Pooling and Servicing Agreement

Nearly All Claims Against U.S. Bank Dismissed in Ambac RMBS Trustee Suit

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On July 16, Judge Schofield in the United States District Court for the Southern District of New York dismissed four out of five claims in a suit filed by Ambac Assurance Corp. (Ambac) against U.S. Bank National Association (U.S. Bank), challenging the Bank’s actions as trustee for a Harborview Mortgage Loan Trust. Ambac insured certain certificateholders against low cashflow from the Trust, which was backed by Countrywide-originated mortgages. In August 2011, U.S. Bank filed suit in New York state court against Countrywide and Bank of America, as its successor, alleging failure to comply with representations and warranties. When U.S. Bank agreed to stay the state suit after Countrywide proposed a $56.96 million settlement, Ambac sued U.S. Bank in the S.D.N.Y. to enjoin the settlement, alleging that the Bank breached its obligations to trust beneficiaries by accepting a low settlement amount. In March 2017, U.S. Bank initiated a trust instruction proceeding (TIP) in Minnesota to address its claims against Countrywide; meanwhile, Judge Stein in the S.D.N.Y. found in the Ambac-led suit that, because of the ongoing TIP, U.S. Bank had not yet breached its duties, and therefore Ambac’s claims were not yet ripe. On June 1, 2018, U.S. Bank disclosed its $94 million settlement with Countrywide, conditioned on approval by the Minnesota court.

In the case before Judge Schofield, Ambac alleged that U.S. Bank accepted an unreasonably low settlement, that it improperly released other lucrative claims, and that by agreeing to stay the New York state court action and bringing the TIP, U.S. Bank had wasted trust funds, harming trust beneficiaries. Judge Schofield dismissed four of Ambac’s five claims based on these facts, finding that any alleged injury was hypothetical and far too speculative, and that Ambac had not adequately alleged that U.S. Bank taking different actions would have resulted in a more favorable settlement or negotiation position. She also rejected Ambac’s counts for declaratory judgment, because such a finding would serve no useful purpose and would not resolve all of the outstanding cases. Judge Schofield let Ambac’s breach of contract claim continue, finding that Ambac sufficiently alleged that U.S. Bank’s improper accounting of recoveries under the Pooling and Servicing Agreement harmed Ambac, because it affected the amount and timing of the insurance payments that it made. Opinion and Order.

S.D.N.Y. Rejects “Pervasive Breach” Claim and Issues Numerous RMBS Rulings In Deciding Trusts’ and Issuer’s Motions for Summary Judgment

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On January 9, 2015, in a series of rulings, Judge P. Kevin Castel of the United States Court for the Southern District of New York granted in part and denied in part motions for partial summary judgment brought by three MASTR Adjustable Rate Mortgages Trusts (2006-OA2, 2007-1, and 2007-3) (the Trusts) and UBS Real Estate Securities Inc. (UBS).  The Trusts filed this repurchase claim against UBS after purchasing 17,082 loans, which the Trusts claimed contained breaches of the Pooling and Servicing Agreements’ representations and warranties.  First, Judge Castel held that, as a general matter, the Trust could only proceed on loans which were the subject of timely repurchase demands – i.e., the demand’s 90-day cure period must have expired within the six-year statute of limitations period. Second, Judge Castel found that the Trusts could also recover on loans for which it proved UBS’ independent discovery of breaches of representations and warranties, even if those loans were not included in any breach notices. The Trust would be required to prove discovery as to individual loans at trial,   In addition, Judge Castel ruled that the Trusts could not recover under a theory of “pervasive breach.”  Judge Castel further held that the Trusts could recover losses incurred on liquidated or foreclosed properties, that evidence of default was not required in order to show a breach of representations and warranties, that summary judgment was inappropriate for determining whether loan files were incomplete at the time of origination, and that the Trusts could not recover rescissory damages.  Order.

N.Y. Federal Court Allows RMBS Trustee Suit Against GE Mortgage to Proceed

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On January 14, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York denied a motion for judgment on the pleadings in an action brought by the Bank of New York Mellon as Trustee for GE-WMC Mortgage Securities Trust 2006-1 against GE Mortgage and WMC Mortgage.  Judge Forrest rejected the argument that, as a matter of law, the Pooling and Servicing Agreement (PSA) limited the Trustee’s remedies for breaches of representations and warranties to WMC Mortgage only, because this interpretation conflicted with the contemporaneous agreements signed between the parties as well as the PSA itself.  Instead, the Court held that the PSA was ambiguous regarding which entities the Trustee could assert claims against, and accordingly the Trustee’s action against GE Mortgage was not barred by the agreement.  Decision.

