Court – United States District Court for the District of Minnesota Jurisdiction – Federal Daubert Factor Involved – Qualification Case Stage – Pre-Trial Ruling Type – Daubert Ruling Case Name –ResCap Liquidating Trust v. Home Loan Ctr., Inc. (In re RFC) Citation -2018 U.S. Dist. LEXIS 160008
In a case involving a series of lawsuits filed against defendant mortgage lenders for the sale of allegedly defective mortgage loans, Minnesota court held that expert testimony could rely on events and circumstances that occurred after the settlement insofar as they informed how a reasonable party would have valued and allocated the claims at the time of settlement.
Facts
The plaintiff, RFC, was engaged in the business of acquiring and securitizing residential mortgage loans. The plaintiff acquired the loans from correspondent lenders, such as the 14 defendants, who were responsible for collecting and verifying information from the borrower and underwriting the loans. The plaintiff alleged that it incurred liabilities and losses because of the poor quality of those loans. Many of the loans defaulted or became delinquent. Consequently, RFC faced lawsuits which stemmed from these defective loans and spent millions of dollars repurchasing defective loans, including loans sold to the company by the defendants.
Earlier In 2012, the plaintiff filed for chapter 11 bankruptcy in the bankruptcy court. According to the plaintiff, most of the proofs of claim related to all the alleged defective mortgage loans were filed in relation to the bankruptcy proceedings. The bankruptcy court approved for a global settlement that provided for resolution of the RMBS-related liabilities of more than $10 billion. The bankruptcy court confirmed the chapter 11 plan under which the ResCap Liquidating Trust succeeded to RFC’s rights and interests, and its claims against the defendants.
The plaintiff appointed a real estate market expert with a Ph.D. in finance to evaluate whether the subject loans were inflated and, if so, what impact accurate appraisals had on the loan-to-value (LTV) ratios. The expert used the Greenfield Automated Valuation Model (GAVM) (a computer program) to identify inflated appraisals. GAVM retroactively assesses what an accurate appraisal would have been at the time loans were issued and predicts the value of individual properties based on a regression analysis of large aggregations of housing market data as well as specific inputs.
Attacks on the Reliability of the Greenfield Automated Valuation Model (GAVM)
The defendants filed a cross-motion to exclude the opinion and testimony of the real estate expert. They argued that the GAVM model was based on post-settlement data and hence not admissible for the purpose of allocating RFC’s indemnity claims. The defendant also pointed that one of the key inputs in the expert’s GAVM model tax assessment values (TAVs) for the subject properties almost entirely post-dated the 2013 settlements. The defendant also questioned the reliability of GAVM as it was not tested nor peer-reviewed by an appraisal expert. The defendants further noted that the error rate of the GAVM model was significant because its confidence interval was wide and its result had barely any statistical significance.
The plaintiff argued that both the expert’s opinion and GAVM model were reliable. The GAVM model was based on real estate and econometrics literature, which was widely accepted, and was also subject to extensive testing. The plaintiffs also referred to various earlier instances GAVM model had been accepted by various other federal courts.
The plaintiff also argued that the defendants did not refer to any legal authority that requires third-party testing of the GAVM model. Mere lack of peer-review was not sufficient grounds to exclude the expert’s testimony. The plaintiff also contended that the defendants’ claims about error rate went more to weight than admissibility.
Held
The motion to exclude the expert’s opinion was denied by the court. The defendants’ arguments concerning the reliability of GAVM were related to the weight and not the admissibility. The court also noted that situations which led to the settlement were relevant only for those issues where they informed how a fair and sensible party would have calculated and allocated the claims at the time of settlement. The expert used post-settlement values to assess information that was available to the parties at the time of settlement.
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