Litigation

WMC Settles $1 Billion RMBS Suit During Pendency Of Appeal

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On August 9, 2016, RMBS trustee Deutsche Bank National Trust Company and WMC Mortgage, LLC, filed a joint motion to stay an appeal pending in the Court of Appeals for the Second Circuit. The parties requested the stay to allow them time to finalize the settlement of a lawsuit alleging that WMC misrepresented the quality of loans it sold in a $1 billion 2006 RMBS offering. The trial court had previously dismissed the lawsuit in 2015 (covered here) as time-barred under New York’s six-year statute of limitations. Joint Motion.

New York Court Dismisses Repurchase Claims Against UBS as Untimely

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On July 27, 2016, Justice Marcy Friedman of the New York Supreme Court for New York County, in accordance with other recent decisions (covered here and here) dismissed an action against UBS Real Estate Securities, Inc.  The case was initially brought by Federal Housing Finance Agency (“FHFA”), as conservator of an RMBS certificateholder.  It was then pursued by the trustee after the limitations period expired.  Because FHFA lacked standing to bring claims for breaches of loan-level representations and warranties, the Court held that the trustee’s claims do not “relate back” to the date of FHFA’s initial filing for statute of limitations purposes.  The court will permit briefing on the viability of claims for failure to notify the trustee of alleged breaches of representations and warranties.  Decision.

New York Court Dismisses Claims against EquiFirst and Barclays as Untimely

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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.

Appellate Court Affirms Dismissal of Certain Claims Against Trustee

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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

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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.

RMBS Suit to Proceed Against Morgan Stanley

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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.

Summary Judgment Denied in Monoline Insurer Lawsuit Against J.P. Morgan

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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

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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

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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

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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.