N.Y. Court Closes Door on MBS Put-Back Claims
In a key win for Simpson Thacher & Bartlett's David Woll and a big chunk of the financial industry, New York's Appellate Division, First Department, on Thursday knocked out billions of dollars in contract claims against banks that churned out mortgage-backed securities. The court ruled that the clock had run out on so-called put-back claims against a subsidiary of Deutsche Bank SA that sold one such securitization, leaving investors and the trustee for the security out of luck.
The decision, which you can read here, dismisses a $330 million lawsuit alleging that Deutsche Bank unit DB Structured Products misled investors about home loans pooled into an RMBS securitization in 2006. A trustee for RMBS investors, HSBC Bank, wanted DB to repurchase the underlying home loans, but the First Department ruled that the allegations are time-barred under New York law. Marc Kasowitz of Kasowitz Benson Torres & Friedman represents the trustee.
The ruling is certain to affect similar cases. The First Department concluded that the six-year statute of limitations began running on the date of the MBS seller's alleged misrepresentation. HSBC tried to argue that the clock didn't start until the date of the seller's refusal to buy back the underperforming home loans. The Manhattan state court trial court judge assigned to the case, Shirley Werner Kornreich, had sided with HSBC's approach—an approach that conceivably would have allowed MBS trustees to bring put-back cases decades into the future.
Presuming the First Department's ruling stands up on further appeal, Kornreich likely will have no choice but to dismiss several MBS cases before her that involve similar fact patterns. Kornreich's plaintiffs-friendly view of the statute of limitations put her at odds with her colleague O. Peter Sherwood, who chimed in on the issue a few days before her in a $259 million case involving Nomura Credit & Capital Inc.
More importantly, the First Department's decision effectively blocks plaintiffs from filing new RMBS put-back cases. In an email, Scott Musoff of Skadden, Arps, Slate, Meagher & Flom explained that the alleged misrepresentations at issue in these cases typically date back to before the financial crisis, so it's hard to see how any new cases could fall within the six-year window. "This decision should significantly limit new RMBS outback claims going forward," said Musoff, who wasn't involved in the DB case.
The First Department held oral argument the day before Thanksgiving. Simpson Thacher's Woll argued for DB, squaring off against Kasowitz, a go-to lawyer for RMBS trustees who was on the winning side of Judge Sherwood's ruling in the Nomura case.
Kasowitz told us that he respectfully disagrees with the First Department's decision. "We look forward to a successful appeal," he said.
The case drew considerable amicus support. George Conway III of Wachtell, Lipton, Rosen & Katz filed an amicus brief on behalf of Securities Industry and Financial Markets Association, which sided with DB. Paul Smith of Jenner & Block argued on behalf of another DB ally, the Mortgage Bankers Association. McKool Smith's Robert Scheef argued on behalf of the Association of Mortgage Investors, which supported the trustee.