Justice Friedman of the New York Supreme Court Dismisses Two FHFA Repurchase Actions

On April 12, 2016, Justice Marcy Friedman of the New York Supreme Court granted motions to dismiss in two RMBS breach of contract actions filed by FHFA against Morgan Stanley ABS Capital I Inc. (“MSAC”) and Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”).  In the decisions, he Court dismissed the actions on similar grounds and granted the parties the opportunity to brief claims for failure to notify, in light of the October 13, 2015 First Department’s decision in Nomura Home Equity Loan Inc. Series 2006-FM2 et al. v. Nomura Credit & Capital Inc.

Like Justice Friedman’s ruling last month in ACE Securities v. DB Structured Products, Inc., which we previously covered, the Court held that both actions were not rendered untimely by the Plaintiff’s failure to file repurchase demand condition precedent prior to the filing of the summons with notice.  However, the FHFA, as certificate holder, lacked standing to commence the action and thus the Trustee’s cause of action was untimely because it did not relate back to the FHFA’s summons with notice.  In so holding, the Court rejected the Trustee’s arguments in both cases that the action was timely commenced, and also that the accrual clause in the RMBS extended the statute of limitations, and that the federal Housing and Economic Recovery Act of 2008, applicable to certain actions brought by FHFA, extended the limitations period.  Finally, the Court also held that no tolling agreements saved Trustee’s claims, and also dismissed the causes of action for breach of the implied covenant of good faith and fair dealing, breach of repurchase obligations, and anticipatory breach. Decision 116. Decision 134.

Morgan Stanley Agrees to Settlement with DOJ and NYAG Totaling $3.15 Billion

On February 11, the U.S. Department of Justice and the Attorney General of State of New York announced dual settlement agreements with Morgan Stanley providing for the payment of $3.2 billion. The settlements relate to Morgan Stanley’s marketing, underwriting, and issuance of RMBS from 2005-2007.

In its agreement with the U.S. Department of Justice, Morgan Stanley acknowledged that it had failed to disclose that certain securitized loans did not comply with applicable underwriting guidelines, and that Morgan Stanley’s due diligence practices did not conform to those described in presentations to RMBS investors. Morgan Stanley will pay $2.6 billion to the U.S. Department of Justice, $150 million to the State of New York, and an additional $400 million in relief directly to consumers.  Payment to the U.S. Department of Justice releases Morgan Stanley from any civil claim brought under FIRREA. DOJ Settlement Agreement. State of New York Settlement Agreement.

Morgan Stanley Settles RMBS Litigation with FDIC for $63M

On January 29, Morgan Stanley and the Federal Deposit Insurance Corporation agreed to settle five suits encompassing state and federal claims alleging that Morgan Stanley made misrepresentations in offering residential mortgage-backed securities to three now-defunct banks.  Morgan Stanley will pay $63 million to the FDIC, as receiver for Colonial Bank of Montgomery, Alabama, Security Savings Bank of Henderson, New York, and United Western Bank of Denver, Colorado.  Morgan Stanley denied all liability regarding the claims, and the settlement agreement specified that the parties settled in order to avoid further litigation.  The settlement was reached in coordination with the Department of Justice.  Settlement and Release Agreement.

New York Appellate Court Affirms Motion to Dismiss RMBS Complaint Against Morgan Stanley

On January 12, 2016, the Appellate Division, First Department, of the New York State Supreme Court affirmed a trial court order granting Morgan Stanley’s motion to dismiss claims brought by Dexia SA’s subsidiary FSA Asset Management LLC (“FSAM”). Plaintiffs asserted fraud claims against Defendants based on allegations that Defendants knowingly misrepresented the quality of more than $626 million in RMBS sold by Morgan Stanley to Plaintiffs in 2006 and 2007.  The Court’s ruling rested on a recent New York Court of Appeals decision holding that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note, and that there must be some language to evince that intent and transfer such rights.  Specifically, the Court found that FSAM’s agreement to deliver “all right, title and interest” in the RMBS to the Dexia Plaintiffs did not transfer the right to bring fraud claims.  The Court also concluded that FSAM could not establish damages because it received from the Dexia Plaintiffs the same amount it originally paid for the securities. Opinion.

