CMFG Life Insurance Company v. RBS Securities, Incorporated , 799 F.3d 729 ( 2015 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-2904
CMFG LIFE INSURANCE CO.,
CUMIS INSURANCE SOCIETY, INC., and
MEMBERS LIFE INSURANCE CO.,
Plaintiffs-Appellants,
v.
RBS SECURITIES, INC.,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Western District of Wisconsin.
No. 3:12-CV-00037 — William M. Conley, Chief Judge.
____________________
ARGUED APRIL 1, 2015 — DECIDED AUGUST 21, 2015
____________________
Before WOOD, Chief Judge, FLAUM, Circuit Judge, and
KENNELLY, District Judge.1
KENNELLY, District Judge. Between 2004 and 2007, CUNA
Mutual, an insurance company, purchased fifteen residential
1 Of the United States District Court for the Northern District of Illi-
nois, sitting by designation.
2 No. 14-2904
mortgage-backed securities from RBS Securities, Inc. Then
the housing market crashed, and the securities with it.
CUNA now wants out of the deals. CUNA alleges that RBS
induced it to purchase the securities by materially misrepre-
senting that the underlying mortgages complied with un-
derwriting guidelines. The district court granted summary
judgment on all but one of CUNA’s rescission claims, and
CUNA appealed. We reverse in part and affirm in part.
I. Background
The plaintiffs in this case are CMFG Life Insurance Co.,
CUMIS Insurance Society, Inc., and Members Life Insurance
Co., collectively called CUNA Mutual. CUNA sells insur-
ance and other investment products to credit unions. In ad-
dition to selling investment products, CUNA maintains its
own investment portfolio. Between 2004 and 2007, CUNA
purchased a number of residential mortgage-backed securi-
ties from RBS Securities, Inc. This case involves fifteen of
those securities.
During the time period at issue in this case, creation of a
mortgage-backed security began with origination of indi-
vidual mortgage loans. In deciding whether to make a loan,
originators evaluated credit risk using underwriting guide-
lines. These guidelines were “designed to gauge two crucial
factors of credit risks: (1) borrower ability to pay and (2) suf-
ficiency of collateral (the mortgaged property) if the borrow-
er defaults.”2 Appellant's Br. at 5. Through a complicated
2 CUNA notes that “[o]ccasionally, noncompliant loans [could] be
made appropriate credit risks by legitimate ‘compensating factors’ such
as low debt-to-income ratio, high borrower assets, or low [loan-to-value]
ratio.” Appellant’s Br. at 5. As used by the parties, “guidelines compli-
No. 14-2904 3
process involving several intermediaries, hundreds or thou-
sands of mortgages would be purchased from originators
and bundled into securities. Securities underwriters—here,
RBS—then sold these securities to investors. The mortgage
payments (or, in the event of default, foreclosure sale pro-
ceeds) provided a stream of income to investors.
Underwriting guidelines were important to investors for
determining the value of securities: the lower the borrower’s
ability to pay (or the lower the property value), the greater
the risk of default (and more defaults, of course, means less
income for investors). Written representations of guidelines
compliance were also important to investors because such
representations created a legally-enforceable duty. Because
originators did not keep the mortgages on their books, they
did not bear any risk of default by the mortgagors. Thus,
aside from reputational consequences, litigation was the
primary deterrent against lax compliance with underwriting
guidelines.
The fifteen securities RBS sold to CUNA were registered
under SEC Form S-3, known as “shelf” registration. Shelf
registration permitted the issuer to “register asset-backed
securities to be offered on a delayed basis in the future
through one or more offerings, or ‘takedowns,’ of securities
off of the shelf registration statement.” Final Rule, Asset-
Backed Securities, 70 Fed. Reg. 1506, 1512 (Jan. 7, 2005); see also
17 C.F.R. § 230.415.3 If registered in this manner, “the regis-
ance” refers to loans that complied with the guidelines and loans with
legitimate compensating factors.
3 RBS argues that the excerpts of this SEC final rule from the Federal
Register are inadmissible hearsay. But "[t]he contents of the Federal Reg-
ister shall be judicially noticed." 44 U.S.C. § 1507. Additionally, CUNA’s
4 No. 14-2904
tration statement [was] often presented through the use of
two primary documents: the ‘base’ or ‘core’ prospectus and
the prospectus supplement.” Id. The base prospectus “out-
line[d] the parameters of the various types of [asset-backed
securities] offerings that may be conducted in the future”;
the prospectus supplement “outline[d] the format of deal-
specific information that [would] be disclosed at the time of
each takedown.” Id. at 1512–13. “At the time of a takedown,
a final prospectus supplement [was] prepared which de-
scribe[d] the specific terms of the takedown, and the base
prospectus and the final prospectus supplement together
form[ed] the final prospectus … .” Id. at 1513; see also 17
C.F.R. § 230.430B; 17 C.F.R. § 229.512(a)(1). After a Form S-3
registration was filed, the SEC permitted issuers to sell secu-
rities using term sheets—even before availability and deliv-
ery of the final prospectus supplement. Id. at 1554–55. As we
will discuss in greater detail below, investors in the mort-
gage-backed securities market often made purchase deci-
sions on term sheets alone.
Following the housing market crash, the fifteen securities
at issue in this case declined in value. CUNA commissioned
a forensic study of the loan pools underlying the securities.
The study found that approximately 40.8 percent of the
loans were materially defective, meaning that “they violated
applicable underwriting guidelines in a manner that materi-
ally increased the credit risk of the loan and that was not jus-
tified by sufficient compensating factors.” App. at 1681.
expert witness may testify based on this final rule. See Fed. R. Evid. 703.
Thus, because the final rule can be "presented in a form that would be
admissible in evidence," it may be considered at summary judgment. See
Fed. R. Civ. P. 56(c)(2).
No. 14-2904 5
CUNA now alleges that RBS induced it to purchase the
securities by materially misrepresenting that the underlying
loans complied with underwriting guidelines. First, CUNA
alleges that RBS repeatedly assured CUNA’s mortgage-
backed securities trader, Mark Prusha, that extensive due
diligence was conducted on the loan pools. Second, CUNA
alleges that the relevant base and supplemental prospectuses
expressly represented that the loans complied with the
guidelines. Absent these misrepresentations, CUNA asserts,
it would not have purchased the securities.
CUNA sued RBS in Wisconsin state court for rescission
based on these alleged misrepresentations. Defendants re-
moved the case to federal court in 2012. Two years later, the
parties cross-moved for summary judgment. The district
court granted summary judgment in RBS’s favor on all but
one of CUNA’s rescission claims. The district court also held
that CUNA’s claims with regard to nine of the fifteen securi-
ties were time-barred and denied CUNA’s motion for leave
to amend. CUNA stipulated to judgment on the remaining
claim and appealed.
II. Discussion
CUNA has appealed the district court’s decisions grant-
ing summary judgment in favor of RBS and denying CUNA
leave to amend its complaint. We review the district court’s
grant of summary judgment de novo, construing all facts
and reasonable inferences in the light most favorable to
CUNA. Ripberger v. Corizon, Inc., 773 F.3d 871, 876 (7th Cir.
2014). We also review summary judgment based on a statute
of limitations de novo. Bernstein v. Bankert, 733 F.3d 190, 199
(7th Cir. 2013). We review denial of leave to amend a com-
6 No. 14-2904
plaint for abuse of discretion. Johnson v. Cypress Hill, 641 F.3d
867, 871 (7th Cir. 2011).
