract and indemnification. (See, e.g., Residential Funding Co., LLC v. Home Loan Center, Inc. , 14-cv-1716 (SRN/HB), First Am. Compl. ¶¶ 78-85; 86-89; Rescap Liquidating Trust v. Freedom Mortg. Corp. , 14-cv-5101 (SRN/HB), Compl. ¶¶ 87-95; 96-100 [Doc. No. 1]; Residential Funding Co., LLC v. CTX Mortg. Co., LLC , 14-cv-1710 (SRN/HB) Am. Compl. ¶¶ 84-91; 92-95 [Doc. No. 30]; Residential Funding Co., LLC v. iServe Residential Lending, LLC , 13-cv-3531 (SRN/HB), First Am. Compl. ¶¶ 71-78; 79-82 [Doc. No. 39]; Residential Funding Co., LLC v. Standard Pacific Mortg., Inc. , 13-cv-3526 (SRN/HB), Am. Compl. ¶¶ 78-85; 86-89 [Doc. No. 35]; Residential Funding Co., LLC v. Impac Funding Corp. , 13-cv-3506 (SRN/HB), First Am. Compl. ¶¶ 88-96; 97-101 [Doc. No. 34].)
In its breach of contract claims, RFC alleges that Defendants breached their R & Ws regarding the quality and characteristics of the residential mortgage loans that they sold to RFC. (See, e.g., Residential Funding Co., LLC v. Home Loan Center, Inc., 14-cv-1716 (SRN/HB), First Am. Compl. ¶¶ 24-26; 82.) RFC contends that Defendants well understood RFC's business model, whereby once the loans were sold to RFC, RFC would pool the loans, eventually selling them into securitization trusts. (Id. ¶ 23.) RFC also alleges that Defendants knew or should have known of the defects in the loans that they sold RFC, but failed to inform RFC. (Id. ) RFC contends that Defendants therefore breached their R & Ws, as the loans failed to materially comply with the terms of their agreements and the Client Guide. (Id. ¶¶ 82-83.) As a result of Defendants' alleged breaches, RFC asserts that it has suffered damages. (Id. ¶¶ 84-85.)
Similarly, with respect to indemnification, RFC alleges that under the parties' agreements and the Client Guide, Defendants expressly agreed to indemnify RFC for all liabilities, losses, and damages, including attorneys' fees and costs incurred by RFC. (Id. ¶ 88.) It contends that it has incurred such liabilities, losses, and damages arising from the alleged material defects in Defendants' loans. (Id. ¶ 87.) Specifically, RFC points to over $10 billion in allowed claims approved by the Bankruptcy Court, as well attorneys' fees, litigation-related expenses, and other costs associated with defending numerous lawsuits and proofs of claim against RFC stemming from the Defendants' allegedly defective loans. (Id. )
In January 2015, to promote the just and efficient conduct of the litigation, this Court consolidated for pretrial purposes 68 of the then-pending first-wave suits. (See Jan. 29, 2015 Am. Admin. Order at 3 [Doc. No. 100].) Throughout the discovery period, many of the lawsuits were resolved through mediation. After extensive discovery, Plaintiffs and Defendants now move for dispositive relief. The first of the individual trials between Plaintiffs and Defendants is set to begin on October 15, 2018. (See Apr. 19, 2018 Minutes at 2 [Doc. No. 3486].)
III. DISCUSSION
A. Standard of Review
Summary judgment is appropriate if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A fact is 'material' " only if it may affect the outcome of the lawsuit. TCF Nat'l Bank v. Mkt. Intelligence, Inc. , 812 F.3d 701, 707 (8th Cir. 2016). Likewise, an issue of material fact is "genuine" only if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The moving party bears the burden of establishing a lack of genuine issue of fact, Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), and the Court must view the evidence and any reasonable inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In responding to a motion for summary judgment, however, the nonmoving party may not " 'rest on mere allegations or denials,' but must demonstrate on the record the existence of specific facts which create a genuine issue for trial." Krenik v. Cty. of Le Sueur , 47 F.3d 953, 957 (8th Cir. 1995).
