How a lone New York judge squeezed billions from banks in MBS cases

July 28, 2014

Asking a federal appeals court to step into the fray of an ongoing case to reverse a decision by a trial judge is extraordinary. Petitions for a writ of mandamus, as such requests are known, assert that trial judges have committed such egregious errors that their appellate overseers must undo the damage immediately, before the case gets to a final judgment. Mandamus petitions are a desperation move, a last resort when you’ve got nothing to lose from alienating a trial judge who’s already ruled against you.

Last Thursday, RBS filed not one but three mandamus petitions at the 2nd, 9th and 10th circuits — an apparently unprecedented response to what the bank claims is an unprecedented abdication of responsibility by trial judges presiding over cases brought by the National Credit Union Administration (NCUA).

The suits, which involve billions of dollars in mortgage-backed securities purchased by failed credit unions, were filed in different federal districts, and the Judicial Panel on Multidistrict Litigation denied requests by bank defendants to consolidate them. But according to RBS, the trial judges took it upon themselves to streamline discovery, agreeing to abide by the rulings of a single “coordination judge.”

Why does RBS, which had previously asked for the cases to be consolidated, now bitterly oppose coordinated discovery?

Because the judge whose rulings will apply in all of the NCUA cases is U.S. District Judge Denise Cote of Manhattan, the avenging angel of financial crisis litigation.

Judge Cote has probably done more than any other single person to extract accountability from big banks for their deceptive MBS practices. Her anti-bank rulings in the suite of cases filed by the Federal Housing Finance Agency in 2011 have already forced 15 defendants to pay about $16 billion in settlements in order to avoid hurry-up trials on FHFA’s claims that they deceived Fannie Mae and Freddie Mac about the mortgage-backed securities they underwrote and sponsored. Only four banks are still fighting FHFA’s claims, and it looks like one of them, Goldman Sachs, is on the verge of capitulation; on Saturday, Reuters confirmed a Wall Street Journal report that Goldman is in talks to settle with FHFA for as much as $1.25 billion.

Those negotiations are a tacit acknowledgment of Cote’s latest rejections of bank defenses. On Wednesday, according to Reuters, the judge said she was unlikely to revisit her previous ruling that Congress extended all time limits for Fannie Mae and Freddie Mac securities fraud claims when it passed the 2008 law creating FHFA. The banks had been hoping (without much hope, really) that Cote would be swayed by a U.S. Supreme Court ruling last month that distinguished between two different kinds of time bars, but Cote suggested at Wednesday’s hearing that she wasn’t interested in hair-splitting.

Nor is she persuaded that the banks aren’t liable to well-informed MBS investors like Fannie Mae and Freddie Mac. On Friday, Cote ruled that no reasonable jury would find that Fannie and Freddie knew the banks were misrepresenting specific characteristics of particular mortgage loan pools. The judge acknowledged that Fannie and Freddie had access to all kinds of general information about shoddy mortgage underwriting practices. But the banks’ representations in offering documents were based on specific, loan-level information Fannie and Freddie didn’t have, Cote said. Her grant of summary judgment to FHFA and its lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman severely handicaps Goldman and the other remaining bank defendants in the FHFA cases: HSBC, RBS and Nomura.

That’s nothing new. The banks in the FHFA litigation have argued for the past two years — most notably in a joint petition they filed at the 2nd Circuit in March 2013 — that Judge Cote’s one-sided decisions and fast-track trial schedule left them no choice but to settle. (The 2nd Circuit summarily denied the joint petition last July.) But what RBS’s new mandamus filings show is how Cote’s views of bank liability for the MBS debacle will shape NCUA’s ongoing cases as definitively as they’ve impacted the FHFA litigation — even though Cote is not overseeing all of the NCUA suits.

The judge’s control over far-flung NCUA claims is no accident. Last September, when NCUA’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel and Korein Tillery filed six new MBS fraud suits in federal court in New York, they asserted that the cases were related to FHFA’s MBS litigation and therefore belonged before Judge Cote. Cote accepted the assignment, over objections from the banks.

The banks had asked instead that the New York cases be transferred to a federal judge in Kansas who’d been presiding over different (and much larger) NCUA suits since 2011. After the Judicial Panel on Multidistrict Litigation rejected that request, Judge Cote, according to RBS, acted quickly to extend her influence over NCUA litigation in Kansas and California. Cote called U.S. District Judges John Lungstrum of Kansas City and George Wu of Los Angeles to suggest a coordinated discovery plan.

At a joint hearing in April in cases across the three jurisdictions, according to RBS, Cote announced that the judges had agreed upon a coordinated discovery protocol and that all discovery disputes — even those arising just in Kansas or California — were to be submitted to her as the “coordination judge.” She said she would consult with the other judges before issuing rulings, but according to RBS, Judge Lungstrum’s name wasn’t even on several orders in the Kansas case.

Both Lungstrum and Wu have rejected RBS calls to stop Cote from issuing rulings in cases outside of her jurisdiction. The bank contends that neither the judges nor NCUA — which is perfectly happy to see Judge Cote in charge — have cited precedent for this sort of informal delegation of judicial authority. RBS wants the federal appeals courts to wrest control from Cote before the NCUA bank defendants end up in the same predicament as those in the FHFA litigation. Hence, those mandamus petitions.

Such petitions are granted very rarely, and it won’t help RBS that the 2nd Circuit has already heard banks whinge about Judge Cote in their joint mandamus filing in the FHFA case. Chances are that the appeals courts will permit to Cote to continue to decide how much information NCUA and the banks can obtain from one another in discovery. Those rulings, in turn, will determine whether the banks can dispose of NCUA’s claims short of settlement.

RBS counsel at Kirkland & Ellis declined to comment. NCUA’s lawyers, Stephen Tillery of Korein Tillery and David Frederick of Kellogg Huber, didn’t respond to my email request for comment.

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