A. Statute of Limitations
Section 893.43 of the Wisconsin Statutes provides that
“[a]n action upon any contract, obligation or liability, ex-
press or implied … shall be commenced within 6 years after
the cause of action accrues or be barred.” Wis. Stat. § 893.43.
The district court held that this statute of limitations gov-
erned claims for rescission and, accordingly, that CUNA's
claims regarding nine of the fifteen certificates at issue in this
case were time-barred. CMFG Life Ins. Co. v. RBS Sec. Inc.,
No. 12–cv–037–wmc, 2014 WL 3696233, at *26 (W.D. Wis. Ju-
ly 23, 2014). CUNA has appealed this determination. Alt-
hough CUNA acknowledges that rescission is a contractual
remedy, it contends that a claim for rescission is not an ac-
tion “upon” a contract, as required by the section 893.43. Ra-
ther, CUNA contends, “rescission seeks to disaffirm a con-
tract, not sue ‘upon’ it.” Appellant’s Br. at 29.
“To avoid the danger of subverting the legislative in-
tent,” the Wisconsin Supreme Court “interpret[s] statutes of
limitation so that no person’s cause of action will be barred
unless clearly mandated by the legislature.” Saunders v. DEC
Int’l, Inc., 85 Wis. 2d 70, 74, 270 N.W.2d 176, 177 (1978); see
also Erdman v. Jovoco, Inc., 181 Wis. 2d 736, 760, 512 N.W.2d
487, 495 (1994) (citing Saunders with approval). Where a
cause of action is not “clearly within” a statute of limitations,
the statute “should not be extended by construction.” Green
v. Granville Lumber & Fuel Co., Inc., 60 Wis. 2d 584, 590, 211
N.W.2d 467, 470 (1973). This standard accords with a “gen-
eral philosophy of insuring that litigants shall have their day
No. 14-2904 7
in court unless clearly barred.” Saunders, 85 Wis. 2d at 74,
211 N.W.2d at 178.
The Wisconsin Supreme Court has not ruled on whether
section 893.43 applies to claims for rescission. We must
therefore predict how the court would decide this question.
We begin with Wisconsin precedent. Although not a
statute of limitations case, the Wisconsin Supreme Court’s
decision in Beers v. Atlas Assurance Co., 231 Wis. 361, 285
N.W. 794 (1939), provides insight into the meaning of the
phrase “action upon the contract.” There, the court held that
“the plaintiff having elected in two of his complaints to af-
firm the contract and to sue for such damage as he had sus-
tained as a result of the asserted fraud and deceit, he may
not now allege a cause of action based upon a disaffirmance
of the contract and ask for rescission.” Id. at 361, 285 N.W. at
797. The court explained that “a person has a right to elect
either to stand upon the contract which the defendant has in-
duced and recover the damages resulting, or rescind the con-
tract, and upon returning what he has received, recover back
that with which he has parted.” Id. (emphasis added). These
remedies are “wholly inconsistent,” the court added, be-
cause “[e]ither there is a contract, for breach of which plain-
tiff is entitled to recover damages, or the contract is set aside
and goes out of existence.” Id.; see also Schnuth v. Harrison, 44
Wis. 2d 326, 340, 171 N.W.2d 370, 377 (1969) (“[W]hen a con-
tract is rescinded the parties are placed in the status quo as if
no contract had ever been made.”). The Wisconsin Supreme
Court has frequently repeated this distinction. Smeesters v.
Schroeders, 123 Wis. 116, 101 N.W. 363, 363–64 (1904); Palmer
v. Goldberg, 128 Wis. 103, 107 N.W. 478, 479 (1906); Bischoff v.
Hustisford State Bank, 195 Wis. 312, 218 N.W. 353, 357 (1928);
8 No. 14-2904
Schlotthauer v. Krenzelok, 274 Wis. 1, 4, 79 N.W.2d 76, 78
(1956). More recently, a Wisconsin appellate court observed
that “an action on a contract for breach and an action to re-
scind a contract … are inconsistent because the former
stands on the contract and the latter seeks to set it aside.” Ga-
latowitsch v. Wanat, 239 Wis. 2d 558, 570, 620 N.W.2d 618, 624
(Ct. App. 2000).
Although somewhat dated, these decisions indicate that
the Wisconsin Supreme Court would hold that rescission is
not an “action upon a contract” as used in section 893.43.
Our prediction finds additional support in the Restatement
of Restitution. Although the Restatement acknowledges that
“[r]escission is usually invoked in a contractual setting,” it
indicates that the remedy is not “upon” the contract. Re-
statement (Third) of Restitution and Unjust Enrichment
§ 54 cmt. b (2011). Rather, “[a] claimant who is allowed to
rescind has usually been given a choice between (i) dealing
with the other party on the basis of their agreement, which
the claimant was free to ratify and enforce, and (ii) dealing
with the other party ‘off the contract,’ where benefits that ei-
ther party may have derived at the expense of the other give
rise to a liability in unjust enrichment.” Id. (emphasis add-
ed). The drafters of the Restatement describe the former
remedy as “contractual”; they describe the latter as “ex-
tracontractual.” Id. In deciding cases involving rescission,
the Wisconsin Supreme Court has drawn from restatements,
including the Restatement of Restitution.4 This leads us to
4For instance, when faced with the question of “when a contract will
be deemed voidable and subject to rescission by one of the parties,” the
Court expressly “adopt[ed] the position taken in the Restatement (Sec-
ond) of Contracts.” First Nat’l Bank & Trust Co. of Racine v. Notte, 97 Wis.
No. 14-2904 9
believe that the Restatement view would inform how the
court would decide the question presented in this case.
Based on this authority, we predict that the Wisconsin
Supreme Court would hold that rescission is not an “action
upon the contract,” as that phrase is used in section 893.43.
Although we think this reading follows from Wisconsin case
law, it also hews more closely to the plain wording of section
893.43. Claims for rescission do not “stand upon” the rights
and obligations established by the contract; they seek to put
the contract “out of existence.” Beers, 231 Wis. at 361, 285
N.W. at 797. We therefore reverse the district court’s grant of
RBS’s motion for summary judgment on its statute of limita-
tions defense.
RBS points us to Harley-Davidson Motor Co. v. Pow-
erSports, Inc., 319 F.3d 973 (7th Cir. 2003). There, we observed
that rescission based on intentional misrepresentation is “a
remedy expressly given … through contract law,” not tort
law, and thus not an “end run around contract law” for the
2d 207, 222, 293 N.W.2d 530, 538 (1980). The Court has also cited to the
Restatement of Restitution, both in rescission cases, see Thompson v. Vill.
of Hales Corners, 115 Wis. 2d 289, 319, 340 N.W.2d 704, 718 (1983) (citing
the Restatement (First) of Restitution for the proposition that “[a] party’s
right to rescind for fraud or mistake is waived if he unreasonably delays
in asserting that right or affirms the agreement after learning of the fraud
or mistake giving rise to the right of rescission”), and in other contexts,
see Lawlis v. Thompson, 137 Wis. 2d 490, 498, 405 N.W.2d 317, 320 (1987)
(noting that “[t]he jurisprudence of unjust enrichment in Wisconsin is
consistent with that found in the recognized treatises and encyclopedi-
as,” and specifically citing the Restatement (First) of Restitution); Wis.
