EvidenceProf Blog

Editor: Colin Miller
Univ. of South Carolina School of Law

Thursday, January 20, 2022

Eastern District of California Allows For the Admission of Background Evidence Regarding Reinsurance

There are five types of relevant evidence under Federal Rule of Evidence 401: (1) direct evidence; (2) circumstantial evidence; (3) character evidence; (4) impeachment evidence; and (5) background evidence. So, what is background evidence, and why is it relevant?

In Munoz v. PHH Mortgage Corp., et al., 2022 WL 138674 (E.D.Cal. 2022), the

plaintiffs filed [a] lawsuit, alleging that defendants violated the antikickback provisions of Section 8(a) of the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2607(a), by requiring that the private mortgage insurers (“MIs”) to which PHH Corporation (“PHH”) referred business, enter into captive reinsurance agreements with Atrium, PHH's affiliated “reinsurer,” as a mechanism to extract payment from the MIs in exchange for the referral of PHH's mortgage insurance business.

Before trial, the defendants filed a motion in limine seeking

“to allow argument, evidence, and testimony relating to the state insurance regulatory oversight of Atrium, including evidence that Atrium was licensed and regulated as a captive reinsurer and that information relating to Atrium's corporate structure and its captive reinsurance business was disclosed to the state regulators.”

According to the court,

The Advisory Committee's Note to Rule 401 states that “[e]vidence which is essentially background in nature can scarcely be said to involve disputed matter, yet it is universally offered and admitted as an aid to understanding.”....“Under this theory of relevance, we have explained that one measure of relevance is whether its exclusion would leave a chronological and conceptual void in the story.” United States v. Boros, 668 F.3d 901, 908 (7th Cir. 2012) (cleaned up). “Evidence that serves as background information about persons, subjects[,] and things in a trial is generally admissible although it may not relate to a consequential fact.”...“Yet because background evidence about ancillary matters has only marginal relevance, it is more susceptible to exclusion under Rule 403's balancing of prejudice and probative value.” Boros, 668 F.3d at 908.

Defendants are surely correct that the average juror is unlikely to have an insurance law background and is not likely to have any familiarity with reinsurance, much less the much narrower class of captive mortgage reinsurance-at most, some jurors might generally be familiar with paying for private mortgage insurance as part of their monthly mortgage payments. Thus, evidence of what a captive mortgage reinsurer is and how it is regulated by the states is potentially relevant background evidence, so the question then becomes whether its probative value “is substantially outweighed by a danger of one of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.” Fed. R. Evid. 403 (emphasis added).

Plaintiffs argue that evidence of state insurance regulation should be excluded under Rule 403 because they contend that, regardless of the reason why Defendants wish to proffer this evidence, there is a risk that the jury will conclude that state regulators approved of Atrium's business, and they argue that “[j]urors could easily be misled into believing that state insurance regulators that examined or audited Atrium for purposes of state insurance requirements also found that the CRAs at issue complied with RESPA, a federal statute which they did not.”...Any such risk is not “unfairly” prejudicial to Plaintiffs under Rule 403. As they concede,....all insurance and reinsurance companies are subject to regulation in the states in which they operate, so background evidence about how that happens is unremarkable, and Plaintiffs may use cross-examination to clarify any testimony they deem incomplete.

-CM

https://lawprofessors.typepad.com/evidenceprof/2022/01/there-are-five-types-of-relevant-evidence-under-federal-rule-of-evidence-401-1-direct-evidence-2-circumstantial-evidenc.html

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Comments

Yikes. This decision seems egregiously wrong on both counts, i.e., for Rule 401 and Rule 403. On the former point, there's absolutely no reason to include any evidence of state law compliance. You can certainly explain "what a captive mortgage reinsurer is" and I agree that's helpful and relevant background. But delving further into state regulation is purely gratuitous. On the latter point, aside from the utter lack of relevance as just noted, it's overwhelmingly prejudicial. That kind of evidence is clearly designed to confuse the issues between state law and RESPA compliance, which are completely separate. By the same token, it would also mislead the jury—and deliberately so. State regulation by itself is a very complex topic, so I think you could say the evidence would create undue delay and waste time as well.

Interestingly, the judge in this case is not a dedicated EDCal judge. Rather, he's been detailed from the Court of International Trade. I believe that's because EDCal is contending with a case overload and/or judge shortage.

Posted by: kotodama | Jan 20, 2022 4:41:04 PM

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