In June 2008, USA experienced the collapse of the housing market and the worst financial crisis since the Great Depression.
For homeowners who put down less than 20% for the purchase of their homes, most were required to purchase private mortgage insurance to protect their lenders in the event of default. Many of those private mortgage insurers, in turn, entered into agreements with reinsurers whereby they paid or “ceded” to the reinsurer a portion of the premiums received in exchange for the reinsurer’s assumption of a percentage of the risk of loss.
Each of the six named Plaintiffs in this case were required to purchase private mortgage insurance in connection with mortgage loans obtained from the lender defendants, PHH Mortgage Corporation and PHH Home Loans, LLC. Atrium Insurance Corporation (“Atrium”), an affiliate of Defendant PHH Corporation, is the reinsurer for Plaintiffs’ loans pursuant to its reinsurance agreements with the private mortgage insurers. According to the Plaintiffs, Atrium receives “millions of dollars” in premiums but assumes “little or no risk of loss” in connection with its obligations under the reinsurance agreements as evidenced by the lack of any paid claims in the years 2000 through 2007.
After more than a decade of litigation asserting other theories, Plaintiffs now claim they have standing based on a theory that they suffered economic harm from the reinsurance Atrium provided in the form of higher mortgage insurance premiums.
Defendants filed a motion to exclude the testimony of Dr. Robert E. Hoyt, whom Plaintiffs offer as an expert on insurance, reinsurance, insurance economics, and risk management to establish their Article III standing.
Risk Management Expert Witness
Robert E. Hoyt is the Moore Chair, Professor of Risk Management and
Insurance and Department Head of the Department of Insurance, Legal Studies & Real Estate in the Terry College of Business at the University of Georgia.
He earned his M.A. (1983) and Ph.D. (1987) degrees in risk and insurance from the Wharton School at the University of Pennsylvania. He joined the Terry College of Business faculty in 1988, where he teaches corporate risk management and insurance.
Discussion by the Court
Hoyt opined that “the captive reinsurance agreements utilized by Defendants which do not involve a real risk transfer simply increased transaction costs and in turn the premiums paid by private mortgage insurance buyers (borrowers/class members).”
For purposes of his report, counsel for Plaintiffs told Hoyt to “assume” the following:
The jury will find: 1) that there was no real transfer of risk to Atrium under the subject captive reinsurance agreements; and 2) that the amounts paid to Atrium by the primary mortgage insurers were not commensurate with the value of reinsurance services (if any) provided by Atrium.
Defendants argued that because Hoyt’s reliance on these assumptions was unfounded, his testimony cannot help the trier of fact determine a fact in issue.
Here the jurisdictional fact in issue is whether Plaintiffs suffered economic injury from Defendants’ assumed Real Estate Settlement Procedures Act of 1974 (“RESPA”) violation.
Defendants first contended that an expert may not assume liability to establish the harm necessary for standing. They relied on the familiar principle that “[s]tanding is an independent threshold issue that must be established before proceeding to the merits of a claim.”
Defendants next argued that allowing Hoyt to testify as to harm “will confuse the jury on the issue of liability,” requiring his exclusion. In substance, their argument invokes Rule 403, though they do not cite it.
Analysis
The topic for Hoyt’s testimony—whether Defendants’ (assumed) RESPA violation injured Plaintiffs—is not the jury’s province, because injury is not an element of the latter’s claim. Instead, the Court decided that question as it would any other factual challenge to standing not intertwined with the merits.
Because the Court must decide whether Plaintiffs suffered economic injury, the Defendants’ Rule 403 challenge to Hoyt’s testimony failed.
Finally, Defendants argued that the assumptions counsel provided to Hoyt are unsubstantiated and refuted by the record. As a general matter, they are correct as to the governing legal principle: An expert witness may not rely on assumptions supplied by counsel that lack factual support in the record because such assumptions, and any testimony based on them, are speculative. However, the flip side of that principle is that an expert may base an opinion on assumptions from counsel provided they are based on evidence that either has been or will be admitted.
Defendants’ arguments failed because the Court had previously held—based on evidence proffered by Plaintiffs—that there is a genuine issue of fact as to Hoyt’s two assumptions. That holding is the law of the case, and therefore those assumptions are supported by evidence to be introduced at trial.
Besides, there is no dispute here that Hoyt’s training and experience will help the Court—the factfinder for these purposes—”determine a fact in issue,” i.e., whether Plaintiffs suffered any economic injury.
The Court conditionally admitted Hoyt’s testimony for purposes of a bench trial as to whether Plaintiffs suffered any economic injury if the jury later finds the two assumptions provided to him by counsel are substantiated. After the hearing, which will also encompass the contested Rule 702 issues, the Court will determine whether to exclude Hoyt’s testimony.
Held
The Court denied Defendants’ motion to exclude Robert Hoyt insofar as they seek such relief on grounds other than Federal Rule of Evidence 702(b)-(d) and otherwise reserved judgment pending the conclusion of a bench trial on economic harm where his testimony shall be conditionally admitted.
Key Takeaway:
While the governing legal principle states that an expert witness may not rely on assumptions supplied by counsel that lack factual support in the record, the flip side of that principle is that an expert may base an opinion on assumptions from counsel provided they are based on evidence that either has been or will be admitted.
As a result, when Defendants argued that the assumptions counsel provided to Hoyt are unsubstantiated and refuted by the record, Defendants’ arguments failed because the Court had previously held—based on evidence proffered by Plaintiffs—that there is a genuine issue of fact as to Hoyt’s two assumptions.
Case Details:
| Case Caption: | Munoz, Et Al. V. PHH Mortgage Corporation, Et Al. |
| Docket Number: | 1:08cv759 |
| Court: | United States District Court, California Eastern |
| Order Date: | January 31, 2025 |
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