On May 17, 2013, Deutsche Bank National Trust Company (Deutsche Bank), as trustee for several trusts, filed a lawsuit in New York state court against Barclays Bank PLC (Barclays) and WMC Mortgage, LLC (WMC), alleging that defendants violated an agreement to repurchase faulty loans that were sold to the trusts. According to Deutsche Bank’s summons with notice, defendants made numerous misrepresentations concerning the credit quality of the loans, and failed to comply with contractual obligations to either cure the breaches or repurchase the loans. Deutsche Bank seeks an order of specific performance requiring defendants to repurchase the loans in the trusts. The case is captioned Deutsche Bank National Trust Co., solely in its capacity as Trustee for SABR 2007-BR2, et al. v. Barclays Bank PLC, et al., 651338/2013, in the Supreme Court of the State of New York, County of New York. Read the summons with notice here.
On May 17, 2013, U.S. District Judge Jed S. Rakoff of the Southern District of New York revived Dexia SA’s lawsuit against JP Morgan, Bear Stearns, and Washington Mutual concerning the sale of residential mortgage-backed securities (RMBS). Dexia, a Belgian bank, sued the banks in New York state court for fraud in connection with the sale of more than $1.7 billion in RMBS, alleging that defendants purposely securitized defective mortgages and then concealed the poor quality of those mortgages in offering materials. Defendants removed the case to federal court primarily on the basis of jurisdiction under the Edge Act, a statute from 1919 that provides for federal jurisdiction in cases arising from certain national bank transactions involving international banking or banking in U.S. territories. The court denied plaintiffs’ motion to remand in September 2012, and, on April 2, 2013, granted defendants’ motion for summary judgment, dismissing with prejudice the entire action. Citing an appellate decision from April 19, 2013, in which the Second Circuit found that the Edge Act did not confer federal subject matter jurisdiction in AIG’s action against Bank of America, Judge Rakoff found that the court lacked jurisdiction to hear the case under the Edge Act, remanded the action to state court, and vacated his April 3 summary judgment decision that had dismissed the case. The case is Dexia SA/NV, et al. v. Bear Stearns & Co., et al., in the U.S. District Court, Southern District of New York, No. 12-cv-04761. Read Judge Rakoff’s opinion here.
On May 15, 2013, a three-judge panel of the Second Circuit Court of Appeals affirmed a district court’s decision to dismiss Liberty Mutual Insurance Co.’s lawsuit against Goldman Sachs concerning Fannie Mae’s exposure to toxic loans. Liberty sued Goldman for its conduct as lead underwriter of certain stock offerings made by Fannie Mae in September and December 2007, transactions which allegedly resulted in Liberty’s loss of $62.5 million. According to the complaint, Goldman drafted and disseminated offering documents falsely representing that Fannie Mae’s capital exceeded statutory and regulatory requirements, and failed to disclose that Fannie Mae had inadequate write-downs and loss reserves for its exposure to approximately $700 billion in risky subprime and Alt-A mortgages. Liberty alleged violations of Rule 10b-5 of the Securities Exchange Act of 1934, the Massachusetts and Washington securities acts, and the Massachusetts and Washington unfair and deceptive trade practices statutes, as well as common law fraud and negligent misrepresentation. The district court concluded that all seven of Liberty’s claims failed because, inter alia, Liberty had not alleged an actionable misstatement or omission. The Second Circuit agreed, concluding that the representations regarding Fannie Mae’s core capital necessarily incorporated imperfect business judgments and predictions about the future, which later proved mistaken. The Second Circuit could not conclude that the representations amounted to fraud. The case is Liberty Mutual Insurance Co., et al. v. Goldman Sachs & Co., case number 12-3859, in the U.S. Court of Appeals for the Second Circuit. Read the Second Circuit’s summary order here.
