Opinion

Alison Frankel

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

Alison Frankel
Jan 23, 2014 20:34 UTC

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.

Judges build on Supreme Court’s Windsor ruling to extend gay rights

Alison Frankel
Jan 22, 2014 21:49 UTC

Justice Antonin Scalia of the U.S. Supreme Court got at least one thing right in his controversial dissent last term in U.S. v. Windsor, the case that struck down federal prohibitions on same-sex marriage as an unconstitutional intrusion on the equal rights of gays and lesbians. In a 5-to-4 opinion by Justice Anthony Kennedy, the majority said its ruling addressed only the conflict between the federal Defense of Marriage Act and the laws of states that have approved same-sex marriage, not the right of a state to bar same-sex marriages. Chief Justice John Roberts’s dissent emphasized the limited scope of the ruling. But Justice Scalia predicted otherwise.

“By formally declaring anyone opposed to same-sex marriage an enemy of human decency, the majority arms well every challenger to a state law restricting marriage to its traditional definition,” he wrote, in one of his dissent’s many hectoring passages. “Henceforth those challengers will lead with this court’s declaration that there is ‘no legitimate purpose’ served by such a law, and will claim that the traditional definition has ‘the purpose and effect to disparage and to injure’ the ‘personhood and dignity’ of same-sex couples, The majority’s limiting assurance will be meaningless in the face of language like that, as the majority well knows.”

Unlike Scalia, I wouldn’t presume to discern any malicious intention in Justice Kennedy’s stirring language on the Fifth Amendment rights of same-sex spouses and their families. But Scalia was undeniably correct that Windsor would echo loudly in lower courts. In the 6-1/2 months since the ruling came down, judges in Ohio, New Mexico, Utah and Oklahoma have struck down laws barring same-sex marriage or restricting the rights of gay and lesbian married couples, citing Windsor’s equal rights reasoning (among other precedent) in every opinion. Though the Utah and Oklahoma rulings have been stayed for appeal and the Ohio injunction is also before a federal appellate court, these are hugely significant decisions.

With recovery imperiled, LightSquared creditors turn on Dish’s Ergen

Alison Frankel
Jan 21, 2014 21:18 UTC

You have to say this for Dish Network founder and corporate governance poster boy Charles Ergen: He has made corporate swashbuckling fun again. For reporters, at least. Less so for his onetime allies on the secured creditors committee of the bankrupt wireless satellite company LightSquared, whose prospects for a full recovery dimmed earlier this month when Dish officially pulled its $2.2 billion bid for LightSquared’s spectrum licenses. The creditors committee had previously supported Dish and Ergen when they were fending off a competing plan for LightSquared by Philip Falcone’s Harbinger Capital; after all, Ergen is one of their own, as the largest holder of LightSquared debt. But now they’ve had quite enough of the Dish founder. On Monday, the creditors’ lawyers at White & Case filed a brief asking U.S. Bankruptcy Judge Shelley Chapman of Manhattan to force Dish to follow through with its LightSquared bid – and to reserve their right to sue Dish for damages.

This latest shakeup in the LightSquared Chapter 11 aligns the senior creditors with the beleaguered company, which is in the midst of litigation to disallow Ergen’s billion-dollar claim against the LightSquared estate because he allegedly acquired the company’s debt illegally. Judge Chapman spent the last week hearing testimony about Ergen’s debt purchases from Ergen, Falcone and various henchmen on both sides. (A highlight: Ergen testified that Dish’s treasurer advised him on his LightSquared acquisitions not because the debt purchases by an Ergen personal investment vehicle would eventually help Dish get control of LightSquared assets but because the treasurer is Ergen’s protégé and welcomes any opportunity to learn from the boss.) On Wednesday, the secured creditors will get their turn to bash Ergen and Dish, at a hearing to determine whether Dish may withdraw its stalking horse bid for LightSquared spectrum assets. If Chapman rules that Dish is permitted to pull out, LightSquared will have no live bids for its assets.

The secured creditors – who would be paid in full under the $2.2 billion deal Dish had offered but has now withdrawn – argue in their new brief that when Dish induced the committee to support its request for bid protection, Dish agreed to make its offer irrevocable until Feb. 15. Debtholders assert that the Feb. 15 cutoff was codified in the bid procedures order Judge Chapman entered last Oct. 1, establishing Dish as the stalking horse bidder in the auction for LightSquared assets and providing a $51.8 million breakup fee if Dish were outbid. The committee’s brief accuses Dish of reneging on its promise in an attempt to sweeten deal terms, now that competing LightSquared bids have fallen through and the company is “essentially out of cash and teetering on the verge of administrative insolvency.”

