On August 12, 2016, Massachusetts Mutual Life Insurance Co. (“MassMutual”) and RBS jointly moved to dismiss MassMutual’s $235 million RMBS claim, stating that the parties had reached a confidential settlement agreement. MassMutual filed the lawsuit in 2011, alleging violations of the Massachusetts Uniform Securities Act. MassMutual claimed that the defendants made material misrepresentations about the characteristics of mortgage loans that RBS securitized in transactions in which MassMutual invested between 2005 and 2007. The court entered a final dismissal order on August 15, 2016. Joint Motion of Dismissal. Order of Dismissal. MassMutual settled similar claims against Barclays Capital Inc. on March 29, 2016 (covered here).
RMBS
Ninth Circuit Revives RMBS Claims against Nomura
On August 15, 2016, the Ninth Circuit Court of Appeals vacated the Central District of California’s order dismissing claims brought by the National Credit Union Administration Board (“NCUA”), as liquidating agent of Western Corporate Federal Credit Union (“Wescorp”), against Nomura Home Equity Loan, Inc. (“Nomura”) under the Securities Act of 1933. In 2014, the district court granted Nomura’s motion to dismiss claims that it had made materially false and misleading statements in the offering documents in respect of certificates sold to Wescorp in 2006 and 2007, holding that the NCUA’s claims were barred by the statute of repose established in Section 13 of the 1933 Act, which runs three years after the securities were offered or sold. The Ninth Circuit disagreed with the district court, concluding that both the text and the legislative purpose of the Extender Statute in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) indicate that Congress intended it to supplant the 1933 Act statute of repose and to further a policy of “protecting the government’s right to recovery.” Opinion at 13. The Ninth Circuit further concluded that, although the text of the Extender Statute only mentions contract and tort claims, because its dictate is to cover “all actions” brought by the NCUA, it also applies to statutory claims, such as the 1933 Act claims at issue in this case. Thus, the Ninth Circuit held that the NCUA’s claims against Nomura are not time-barred and remanded the case to the Central District for further proceedings. Summary.
Rating Agency Developments
On August 16, Moody’s supplemented its approach to rating residential mortgage-backed securities (RMBS) in China. Report.
On August 16, Fitch updated its country ceilings cross-sector criteria report. Report.
On August 16, Fitch updated its criteria for rating sukuk. Report.
On August 15, Moody’s updated its rating methodology for U.S. charter schools. Report.
On August 12, Fitch published its U.S. residential mortgage-backed securities (RMBS) non-performing loans rating criteria. Report.
On August 12, Fitch updated its solid waste revenue bond rating criteria. Report.
On August 11, Fitch updated its criteria for rating currency swap obligations of an SPV in structured finance transactions and covered bonds. Report.
On August 11, Fitch updated its criteria for rating tolled roads, bridges and tunnels. Report.
On August 11, Moody’s updated its approach to rating securities backed by FFELP student loans. Report.
New York Intermediate Appellate Court Holds that Accrual Provision Does Not Save RMBS Trustee’s Time-Barred Putback Claim
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
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
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
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.
Rating Agency Developments
On August 2, 2016, Moody’s issued a report entitled: Moody’s Approach to Rating Securitisations Backed by Non-Performing and Re-Performing Loans. Report.
On August 1, 2016, S&P issued a report entitled: General: Global Methodology for Rating Retranchings of ABS, CMBS, and RMBS. Report.
On July 29, 2016, DBRS issued a report entitled: Global Methodology for Rating Banks and Banking Organisations. Report.
On July 28, 2016, Fitch issued a report entitled: Fitch Updates Global Rating Criteria for CLOs and Corporate CDOs. Report.
On July 28, 2016, Fitch issued a report entitled: Fitch: No Rating Changes from Update to Global LMI Criteria in RMBS. Report.
New York Court Dismisses Repurchase Claims Against UBS as Untimely
On July 27, 2016, Justice Marcy Friedman of the New York Supreme Court for New York County, in accordance with other recent decisions (covered here and here) dismissed an action against UBS Real Estate Securities, Inc. The case was initially brought by Federal Housing Finance Agency (“FHFA”), as conservator of an RMBS certificateholder. It was then pursued by the trustee after the limitations period expired. Because FHFA lacked standing to bring claims for breaches of loan-level representations and warranties, the Court held that the trustee’s claims do not “relate back” to the date of FHFA’s initial filing for statute of limitations purposes. The court will permit briefing on the viability of claims for failure to notify the trustee of alleged breaches of representations and warranties. Decision.
Appellate Court Affirms Dismissal of Certain Claims Against Trustee
On July 5, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York affirmed the partial grant of Bank of New York Mellon’s (“BNY”) motion to dismiss certain claims brought by RMBS investors arising from BNY’s alleged failure to perform its duties as RMBS trustee. While the court affirmed partial denial of BNY’s motion to dismiss the negligence claims as duplicative of the contract claims, it also affirmed that portion of the trial court’s order granting BNY’s motion to dismiss portions of those negligence claims to the extent they are predicated on the incorrect assumption that a trustee owes a duty to (i) monitor other PSA counterparties’ performance of basic non-ministerial tasks; and/or (ii) put its “nose to the source” to uncover improper counterparty conduct. The First Department also held that the trial court should have dismissed contract claims against BNY alleging a breach of the alleged duty to notify PSA counterparties of loan seller representation and warranty breaches, as they had not been sufficiently alleged. It also affirmed dismissal of all breach of fiduciary duty claims. Decision.