Tag Archives: misrepresentation

Individual Liability for RMBS Misrepresentations

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Judge Cote (SDNY) issued an Opinion and Order in Federal Housing Finance Agency v. HSBC North America Holdings Inc, et al., 11-cv-06201 (Dec. 10, 2013).  The opinion relates to the potential liability of individuals who signed various documents containing alleged misrepresentations that were filed with the Securities and Exchange Commission. These misrepresentations, if true, may violate the Securities Act of 1933. Individuals who signed off on the alleged misrepresentations could be liable as “control persons” or other key individuals under the Act. The alleged misrepresentations were contained in offering materials for RMBS purchased by Fannie Mae and Freddie Mac.

The issue in the case is a pretty technical one: “the motion requires the Court to decide whether the SEC radically altered Section 11 liability for individuals who sign registration statements in the context of the shelf registration process when the SEC promulgated Rule 430B in 2005.” (5) Less technically, the motion requires that the Court decide the scope of potential liability for individuals for misrepresentations made in documents that they DID NOT sign that were supplemental to documents that they DID sign. The Court found that individuals could be held liable for such misrepresentations as had been the case before Rule430B had been promulgated.

I am not a securities law expert, so I assume that Judge Cote is right in stating that the defendants were arguing for a radical change to  the Securities Act of 1933 liability regime. I am also on the record in support of liability for individuals who are responsible for material aspects of the financial crisis. But I have also expressed concern about incredibly broad liability provisions. As a non-expert in this area, I was surprised that individuals could be held liable for misrepresentations that were made after they signed off on the preliminary documentation for securitizations.

Battle of the Mortgage Experts

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Judge Saris of the United States District Court (D. Mass.) issued a Memorandum and Order in Massachusetts Mutual Life Insurance Company v. Residential Funding Company, et al., No. 11-30035-PBS (Dec. 9, 2013). The opinion addresses a battle of statistical experts over the proper way to sample some of the hundreds of thousands of mortgages at issue in this litigation.

Mass Mutual, the plaintiff, alleges that the defendants misrepresented material aspects of many of those mortgages. To prove this, Mass Mutual intends to “reunderwrite” about 3.5% of loans by reviewing the “original loan file to determine whether  it was originated in accordance with applicable standards.” (3) . More particularly, Mass Mutual alleged that

the defendants marketed the [RMBS] certificates with representations that the loans backing the securities were underwritten in accordance with prudent underwriting standards and the underlying properties were appraised in accordance with sound appraisal standards, in order to ensure that the borrower could repay the loan and to decrease the risk of default. Plaintiff asserts that the loans underlying each [loan pool] were, in reality, far riskier than represented. Plaintiff also alleges that the defendants knowingly reported false loan-to-value (“LTV”) ratios, and in the case of defendant HSBC, inaccurate owner-occupancy rates for underlying properties. The defendants deny that they made any material misrepresentations in the marketing and sale of the certificates. (4)

The Court stated that while the defendants had identified various methodological errors that would render the report of Mass Mutual’s expert unreliable, similar challenges had failed in four other RMBS litigations. The Court ultimately denied the defendants’ motion to exclude the opinions of the plaintiff’s expert.

A body of law about expert evaluation of misrepresentations in securitization is slowly developing as cases are moving from the motion to dismiss stage to the pretrial discovery phase. This will have broader significance than just securitization litigation, but I find it particularly interesting to watch experts attempt to reduce “questions of misrepresentation” regarding RMBS to yes/no answers. (15) Such attempts to quantify misrepresentation will be useful to resolve cases such as this but also to regulators and researchers down the line.

Michigan Court Holds That Plaintiffs Were Not Subject to Double Liabilty on Their Debt and Thus Lacked Standing

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The court in deciding Laues v. Bank of Am., N.A., 2013 U.S. Dist. LEXIS 147912 ( E.D. Mich. Oct. 15, 2013) granted the defendant’s motion and dismissed the plaintiff’s claim.

Plaintiffs Roy A. Laues and Kristin G. Laues (“the Laues”), preceded pro se, and filed a complaint claiming that the defendants fraudulently conveyed their property and improperly bifurcated their note and mortgage. The plaintiff’s sought to quiet title by extinguishing Defendants’ interest in the property. Defendants filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted, pursuant to Fed. R. Civ. P. 12(b)(6). After considering the arguments the court ultimately granted the defendant’s motion.

Plaintiff alleged that MERS lacked authority to assign the mortgages, which would make the subsequent assignments invalid. MERS acted as nominee for lender AWL in assigning the mortgages. The court found that the plaintiffs were not a party to the assignment and as such was not threatened with double liability on the debt. Thus the court determined that they had no standing to challenge the assignment.

Georgia Court Dismisses Wrongful Foreclosure Claim

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The court in deciding Bowman v. U.S. Bank Nat’l Ass’n, 2013 U.S. Dist. LEXIS 149660 (N.D. Ga. 2013) eventually granted the defendant’s motion to dismiss.

Plaintiff’s complaint was wide-ranging and repetitive, the gravamen of the complaint was a wrongful foreclosure claim which was premised on plaintiff’s allegations that: (1) Castle Rock Trustee was not the “secured creditor,” (2) the actual “secured creditor” was not identified to plaintiff in any notice, (3) the Castle Rock Trustee did not send notice of the November 6, 2012, foreclosure sale to plaintiff, (4) the assignments were invalid, and (5) the discharge of the underlying debt in a Chapter 7 bankruptcy case precluded foreclosure.

