New paradigm for mortgage put-back claims?

January 16, 2013

I did a double take Wednesday, when I noticed a pair of new suits by Lehman Brothers Holdings in federal court in Colorado. The complaints, which are almost identical, claim that the mortgage originator Universal American Mortgage breached representations and warranties about loans it sold to Lehman, which subsequently suffered losses as a result of those breaches. But here’s the thing: Each suit addresses only one supposedly deficient loan! Lehman’s lawyers at Akerman Senterfitt allege that Lehman sustained about $100,000 in damages on one of the loans and $120,000 on the other — numbers that are light years apart from the multibillion-dollar claims we’ve seen from groups of mortgage-backed securities investors who band together to assert contract breaches in thousands of loans at a time.

The Lehman complaints each also contained a curious paragraph, noting that the claims at issue were previously asserted as counts in an eight-loan put-back case Lehman was litigating in federal court in Miami. The judge in that case, Lehman said, had decided after a pretrial conference last week that “each loan must be filed separately, rather than joined within one action.”

That notation sent me to the docket in the Florida case, and to the order entered by U.S. District Judge James King on Jan. 9. It’s true: King ruled that every allegedly deficient loan has to be addressed in its own suit, not in a block case. “The lack of commonality among the various factual circumstances pertinent to each of the eight individual loans makes them all but impossible to be adjudicated together,” King wrote. “That lack of commonality flows from, among other things, the facts that each of these loans was made at a different time, to different borrowers, in different locations involving different purchases of different real properties; most fundamentally, each loan requires separate proof as to whether a breach occurred, what damages, if any, flowed from any such breach, and what the amounts of any such damages are.”

So even though discovery was complete, summary judgment motions had been fully briefed and the eight-loan case was scheduled for a March trial, the judge dismissed claims based on all but one of the loans in the original suit. He said Lehman could refile the other seven as separate cases in Miami federal court. (I called Lehman counsel Kelly Garcia of Akerman to ask why the new complaints were filed in Colorado, not Florida, but didn’t hear back.)

Universal American’s lawyer, Philip Stein of Bilzin Sumberg Baena Price & Axelrod, told me Wednesday that if other judges following King’s lead, the ruling could have profound implications for put-back litigation, since it significantly increases the cost of asserting breach-of-contract claims. (Stein also blogged about the order at Bilzin’s Mortgage Crisis Watch site.) Few put-back cases, Stein said, have reached final pretrial conferences, so few judges have considered the kind of commonality challenges he raised back in 2011 in Universal American’smotion to dismiss the Lehman suit. The judge denied the dismissal motion in order to permit discovery, Stein said, but was receptive when Universal American revived its argument at a pretrial hearing on Jan. 4.

“This is a big development, perhaps a bellwether,” Stein said, because it shifts the economic burden of put-back litigation. In this case, he told me, Lehman resold the loans it acquired from Universal American to Fannie Mae, which subsequently claimed Lehman had breached its representations about the mortgages. Lehman sued the mortgage originator to recover its own put-back payments to Fannie Mae. Stein, who represents several mortgage originators in put-back cases, said he’s noticed that the banks that aggregated and securitized mortgage loans espouse different views of put-back obligations, depending on whether they’re suing originators or being sued by MBS investors. “They talk out of both sides of their mouth,” he said.

King’s severance order, he said, may lessen banks’ enthusiasm for bringing claims. “Once the Lehmans of the world realize they’re facing eight mini-trials instead of one big trial, they may reconsider,” he said.

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