On May 15, 2013, a federal court in Colorado allowed hedge fund Galena Street Fund LP (Galena) to proceed with its lawsuit against Wells Fargo in connection with residential mortgage-backed securities (RMBS) for which Wells Fargo served as trustee and servicer. Galena filed its complaint in March 2012, alleging that Wells Fargo breached its responsibilities as trustee and servicer by failing to stop wrongful conduct that Washington Mutual (WaMu) had committed as the original servicer of the loans underlying the RMBS. Specifically, Galena alleged that WaMu mishandled the process by which it advanced payments to the trusts in connection with missed borrower payments. In denying most of Wells Fargo’s motion to dismiss, the court found that Galena had sufficiently alleged that Wells Fargo, which acquired the servicing rights from WaMu in 2006, failed to correct WaMu’s mistakes, and that Wells Fargo had a conflict of interest in serving as both trustee for the trusts at issue and servicer for many of the loans in the trusts. The case is Galena Street Fund LP v. Wells Fargo Bank NA, case number 12-cv-00587, in the U.S. District Court for the District of Colorado. Read the court’s order here.
On May 14, 2013, New York’s Appellate Division, First Department reversed a lower court’s order and dismissed bond insurer ACA Financial Guaranty Corp.’s lawsuit against Goldman Sachs in connection with the Abacus 2007-AC1 collateralized debt obligation (CDO). ACA filed its complaint in January 2011, alleging that Goldman Sachs fraudulently induced ACA into insuring the Abacus CDO by misrepresenting hedge fund Paulson & Co.’s economic interest in the transaction, including Paulson’s role in the portfolio selection process and Paulson’s short position against the CDO. In denying Goldman’s motion to dismiss the fraud claims, Justice Barbara R. Kapnick found that ACA’s complaint contained a “‘rational basis’ to infer that Goldman Sachs intentionally misled ACA from its silence in the face of ACA’s manifest detrimental reliance on its mistaken belief that Paulson was on the same of the transaction as it was.” In reversing Justice Kapnick, the First Department found that Goldman’s purported misrepresentation was contradicted by the deal’s offering documents, and that ACA’s amended complaint failed to establish justifiable reliance as a matter of law in light of ACA’s acknowledgment that, in entering into the deal, it was not relying on any representations other than in the offering documents. Furthermore, the court found that Paulson’s intentions with regards to the investment were not peculiarly within Goldman’s knowledge, and ACA, although in direct contact with Paulson, failed to ask the hedge fund what position it intended to take in the investment. The case is ACA Financial Guaranty Corp. v. Goldman Sachs & Co., case number 650027/2011, in the Appellate Division of the Supreme Court of the State of New York, First Judicial Department. Read the First Department’s decision here.
On May 13, 2013, a New York state court denied Deutsche Bank’s motion to dismiss a putback lawsuit in connection with allegedly defective residential mortgage-backed securities (RMBS). Investors sued DB Structured Products (DBSP), an affiliate of Deutsche Bank AG, on March 28, 2012, alleging that DBSP, as originator of the loans underlying the RMBS at issue, misrepresented the risk characteristics of the loan portfolio backing the RMBS. HSBC Bank USA, as trustee, was later substituted as the plaintiff. DBSP moved to dismiss the action on the basis that plaintiff’s single claim, for breach of contract, was subject to a six-year statute of limitations that began when the Pooling and Servicing Agreement (PSA) was executed on March 1, 2006. The trustee argued that its claims did not accrue until DBSP breached its obligations to repurchase loans that did not conform to representations and warranties made regarding their characteristics and quality. In denying DBSP’s motion to dismiss, Justice Shirley Werner Kornreich found that “[t]he statute of limitations began to run when DBPS improperly rejected the Trustee’s repurchase demand. Ergo, the breach is the failure to comply with the demand.” The case is Ace Securities Corp. v. DB Structured Products Inc., 650980/2012, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