Class action firm maligned by 7th Circuit wants its reputation back

Alison Frankel
Jan 17, 2014 23:02 UTC

There’s essentially no way to undo the reputational harm of a judicial opinion. If a federal judge – especially an appellate judge – has something bad to say about you in a published opinion, your permanent record (as we used to say in grade school) is forever besmirched even if it later turns out that the opinion was based on misinformation. You can’t sue a judge for libel for what’s said in an opinion, and judicial rulings live on forever.

You can’t even expect to win a suit against news organizations that reported accurately on the contents of the opinion, which means that you just have to grit your teeth and bear it when the Internet continues to echo your shame, however undeservedly.

It’s pretty small consolation, it seems to me, to sue those who have supposedly reported erroneously on your bench-slapping. You’re forced to endure a rehashing of the facts that led to the judicial opinion, as well as the opinion itself, which is a heavy counterbalance to the benefit of proving one detractor wrong. Nevertheless, the Chicago class action firm of Bock & Hatch, which was the subject of a brutal 2011 opinion from the 7th Circuit Court of Appeals, is reportedly willing to accept that downside. According to Law360, Bock & Hatch has filed a libel suit against McGuireWoods, whose Class Action Countermeasures Blog posted an item on the 7th Circuit’s decision back in November 2011.

N.Y. judge: Defendant can’t settle unless class can be certified

Alison Frankel
Jan 16, 2014 20:02 UTC

I’ve been writing a lot recently about the struggles of the 5th Circuit Court of Appeals to find consensus on the constitutionality of a settlement class that sweeps in uninjured claimants. Two different 5th Circuit panels have reached different conclusions on that issue in a pair of overlapping appeals in BP’s epic class action settlement of claims stemming from the 2010 Deepwater Horizon oil spill: Judge Edith Clement, in an opinion last October, said that trial judges may not approve certification of a class that includes members who lack constitutional standing; but last week, two judges on another 5th Circuit panel upheld certification of the BP class, with Judge Eugene Davis citing decisions by other federal circuits that acknowledged the reality of uninjured class members swept into global settlements. The 5th Circuit’s divide highlights the complexity of the underlying question, which is as important for defendants as it is for plaintiffs: Can a defendant buy global peace through a class action settlement when the class might not otherwise be certifiable?

A federal district judge in Manhattan who has been notably skeptical of class actions provided her answer to that question Wednesday: No. U.S. District Judge Katherine Forrest refused to approve a $1.7 million securities class action settlement between the audit firm Schwartz Levitsky Feldman and investors in China Automotive Systems, one of the many U.S.-listed Chinese companies accused of swindling investors through accounting fraud. Forrest had previously rejected a motion by class counsel at Pomerantz Grossman Hufford Dahlstrom & Gross to certify the investor class, finding both that the name plaintiffs weren’t typical investors because they bought and sold shares in the class period, and that shareholders hadn’t satisfied the Basic v. Levinson efficient-market test for classwide reliance. In Wednesday’s ruling, the judge said that shareholders hadn’t given her any reason to change her mind about class certification so her duty to absent investors with legitimate claims prevents her approval of the settlement.

“At no point during this litigation, including most significantly after the court’s ruling on class certification for litigation purposes, did plaintiffs sufficiently support predominance by showing that the question of reliance can be demonstrated on a representative (e.g. class) basis,” Forrest said. “If this court were to certify the proposed settlement class in light of the evidentiary findings it previously made and without anything more from plaintiffs, it would effectively allow plaintiffs who potentially did not rely on materials setting forth the alleged misstatements to collect from the settlement fund…. Doing so would prevent those plaintiffs with real claims from obtaining the maximum amount to which they may be entitled.”

Why does SCOTUS want SG view on Madoff trustee suits vs bank enablers?

Alison Frankel
Jan 15, 2014 22:26 UTC

Last Wednesday, JPMorgan Chase resolved civil and criminal allegations of enabling Bernard Madoff to swindle customers of his defunct broker by agreeing to pay $2.6 billion, including $543 million to Irving Picard of Baker & Hostetler as trustee for Madoff’s defrauded investors. Two days later, the U.S. Supreme Court gave Picard and his Baker & Hostetler team reason to hope that JPMorgan won’t be the last bank to cough up millions to Madoff customers: The court invited the U.S. solicitor general to submit a brief expressing the federal government’s position on Picard’s request that the Supreme Court review the 2nd Circuit Court of Appeals’ dismissal of Picard’s claims against the banks he has accused of enabling Madoff’s scheme.

