On May 23, 2016, a three-judge panel of the Second Circuit Court of Appeals overturned a judgment of fraud against Bank of America, Countrywide, and former Countrywide executive Rebecca Mairone in U.S. v Countrywide Home Loans, Inc. In reversing the District Court and ruling for the Defendants, the Second Circuit vacated a $1.27 billion judgment against Bank of America and a $1 million judgment against Ms. Mairone. The Second Circuit panel held that the evidence at trial showed at most an intentional breach of contract, which is insufficient as a matter of law to constitute fraud under the federal mail and wire fraud statutes. Instead, to support a claim, the government was required, but failed, to prove that defendants’ intent at the time of contracting was not to comply with their contractual obligations. Orrick represented Ms. Mairone in connection with the appeal. Opinion.
Second Circuit Court of Appeals
Second Circuit Reverses and Remands Trial Court’s Summary Judgment Order in Favor of Morgan Stanley in a CMBS Case
On April 27, 2016, the Second Circuit Court of Appeals vacated and remanded the district court’s summary judgment order entered in favor of defendant Morgan Stanley Mortgage Capital, Inc. in the Southern District of New York. Plaintiff Bank of New York Mellon Trust Company, N.A., as trustee of a CMBS deal, alleged that Morgan Stanley breached an environmental conditions contract representation, requiring Morgan Stanley to repurchase an $81 million mortgage loan. The Second Circuit reversed the trial court’s conclusion that Morgan Stanley was not contractually obligated to repurchase the mortgage loan because the Trustee’s duty to give “notice of cure” within three business days of becoming aware of a material breach was a condition precedent to Morgan Stanley’s repurchase obligation. The Second held that a request to cure a material breach was not a condition precedent under the contract. In so holding, the Second Circuit distinguished between the Mortgage Loan Purchase Agreement’s separate obligations of “notice of breach” and “request to cure.” As to the “request to cure” obligation, the Court found nothing that made it clear that Morgan Stanley’s remedy obligation does not arise until a request for cure is made. The Court remanded the case to the trial court to reassess the timeliness of the Trustee’s notice for cure, which was a fact issue that must be presented to the factfinder at trial to determine when the Special Servicer concluded its investigation. In addition, because request for cure is not a condition precedent, the jury would have to decide the question of substantial performance. The Court held that a reasonable jury could find that, even if there was some delay in requesting cure, it could determine that substantial performance occurred. Decision.
Second Circuit Rules that Payments Made to Purchase Notes are Exempt from Avoidance Under Section 546(e) of the Bankruptcy Code
On June 10, the Second Circuit Court of Appeals held in the Quebecor World (USA) Inc. bankruptcy that payments made by a company in purchasing notes issued by an affiliate constituted transfers made in connection with a securities contract. Therefore, the payments were protected from avoidance by a “safe harbor” under section 546(e) of the Bankruptcy Code. Orrick covered the Quebecor decision in depth in the linked client memo. Quebecor Case.
Federal Appellate Court Affirms Dismissal of AIG Derivative Suit
On March 17, 2011, the Second Circuit Court of Appeals affirmed a district court’s dismissal of plaintiff Louisiana Municipal Police Employees Retirement System’s derivative action on behalf of American International Group (“AIG”) and certain of its current and former directors and officers for breaches of fiduciary duty, waste of corporate assets, unjust enrichment and contribution, as well as violations of the Securities and Exchange Act Sections 20(a) and 10(b). Plaintiff’s Complaint alleged that current and former AIG directors and officers failed to properly oversee the company’s credit default swap transactions, particularly as they related to RMBS-backed CDOs, and made misstatements concerning the company’s financial health and risk management. The Second Circuit panel affirmed the trial court’s dismissal of the case for failure to make a demand on AIG’s Board, finding that plaintiffs had not met the burden for demonstrating demand futility, and noting that “directors are entitled to a presumption that they were faithful to their fiduciary duties.” 2nd Circuit Order. SDNY Order.
Second Circuit Reverses Lower Court’s Grant of Dismissal in a Securities Case Against the Blackstone Group
On February 10, 2011, the Second Circuit Court of Appeals vacated ad remanded the dismissal of an action against the Blackstone Group that alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act in connection with Blackstone’s Registration Statement and Prospectus filed as part of its IPO. Plaintiffs had alleged that Blackstone violated the Securities Act when it failed to disclose the likely impact on its real estate investment private equity businesses from the decline in the residential mortgage market and certain other publicly-disclosed events concerning two of its equity investments. In reinstating the claims, the Second Circuit emphasized that public knowledge of the events did not excuse Blackstone from making disclosures about them because Item 303 of Regulation S-K requires issuers to disclose how such events might be reasonably expected to materially affect an issuer’s business. The Second Circuit also emphasized that materiality had to be assessed qualitatively, and that a material impact on one segment of Blackstone’s operations could require disclosure even if quantitatively immaterial to Blackstone as a whole. Appeal.