Patients Comp. Fund v. Wis. Health Care Liab. Ins. Plan, 200 Wis. 2d 599,
621, 547 N.W.2d 578, 586 (1996) (noting that the Court’s conclusion was
“bolstered” by the Restatement (First) of Restitution).
10 No. 14-2904
purposes of Wisconsin’s economic loss doctrine. Id. at 987.
The fact that a remedy arises from contract law, however,
does not make it a remedy upon the contract. Indeed, as we
explained in Harley-Davidson, the duty underlying the rescis-
sion remedy does not “arise from the terms of the agree-
ment,” but from “a duty not to fraudulently induce a person
into a bargain.” Id. at 986.
RBS also relies on First National Bank and Trust Co. of Ra-
cine v. Notte, 97 Wis. 2d 207, 293 N.W.2d 530 (1980). For simi-
lar reasons, however, Notte is inapposite. In that case, the
suit itself was to “recover on [the] contract” for breach; re-
scission was raised as a defense “to the contract.” Id. at 212,
293 N.W.2d at 533. The Wisconsin Supreme Court was asked
to decide whether the lower court had erred by instructing
the jury on comparative negligence (the rescission defense
was based on negligent misrepresentation). Id. at 211–12, 293
N.W.2d at 533. Because rescission is a contractual remedy,
the court concluded that it must “look to principles of con-
tract and suretyship law in framing the issues and formulat-
ing a mode of analysis,” not “traditional tort concepts of
misrepresentation.” Id. at 212, 293 N.W.2d at 533. Applying
this framework, the court held that “discussion of compari-
son of negligence between the parties”—a defense that only
arises in tort—”is inappropriate.” Id. at 213, 293 N.W.2d at
533. Thus, like Harley-Davidson, Notte simply stands for the
proposition that rescission arises from contract law. That
does not make rescission an action upon a contract.
CUNA urges us to also hold that the proper statute of
limitations is section 893.93(1)(b). Section 893.93(1)(b) pro-
vides that “[a]n action for relief on the ground of fraud”
must be “commenced within 6 years after the cause of action
No. 14-2904 11
accrues or be barred.” Wis. Stat. § 893.93(1)(b). However, un-
like section 893.43, section 893.93(1)(b) includes a discovery
provision: “The cause of action in such case is not deemed to
have accrued until the discovery, by the aggrieved party, of
the facts constituting the fraud.” Id. If measured from the
date of discovery, all of CUNA’s rescission claims would be
timely.
We do not need to decide whether section 893.93(1)(b)
applies to CUNA’s rescission claim, because the alternative
to applying section 893.93(1)(b) is that no statute of limita-
tions applies. Although Wisconsin has a general statute of
limitations for any “action upon a liability created by statute
when a different limitation is not prescribed by law,” it does
not have an equivalent statute of limitations for equitable
remedies such as rescission. Wis. Stat. § 893.93(1)(a).5 Thus,
regardless of whether section 893.93(1)(b) applies, CUNA’s
rescission claim is not time-barred.
Of course, CUNA’s rescission claim still may be subject to
the defense of laches, a defense that is available to RBS re-
gardless of whether section 893.93(1)(b) applies. See Zizzo v.
Lakeside Steel & Mfg. Co., 312 Wis. 2d 463, 469, 752 N.W.2d
889, 892 (2008) (“Laches is distinct from a statute of limita-
5 At one time, Wisconsin had a 10-year statute of limitations for “[a]n
action which, on and before February 28, 1857, was cognizable by the
court of chancery, when no other limitation is prescribed in this chapter.”
Hammes v. First Nat’l Bank, 102 Wis. 2d 720, 308 N.W.2d 419 (Ct. App.
1981); see also Pietsch v. Wegwart, 178 Wis. 498, 190 N.W. 616, 619 (1922).
The chancery statute of limitations, however, “was repealed by ch. 323,
Laws of 1979.” Id. at *4 n.4. No statute of limitations was adopted to re-
placed it. See Tyler v. Schoenherr, 2012 WI App 97, ¶ 38, 344 Wis. 2d 124,
820 N.W.2d 156 (unpublished decision).
12 No. 14-2904
tions and may be found where the statute of limitations has
not yet run.”); Haferman v. St. Clare Healthcare Found., Inc., 286
Wis. 2d 621, 647, 707 N.W.2d 853, 866 (2005) (noting that
even when “the legislature has not provided a statute of lim-
itations … the affirmative defense of laches remains availa-
ble in an appropriate case”). But the district court concluded
that laches was an issue for trial. See CMFG, 2014 WL
3696233, at *24 (holding that that “laches [was] best left for
trial” because a reasonable factfinder “could conclude that
CUNA Mutual’s delay, while acquiring the information nec-
essary to make its claims against RBS plausible, was reason-
able under the circumstances”). The merits of this defense
thus are not before us in this appeal.
B. Material Misrepresentations
Having concluded that CUNA's rescission claims are not
time-barred, we turn to the merits of the claims. Under Wis-
consin law, “[t]o rescind a contract based on a fraudulent or
material misrepresentation made during contract formation,
the recipient must have justifiably relied on the misrepresen-
tation in deciding to enter into the contract.” Archdiocese of
Milwaukee v. Doe, 743 F.3d 1101, 1106 (7th Cir. 2014) (citing
Notte, 97 Wis. 2d at 222, 293 N.W.2d at 538). “The reliance
inquiry thus involves two subsidiary questions: (1) Did the
party actually rely on the misrepresentation? (2) If so, was
the reliance justifiable?” Id.
As we recently noted, “[t]he Wisconsin Supreme Court
has not addressed the standard that governs [the actual reli-
ance] aspect of a fraudulent-inducement claim.” Id. Based on
relevant Wisconsin precedent, we predicted that Wisconsin
would follow the Restatement (Second) of Contracts. Id. Un-
der this approach, a person actually relies on a misrepresen-
No. 14-2904 13
tation if the misrepresentation “substantially contributes to his
decision to manifest his assent.” Id. (citing Restatement (Sec-
ond) of Contracts § 167 (1981)). “Substantially contributes” is
a less demanding standard than “‘but for,’ ‘sole,’ or even
‘predominant,’ causation.” Id. The party asserting fraudulent
inducement must also show that the representation was ma-
terial to his or her decision. Id. at 1107. “A misrepresentation
is material if it is likely to induce a reasonable person to
manifest his assent, or if the maker knows that it is likely
that the recipient will be induced to manifest his assent by
the misrepresentation.” Notte, 97 Wis. 2d 207 at 222–23, 293
N.W.2d at 538.
CUNA argues that it relied on two types of representa-
tions: RBS’s written representations that the loans underly-
ing its securities complied with underwriting guidelines,
and RBS’s oral representations that it performed due dili-
gence on every deal to confirm guidelines compliance. RBS
contests actual reliance. We address each representation in
turn.
1. Written Representations of Guidelines Compli-
ance
CUNA contends that Prusha relied on written represen-
tations contained in the prospectuses. All of the base pro-
spectuses represent that the underlying loans will have been
originated in compliance with underwriting guidelines. All
of the prospectus supplements also represent that the loans
comply with underwriting guidelines, and they provide de-
tail about the originators’ underwriting standards. Although
there are variations among the representations, they all une-
quivocally state that the loans will comply with underwrit-
ing guidelines of some kind.
