Southern District of New York

Royal Park and Wells Fargo Reach Settlement in RMBS Litigation

 

On January 14, U.S. District Judge Katherine Polk Failla of the Southern District of New York granted a joint request from plaintiff certificateholder Royal Park Investments SA/NV and defendant trustee Wells Fargo Bank NA to dismiss Royal Park’s remaining claims against Wells Fargo. The dismissal follows a settlement that resolves the litigation brought by Royal Park accusing Wells Fargo of breaching its contractual duties as trustee of two RMBS trusts, including the alleged failure to notify and enforce repurchase obligations of mortgage loan sellers for purported breaches of representations and warranties. The settlement also resolves a separate suit brought by Royal Park, which accused Wells Fargo of improperly financing its defense using money from two RMBS trusts. Wells Fargo maintained that it was entitled to reimbursement pursuant to the trusts’ governing agreements. Details of the settlement agreement were not disclosed as a stipulation of the voluntary dismissal.

U.S. Bank and UBS Reach $850M Settlement in RMBS Put-Back Action

 

On July 25, 2018, U.S. Bank NA and UBS AG announced they had reached an $850 million settlement in connection with a dispute over loans in three residential mortgage-backed securities trusts. U.S. Bank filed suit against UBS in the Southern District of New York in 2012 seeking $2 billion for UBS’s alleged breach of representations and warranties about those loans. Following a three-week bench trial in 2016, U.S. District Judge P. Kevin Castel held that UBS had breached representations and warranties in certain respects and appointed special master Barbara S. Jones to review breach allegations concerning thousands of individual loans and issue a recommendation regarding liability and damages as to each loan. Order.

SDNY Court Appoints Lead Master to Review 9,300 UBS Loans for Material Breach Following UBS Putback Trial

 

On September 6, 2016, following a 3-week long bench trial in May, U.S. District Judge P. Kevin Castel of the Southern District of New York held that he will appoint a Lead Master to determine whether there are “material breaches” in 9,300 loans at issue in putback litigation against UBS. In its 239-page post-trial decision, after addressing a number of issues and discussing 20 loans, the Court appointed a Lead Master to examine each loan on an individual basis and prepare recommended findings and conclusions on liability.

The Court outlined Plaintiff’s burden of proof for breach of underwriting guidelines, holding that the Plaintiff must demonstrate it is more likely than not that the loan was not originated in compliance with the relevant underwriting guidelines, unless an exception was actually exercised, in a reasonable manner, at the time of origination. Plaintiffs will then be required to prove a breach has a “material and adverse” effect at the time UBS’s repurchase obligation was triggered. The Court held this can be shown: (1) by proving an increased risk of loss to certificateholders; (2) with evidence that a breach resulted in altered loan terms; or (3) through a showing of layered risk and/or the cumulative effect of multiple breaches. The Court held that discovery of a breach cannot be based on constructive knowledge. Instead, Plaintiffs must show actual knowledge, which may be established by circumstantial evidence, or willful blindness. Memorandum and Court Order.

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.

Claims Against RMBS Trustees Dismissed

On January 19, Judge Richard Berman of the Southern District of New York dismissed, for lack of jurisdiction, the vast majority of claims asserted against Deutsche Bank and Wells Fargo in their respective capacities as RMBS trustees for 564 and 273 RMBS trusts, pooling a collective $826.5 billion in securitized loans.  Plaintiffs in the two actions claimed the court had federal jurisdiction over certain of the claims arising from the Trustee Indenture Act of 1939, and asked the court to exercise supplemental jurisdiction over the accompanying state law claims as well.  Judge Berman held that while the court was empowered to exercise supplemental jurisdiction it would not do so, because the state claims pressed by Plaintiffs predominated over the federal ones.  Judge Berman stressed that Plaintiffs asserted no federal claims in connection with almost 90% of the trusts at issue in the Deutsche Bank action and roughly 96% of trusts at issue in the Wells Fargo action.  The court concluded that to permit such a relatively small number of federal claims to pull in a much larger body of state claims would improperly allow “a federal tail…to wag what is in substance a state dog.”  The court granted plaintiffs three weeks to file a joint amended complaint with the state law claims removed.  The court did not rule on the merits of Plaintiffs’ TIA or state law claims.  Order.