On May 10, 2013, a New York state court dismissed a putback lawsuit against Nomura Credit & Capital (Nomura) in connection with allegedly defective residential mortgage-backed securities (RMBS). Two hedge funds – Zambezi C2 LLC and Zambezi C4 LLC – commenced the lawsuit on December 20, 2011, alleging that Nomura misrepresented the risk characteristics of the loan portfolio backing the RMBS. In August 2012, counsel for plaintiffs filed an amended complaint substituting the trustee, HSBC Bank USA, National Assocation, as plaintiff. In granting Nomura’s motion to dismiss, Justice Peter O. Sherwood found that the 6-year statute of limitations for breach of contract actions had expired by August 2012, which the court deemed to be the controlling date in the case. The court further found that plaintiff’s cause of action accrued no later than the closing date of the transaction, although the court did not reach a decision on whether the alleged misrepresentations were made for statute of limitations purposes as of the date of the transaction’s operative agreements or as of the transaction’s closing date. The case is Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital Inc., case number 653541/2011, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
On May 8, 2013, a federal court in New York allowed the U.S. Department of Justice to proceed with its action against Bank of America in connection with the packaging and sale of mortgage-backed securities (MBS) to Fannie Mae and Freddie Mac. Federal prosecutors in New York filed a civil fraud lawsuit against Bank of America, as successor to mortgage lender Countrywide, in October 2012, alleging that Countrywide implemented – and Bank of America inherited and continued to operate – a home loan program known as the “Hustle,” which effectively eliminated the underwriting review of mortgage loans that Countrywide originated and that Fannie and Freddie later guaranteed. U.S. District Judge Jed S. Rakoff allowed the Justice Department to proceed with its claims brought under the Financial Institutional Reforms, Recovery, and Enforcement Act (FIRREA), but he granted the banks’ motion to dismiss claims brought under the False Claims Act. In his order, Judge Rakoff wrote that he would issue the reasons for his decision in a forthcoming opinion. The case is United States v. Bank of America Corp., et al., U.S. District Court, Southern District of New York, No. 12-cv-1422. Read the court’s order here.
On May 7, 2013, New York’s Appellate Division, First Department revived fraud claims that bond insurer CIFG Assurance (CIFG) filed against Goldman Sachs in connection with approximately $275 million in residential mortgage-backed securities (RMBS) that CIFG insured. CIFG sued Goldman in August 2011, accusing the bank of fraudulently inducing CIFG to insure the RMBS by misrepresenting the underwriting standards and quality of the loans underlying the RMBS. In May 2012, the trial court dismissed CIFG’s fraudulent inducement claims, finding that CIFG was a sophisticated party that should have done more due diligence before insuring the bonds. In reversing the trial court and ruling that the fraudulent inducement claims should not have been dismissed, the First Department concluded that CIFG’s use of an outside consultant to analyze the characteristics of the underlying loans raised sufficient questions of fact as to whether CIFG reasonably relied on Goldman’s representations. The First Department also revived CIFG’s fraud claim against M&T Bank, one of several originators that sold the loans to Goldman. The case is CIFG Assurance North America, Inc., v. Goldman Sachs & Co., et al., New York State Supreme Court, New York County, No. 652286/2011. Read the First Department’s decision here.
On May 6, 2013, a federal court in California allowed American International Group, Inc. (AIG) to proceed in its $10.5 billion lawsuit against Bank of America and Countrywide in connection with residential mortgage-backed securities (RMBS) that AIG purchased from Countrywide. AIG filed its complaint in August 2011 in New York state court, alleging that, between 2005 and 2007, the defendants ignored underwriting standards when they sold AIG billions of dollars in RMBS backed by residential mortgages that were issued to subprime borrowers. The case was removed to the Southern District of New York and then transferred to U.S. District Judge Mariana Pfaelzer of the Central District of California, who presides over all Countrywide-related litigation in federal court. In partially denying defendants’ motion to dismiss, Judge Pfaelzer held that AIG’s fraudulent inducement claims were adequately pleaded, except for causes of action based on misstatements of owner-occupancy data and oral misstatements. The court also dismissed AIG’s negligent misrepresentation claims. The court further ruled that AIG has standing, for now, to bring claims for RMBS it sold to Maiden Lane II, a vehicle created by the Federal Reserve Bank of New York to buy troubled RMBS from AIG. Bank of America had argued that AIG lost its right to sue for fraud when AIG sold the RMBS to Maiden Lane II. The case is American International Group, Inc., et al. v. Bank of America Corp., et al., 11-cv-10549, U.S. District Court, Central District of California (Los Angeles). Read the court’s order here.