Second Circuit Affirms Dismissal of Class Action Alleging That RBS Mislead Investors About RMBS Exposure

On April 15, 2015, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a putative investor class action against the Royal Bank of Scotland (RBS).  The plaintiffs had brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that RBS induced them into buying American Depository Shares (ADSs) of RBS between October 2007 and January 2009 by misrepresenting the scope of RBS’s investment exposure to subprime mortgage-backed securities at that time.

The Second Circuit affirmed the District Court’s dismissal on all grounds, holding that certain of the alleged misstatements could not serve as the basis for the investors’ claims because they were made in August 2007, before the class period began, and that other alleged misstatements, concerning RBS’s acquisition of Dutch Bank ABR AMRO, likewise could not sustain a claim because they constituted inactionable puffery.  Opinion.

Morgan Stanley Mortgage Capital Holdings LLC Motion to Dismiss RMBS Claims Granted in Part

On April 3, 2015, Judge Laura Swain of the U.S. District Court for the Southern District of New York granted in part and denied in part Morgan Stanley Mortgage Capital Holdings LLC’s (“MSMC”) motion to dismiss breach of contract and breach of the covenant of good faith and fair dealing claims brought by Deutsche Bank National Trust Company (“Deutsche Bank”), in its capacity as Trustee for the Morgan Stanley Structured Trust I 2007-1.  Deutsche Bank alleged that MSMC, as the sponsor of the RMBS securitization, breached the representations and warranties in the Mortgage Loan Purchase Agreement, and was therefore obligated to cure or repurchase breaching loans.  Judge Swain granted MSMC’s motion to dismiss Deutsche Bank’s claims that MSMC breached an implied covenant of good faith and fair dealing, holding that this was based on the same facts as, and therefore impermissibly duplicative of, the breach of contract claim.  However, Judge Swain denied MSMC’s arguments that the breach of contract claims should be dismissed.  Judge Swain found that Deutsche Bank had provided adequate notice of breaches beyond the 1,620 loans specifically addressed in Deutsche Bank’s breach notice letter because the letter gave MSMC notice of pervasive breaches.  She also declined to dismiss Deutsche Bank’s claims for compensatory, rescissory, and consequential damages at the pleadings phase.  Order.

Motion to Dismiss Action Against RMBS Trustee Denied

On March 31, 2015, Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York denied HSBC Bank USA, National Association’s (“HSBC”) motion to dismiss an action brought by a consortium of investors in RMBS for lack of subject matter jurisdiction.  The plaintiffs’ Complaint alleges, inter alia, that HSBC failed to discharge its duties as Trustee for 271 RMBS Trusts in violation of the Trustee Indenture Act (“TIA”) and state common law.  Because the TIA governs only 27 of the 271 Trusts at issue, the plaintiffs invoked supplemental jurisdiction as the basis for the court to hear the claims as to the remaining 244 Trusts.  Judge Scheindlin denied HSBC’s motion, holding that the plaintiffs’ claims all arise from the “same nucleus of operative fact” because the relevant governing agreements all contain substantially similar contract provisions and impose similar duties on HSBC in its capacity as Trustee.  Judge Scheindlin added that judicial economy would be served by retaining supplemental jurisdiction as proof of both the TIA and non-TIA claims would require depositions of many of the same witnesses.  Order.

RMBS Claims Against Ratings Agencies Dismissed as Time-Barred

On March 27, 2015 Judge John Robert Blakely of the U.S. District Court for the Northern District of Illinois granted Standard & Poor’s Financial Services, LLC’s and Moody’s Investors Service, Inc.’s motion to dismiss claims brought by First National Bank and Trust Co. of Rochelle, Illinois arising out of First National’s purchase of certain RMBS certificates.  First National asserted causes of action under the Illinois Consumer Fraud and Deceptive Business Practices Act, the Uniform Deceptive Trade Practices Act, as well as other common law misrepresentation claims, alleging that it had been induced to purchase the certificates in reliance upon misstatements by the ratings agencies.  Judge Blakely dismissed the complaint as time-barred by the Illinois Securities Law’s five-year statute of repose.  He first concluded that the ISL’s statute of repose applied to First National’s claims because the facts alleged, if proven, would have established a violation of the ISL sections on fraud or deceit in connection with the purchase or sale of securities, and because the ISL specifically provided for the injunctive relief requested by First National.  Judge Blakely then found all claims untimely because the RMBS certificates at issue were purchased in February 2008, five years and four months before First National’s suit was filed.  Order.

