Supreme Court of New York County Rules Against Credit Suisse’s Motion to Dismiss MBS Investor Suit

In Stichting Pensioenfonds ABP v. Credit Suisse Group AG, 2012 WL 6929336 (N.Y.Sup. Nov. 30, 2012), the Supreme Court in New York County ruled that the lawsuit against Credit Suisse related to sales of MBS would proceed. The court denied Credit Suisse’s motion to dismiss with respect to (1) the statute of limitations, (2) fraud, (3) fraudulent inducement, and (4) officers and directors aiding and abetting fraud. The court granted the motion with respect to (1) negligent misrepresentation and (2) punitive damages.

With respect to the statute of limitations, the court held that a plaintiff must provide prompt notice under Dutch Law to sustain a claim, and whether the claim was prompt is within the competence and traditional purview of a jury. With respect to fraud, the court held that cure provisions (requiring Credit Suisse to replace bad mortgages in the securitization pool) in the offering documents did not change Credit Suisse’s representations about the process of selecting mortgages. It also held that the allegations about systematic underwriting failure are sufficient to state a claim and do not need to be accompanied by reference to specific loans. Allegations that Credit Suisse knew that many representations in its offering documents were false were also sufficient to state a claim. Finally, the plaintiff’s allegations of justifiable reliance on Credit Suisse’s representation and its losses are sufficient to state a claim.

With respect to fraudulent inducement, the court held that the offering documents are evidence extrinsic to the contracts and, drawing all reasonable inferences from the complaint, they induced the plaintiff to enter into a purchase agreement. The court also denied the motion to dismiss claims against individual officers and directors of Credit Suisse for aiding and abetting fraud. The complaint alleged that the individuals “directed, supervised and otherwise knew of the abandonment of underwriting practices and the utilization of improper appraisal methods; the inaccuracy of the ratings assigned by the ratings agencies; and the failure to convey to the Issuing Trusts legal title to the underlying mortgages.” The court held that those allegations were sufficient to provide the defendants “more than enough information regarding the claims against them to mount their defense.”

The court granted the motion to dismiss the negligent misrepresentation claim because the plaintiff failed to establish that Credit Suisse owed it a duty. The court also held that the plaintiff failed to establish that the fraud was aimed at the public generally, so punitive damages were not warranted.

Kentucky Counties Sue MERS and Banks for Recording Fees

In Boyd County, et al. v. MERSCORP, Inc., 0:12-cv-00033-HRW (Apr. 19, 2012) several counties in Kentucky brought a lawsuit against MERS and several Banks for lost recording fees. On August 7, 2012, the U.S. District Court for the Eastern District of Kentucky issued a stay of action pending the result of Christian County Clerk v. Mortgage Electronic Registration Systems, Inc. (6th Cir. No. 12-5237). 

Kentucky Attorney General Sues MERS for Recording Fees

In Commonwealth of Kentucky v. MERS Holdings, Inc., L3-CI-00060 (Jan. 23, 2013), the Kentucky attorney general filed a lawsuit against MERS seeking recording fees, claiming that it wrongfully held itself out as mortgagee on recorded mortgages, deceptively failed to record mortgage assignments, deceptively brings foreclosure actions, and lacks standing to bring foreclosure actions.

This suit follows a lawsuit brought by several Kentucky counties against MERS an other bank defendants.

UCC’s Permanent Editorial Board Reports on Ownership of and Right to Enforce Notes

In Application of the Uniform Commercial Code to Selected Issues Related to Mortgage Notes, the Permanent Editorial Board for the Uniform Commercial Code describes the legal difference between the right to enforce a note (governed by Article 3 of the UCC) and ownership of a note (governed by Article 9 of the UCC). The Report identifies the bases for different rules governing the right to enforce and ownership:

  • The rules that determine who is entitled to enforce a note are concerned primarily with the maker of the note, providing the maker with a relatively simple way of determining to whom his or her obligation is owed and, thus, whom to pay in order to be discharged.
  • The rules concerning transfer of ownership and other interests in a note, on the other hand, primarily relate to who, among competing claimants, is entitled to the economic value of the note.

The Report recognizes that a person may own a mortgage note but not have the right to enforce it. In disputes between parties regarding the rights of finance institutions vis-a-vis other finance institutions or borrowers, that distinction could be important. When the issue relates to the tax status of a mortgage pool, the distinction is relevant for purposes of determining the parties rights with respect to the note.


Borden & Reiss: “Once a Failed REMIC, Never a REMIC”

This article analyses how courts may reach results that undercut arguments that REMICs were the owners of the mortgage notes and mortgages for tax purposes. And even if the majority of states rule in favor of REMICs, the few that do not can destroy the REMIC classification of many mortgage-back securities that were structured to be—and promoted to investors as—REMICs. This is because rating agencies require that REMICs be geographically diversified in order to spread the risk of defaults caused by local economic conditions, REMICs hold notes and mortgages from multiple jurisdictions. Most, if not all, REMICs own mortgages notes and mortgages from states governed by laws that the courts determine do not support REMIC eligibility for the mortgages from those jurisdictions. This diversification requirement makes it very likely that REMICs will have more than a de minimis amount of mortgages notes that do not come within the definition of qualified mortgage under the REMIC regulations. Professionals who helped structure these securitizations may face liability if the IRS were to find that a purported REMIC was just purported and not a REMIC.

New York Attorney General Sues J.P. Morgan for Fraudulent and Deceptive Acts in Promoting and Selling Mortgage-Backed Securities

In New York v. J.P. Morgan Securities LLC, No. 451556/2012 (County of New York Oct. 10, 2012), the New York Attorney General sued J.P. Morgan (and several of its affilliates, including entities formerly a part of Bear, Stearns & Co.) for its role in connection with the creation and sale of residential mortgage-backed securities (RMBS). The multiple allegations include (1) J.P. Morgan’s systematic failure to fully evaluate loans and disregard for defects uncovered by its limited review, (2) its failure to reform practices and disclose information to investors, (3) its failure to confirm that loans were originated in accordance with applicable underwriting guidelines (including assurance that loans were extended to borrowers who demonstrated a willingness and ability to repay), (4) its failure to follow due diligence processes that it communicated to investors, (5) its disregard for defects that the watered-down due diligence uncovered, and (6) its failure to properly respond to defects uncovered through post-purchase quality control. The complaint alleges that J.P. Morgan had integrated the securitization process by controlling the originator and MBS sponsor and that those entities colluded to defraud investors of proceeds paid by the originator to the sponsor to settle re-purchase claims.

HSH Nordbank Sues Barclays Bank for Fraud in Issuing Mortgage-Backed Securities

In HSH Nordbank v. Barclays Bank, No. 652678/2011 (New York County Apr. 2, 2012), HSH Nordbank claims that Barclays Bank issued MBS offering materials that included false and misleading statements regarding (1) assignment of mortgages and notes to trusts, (2) the tax treatment of trusts as REMICs, (3) occupancy status of homes secured by mortgages, (4) the combined loan-to-value ratios of mortgages, and (5) compliance with underwriting standards.

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