On May 13, Justice Kornreich of the Supreme Court of the State of New York denied DB Structured Products, Inc.’s (DBSP) motion to dismiss an RMBS putback action brought against it by the trustee for the relevant RMBS trust. The plaintiff alleged that DBSP breached representations and warranties concerning the mortgage loans backing the trust and then failed to fulfill its contractual obligation to repurchase those loans. Justice Kornreich held that plaintiff’s claims were timely because each alleged failure by DBSP to comply with its recurring repurchase obligation constituted an independent contractual breach that re-started the statute of limitations. Order.
On May 10, Justice Sherwood of the Supreme Court of the State of New York dismissed on statute of limitations grounds an RMBS putback action brought against Nomura Credit & Capital, Inc. (Nomura). Plaintiff alleged that Nomura breached representations and warranties concerning mortgage loans securitized in a $259 million RMBS trust and sought to compel Nomura to buy back the loans or rescind the entire transaction. Justice Sherwood held that plaintiff’s claim for breach of contract accrued at the time of the transaction – when the representations were made – not when Nomura declined to repurchase allegedly breaching loans. Applying that accrual date, Justice Sherwood found the claims untimely. The amended complaint was filed by the trustee more than six years after the time of the transaction, and it did not relate back to the filing of the original complaint and summons with notice because the original hedge fund plaintiffs lacked standing to sue under the governing agreements. Orrick, Herrington & Sutcliffe represents Nomura in this case. Order.
On May 8, Judge Jed Rakoff of the United States District Court for the Southern District of New York dismissed claims by the United States for damages and civil penalties under the False Claims Act against Countrywide and Bank of America. The court held that the government could proceed with its claims for violations of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. FIRREA permits the government to recover civil penalties for fraudulent activities that “affect” federally insured financial institutions. The government alleged that Countrywide’s mortgage origination business had defrauded Fannie Mae and Freddie Mac. The court noted it would explain its reasoning at a later date. Order. Amended Complaint.
On May 6, Judge Mariana Pfaelzer of the United States District Court for the Central District of California allowed American International Group, Inc. (AIG) to proceed with several of its claims against Bank of America and related entities arising from AIG’s purchase of Countrywide-issued RMBS. The court held that AIG has standing to bring suit, rejecting the argument that AIG had assigned its claims to the Federal Reserve Bank of New York. Among other causes of action, the court upheld certain claims for fraudulent inducement on the grounds that AIG adequately alleged misstatements regarding loan-to-value ratios, compliance with underwriting guidelines, appraisal values and credit ratings, but dismissed fraud claims as to borrower-provided owner-occupancy data. The court also dismissed AIG’s claims based on alleged oral misrepresentations for failure to specify the speakers, and dismissed AIG’s fraud claims against two underwriters for failure to allege awareness of any misconduct at Countrywide. Order.
On May 7, New York’s First Department appellate court reinstated CIFG Assurance North America, Inc.’s fraud claim against Goldman Sachs & Co. and M&T Bank. Last May, a New York trial court dismissed CIFG’s claim for fraudulent inducement relating to its insurance of RMBS, holding that CIFG was unable to establish reasonable reliance as a matter of law because it had not reviewed a sample of the mortgage loans in its pre-investment due diligence, and dismissed certain breach of contract claims for lack of standing. The First Department held that CIFG had adequately pleaded that it was unaware that defendants’ warranties were false despite having conducted its own limited diligence, and found that questions of fact existed as to whether CIFG’s reliance was reasonable. The court upheld the other aspects of the lower court’s decision, including that CIFG did not have standing to sue for breach of certain transaction documents. Decision.
On May 6, Judge Katherine Forrest of the United States District Court for the Southern District of New York denied Bank of America and U.S. Bank’s motions to dismiss an action relating to their roles as trustees of Washington Mutual mortgage-backed securities. Plaintiffs, including the Policemen’s Annuity and Benefit Fund of Chicago and other entities, claimed the trustees failed to notify certificate-holders of breaches of the Pooling and Servicing Agreements relating to the completeness of mortgage files and compliance with loan underwriting guidelines. The court held the Trust Indenture Act plausibly applies to the securities at issue and requires trustees to provide notice of all defaults known to it within ninety days. The court also held that Plaintiffs adequately pleaded that defaults occurred, such as the failure of certain entities to correct flaws in the mortgage files, and that defendants plausibly knew that certain representations in the Pooling and Servicing Agreements had been breached. Judge Forrest noted that Plaintiffs must ultimately prove that the trustees had actual, rather than constructive, knowledge of the alleged breaches and that the existence of even pervasive practices is not necessarily sufficient evidence of actual knowledge. Order.
On May 6, monoline insurer Assured Guaranty Ltd. announced a $358 million settlement with UBS and its affiliates stemming from losses on residential mortgage-backed securities that were issued, sponsored or underwriten by UBS. Assured sued UBS in 2012 in federal court in New York alleging material misrepresentations and omissions concerning the quality of loans underlying the securitizations at issue that it insured. The settlement terminates all pending RMBS litigation between UBS and Assured. Under the terms of the settlement, the parties will also enter into a collateralized loss-sharing reinsurance agreement whereby UBS will compensate Assured for 85 percent of Assured’s future losses on the securitizations at issue in the litigation. Press Release. SEC Filing.
On May 6, monoline insurer MBIA announced that it had reached a $1.7 billion settlement with Bank of America in connection with alleged fraud and breach of contract claims related to Countrywide-issued mortgage-backed securities insured by MBIA. Under the terms of the settlement, Bank of America will make a $1.6 billion cash payment, will transfer back $134 million of MBIA’s securities, and will extend MBIA a $500 million credit line. The settlement ends litigation pending in the Supreme Court for the State of New York since 2008. The agreement also affected other MBIA-issued policies insuring Bank of America’s credit default swaps, and grants Bank of America warrants to purchase approximately 10 million shares of MBIA common stock. The settlement is subject to approval by the New York State Department of Financial Services. Press Release.
On May 2, MBIA Insurance Corporation announced that it reached a settlement with Flagstar Bank in its lawsuit arising out of $1 billion in Flagstar-sponsored MBS that MBIA insured. MBIA sued Flagstar for breach of warranty under the insurance agreements, breach of the repurchase protocol, material breach of the insurance agreements, and reimbursement. MBIA alleged that representations and warranties made by Flagstar about the insured mortgage loans and about Flagstar’s operations and quality-control procedures were false. Under the terms of the Settlement Agreement, MBIA will receive $110 million in cash and other consideration in return for termination of the pending lawsuit. Press Release.
On May 1, Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York reinstated previously dismissed claims in two class actions brought by several pension fund plaintiffs against Royal Bank of Scotland Group PLC and Residential Capital LLC, among others. Judge Baer had previously dismissed claims under the Securities Act of 1933 as to certain RMBS for lack of standing. In light of a recent Second Circuit decision, NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), Judge Baer reconsidered his prior orders and held that the plaintiffs had standing to assert claims on behalf of purchasers of all RMBS issued under the same shelf registrations that were backed by mortgages originated by the same lenders that originated the mortgages backing the certificates purchased by the named plaintiffs. The court’s order revived claims with respect to a total of 49 offerings across both cases that previously had been dismissed. Order.