Litigation

New York Appellate Court Allows Repurchase Claims Against Nomura To Proceed

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On October 13, 2015, the First Department of the Appellate Division of the Supreme Court for the State of New York decided an appeal in four actions brought by HSBC Bank as Trustee on behalf of four RMBS trusts against Nomura Credit & Capital, Inc. and related entities.  We previously covered Justice Friedman’s trial court decision in one of the actions here. In a decision written by Justice John W. Sweeney, the First Department held that the trusts can proceed with claims relating to loans that were not the subject of pre-suit breach notices or where Nomura was not given the contractual 90-days-notice of the alleged breaches before suit was filed.  The First Department distinguished its decision in Ace (previously covered here) on the basis that in Ace there were no timely claims.  The court reasoned that the untimely claims here would have related back in an amended pleading to timely claims in the complaint, and cited the trusts’ allegations that Nomura independently discovered the alleged breaches.

Affirming Justice Friedman’s decision, the court also held that the trusts are not limited by the contractual “sole remedy” of repurchase of loans breaching representations and warranties if the loans have been liquidated or foreclosed.  Instead, the trusts may seek money damages for breaching loans where specific performance of the repurchase sole remedy is impossible.  The court further affirmed the lower court’s decision that the trusts’ claims for breach of the implied covenant of good faith and fair dealing were duplicative of their breach of contract claims and affirmed the dismissal of the trusts’ claims for rescission or rescissory damages.

The court reversed Justice Friedman’s decision insofar as it dismissed the trusts’ claims that Nomura breached its representation that the deal documents did not contain any untrue statements.  The court held that alleged breaches of that provision were not subject to the contract’s sole remedy of repurchase.  The court further held that the trusts’ claims for damages for the failure to repurchase were properly dismissed, but the lower court erred in dismissing claims for damages for Nomura’s failure to give notice of breaches that it allegedly discovered.  Decision.

RMBS Trustee Wins Partial Dismissal of Investor Claims

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On September 29, 2015, Judge Valerie Caproni of the United States District Court for the Southern District of New York partially granted RMBS trustee Bank of New York Mellon’s (“BNYM”) motion to dismiss claims brought by Phoenix Light SF Ltd., and certain other RMBS investors (together, the “Plaintiffs”).  Judge Caproni dismissed Plaintiffs’ breach of fiduciary duty claims as duplicative of Plaintiffs’ breach of contract claims, whose viability Judge Caproni also appeared to doubt in her decision, noting that “[t]he low bar at the motion to dismiss stage salvage[d] Plaintiffs’ claims for now.”  Judge Caproni explained that to survive summary judgment, Plaintiffs would need to demonstrate that BNYM possessed actual knowledge of events of default on a loan-by-loan basis.  Judge Caproni denied BNYM’s motion to dismiss Plaintiffs’ negligence, gross negligence, and negligent misrepresentation claims.  Order.

RMBS Contract Claims Against Trustee Dismissed in Part

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On October 2, 2015, Justice Saliann Scarpulla of the New York Supreme Court issued an Opinion and Order partially granting Bank of New York Mellon’s (“BNYM”) Motion to Dismiss an RMBS action brought by Commerce Bank and other RMBS investors (together, the “Plaintiffs”).  Justice Scarpulla dismissed Plaintiffs’ breach of fiduciary duty claim as well as Plaintiffs’ breach of contract claim to the extent it relies on allegations that BNYM failed to provide Plaintiffs with notice of events of default under the transaction documents.  Justice Scarpulla stated that a Trustee’s obligation to notify certificateholders of an event of default under the relevant Pooling and Servicing Agreements arises only upon the receipt of written notice that a default has occurred, and that Plaintiffs failed to allege that BNYM had received such written notice.  Justice Scarpulla permitted claims that BNYM had failed to notify certificateholders of breaches of representations and warranties to proceed, but noted that Plaintiffs will ultimately be required to prove the Trustees’ actual discovery of those breaches on a loan-by-loan basis.  Justice Scarpulla also permitted breach of contract claims based on BNYM’s alleged failure to properly review and examine the loan files and accurately certify what it had received, as well as claims alleging negligence by BNYM.  Order.

Court Denies CIFG’s Attempt to Refile CDO Suit Against J.P. Morgan

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On September 23, Justice Marcy S. Friedman of the New York Supreme Court for New York County denied CIFG’s motion to amend its complaint against J.P. Morgan in a case the Court previously dismissed in June.  CIFG had originally brought suit claiming two causes of action against J.P. Morgan: 1) that J.P. Morgan had made material misrepresentations to induce CIFG to issue insurance on credit default swaps guaranteeing two collateralized debt obligations, and 2) for common-law fraud.  In its June dismissal order, the Court dismissed the first cause of action but allowed CIFG to attempt to replead its fraud claim.  CIFG’s proposed amended complaint included two causes of action, the first of which the Court held was identical in all material respects to the previously dismissed first cause of action.  As to the proposed second cause of action for common law fraud, the Court noted that while CIFG had added additional allegations to attempt plead the action with particularly, it had failed to address whether a common law fraud claim could be maintained based on alleged misrepresentations made by non-insured Bear Stearns about the collateral underlying the CDOs.  The Court granted CIFG leave to amend to attempt to cure this issue.  Order.

