Close-up of weights balancing scales of justice with gavel beside itWednesday, February 1 brought a welcome development for the many correspondent lenders currently defending against claims filed by (or threatened with future lawsuits by) Residential Funding Company (“RFC”) and its successor-in-interest, the ResCap Liquidating Trust (“ResCap”). There have been three venues in which RFC and ResCap have been litigating, for years now, against correspondent lenders. They filed dozens of lawsuits in federal court in Minnesota, several more in the Bankruptcy Court for the Southern District of New York, and just a few in state court in Minnesota. On February 1, three state court defendants triumphed on their motion for partial summary judgment against RFC and ResCap. They obtained a ruling that, though limited in scope, is potentially of great significance. Specifically, the Minnesota state court (the District Court of Hennepin County) held that RFC and ResCap would not be able to pursue loan-level (i.e., loan-by-loan) damages associated with a repurchase claim, and thus could not apply a repurchase price “formula” to establish damages.

This state court order could substantially limit the amount of damages RFC could recover if it were ever to prevail on its claims in a given lawsuit. Along with some other helpful statements throughout the order, footnote 7 lays out one of the reasons from a legal standpoint this decision is potentially very important. Under this court’s decision, RFC can’t simply invoke a contractual right to declare a default, and then demand a repurchase and seek related damages according to a formula. Instead, it has to establish causation and prove actual damages. In other words, it may face a significantly tougher path to possible victory than it previously hoped.

The state court order is not binding on the federal court in Minnesota, or the bankruptcy court in New York. But the cases in both those courts involve claims that must be evaluated under Minnesota law, and the Minnesota law (and law of other jurisdictions) cited by the state court is a compelling part of a thorough and well-reasoned opinion. It is reasonable to assume that the state court’s order will be deemed persuasive by the other courts adjudicating RFC and ResCap lawsuits.