14 No. 14-2904
The parties do not dispute the existence and content of
the prospectus representations. What they do dispute, how-
ever, is whether Prusha actually relied on these representa-
tions in deciding to purchase the securities at issue. In fact,
Prusha could not specifically recall reading the prospectus
representations. For five of the ten deals, Prusha made an
initial commitment to purchase before RBS provided the
prospectus supplements.6 For the remaining five deals,
Prusha made an initial commitment to purchase after receiv-
ing the prospectus supplements, but he does not recall read-
ing them; he could testify only that it was his habit and prac-
tice to do so. The district court concluded that Prusha did
not actually rely on the written representations in deciding
to purchase the securities. CMFG, 2014 WL 3696233, at *29–
32.
On appeal, CUNA argues that Prusha need not have read
the written representations to have relied on them. CUNA
contends that Prusha “properly expected that RBS’s prospec-
tuses would represent guideline compliance” based on their
course of dealing. Appellant’s Br. at 35.
The Restatement of Contracts defines a course of dealing
as “a sequence of previous conduct between the parties to an
agreement which is fairly to be regarded as establishing a
common basis of understanding for interpreting their ex-
pressions and other conduct.” Restatement (Second) of Con-
tracts § 223 (1981); see also Wis. Stat. § 401.303(2) (2010) (codi-
6 In a sixth deal, RAMC 2005-4, Prusha also made his initial com-
mitment to purchase before the prospectus supplement was provided to
him. For this deal, however, Prusha had received a preliminary prospec-
tus supplement. Accordingly, the district court did not include the deal
in this category. See CMFG, 2014 WL 3696233, at *20.
No. 14-2904 15
fying section 223). “Course of dealing may become part of an
agreement either by explicit provision or by tacit recogni-
tion, or it may guide the court in supplying an omitted
term.” Id. § 223 cmt. b.; see also Wis. Stat. § 401.303(4) (2010)
(“[C]ourse of dealing between the parties … is relevant in
ascertaining the meaning of the parties’ agreement, may give
particular meaning to specific terms of the agreement, and
may supplement or qualify the terms of the agreement.”).
Through their course of dealing, CUNA contends, RBS and
CUNA reached an understanding that every prospectus
supplement would include a written representation of
guidelines compliance and that CUNA would not assent to a
contract without this representation.
The transactions between CUNA and RBS took place in a
broader market for residential mortgage-backed securities.
Understanding how this market operated is essential to un-
derstanding the course of dealing between CUNA and RBS.
In 2005, three industry associations—all of which count RBS
as a member—submitted letters to the SEC commenting on
“the SEC’s proposed rules … for securities offering re-
form … as they relate[d] to asset-backed securities.” App. at
2340; see also App. at 2275, 2368. These letters provide insight
into how the market functioned at that time.7
The American Securitization Forum’s letter to the SEC
observes that “parties often forego the preparation of a pre-
liminary prospectus prior to pricing and pricing is based on
a term sheet alone.” App. at 2311. This practice, the letter ex-
7 RBS argues that these letters are inadmissible hearsay. But as dis-
cussed above with regard to the SEC final rule, CUNA’s expert witness
may testify based on these letters. See supra note 3; Fed. R. Evid. 703.
16 No. 14-2904
plains, is necessitated by the “fluid nature” of these transac-
tions. App. at 2311. Thus, where “only a term sheet is deliv-
ered … any contract with investors is also subject to the con-
dition that the more detailed terms of the offering set forth in
the final prospectus are reasonably consistent with market
customs and standards (or with prior issuances by the relat-
ed depositor or its affiliates).” App. at 2313. Put another
way, there is an “implied representation that the terms of the
offering … will be reasonably consistent with market cus-
toms and standards or with prior issuances by the related
depositor or its affiliates.” App. at 2314. Because “it is diffi-
cult for investors to review and digest revisions to the in-
formation previously delivered at the time of pricing,”
moreover, issuers generally “notify investors that there is a
material change that investors should be aware of.” App. at
2316. The letter describes this as a “general view” in the in-
dustry, “reflect[ing] both widespread current practice and
best practice.” App. at 2312, 2320. Aware of these market
norms, “[i]nvestors in many transactions for which only a
term sheet is prepared prior to pricing … make their invest-
ment decision based on the issuer’s reputation and their pri-
or course of dealing with the related depositor, or based on
market customs and standards for the asset class and trans-
action structure involved in the offering.” App. at 2318 (em-
phasis added).
The Bond Market Association’s letter to the SEC de-
scribes the market in nearly identical terms. The letter says
that “long-standing practice” in the asset-backed securities
market is that “to the extent the final prospectus contains
material terms not described in the [p]reliminary
[i]nformation, those material terms will be consistent with
[asset-backed securities] market customs and standards or
No. 14-2904 17
prior similar transactions of the same depositor or an affili-
ated depositor.” App. at 2348. Thus, “[i]f the underwriter be-
lieves that there are [m]aterial [c]hanges between the
[p]reliminary [i]nformation and the final prospectus, current
standard practice is to alert the investor prior to settlement
and give the investor an opportunity to break the trade, or to
agree to re-price the trade.” App. at 2348. Likewise, the
Mortgage Bankers Association’s letter to the SEC says, “in-
vestors expect that … the final prospectus … will be con-
sistent with market custom and standards as well as any
prior dealings with the same depositor.” App. at 2374. With
regard to guidelines-compliance representations specifically,
RBS’s own expert testified that “representations and warran-
ties about compliance with underwriting guidelines [were]
standard, common and customary in the secondary mort-
gage market,” and that “active, regular participants in the
market understood these provisions to be a part of the foun-
dational pieces enabling the transaction to go forward, sup-
porting the economics of the transactions and specifically
allocating risk.” App. at 1565, 1571. Notably, RBS has not
presented any evidence—from industry associations, ex-
perts, or otherwise—that contradicts these descriptions of
how the mortgage-backed securities marketplace operated.
It is in this context that CUNA and RBS entered into the
ten deals at issue in this case. Like other investors in this
market, Prusha often made commitments to purchase on
term sheets alone. He testified that he felt confident doing so
because his decision was “conditional … on the understand-
ing that any subsequent information I received would be
consistent with generic information that is always included
in the final prospectus supplements.” App. at 1579, ¶ 13.
That is, if “the generic information was materially different
18 No. 14-2904
from what was typically disclosed in prospectus supple-
ments,” Prusha understood that “RBS would contact [him]
to make sure [he] still wanted to go through with the trade.”
App. at 1579, ¶ 13.
CUNA’s evidence shows that Prusha's expectation was
not only the predominant one in the market, but one that
was urged by securities issuers—to both investors and the
SEC. There is no evidence, furthermore, that RBS’s course of
dealing with CUNA was any different; specifically, there is
no evidence that RBS ever deviated from these market
norms. Every base prospectus and prospectus supplement
between CUNA and RBS included written representations of
guidelines compliance. RBS’s head of mortgage trading and
asset-backed finance testified that it was his “understanding
of market practice” that an investor had “the right to break
the trade” if there were “material changes between the pre-
liminary information and the final prospectus.” App. at 976.
