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.
Litigation
RMBS Claims Against Bank of New York Mellon Remain in Federal Court
On December 18, Judge William Pauley III of the U.S. District Court for the Southern District of New York denied Bank of New York Mellon’s motion to dismiss RMBS claims regarding fourteen trusts and one indenture trust for lack of subject matter jurisdiction. With respect to the indenture trust, the Court held that it did have original jurisdiction over that claim because the federal Trust Indenture Act (“TIA”) implicitly creates a private right of action. Judge Pauley exercised supplemental jurisdiction over plaintiffs’ Pooling and Servicing Agreement (“PSA”) claims for the remaining fourteen trusts. Citing Judge Shira Scheindlin’s March 31, 2015 decision in BlackRock v. HSBC, Judge Pauley held that both the TIA and PSA claims share a common nucleus of operative fact because all of the trusts at issue in the case were sponsored by Countrywide affiliates and serviced by Countrywide Home Loan Servicing. Judge Pauley dismissed any concern that allowing a single TIA claim to create jurisdiction over fourteen state law claims would “allow a federal tail to wag a state dog,” noting Countrywide’s imprint on every transaction as sponsor and servicer. Judge Pauley also highlighted that the case has been pending in the S.D.N.Y. for over four years and to create parallel proceedings would be both inconvenient and against the interests of judicial economy. Decision.
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.
New York Appellate Court Allows Repurchase Action Against J.P. Morgan To Proceed
On December 1, 2015, the First Department of the Appellate Division of the Supreme Court for the State of New York affirmed the denial of a motion to dismiss an action brought by Bank of New York Mellon Corporation against J.P. Morgan Mortgage Acquisition Corporation (“JPMMAC”) and WMC Mortgage LLC. The case is based on claims that JPMMAC breached its obligation to repurchase mortgage loans originated by WMC that violated certain representations and warranties. At issue in JPMMAC’s appeal was a representation and warranty that stated that “[w]ith respect to the period from [the] Whole Loan Sale Date to and including the Closing Date” the information in the Mortgage Loan Schedule (“MLS”) and the loan tape “is true, correct, and complete in all material respects.” JPMMAC argued that this representation and warranty was a “bring-down” provision that only provided against defects that arose after JPMMAC purchased the loans from WMC, and did not apply to alleged defects that existed at the time WMC sold the loans to JPMMAC. The Appellate Division rejected JPMMAC’s arguments, holding that the contractual language was not so limited. Decision.
Investors File Putative Class Action Against Citibank for Allegedly Failing to Comply with RMBS Trustee Duties
On November 24, 2015, a group of investors, led by Pacific Investment Management Co. (“PIMCO”), filed suit in the Supreme Court of the State of New York against Citibank, N.A., as trustee of 25 private-label RMBS Trusts. This state court complaint follows the Southern District of New York’s dismissal of a similar action for lack of jurisdiction over claims relating to the majority of trusts, as discussed here. The investors allege that Citibank knew the trusts contained loans that breached seller representations and warranties, and that Citibank failed to perform its contractual obligations to require the sellers to cure or repurchase the defective loans. Plaintiffs further allege that Citibank breached its duties to enforce the obligations of loan servicers by failing to redress alleged servicer misconduct. The complaint also alleges breaches of Citibank’s fiduciary duties and a violation of New York’s Streit Act. Complaint.
Second Circuit Upholds Dismissal of RMBS Lawsuit as Time-Barred
On November 16, the Second Circuit Court of Appeals affirmed the District Court’s dismissal of a lawsuit brought by Deutsche Bank National Trust Co. (acting as Trustee for RMBS Trust GSR 2007-OA1) against Quicken Loans, alleging that Quicken breached its obligation to repurchase mortgage loans that violated representations and warranties (“R&Ws”). The court held that because Quicken’s R&Ws only purported to guarantee characteristics of the loans at the time of sale, New York’s six year statute of limitations for breach of contract ran from that date, and had lapsed by the filing date of the action.
