The Eighth Circuit Raises the Bar for Would-Be Indemnitees

by Bilzin Sumberg
Contact

Bilzin Sumberg

Here is a situation that comes up quite a bit in the world of business contracts containing indemnification provisions, and in the insurance industry as well. First, a party (“Party A”) gets sued, or threatened with a suit, and settles the claims against it.  Party A then seeks indemnification from another party (“Party B”) for all, or a portion of, the settlement payment that Party A made.  Party B, in addition to challenging in other ways whether it owes Party A anything at all, believes it is able to show that some portion of the settlement payment relates to issues outside the scope of the indemnification provision, and/or that other parties are the ones truly responsible for some or all of whatever amount of indemnification Party A might be owed. This fairly common situation raises a host of complex issues, requiring analysis of all potentially applicable contracts, the specific claims that were asserted against Party A, the basis for its settlement, and other legal considerations like causation.

In late 2017, the U.S. Court of Appeals for the Eighth Circuit issued an order dealing with indemnification for prior settlements, and it could have a hugely beneficial impact on potential indemnitors, including sellers of mortgage loans as well as insurers. UnitedHealth Group Inc. v. Executive Risk Specialty Insurance Company, 870 F.3d 856 (8th Cir. 2017) (rehearing and rehearing en banc denied) addressed an insured’s burden to allocate between “covered” and “non-covered” claims when seeking reimbursement from its insurer for settlement payments. The Eighth Circuit affirmed the District of Minnesota’s holding that, when an insured seeks indemnification for settlements that encompassed both covered and non-covered claims, the insured must present sufficient evidence to establish with reasonable certainty the value that the settling parties attributed to the covered claims.  Moreover, the insured’s allocation must be predicated on “what the parties knew at the time of settlement.” Id. at 863.  In other words, the insured cannot point to evidence or case law identified or arising after the settlement in order to justify an allocation that deviates from the settling parties’ reasonable valuation of the various claims at the time of settlement.

Limitations on Using Expert Testimony to Establish Allocation:

In UnitedHealth, the Court held that because the underlying lawsuits that precipitated the settlement payments at issue were “complex lawsuits involving different claims and legal theories[,] allocation required either contemporaneous evidence of valuation or expert testimony on relative value to provide a reasonable foundation for a jury’s decision.” Id. at 865.

The Court rejected the expert testimony offered by the plaintiff in support of its attempted allocation because the expert failed to analyze the value of the non-covered claims, and was unqualified to do so.  The Court held that “[w]ithout analyzing the [non-indemnifiable] suit, [the expert] could not provide an expert opinion about its value.  And without knowing the value of the [non-indemnifiable] suit, the expert could not testify as to the relative value of the [indemnifiable] suit compared to the [non-indemnifiable] suit.” Id.  Therefore, under this opinion, when a plaintiff seeks to establish its allocation based on expert testimony alone, that expert must analyze both the covered and non-covered claims, and must have sufficient expertise to guide that analysis.

The Court’s mandate that the allocation be based on information known at the time of settlement constrains the expert analysis and testimony offered in support of a plaintiff’s allocation.  A key take-away from UnitedHealth is that a party cannot later manipulate or “reverse engineer” a valuation of the covered claims in an attempt to maximize its indemnification recovery.  Rather, the required reasonableness inquiry seeks to approximate the value the settling parties actually attributed to the indemnifiable claims, and to limit the plaintiff’s indemnity accordingly.  The option to provide expert testimony therefore should not be construed as a loophole in a plaintiff’s obligation to allocate based on information known at the time of settlement. The expert’s analysis must be limited to that same factual and legal context.

Application of holding to the mortgage industry:

In the past several years, there has been a proliferation of lawsuits filed by private purchasers of mortgage loans and issuers of mortgage-backed securities (RFC/ResCap and Lehman Brothers Holdings, among others) against correspondent lenders that sold them loans. Those lawsuits often seek indemnification for composite settlements (including bankruptcy settlements) that the plaintiffs made with trustees, investors, insurers, or government departments and agencies.  These lawsuits typically claim that the loans sold by the defendants breached various representations and warranties the defendants made, and therefore necessitated some portion of the plaintiff’s settlement payments, for which defendants are alleged to be liable.  However, like the settlement at issue in UnitedHealth, the settlements underlying these mortgage-related lawsuits regularly include non-reimbursable claims and dollar amounts that should not be attributed to defendants: for example, claims related to loans not originated or sold by the defendants, or payments related to common law fraud and securities fraud claims, breach of contract claims, or time-barred claims.

The seller contracts that give rise to defendants’ purported indemnification obligations in these cases almost universally limit defendants’ obligations to damages caused by their material breaches of representations and warranties. Accordingly, just like the insured in UnitedHealth, the plaintiffs in these actions bear the burden of establishing what portions of their settlements (if any) can be attributed to defective loans sold to them by defendants.  And, also like an insured, these plaintiffs cannot retroactively manufacture a settlement allocation between covered and non-covered claims that artificially inflates the defendants’ indemnification liability.  Rather, such Plaintiffs must be limited to the amounts that they and their creditors genuinely attributed to at-issue loans originated by a particular defendant.  Given the massive and complex nature of these settlements, most correspondents’ loans are a miniscule drop in the bucket—a relative handful of loans among dozens or even hundreds of trusts that were involved in the settlement. This calls into substantial question the true value, if any, of the claims against correspondents for the remedy of indemnification.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bilzin Sumberg | Attorney Advertising

Written by:

Bilzin Sumberg
Contact
more
less

Bilzin Sumberg on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.