New York

New York Intermediate Appellate Court Holds that Accrual Provision Does Not Save RMBS Trustee’s Time-Barred Putback Claim

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On August 11, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York affirmed dismissal of an action brought by Deutsche Bank National Trust Company, as RMBS Trustee, against Quicken Loans, Inc. Following the New York Court of Appeals decision in the closely-followed case of ACE Securities Corp., Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Products, Inc. (covered here) – which held that a breach of contract claim in an RMBS putback action accrues on the date the representations and warranties are made – the First Department concluded Deutsche Bank’s action was time-barred, notwithstanding the presence of an accrual provision in the transaction documents that might have otherwise delayed the accrual of putback claims indefinitely. The decision holds that such accrual provisions are unenforceable attempts to extend the statute of limitations. Order.

New York Appellate Court Allows Fraud Claim to Proceed Against Morgan Stanley

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On August 11, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York affirmed a trial court ruling that investor-plaintiff IKB International to proceed with claims that RMBS sponsor and underwriter Morgan Stanley knowingly misrepresented loans’ credit quality and characteristics. The Court affirmed a ruling that justifiable reliance was adequately pleaded as the complaint contained allegations that (i) plaintiffs hired investment advisors to analyze the offering documents for the 18 RMBS deals at issue; and (ii) plaintiffs lacked the access to (and the ability to demand) loan files prior to purchase.

Additionally, the Court agreed that the plaintiffs adequately pleaded the fraud element of scienter by alleging that Morgan Stanly learned about the loans’ defects during the course of its own due diligence reviews, and in its role as underwriter. Order.

New York Appellate Court Reverse Lower Court, Allows RMBS Action to Proceed Against Morgan Stanley

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On August 11, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York reversed the lower court, allowing RMBS Trustee U.S. Bank to proceed with claims against Morgan Stanley in connection with alleged losses of $140 million resulting from the sale of allegedly defective loans. Following its own ruling from last year (covered here), the First Department again concluded that the alleged failure to notify securitization counterparties of breaches of representations and warranties constitutes a viable cause of action independent from claims arising from the alleged breaches themselves. The First Department also reversed dismissal of the plaintiff’s gross negligence claims noting that – notwithstanding language in the governing contract’s sole remedy provision – the law does not permit a party to insulate itself from paying for damages arising from its grossly negligent conduct. Order.

WMC Settles $1 Billion RMBS Suit During Pendency Of Appeal

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On August 9, 2016, RMBS trustee Deutsche Bank National Trust Company and WMC Mortgage, LLC, filed a joint motion to stay an appeal pending in the Court of Appeals for the Second Circuit. The parties requested the stay to allow them time to finalize the settlement of a lawsuit alleging that WMC misrepresented the quality of loans it sold in a $1 billion 2006 RMBS offering. The trial court had previously dismissed the lawsuit in 2015 (covered here) as time-barred under New York’s six-year statute of limitations. Joint Motion.

FDIC Files Five Lawsuits Against Bank Entities Over RMBS

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On August 10, the FDIC in its capacity as receiver for Colonial Bank filed five lawsuits – three in Alabama state court, one in New York federal court, and one in California federal court – seeking $741 million in damages from a number of investment banks, including Bank of America Corp., JPMorgan Chase & Co., Citigroup, Inc., and others, for making allegedly false and misleading statements that induced Colonial Bank into buying mortgage-backed securities.  The FDIC alleges that the banks made numerous false and misleading statements in the offering documents for the RMBS regarding the credit quality of the mortgage loans underlying the securities.  The three Alabama cases each assert two causes of action under the Alabama Securities Act, as well as causes of action under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (Securities Act).  The New York and California cases each assert causes of action under Sections 11 and 15 of the Securities Act.  

Complaint: Alabama – FDIC v Bank of America, et al. 
Complaint: Alabama – FDIC v Citigroup Mortgage Loan Trust, et al. 
Complaint: Alabama – FDIC v Countrywide Securities Corp, et al. 
Complaint: New York – FDIC v Chase Mortgage Finance Corp., et al. 
Complaint: California – FDIC v Countrywide Securities Corp, et al. 

PLI’s Internal Investigations 2012: How to Protect Your Clients or Companies in the Global, Post-Dodd Frank World

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Mike Delikat, chair of Orrick’s Employment Law practice, will be speaking at PLI’s Internal Investigation program on June 26 in New York. This program will discuss how to conduct an internal investigation, in-house or outside; considerations at the outset: nature and scope of the investigation; how to conduct the investigation: considerations, processes and procedures; the government’s use, evaluation and weighing of internal investigations; how to conclude the investigation: when and how to prepare a report, alternatives, corrective actions; and ethical issues and how to deal with them. For more information, please click here.

Deutsche Bank Affiliate Sued for Breach of MBS Warranties

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On May 29, 2012, the Federal Housing Finance Agency (“FHFA”), acting as conservator for Freddie Mac, filed a summons with notice in New York state court against DB Structured Products. The FHFA purports to sue derivatively on behalf of the Trustee of a particular RMBS trust that issued certificates purchased by Freddie Mac. The FHFA alleges that DBSP breached its contractual representations and warranties concerning the underlying mortgage loan originators’ compliance with underwriting guidelines, the absence of errors or fraud in the origination process, the loans’ compliance with federal, state, and local laws, the accuracy of loan-level data provided to rating agencies, and other loan-related characteristics. The FHFA seeks specific performance of DBSP’s repurchase obligations under the relevant contracts. Summons.

New York, Delaware AGs Again Intervene in BofA-Countrywide MBS Settlement Proceeding

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On Wednesday, June 6, 2012, Judge Barbara R. Kapnick granted the motions of the Attorneys General of the states of New York and Delaware to intervene in the proceeding to approve the $8.5 billion settlement between Bank of America and investors in certain Countrywide MBS. Both Attorneys General previously had been allowed to intervene in related federal court proceedings. The case was subsequently remanded to state court, where the New York and Delaware AGs again sought to intervene. In granting the motions over the objection of the trustee for the MBS trusts and certain institutional investors, Judge Kapnick found that the Attorneys General had “identified legitimate quasi-sovereign interests at play in this Proceeding,” and that the intervention would not result in undue delay. Order.

Asset Management Fund Sues Bank of America, Merrill Lynch, Countrywide, and Others for $478 Million

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On March 1, 2012, Asset Management Fund filed a summons with notice in New York state court against Bank of America, Merrill Lynch, Countrywide, Credit Suisse, Goldman Sachs, and others.  Asset Management Fund alleges that it purchased $239 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.  Asset Management Fund is seeking approximately $478 million in damages, including punitive damages, and alternatively seeks rescission.  Summons.

JPMorgan Sued for $314 Million by Deutsche Zentral-Genossenschaftsbank

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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.