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November 2020: Trial Victory for Rescap Liquidating Trust

November 2020

The firm won a complete victory in a three-week bench trial in the District of Minnesota on behalf of its client, the Rescap Liquidating Trust.  On August 14, 2020, Judge Nelson issued a 202-page decision that awarded ResCap its entire damages request, which will generate an approximate $20 million judgment if ResCap's pending motion for fees and interest is granted in full.  This victory is the capstone of the firm’s 6.5 year engagement for ResCap, on whose behalf the firm has recovered nearly $1.3 billion to date.

Prior to the global financial crisis, ResCap’s predecessor, the now-liquidated Residential Funding Corporation (“RFC”), purchased residential mortgage loans from hundreds of mortgage originators and financial institutions.  As part of these transactions, RFC required these mortgage loan sellers to make representations and warranties concerning the characteristics and risk profile of the loans.  The sellers agreed to indemnify RFC if any breaches of their representations and warranties caused RFC damage.  RFC’s business model was to securitize these loans into residential mortgage-backed securitizations (“RMBS”) in reliance on the sellers' representations, warranties, and pledges to indemnify.  In turn, RFC made its own representations and warranties to the RMBS trusts (relying on the accuracy of the representations provided by the mortgage loan sellers, including PRMI).

A large percentage of the loans that RFC purchased from sellers ultimately proved not to have the characteristics and risk profile  the sellers had represented to RFC and that RFC had represented to its counterparties in turn.  Ultimately,  RMBS trustees, monoline insurers, and securities investors sued RFC for these breaches, in a series of lawsuits that triggered RFC and its affiliates to file for bankruptcy.   RFC settled these claims as part of its multi-billion dollar Bankruptcy Plan, following which Quinn Emanuel was engaged to pursue indemnification claims against the scores of loan sellers that had breached their representations and warranties to RFC.   

The 13-day PRMI trial was the conclusion of the ResCap cases and culminated in a victory for Rescap.  The pivotal question at trial was whether PRMI’s breaches were a contribution cause of the claims that RFC settled in its bankruptcy.    In a comprehensive opinion, the Court adopted all of ResCap’s arguments, holding that the loans sold by PRMI to RFC breached PRMI’s representations and warranties, and that, because these breaches increased RFC’s risk of liability under its own representations and warranties, PRMI was liable for its share of RFC's bamkruptcy settlement.  In a trial heavy with expert witnesses, the Court repeatedly found that PRMI’s witnesses were unpersuasive, not credible, and effectively impeached during cross-examination; in contrast, the Court recognized ResCap’s witnesses as credible and persuasive.