B. Summary Judgment Motions
Plaintiffs seek summary judgment on the following issues: (1) the Client Guide confers Plaintiffs with sole discretion to (a) determine breaches of Defendants' R & Ws, and (b) enter into, and determine the amounts of, the Settlements, such that Defendants may not challenge the Settlements as unreasonable; (2) the Client Guide should be broadly interpreted to permit recovery for (a) all liabilities, not just losses, or, alternatively, (b) all losses on breaching loans; (3) Defendants' breaches caused RFC's origination-related losses and liabilities; (4) Defendants' affirmative defenses that contradict the Client Guide fail, as do any defenses that RFC's actions or other "superseding and intervening factors" may have contributed to RFC's liabilities; (5) Defendants' liability for indemnity is not extinguished by (a) RFC's bankruptcy or (b) RFC's alleged wrongdoing; (6) Plaintiffs may use statistical sampling to prove their claims and need not re-underwrite each at-issue loan; and (7) Plaintiffs' right to assert claims for remedies extends to losses and liabilities on foreclosed and liquidated loans. (See generally Pls.' Mem. Supp. Mot. for Summ. J. ("Pls.' Mem.") [Doc. No. 3243]; Pls.' Mem. in Opp'n to Defs.' Summ. J. Motion ("Pls.' Opp'n") at 55 [Doc. No. 3720] (citing March 21, 2018 Order [Doc. No. 3171] ) (permitting Plaintiffs to move for partial summary judgment on this issue).
Defendants move for summary judgment on the following issues, some of which overlap with Plaintiffs' affirmative motions: (1) RFC cannot recover damages under its Breaching Loss damages methodology because (a) Residential Funding Co., LLC v. Quicken Loans, Inc. , 2017 WL 5571222 (Minn. Dist. Ct. Feb. 1, 2017), precludes such damages, (b) repurchase damages are unavailable under RFC's "guise" of seeking indemnity for losses or liabilities under Section A212 of the Client Guide, and (c) RFC fails to prove that Defendants' alleged R & W breaches caused loan-level losses; (2) RFC cannot recover damages under its Allocated Breaching Loss damages approach because it fails to provide a non-speculative basis for allocating the RMBS Trust Settlements and Monoline Settlements; (3) RFC's Allocated Loss approach to calculating damages fails; (4) RFC is not entitled to indemnity for its own misconduct (a) as evidenced by allegations of fraud and negligence against RFC, (b) because the Client Guide does not permit indemnity for RFC's own misconduct, and (c) because even if the Client Guide permitted such recovery, it would be unenforceable; (5) RFC's claims for loans sold before May 14, 2006 are time-barred; (6) RFC is barred from recovering damages on "expired" loans; (7) RFC cannot recover damages resulting from alleged breaches of pool-wide representations; (8) RFC's indemnity claim related to the MBIA Settlement fails; (9) RFC cannot use sampling to establish liability for loans outside its samples; (10) damages for indemnity are limited to RFC's actual losses; and (11) RFC's expert opinions are inadmissible and foreclose its claims. (See generally Defs.' Mem. Supp. Mot. for Summ. J. ("Defs.' Mem.") at 1-2, 10-11 [Doc. No. 3251].)
C. Principles of the Law of Contractual Indemnity
Under the common law indemnity doctrine, "[a] right of indemnity arises when a party seeking indemnity has incurred liability due to a breach of a duty owed to it by the one sought to be charged, and such a duty may arise by reason of a contractual obligation."
Rice Lake Contracting Corp. v. Rust Env't & Infrastructure, Inc. , 616 N.W.2d 288, 291 (Minn. Ct. App. 2000). As such, common law indemnity is considered an equitable remedy. See Zontelli & Sons, Inc. v. City of Nashwauk , 373 N.W.2d 744, 755 (Minn. 1985) ("Indemnity is, however, an equitable doctrine that does not lend itself to hard-and-fast rules, and its application depends upon the particular facts of each case."); see also Lambertson v. Cincinnati Welding Corp. , 312 Minn. 114, 257 N.W.2d 679, 685 (1977) ("Contribution and indemnity are variant common-law remedies used to secure restitution and fair apportionment of loss among those whose activities combine to produce injury."); Hendrickson v. Minn. Power & Light Co. , 258 Minn. 368, 104 N.W.2d 843, 846-47 (1960), ("Indemnity is the remedy securing the right of a person to recover reimbursement from another for the discharge of a liability which, as between himself and the other, should have been discharged by the other.... In the modern view, principles of equity furnish a more satisfactory basis for indemnity."), overruled in part on other grounds by Tolbert v. Gerber Indus., Inc. , 255 N.W.2d 362 (Minn. 1977) ; Shore v. Minneapolis Auto Auction, Inc. , 410 N.W.2d 862, 866 (Minn. Ct. App. 1987) ("Indemnification is a flexible, equitable remedy designed to accomplish a fair allocation of loss among parties. Such a remedy should be used to achieve fairness as applied to a particular set of facts.").
