March 4, 2013
The Second Circuit ruled in New Jersey Carpenters Fund v. The Royal Bank of Scotland Group et al. on a number of issues, but of interest to me are the sections dealing with allegations of misrepresentations.
The Court writes that “numerous courts, including the First Circuit in Nomura, have concluded that misstatements of an underwriter’s guidelines are not ‘so obviously unimportant’ that they are immaterial as a matter of law. Id. at 162; see Nomura, 632 F.3d at 773; J.P. Morgan, 804 F. Supp. 2d at 154; IndyMac, 718 F. Supp. 2d at 510; Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 392-93 (S.D.N.Y. 2010). We agree. The Series 2007-2 Trust consisted primarily of a pool of mortgage loans and interests in the properties that secured those loans. Investors would profit from their interests in the Series 2007-2 Trust only if the trust could recoup a sufficient portion of the balance of those loans. Thus, a ‘substantial likelihood’ exists that a reasonable investor would want to know whether those underwriting the loans had adhered to the procedures in place for evaluating ‘the capacity and willingness of the borrower[s] to repay the loan[s] and the adequacy of the collateral securing the loan[s].’ J. App’x at 370. Given the apparent importance of this information, we conclude that, at this stage of the proceedings, the alleged misstatements and omissions are not immaterial as a
matter of law.” (25-26)
The Court further writes that “knowledge that the borrowers had low credit scores and that many of the mortgages had high loan-to-value ratios would make a reasonable investor more, rather than less, interested in whether NMI [one of the Novastar defendants] had adhered to its processes for evaluating ‘the capacity and willingness of the borrower[s] to repay.’ J. App’x at 370. Accordingly, for the reasons described above, we conclude that the alleged misstatements and omissions are not immaterial as a matter of law.” (28)
The cumulative effect of the cases (see here for another example) arising from the Subprime Crisis is that broad carve-outs from representations will not protect parties from claims of misrepresentation. This seems to be an example of schoolyard law — in the good sense. Just because you crossed your fingers, it doesn’t mean that you weren’t lying.