Commerzbank AG Sues Four RMBS Trustees Alleging Violations of Duties to Investors

On December 23 and 24, Commerzbank AG filed four actions in the Southern District of New York against Deutsche Bank National Trust Company, HSBC Bank USA, N.A., Wells Fargo Bank, N.A., and the Bank of New York Mellon in their capacities as trustees for a number of RMBS trusts.  Commerzbank, as an RMBS investor, alleges that the trustees violated their contractual, fiduciary, and statutory duties by, among other things, failing to address servicers’ “looting” of the trusts.  Commerzbank further alleges that the trustees failed to act to defend the trusts’ interest against misconduct by sponsors and originators for the deals at issue.  The complaints in these actions are substantially similar, and closely parallel other RMBS cases alleging violations of the Trust Indenture Act and the Streit Act, as well as breach of contract, breach of fiduciary duty, negligence and breach of the covenant of good faith.  We have previously covered similar suits by the National Credit Union Administration and Pacific Investment Management Company. Representative Complaint.

JP Morgan Settles RMBS Lawsuit for $500 Million

On February 1, JP Morgan Chase & Co. settled federal securities claims brought by investors led by the Public Employees’ Retirement System of Mississippi and the New Jersey Carpenters Health Fund related to Bear Stearns’ sale of $17.58 billion in residential mortgage-backed securities. The settlement is subject to approval by U.S. District Judge Laura Taylor Swain of the United States District Court of the Southern District of New York.  Settlement Agreement.

ResCap Liquidating Trust Repurchase Lawsuit Survives Motion to Dismiss in Part

On February 3, Judge Martin Glenn of the United States Bankruptcy Court of the Southern District of New York denied defendants’ motions to dismiss four adversary proceedings brought by the liquidating trust for Residential Capital LLC against several originators of residential mortgage loans. The court ruled that the ResCap Liquidating Trust was the real party in interest and therefore had standing to pursue claims against the originators for breach of representations and warranties. The defendants also argued that the Trust lacked standing to sue with regard to loans that had been securitized, because a predecessor ResCap entity had assigned its rights concerning those loans to third-parties. The court rejected this argument, holding that the scope of the assignments raised factual questions that could not be resolved at the motion to dismiss stage. The court granted defendants’ motion to dismiss claims with respect to certain loans as time-barred, holding that New York’s six-year statute of limitations expired as to all loans sold to ResCap prior to May 14, 2006 (six years before the adversary proceedings were filed). Finally, the Court declined to rule on the scope of the remedy available to the Trust at the pleading stage.  Memorandum Opinion and Order.

SDNY Allows FHFA’s Claims Against Goldman Sachs and Deutsche Bank to Proceed

In two separate orders issued on November 12, Judge Cote of the Southern District of New York granted in part and denied in part motions to dismiss claims brought by the FHFA against Goldman Sachs & Co. and Deutsche Bank AG.  FHFA’s claims are based on alleged purchases by Fannie Mae and Freddie Mac of residential mortgage-backed securities from these banks.  The court dismissed FHFA’s common-law fraud claims against both banks based on owner-occupancy and LTV ratio allegations for failure to sufficiently allege scienter.  The court rejected the remaining arguments to dismiss other aspects of the claims.  Judge Cote denied Deutsche Bank’s motion as to the FHFA’s pleading of reasonable reliance and held that New York’s Martin Act did not preclude FHFA from raising claims based on other states’ securities laws.  The court also rejected Goldman’s argument that as an underwriter it lacked “ultimate authority” over the contents of certain offering documents.  In both actions, FHFA asserts claims for violations of Sections 11, 12, and 15 of the Securities Act of 1933, for violations of the Virginia and District of Columbia securities laws, and for fraud.  
Goldman Sachs Decision.  Deutsche Bank Decision.

Court Certifies RMBS Investor Class in IndyMac RMBS Suit

On August 17, Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York certified a class of investors in an action brought by lead plaintiffs Wyoming State Treasurer and Wyoming Retirement System against several financial institutions in connection with RMBS issued by IndyMac.  Judge Kaplan found that while the prospective class members’ claims differ in some respects, the central issue for all class members is whether IndyMac made material misrepresentations in its offering documents.  Judge Kaplan rejected the defendants’ argument that individual issues regarding investor knowledge, reliance, and notice warranted the denial of class certification.  However, the court dismissed claims in connection with one RMBS certificate because Wyoming Retirement System did not acquire the certificate in an initial offering.  The class claims are alleged to arise under Sections 11, 12(a)(2), and 15 of the Securities Act. Decision.