August 2016: Securities & Structured Finance Litigation Update: Relation Back in RMBS Putback Cases.

by Quinn Emanuel Urquhart & Sullivan, LLP
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Quinn Emanuel Urquhart & Sullivan, LLP

In a recent RMBS putback case in the Southern District of New York, Quinn Emanuel won a ruling that the plaintiff trustee’s expert reports, served nearly three years after the litigation commenced, satisfied the contractual requirement of loan-level breach notice and “related back” to the original complaint such that the statute of limitations did not bar any of the trustee’s claims. MASTR Adjustable Rate Mortgages Trust 2006-OA2 v. UBS Real Estate Securities (“MARM”), 2016 WL 1449751 (S.D.N.Y. Apr. 12, 2016). This ruling almost doubled the number of loans at issue in the action under a notice theory, and thus substantially increased the potential recovery. If followed, this ruling should vitiate defendants’ attempts to bar putback claims relating to loans that were not the subject of pre-suit breach notices, as long as timely claims were brought as to some portion of the loans in the relevant trust.

The trustee sought recovery from the sponsor of three RMBS securitizations for the sponsor’s breaches of representations and warranties concerning the characteristics of securitized loans that it made in Pooling and Servicing Agreements (“PSAs”) governing the securitizations. The PSAs provided that the sponsor had to cure or repurchase materially defective loans within 90 days after receiving written notice of or discovering such breaches. The courts have held that no suit can be brought to enforce a repurchase obligation as to any loan until the cure or repurchase period for that loan has ended, and that, under the statute of limitations, any such suit must be commenced within six years of the closing of the securitization. See ACE Securities Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581 (2015) (“ACE”). RMBS sponsors have repeatedly argued that, under ACE, no repurchase claims can be made with respect to any loans that were not specifically noticed prior to suit unless the defendant independently discovered the breaches, and that any attempt to notice claims after the commencement of suit is barred by the statute of limitations.

This argument was rejected in Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015) (“Nomura”). There, the First Department affirmed the lower court’s refusal to dismiss “claims relating to PRACTICE AREA NOTES (cont.) 8 loans that plaintiffs failed to mention in their breach notices or that were mentioned in breach notices sent less than 90 days before plaintiffs commenced their actions.” Id. at 108. The court distinguished ACE on the basis that no timely claims as to any loans were ever filed in ACE. By contrast, the plaintiffs in Nomura brought timely claims as to a portion of the loans at issue and any amendment to the complaint adding claims as to later-noticed loans would relate back to the timely claims and thus be timely. The court held that the allegations in the pre-suit letters put the defendant on notice that the plaintiffs may discover more defective loans. This, coupled with the complaint’s allegations that defendants discovered defective loans through their own due diligence, was sufficient to meet New York’s relation back standard.

In MARM, only 4,460 of the 17,082 loans in the trusts at issue were identified as materially defective in pre-suit breach notices. However, the trustee’s re-underwriting expert ultimately determined that 10,000 loans were materially defective. In August 2015, nearly three years after the complaint was filed, the trustee served its expert’s written report as to these 10,000 loans on UBS. UBS argued that because these loans were not identified in pre-suit breach notices, the trustee’s claims as to these loans based on a notice theory were untimely. The court disagreed, holding that the expert report provided written notice of all materially defective loans, and that because the trustee had brought timely claims as to at least some of these loans which had been the subject of pre-suit breach notices that warned that investigation of the loans was ongoing, under Nomura, the trustee’s claims as to later-noticed loans in the same trusts related back to these timely claims, and were themselves timely. MARM, 2016 WL 1449751, *4 (S.D.N.Y. Apr. 12, 2016). The court further held that UBS suffered no prejudice from an amendment adding claims for these additional loans, because, contrary to UBS’s assertion, the complaint did allege that UBS independently discovered all materially defective loans, and thus “UBS was on notice that all loans were potentially in play.” Id. Quinn Emanuel’s successful application of Nomura more than doubled the number of loans for which the MARM trustee could pursue a notice-based theory, significantly easing its burden of proof.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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