And, as we will discuss in greater detail below, Prusha testi-
fied that RBS repeatedly assured him that it performed due
diligence on all deals brought to market. Based on this evi-
dence, a reasonable factfinder could find that RBS’s course of
dealing with CUNA was consistent with prevailing market
norms.
We now come to the issue presented on appeal: Could a
reasonable factfinder also find that Prusha actually relied on
the prospectus representations even though he had not read
them in advance? Or does failure to read a contractual repre-
sentation preclude actual reliance on that representation as a
matter of law?
A person can come to know facts in any number of ways.
Here, CUNA contends that Prusha came to know that RBS
No. 14-2904 19
made guidelines-compliance representations in its prospec-
tuses through his course of dealing with RBS. CUNA alleges
that its course of dealing with RBS included a common basis
of understanding that any and all mortgage-backed securi-
ties agreements between them would contain a guidelines-
compliance representation.
Based on CUNA’s course-of-dealing evidence, we con-
clude that a reasonable factfinder could find that Prusha ac-
tually relied on the guidelines-compliance representations
that he reasonably expected to be made in the prospectuses.
CUNA and RBS’s course of dealing took place in a market
where guidelines-compliance representations were ubiqui-
tous and understood to be “foundational pieces” of any deal.
See App. at 1571. Industry practice, moreover, was to inform
the investor if the final prospectus deviated from “market
custom and standards” or the parties’ “prior dealings.” See
App. at 2374. (Indeed, this practice was so entrenched that
RBS’s industry association told the SEC it amounted to an
“implied representation” in any offering. See App. at 2314.)
CUNA and RBS conducted over a dozen deals, each of
which included the guidelines-compliance representation.
RBS never told CUNA that any of their deals would deviate
from market custom. To the contrary: Prusha testified that
throughout their relationship, RBS repeatedly assured him
that due diligence would be performed on every deal be-
tween them. That is effectively the same as saying that each
deal would include the guidelines-compliance representa-
tion; as RBS’s own policy manual states, the entire point of
conducting due diligence was to minimize “legal and repu-
tational exposure” from its representations about the charac-
teristics of the underlying mortgages. See App. at 2522.
20 No. 14-2904
That is not to say, however, that a reasonable factfinder
could find that Prusha relied on the prospectus representa-
tions down to the letter. For instance, if one of the prospec-
tuses stated that Guideline X had been used when, in fact,
Guideline Y had been used, and both guidelines complied
with industry standards, CUNA could not sue RBS for mate-
rially misrepresenting that Guideline X had been used.8
That’s because Prusha does not recall reading the specific
prospectuses at issue in this case; he thus could not have re-
lied on a specific set of guidelines being used. A reasonable
factfinder could find, however, that Prusha relied on a rep-
resentation of compliance with guidelines that met industry
standards. Exactly what this means—what Prusha would
have understood about the prospectus representations
through course of dealing and market custom—is an issue
for trial, not summary judgment.
RBS argues that this amounts to misrepresentation by si-
lence. The actual representation at issue, however, was writ-
ten. CUNA does not argue that RBS’s silence represented
that the prospectus supplements contained guidelines-
compliance representations when, in fact, they didn’t. Nor
could they: every prospectus supplement did contain the
representation.
RBS also contends that Prusha “rel[ied] on his assump-
tions about what the documents might say,” not the actual
written representations. Appellee’s Br. at 18. Thus, RBS con-
8 It is undisputed that the originators did not all use the same un-
derwriting guidelines. Def.’s Reply in Supp. of Def.’s Proposed Findings
of Fact ¶ 52. CUNA emphasizes, however, that “all underwriting guide-
lines [were] meant to assess the ability of the borrower to repay the loan
and the sufficiency of the collateral.” Id.
No. 14-2904 21
tends, “[i]f CUNA purchased securities based on its assump-
tions, it did not act on representations made by RBS.” Id. at
19. We disagree. CUNA does not contend that Prusha made
an assumption about what the prospectuses contained that
just happened to be correct. Rather, CUNA contends—and
Prusha testified—that Prusha understood, via his course of
dealing with CUNA, that the prospectuses contained the
representations. If he understood, based on the parties'
course of dealing, that the contract would contain a particu-
lar representation, a reasonable factfinder could determine
that he did not have to read it immediately before signing in
order to say that he relied on the representation, particularly
when the contract actually contained the representation he
understood would be there.
We wish to emphasize, however, the narrowness of our
conclusion. We do not establish a rule that a party to a trans-
action may claim justifiable reliance on representations that
were not made, or that he had not read. To the contrary, a
party entering into a business transaction cannot do so based
on assumptions and suppositions and then complain after
the fact that they turned out to be unfounded. That would
not constitute justifiable reliance. And indeed, the finder of
fact in this case may conclude after a trial that CUNA has
not proven reliance or at least not justifiable reliance. Our
determination that the issue is reserved to the finder of fact
in this case is premised on the relatively unusual situation
laid out in Prusha's testimony—which we are required to
take as true at the summary judgment stage—that his prior
dealings with RBS warranted him in understanding that the
representations that he knew had been made in the prior
deals he had reviewed and that were established standards
in the industry were also being made in the deals at issue.
22 No. 14-2904
Given that testimony, but only given that testimony, entry of
summary judgment in RBS's favor was inappropriate.
In summary, a reasonable factfinder could find that
Prusha actually relied on the prospectuses' guidelines-
compliance representations. A reasonable factfinder could
also find that the representations were material—that is, that
they would induce a reasonable investor to enter the con-
tract. There is ample evidence in the record that the guide-
lines-compliance representations were foundational to the
deals at issue in this case. CUNA was thus entitled to a trial
on these claims.
2. Oral Representations of Due Diligence
In its response to the motion for summary judgment,
CUNA also contended that RBS represented to Prusha that it
performed due diligence on every mortgage-backed securi-
ties deal. These representations, CUNA argued, are “inde-
pendently actionable”—that is, they can support the rescis-
sion claim even without the prospectus representations. Pls.’
Resp. to Def.’s Mot. for Summ. J. at 48. The district court
ruled that CUNA inappropriately sought to add a new claim
at summary judgment. CMFG, 2014 WL 3696233, at *17.
On appeal, CUNA argues that the due-diligence repre-
sentations did not amount to a new claim. CUNA notes that
both its first and second amended complaints alleged the
due-diligence representations. Thus, CUNA contends,
Prusha’s “independent reliance” on the due-diligence repre-
sentations are merely “a permissible view of the facts,” not
an amendment of its complaint. Appellant’s Br. at 44.
The district court’s ruling concerns how it read the com-
plaint, not a decision to permit or deny leave to amend. Our
No. 14-2904 23
review is therefore de novo. Cf. Reger Dev., LLC v. Nat’l City
Bank, 592 F.3d 759, 763 (7th Cir. 2010) (district court’s grant
of a motion to dismiss under Fed. R. Civ. P. 12(b)(6) is re-
viewed de novo). As CUNA observes, both the first and sec-
ond amended complaints alleged due-diligence representa-
tions. See, e.g., First Am. Compl. ¶¶ 302–03; Second Am.
