On July 25, 2016, Justice Marcy Friedman of the New York Supreme Court dismissed a $619 million suit brought by U.S. Bank in its capacity as Trustee of an RMBS trust against the originator of the loans, Equifirst, Barclays’ now-defunct mortgage originator. The Federal Housing Finance Agency (“FHFA”), as conservator of an RMBS certificateholder, initially filed the summons with notice on February 28, 2013, the six-year anniversary of the securitization’s closing date. U.S. Bank waited another six months before filing the complaint on October 28, 2013. U.S. Bank brought claims for breach of contract for Equifirst’s alleged misrepresentations regarding the quality of the underlying mortgage loans, and breach of the implied covenant of good faith and fair dealing arising from an alleged failure to notify contractual counterparties of Equifirst’s alleged breaches. Relying on a recent intermediate appellate decision and her orders in similar cases, Justice Friedman dismissed those claims holding that FHFA, as a certificateholder, lacked standing to commence the action, and that the Trustee’s complaint, which was filed after the passage of the statute of limitations, did not relate back to FHFA’s summons with notice. The court granted U.S. Bank leave to replead its failure to notify claims. Order.
Posts by: Amelia Hochman
Summary Judgment Denied in Monoline Insurer Lawsuit Against J.P. Morgan
On June 6, 2016, Justice Alan D. Scheinkman of the New York Supreme Court for Westchester County denied J.P. Morgan’s motion for summary judgment on MBIA’s fraudulent concealment claim. The court had previously granted summary judgment in favor of J.P. Morgan on MBIA’s fraud claim, but permitted MBIA to amend its complaint to add a fraudulent concealment claim that J.P. Morgan failed to disclose complete and accurate third-party due diligence results regarding the collateral underlying the securitization. First, Scheinkman rejected J.P. Morgan’s argument that it did not owe MBIA an affirmative duty to disclose the results of the due diligence review. The Court held that the bid letter between J.P. Morgan and MBIA evinced a contractual relationship between the parties, and that even in the absence of such a relationship, J.P. Morgan was acting as an agent for the deal’s sponsor, who was obligated to share the due diligence results with MBIA. Second, Scheinkman held that issues of fact precluded summary judgment on actual reliance, because withholding, disguising the significance, and delivering an altered version of due diligence results may have thwarted MBIA’s ability to protect itself. Last, the Court held that whether MBIA justifiably relied on J.P. Morgan’s failure to disclose the due diligence results is a question for the jury. Decision & 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.
Bank of New York Mellon’s Motion to Dismiss Denied in Part in Trustee RMBS Suit by Royal Park Investments
On March 2, Judge Gregory H. Woods of the United States District Court for the Southern District of New York issued an Opinion and Order denying in part and granting in part the Bank of New York Mellon’s (“BNYM”) motion to dismiss an action brought by Royal Park Investments SA/NV (“Royal Park”) claiming damages of $1.12 billion arising from failures by BNYM, in its capacity as trustee, to protect the interests of investors in certain RMBS trusts. Judge Woods denied arguments by BNYM that Royal Park had failed to plausibly allege BNYM’s discovery and knowledge of (i) breaches of representations and warranties in securitized loans; and (ii) events of defaults committed by servicers of the relevant trusts. Judge Woods did, however, dismiss Royal Park’s claims against the bank for breach of trust, a violation of section 315(a) of the Trust Indenture Act, and the Streit Act. Opinion and Order.
Claims Against RMBS Trustee U.S. Bank Partially Dismissed
On February 26, Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York denied U.S. Bank N.A.’s (“U.S. Bank”) motion to dismiss claims for breach of contract and violation of the Trust Indenture Act (“TIA”) with regard to the 27 trusts that remain before the Court after it previously declined to exercise supplemental jurisdiction over claims arising from an additional 810 trusts. Orrick covered that decision here. The Court dismissed plaintiffs’ claims for breach of fiduciary duty and extra-contractual duties under the economic loss doctrine, but did not dismiss plaintiffs’ TIA-based claim, holding that the statute provides plaintiffs with a private right of action. Judge Forrest also held that the Indentures’ no-action clauses have no effect in suits against RMBS trustees, rejecting U.S. Bank’s attempt to dismiss all claims against it on the basis of plaintiffs’ non-compliance with those provisions. Opinion and Order.
