Opinion

Alison Frankel

MBS investors bring in Paul Clement to appeal N.Y. timeliness opinion

By Alison Frankel
January 23, 2014

There are probably fewer than 100 lawyers in America who argue regularly before the U.S. Supreme Court and the highest state courts of appeal. And of those, a scant handful argue against corporate interests. That is particularly true when banks are involved: Lawyers who practice at big firms that regularly represent (or hope to represent) financial institutions avoid cases that endanger those relationships, even when one bank is suing another. But the renowned former U.S. Solicitor General Paul Clement left behind those concerns in 2011 when he left King & Spalding and joined Bancroft, a tiny appellate startup. Last year, Clement took up the Supreme Court case of small merchants suing American Express for antitrust violations. (He lost.) Now he’s turned up to oppose banks in one of the biggest-dollar appeals in the courts. On Tuesday, as first reported by the New York Commercial Litigation Insider, Clement appeared as counsel of record in HSBC’s motion, as a mortgage-backed securities trustee, for the New York Appellate Division, First Department to reconsider its Dec. 19 ruling on the timeliness of MBS breach-of-contract claims or else let the case proceed to the state’s highest court.

The appellate opinion in Ace Securities v. DB Structured Products, as you probably recall, shut the door on N.Y. state-court mortgage-repurchase suits filed more than six years after the MBS sponsor closed on its agreement to acquire the underlying loans for securitization. That ruling, as Clement and HSBC co-counsel Kasowitz Benson Torres & Friedman explained in the reconsideration brief filed Tuesday, has the potential to wipe out hundreds of cases already brought by MBS trustees and certificate holders, implicating “hundreds of billions of dollars in losses,” according to the brief. Clement and Kasowitz argue that the Appellate Division’s skimpy three-page opinion on the timeliness of put-back suits “fails to grapple with…conflicting precedents in a meaningful way,” so HSBC should either have a chance to reargue before the intermediate appeals court or to take its case to New York’s Court of Appeals. (Quinn Emanuel Urquhart & Sullivan‘s name isn’t on the new filing, but I’ve been told the firm is involved in the appeal on behalf of the certificate holder that originally directed HSBC to sue over supposedly deficient underlying loans in the Deutsche Bank MBS offering.)

The brief also points out that courts around the country have reached conflicting conclusions about when, under New York law, the six-year statute of limitations begins to run on MBS mortgage repurchase claims. Even federal judges in Manhattan, ruling in the wake of the Appellate Division’s opinion last month, have split on the question (as I’ve reported). That muddle must be resolved, according to the new brief. “Analogous lawsuits ostensibly governed by the same New York laws now will be permitted to proceed in some courts but not others,” it says. “What is more, DB and other RMBS sponsors will be able to evade all liability for their actions under this court’s decision, even though other RMBS investors have already collected massive settlements in cases that include failure-to-repurchase claims nearly identical to those raised here. That untenable situation readily warrants the reconsideration of this court or, in the alternative, the immediate attention of the Court of Appeals.”

By my read, the brief makes a good case that the state’s highest court should take up HSBC’s appeal, but it doesn’t add much to arguments that MBS trustees have already made for why the clock shouldn’t begin to tick on their claims until the mortgage originator has refused a repurchase demand. The brief cites New York precedent we’ve already seen in the timeliness debate, such as Bulova Watch v. Celotex, Hahn Automotive v. American Warehouse and John J. Kassner v. City of New York.

Clement and Kasowitz do put a twist on trustees’ previous citations of Kassner. In that 1979 case, the Court of Appeals found that when a final payment is subject to contractual conditions, the obligation to pay – and a claim for failure to meet that obligation – accrues only after the conditions have been met. In the Ace opinion, the Appellate Division said that trustees cannot bring put-back suits under MBS contracts until mortgage originators have had 60 or 90 days to review their repurchase demands. Kassner precedent would seem to compel the Appellate Division to start the clock on MBS contract claims only when that condition is met, the brief argues. The court’s contrary holding that the statute of limitations begins before anyone discovers deficiencies in the underlying mortgage loans is irreconcilable with Kassner, according to the brief.

It’s my understanding that Clement will argue for HSBC (and, by extension, for MBS trustees and investors) if the Appellate Division agrees to rehear the ACE case or if the Court of Appeals eventually takes up the issue. The big question, though, is whether that will occur before the 2nd Circuit Court of Appeals hears an appeal of U.S. District Judge Shira Scheindlin‘s dismissal of a put-back suit by U.S. Bank (as MBS trustee) against Greenpoint Mortgage. The 2nd Circuit has an expedited process for cases tossed on dismissal motions, so, as I’ve mentioned, U.S. Bank’s lawyers from Quinn Emanuel could end up asking the federal appeals court to redefine the timeliness of MBS put-back claims before Paul Clement gets to make that argument in a New York state courtroom.

I left messages with Clement and HSBC counsel Marc Kasowitz but didn’t hear back. Deutsche Bank lawyer David Woll of Simpson Thacher & Bartlett didn’t respond to an email request for comment.

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