Litigation

U.S. Bank and UBS Reach $850M Settlement in RMBS Put-Back Action

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On July 25, 2018, U.S. Bank NA and UBS AG announced they had reached an $850 million settlement in connection with a dispute over loans in three residential mortgage-backed securities trusts. U.S. Bank filed suit against UBS in the Southern District of New York in 2012 seeking $2 billion for UBS’s alleged breach of representations and warranties about those loans. Following a three-week bench trial in 2016, U.S. District Judge P. Kevin Castel held that UBS had breached representations and warranties in certain respects and appointed special master Barbara S. Jones to review breach allegations concerning thousands of individual loans and issue a recommendation regarding liability and damages as to each loan. Order.

New York Court of Appeals Requires Ambac to Follow Repurchase Protocol and Prove Elements of Fraud Claim

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On June 27, 2018, the New York Court of Appeals ruled that Ambac Assurance Corporation (“Ambac“) could not recover the full $2.2 billion in damages it sought in the form of claim payouts on $25 billion worth of securitized mortgages from Countrywide Home Loans, Inc. (“Countrywide“). Ambac, a monoline financial guaranty insurer, had agreed to insure payments of principal and interest owed to holders of 17 RMBS securitizations that had been sponsored by Countrywide. Ambac sued Countrywide, alleging claims for fraudulent inducement and breach of contractual representations and warranties. At summary judgment, Ambac contended that it was not required to prove justifiable reliance or loss causation for the fraudulent inducement claim, and that the contract’s repurchase protocol—specified to be the sole remedy for breaches of representations and warranties—did not govern its contractual claims. READ MORE →

Merrill Lynch Settles SEC RMBS Fraud Claims for $16M

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On June 12, 2018, the United States Securities and Exchange Commission (“SEC“) issued an Order instituting administrative proceedings, making findings, and imposing remedial sanctions against Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch“), a subsidiary of Bank of America Corporation, pursuant to Section 15(b) of the Securities Exchange Act of 1934. The SEC alleged that personnel of Merrill Lynch, acting as broker-dealers engaged in secondary market trading of non-agency RMBS, made false or misleading statements to customers between June 2009 and December 2012 that led customers to accept less or pay more for securities than they otherwise might have accepted or paid.  Merrill Lynch agreed to settle the claims for approximately $16 million without admitting or denying the allegations. Order.

Monoline Insurer Sues Trustee Over Settlement Figure in RMBS Repurchase Action

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On June 8, 2018, monoline insurer Ambac Assurance Corporation (“Ambac“) filed a complaint in the United States District Court for the Southern District of New York against U.S. Bank National Association (“U.S. Bank“), trustee of the Harborview Mortgage Loan Trust 2005-10 (the “Trust“). The complaint alleges that U.S. Bank breached certain contractual and common law duties when it agreed to a proposed $94 million settlement of an ongoing RMBS repurchase action in New York state court against Bank of America, N.A. and certain affiliates, as successors to Countrywide Home Loans, Inc. (the “Countrywide Action“). Among other things, Ambac alleges that U.S. Bank was required to observe heightened duties of care when an Event of Default occurred under the governing PSA, and that U.S. Bank breached those duties when it agreed to settle the Countrywide Action for approximately 28% of the amount that its expert opined it was entitled to recover. Ambac further alleges that U.S. Bank breached the PSA by incorrectly accounting for recoveries received by the Trust. The complaint asserts two claims for declaratory judgments, two claims for breach of contract, and one claim for breach of fiduciary duty.  Complaint.

RMBS Trustees Defeat Motion for Class Certification in California State Court

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On May 30, 2018, Judge Ronald L. Bauer of the Superior Court of the State of California, County of Orange denied investor Plaintiffs’ (led by BlackRock Balanced Capital Portfolio (FI)) Motion for Class Certification and Appointment of Class Representative and Class Counsel in an action alleging breach of contract against RMBS Trustees Deutsche Bank National Trust Company and Deutsche Bank Trust Company Americas. Ruling from the bench, Judge Bauer based his decision on the difficulties Plaintiffs would face in “presenting evidence of causation and damages” in a class action without making an individualized showing. He further noted that the analysis would be “intensely factually oriented” and would require reviewing “an enormous number of detailed transactions.” Judge Bauer also referred to the issues of standing, statute of limitations, and choice of law in the case as “impossible” to pursue in a class action. Order.