"In the contractual context," however, "a claim based on an express indemnification provision is a legal, rather than equitable, claim." Johnson v. Johnson , 902 N.W.2d 79, 85 (Minn. Ct. App. 2017) ; see also Hendrickson , 104 N.W.2d at 848 (expressly recognizing that a duty to indemnify can arise "[w]here there is an express contract between the parties containing an explicit undertaking to reimburse for liability of the character involved"). "Indeed, when the duty to indemnify arises from contractual language, it generally is not subject to equitable considerations; rather, it is enforced in accordance with the terms of the contracting parties' agreement." 41 Am. Jur. 2d Indemnity § 13.
Under Minnesota law, and as more specifically described throughout this Order, "[a]n indemnity agreement is a contract, which is to be construed according to the principles generally applied in the construction or interpretation of other contracts." Buchwald v. Univ. of Minn. , 573 N.W.2d 723, 726 (Minn. Ct. App. 1998) ; see also Grand Trunk W. R.R., Inc. v. Auto Warehousing Co. , 262 Mich.App. 345, 686 N.W.2d 756, 761 (2004) ("Contractual indemnity is an area of law guided by well-settled general principles. Nonetheless, each case must ultimately be determined by the contract terms to which the parties have agreed."). An indemnity contract is "to be given 'a fair construction that will accomplish its stated purpose.' " Sorenson v. Safety Flate, Inc. , 306 Minn. 300, 235 N.W.2d 848, 852 (1975) (quoting N.P. Ry. Co. v. Thornton Bros. Co. , 206 Minn. 193, 288 N.W. 226, 227 (1939) ).
In these claims of contractual indemnity, which Plaintiffs assert here, the threshold question is whether that for which the indemnitee seeks indemnification-whether it be losses, damages, or liabilities-falls within the language of the contract. This initial inquiry involves not only interpreting the indemnity contract to determine its scope, but also evaluating whether the facts of the case fit within that scope. See Art Goebel, Inc. v. N. Suburban Agencies, Inc. , 567 N.W.2d 511, 515 (Minn. 1997) (holding that unambiguous contract language required three conditions to be met before one party would indemnify another, that one of those conditions was not met, and hence that there was no duty to indemnify); see also 41 Am. Jur. 2d Indemnity § 13 (describing the "threshold question [of] whether the fact situation is covered by the indemnity contract" as requiring "only a straightforward analysis of the facts and the contract terms").
Assuming that the facts fall within the indemnity contract, particular issues arise when a party seeks indemnity for a settlement, as is the case here. Although "the right to recover indemnity is not lost by reason of any settlement with the claimant," Altermatt v. Arlan's Dep't Stores , 284 Minn. 537, 169 N.W.2d 231, 232 (1969) (per curiam), where one party seeks to recover from another "for a settlement 'entered into before trial ..., the party seeking indemnification must show the settlement was reasonable and prudent.' " Jackson Nat'l Life Ins. Co. v. Workman Sec. Corp. , 803 F.Supp.2d 1006, 1012 (D. Minn. 2011) (emphasis added) (quoting Osgood v. Med., Inc. , 415 N.W.2d 896, 903 (Minn. Ct. App. 1987) ). "The test as to whether the settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant would have settled for on the merits of plaintiff's claim." Miller v. Shugart , 316 N.W.2d 729, 735 (Minn. 1982). As more thoroughly explained below, what is reasonable and prudent "involves a consideration of the facts bearing on the liability and damage aspects of plaintiff's claim, as well as the risks of going to trial." Id. With respect to the considerations of the underlying liability, "[t]he party seeking indemnification need only show it could have been liable under the facts shown at trial not whether they would have been liable." Jackson , 803 F.Supp.2d at 1012 (quoting Glass v. IDS Fin. Servs., Inc. , 778 F.Supp. 1029, 1083 (D. Minn. 1991) ). Indeed, "[r]easonableness ... is not determined by conducting the very trial obviated by the settlement." Alton M. Johnson Co. v. M.A.I. Co. , 463 N.W.2d 277, 279 (Minn. 1990).