Compl. ¶¶ 135–69, 306, 876. Accordingly, RBS was on notice
that CUNA was asserting Prusha’s reliance on the due-
diligence representations (indeed, RBS deposed Prusha on
precisely this question). The due-diligence representations
are not a new claim; they are simply another factual basis for
rescission based on misrepresentation of guidelines compli-
ance. CUNA was entitled to refine its rescission theory at
summary judgment based on evidence produced in discov-
ery. See Whitaker v. Milwaukee Cty., 772 F.3d 802, 807–09 (7th
Cir. 2014) (argument raised on summary judgment was not
improper “attempt to amend the pleadings” because plain-
tiff was merely “offer[ing] an alternative legal characteriza-
tion of” a fact); Rabe v. United Air Lines, Inc., 636 F.3d 866, 872
(7th Cir. 2011) (“A complaint need not identify legal theo-
ries … .”).
Despite ruling that CUNA could not assert the due-
diligence representations as an independent basis for rescis-
sion, the district court addressed this theory out of “an
abundance of caution.” CMFG, 2014 WL 3696233, at *17. The
court acknowledged that “by advertising its underwriting
procedures to potential buyers,” RBS was effectively
“vouching for the accuracy of the original underwriting da-
ta.” Id. at *27. Thus, the court reasoned, the due-diligence
representations could potentially serve as an independent
basis for rescission based on misrepresentation of guidelines
compliance. The court nevertheless concluded, however,
24 No. 14-2904
that Prusha’s testimony about the due-diligence representa-
tions was “too vague to allow for the reasonable inference
that any representations RBS made were material” because
they “do not refer to ‘re-underwriting’ or any other specifics
regarding RBS’s ‘due diligence.’“ Id. at *27–28. Lack of speci-
ficity,” the court said, can render a statement so vague that
“no reasonable investor could rely on it.” Id. at *28. We must
therefore also decide whether Prusha’s recollection regard-
ing RBS’s due-diligence representations is specific enough to
create a genuine dispute of fact.
Prusha testified that “RBS representatives repeatedly told
me that RBS performed due diligence on every deal to en-
sure compliance with underwriting guidelines.” App. at
1580, ¶ 15. RBS described this due diligence, Prusha alleged,
as “a reunderwriting of loans according to the guidelines of
the originator which includes doing valuation appraisals
or … appraisal review … and other things that are part of
due diligence.” App. at 846; see also App. at 901 (testifying
that he felt “comfortable [ ] because … RBS said they did due
diligence on all deals and that they sampled all deals and …
because they had the mathematicians and the quantitative
personnel to determine what was a significant sample size”).
Asked when he heard these representations, Prusha replied,
“[i]t’s in documentation that [RBS] did due diligence on eve-
ry deal that they bring to market,” and “I would talk about
that with either Mike Carothers [one of RBS’s salespeople] or
others at conferences.” App. at 847. Prusha also alleged that
“RBS put on meetings themselves where they made presen-
tations” about “their due diligence process.” App. at 895; see
also App. at 895 (“[W]e would have meetings with RBS and
with originators. And … RBS would go through their due
diligence process … .”). The district court ruled that this evi-
No. 14-2904 25
dence was insufficient to create a genuine dispute of fact be-
cause Prusha could not testify “as to when these statements
were made, who made them and whether they were made in
connection with these offerings,” and because his descrip-
tions of the statements lacked detail. CMFG, 2014 WL
3696233, at *28.
Prusha’s recollection is thin on specifics. He attributes
this, however, to the number of offerings that he reviewed.
By the time Prusha did his first deal with RBS, he “had al-
ready purchased more than 100 [residential mortgage-
backed securities] certificates” and had reviewed many more
offers. App. at 1577, ¶ 8. Accordingly, Prusha testified, he
could not remember specific details “because of the fact that
I’m looking at deals on a daily basis … over the course of a
15 year career.” App. at 899. In other words, Prusha says that
he is unable to recall specific dates and locations because
RBS’s offers did not stand out from the hundreds—possibly
thousands—of other offers he reviewed.
Although Prusha cannot recall when and where he heard
the due-diligence representations, his recollection of their
substance is corroborated by evidence produced in discov-
ery. RBS produced internal policy manuals stating that due
diligence was to be performed on all asset-backed securitiza-
tions. See, e.g., App. at 2522. RBS also produced slides from
presentations that were delivered to investors in 2004, 2006,
and 2007. These presentations uniformly state that “[a]ll
whole loan pools are re-underwritten,” “each loan under-
goes a full [due diligence] review” using random sampling,
and that RBS “has followed consistent strategies for due dil-
igence for whole loan trades.” See, e.g., App. at 1983, 1990,
1994. It is undisputed, moreover, that RBS actually discussed
26 No. 14-2904
its due diligence procedures in these presentations. See App.
at 1929 (stating that presentation was “something we’ve sent
to investors in the past,” and that RBS’s head of due dili-
gence typically talked potential investors through the due
diligence slides); App. at 982–93 (“We certainly discussed
our loan file diligence procedures with investors … [t]o let
them know that we had done the appropriate amount of
work to ensure that what we had presented to them in the
prospectus was accurate.”); App. at 1884 (“I found myself
repeating with investors [that] … we perform extensive loan
file and appraisal diligence … .”). It is true that CUNA has
not produced evidence tying Prusha to one of these docu-
mented presentations. But these presentations are offered as
corroborating evidence, not misrepresentations in their own
right. And, notably, all of the evidence on this issue points in
the same direction; RBS has not pointed to any evidence of
investor presentations that did not include representations
of due diligence.
We conclude that CUNA’s evidence is sufficient to pre-
clude entry of summary judgment. There are, to be sure, de-
ficiencies in Prusha’s testimony. But Prusha’s plausible ex-
planation for these deficiencies, as well as the evidence cor-
roborating the substance of his testimony, is enough to get
past summary judgment. The deficiencies go to weight, a
matter appropriately addressed by the factfinder at trial.
Moreover, there is ample evidence in the record that the due
diligence described by Prusha was essential to evaluating
the riskiness—and, accordingly, the price—of the securities.
A reasonable factfinder therefore could find that the due-
diligence representations were material.
No. 14-2904 27
The district court also ruled that the due-diligence repre-
sentations were non-actionable puffery as a matter of Wis-
consin law. CMFG, 2014 WL 3696233, at *28. We disagree.
The touchstone case is United Concrete & Const., Inc. v.
Red-D-Mix Concrete, Inc., 349 Wis. 2d 587, 836 N.W.2d 807,
816 (2013). In United Concrete, the plaintiff had terminated its
relationship with a concrete supplier when it encountered a
specific, technical problem with the concrete—excessive
bleed water. Id. at 594, 836 N.W.2d at 810–11. The plaintiff
later contacted the concrete company about restoring their
business relationship, and the concrete company represented
that the bleed water problem had been resolved. Id. at 594,
836 N.W.2d 811. In fact, however, the concrete remained de-
fective. Id. at 595, 836 N.W.2d 811.
The Wisconsin Supreme Court held that these represen-
tations did not amount to non-actionable puffery. Puffery,
the court explained, is an “exaggeration[] reasonably to be
expected of a seller as to the degree of quality of his product,
the truth or falsity of which cannot be precisely deter-
mined.” Id. at 605, 836 N.W.2d at 816. Such exaggerations
“do not subject the speaker to liability … because they con-
vey only the seller’s opinion and are not capable of being
substantiated or refuted.” Id. Excessive bleed water, by con-
trast, “is a technical problem, with a technical definition and
a technical solution.” Id. Indeed, both parties had “retained
experts who undertook extensive investigations into the pre-
cise composition of the concrete used in the relevant proper-
ties, and then submitted elaborate reports on that composi-
tion.” Id. at 605–06, 836 N.W.2d at 816. Thus, the court con-
cluded, there was “nothing in the record to suggest that a
trier of fact, properly instructed and assisted by expert tes-
28 No. 14-2904
timony, would be unable to ascertain whether [the defend-
ant] used an acceptable combination of ingredients in its
concrete or did not.” Id. at 606, 836 N.W.2d at 816.