Morgan Stanley Settles RMBS Suits With NCUA

On December 10, 2015, the National Credit Union Administration (“NCUA”) announced Morgan Stanley’s agreement to pay $225 million to settle litigation brought in New York and Kansas federal courts by NCUA as liquidating agent of U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union (the “Credit Unions”), all of which failed during the financial crisis.  In the settled claims – previously covered here and here – NCUA alleged that Morgan Stanley had materially misrepresented the collateral characteristics of RMBS it sold to the Credit Unions.  Morgan Stanley did not admit fault in the settlement. Press release.

Morgan Stanley Reaches Agreement to End DOJ Investigation into MBS Deals

On February 25, 2015, Morgan Stanley announced that it reached an agreement in principle with the U.S. Department of Justice, Civil Division, and the U.S. Attorney’s Office for the Northern District of Califoirnia, Civil Division (collectively, the “Civil Division”) to resolve claims that the Civil Division intended to bring against Morgan Stanley related to residential mortgage-backed securities.  As part of the settlement, Morgan Stanley agreed to pay the Civil Division $2.6 billion.  The exact nature of the resolved claims and additional terms of the settlement agreement were not specified.  8-K.

$95 Million Settlement Approved in Morgan Stanley RMBS Case

On December 18, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York approved a $95 million settlement to end a class action brought by RMBS investors against Morgan Stanley. The complaint alleged that Morgan Stanley made material misrepresentations regarding its appraisals and underwriting standards of the underlying mortgages in the marketing and sale of the RMBS. Judge Forrest also granted lead plaintiffs’ application for approximately $17.2 million in attorneys’ fees and expenses.  Final JudgmentOrder Granting Attorneys’ Fees and Expenses.

Trustee Representation and Warranty Suit against Morgan Stanley Will Proceed

On November 24, Justice Marcy Friedman of the Supreme Court for the State of New York partially dismissed U.S. Bank’s suit against sponsor Morgan Stanley Mortgage Capital and originator Greenpoint Mortgage Funding in connection with Morgan Stanley Mortgage Loan Trust 2007-2AX.   Referencing previous decisions made by the court in similar cases, Justice Friedman dismissed the trustee’s claim for rescissory damages under the sole remedy provisions in the relevant agreements. The court denied Morgan Stanley’s motion to dismiss based on standing, held the case was timely brought based on the closing date of the transaction, and declined to dismiss claims concerning liquidated loans or claims based on alleged independent discovery of breaches.  Decision.

Bank of America and Merrill Lynch Settle RMBS Lawsuit with FDIC

On November 17, Bank of America and Merrill Lynch settled securities claims brought by the FDIC related to RMBS sold to United Western Bank.  The FDIC, as the receiver for United Western Bank, alleged claims under the Securities Act of 1933 and the Colorado Securities Act against Bank of America, Merrill Lynch, Morgan Stanley, and RBS Securities related to $110 million in RMBS. The case against Morgan Stanley and RBS remains pending.  Stipulation.

Morgan Stanley Settles RMBS Charges with SEC

On July 24, the SEC announced that it had charged three Morgan Stanley entities with misleading investors with regard to two RMBS securitizations that the firms underwrote, sponsored and issued and that the firm agreed to settle the charges.  In the cease and desist order memorializing the settlement, the SEC alleged that Morgan Stanley misrepresented the current and historical delinquency status of the mortgage loans underlying the securitizations.  The SEC alleged that these misrepresentations violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  Morgan Stanley agreed to settle the charges without admitting or denying wrongdoing.  As part of the settlement, Morgan Stanley agreed to cease and desist further violations of §§ 17(a)(2)-(3) and to pay US$275 million in disgorgement, prejudgment interest and penalties, which will be placed in a Sarbanes-Oxley Fair Fund for distribution to investors.  Press Release.  Order.