Bank of America Settles RMBS Suit

On April 2, 2015, plaintiffs BNP Paribas Mortgage Corporation and BNP Paribas and defendant Bank of America filed a Joint Stipulation of Dismissal with Prejudice stating that both parties had reached an agreement to settle claims arising out of Bank of America’s handling of $480.7 million worth of mortgage-backed notes issued by Taylor Bean and Whitaker’s Ocala Funding LLC.  Plaintiffs Complaint alleged that Bank of America, which served as agent, custodian, depositor, and Indentured Trustee of the Ocala facility, failed to live up to its contractual obligations to secure and protect the cash and mortgage loans collateralizing the notes.  The details of the settlement are not yet public.  Joint Stipulation.

UBS and Capital Ventures Settle RMBS Dispute

On March 26, Capital Ventures International and several UBS affiliates filed a stipulation of dismissal after reaching a settlement disposing of all claims in the action.  The terms of the settlement are undisclosed.  Capital Ventures had sued UBS for alleged violations of the Massachusetts Uniform Securities Act in connection with $131 million in RMBS that Capital Ventures allegedly purchased from UBS.  Stipulation.

NCUA Sues HSBC For Alleged Breaches of Duties as Trustee for 37 RMBS Trusts

On March 20, the National Credit Union Administration Board, acting as liquidating agent for five failed credit unions, filed suit against HSBC USA in the Eastern District Court of Virginia.  NCUA alleged that HSBC breached its duties as trustee for 37 RMBS trusts from which the credit unions had purchased $2.37 billion in certificates.  In particular, NCUA alleges that HSBC failed to enforce loan originators’ repurchase obligations in connection with alleged breaches of representations and warranties about the loans in the trusts, failed to prudently address servicer or master servicer defaults, and failed to ensure proper conveyance of the loan files to the trusts.  NCUA asserts claims for breach of contract, breach of fiduciary duty, negligence, negligent misrepresentation, breach of the covenant of good faith, violation of the Streit Act, and violation of the Trust Indenture Act.  Complaint.

Appellate Court Affirms in Part Denial of Moody’s Motion to Dismiss Fraud Claims

On March 20, the Appellate Division, Fourth Department, of the Supreme Court of New York affirmed in part and reversed in part the lower court’s denial of Defendant Moody Investor Services, Inc.’s motions to dismiss two actions filed against it arising out of credit ratings Moody’s assigned to CDO certificates.  The court held that Plaintiffs’ fraud claims were sufficiently pled because, although Moody’s credit ratings were statements of opinion, not fact, Plaintiffs adequately alleged that Moody’s did not believe its opinions when it issued the ratings.  The court held that the trial court erred, however, in denying Moody’s motion to dismiss Plaintiffs’ negligent misrepresentation claims because Plaintiffs failed to plead that a special or privity-like relationship existed between Plaintiffs and Moody’s and failed to adequately allege that Moody’s knew the CDOs would be marketed to Plaintiffs.  Opinion.

RBS Motion to Dismiss RMBS Fraud Claim Granted in Part

On March 20, U.S. District Judge Paul G. Gardephe of the Southern District of New York granted in part and denied in part Defendants’ motion to dismiss a complaint filed by several HSH Nordbank affiliates against several RBS affiliates relating to Plaintiffs’ investment in RMBS issued or underwritten by RBS.  The court held that Plaintiffs sufficiently alleged fraudulent intent in connection with alleged misstatements concerning the underlying loans’ compliance with underwriting guidelines, but failed to do so in connection with alleged misstatements concerning the loans’ LTV and CLTV ratios, and owner occupancy rates, as well as the RMBS certificates’ credit ratings and the validity of the assignment of the mortgages to the RMBS trusts.  The court thus allowed Plaintiffs’ fraud and aiding and abetting fraud claims to proceed as to alleged misstatements concerning compliance with underwriting guidelines only.  The court separately dismissed Plaintiffs’ claims for negligent misrepresentation and fraudulent concealment due to the absence of privity, as well as Plaintiffs’ claim for rescission based on mutual mistake.  Order.

Court Dismisses FDIC’s Amended Complaint for Untimeliness

On March 24, Judge Laura Taylor Swain of the United States District Court for the Southern District of New York granted Defendants’ motion to dismiss an action filed by the FDIC, as receiver for two failed banks, related to RMBS certificates that the banks purchased.  The court held the FDIC’s federal Securities Act claims to be untimely because they were filed outside of the statute of repose period provided by Section 13 of the Securities Act.  The court further held that the “Extender Provision” of FIRREA does not preempt the statute of repose set forth in Section 13.  The court held that the Extender Provision was indistinguishable from a similar provision in CERCLA that the Supreme Court recently held, in CTS Corp. v. Waldburger, did not preempt statutes of repose.  Order.