BANK v. LaSALLE BANK Nat'l Ass'n

(1) WELLS FARGO BANK, N.A. as Trustee for the Certificateholders of Commercial Mortgage Pass-Through Certificates, Series 2006-MF2 and2006-MF3, acting by and through Crown NorthCorp, Inc., as Special Servicer, Plaintiff,

v.LaSALLE BANK NATIONAL ASSOCIATION, Defendant.

Case No. CIV-08-1125-C

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

Date: April 1, 2011

MEMORANDUM OPINION AND ORDER

Plaintiff Wells Fargo Bank ("Wells Fargo") brought suit, in its capacity as Trustee for certificateholders of commercial mortgage-backed securities, against Defendant LaSalle Bank National Association ("LaSalle") seeking damages and specific performance, pursuant to the Mortgage Loan Purchase Agreement ("MLPA"), requiring Defendant LaSalle to repurchase three loans contained within the securities.¹ Before the Court are Defendant's and Plaintiffs Motions in Limine, which will each be discussed in turn.

I. Defendant's Motion in Limine

A. MFG Program's Performance and Default Rates

Defendant moves to prohibit evidence regarding the default rates of the MF2 and MF3 securities and evidence of the MFG Program's performance arguing that this evidence is not relevant. Defendant claims that even if this evidence were relevant, any probative value it may have is substantially outweighed by its unfair prejudicial effect, confusion of the issues, and misleading the jury. Plaintiff asserts that this circumstantial evidence is necessary to establish systemic flaws in the MFG Program to prove that Defendant breached its warranty regarding the three underlying loans.

The securities at issue involve over 900 loans, three of which are the underlying loans in this action. While it is true that overall default rates of the securities in comparison to non-LaSalle securities is probative of whether systemic flaws existed in the MFG Program's origination and underwriting, the probative value of this evidence is substantially outweighed by the confusion of the issues, its potential to mislead the jury, and the unfair prejudice caused against Defendant.

To succeed in this suit, Plaintiff must show, in part, that Defendant breached a warranty with respect to three specific loans: the Hillandale, Heritage Ridge, and Royal Oak loans. While circumstantial evidence regarding the performance of the security and the default rates of the securitized loans may be probative of whether Defendant satisfied its duties under the warranties regarding these three specific loans, this evidence has great potential to mislead the jury to decide liability based on the alleged poor performance of thesecurity as a whole. Instead, liability should be based on whether Defendant breached its warranty as to these three specific loans. Additionally, admitting evidence of comparison default rates would inevitably lead to extensive evidence comparing the underlying properties, lenders, borrowers, and market fluctuations. Accordingly, evidence regarding the overall performance of the securities, the overall performance of the MFG Program, and the default rates is inadmissible.

B. Bank of America's Evaluation and Termination of the MFG Program

Defendant seeks exclusion of evidence regarding Bank of America's ("BoA") termination and evaluation of the MFG Program arguing that this evaluation was part of BoA's effort to analyze and value portfolio assets and liabilities and, therefore, is irrelevant to the present action. Additionally, Defendant argues that this evaluation took place in 2007, after the underlying loans in this action were created and in a different economic climate. While Plaintiff agrees not to introduce evidence regarding BoA's termination of the MFG Program, Plaintiff argues that BoA's evaluation remains highly relevant as to systemic flaws in the MFG Program and whether the MFG Program's guidelines met customary industry standards. Again, while this circumstantial evidence may be relevant to whether Defendant breached warranties regarding the three underlying loans, its probative value is substantially outweighed by its potential to confuse the issues and unfairly prejudice the jury. Therefore, this evidence is inadmissible.

C. Internal Audits of the MFG Program

Defendant seeks exclusion of evidence relating to internal loan reviews performed on MFG loans. Defendant argues that exclusion is necessary because this loan review sampled "left-over" loans that do not reflect or include the loans at issue. Plaintiff argues that this review is generally indicative of the MFG Program's flaws in underwriting. Given that the reviewed loans did not include the loans at issue and represented the "stale loan portfolio," the relevance, if any, of this review on whether Defendant breached warranties regarding the three underlying loans is substantially outweighed by the confusion of the issues and unfair prejudice caused to Defendant. (See Def.'s Reply, Dkt. No. 364 Ex. 5, at 155.) Accordingly, evidence of internal audits of the MFG Program, which do not include the relevant loans, are inadmissible.