Delaware Federal Court Grants RMBS Trustee’s Motion to Dismiss

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On May 14, 2018, Judge John E. Jones III of the United States District Court for the District of Delaware granted the Trustee-Defendant Wilmington Trust Company’s (“Wilmington Trust”) motion to dismiss in IKB International, S.A. v. Wilmington Trust Co. Plaintiffs IKB International, S.A. (“IKB S.A.“) and IKB Deutsche Industriebank, A.G. (“IKB A.G.“) are holders of certain securities issued by various RMBS trusts, and they sued Wilmington Trust, as Owner Trustee of the various trusts, for breach of contract and the implied covenant of good faith and fair dealing. The Court first dismissed the claims asserted by IKB S.A., holding that IKB S.A. lacked standing to assert claims under the governing agreements because it transferred all of its claims to third parties. The Court next held that IKB A.G. failed to adequately state its claims. The Court found that Wilmington Trust’s obligations were limited by the terms of the governing agreements, and thus had no extra-contractual duties to ensure that the Indenture Trustees and Sellers complied with their obligations regarding the mortgage loan files, notify any other parties of breaches of Sellers’ representations and warranties, or address uncured servicing defaults. The Court also rejected IKB A.G.’s claim that Wilmington Trust breached the implied covenant of good faith and fair dealing as duplicative of the breach of contract claim. Memorandum & Order

New York Supreme Court Grants in Part and Denies in Part Cross Motions for Summary Judgment in RMBS Action

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On May 16, 2018, Justice Shirley W. Kornreich of the New York Supreme Court granted in part and denied in part the parties’ summary judgment motions in Merrill Lynch Mortgage Investors Trust Series 2006-RM4 v. Merrill Lynch Mortgage Lending, Inc. Defendants Merrill Lynch Mortgage Lending, Inc. (“Merrill“) and Bank of America National Association (“BANA“) and Plaintiff-Trustee U.S. Bank National Association (“Trustee“) cross-moved for partial summary judgment regarding the scope and enforceability of an allocation agreement between Merrill and BANA and certain provisions therein about the release of Merrill’s contractual liability to the Trustee (the “Release”). Justice Kornreich granted summary judgment for Defendants with respect to the Release language being unambiguous but denied summary judgment as to its enforceability. Justice Kornreich concluded that material questions of fact exist as to whether Merrill’s and BANA’s negotiation and execution of the Release was a true arm’s length transaction and whether the Release was unconscionable. Justice Kornreich also denied the Trustee’s motion for a ruling that Merrill provided a backstop to originator ResMAE Mortgage Corporation’s putback liability. The Court granted summary judgment to the Trustee regarding the meaning of certain sections of the mortgage loan purchase agreement, the existence of warranty breaches on certain loans, and Defendants’ causation defenses. In addition, Justice Kornreich granted the Trustee’s motion for leave to amend to add a “breach of trust” cause of action against BANA. Decision & Order

UBS Settles New York AG RMBS Claims for $230M

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On March 20, 2018, UBS entered into a $230 million settlement with the New York Attorney General to resolve allegations against UBS under New York’s Martin Act and Executive Law arising from the creation, packaging, structuring, underwriting, issuance, and sale of fifteen residential mortgage-backed securities sponsored by UBS in 2006 and 2007. The settlement agreement sets aside $189 million for New York homeowners and $41 million for the state, and an agreement by UBS to acknowledge certain facts relating to its alleged misconduct between 2006 and 2007. Settlement Agreement

Lehman Brothers to Pay $2.38 Billion in Connection with RMBS Claims

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On March 8, 2018, Judge Shelley C. Chapman of the United States Bankruptcy Court for the Southern District of New York issued a decision from the bench valuing RMBS breach of representation and warranty claims against now-defunct Lehman Brothers Holdings Inc. at approximately $2.38 billion. While the Trustees of the Lehman-issued RMBS at issue sought an $11.4 billion valuation, the Court concluded that such a figure was not a fair or reasonable estimate of the claims, particularly in light of the fact that over a dozen institutional investors agreed to the lower figure earlier in the proceedings. The Court also highlighted that the Trustees could not point to any comparable settlement to support their valuation.

SDNY Grants Trustees’ Motion to Dismiss Triaxx CDOs’ RMBS Claims with Prejudice

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On March 8, 2018, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York issued a Memorandum and Order granting Defendants’ motion to dismiss Plaintiffs’ Third Amended Complaint in its entirety in Triaxx Prime CDO 2006-1, Ltd., et al. v. The Bank of New York Mellon and U.S. Bank, N.A., and forbidding Plaintiffs from amending the Complaint any further. In dismissing Plaintiffs’ breach of contract claims for lack of standing, the Court found that Plaintiffs failed to remedy the deficiencies that previously resulted in dismissal of these same claims, covered here (“Triaxx I“), because Plaintiffs assigned away their right to sue under the contracts. Judge Buchwald also dismissed Plaintiffs’ negligence and breach of fiduciary duty claims because Plaintiffs failed to allege that Defendants owed them any duty of care or fiduciary duty. Additionally, the Court held that the fiduciary duty claims were an improper attempt to re-plead claims already dismissed as abandoned in Triaxx I, and in any event, the claims were barred by New York’s economic loss doctrine. Plaintiffs’ claim for equitable relief directing U.S. Bank to assign Plaintiffs the authority to sue was also dismissed as inappropriate and unsupported by law. [Memorandum and Order]