D. Principles of Contract Interpretation
There is no dispute that Minnesota law applies to the interpretation of the Client Guide, as well as to RFC's breach of contract and indemnity claims. When construing a contract under Minnesota law, a court's "primary goal ... is to determine and enforce the intent of the parties." Loftness Specialized Farm Equip., Inc. v. Twiestmeyer , 818 F.3d 356, 361 (8th Cir. 2016) (quoting Motorsports Racing Plus, Inc. v. Arctic Cat Sales, Inc. , 666 N.W.2d 320, 323 (Minn. 2003) ). Where the contracting parties' intention is ascertainable from the language of a written contract, the construction of the contract is for the court. Chergosky v. Crosstown Bell, Inc. , 463 N.W.2d 522, 526 (Minn. 1990). If the parties' intent is unambiguously expressed, "[t]he language found in a contract is to be given its plain and ordinary meaning." Turner v. Alpha Phi Sorority House , 276 N.W.2d 63, 67 (Minn. 1979) ; Bass v. Ring , 215 Minn. 11, 9 N.W.2d 234, 236 (1943) ). While courts apply the plain and ordinary meaning of contractual terms to the interpretation of a contract, those terms are construed in the context of the entire contract. Quade v. Secura Ins. , 814 N.W.2d 703, 705 (Minn. 2012) (citing Emp'rs Mut. Liab. Ins. Co. of Wis. v. Eagles Lodge of Hallock, Minn. , 282 Minn. 477, 165 N.W.2d 554, 556 (1969) ).
In construing a contract, courts attempt to harmonize all of the contract's provisions. Chergosky , 463 N.W.2d at 525. Also, "[b]ecause of the presumption that the parties intended the language used to have effect," courts "attempt to avoid an interpretation of the contract that would render a provision meaningless." Id. at 526.
"A contract is ambiguous if, based on the language alone, it is reasonably susceptible of more than one interpretation." Art Goebel, 567 N.W.2d at 515. "If there is ambiguity, extrinsic evidence may be used, and construction of the contract is a question of fact for the jury unless such evidence is conclusive." Hickman v. SAFECO Ins. Co. of Am. , 695 N.W.2d 365, 369 (Minn. 2005) (citing Donnay v. Boulware , 275 Minn. 37, 144 N.W.2d 711, 716 (1966) ). While ambiguity in a contract can be construed against the drafter, see, e.g., Premier Bank v. Becker Dev., LLC , 767 N.W.2d 691, 698 (Minn. App. 2009), courts should do so only after attempting to "determine the parties' intent behind an ambiguous term, using extrinsic evidence if available." Staffing Specifix, Inc. v. TempWorks Mgmt. Servs. , 913 N.W.2d 687, 694 (Minn. 2018). Moreover, "this rule has less application as between parties of equal bargaining power or sophistication," Re-Sols.Intermediaries, LLC v. Heartland Fin. Grp., Inc. , No. A09-1440, 2010 WL 1192030, at *3 (Minn. Ct. App. Mar. 30, 2010), and where both parties are represented by sophisticated legal counsel during the formation of the contract. Porous Media Corp. v. Midland Brake, Inc. , 220 F.3d 954, 960 (8th Cir. 2000).
As a general matter, Minnesota upholds principles of freedom of contract, in which "parties are generally free to allocate rights, duties, and risks," Lyon Fin. Servs. v. Ill. Paper & Copier Co., 848 N.W.2d 539, 545 (Minn. 2014), and "[c]ourts are not warranted in interfering with the contract rights of parties as evidenced by their writings which purport to express their full agreement," Cady v. Bush , 283 Minn. 105, 166 N.W.2d 358, 362 (1969). Indeed, "[w]here the parties have contracted to create duties that differ or extend beyond those established by general principles of law, and the terms of the contract are not otherwise unenforceable, the parties must abide by the contractual duties created." Grand Trunk W. R.R. , 686 N.W.2d at 761. Terms of those contract provisions must "be given their ordinary meaning, as well as the interpretations adopted in prior cases." Ritrama, Inc. v. HDI-Gerling Am. Ins. Co. , 796 F.3d 962, 969 (8th Cir. 2015) (quoting Boedigheimer v. Taylor , 287 Minn. 323, 178 N.W.2d 610, 613 (1970) ).
E. Cross Motions for Summary Judgment
Respectively, the parties move for summary judgment on several identical bases. These include whether RFC's alleged "misconduct" precludes recovery on its claims for indemnification, whether RFC can recover losses and liabilities incurred from "expired" loans, whether RFC's liabilities were extinguished in bankruptcy, and whether RFC may use statistical sampling as a means of establishing liability and damages. The Court addresses the parties' arguments on these overlapping issues below.