WMC Mortgage and GE Mortgage Holding Settle RMBS Repurchase Case

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On September 21, 2015, Judge Denise L. Cote of the United States District Court for the Southern District of New York endorsed Bank of New York Mellon’s (“BNYM”) September 18, 2015 letter reporting that the parties had settled a case in which BNYM sought repurchase of a number of allegedly defective loans as trustee for the GE-WMC Mortgage Securities Trust 2006-1.  The terms of the settlement were not disclosed.  Endorsed Letter.

In a ruling last month, Judge Cote had significantly reduced the potential damages in the case by holding that the trustee’s potential damages were limited to the repurchase price defined in the relevant agreements, which included the stated principal balance of “zero” for all liquidated loans.

$600 Million RMBS Repurchase Suit Against J.P. Morgan Dismissed

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On September 18, 2015, Justice Shirley Kornreich of the Supreme Court of the State of New York dismissed a $600 million suit brought by Bank of New York Mellon, as securitization trustee (“BNYM”), against WLM Mortgage, LLC, J.P. Morgan Acquisition Corporation, and J.P. Morgan Chase Bank, N.A.  BNYM brought the action as trustee for the J.P. Morgan Mortgage Acquisition Trust, Series 2006-WMC2, alleging that the defendants breached contractual representations and warranties as to 1,593 or more of the mortgage loans in the trust.  The defendants sought dismissal on the ground that BNYM’s put-back claims were time barred under the New York Court of Appeals’ decision in ACE v. DB Structured Products.  Justice Kornreich held that under ACE, BNYM’s claims were untimely because BNYM did not bring them within six years of the closing date of the transaction.  The court further held that the trustee did not have a separate claim for the defendants’ alleged failure to notify the trustee of breaches of representations and warranties.  Decision & Order.

Claims Dismissed From RMBS Class Action Against Citibank

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On September 8, 2015, the Southern District of New York dismissed, for lack of jurisdiction, a large portion of claims from a derivative class action alleging that Citibank NA, as trustee of 27 trusts, had breached its contractual, statutory, and common law duties in connection with $17 billion of pooled loans.  Plaintiffs invoked federal jurisdiction based on the Trust Indenture Act of 1939 (“TIA”) and asked the court to take supplemental jurisdiction over the accompanying state law claims.  Plaintiffs asserted TIA claims in connection with just 3 of the 27 trusts.  The court held that those claims could proceed, denying Citibank’s argument that the TIA does not provide a private right of action.  However, the court declined to exercise supplemental jurisdiction over state law claims relating to the other 24 trusts.  The court concluded that supplemental jurisdiction was permissible, but that it should nonetheless decline such jurisdictions because the claims as to each trust—which must be litigated loan-by-loan and trust-by-trust—were not sufficiently related.  Order.

Bank of America and Midland Settle RMBS Litigation

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On September 8, 2015, Bank of America NA and Midland Loan Services settled Bank of America’s lawsuit seeking a declaratory judgment that it did not breach the representations and warranties in connection with a CMBS securitization and, consequently, did not need to repurchase loans from the securitization.  As a result of the settlement, the lawsuit was dismissed with prejudice.  The terms of the settlement were not disclosed.  Dismissal Order.

Goldman Sachs Wins Summary Judgment In CDO Class Action

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On September 8, 2015, the Southern District of New York granted summary judgment in favor of Goldman Sachs Group, Inc. in a class action lawsuit concerning the sale of two collateralized debt obligations.  The court had previously dismissed plaintiffs’ fraud claims on all grounds but one—whether Goldman was aware of “singularly prohibitive risks” associated with the CDOs but failed to completely and accurately disclose those risks.  At summary judgment, it held that plaintiffs had not shown sufficient evidence to prove Goldman’s knowledge of such risks.  In particular, the court rejected plaintiffs’ reliance on inflammatory emails, which merely “show, at most, that some Goldman employees, based on the same information available to Plaintiffs, were bearish on the RMBS market.”  The court also found insufficient evidence that Goldman knew the CDOs would perform poorly and intended for them to perform poorly.  Order.

Potential Damages in RMBS Suit Against WMC Mortgage Drastically Reduced

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On August 18, 2015, Judge Denise Cote of the federal district court for the Southern District of New York addressed the appropriate measure of potential damages in an action by Bank of New York Mellon (BoNY), as RMBS trustee, against WMC Mortgage, LLC and GE Mortgage Holding, L.L.C. In that action, BoNY seeks repurchase of a number of allegedly defective loans as trustee for the GE-WMC Mortgage Securities Trust 2006-1.  Judge Cote previously held that where repurchase is unavailable, the trustee may be entitled to damages.  On defendants’ motion to exclude the testimony of the trustee’s damages expert, the court held that the trustee’s potential damages are limited to the repurchase price for liquidated loans, as defined in the relevant agreements.  One component of that measure is the stated principal balance of the loan; the agreements define the stated principal balance of liquidated loans as “zero.”  The trustee’s damages expert had not used this measure.  As a result, Judge Cote struck the report of the trustee’s damages expert.  The decision reduces potential damages on liquidated loans from $379 million (as calculated by the trustee’s expert) to $13.3 million (the maximum calculated by the defense expert).  Order.