Following the New York Court of Appeals’ decision in ACE, the court rejected the Trustee’s argument that the accrual date for its claim was delayed by the repurchase procedures set forth in the transaction documents. The court also rejected the Trustee’s argument that it should be entitled to take advantage of a statutory extension to the applicable limitations period because the FHFA originally filed the lawsuit. It held that FHFA did not “bring” the claims at issue because it only filed the initial summons and notice in the case before abandoning prosecution of the action after realizing it was not the proper plaintiff. Finally, the court upheld the dismissal of the Trustee’s breach of the implied covenant of good faith and fair dealing as duplicative of the breach of contract claim. Order.
U.S. Supreme Court Denies S&P Investors’ Petition for Certiorari
On November 2, 2015, the United States Supreme Court denied investors’ petition for review of a Second Circuit decision affirming the dismissal of their class action against Standard & Poor’s Rating Services’ parent, McGraw-Hill Cos. Inc., and two of its corporate officers. In that case, the plaintiff pension fund had made claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933, alleging that S&P’s Ratings Services had intentionally made false and misleading statements to investors about the accuracy of its credit ratings for mortgage-backed securities. As we previously covered, the Second Circuit had affirmed a decision by Judge Sidney H. Stein of the Southern District of New York dismissing the suit and holding that S&P’s ratings were “mere commercial puffery” and could not form the basis for a securities fraud claim. In its certiorari request, Plaintiff argued that Judge Stein’s and the Second Circuit’s broad interpretation of “puffery” conflicted with Supreme Court precedent, Omnicare Inc. et al. v. Laborers District Council Construction Industry Pension Fund by holding that the alleged knowing falsity of S&P’s statements is irrelevant. Petition for Cert. Order List.
Goldman Sachs Settles CDO Class Action
On November 3, 2015, Goldman Sachs Group Inc. agreed to settle a lawsuit brought by a class of investors over Goldman’s sale of two collateralized debt obligations. The settlement agreement comes on the heels of a September 8, 2015 summary judgment decision for Goldman that we recently covered, which found that Plaintiffs had failed to show evidence that Goldman Sachs knew about the risks associated with the CDOs. The settlement amount was not disclosed. Settlement Announcement.
Summary Judgment Denied in Litigation Against Countrywide
On October 27, 2015, Justice Eileen Bransten of the New York Supreme Court issued a Decision and Order granting in part and denying in part cross motions for summary judgment brought by Countrywide and Ambac in an RMBS action brought by Ambac against Countrywide. Justice Bransten’s order addressed numerous issues, including the following.
Justice Bransten held that Insurance Law §3105 does not require Ambac to prove justifiable reliance on an alleged misrepresentation or that the misrepresentation proximately caused Ambac’s harm, but instead only that there was a misrepresentation and that it was material. Justice Bransten also concluded that the contractual repurchase remedy will not be the sole remedy available to Ambac if it can prove breaches of other sections of the Insurance & Indemnity Agreements at trial. Justice Bransten declined to dismiss on timeliness grounds Ambac’s claims with respect to loans that were not the subject of repurchase demands within six years of the relevant securitization’s closing, but held that Ambac would be required to prove at trial that Countrywide discovered those loans breached within the limitations period. Finally, Justice Bransten granted Countrywide’s motion with respect to Ambac’s claims for indemnification and reimbursement, holding that neither is available under the contracts at issue. Order on Summary Judgment.
In this same action, and on the same day, Justice Bransten also ruled on the parties’ motions to strike certain experts. She granted Ambac’s motion to strike portions of the testimony from a Countrywide expert report that addressed legal interpretations of New York Insurance Law on the grounds that the testimony invaded the province of the court. Justice Bransten denied Ambac’s motion to strike several other Countrywide experts and also denied Countrywide’s motion to strike two of Ambac’s experts. Order on Experts.
Barclays and Wachovia Settle with NCUA
On October 19, 2015, Barclays PLC and Wachovia Capital Markets LLC agreed to pay $325 million and $53 million, respectively, to settle claims brought by the National Credit Union Administration Board (NCUA), as liquidating agent of five credit unions, regarding residential mortgage backed securities purchased by those credit unions. NCUA alleged in the actions (filed in New York, California, and Kansas federal courts) that the characteristics of the RMBS and the underlying loans were misrepresented in the offering documents. NCUA Press Release on Barclays. NCUA Press Release on Wachovia. We previously covered two of NCUA’s actions against Wachovia here and here.