RMBS Trustee Brings $157 Million RMBS Lawsuit Against Citigroup

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On November 1, U.S. Bank National Association, acting in its capacity as trustee for Citigroup Mortgage Loan Trust 2007-AHL2, filed a lawsuit in the Supreme Court for the State of New York against Citigroup Global Markets Realty Corp. (Citigroup), on behalf of and at the direction of a holder of certificates issued by the trust.  The trustee alleges, inter alia, that Citigroup breached its obligations arising under the Mortgage Loan Purchase Agreement (MLPA) and Pooling and Servicing Agreement for the deal.  In particular, the trustee alleges that certain of the mortgage loans backing the certificates did not comply with the representations and warranties made in the MLPA, and that Citigroup failed to cure or repurchase those mortgage loans.  The trustee seeks rescissory and compensatory damages and/or an order requiring Citigroup to repurchase the loans at issue.  Summons.

NY Appellate Court Affirms Dismissal of Walnut Place’s Claims Against BofA and Countrywide

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On June 28, 2012, the New York Appellate Division, First Department, affirmed the dismissal of Walnut Place’s $1.1 billion RMBS suit against Countrywide and Bank of America. Walnut Place sued derivatively on behalf of an RMBS trustee seeking to compel repurchase of securitized loans due to alleged breaches of representations and warranties about the loans in the pooling and servicing agreement (“PSA”). The court held that the “no-action” clause in the PSA precludes the investor plaintiffs from bringing any action related to the PSA other than for an “event of default,” which is defined to include only loan servicing-related claims and does not include the representation and warranty claims plaintiffs attempted to assert. Order.

California District Court Grants Partial Summary Judgment in Citigroup’s Suit Against Impac

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On May 4, Judge Pfaelzer of the Central District of California granted partial summary judgment to Citigroup establishing that Impac Funding Corp. was liable to Citigroup on two of Citigroup’s three claims against Impac. Citigroup’s suit alleges that Impac Funding misled investors by filing a Pooling and Servicing Agreement (“PSA”) that incorrectly described the payment waterfall for the relevant securitization trust, and which Impaq waited six weeks to correct. Citigroup brought claims pursuant to Sections 18 (material false statement in an Exchange Act filing) and 20(a) (control person liability) of the Securities Exchange Act of 1934, as well as a common law claim for negligent misrepresentation. The court rejected Impac’s argument that the discrepancies between the PSA and the Prospectus Supplement should have raised a red flag for the trader who purchased the securities on Citigroup’s behalf. The court also held that Impac was not entitled to a good faith “safe harbor” defense because Impac knew in 2007 that the PSA was incorrect and, as a general matter, a corporate entity is deemed to have knowledge of its own public statements. Judge Pfaelzer denied Citigroup’s motion for summary judgment on its negligent misrepresentation claim, concluding that Impac did not make the false statements itself but caused its subsidiaries to make them, and that California law does not extend negligent misrepresentation liability where one merely “causes” a misstatement to be made.  Decision.

Citigroup Files New RMBS Action Against Impac

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On May 25, 2011, Citigroup Global Markets, Inc. (“Citigroup”) filed a complaint against Impac Funding Corp (“Impac”) in the U.S. District Court for the Central District of California alleging violations of Sections 18 and 20 of the ’34 Act and negligent misrepresentation related to Impac’s filing of a revised Pooling and Servicing Agreement (“PSA”) with the Securities and Exchange Commission (“SEC”). Citibank alleges that three weeks after it purchased approximately $7 million worth of mortgage-backed securities, Impac notified the Securities and Exchange Commission that the Pooling and Servicing Agreement (“PSA”) filed three years earlier in connection with the issuance of those securities was submitted in error. Citibank alleges that Impac filed a new PSA with the SEC including different terms that adversely impacted on the value of the certificates purchased by Citigroup. Citigroup seeks to recover the money damages that it claims to have suffered as a result. Complaint.