In this case, a reasonable factfinder could find that the
due-diligence representations were not puffery. Under cer-
tain circumstances, a general representation of due diligence
could be puffery. There is evidence, however, that in the
mortgage-backed securities market, this representation car-
ried a very specific meaning: due diligence that was ade-
quate to ensure guidelines compliance (generally by means
of statistically-significant loan sampling). Like the represen-
tations in United Concrete, guidelines compliance involves “a
technical problem, with a technical definition and a technical
solution.” Id. at 605, 836 N.W.2d at 816. Such representations
do not amount to non-actionable puffery.
The cases cited by RBS and the district court are distin-
guishable. Only one comes from Wisconsin, and it involved
a vague superlative that could not be verified as true or false.
See Tietsworth v. Harley-Davidson, Inc., 270 Wis. 2d 146, 172,
677 N.W.2d 233, 246 (2004) (advertisement claimed that mo-
torcycle engine was a “masterpiece” of “premium quality”).
The case from our circuit is distinguishable for the same rea-
son. See Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir. 1995)
(“[T]he phrase ‘recession-resistant’ is simply too vague to
constitute a material statement of fact. Plaintiffs apparently
interpret the phrase to mean ‘recession-proof.’ But it could
be just as easily used to describe a company that although
not impervious to the effects of a recession will nevertheless
survive it better than others. It is a promotional phrase used
to champion the company but is devoid of any substantive
information.”).
No. 14-2904 29
The remaining cases that RBS cites are out-of-circuit cas-
es. Although four of these cases involved representations
about due diligence, they are not instructive here. In two of
the cases, the due-diligence representation was vague and
undefined. See ECA & Local 134 IBEW Joint Pension Trust of
Chi. v. JP Morgan Chase Co., 553 F.3d 187, 205–06 (2d Cir.
2009) (statements that company had “risk management pro-
cesses [that] are highly disciplined and designed to preserve
the integrity of the risk management process” and that com-
pany “set the standard for integrity,” were puffery (internal
quotation marks omitted)); City of Austin Police Ret. Sys. v.
Kinross Gold Corp., 957 F. Supp. 2d 277, 297 (S.D.N.Y. 2013)
(concluding that “very detailed,” “in-depth,” and “exhaus-
tive” were “rosy but general portraits of [defendant’s] due
diligence” and therefore puffery, but acknowledging that
“representations about due diligence anchored in specific
factual claims may be actionable”). Here, by contrast, there is
evidence that both parties understood the due-diligence rep-
resentations to have a definite meaning that conveyed specif-
ic facts about the securitization process and underlying
loans. In the third case, the court held that reliance on the
due-diligence representation was unjustifiable for reasons
that are irrelevant here. See Rosenzweig v. Azurix Corp., 332
F.3d 854, 869 (5th Cir. 2003) (holding that “a rational investor
would not have relied on the due diligence statements con-
tained in the prospectus” because the prospectus warned
that the company “had not yet assumed operations” and
provided nine pages of risk disclosures, including risks that
the defendant allegedly misrepresented). And in the last
case, the district court held that a statement that “representa-
tives from the two banks met and discussed, among other
things, ‘due diligence matters generally’“ was not actionable
30 No. 14-2904
because it was true. See Lighthouse Fin. Grp. v. The Royal Bank
of Scot. Grp., PLC, 902 F. Supp. 2d 329, 341 (S.D.N.Y. Sept. 28,
2012). Here, by contrast, there is evidence that RBS’s due-
diligence representations were false.9
Finally, RBS observes that the presentations “noted that
the material was informational, was not intended as an offer
to buy or sell securities, and that ‘no representation or war-
ranty, whether express or implied, is made and no liability or
responsibility is accepted … as to the accuracy or complete-
ness thereof.” Appellee’s Br. at 23–24. As CUNA notes, how-
ever, the presentations also contained prefatory language
stating that “[t]he information contained in these materials is
believed to be reliable.” See, e.g., App. at 494. And, in any
event, CUNA’s due diligence claim is not based on the
presentations; it is based on Prusha’s testimony. The presen-
tations are offered simply as corroborating evidence.
In sum, the due-diligence representations are inde-
pendently actionable, and CUNA's claim based on them
must proceed to trial.
9 In a footnote, RBS argues that if it “made a general representation
regarding how it would conduct its due diligence process on future of-
ferings, that would be a non-actionable statement of future events.” Ap-
pellee’s Br. at 23 n.11. As presented by Prusha, however, the due-
diligence representations were not statements of future events; they were
statements of fact about RBS’s process for creating mortgage-backed se-
curities. The due-diligence representations at issue here are therefore
different from those in the case cited by RBS, which involved a promise
to perform a future action in a one-off transaction. See Badger Pharmacal,
Inc. v. Colgate-Palmolive Co., 1 F.3d 621, 626 (7th Cir. 1993) (defendant’s
promise to “launch a national advertising and marketing campaign” was
“promissory in nature” and thus did not “relate to present or preexisting
facts”).
No. 14-2904 31
3. Disclaimers
In four of the ten deals at issue in this case, the prospec-
tus supplements contained liability disclaimers. These dis-
claimers stated that guidelines-compliance information was
provided by the originator and that RBS did not vouch for
the accuracy or completeness of such information. CUNA
moved for partial summary judgment on these disclaimers,
arguing that they were void under federal law. Because the
district court granted summary judgment for RBS on other
grounds, it denied CUNA’s motion as moot. CMFG, 2014
WL 3696233, at *32. The district court noted, however, that
the remaining prospectuses “include[d] statements to the
effect of: ‘The information set forth in the following para-
graphs has been provided by the originator.’“ Id. The district
court ruled that no reasonable factfinder could “find that
RBS independently made representations that the origina-
tors had complied with their underwriting guidelines” be-
cause the latter statements establish “that the originators, not
RBS, actually made the representations at issue, and that
[RBS] was simply passing along the information.” Id. The
district court acknowledged that “if RBS actually told CUNA
Mutual that it had re-underwritten the loans to ensure com-
pliance with guidelines [i.e. represented that it had per-
formed due diligence], then a reasonable factfinder could
conclude that RBS was making those same representations.”
Id. Because the district court ruled that Prusha’s testimony
was too vague to make these representations actionable,
however, it concluded that they were also “not enough to
keep CUNA Mutual’s claim based on compliance with un-
derwriting guidelines alive.” Id.
32 No. 14-2904
The district court's ruling on the originators' guidelines-
compliance representations was predicated on its ruling on
the due-diligence representations. Because we have reversed
the district court's ruling on the due-diligence representa-
tions, we also reverse the district court's ruling that no rea-
sonable factfinder could find that RBS “independently made
representations that the originators had complied with their
underwriting guidelines.” Id.
