United States District Court, D. Connecticut
LAW DEBENTURE TRUST COMPANY OF NEW YORK, solely in its capacity as Separate Trustee of the Securitized Asset Backed Receivables LLC Trust 2006-WM2, Plaintiff,
WMC MORTGAGE, LLC, f/k/a WMC MORTGAGE CORP., Defendant.
RULING ON DEFENDANT'S MOTION TO EXCLUDE OR, IN THE ALTERNATIVE, LIMIT TESTIMONY OF NELSON R. LIPSHUTZ, PH.D., AN EXPERT WITNESS
CHARLES S. HAIGHT, JR. Senior United States District Judge
This is a residential mortgage backed securities case, one of a current legion of such cases generically referred to as an "RMBS" case.
Plaintiff Law Debenture Trust Company of New York ("Law Debenture") is the trustee of an RMBS trust. Defendant WMC Mortgage, LLC (WMC") is the originator of the mortgage loans comprising that trust. WMC now moves pursuant to Rule 702 of the Federal Rules of Evidence to exclude or limit the opinion testimony of an expert witness proffered by Law Debenture. See Doc. 74. That sort of application is known colloquially as a Daubert motion, in tribute to the Supreme Court decision which inspired Rule 702's amendments into its present form. This Ruling resolves that motion.
Familiarity is assumed with each of the Court's prior rulings during the course of this energetically conducted litigation. For present purposes, it is sufficient to state that the Plaintiff at bar, like many plaintiffs in RMBS cases, asserts "put-back breach of contract claims" against the originator of residential mortgages that were bundled together into a trust that then issued certificates purchased by the investing public.
RMBS investors anticipate they will share in a stream of cash generated by a universe of faithful and solvent home owners making their mortgage payments on time. That anticipation was dashed when an epidemic of failed and defaulted mortgages afflicted the economy. On behalf of investors, trustees of RMBS trusts sued the arrangers and sponsors of the trust to recover damages for the certificate holders. The case at bar is such a case. Stated briefly, the typical plaintiff in an RMBS case (plaintiff at bar is one of them) alleges that the defendant originator or sponsor breached representations and warranties contained in interlocking agreements controlling the securitization process which reassured investors as to loan characteristics concerning the likelihood of repayment of each mortgage. These representations and warranties were contained in, among other places, a Pooling and Service Agreement ("PSA") under which the bundled loans were transferred into the trust. The PSA provided that if the defendant was found to be in breach of these representations or warranties, it would cure the breach, repurchase the defective loan, or substitute a qualifying loan for the defective one.
The phrase "put-back breach of contract claims" reflects and summarizes the claims Law Debenture makes against WMC: specifically, that WMC committed pervasive breaches of representations and warranties throughout the mortgage loans contained in the trust, and thereafter breached the PSA contract's "put-back" obligation by failing to take any of the curative steps required by that contract with respect to any of the breaching loans.
This is all by way of background. The case now comes before the Court as Law Debenture, having survived WMC's motion to dismiss the complaint,  has made a motion for an expedited determination of the validity of statistical sampling as a source of proof at the trial. That subject has generated brisk exchanges of opposing views by the parties and counsel.
Specifically, the controversy began when counsel for Law Debenture proffered the expert opinion of Nelson R. Lipshutz, Ph.D. Dr. Lipshutz is a statistical consultant. Law Debenture identifies him as its expert in sampling. Dr. Lipshutz submitted a report setting forth the testimony he intended to present at the bench trial of this case. Counsel for WMC deposed Dr. Lipshutz about his report and intended testimony, and then attacked them in what may be characterized as a Daubert cross-motion.
Counsel for Law Debenture characterize their motion as "seeking an expedited determination of whether [Plaintiff] may establish the extent of Defendant [WMC's] liability and damages based on a statistically significant, random sample of the loans at issue." Brief [Doc. 61], at 1. The substance of Dr. Lipshutz's opinion and testimony has been usefully summarized in counsel's submissions. An early brief for Law Debenture refers to "Dr. Lipshutz's opinion regarding the use of statistical sampling to streamline this litigation." Doc. 77, at 1. WMC does not quarrel with this use of the verb "to streamline, " and of course the proposition is obvious, if one gives that verb its dictionary definition of "to make simpler or more efficient." Webster's New Collegiate Dictionary (1976) at 1151. If one undertakes to prove a case involving a number of nonperforming mortgages by sampling and examining some (but not all) of them, those responsible for the litigation will have to read fewer mortgages than would be necessary if there was no sampling.
In aid of this motion for expedited consideration, counsel for Law Debenture cite a number of cases for the proposition that
statistical sampling should be approved before discovery goes into full swing, so that the parties can tailor their discovery and other pretrial efforts to the approximately 400 loans in the [Plaintiff's] proposed sample, and avoid the much more costly and time-consuming task of re-underwriting and litigating thousands of loans. To maximize judicial economy and cost savings, sampling should be addressed now.
Brief [Doc. 61], at 10. The procedure Law Debenture envisioned on this motion called for it to "submit its statistically significant sample of [m]ortgage [l]oans and supporting expert report at this early stage of the litigation, " with the understanding that "[t]o the extent WMC opposes the sample's validity for establishing liability and damages in this litigation or seeks to disqualify the [Plaintiff's] expert on Daubert or other grounds, WMC shall file any such objections within 30 days, so this issue will be ripe for determination by the Court well in advance of trial." Id. at 10-11. To no one's surprise, WMC timely opposed the sample's validity for the stated purpose, its opposition taking the form of a Daubert cross-motion.
To turn from the preliminaries to the particulars of the issues: Counsel for Law Debenture say in their Court-directed offer of proof that "Dr. Lipshutz has devised a randomly selected, statistically significant sample of 400 loans out of 4, 170 loans not paid in full." Doc. 89, ¶ 4. In its most recent brief, counsel reiterate that a ruling sustaining "the statistical validity" of Dr. Lipshutz's sample "will greatly aid the parties and the Court in streamlining this litigation" and then break down their intended trial presentation into a series of steps which I will quote, adding bracketed progressive step numbers for the sake of clarity:
The use of statistical sampling necessarily requires several steps. The first step is to  draw a representative sample of loans from the Trust. That is what Dr. Lipshutz has done at this stage. The second step is to  conduct a review of the loans in the sample to determine whether the loans are in breach of WMC's representations and warranties, which includes an analysis of whether the original loan files comply with WMC's own underwriting guidelines. That process will be far more efficient-for the Court and the parties-when focused on the sample of 400 loans, rather than thousands of mortgage loans, as WMC proposes. After the number of loans in breach has been identified through the loan file review process, Dr. Lipshutz will  mathematically determine the breach rate among the loans in the sample. Dr. Lipshutz will ...