On August 11, the Appellate Division of the New York Supreme Court First Department reversed a trial court’s decision and held that the trustee plaintiff’s allegations against a financial institution were sufficient to support breach of contract and negligence claims arising from the securitization and sale of residential mortgages. Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley Mortg. Capital, 2016 NY Slip Op. 05781 (N.Y. App. Div. Aug. 11, 2016). According to the plaintiff, the defendant’s alleged breach of its contractual duty to notify the trustee of defective loans resulted in the sale of “virtually worthless” residential mortgage-backed securities (RMBS) to outside investors. The plaintiff further alleged that the defendant failed to “adhere to the barest minimum of underwriting standards,” claiming that many of loans had incorrect and/or unsatisfactory debt-to-income ratios and that the defendant represented the loans to appear less risky than they actually were. In reversing the lower court’s ruling that the “complaint did not contain facts to sufficiently support” an independent, separate claim for breach of contract, the court cited its recent decision in Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital, Inc., stating that “under similar RMBS agreements, a seller’s failure to provide a trustee with notice of material breaches it discovers in the underlying loans states an independently breached contractual obligation, allowing a plaintiff to pursue separate damages” (internal citation omitted).
New York Supreme Court Appellate Division Affirms Six-Year Statute of Limitations Applicable to Breach of Contract Action
On August 11, the Appellate Division of the New York Supreme Court First Department affirmed a trial court’s decision that the statute of limitations bars a breach of contract action brought more than six years after the seller (defendant) of mortgage loans made allegedly false representations and warranties to the purchaser (plaintiff) regarding the characteristics, quality, and risk profile of the loans. Deutsche Bank Nat’l Trust Co. v. Flagstar Capital Mkts. Corp., 2016 NY Slip Op. 05780 (N.Y. App. Div. Aug. 11, 2016). In this case, the plaintiff purchased loans from defendant with closing dates between December 7, 2006 and May 31, 2007. Through various assignments, the loan pool was conveyed to a Trust, of which the plaintiff was a trustee, securitized, and sold to investor certificateholders on October 2, 2007. In 2013, at the request of one of the certificateholders, an underwriting firm performed a forensic review of the loans underlying some of the certificates and found that “a large number of the loans breached representations and warranties made by defendant regarding the quality and characteristics of the loans.” Although the defendant was notified of the breaches, it failed to comply with the repurchase protocol set forth in the agreement between the seller and purchaser.
The plaintiff commenced action against the defendant on August 30, 2013, subsequently filing a complaint on February 3, 2014 “seeking specific performance, damages and/or rescission, and asserting a cause of action for breach of contract and a cause of action for breach of the implied covenant of good faith and fair lending.” The defendant moved to dismiss the case on the ground that the action was time barred, since it began more than six years after the plaintiff’s accrual date of the loans. The trial court ruled in favor of the defendant, reasoning that in the Court of Appeal’s recent decision in ACE, it “held that a breach of contract claim in an RMBS put-back action accrues on the date the allegedly false representations and warranties were made.” ACE Sec. Corp. v DB Structured Products, Inc., 36 N.E.3d 623 (N.Y. June 11, 2015). The Appellate Division affirmed, holding that “New York’s statutes of limitation codify the public policies of ’finality, certainty and predictability that [our] contract law endorses’ (ACE, 25 NY3d at 593). The parties’ accrual provision runs afoul of these important policies.”
On June 2, the FDIC announced a settlement with eight financial institutions to resolve federal and state securities law claims based on the institutions’ residential mortgage-backed securities (RMBS) practices. As the receiver for five failed banks from November 2011 through August 2012, the FDIC filed six lawsuits for alleged violations of federal and state securities laws. Specifically, according to the FDIC, the eight financial institutions made misrepresentations in offering documents in connection with the sale of 21 RMBS to the five failed banks. The $190 million in settlement funds will be distributed among the receiverships for the five failed banks.
Last week, Illinois AG Madigan announced a $41 million settlement with a New York-based investment bank for its alleged misconduct in connection with the marketing and selling of at risk residential mortgage-backed securities (RMBS) prior to the economic collapse in 2008. Specifically, according to an investigation led by AG Madigan’s office, the investment bank allegedly failed to disclose the actual risk of RMBS investments. Under the terms of the settlement, $16 million of the settlement funds will go toward consumer relief, with the remainder being distributed to the Teachers Retirement System of the State of Illinois, the State Universities Retirement System of Illinois, and to the Illinois State Board of Investment. Finally, the investment bank’s settlement with Illinois is part of a $5 billion national settlement led by the DOJ – as well as additional federal entities – and the state AGs of New York and California.
New York AG Schneiderman Announces Settlement with New York-Based Financial Institution Regarding RMBS Practices
On February 11, New York AG Schneiderman announced a $3.2 billion settlement that includes $550 million for New York with a New York-based financial institution over its alleged deceptive practices involving the sales and issuance of Residential Mortgage-Backed Securities (RMBS) leading up to the financial crisis. According to the settlement agreement, the financial institution (i) increased the acceptable risk levels for loans held in its securitized pools; (ii) securitized certain loans that did not comply with underwriting guidelines and did not have adequate compensating factors; (iii) purchased and securitized loans which its credit and compliance team advised it not to purchase; and (iv) allowed for the purchase of loans it knew to be risky without a loan file review for credit and compliance. The settlement requires the financial institution to (i) provide at least $400 million in consumer relief directly to struggling families and communities across the state; and (ii) pay $150 million “in consideration for the settlement of potential legal claims by the NYAG as compensation for harms to the State of New York allegedly resulting from [its] creation, packaging, marketing, underwriting, sale, structuring, arrangement, and issuance of RMBS in 2006 and 2007.” Read more…