1. Misconduct Defense Against Indemnification
Defendants contend that underlying claims of fraud and negligent misrepresentation are non-indemnifiable under Minnesota law. (Defs.' Mem. at 57-59.) Because the Settlements resolved underlying claims asserting RFC's misconduct, Defendants assert that Plaintiffs may not allocate any value to these claims. In addition, Defendants argue that the Client Guide does not provide for indemnification for RFC's own misconduct, (id. at 59-61), and permitting indemnification under these circumstances would violate public policy. (Id. at 61-62.) Defendants therefore argue, "Summary judgment on RFC's allocation approaches is warranted because RFC has failed to account for the value of these non-indemnifiable claims based on its own alleged misconduct." (Id. at 57.)
Plaintiffs also move for summary judgment on this issue, arguing that Defendants cannot avoid liability based on unproven underlying allegations of "negligence" and "fraud" against RFC. (Pls.' Mem. at 44-46.) They assert that there has never been a finding that RFC engaged in wrongdoing with respect to the settled claims. (Id. at 45; Pls.' Opp'n at 40.) While Plaintiffs find this lack of evidence dispositive, they also assert that the Client Guide's plain language required Defendants to indemnify RFC for its own alleged misconduct and negligence, (Pls.' Opp'n at 37-39), and that those Client Guide provisions are enforceable and not violative of public policy. (Id. at 40-41.)
Defendants identify underlying claims of fraud and negligent misrepresentation against RFC, grouping them together under the general label of "misconduct." (Defs.' Mem. at 57-58.) Under Minnesota law, "negligent misrepresentation constitutes fraud." Hardin Cty. Sav. Bank v. Housing & Redevelopment Auth. of Brainerd , 821 N.W.2d 184, 191 (Minn. 2012). Under New York law, however, where many of the underlying claims were filed, negligent misrepresentation is considered a form of negligence, Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd. , 257 F.Supp.3d 348, 359 (S.D.N.Y. 2017) (finding negligent misrepresentation claim duplicative of negligence claim), for which intent is not a required element.
Abu Dhabi Commercial Bank v. Morgan Stanley & Co. , 910 F.Supp.2d 543, 546 (S.D.N.Y. 2012) ("[U]nder New York negligent misrepresentation law, the question is not whether an affirmative misrepresentation can be attributed to a defendant, but whether a defendant breached a duty to provide a plaintiff with accurate information.") Because the enforceability of an indemnification provision for underlying claims of negligence versus underlying claims of intentional conduct is slightly different, the Court addresses the two theories of underlying liability separately.
As to claims of negligence, Minnesota law generally disfavors agreements that seek to indemnify the indemnitee for its own negligence. DeWitt v. London Rd. Rental Ctr., Inc. , 910 N.W.2d 412, 416 (Minn. 2018). Such provisions are therefore strictly construed against the indemnitee. Id. The word "negligence" is not required in the indemnification provision, but the clause must contain "specific, express language that 'clearly and unequivocally' states the contracting parties' intent for the indemnitor to indemnify the indemnitee for the indemnitee's own negligence." Id. at 417 (quoting Johnson v. McGough Constr. Co. , 294 N.W.2d 286, 288 (Minn. 1980), superseded by statute on other grounds , Minn. Stat. § 337.02, as recognized in Katzner v. Kelleher Constr. , 545 N.W.2d 378, 381 (Minn. 1996) ). In short, such clauses must "fairly apprise" the indemnitor of the transfer of liability for the indemnitee's acts of negligence. Id. (citing Yang v. Voyagaire Houseboats, Inc. , 701 N.W.2d 783, 791 n.5 (Minn. 2005) ).