The court eventually held that plaintiff had fraudulently joined the LLC did not defeat diversity; the value of the property was the appropriate benchmark for the amount in controversy and there was no dispute that tax records value the property at $188,900. The court also found that plaintiff’s Chapter 7 discharge did not bar defendants from initiating foreclosure proceedings against the property nor did the Chapter 7 discharge render “false” defendants description that plaintiff had failed to pay the mortgage debt.

The court also found that plaintiff’s complaint failed to state a claim for wrongful foreclosure due to errors in the Foreclosure Notice where the Notice was sent to the property address, which was authorized under the statute, and plaintiff had not alleged that he requested the Notice be sent to an alternate address.

After considering the merits of both claims, the court ultimately agreed with the defendant and granted the defendant’s motion to dismiss, and dismissed with prejudice.

Michigan Court Dismisses Fraud & RESPA Claims

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The court in deciding Neroni v. Bank of Am., N.A., 2013 U.S. Dist. LEXIS 149190 ( E.D. Mich. 2013) eventually granted the defendant’s motion to dismiss.

Plaintiffs alleged claims against defendant [Bank of America, N.A.] for infringement of the Real Estate Settlement Procedures Act (“RESPA”) (Counts I–IV), common law fraud (Count V), common law silent fraud (Count VI), and common law breach of contract (Count VII).

Defendant responded by asserting that plaintiffs’ RESPA claims should be dismissed because (1) defendant had no legal obligation under RESPA to respond or, alternatively, (2) plaintiffs failed to plead any actual damages related to their RESPA claims. Defendant further asserted that plaintiffs had failed to adequately plead claims for fraud or breach of contract relating to defendant’s legal standing to foreclose on Plaintiffs’ Home.

After considering the merits of both claims, the court ultimately agreed with the defendant and granted the defendant’s motion to dismiss.

More on Misrepresentation

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NY Supreme Court Justice Schweitzer (NY County) issued a Decision and Order on a motion to dismiss in HSH Nordbank AG, et al., v. Goldman Sachs Group, Inc., et al., No. 652991/12 (Nov. 26, 2013) that builds on the NY jurisprudence of RMBS misrepresentation. The decision notes that “The gravamen of the complaint is that Goldman Sachs knew that” its metrics and representations regarding various RMBS “were false, but did not alert Nordbank.” (2) In particular,

Nordbank alleges that Goldman Sachs knew that loan originators had systematically abandoned underwriting guidelines described in the Offering Materials. It alleges that Goldman Sachs knowingly reported false credit ratings, owner-occupancy percentages, appraisal amounts, and loan-to-value ratios. It alleges that although Goldman Sachs represented otherwise in the Offering Materials, Goldman Sachs never intended to properly effectuate transfer of the underlying notes and mortgages that collateralized the Certificates. (2)

The Court found that Nordbank “sufficiently alleged that Goldman Sachs had knowledge that originators were deliberately inflating appraisal values to artificially obtain understated CLTV ratios that corresponded with lower risk.” (9) As a result, “the complaint sufficiently describes actionable misrepresentations regarding appraisal values, loan-to-value ratios, and owner-occupancy rates.” (9)

Nordbank also alleged

that it has suffered losses totaling more than $1.5 billion as a result of the alleged misrepresentations regarding the loans’ conformity with originators’ underwriting guidelines. Specifically, Nordbank alleges that it has been unable to transfer notes and mortgages that have declined in value because of the poor quality of the underlying loans. The representations at issue allegedly resulted in higher rates of default, an impaired ability to obtain forecloses, and ultimately, a lower cash flow to Certificate-holders like Nordbank. Because Nordbank has sufficiently alleged a chain of causation leading from the alleged abandonment of underwriting standards to a decline in the market value of the Certificates, the complaint cannot be dismissed for failure to allege lost causation. (20)

As this decision was on a motion to dismiss, none of these findings result in actual liability for Goldman Sachs, but they do provide a road map for what liability could look like.  As I have noted in the past, it will be interesting to see how this body of law will affect the securitization process going forward.

Court Dismisses Plaintiffs’ RESPA Claims Because Defendant Was Not Under Legal Obligation to Respond to Plaintiffs

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The court in deciding Neroni v. Bank of Am., N.A., 2013 U.S. Dist. LEXIS 149190 ( E.D. Mich. Oct. 17, 2013) granted defendant’s motion to dismiss plaintiffs’ complaint pursuant to F.R.C.P. 12(b)(6).

Plaintiffs alleged several claims in their complaint against Defendant for infringement of the Real Estate Settlement Procedures Act (“RESPA“) (Counts I–IV), common law fraud (Count V), common law silent fraud (Count VI), and common law breach of contract (Count VII).

Defendant asserted that plaintiffs’ RESPA claims should be dismissed because (1) defendant had no legal obligation under RESPA to respond or, alternatively, (2) plaintiffs failed to plead any actual damages related to their RESPA claims.

Defendant further asserts that plaintiffs have failed to adequately plead claims for fraud or breach of contract relating to defendant’s legal standing to foreclose on plaintiffs’ Home. After considering both sides’ arguments, the court agreed with the defendant’s reasoning and dismissed the case.