Although this alone is grounds for reversal, we think that
a reasonable factfinder could find that RBS vouched for the
originators’ guidelines-compliance representations even
without the due-diligence representations. To begin, the of-
fering documents came from RBS, included the RBS logo,
and were drafted by RBS. One could infer from this that RBS
was making the representations contained in the documents.
It is true that the offering documents state that the origina-
tors provided the guidelines-compliance information and do
not state that RBS vouches for this information. One possible
interpretation of these statements, then, is that RBS simply
intended to convey information it had received from the
originators, not represent that this information was accurate.
But the prospectus supplements did not disclaim the accura-
cy of this information either—even though other RBS pro-
spectuses did disclaim the accuracy of this information. Thus,
another possible interpretation is that by excluding the dis-
claimers, RBS intended to represent (and CUNA understood
RBS to be representing) that the guidelines-compliance in-
formation was accurate.
RBS's response to an SEC letter regarding express dis-
claimers supports the latter interpretation. In 2006, the SEC
sent a letter to RBS that said the following: “[D]isclaimers of
No. 14-2904 33
liability for material information provided by the issuer or
underwriters or any of their affiliates is not appropriate.
Please revise the disclaimers mentioned above, and delete
any other similar disclaimers in the prospectus.” App. at 541.
Elsewhere in the letter, the SEC reminded RBS that it was
“responsible for the accuracy and adequa[c]y of the disclo-
sures … made [in the base and supplemental prospectuses]”
because “its management are in possession of all the facts
relating to [its] disclosure[s].” App. at 543.
The original language in RBS’s prospectus supplement
read as follows:
The Mortgage Loans were originated or pur-
chased by [______] (either directly or through
affiliates) from mortgage loan brokers or origi-
nated by its retail division, generally in accord-
ance with the underwriting criteria described
herein. The information set forth in the follow-
ing paragraphs has been provided by [______],
and none of the Depositor, the Servicer, the
Sponsor, the Indenture Trustee, the Under-
writer or any other party makes any represen-
tation as to the accuracy or completeness of
such information.
App. at 558. After receiving the SEC’s letter, RBS agreed to
remove the disclaimer. The final language, approved by the
SEC, read as follows:
The Mortgage Loans were originated or pur-
chased by [______] (either directly or through
affiliates) from mortgage loan brokers or origi-
nated by its retail division, generally in accord-
34 No. 14-2904
ance with the underwriting criteria described
herein. The information set forth in the follow-
ing paragraphs has been provided by [______].
Id. at 588. Given this drafting history, it does not appear that
RBS viewed the second sentence as a disclaimer of the in-
formation's accuracy.
A reasonable factfinder could find that, by providing the
guidelines-compliance representation in the prospectus sup-
plements and excluding express disclaimers of the infor-
mation's accuracy, RBS intended to vouch for the infor-
mation. Thus, even without the due-diligence representa-
tions, a reasonable factfinder could find that RBS represent-
ed that the originators had complied with their underwriting
guidelines.
C. Leave to Amend
The district court denied CUNA’s motions to amend the
complaint to add claims for rescission based on mutual mis-
take and intentional misrepresentation. See CMFG Life Ins.
Co. v. RBS Sec. Inc., No. 12-CV-037-WMC, 2013 WL 4483068,
at *18 (W.D. Wis. Aug. 19, 2013); CMFG, 2014 WL 3696233, at
*36–37. CUNA appeals these rulings.
Both motions were filed after the district court’s deadline
to amend the pleadings of April 20, 2012. The motion to add
the mistake claim was filed one year after the amendment
deadline (on April 12, 2013); the motion to add the inten-
tional misrepresentation claim was filed over two years after
the deadline (on July 14, 2014). “To amend a pleading after
the expiration of the trial court’s [s]cheduling [o]rder dead-
line to amend pleadings, the moving party must show ‘good
cause.’” Trustmark Ins. Co. v. Gen. & Cologne Life Re of Am.,
No. 14-2904 35
424 F.3d 542, 553 (7th Cir. 2005). In making this determina-
tion, “the primary consideration … is the diligence of the
party seeking amendment.” Alioto v. Town of Lisbon, 651 F.3d
715, 720 (7th Cir. 2011).
CUNA does not argue good cause on appeal. Instead,
CUNA argues unfairness, pointing to the fact that the district
court excused RBS’s delay in asserting the statute of limita-
tions defense. But a court need not excuse one party’s delay
simply because it excused the other’s. Here, the district court
believed it was compelled to excuse RBS’s delay by King v.
Kramer, 763 F.3d 635 (7th Cir. 2014). In that case, we held that
delay alone is insufficient to justify trying a case “under the
incorrect legal standard, when all parties and the court are
aware of the correct standard.”10 Id. at 644. King does not ap-
ply to CUNA’s motions to amend, however, and the court
provided reasoned bases for denying them. With regard to
the mistake claim, the district court held that CUNA had
failed to “convincingly explain why an argument based up-
on mistake could not have been added to the original com-
plaint—or at least proposed as an amendment in response to
RBS’s motion to dismiss filed a full year earlier than its re-
quest to amend.” CMFG, 2013 WL 4483068, at *18. With re-
gard to the intentional misrepresentation claim, the district
court concluded that CUNA’s delay was “too long” and
“highly prejudicial” because “[b]elieving that its intent was
not at issue, RBS has proceeded to litigate this case based on
other grounds.” CMFG, 2014 WL 3696233, at *37. Thus, the
district court concluded, “[t]o allow CUNA Mutual to aban-
10 Although we have reversed the district court on this point, the
court believed section 893.43 to be the correct statute of limitations at the
time.
36 No. 14-2904
don the need to prove materiality, in favor of proving
knowledge and intent to defraud, would either substantially
alter the course of trial or effectively deny RBS the oppor-
tunity (and certainly the reason) to take discovery on an in-
tent-based theory and/or attack CUNA Mutual’s purported
fraud claims at summary judgment.” Id. The district court
did not abuse its discretion by denying leave to amend.
D. Circuit Rule 36
CUNA asks us to invoke Circuit Rule 36 on remand. Rule
36 requires that a case be assigned to a different judge when
“we reverse a judgment entered after a trial and remand for
a new trial.” Dey v. Colt Const. & Dev. Co., 28 F.3d 1446, 1463
(7th Cir. 1994). We have also invoked Rule 36 “to avoid the
operation of bias or mindset which seems likely to have de-
veloped from consideration and decision of motions to dis-
miss or motions for summary judgment and the like.” Cange
v. Stotler & Co., 913 F.2d 1204, 1208 (7th Cir. 1990). CUNA ar-
gues that bias is shown because the district court “has al-
ready weighed Prusha’s credibility and rejected the course-
of-dealing evidence.” Appellant’s Br. at 54.
We decline to invoke Rule 36. Chief Judge Conley has
demonstrated impartiality in his handling of this case, even
if we have overturned some of his rulings. It is true that he
noted a “glaring inconsistency” in Prusha’s testimony (and
questioned whether trial was required to assess his credibil-
ity on this point), see CMFG, 2014 WL 3696233, at *32, but
this isolated comment does not evidence bias.
III. Conclusion
For the reasons stated above, we reverse in part and af-
firm in part. We REVERSE the district court’s grant of RBS’s
No. 14-2904 37
motion for summary judgment. We AFFIRM the district
court’s denial of CUNA’s motions for leave to amend.