Bank of America's $8.5B MBS Settlement Approved
On Thursday, March 5, New York's Appellate Division, First Department affirmed a trial court's approval of an $8.5 billion dollar settlement between Bank of America and plaintiff Bank of New York Mellon, as trustee of 530 RMBS trusts backed by mortgages originated by Countrywide Financial. The trustee entered into the settlement after it was negotiated with Bank of America by a group of 22 of the largest holders of certificates in the trusts. The trial court approved the settlement in most respects. Objecting investors appealed, challenging whether the trustee had properly exercised its discretion in entering into the settlement on behalf of the trusts. The appellate court approved the settlement in all respects, modifying the trial court's ruling by approving the trustee's release of claims concerning loan modification as part of the settlement. Order.
New York Supreme Court Holds RMBS Claims Are Timely, But Accrual Provision Unenforceable
On March 3, Justice Marcy S. Friedman of the New York Supreme Court granted in part and dismissed in part Defendant Greenpoint Mortgage Funding, Inc.'s Motion to Dismiss an action in which it was said to have misrepresented the quality of loans underlying an RMBS transaction. Plaintiff-Trustee, U.S. Bank National Association, argued that the case was timely under a provision of the governing Mortgage Loan Sale Agreement providing that no claim accrues for breach of a repurchase obligation until the purchaser discovers a breaching loan (or is so notified), the seller fails to cure such breach, and the purchaser makes a demand for cure. The court rejected the plaintiff's reliance on this accrual provision, citing earlier decisions holding that New York law precludes the extension of an applicable statute of limitations by contract. The court nonetheless concluded that the action was timely, finding that the plaintiff had pled sufficient facts to state a claim that Greenpoint was aware of breaches within the limitations period. Additionally, Justice Friedman granted the motion to dismiss the plaintiff's claims for (1) reimbursement of attorney's fees, as these were not encompassed by the MLSA's indemnification provisions, (2) all claims that sought relief beyond that permitted under the contract's sole remedy provision, and (3) claims for breach of the implied covenant of good faith and fair dealing, which the court found to be duplicative of the underlying contract claim. Order.
11th Circuit Certifies Insurable Interest Questions in Pruco Cases to the Florida Supreme Court
On February 27, 2015, the United States Court of Appeals for the Eleventh Circuit certified two important questions of Florida insurable interest law to the Florida Supreme Court. The Eleventh Circuit asked the Supreme Court to determine: (1) whether under Florida law, an insurer may challenge a policy for lack of insurable interest after expiration of the statutory two-year contestability period; and (2) whether Florida insurable interest law requires that an individual procuring life insurance do so in "good faith" and not with the intent to effect an assignment of the policy to one without an insurable interest. The certified issues arose in separate appeals from conflicting decisions rendered by two federal courts in the Southern District of Florida interpreting Florida law. In both Pruco Life Ins. Co. v. Brasner and Pruco Life Ins. Co. v. U.S. Bank, the insurer filed suit years after the statutory contestability period expired, alleging that the policies at issue were procured as part of a stranger-originated life insurance ("STOLI") scheme and seeking to invalidate them for lack of insurable interest.
In Brasner, an infamous insurance broker, Stephen Brasner, arranged for an elderly couple, Arlene and Richard Berger, to participate in a "STOLI scheme." On Brasner's application, which contained fraudulent misrepresentations concerning Ms. Berger's net worth and annual income, Pruco issued a policy on Ms. Berger's life. Her husband was the beneficiary, but the Bergers claimed they did not need and never intended to keep the insurance. Brasner secured third-party financing to pay the policy premiums, and arranged the transfer of the policy to a trust. More than two years after the policy was issued, the trust, with Ms. Berger's consent, surrendered the policy to the third-party premium lender in satisfaction of the debt incurred to finance the premiums. The beneficial interest in the policy was subsequently sold to a different investor.
The U.S. Bank case involved a different insurance broker and insured but, like Brasner, the case concerned a similar "STOLI scheme" in which Pruco issued a policy based on a fraudulent application submitted by an insurance broker. The policy named the insured's daughter as the primary beneficiary, although it was understood that the insured and her named beneficiary intended to transfer the beneficial interest in the policy to an investor. As in Brasner, a third party paid the policy premiums, and the beneficial interest in the policy was sold to an investor.
While the facts of the two cases were similar, the courts reached vastly different decisions. In Brasner, the court invalidated the policy for lack of insurable interest, notwithstanding that Pruco initiated its challenge outside the contestability period. In so holding, the Brasner court ruled that because the policy at issue was void ab initio, the clause in the policy providing for a two-year contestability period never took effect. The court then ruled that Florida law required persons procuring life insurance policies to do so in "good faith" and that purchasing a policy with the intent of effecting an assignment to a person without an insurable interest, as was the case in Brasner, did not satisfy that requirement.
By contrast, the U.S. Bank court dismissed Pruco's claim on the grounds that it was initiated outside of the two-year contestability period, and therefore barred as a matter of law. The court reasoned that in the STOLI context, a lack of insurable interest is inseparable from the fraud employed to procure the insurance policy, and because Florida law required insurers to contest fraudulently procured policies within the two-year contestability period, Pruco's challenge to the policy was time-barred. Having dismissed Pruco's claim as untimely, the U.S. Bank court did not address the substance of Pruco's insurable interest claims.
Because the Florida Supreme Court has the final word on the interpretation of Florida law, and insurable interest is governed by state law, the resolution of the certified questions by the Florida Supreme Court should provide answers to issues that have long remained unclear under Florida law. The Eleventh Circuit's certification order provides an opportunity for the Florida Supreme Court to upend rulings issued by federal trial courts that have largely interpreted Florida law unfavorably for investors.
SDNY Declines to Reconsider Denial of Plaintiffs' Summary Judgment Motion in RMBS Putback Case
On February 25, Judge P. Kevin Castel of the S.D.N.Y. issued an opinion denying reconsideration of a January 9, 2015 order that granted in part and denied in part the parties' competing motions for summary judgment in MASTR Adjustable Rate Mortgages Trust 2006-OA2 v. UBS Real Estate Secs., Inc., 1:12-cv-07322 (S.D.N.Y.). The plaintiff trusts moved the court for reconsideration of the prior ruling to the extent it (i) denied the trusts' motion for summary judgment as to a purported repurchase obligation for a specified percentage of the underlying loan pool based on statistical sampling, and (ii) dismissed the trusts' claims based on a "pervasive breach" theory. First, the Court concluded that plaintiff's submission of the results of their experts' re-underwriting of a sample of loans in which the experts concluded that 37% of the sampled loans were "materially defective" was not sufficient to require repurchase of 37% of the entire loan pool. Judge Castel reasoned that the reunderwriting conclusions "did not align with the materiality requirement of the parties' agreements," which require that the breach of a representation "materially and adversely affect the interest of the Certificateholders" in order to trigger a repurchase obligation. Second, the Court reaffirmed its prior rejection of the plaintiffs' "pervasive breach" theory, by which they argued that notice of "many" defective loans put the sponsor on inquiry notice and triggered an obligation to repurchase all defective loans. The Court relied on the parties' agreements, explaining that the parties could have, but did not, bargain for an inquiry notice standard. Order.
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