Picard has to be encouraged by the justices’ request. Every certiorari petition faces long odds, and the Madoff trustee is asking the court to review an emphatic appellate decision on arcane issues that have arisen in only a handful of cases in the last 40 years. So any indication that the petition has piqued the justices’ interest is good news for the trustee and bad news for the banks that want the 2nd Circuit’s decision to stand as the last word on Picard’s claims.

Picard’s petition, moreover, doesn’t raise questions that would usually prompt the Supreme Court to ask for the SG’s views. Remember, Picard operates under the auspices of the Securities Investor Protection Corporation, a nonprofit that was established by Congress in the Securities Investor Protection Act but is not a federal agency. The trustee’s suits against Madoff’s bankers don’t implicate obvious federal government interests, as, for example, a case involving a foreign government would. Nor is this a circumstance in which the Supreme Court is weighing an issue that’s percolating in the lower courts and wants the SG’s view of whether a particular case presents a good vehicle to decide it. As I mentioned, the three questions presented in the trustee’s cert petition are obscure indeed: When the SIPC has advanced payments to defrauded investors, does it then have the right to pursue those investors’ claims against third parties under the theory of subrogation; does the SIPA give the trustee a right to sue third parties under state law for contributing to a brokerage’s wrongdoing; and does an SIPC trustee have standing to sue third parties on behalf of a brokerage’s customers through another mechanism, such as the federal bankruptcy code? (Believe it or not, I’ve attempted to strip those questions of legalese; that’s the best I could do.)

With 5th Circuit split on class constitutionality, what’s next for BP?

Alison Frankel
Jan 14, 2014 20:44 UTC

Considering that BP’s resolution of claims stemming from the Deepwater Horizon oil spill in 2010 is the biggest single-defendant private settlement in U.S. history, it’s only fitting that the case has generated a spectacular – and procedurally peculiar – appellate record on the constitutionality of class actions. As you’ve probably heard, on Friday a divided panel of the 5th Circuit Court of Appeals upheld certification of the settlement class, rejecting BP’s argument that class certification must be reversed if the class includes uninjured claimants. Friday’s majority opinion by Judge Eugene Davis directly contradicts a previous analysis of the constitutionality of the BP class by his 5th Circuit colleague Judge Edith Clement in a distinct but overlapping BP appeal decided in October. Since both 5th Circuit appellate rulings on the BP class included dissents, we now have opinions from five different 5th Circuit judges on whether a settlement that dishes out money to uninjured class members can survive constitutional scrutiny. For us class action geeks, these BP appeals are a fascinating debate with enormous consequences. For BP, the conflicting decisions present a multibillion-dollar strategic turning point.

The abbreviated appellate backstory dates back to December 2012, when U.S. District Judge Carl Barbier of New Orleans granted final approval to a class action settlement between BP and a steering committee of plaintiffs lawyers, negotiated over the course of more than a year. The settlement, which replaced a claims facility BP established right after the spill, was designed to compensate several different sorts of victims, from the shellfishing and tourism industries directly impacted by the spill to businesses whose losses were indirect fallout. As the settlement defined it, the class included everyone whose losses resulted from the Deepwater Horizon disaster.

BP supported class certification and approval of the settlement. But the company developed qualms after Judge Barbier approved policy decisions by claims administrator Patrick Juneau that, in the company’s view, enabled businesses unharmed by the oil spill to recover money from BP through creative accounting tactics. As business loss claims mushroomed, BP’s lawyers from Kirkland & Ellis (which had negotiated the settlement) and Gibson, Dunn & Crutcher (which came in for the company after the deal was approved) appealed Barbier’s order to the 5th Circuit. That appeal led to Judge Clement’s opinion last October. Despite arguments by class counsel, represented on appeal by New York University law professor Samuel Issacharoff, that BP agreed to settlement terms that were open to the interpretation Barbier approved, Judges Clement and Leslie Southwick instructed Judge Barbier to reconsider his interpretation of deal terms. On her own, Clement went quite a bit further. If the BP settlement permitted claims by class members who had suffered no losses attributable to the oil spill, she said, then it was illegal. Uninjured plaintiffs don’t have standing under Article III of the Constitution, Clement wrote, and judges can’t create a cause of action that doesn’t otherwise exist – even if the defendant wants to buy global peace through a settlement.

