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.
motion to dismiss
S.D.N.Y. Judge Preserves Plaintiffs’ Section 11 Claims Against Residential Capital
On April 28, 2011, Judge Harold Baer, District Judge in the Southern District of New York, granted in part and denied in part the defendants’ motion to dismiss in New Jersey Carpenters Health Fund, et al. v. Residential Capital, LLC et al. Plaintiffs are institutional investors who purchased mortgage-backed securities from Residential Capital LLC and its underwriters in 2006 and 2007. The complaint alleges that defendants violated Sections 11, 12(a)(2), and 15 of the ’33 Act by making misstatements about the value of the securities in the offering documents. The Court denied defendants’ motion to dismiss the section 11 claims, finding that the loss in value when the securities dropped from investment grade to junk status was a cognizable loss, even if the purchaser continues to hold the securities. The Court, however, granted defendants’ motion to dismiss the section 12(a)(2) claims because it found that, while the plaintiffs alleged the securities purchased and the date of purchase, they failed to allege that they directly purchased the securities from the defendants. The Court also granted defendants’ motion to dismiss the section 15 claims against the underwriters, holding that the complaint’s allegations that the underwriter defendants were “controlling persons” were conclusory. The Court further found that the claims were timely, and that the defendants had not shown that a reasonably diligent purchaser would have discovered the high delinquency rates when purchasing the securities. Decision.
Federal Judge Grants Motion to Dismiss Claims Against Bank of America as Successor to Countrywide
On April 20, 2011, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California granted Bank of America’s motion to dismiss the claims against it in a putative class action complaint that sought to hold Bank of America liable for Countrywide’s alleged misstatements and omissions regarding Countrywide’s loan origination practices. Plaintiffs argued that Bank of America can be held liable as a successor to Countrywide’s liability because the asset transfer between Bank of America and its subsidiary Countrywide constituted a de facto merger. Judge Pfaelzer disagreed; in applying Delaware law, Judge Pfaelzer noted that “Delaware courts use the doctrine of de facto merger sparingly” and declined to apply the doctrine here. Notably, Judge Pfaelzer’s decision runs contrary to an April 2010 decision by New York Supreme Court Justice Eileen Bransten which held, under New York law, that the asset transfer did constitute a de facto merger and that Bank of America could be liable as a successor to Countrywide. Pfaelzer Decision. Bransten Decision.
S.D.N.Y. Grants in Part and Denies in Part Motion to Dismiss Multiple Actions Against Wachovia
In re Wachovia Equity Sec. Litig., No. 09 Civ. 4473 (S.D.N.Y. Mar. 31, 2011) (Sullivan, J.)
Investors in equity and debt securities of Wachovia brought four related actions against Wachovia and several related entities and individuals, Wachovia’s underwriters and its auditors alleging claims under Section 10(b) of the ’34 Act, and Rule 10b-5 thereunder, and Sections 11, 12(a)(2), and 15 of the ’33 Act. In considering four complaints and seven motions to dismiss, the court granted in part and denied in part the motions. The court found that the Section 10(b) claims, which included allegations of fraudulent concealment of the true value of Wachovia’s CDO holdings, failed for insufficient allegations of scienter. The court also found that: (1) plaintiffs cannot assert claims based on offerings they did not purchase; (2) tolling of the ’33 Act’s one-year statute of limitations was appropriate due to a pending class action; (3) allegations of misstatements of loan-to-value ratios in Wachovia’s mortgage lending portfolio were sufficient; and (4) the Section 11 claim against Wachovia’s auditor survives because a due diligence defense cannot be evaluated on a motion to dismiss. Decision.
S.D.N.Y. Partially Grants and Partially Denies Motion to Dismiss RMBS Investor Putative Class Action Against J.P. Morgan Chase
On March 30, 2011, Judge John G. Koeltl of the Southern District of New York granted in part and denied in part a motion to dismiss an RMBS investor putative class action lawsuit asserting federal securities law claims against RMBS issuer J.P. Morgan Acceptance Corporation I (“JPMAC”) and certain of its affiliates, officers and directors. The court dismissed claims relating to several certificates because the putative class representative did not itself purchase those certificates. The court also dismissed plaintiff’s Section 12(a)(2) claim, finding plaintiff had failed to allege adequately that it purchased its Certificates in the initial public offering, as opposed to secondary market purchases, as would be required to state a claim under that section. As to the plaintiff’s Section 11 claim, the court sustained allegations that the offering materials for the RMBS certificates misrepresented or concealed deficient underwriting and appraisal practices and inflated loan-to-value ratios, but dismissed plaintiff’s allegation that the credit ratings for the certificates were misstated. The court sustained control-person liability claim under Section 15 against the officer and director defendants, but dismissed that claim against JPMAC’s parent corporation because the parent-subsidiary relationship, standing alone, is insufficient for pleading a Section 15 claim. Decision.
Complaint Against Merrill Lynch for Sale of Mainsail and Victoria Commercial Paper Survives Motion to Dismiss
On February 18, 2011, Judge Martinez of the U.S. District Court for the Western District of Washington denied Merrill Lynch’s motion to dismiss, holding that plaintiffs had pleaded sufficient facts to state claims under the Washington State Securities Act (“WSSA”) for primary and control person liability and for breach of contract. Plaintiff, King Country, Washington, invested county cash reserves in RMBS and alleges that defendants omitted to disclose significant and foreseeable risks in the underlying mortgage pools. Plaintiff further alleges that defendants knew the credit ratings associated with the securities were not reliable and that they were in fact trying to rid themselves of the same securities they held out as prudent investments. The Court found these allegations sufficient to survive the motion to dismiss. Decision.