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.
JP Morgan
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.
Ambac and J.P. Morgan Reach $995M RMBS Settlement
On Monday, January 25, 2016, monoline insurer Ambac Assurance Corporation (“Ambac”) reached a $995 million settlement with J.P. Morgan, resolving two RMBS actions pending before Justice Ramos in the Supreme Court of the State of New York and Ambac’s objections to J.P. Morgan’s $4.5 billion global settlement with RMBS trustees. We previously covered Ambac’s actions against J.P. Morgan here, here and here. In those actions, Ambac brought claims against J.P. Morgan as the successor to EMC Mortgage and Bear Stearns for alleged misrepresentation of the quality the loans underlying eleven RMBS transactions. The settlement also resolves Ambac’s objections to J.P. Morgan’s 2014 settlement with RMBS trustees of claims for alleged breaches of representations and warranties and servicing deficiencies. The adequacy of that settlement is currently the subject of an Article 77 proceeding before Justice Friedman of the Supreme Court of the State of New York, which we previously covered here. Press Release. Stipulation of Withdrawal.
JP Morgan Sued by Investors Over $1.7B in Mortgage-Backed Securities
On August 21, a collection of investors including Phoenix Light SF Limited, Blue Heron Funding II Ltd. and Kleros Preferred Funding V PLC (the Investors) brought suit against a number of JP Morgan and Bear Stearns entities in New York State Supreme Court. The Investors allege that JP Morgan and Bear Stearns made misrepresentations in the offering documents for 47 RMBS concerning the underwriting guidelines used to originate the mortgage loans backing the RMBS, loan-to-value ratios, owner occupancy rates, the credit ratings assigned to the RMBS and the transfer of title of the underlying mortgage loans. The Investors allege that the defendants knew their representations were false by virtue of due diligence performed prior to the securitizations and by virtue of their decision to dispose of substantial subprime assets while simultaneously marketing the RMBS to the Investors as sound investments. The Investors assert causes of action for common law fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and rescission based upon mutual mistake. Complaint.
CIFG Sues JP Morgan Over Two Bear Stearns CDO Portfolios
On November 26, CIFG sued JP Morgan in Supreme Court for the State of New York for alleged losses stemming from its insurance of credit default swaps on two Bear Stearns RMBS-backed CDOs. CIFG alleges that instead of being selected and managed by independent collateral managers, the CDO portfolios were actually selected by Bear Stearns in order to unload its own risk. CIFG alleges it suffered more than $100 million in losses when the two CDOs defaulted. The complaint’s causes of action are for material misrepresentation in the inducement of an insurance contract and fraud. Complaint.
FDIC Brings Two RMBS Lawsuits Against Several Investment Banks and Related Entities
On May 18, 2012, the FDIC, in its capacity as receiver for two failed banks, filed two actions in the Southern District of New York arising out of the banks’ alleged purchase of RMBS. In the first suit, the FDIC asserts claims on behalf of Citizens National Bank and Strategic Capital Bank that arise out of the banks’ investment in ten RMBS certificates worth $140.5 million issued and/or underwritten by the defendants, including Bear Stearns, Citigroup, Credit Suisse, Merrill Lynch, and Deutsche Bank. Complaint. In the second suit, the FDIC asserts claims on behalf of Strategic Capital Bank arising out of the bank’s investment in five RMBS certificates worth $31 million underwritten by JP Morgan, Citigroup, Bank of America, and Deustche Bank. Complaint. In both suits, the FDIC alleged that the defendant banks violated Sections 11 and 15 of the Securities Act of 1933 by making material misstatements and omissions in the certificates’ registration statements regarding, among other things, the loan to value ratios of the mortgages underlying the certificates, the appraisal standards used in connection with the appraisals of the underlying properties, whether the borrowers intended to occupy the properties as their primary residences, and whether the originators complied with their underwriting guidelines when originating the underlying mortgages. The FDIC seeks a combined total of $77 million in damages, plus attorneys’ fees and costs.
Ambac Sues JP Morgan Over Insurance of Bear Stearns RMBS
On March 30, 2012, Ambac Assurance Corp. brought claims against J.P. Morgan Chase, EMC Mortgage, and Bear Stearns in the Supreme Court of the State of New York, alleging fraudulent marketing of RMBS by Bear Stearns. Ambac alleges that Bear Stearns, which was acquired by J.P. Morgan, misrepresented the quality of the underlying mortgage loans when obtaining insurance from Ambac on the RMBS. Ambac, which alleges losses of $200 million, brings claims for fraudulent inducement, breach of contract, and successor liability. Complaint.
Assured GuarantySues Bear Stearns and JPMorgan
On March 15, 2012, Assured Guaranty Corp. filed a complaint in New York state court against Bear Stearns, its affiliate, EMC Mortgage LLC, and its successor, JPMorgan, alleging that Bear Stearns misrepresented the risk of RMBS and fraudulently induced Plaintiff to guarantee those RMBS. The complaint relies on alleged statements of confidential informants, including former employees of Bear Stearns, GreenPoint Mortgage Funding, Inc., and Watterson Prime LLC. Plaintiff alleges that the securities involved in the transactions at issue have experienced losses of more than $75 million, and that Plaintiff has paid unreimbursed claims of more than $43 million. Plaintiff asserts claims for fraudulent inducement, various breaches of contract, and for indemnification, claims payments, costs, and fees. Complaint.
JPMorgan Sued for $314 Million by Deutsche Zentral-Genossenschaftsbank
On March 1, 2012, Deutsche-Zentral Genossenschaftsbank (“DZ Bank”) filed a summons with notice in New York state court against Bear Stearns, JPMorgan Chase, and related entities. DZ Bank alleges that it purchased $157 million in RMBS from defendants, and that the offering documents in connection with the sales of those securities contained material misstatements and omissions. The summons asserts claims for common-law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and breach of contract. DZ Bank is seeking approximately $314 million in damages, including punitive damages, and alternatively seeks rescission. Summons.
JPMorgan Sued for $228 Million by Principal Life Insurance
On March 1, 2012, Principal Life Insurance Company filed a summons with notice in New York state court against JPMorgan Chase and related entities. Principal alleges that it purchased $114 million in RMBS from JPMorgan, and that the offering documents in connection with the sales of those securities contained material misstatements and omissions. The summons asserts claims for common-law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and breach of contract. Principal is seeking approximately $228 million in damages, including punitive damages, and alternatively seeks rescission. Summons.