Trustee Representation and Warranty Suit against Morgan Stanley Will Proceed

On November 24, Justice Marcy Friedman of the Supreme Court for the State of New York partially dismissed U.S. Bank’s suit against sponsor Morgan Stanley Mortgage Capital and originator Greenpoint Mortgage Funding in connection with Morgan Stanley Mortgage Loan Trust 2007-2AX.   Referencing previous decisions made by the court in similar cases, Justice Friedman dismissed the trustee’s claim for rescissory damages under the sole remedy provisions in the relevant agreements. The court denied Morgan Stanley’s motion to dismiss based on standing, held the case was timely brought based on the closing date of the transaction, and declined to dismiss claims concerning liquidated loans or claims based on alleged independent discovery of breaches.  Decision.

Fund Managers Sue Citibank for Breach of Contract and Fiduciary Duty

On November 24, financial institutions including AEGON, Pacific Investment Management Co., Prudential Financial Inc., Kore Advisors LP, Sealink Funding Ltd., TIAA-CREF Bond Fund, and affiliates, sued Citibank N.A. in the United States District Court for the Southern District of New York.  The plaintiffs purport to sue derivatively on behalf of the securitization trustee, and in the alternative bring a putative class action on behalf of all current certificateholders. The complaint asserts six causes of action: (1) breach of contract; (2) violation of the Trust Indenture Act; (3) negligent breach of pre-default duty of independence; (4) breach of the fiduciary duty of care; (5) negligent breach of the duty of care; and (6) breach of the post-default fiduciary duty of independence.  The plaintiffs seek damages and costs, as well as an order requiring Citibank to undertake “corrective actions.”  Complaint.

Second Circuit Affirms Dismissal of $56M MBS Suit against Bank of America

On November 25, the United States Court of Appeals for the Second Circuit upheld the dismissal of IKB Deutsche Industriebank AG’s suit against Bank of America. IKB alleged that BofA fraudulently misrepresented the quality of loans underlying mortgage backed securities sold in 2005 and 2006. The court held that the complaint’s generalized allegations that BofA knew of claimed mortgage defects by virtue of access to due diligence reports prepared by Clayton and BofA’s own due diligence procedures were not sufficient to plead fraudulent intent. The court also affirmed dismissal of IKB’s claim for fraud relating to representations about the transfer of mortgages to the issuing trust, holding that these representations constituted promises to perform in the future and thus were not the proper subject of a fraud claim absent allegations that there was an intent not to perform at the time the promises were made.  Summary Order.

ResCap’s Claims Against Mortgage Originators in Minnesota Will Proceed

On November 12, Judge Susan Richard Nelson of the United States District Court for the District of Minnesota declined to dismiss claims by the Residential Capital LLC (ResCap) bankruptcy trust against six mortgage originators.  ResCap alleges that the six originators—Academy Mortgage Corp., First California Mortgage Corp., Provident Funding Associates, L.P., T.J. Financial, Inc., Universal American Mortgage Company, LLC, and Wells Fargo Financial Retail Credit, Inc.—breached representations and warranties in regard to almost $4 billion in RMBS.  ResCap asserts claims for breach of representation and warranty and for indemnification. Judge Nelson held that ResCap’s allegations stated a claim for breach of warranty without identifying specific allegedly breaching loans. The Court further held that ResCap had standing to bring these claims, and the claims were not time-barred because they were brought within the two-year period for debtor claims under the Bankruptcy Code.  Order.

Assured Guaranty Discontinues Lawsuit Against DB Structured Products

On November 17, 2014, Justice Shirley Werner Kornreich of the Supreme Court for the State of New York, New York County approved the stipulation of voluntary discontinuance between Assured Guaranty Municipal Corp., DB Structured Products, Inc., and ACE Securities Corp. DB Structured Products’s third-party claim against Greenpoint Mortgage Funding, Inc. was also voluntarily discontinued.  Monoline insurer Assured filed the action in 2010, alleging breaches of representations and warranties in a 2006 RMBS transaction.  Stipulation of Voluntary Discontinuance.

