Second Circuit Upholds Dismissal of RMBS Lawsuit as Time-Barred

On November 16, the Second Circuit Court of Appeals affirmed the District Court’s dismissal of a lawsuit brought by Deutsche Bank National Trust Co. (acting as Trustee for RMBS Trust GSR 2007-OA1) against Quicken Loans, alleging that Quicken breached its obligation to repurchase mortgage loans that violated representations and warranties (“R&Ws”).  The court held that because Quicken’s R&Ws only purported to guarantee characteristics of the loans at the time of sale, New York’s six year statute of limitations for breach of contract ran from that date, and had lapsed by the filing date of the action.

Following the New York Court of Appeals’ decision in ACE, the court rejected the Trustee’s argument that the accrual date for its claim was delayed by the repurchase procedures set forth in the transaction documents. The court also rejected the Trustee’s argument that it should be entitled to take advantage of a statutory extension to the applicable limitations period because the FHFA originally filed the lawsuit. It held that FHFA did not “bring” the claims at issue because it only filed the initial summons and notice in the case before abandoning prosecution of the action after realizing it was not the proper plaintiff. Finally, the court upheld the dismissal of the Trustee’s breach of the implied covenant of good faith and fair dealing as duplicative of the breach of contract claim.  Order.

U.S. Supreme Court Denies S&P Investors’ Petition for Certiorari

On November 2, 2015, the United States Supreme Court denied investors’ petition for review of a Second Circuit decision affirming the dismissal of their class action against Standard & Poor’s Rating Services’ parent, McGraw-Hill Cos. Inc., and two of its corporate officers.  In that case, the plaintiff pension fund had made claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933, alleging that S&P’s Ratings Services had intentionally made false and misleading statements to investors about the accuracy of its credit ratings for mortgage-backed securities.  As we previously covered, the Second Circuit had affirmed a decision by Judge Sidney H. Stein of the Southern District of New York dismissing the suit and holding that S&P’s ratings were “mere commercial puffery” and could not form the basis for a securities fraud claim.  In its certiorari request, Plaintiff argued that Judge Stein’s and the Second Circuit’s broad interpretation of “puffery” conflicted with Supreme Court precedent, Omnicare Inc. et al. v. Laborers District Council Construction Industry Pension Fund by holding that the alleged knowing falsity of S&P’s statements is irrelevant.  Petition for CertOrder List.


Goldman Sachs Settles CDO Class Action

On November 3, 2015, Goldman Sachs Group Inc. agreed to settle a lawsuit brought by a class of investors over Goldman’s sale of two collateralized debt obligations.  The settlement agreement comes on the heels of a September 8, 2015 summary judgment decision for Goldman that we recently covered, which found that Plaintiffs had failed to show evidence that Goldman Sachs knew about the risks associated with the CDOs.  The settlement amount was not disclosed.  Settlement Announcement.

Summary Judgment Denied in Litigation Against Countrywide

On October 27, 2015, Justice Eileen Bransten of the New York Supreme Court issued a Decision and Order granting in part and denying in part cross motions for summary judgment brought by Countrywide and Ambac in an RMBS action brought by Ambac against Countrywide.  Justice Bransten’s order addressed numerous issues, including the following.

Justice Bransten held that Insurance Law §3105 does not require Ambac to prove justifiable reliance on an alleged misrepresentation or that the misrepresentation proximately caused Ambac’s harm, but instead only that there was a misrepresentation and that it was material.  Justice Bransten also concluded that the contractual repurchase remedy will not be the sole remedy available to Ambac if it can prove breaches of other sections of the Insurance & Indemnity Agreements at trial.  Justice Bransten declined to dismiss on timeliness grounds Ambac’s claims with respect to loans that were not the subject of repurchase demands within six years of the relevant securitization’s closing, but held that Ambac would be required to prove at trial that Countrywide discovered those loans breached within the limitations period.  Finally, Justice Bransten granted Countrywide’s motion with respect to Ambac’s claims for indemnification and reimbursement, holding that neither is available under the contracts at issue.  Order on Summary Judgment.

In this same action, and on the same day, Justice Bransten also ruled on the parties’ motions to strike certain experts.  She granted Ambac’s motion to strike portions of the testimony from a Countrywide expert report that addressed legal interpretations of New York Insurance Law on the grounds that the testimony invaded the province of the court.  Justice Bransten denied Ambac’s motion to strike several other Countrywide experts and also denied Countrywide’s motion to strike two of Ambac’s experts.  Order on Experts.

Barclays and Wachovia Settle with NCUA

On October 19, 2015, Barclays PLC and Wachovia Capital Markets LLC agreed to pay $325 million and $53 million, respectively, to settle claims brought by the National Credit Union Administration Board (NCUA), as liquidating agent of five credit unions, regarding residential mortgage backed securities purchased by those credit unions.  NCUA alleged in the actions (filed in New York, California, and Kansas federal courts) that the characteristics of the RMBS and the underlying loans were misrepresented in the offering documents.  NCUA Press Release on Barclays.  NCUA Press Release on Wachovia.  We previously covered two of NCUA’s actions against Wachovia here and here.