D. OCC Audits

The Office of the Comptroller of the Currency ("OCC") conducted an audit of LaSalle's compliance under the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"). This audit did not include the MFG Program. Defendant seeks exclusion of evidence regarding this audit arguing that because it did not include the MFG Program it is irrelevant. Even if marginally relevant, Defendant argues, its probative value is substantially exceeded by its potential to confuse and unfairly prejudice the jury. Plaintiff argues that the audit led LaSalle to conduct further internal discussions and reviews of its FIRREA compliance and, therefore, is relevant to whether Defendant breached Warranty 35 regarding the three underlying loans. Because this audit did not include the MFG Programany small probative value this evidence may have in showing that Defendant breached a warranty regarding the three underlying loans is substantially outweighed by the confusion of the issues and the unfair prejudice caused to Defendant. Accordingly, evidence regarding the OCC audit is inadmissible at trial.

E. Broker-Ordered Appraisal Program

Defendant seeks exclusion of evidence regarding its program allowing broker-ordered appraisals arguing that such evidence is irrelevant because the three underlying loans did not involve appraisals ordered by brokers. Plaintiff agrees not to admit evidence solely regarding broker-ordered appraisals, but argues that evidence establishing a lack of independence should not be excluded simply because it indicates broker-ordered appraisals. Evidence of appraisal independence is relevant to Plaintiff's claimed breach of Warranty 35, and this evidence's probative value substantially outweighs any risk of confusion or unfair prejudice caused. Accordingly, evidence regarding appraisal independence that indicates the existence of the broker-ordered appraisal procedure is admissible.

F. Project 30

Defendant moves to exclude all evidence regarding "Project 30," an MFG Program initiative to shorten loan-processing time to thirty days. Defendant argues that this evidence is not relevant given that the program began after the closing date of the MF2 and MF3 securities. Plaintiff acknowledges that the official start date of Project 30 was after the closing periods, but argues that the pressure to speed up closing time affected the origination process which led to systemic flaws in the MFG Program. Finding this evidence relevant andmore probative than prejudicial, evidence of pressure to shorten loan-processing time is admissible. However, because Project 30 was not initiated until after the closing dates of the securities, reference to this specific project is not admissible.

G. Relationship within MFG Program

Defendant seeks an order excluding all evidence of strained relationships between the origination and underwriting departments within the MFG Program. Defendant claims that this evidence is irrelevant to whether it breached warranties as to the three loans in question, and, therefore, is inadmissible. Plaintiff claims that this evidence shows morale problems and strained relationships within the department, which is probative of systemic flaws within the program that led to substandard underwriting of the loans. Finding this evidence relevant and more probative than prejudicial, evidence of strained relationships within the MFG Program is admissible. However, reference to the "dysfunctional relationship" is not admissible as this label is more prejudicial than it is probative.

H. Top Ten Brokers

Defendant also seeks exclusion of evidence regarding its "Top Ten Brokers," which included brokers with the highest volume of loans or highest loan amount. Defendant claims this evidence is not relevant and would be highly prejudicial. Plaintiff counters that the broker of the Flessner loans was a Top Ten Broker, and, therefore, this evidence is highly relevant because Top Ten Brokers were treated with more leniency and received underwriting exceptions. Evidence of a pattern of leniency with Top Ten Brokers is relevant to whether Defendant adhered to customary industry standards regarding the three underlyingloans, and its probative value substantially outweighs any unfair prejudice to Defendant. Accordingly, evidence regarding Top Ten Brokers is admissible.

I. National Field Representative's Property Inspection Report

Defendant seeks exclusion of evidence relating to the quality of the National Field Representative ("NFR") reports and complaints regarding those reports. Defendant argues that these reports and complaints are not relevant to whether it breached any warranty and would mislead the jury. Plaintiff claims that complaints regarding the poor quality of reports and NFR's inspection of the Royal Oak property, which Plaintiff argues was defective and below industry standards, evidence that the underwriting of the three loans at issue...