Why (most) consumer data breach class actions vs Target are doomed

Alison Frankel
Jan 13, 2014 20:38 UTC

Who doesn’t empathize with the 70 million Target customers whose private information was supposedly hacked? No one likes to worry about identity theft and impaired credit ratings, the odds of which, according to Reuters, drastically increase for data breach victims. But that doesn’t mean Target customers have a cause of action in federal court. I don’t see how the vast majority of hacked Target shoppers can get past the threshold constitutional requirement that they show an actual injury, at least under the U.S. Supreme Court’s 2013 definition of injury in Clapper v. Amnesty International.

I’m not saying Target faces no litigation exposure for the data breach. Some of the new cases against the company are class actions by financial institutions that had to bear the cost of notifying customers about compromised debit cards, closing customer accounts and reissuing new cards. Those cases involve real-money claims that will be tough for the company to fend off with threshold defenses. So too will be suits by state attorneys general making claims in state court under state consumer protection laws (assuming, of course, that the Supreme Court does not hold that state AG suits have to be litigated in federal court in this term’s Mississippi v. AU Optronics case). And depending on the facts that emerge about Target’s disclosure decisions, Target shareholders may have viable class action claims that the company engaged in misrepresentation-by-omission.

Customers, however, are a different story, thanks to what I predict will be a fatal intersection between the 2013 Clapper decision and the Class Action Fairness Act.

Dow Jones chooses weak weapon in suit vs news aggregator Ransquawk

Alison Frankel
Jan 10, 2014 22:41 UTC

Like most creators of news content – those of us who used to be known as “reporters” – I worry a lot about the value of information. Unless information consumers – those of you who used to be called “readers” – won’t pay for the content we provide, news organizations can’t make enough money to keep our owners happy. The journalism business is now in the slow and painful process of figuring out how to convince readers that news is worth paying for.

Our foes, of course, are businesses that undermine the value of content by free-riding on the hard work of journalists. You know what I’m talking about: data scrapers and aggregators that gobble up and regurgitate news stories produced by reporters employed elsewhere. These free-riders can charge less for content than journalism outfits because aggregators don’t have to bother with the expense of actually finding things out or crafting and editing stories. As the Associated Press wrote last year in a summary judgment brief in its copyright and misappropriation case against the news aggregator Meltwater, content piracy has sent the news industry into “a period of crisis, with numerous news publications folding or struggling with significantly reduced staffs.”

So you’d think it would be in the best interests of a news organization to throw everything it’s got at a data scraper it believes to be profiting from the hijacking of its work, right? That’s why I can’t figure out why Dow Jones, publisher of The Wall Street Journal, is only asserting “hot news” misappropriation and tortious interference – and not also copyright infringement – in its newly filed complaint against the financial news aggregator Real Time Analysis & News, better known as Ransquawk.

Too late for MBS investors to sue in N.Y. state? Try federal court!

Alison Frankel
Jan 9, 2014 20:55 UTC

We are just beginning to witness the impact of the ruling last month by the New York State Appellate Division, First Department, that the six-year statute of limitations for breach-of-contract claims based on mortgage-backed securities begins to run on the securities’ closing date. As you surely recall, a unanimous state appeals court flatly rejected contrary reasoning by State Supreme Court Justice Shirley Kornreich, who had ruled that the breach in MBS contracts occurs not at the moment the deal closes but when the issuer refuses an MBS trustee’s demand for the repurchase of underlying mortgages that don’t live up to the issuer’s representations and warranties. Kornreich’s interpretation would have permitted MBS mortgage repurchase, or put-back, claims to be filed throughout the life of the securities. Instead, the appeals court essentially capped put-back exposure for MBS issuers. It’s only been a couple of weeks since the appellate ruling, but as the New York Commercial Litigation Insider reported Wednesday, state-court judges have already begun tossing mortgage repurchase cases filed more than six years after the MBS closing date.

That’s why a one-paragraph, handwritten order Tuesday by U.S. District Judge Alvin Hellerstein of Manhattan raises such intriguing possibilities.

Judge Hellerstein is presiding over a breach-of-contract suit by MBS trustee Deutsche Bank against MBS issuer WMC Mortgage, a now-defunct General Electric mortgage originator. On Dec. 17 – two days before the New York state appellate ruling on the statute of limitations – Hellerstein denied a motion by WMC’s lawyers at Jenner & Block to dismiss the case on timeliness grounds. The federal judge agreed with his state-court colleague Kornreich that the breach of an MBS contract occurs when the issuer refuses to cure false representations and warranties by repurchasing deficient underlying mortgages. After the state court held otherwise on Dec. 19, the trustee’s counsel, Ropes & Gray, sent Hellerstein a letter asserting that he need not reconsider his Dec. 17 finding because he’s not bound by the decision of an intermediate state appeals court.

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