Goldman Sachs’s Motion to Dismiss Mostly Denied in $73M RMBS Suit
On June 29, 2015, Justice Eileen Bransten of New York Supreme Court granted Goldman Sachs Group Inc.’s (“Goldman”) motion to dismiss a cause of action for negligent misrepresentation but denied Goldman’s motion to dismiss causes of action for fraud. IKB Deutche Industriebank AG (“IKB”) had sued Goldman over losses that IKB suffered after it purchased $73.2 million in RMBS. IKB filed the suit in September 2012, alleging that Goldman fraudulently induced IKB to purchase the RMBS by providing offering materials for the RMBS that misrepresented or omitted details about underwriting standards, loan-to-value ratios, occupancy rates of the mortgaged properties, and credit ratings. Goldman sought dismissal on the grounds that IKB’s claims were time-barred, that IKB lacked standing to sue, and that IKB’s allegations failed to state a claim.
Justice Bransten found that it would be premature to determine whether IKB was a proper party before conducting discovery. She rejected Goldman’s argument that IKB filed the case after the three-year German statute of limitations for fraud had run, finding that the claims accrued in Luxembourg, not Germany. Accordingly, Justice Bransten determined that New York’s six-year statute of limitations—not Germany’s—applied and that Goldman had not argued that the claims were time-barred under that longer period. Justice Bransten dismissed IKB’s claim for negligent misrepresentation, finding that IKB’s allegations did not describe the necessary special relationship between the parties, but rather an ordinary arms-length relationship. Finally, Justice Bransten held that IKB had sufficiently pleaded its fraud claims. Order.
U.S. Bank Sues Countrywide for $178M in RMBS Losses
On June 25, 2015, U.S. Bank, in its capacity as Trustee for the LXS 2007-7N Trust, filed a summons with notice in New York Supreme Court against Countrywide Home Loans (“CHL”), Countrywide Home Loans Servicing LP (“Countrywide Servicing”), and others, seeking to recover $178 million in losses over alleged breaches of representations and warranties made about the sold to the Trust. U.S. Bank alleges that, despite receiving repurchase demands in connection with allegedly breaching loans, CHL failed to cure or repurchase the loans, or indemnify the Trust for the resultant losses. U.S. Bank also claims that Countrywide Servicing failed to notify the Trustee when it discovered breaches, and failed to force CHL to repurchase or substitute such breaching loans. U.S. Bank seeks specific performance, declaratory relief, damages, indemnification, and prejudgment interest. Summons with Notice.
US Bank and Bank of America Prevail on Motions to Dismiss
On May 18, 2015, Judge Katherine Forrest of the United States District Court for the Southern District of New York dismissed claims in two suits brought by private investors and the National Credit Union Association, respectively, against U.S. Bank and Bank of America in their capacity as trustees for RMBS trusts. The lawsuits asserted several causes of action arising out of the trustees’ alleged failure to fulfill their contractual, statutory, and fiduciary obligations to hundreds of RMBS trusts.
In the first case, brought by a number of institutional investors led by BlackRock, Judge Forrest dismissed claims brought under the federal Trust Indenture Act as to 810 of the 843 trusts at issue because they were governed by Pooling and Servicing Agreements (“PSAs”), rather than indentures, and the TIA does not apply to PSA trusts. She declined to exercise supplemental jurisdiction over the state law claims asserted in connection with the 810 PSA Trusts, holding that allowing 33 indenture trusts to pull in another 810 would allow “a federal tail to wag a state dog.” For the remaining 33 indenture trusts, Judge Forrest dismissed the claims because the plaintiffs failed to make a demand on the proper party (the “Owner Trustee”) or allege any that such demand would have been futile. Judge Forrest granted plaintiffs leave to amend as to the indenture trusts. Order.
In the second case, brought by NCUA, Judge Forrest dismissed claims as to 74 out of the 82 Trusts at issue on standing grounds. Judge Forrest held that the Amended Complaint failed to demonstrate that NCUA retained any right to sue when it re-securitized its certificates in the 74 trusts as part of the NCUA Guaranteed Note Program. She rejected NCUA’s statutory standing argument, holding that 12 U.S.C. § 1787 does not authorize NCUA to sue on behalf of separate statutory trusts created to re-securitize the CCUs’ assets. Additionally, Judge Forrest held that the PSAs did not allow third party beneficiary status to extend beyond direct certificateholders, meaning that NCUA no longer had standing once it ceased being a certificateholder following the re-securitization. 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.