New York Appellate Court Allows Repurchase Claims Against Nomura To Proceed

On October 13, 2015, the First Department of the Appellate Division of the Supreme Court for the State of New York decided an appeal in four actions brought by HSBC Bank as Trustee on behalf of four RMBS trusts against Nomura Credit & Capital, Inc. and related entities.  We previously covered Justice Friedman’s trial court decision in one of the actions here. In a decision written by Justice John W. Sweeney, the First Department held that the trusts can proceed with claims relating to loans that were not the subject of pre-suit breach notices or where Nomura was not given the contractual 90-days-notice of the alleged breaches before suit was filed.  The First Department distinguished its decision in Ace (previously covered here) on the basis that in Ace there were no timely claims.  The court reasoned that the untimely claims here would have related back in an amended pleading to timely claims in the complaint, and cited the trusts’ allegations that Nomura independently discovered the alleged breaches.

Affirming Justice Friedman’s decision, the court also held that the trusts are not limited by the contractual “sole remedy” of repurchase of loans breaching representations and warranties if the loans have been liquidated or foreclosed.  Instead, the trusts may seek money damages for breaching loans where specific performance of the repurchase sole remedy is impossible.  The court further affirmed the lower court’s decision that the trusts’ claims for breach of the implied covenant of good faith and fair dealing were duplicative of their breach of contract claims and affirmed the dismissal of the trusts’ claims for rescission or rescissory damages.

The court reversed Justice Friedman’s decision insofar as it dismissed the trusts’ claims that Nomura breached its representation that the deal documents did not contain any untrue statements.  The court held that alleged breaches of that provision were not subject to the contract’s sole remedy of repurchase.  The court further held that the trusts’ claims for damages for the failure to repurchase were properly dismissed, but the lower court erred in dismissing claims for damages for Nomura’s failure to give notice of breaches that it allegedly discovered.  Decision.

RMBS Trustee Wins Partial Dismissal of Investor Claims

On September 29, 2015, Judge Valerie Caproni of the United States District Court for the Southern District of New York partially granted RMBS trustee Bank of New York Mellon’s (“BNYM”) motion to dismiss claims brought by Phoenix Light SF Ltd., and certain other RMBS investors (together, the “Plaintiffs”).  Judge Caproni dismissed Plaintiffs’ breach of fiduciary duty claims as duplicative of Plaintiffs’ breach of contract claims, whose viability Judge Caproni also appeared to doubt in her decision, noting that “[t]he low bar at the motion to dismiss stage salvage[d] Plaintiffs’ claims for now.”  Judge Caproni explained that to survive summary judgment, Plaintiffs would need to demonstrate that BNYM possessed actual knowledge of events of default on a loan-by-loan basis.  Judge Caproni denied BNYM’s motion to dismiss Plaintiffs’ negligence, gross negligence, and negligent misrepresentation claims.  Order.

RMBS Contract Claims Against Trustee Dismissed in Part

On October 2, 2015, Justice Saliann Scarpulla of the New York Supreme Court issued an Opinion and Order partially granting Bank of New York Mellon’s (“BNYM”) Motion to Dismiss an RMBS action brought by Commerce Bank and other RMBS investors (together, the “Plaintiffs”).  Justice Scarpulla dismissed Plaintiffs’ breach of fiduciary duty claim as well as Plaintiffs’ breach of contract claim to the extent it relies on allegations that BNYM failed to provide Plaintiffs with notice of events of default under the transaction documents.  Justice Scarpulla stated that a Trustee’s obligation to notify certificateholders of an event of default under the relevant Pooling and Servicing Agreements arises only upon the receipt of written notice that a default has occurred, and that Plaintiffs failed to allege that BNYM had received such written notice.  Justice Scarpulla permitted claims that BNYM had failed to notify certificateholders of breaches of representations and warranties to proceed, but noted that Plaintiffs will ultimately be required to prove the Trustees’ actual discovery of those breaches on a loan-by-loan basis.  Justice Scarpulla also permitted breach of contract claims based on BNYM’s alleged failure to properly review and examine the loan files and accurately certify what it had received, as well as claims alleging negligence by BNYM.  Order.

Court Denies CIFG’s Attempt to Refile CDO Suit Against J.P. Morgan

On September 23, Justice Marcy S. Friedman of the New York Supreme Court for New York County denied CIFG’s motion to amend its complaint against J.P. Morgan in a case the Court previously dismissed in June.  CIFG had originally brought suit claiming two causes of action against J.P. Morgan: 1) that J.P. Morgan had made material misrepresentations to induce CIFG to issue insurance on credit default swaps guaranteeing two collateralized debt obligations, and 2) for common-law fraud.  In its June dismissal order, the Court dismissed the first cause of action but allowed CIFG to attempt to replead its fraud claim.  CIFG’s proposed amended complaint included two causes of action, the first of which the Court held was identical in all material respects to the previously dismissed first cause of action.  As to the proposed second cause of action for common law fraud, the Court noted that while CIFG had added additional allegations to attempt plead the action with particularly, it had failed to address whether a common law fraud claim could be maintained based on alleged misrepresentations made by non-insured Bear Stearns about the collateral underlying the CDOs.  The Court granted CIFG leave to amend to attempt to cure this issue.  Order.

WMC Mortgage and GE Mortgage Holding Settle RMBS Repurchase Case

On September 21, 2015, Judge Denise L. Cote of the United States District Court for the Southern District of New York endorsed Bank of New York Mellon’s (“BNYM”) September 18, 2015 letter reporting that the parties had settled a case in which BNYM sought repurchase of a number of allegedly defective loans as trustee for the GE-WMC Mortgage Securities Trust 2006-1.  The terms of the settlement were not disclosed.  Endorsed Letter.

In a ruling last month, Judge Cote had significantly reduced the potential damages in the case by holding that the trustee’s potential damages were limited to the repurchase price defined in the relevant agreements, which included the stated principal balance of “zero” for all liquidated loans.