RMBS

Appellate Court Affirms Dismissal of Certain Claims Against Trustee

On July 5, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York affirmed the partial grant of Bank of New York Mellon’s (“BNY”) motion to dismiss certain claims brought by RMBS investors arising from BNY’s alleged failure to perform its duties as RMBS trustee. While the court affirmed partial denial of BNY’s motion to dismiss the negligence claims as duplicative of the contract claims, it also affirmed that portion of the trial court’s order granting BNY’s motion to dismiss portions of those negligence claims to the extent they are predicated on the incorrect assumption that a trustee owes a duty to (i) monitor other PSA counterparties’ performance of basic non-ministerial tasks; and/or (ii) put its “nose to the source” to uncover improper counterparty conduct.  The First Department also held that the trial court should have dismissed contract claims against BNY alleging a breach of the alleged duty to notify PSA counterparties of loan seller representation and warranty breaches, as they had not been sufficiently alleged.  It also affirmed dismissal of all breach of fiduciary duty claims. Decision.

New York Appellate Court Holds Repurchase Demand Analysis Is Not Protected Work Product

On June 23, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York decided an appeal in an action brought by Bank of New York Mellon, as RMBS Trustee, against WMC Mortgage and JP Morgan. In its decision, the Court held that originator WMC’s repurchase demand analysis is not protected work product because it was not primarily prepared in anticipation of litigation and was a regular part of the loan originator’s business. The court therefore affirmed the decision of the trial court, Justice Shirley Werner Kornreich, ordering WMC Mortgage to produce the repurchase demand analysis. Order.

Rating Agency Developments

On June 21, 2016, Fitch issued a report titled: Rating Non-Financial Corporates Above the Country Ceiling. Press release.

On June 20, 2016, Fitch issued a report titled: Canadian RMBS Loan Loss Model Criteria. Press release.

On June 17, 2016, Fitch issued a report titled: U.S. RMBS Surveillance and Re-REMIC Criteria. Press release.

On June 16, 2016, Fitch issued a report titled: Criteria for Rating U.S. Timeshare Loan ABS. Press release.

On June 16, 2016, Fitch issued a report titled: Criteria for Rating Caps and Limitations in Global Structured Finance Transactions. Press release.

RMBS Suit to Proceed Against Morgan Stanley

On June 16, 2016, Justice Marcy S. Friedman of the Supreme Court of the State of New York largely denied Morgan Stanley’s motion to dismiss a breach of contract action brought by RMBS trustee Wilmington Trust Company. The court dismissed the trustee’s claim for indemnification of attorney’s fees, finding that the contracts did not unmistakably contemplate such indemnification. The court denied without prejudice defendant’s motion to dismiss the trustee’s claim as to non-Morgan Stanley loans in the offering at issue, as the parties did not have the opportunity to address the import of recent RMBS precedent or whether the repurchase demand in this case included any such loans. The court will receive further briefing on the import of a 2015 intermediate appellate court decision, previously covered here, on plaintiff’s claim that the bank improperly failed to notify the trustee of breaches Morgan Stanley discovered. The court denied the remainder of Morgan Stanley’s motion to dismiss. Following her prior decisions (such as her decision in ACE on remand from the Court of Appeals, covered here), Justice Friedman held that the trustee’s claims for breach of contract were timely filed within the statute of limitations, and that its claim for damages was not precluded by the repurchase protocol. Order.

New York Court Orders BlackRock to Seek Discovery from Former Certificateholders and Produce That Information in Suit Against RMBS Trustee

On June 3, 2016, Judge Sarah Netburn of the U.S. District Court for the Southern District of New York ordered BlackRock, an RMBS certificateholder that has sued the RMBS trustee, HSBC, to identify and serve document subpoenas on the former owners of BlackRock’s RMBS certificates. BlackRock’s lawsuit against HSBC (which we previously discussed here) asserts several causes of action arising out of HSBC’s alleged failure to fulfill its contractual, statutory, and fiduciary obligations as Trustee. HSBC argued in its motion to compel production that the requested documents from the former owners are directly relevant to proving HSBC’s affirmative defenses and showing that BlackRock lacks standing to assert the litigation rights of the prior certificateholders.  The Court agreed, holding that BlackRock cannot assert the litigation rights of the prior certificateholders without assuming the corresponding discovery obligation.  Order.

