Court Grants in Part RBS Motion for Summary Judgment in Repurchase Action

On July 23, Judge William Conley of the Western District of Wisconsin granted in part and denied in part RBS Securities Inc.’s motion for summary judgment in a suit brought by CUNA Mutual Group seeking to rescind the purchase of fifteen RMBS certificates.  Judge Conley granted RBS’s motion for summary judgment as to nine of the fifteen RMBS certificates on the ground that CUNA Mutual’s claims were time-barred by Wisconsin’s six-year statute of limitations.  He also granted summary judgment to RBS in connection with CUNA Mutual’s allegations of misrepresentations concerning compliance with underwriting guidelines, finding that CUNA Mutual presented insufficient evidence to allow a trier of fact to conclude that it actually relied on any of those representations.  Judge Conley similarly granted summary judgment to RBS in connection with CUNA Mutual’s allegations of misrepresentations concerning owner occupancy status, finding that CUNA Mutual had not submitted adequate evidence of any misstatement by RBS of the owner occupancy ratios, which were based on occupancy information provided by the borrowers.  As to the six certificates remaining in the lawsuit, CUNA Mutual is allowed to proceed on its claim for rescission based on allegations that RBS misrepresented the LTV and CLTV ratios of the collateral pools.  Finally, Judge Conley denied a series of discovery and sanctions motions raised by both parties.  The case is scheduled to proceed to trial on August 4.  Order.

Court Grants in Part and Denies in Part Nomura’s Motion to Dismiss Trustee Repurchase Action

On July 18,  Justice Marcy Friedman of the New York County Supreme Court, Commercial Division, granted in part and denied in part Nomura Credit & Capital Inc.’s motion to dismiss claims brought by HSBC, as Trustee for the NAAC 2006-AF2 RMBS Trust, seeking damages, specific performance and indemnification for alleged breach of contract.  Relying on her order from a prior case involving Nomura, Justice Friedman held that the causes of action for damages and specific performance were adequately pled to the extent they were based on Nomura’s alleged breaches of representations and warranties regarding mortgage loans.  Justice Friedman held that the relief available to the plaintiff was limited, by operation of the sole remedy provision of the parties’ contract, to specific performance of the repurchase protocol or damages consistent with the protocol’s terms.  She thus dismissed plaintiff’s cause of action seeking rescissory damages.  Justice Friedman also rejected the plaintiff’s argument that alleged willful misconduct rendered the sole remedy provision unenforceable, holding both that plaintiff failed to adequately allege intentional wrongdoing by Nomura and that the sole remedy provision was not the type of exculpatory clause that could be rendered unenforceable by willful misconduct.  Finally, Justice Friedman rejected plaintiff’s request for attorneys’ fees, holding that the indemnification provision in the parties’ contract did not clearly provide for fee shifting in lawsuits between the parties.  Order.

Morgan Stanley Settles RMBS Charges with SEC

On July 24, the SEC announced that it had charged three Morgan Stanley entities with misleading investors with regard to two RMBS securitizations that the firms underwrote, sponsored and issued and that the firm agreed to settle the charges.  In the cease and desist order memorializing the settlement, the SEC alleged that Morgan Stanley misrepresented the current and historical delinquency status of the mortgage loans underlying the securitizations.  The SEC alleged that these misrepresentations violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  Morgan Stanley agreed to settle the charges without admitting or denying wrongdoing.  As part of the settlement, Morgan Stanley agreed to cease and desist further violations of §§ 17(a)(2)-(3) and to pay US$275 million in disgorgement, prejudgment interest and penalties, which will be placed in a Sarbanes-Oxley Fair Fund for distribution to investors.  Press Release.  Order.

SEC Sends Wells Notice to S&P Concerning MBS Ratings

On July 23, S&P’s parent company, McGraw Hill Financial Inc., disclosed that it received a Wells notice indicating that the SEC’s enforcement staff had made a preliminary determination to recommend that the SEC institute an enforcement action against S&P alleging violation of federal securities laws with respect to S&P’s ratings of six commercial MBS transactions in 2011 and public disclosures made by S&P regarding those ratings thereafter.  S&P will have the opportunity to respond to provide its perspective and to address the issues raised by the enforcement staff before any enforcement proceeding is initiated.  Press Release.

