On August 18, 2015, Judge Denise Cote of the federal district court for the Southern District of New York addressed the appropriate measure of potential damages in an action by Bank of New York Mellon (BoNY), as RMBS trustee, against WMC Mortgage, LLC and GE Mortgage Holding, L.L.C. In that action, BoNY seeks repurchase of a number of allegedly defective loans as trustee for the GE-WMC Mortgage Securities Trust 2006-1. Judge Cote previously held that where repurchase is unavailable, the trustee may be entitled to damages. On defendants’ motion to exclude the testimony of the trustee’s damages expert, the court held that the trustee’s potential damages are limited to the repurchase price for liquidated loans, as defined in the relevant agreements. One component of that measure is the stated principal balance of the loan; the agreements define the stated principal balance of liquidated loans as “zero.” The trustee’s damages expert had not used this measure. As a result, Judge Cote struck the report of the trustee’s damages expert. The decision reduces potential damages on liquidated loans from $379 million (as calculated by the trustee’s expert) to $13.3 million (the maximum calculated by the defense expert). Order.
Judge Denise Cote
Judge Cote Grants Partial Summary Judgment in RMBS Suit
On July 10, 2015, Judge Denise Cote of the Southern District of New York granted partial summary judgment in favor of defendants WMC Mortgage LLC and GE Mortgage Holding LLC in an action filed by Trustee Bank of New York Mellon (“BoNY”) in connection with the sale of over $900 Million in RMBS. Judge Cote dismissed BoNY’s failure to repurchase claim against WMC, citing ACE v. DB Structured Products, which held that a failure to repurchase claim is not a separately enforceable right that gives rise to a separate breach of contract claim independent of a claim for breach of representations and warranties. Judge Cote also dismissed BoNY’s indemnification claims against both defendants as duplicative of BoNY’s claim for breach of the representations and warranties in the Mortgage Loan Purchase Agreements (“MLPAs”). BoNY’s primary claim, for breach of representations and warranties, was not a subject of the motion for partial summary judgment. Opinion and Order.
In a separate decision, also issued on July 10, Judge Cote denied the defendants’ request for a jury trial, holding that the Trustee’s remaining claims, for breaches of the MLPAs and Pooling and Servicing Agreement seek equitable remedies. Opinion and Order.
Court Denies Motion for Partial Summary Judgment in RMBS Repurchase Litigation
On May 22, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York denied defendants WMC Mortgage, LLC and GE Mortgage Holding, L.L.C.’s motion for partial summary judgment to dismiss certain loan repurchase claims asserted by Bank of NewYork Mellon in its capacity as RMBS Trustee for GE-WMC Mortgage Securities Trust 2006-I. Defendants argued that because certain loans in the trust had been foreclosed-upon and liquidated, the terms of the operative Pooling and Service Agreement barred recovery. Judge Cote rejected this argument. Following New York State courts construing prevailing New York law, Judge Cote held that money damages could be awarded in lieu of the PSA’s “sole remedy” of loan repurchase for a breaching loan where the granting of equitable relief appears to be impossible or impracticable. The court held that the liquidation of a breaching loan presents such a circumstance, and permitted Bank of New York Mellon’s claims as to foreclosed-upon loans to go forward. Order.
Court Enters $806 Million Judgment in FHFA v. Nomura
On May 16, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York entered a judgment requiring Nomura and RBS to buy back, at a total cost of $806 million, seven RMBS certificates sold to Fannie Mae and Freddie Mac from 2005 to 2007. The judgment stemmed from Judge Cote’s May 11, 2015 Opinion finding Nomura and RBS liable for violations of the Securities Act of 1933, the D.C. Securities Act, and the Virginia Securities Act. For those certificates for which FHFA prevailed under multiple statutes, FHFA was permitted to, and did, elect the maximum available remedies. Judge Cote also ordered that FHFA is entitled to post-judgment interest, reasonable attorneys’ fees, and costs. Judgment.
Nomura Found Liable in RMBS Trial
On May 11, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York found Nomura Holdings Inc. liable for inaccurately characterizing the mortgage loan collateral backing seven RMBS certificates it sold to Fannie Mae and Freddie Mac between 2005 and 2007. The suit against Nomura is the last that remains of sixteen lawsuits originally filed against by FHFA against RMBS issuers and sellers alleging violations of Sections 12(a)(2) and 15 of the 1933 Securities Act and state securities laws. Judge Cote’s decision followed a nearly 4-week bench trial that concluded on April 9, 2015.
In a 361-page decision, Judge Cote found, among other things, that 45% to 59% of the sample loans were materially defective insofar as they deviated from relevant underwriting guidelines, and that 27% of the sample loans were subject to inflated appraisals. Judge Cote treated this as strong circumstantial evidence that the appraisers did not believe in the credibility of their appraisals at the time that they were made. Additionally, Judge Cote found that inadequacies in credit ratings of the offered certificates were due to inaccurate loan tapes Nomura provided to the rating agencies. Finally, Judge Cote found that Nomura’s due diligence practices were insufficient, and rejected Nomura’s argument that market conditions, and not the misrepresentations, caused the losses alleged. Judge Cote did not specify the amount of damages and asked the parties to submit a proposed judgment by May 15, 2015. Opinion and Order.
Ally Financial’s Motions to Dismiss FHFA Claims Granted in Part
On December 19, 2012, Judge Denise Cote of the federal district court for the Southern District of New York decided motions to dismiss FHFA’s action against Ally Financial and underwriters of Residential Capital securities. The court dismissed claims of owner-occupancy and LTV-ratio fraud, Virginia Securities Act claims for certificates purchased before September 6, 2006, and Virginia Securities Act and Section 12(a)(2) claims with respect to certificates purchased from parties other than defendants. The court denied the remaining aspects of the motions to dismiss, including defendants’ requests that the court strike the demand for punitive damages, that the claims against Ally Financial Inc. be dismissed based on lack of control of the alleged primary violators, and for dismissal of the allegations against underwriter defendants that are not based on owner-occupancy and LTV fraud. Decision.
New York Federal Court Denies BofA’s Motion for Reconsideration in FHFA Case
On December 18, 2012, Judge Denise Cote of the United States District Court for the Southern District of New York denied Bank of America’s motion for reconsideration of the denial of its motion to dismiss claims brought by FHFA. Bank of America argued that FHFA could not bring claims under Sections 11 and 12(a)(2) with respect to ten certificates issued before a final prospectus was filed. The court held that under Section 11, FHFA may assert claims based on commitments to purchase that were made before the filing of a final prospectus. Judge Cote further held that Bank of America’s arguments under Section 12(a)(2) and Rule 159 involve factual issues that cannot be resolved at the motion to dismiss stage. Decision.