On September 15, 2011, Southern District of New York Judge Laura Taylor Swain granted in part Morgan Stanley’s motion to dismiss claims in a putative class action by MBS investors that Morgan Stanley violated Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs allege that Morgan Stanley made material misrepresentations regarding its ratings and the appraisals and underwriting standards of the underlying mortgages in the marketing and sale of the MBS. Judge Swain found that Plaintiffs failed to sufficiently allege any facts supporting any misrepresentation regarding the derivation or integrity of the MBS ratings or that Morgan Stanley had a duty to disclose any alleged underlying flaws in the ratings process. Judge Swain found that Plaintiffs’ allegations regarding the appraisals and underwriting standards were sufficient and denied the motion to dismiss with respect to those claims. Decision.
Morgan Stanley
Delaware Supreme Court Reverses Dismissal of RMBS Suit Against Morgan Stanley
In an en banc decision, the Delaware Supreme Court reinstated a suit by mortgage loan servicer Central Mortgage Co. (“CMC”) against Morgan Stanley for breach of contract and breach of the implied covenant of good faith and fair dealing. CMC had purchased from Morgan Stanley mortgages that CMC alleges became delinquent. Then-Vice Chancellor Strine of the Delaware Court of Chancery found that CMC had failed to follow the notice requirements in the parties’ Master Agreement to provide Morgan Stanley with sixty days notice to attempt to cure the alleged breaches of that contract. The court held that CMC’s complaint sufficiently pleaded compliance with the notice provision, and factual issues remained as to the adequacy of the notice. The court also held that CMC’s claim for breach of the implied covenant of good faith and fair dealing did not duplicate its breach of contract claims because, it found, CMC pleaded various additional facts that provide a separate basis for the former claim. Decision.
Allstate Sues Morgan Stanley in New York State Court for Concealing and Misrepresenting Loan Quality in RMBS Pools
On July 5, 2011, Allstate Insurance Co. filed suit against Morgan Stanley in the Supreme Court of New York, alleging that Morgan Stanley committed common law fraud and negligent misrepresentation in connection with the sale of $104 million in RMBS purchased by Allstate. Complaint.
New York Court Preserves MBIA’s Fraud and Breach of Contract Claims Against Morgan Stanley
On May 26, 2011, Justice Gerald Loehr of the Supreme Court of the State of New York granted in part and denied in part Morgan Stanley’s motion to dismiss MBIA’s claims for breach of contract, fraud, and unjust enrichment arising out of MBIA’s wrap of a $269,000,000 second-lien RMBS transaction. The Court denied Morgan Stanley’s motion to dismiss MBIA’s fraudulent inducement and contract claims, finding that those counts were pled with sufficient particularity. The Court further held that MBIA’s fraudulent inducement claim was not duplicative of its contract claim. The Court also refused to strike MBIA’s request for punitive, consequential, and future damages. The Court, however, granted the defendants’ motion to dismiss the unjust enrichment claim, finding that such a claim was precluded by the relevant servicing agreement. Decision.