Court Finds FHFA Claims Against Nomura Are Not Time-Barred

On November 18, Judge Denise Cote of the United States District Court for the Southern District of New York granted the Federal Housing Finance Agency’s motion for partial summary judgment on the statute of limitations defense asserted by Nomura and related entities.  FHFA, as conservator for Fannie Mae and Freddie Mac, alleges that Nomura made materially false statements in offering documents for RMBS between 2005 and 2007 in violation of Sections 11 and 12(a)(2) of the Securities Act of 1933.   Judge Cote found that Fannie and Freddie did not have sufficient information by September 2007 to determine whether the offering documents contained misstatements, and that a reasonably diligent investor in their position would not have investigated the offering documents or discovered the misstatements by that date.  As a result, the Court held that FHFA’s claims were not barred by the statute of limitations.  Opinion & Order.

Bank of America and Merrill Lynch Settle RMBS Lawsuit with FDIC

On November 17, Bank of America and Merrill Lynch settled securities claims brought by the FDIC related to RMBS sold to United Western Bank.  The FDIC, as the receiver for United Western Bank, alleged claims under the Securities Act of 1933 and the Colorado Securities Act against Bank of America, Merrill Lynch, Morgan Stanley, and RBS Securities related to $110 million in RMBS. The case against Morgan Stanley and RBS remains pending.  Stipulation.

Court Dismisses U.S. Bank’s RMBS Repurchase Claims Against Citigroup as Too Speculative

 On November 14, Judge George B. Daniels of the United States District Court for the Southern District of New York dismissed several of U.S. Bank’s repurchase claims against Citigroup Global Markets Realty Corp.  U.S. Bank alleged that Citigroup breached representations and warranties with respect to loans underlying $832 million of RMBS.  The Court dismissed the trustee’s claim for breach of contract as to loans for which the trustee had not requested repurchase, holding that U.S. Bank did not sufficiently allege that Citigroup actually discovered any breaches of representations and warranties as to those loans.  The Court also dismissed the trustee’s claim for anticipatory breach of contract based on repurchase requests sent to Citigroup the same day as the complaint was filed.  In addition, Judge Daniels dismissed claims against servicer CitiMortgage, Inc., holding the trustee’s allegations suggesting CitiMortgage should have discovered breaches of representations and warranties in the course of servicing were conclusory and speculative.  The case remains pending against Citigroup as to claims for breach of contract with respect to the failure to repurchase 466 loans identified in pre-suit repurchase demands.  Order.

NCUA Sues Deutsche Bank National Trust Co. For Allegedly Failing to Comply With RMBS Trustee Duties

The National Credit Union Administration, acting as liquidating agent for five failed credit unions, sued Deutsche Bank National Trust Company (DBNTC) for allegedly breaching its duties as trustee under the governing trust agreements for 121 RMBS trusts with a total original face value of approximately $140 billion. The complaint, filed November 10, in the U.S. District Court for the Southern District of New York, asserts causes of action under the Trust Indenture Act and a provision of the New York Real Property Law known as the Streit Act. The complaint alleges that DBNTC failed to properly review and monitor the loans underlying the RMBS, notify the investors of deficiencies in the loans, take action to address those alleged deficiencies, and enforce the repurchase of defective loans as provided for in the governing agreements. The complaint also alleges that DBNTC failed to exercise proper oversight over the loans’ servicers, including by failing to declare the servicers and master services in default under the agreements. NCUA seeks unspecified damages, equitable relief, pre- and post-judgment interest, and fees and costs.  Complaint.

Bank of America and U.S. Bank Agree to Settle MBS Suit with Pension Funds

On October 30, Bank of America notified Judge Katherine B. Forrest of the United States District Court for the Southern District of New York of a planned settlement of an action brought by pension funds in 2012.  The funds had alleged that Bank of America and U.S. Bank violated their duty to ensure that the loans underlying 19 Washington Mutual RMBS portfolios did not contain missing, defective, or incomplete documents, and to ensure that defective loans were removed from the trusts.  The complaint included claims for violating the Trust Indenture Act of 1939, breach of contract, and breach of the implied covenant of good faith and fair dealing.  LetterComplaint.