As the Court will explain later in this Order, the Client Guide allows RFC to seek indemnification of its actual losses and liabilities incurred in the Settlements under Section A212 and A202(II). Section A212 requires Defendants to indemnify RFC for "all losses ... resulting from any Event of Default." (Client Guide § A212.) Defendants argue that the phrase "resulting from any Event of Default" limits the scope of this indemnification provision to breaches caused by the Client or third parties. (Defs.' Mem. at 59.) Because "Event of Default" is a specifically defined term that does not include the actions of RFC, they contend that any obligations to indemnify arising from an "Event of Default" do not extend to RFC's own underlying actions. (Id. )
The Court does not read the Client Guide so narrowly. While it does not use the specific word "negligence," it nevertheless makes clear the parties' intent to indemnify RFC for its own negligent acts. Under Section A202(II), Defendants agreed to indemnify RFC from "any claim, demand, defense or assertion against or involving [ ]RFC based on or grounded upon, or resulting from such misstatement or omission [by Defendants] or a breach of any representation, warranty or obligation made by [ ]RFC in reliance upon such misstatement or omission." (Client Guide § A202(II) ) (emphasis added). Similarly, Section A212 requires indemnification for liabilities resulting from "any breach of any representation, warranty or obligation made by [ ]RFC in reliance upon any warranty, obligation or representation made by the Client contained in the Client Contract[.]" (Id. § A212) (emphasis added). These provisions expressly apprised Defendants of their indemnification obligations for RFC's own negligent conduct. See McGough Constr. Co. , 294 N.W.2d at 288 (finding coverage for claims of indemnitee's negligence based on coverage for "claims for which the [indemnitee] may be, or may be claimed to be, liable").
Moreover, the Client Guide provisions are unlike those in National Hydro Systems v. M.A. Mortenson Co. , 529 N.W.2d 690 (Minn. 1995), and Servais v. T.J. Management of Minneapolis, Inc. , 973 F.Supp. 885 (D. Minn. 1997), cited by Defendants. The indemnification provisions in those cases required indemnification for claims related to the indemnitor's conduct. Nat'l Hydro , 529 N.W.2d at 692 (requiring a contractor to indemnify for claims arising out of his own work); Servais , 973 F.Supp. at 892 (finding that while a broad indemnification clause conceivably covered the indemnitee's own negligence, it was instead limited to the indemnitor's actions by additional language requiring indemnification for "any liabilities ... resulting from injury ... to employees injured while utilizing the services of [the indemnitor]"). Likewise, the provisions here are unlike those in DeWitt , in which the Minnesota Supreme Court found that broad indemnification language for "any and all liabilities" was not unequivocally linked to the indemnitee's own negligence. 910 N.W.2d at 418-20. The indemnitee had argued that because the provision included an exception for the indemnitee's own intentional misconduct, the provision must be construed to cover all other acts of the indemnitee, including torts. Id. The court rejected this argument, finding that the language failed to expressly inform the indemnitor of its obligation for such coverage. Id. In contrast, the language here specifically provides for indemnification based on RFC's own representations, warranties, or obligations, as discussed above.
Defendants further argue that the indemnification provisions are limited to underlying claims for breach of contract, but not for claims for negligence, because the Client Guide refers to indemnity for RFC's "breaches." The Court disagrees, finding that the obligations in Sections A202(II) and A212 to indemnify for "any breach of any representation, warranty or obligation made by [ ]RFC," (Client Guide § A212), and for "any" claim against RFC "based on or grounded upon, or resulting from [Defendants'] misstatement or omission or a breach of any representation, warranty or obligation made by [ ]RFC in reliance upon such misstatement or omission," (id. § A202(II) ), extend to claims for negligent representation. See Abu Dhabi Commercial Bank. , 910 F.Supp.2d at 547 (stating that under New York law, claims for negligent misrepresentation may be based on a breach of the defendant's duty to provide a plaintiff with accurate information). The Court thus finds that Sections A202(II) and A212 clearly and unequivocally express the parties' intent to transfer liability to Defendants for RFC's own acts of negligence. Moreover, because RFC and Defendants were sophisticated business parties, there can be no claim that Defendants lacked either understanding or notice of their obligation to indemnify RFC for such claims. Harleysville Ins. Co. v. Physical Distrib. Servs., Inc. , 716 F.3d 451, 457-58 (8th Cir. 2013) (finding, under Minnesota law, no public policy violation rendering indemnification provision unenforceable where parties to the agreement were sophisticated businesses who fully understood the agreement's terms and had clear notice of the obligation to indemnify for the indemnitee's negligence).
Turning to the allegations of Plaintiffs' intentional underlying conduct, courts may void an indemnification provision on public policy grounds where the indemnitor shows that the indemnitee's underlying conduct was intentional, willful, or wanton. ACLU of Minn. v. Tarek ibn Ziyad Acad. , 788 F.Supp.2d 950, 967-68 (D. Minn. 2011) (stating that an indemnification provision is enforceable if it is "(1) not ambiguous; (2) does not release intentional