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

ACE Files Complaint Re-Asserting Repurchase Claims Dismissed by the First Department

On June 18, trustee HSBC filed suit on behalf of ACE Securities Corp. Home Equity Loan Trust Series 2006-SL2 against DB Structured Products, Inc., a Deutsche Bank Subsidiary, in New York state court.  The complaint attempts to revive claims previously dismissed by New York’s First Department intermediate appellate court.  In its December 2013 decision, the First Department held that the Trustee’s claims were untimely and that the certificate holder-plaintiffs who initially had brought the claims lacked standing to sue.  Plaintiff asserts that the new complaint is properly brought under a procedure that permits refiling a suit within six months after dismissal on certain grounds, alleging that it has cured the deficiencies previously identified by the First Department.  In the new action, the plaintiff again alleges that DB Structured Products breached contractual representations and warranties related to mortgage loans underlying the securitization at issue.  Complaint.

EMC Obtains Partial Dismissal of Repurchase Action

On May 29, Justice Eileen Bransten of the New York County Supreme Court denied in part and granted in part defendants’ motion to dismiss a loan repurchase lawsuit brought at the direction of certain certificate holders of four RMBS.  The complaint alleged that EMC Mortgage breached certain representations and warranties concerning loans in the trusts and also sought to hold certain JPMorgan entities vicariously liable for EMC’s alleged breaches.  Justice Bransten dismissed without prejudice the claims against the JPMorgan entities for failure to properly plead successor liability or parent liability.  As to EMC, the Court rejected EMC’s argument that the claims were limited to certain loans identified in timely repurchase demands, holding that the content of the specific repurchase demands at issue sufficiently and timely notified EMC of its alleged obligation to repurchase all allegedly breaching loans in the trusts.  Justice Bransten also relied on Plaintiff’s allegation that EMC discovered allegedly breaching loans during its pre-closing due diligence to hold that Plaintiff’s claims as to all allegedly breaching loans in the transaction were timely.  Justice Bransten refused to dismiss plaintiff’s unjust enrichment claims, which were based upon allegations that EMC withheld settlement funds received from loan originators that properly belonged to the Trust, holding that the PSA’s sole remedy clause does not preclude these claims.  Finally, Justice Bransten dismissed claims for consequential and rescissory damages as barred by the sole remedy provision, and dismissed plaintiff’s reimbursement claim because the PSA did not unmistakably provide for attorney’s fees in first-party actions.  Order.

UBS Motion to Dismiss RMBS Suit Granted in Part

On June 10, Judge Denise Cote of the U.S. District Court for the Southern District of New York granted in part and denied in part UBS’s motion to dismiss a lawsuit filed against it by the National Credit Union Administration, as liquidating agent for Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union.  The credit unions each owned certain RMBS issued by UBS.  Following her ruling in an earlier case NCUA brought against Morgan Stanley, Judge Cote dismissed NCUA’s federal Securities Act claims as time barred.  Judge Cote denied UBS’s motion to dismiss NCUA’s claims under Illinois and Texas Blue Sky Laws, holding that NCUA had satisfied the liberal pleading standard by making the requisite “originator-specific allegations” to support its claims that UBS made material misrepresentations regarding whether the originators had complied with underwriting guidelines.  Order.

Second Circuit Vacates Judge Rakoff’s Ruling Rejecting SEC-Citigroup Settlement

On June 4, the U.S. Court of Appeals for the Second Circuit vacated a November 28, 2011, decision of the U.S. District Court for the Southern District of New York in which the district court declined to approve a settlement of claims that the SEC brought against Citigroup Global Markets Inc.  The SEC alleged that Citigroup had negligently misrepresented its role and economic interest in selecting RMBS to be included in the pool of reference obligations in respect of a billion-dollar synthetic CDO transaction.  The lower court critiqued the SEC’s practice of settling enforcement actions without requiring defendants to admit fault.  The Second Circuit held that the court’s role in approving an SEC settlement is limited to determining whether there is a factual basis to support the proposed consent judgment, that the judgment is fair and reasonable, and, if injunctive relief is imposed by the judgment, that the public interest would not be disserved.  The appellate court further ruled that the SEC’s discretion to settle on terms it finds acceptable must be given substantial deference, and held that the lower court misapplied the law and abused its discretion by requiring the parties to show adequacy of the settlement and the truth of the SEC’s allegations.  The Second Circuit remanded the case to the district court to again consider settlement approval applying the correct, more deferential standard of review.  Decision.