The courts have been busy this year, handing down several key decisions which have affected the structured finance landscape. Among them are Omnicare, Ace Securities and Madden. In the grand tradition of the Golden Turkey Awards due out later this month (and without stealing any of their thunder), this post is a quick review of these important cases.
In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015), the Supreme Court clarified issuer liability under §11 of the Securities Act for the opinions given in registration statements. Section 11 provides that issuers are liable for registration statements that contain “an untrue statement of a material fact or omit to state a material fact required . . . to make the statements therein not misleading.” The Court held that an issuer is not liable under §11 merely because a sincerely-held opinion turns out to be factually wrong. Future litigation under §11 will likely focus on the content, sincerity and basis of opinions given on registration statements rather than the factual truth of those opinions. Furthermore, the standard set in Omnicare could apply more broadly to contexts beyond publicly registered deals and §11. Anyone giving an opinion in connection with an offering of securities should take care that the basis of that opinion can be documented.
We previously considered Omnicare’s potential impact on secutizations here.
The New York Court of Appeals decided in Ace Securities Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581 (2015) (“Ace Securities”) that New York’s statute of limitations on repurchase obligations in a typical mortgage loan repurchase agreement starts running from the closing date of a securitization. Previously, many parties assumed representations and warranties made at the close of a securitization would run for the life of the related loans. Instead we have learned that under New York law, claims for breach of representations and warranties go stale six years from closing, unless the parties agree otherwise. Moody’s noted that this decision is credit negative and that it expects that parties will contract around the statute of limitations. Securitization parties should consider how to structure their deals to avoid unintended negative impacts.
In Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015) (“Midland”), the Second Circuit Court of Appeals held that state usury claims are not preempted by the National Banking Act when a non-bank entity takes an assignment of debts originated by a national bank. This case leaves a lot of unanswered questions. Does the fact that the National Banking Act not preempt state usury claims matter if other arguments limiting those claims exist? For example, Madden does not address the “valid when made” doctrine of assignment law–the principle that if a loan that is non-usurious when made then it will remain non-usurious even if it is subsequently assigned. Nonetheless, market participants should consider how deals may be structured consistent with Madden to avoid running afoul of state usury laws.
We recently put out an OnPoint which goes into much more detail about this case, which you can find here.
While Omnicare clarifies issuer liability, Ace Securities and Madden create uncertainty in the structured finance landscape. Any could affect your next deal.