Editor: David Reiss
Brooklyn Law School

July 9, 2013

Ohio Court Grants in Part Securitization Sponsors’ Motions to Dismiss

By Brian Hanley

In Western & Southern Life Ins. Co. v. Residential Funding Co., No. A1105042, slip op. at 15 (Ohio Ct. Common Pleas June 6, 2012), an Ohio state trial court granted in part and denied in part motions to dismiss brought by defendants involved in the securitization and sale of mortgage backed securities. The court granted in part a motion to dismiss based on the statute of limitations and granted a motion to dismiss brought by officers of one of the defendant corporations on the ground that it lacked personal jurisdiction over those individuals. The rest of the motions were denied.

In connection with the purchase of $200 million of mortgage backed securities, plaintiffs Western & Southern Life Insurance Company, Western and Southern Life Assurance Company, Columbus Life Insurance Company, Integrity Life Insurance Company, National Integrity Life Insurance Company, and Fort Washington Investment Advisors brought an action alleging various kinds of fraud against defendants, a group of entities that participated in the securitization and sale of mortgage backed securities. The sponsors of the ten securitization actions in this case include Residential Funding Company, LLC, GMAC Mortgage, and Residential Accredit Loans. The underwriters included UBS Securities, RBS Securities, J.P. Morgan Securities, Deustche Bank, and Citigroup Global Markets.

Plaintiffs alleged that defendants’ fraudulent behavior included misrepresentation about owner occupancy rates, loan origination guidelines, appraisals and loan value ratios, underwriting guidelines, borrowers’ ability to pay, and transfer title issues. This case was before the court following oral argument on motions to dismiss plaintiff’s complaint on several grounds, defendants arguing (1) that the plaintiff’s claims are barred by the statute of limitations; (2) the plaintiffs failed to state a claim for which relief could be granted; (3) that plaintiffs failed to plead that the misrepresented or omitted matters were material; (4) that plaintiffs failed to properly plead reliance; (5) that plaintiffs failed to state the fraud and misrepresentation claims with sufficient particularity; (6) that plaintiffs failed to properly plead civil conspiracy; (7) that plaintiffs failed to adequately plead a claim for negligent misrepresentation; (8) that plaintiff National Integrity’s claims must be dismissed because its purchases occurred in New York, and (9) that the court lack personal jurisdiction over RFC Officers.

The Court granted in part and denied in part defendants’ motion to dismiss on the basis of the statute of limitations. The relevant statute provided that no action “shall be brought more than two years after the plaintiff knew, or had reasons to know, of the facts by reason of which the actions of the person or directors were unlawful, or more than five years from the date of such sale or contract for sale, whichever is shorter.” The court rejected defendants’ claims that plaintiffs had constructive notice more than two years before the complaint was filed because of rising delinquency rates and credit agency downgrades. The Court concluded that there was no “storm of warnings” sufficient to put plaintiffs on notice more than two years before the complaint was filed. However, the court granted defendants’ motion for all of plaintiffs’ claims within the 5 year statute.

The Court denied defendants’ motion to dismiss for failure to state a claim, finding that plaintiffs had pled facts sufficient to state claims for misrepresentation of underwriting guidelines, transfers of title, appraisals and loan to value ratios, credit ratings, and owner occupancy data.

The Court denied defendants’ motions to dismiss for failure to plead materiality of misrepresented material, failure to plead reliance, failure to state fraud with particularity, failure to plead the elements of civil conspiracy, and failure to plead negligent misrepresentation. The Court found that plaintiffs had sufficiently pled all of these elements. The Court also denied defendants’ motion to dismiss National Integrity’s claims.

With regard to defendants’ jurisdictional claim, the court found that although Ohio’s long arm statute extended jurisdiction to the officer defendants, such jurisdiction would not meet the requirements of due process with regard to the RFC officers.

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