Parallel Government Actions Against Bank of America May Proceed

On June 19, Judge Max O. Cogburn, Jr. of the Western District of North Carolina issued Orders in two parallel actions by the DOJ and SEC against Bank of America, previously covered in the August 12, 2013 and April 7, 2014 issues.  In the action brought by the DOJ, Defendants moved to dismiss on the ground that the government failed to adequately plead that Defendants violated Sections 1001 and 1014 of the Financial Institutions Reform, Recovery and Investment Act of 1989 (FIRREA).  Declining to follow the Magistrate Judge’s recommendation that the case be dismissed, Judge Cogburn granted the government’s motion for leave to amend both of its claims, rendering the motion to dismiss moot.  Among other things, the court held that a Section 1014 claim may be adequately pleaded by alleging false statements that influenced a covered institution’s decision to purchase RMBS securities, in addition to loans.  In the action brought by the SEC, Judge Cogburn denied Defendants’ motion to dismiss without prejudice, adopting the Magistrate Judge’s finding that the violations of sections 17(a)(2), 17(a)(3) and 5(b)(1) of the Securities Act of 1933 were pleaded with sufficient particularity.  However, the Order made clear that Defendants were not precluded from moving for summary judgment on the sufficiency of the evidence against them.  DOJ v. BofA OrderSEC v. BofA Order.

Royal Park Investments Sues RMBS Trustee Deutsche Bank Over $3.1 Billion in Alleged Losses

On June 18, Royal Park Investments filed a putative class action in the Southern District of New York against Deutsche Bank National Trust Company.  This action is similar to a series of lawsuits filed by a group of institutional investors against Deutsche Bank and other RMBS trustees, which was covered in last week’s issue.   Royal Park alleges that Deutsche Bank, as trustee, breached its contractual obligations and fiduciary duties in connection with 10 RMBS trusts for which it served as trustee by failing to provide notice that many loans in the trusts were defective, to provide that events of defaults resulting from servicer conduct had occurred, and to take appropriate remedial action in light of those occurrences.  The complaint asserts three causes of action:  (1) violation of the Trust Indenture Act; (2) breach of contract; and (3) breach of trust.  The plaintiff seeks damages, equitable relief and costs.  Complaint.

New York Appellate Division Affirms Denial of Merrill Lynch’s Motion to Dismiss Repurchase Claims

On June 17, New York’s Appellate Division, First Department intermediate appellate court affirmed the denial of Merrill Lynch’s motion to dismiss a repurchase suit brought by two RMBS Trusts.  The plaintiff-trusts allege that Merrill Lynch violated its contractual obligations to repurchase loans acquired from the now-bankrupt originator ResMae Mortgage Corporation.  The parties dispute whether Merrill Lynch guaranteed ResMae’s obligation to repurchase loans that breached representations and warranties in the event that ResMae was not able to do so.  The First Department held that the contractual provision at issue was ambiguous and extrinsic evidence would be required to determine its meaning.  Supreme Court DecisionFirst Department Decision.

SunTrust Settles with DOJ for US$968 Million

On June 17, the United States Department of Justice announced a US$968 million settlement with SunTrust Mortgage Inc.  Other parties to the settlement are the Department of Housing and Urban Development, the Consumer Financial Protection Bureau, and the attorneys general of 49 states and the District of Columbia.  The settlement resolves allegations of mortgage loan origination, servicing, and foreclosure abuses.  Approximately US$500 million of the settlement will be used for homeowner relief.  The settlement also resolves claims under the False Claims Act that SunTrust originated and underwrote Federal Housing Administration-insured mortgages that did not meet applicable requirements.  Press Release.

RBS Settles with FHFA for US$99.5 Million

On June 19, the Federal Housing Finance Agency (FHFA) and RBS Securities Inc. (RBS) announced a US$99.5 million settlement of claims that FHFA brought against RBS in a case against a number of financial institutions in the United States District Court for the Southern District of New York.  FHFA alleged that RBS made false and misleading statements in disclosures relating to six RMBS securitizations.  It brought claims for violations of Sections 11 and 12(a)(2) of the Securities Act of 1933, as well as the Virginia Securities Act.  The settlement does not resolve claims that FHFA brought against RBS in two other actions pending in the Southern District of New York and the District of Connecticut, nor does it resolve FHFA’s claims against any other defendant.  RBS did not admit any liability or wrongdoing.  Settlement Agreement

Fund Managers Sue Deutsche Bank for Breach of Contract and Fiduciary Duty

On June 18, financial institutions including BlackRock Inc., Pacific Investment Management Co., Prudential Financial Inc., DZ Bank AG, and Charles Schwab Co., sued Deutsche Bank National Trust Company in New York state court.  The suit alleges that Deutsche Bank breached contractual representations and warranties, knew there were defects in the loan origination process, and breached its fiduciary duty as to 544 RMBS trusts for which it served as trustee.  The plaintiffs also allege that the servicers of the trusts failed to give notice of the representation and warranty breaches or to enforce repurchase obligations, and that Deutsche Bank knew of these issues.  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.  Complaint