FDIC Settles RMBS Litigation for $190 Million with U.S. Financial Institutions

On May 26, 2016, the FDIC reached a $190 million settlement of RMBS claims against eight financial institutions, including Barclays Capital Inc.; Deutsche Bank Securities Inc.; Goldman, Sachs & Co; RBS Securities Inc.; and UBS Securities LLC. The settlement resolves six separate suits brought in 2011 and 2012 in California and Alabama alleging misrepresentations within the defendant underwriters’ RMBS offering documents.  The FDIC, as a receiver, will distribute the settlement funds among five failed bank receiverships.  FDIC Settlement Agreement.

Tennessee Chancery Court Denies Motion to Dismiss $164 Million RMBS Suit Brought by Tennessee Pension Fund

On May 24, 2016, Chancellor Carol L. McCoy of the Chancery Court for Davidson County, Tennessee, declined to dismiss claims brought by the Tennessee Consolidated Retirement System (“TCRS”) against several large financial institutions related to $164 million in alleged losses on mortgage-backed securities.  The banks argued that the case was barred by the three-year statute of limitation for common law fraud claims in Tennessee and the two-year limit for claims under the Tennessee Securities Act.  Invoking the doctrine of nullum tempus occurit regni (“no time runs against the king”), however, the court held that limitations periods do not apply to the state or its political arms, such as TCRS.  The court also held that TCRS adequately alleged the elements of its fraud, constructive fraud, negligent misrepresentation, and Tennessee Securities Act claims. Order.

HSBC Sues Merrill Lynch and Bank of America for $420 Million Relating to RMBS Deal

On May 24, 2016, HSBC Bank USA, N.A., in its capacity as Trustee of Merrill Lynch Alternative Note Asset Trust, Series 2007-0AR5 (“the Trust”), served a summons with notice on Merrill Lynch Mortgage Lending, Inc. (“Merrill”), Countrywide Home Loans, Inc. (“Countrywide”), and Bank of America, N.A. (“BofA”), in their respective capacities as sponsor, originator, and servicer of the Trust, alleging that the three Defendants discovered that mortgage loans securitized in the Trust breached certain representations and warranties and failed to notify the Trustee in accord with their contractual obligations.  Specifically, HSBC alleges that Merrill, Countrywide, and BofA discovered the breaches through (i) the performance of their respective roles as issuer, originator, and servicer; and (ii) through their participation in multiple government investigations related to the origination, securitization, and servicing or mortgage loans.  The summons with notice seeks $420 million in damages. Summons with Notice.

Rating Agency Developments

On May 18, 2016, Fitch issued a report entitled: Fitch: NSFR Rule Could Constrain Trust Banks’ Liquidity Position. Report.

On May 16, 2016, Fitch issued a report entitled: Fitch: Confidence in US Marketplace Lending ABS Takes a Hit. Report.

On May 12, 2016, Fitch issued a report entitled: Fitch Updates U.S. RMBS Seasoned and Re-Performing Loan Criteria. Report.

On May 12, 2016, Fitch issued a report entitled: Fitch Updates U.S. RMBS Loan Loss Model Criteria. Report.

On May 12, 2016, Fitch issued a report entitled: Fitch Publishes Revised EETC Criteria: Allows for Ratings in the ‘AA’ Category. Report.

Federal Appellate Court Reinstates RMBS Action Against Moody’s

On May 2, 2016, the First Circuit Court of Appeals reinstated a $5.9B suit brought by the Federal Home Loan Bank of Boston (“FHLBB”), alleging that Moody’s Corp and Moody’s Investor’s Service, Inc. (together, “Moody’s”) knowingly provided false ratings on certain Residential Mortgage-Backed Securities purchased by FHLBB. The case had been dismissed for lack of personal jurisdiction by Judge George A. O’Toole Jr. of the District of Massachusetts, who also held that the court could not transfer the case to another federal court where jurisdiction would be proper because 28 U.S.C. §1631 only permitted the transfer of cases dismissed for lack of subject matter jurisdiction, rather than personal jurisdiction.

The First Circuit vacated that decision, concluding that the plain language of 28 U.S.C. §1631, the statute’s legislative history, and case law from other Circuits all weighed in favor of a ruling that the statute also permits transfer where the claims at issue were dismissed on either personal or subject matter jurisdiction grounds. Accordingly, the First Circuit remanded the case to the district court to determine whether transfer was “in the interests of justice,” in accord with the statutory requirement for transfer under 28 U.S.C. §1631.  Decision.