Opinion

Alison Frankel

Mortgage investor group enters fray over time bar on MBS put-backs

Alison Frankel
Aug 6, 2013 22:00 UTC

Remember the great statute of limitations schism that occurred in New York State Supreme Court in May? On the very same day, two state court judges issued drastically different decisions on when the statute begins to run in cases asserting that sponsors of mortgage-backed securities breached representations and warranties on the underlying loans. Justice Shirley Kornreich sided with investors in a put-back case against DB Structured Products, holding that the clock starts ticking when an MBS securitizer refuses a demand to repurchase defective loans in the mortgage pools. Justice Peter Sherwood, on the other hand, explicitly rejected that interpretation of the statute of limitations, ruling instead in a put-back case against Nomura that the statute is triggered when the MBS offering closes.

Given that so many mortgage-backed trusts are governed by New York state law – and that so many investors have only recently managed to amass sufficient voting rights to assert put-back claims – this divide over the statute of limitations has multibillion-dollar consequences. If Sherwood’s view ends up prevailing when New York appellate courts consider the issue, banks will knock out a swath of suits filed in 2012 and 2013 asserting contract breaches in MBS issued in 2006 and 2007. But if Kornreich is correct, MBS investors can continue directing trustees to sue for years to come under New York’s six-year statute for breach of contract claims.

The Association of Mortgage Investors, a trade group for MBS noteholders, considered the statute of limitations issue so significant that it filed an amicus brief in the Nomura case before Sherwood, arguing that the statute begins to run when an issuer refuses to buy back a deficient loan. Obviously, Sherwood didn’t find AMI’s position persuasive. But that hasn’t deterred the trade group. This week a new AMI amicus brief on the statute of limitations hit the docket in Manhattan federal district court, in a Federal Housing Finance Agency put-back case against GreenPoint Mortgage, which originated supposedly defective loans underlying a Lehman MBS trust.

The brief, filed by AMI’s counsel at Holwell Shuster & Goldberg, reiterates the trade group’s position that the statute of limitations for put-backs begins to run when a mortgage originator or issuer refuses to buy back a loan that breaches its reps and warranties. The new filing acknowledges Sherwood’s ruling to the contrary, but only in passing (and on minor points). Its emphasis is instead on specific language in the GreenPoint contracts stating that causes of action accrue when a breach is discovered, a demand is asserted and that demand is refused. GreenPoint itself, according to the AMI brief, has cited that contract language in two cases in which the lender claimed that put-back suit were prematurely filed because all of the contract conditions weren’t met. GreenPoint can’t have it both ways, AMI argues. And industry custom and expectation dictates that loan originators repurchase bad loans regardless of when breaches are asserted.

“If a court applying New York law accepts GreenPoint’s argument that the (contract conditions) should either be ignored or be declared void as a matter of public policy,” the brief said, “this will establish an adverse precedent that may result in an unjustified market-wide windfall to legally obligated parties such as GreenPoint at the expense of RMBS investors such as AMI’s members.”

The smartphone wars are ending, and nobody won (but the lawyers )

Alison Frankel
Aug 5, 2013 20:59 UTC

Over the weekend, the Obama administration made an extraordinary decision: The U.S. Trade Representative overturned a U.S. International Trade Commission injunction barring the import of Apple iPhones found to infringe Samsung standard-essential technology. It’s been almost 30 years since the ITC commissioners were previously overruled by the White House, but, as I told you last month, Apple argued that the ITC’s injunction was contrary to the emerging consensus among federal courts and executive-branch agencies that injunctions should not, except in rare instances, be based on standard-essential patents.

In a less dramatic but also consequential filing Friday, the Justice Department responded to a complaint Microsoft filed in federal district court in Washington on July 12, demanding that the U.S. Bureau of Customs and Border Protection enforce an ITC exclusion order barring the import of Motorola smartphones that infringe a Microsoft patent on Outlook calendar synchronization. Motorola, which is appealing the ITC’s determination that the patent is valid, evaded the ITC injunction by convincing Customs that it had removed the infringing feature from its phones. Microsoft argued that Customs made an improper ex parte determination and effectively undermined the ITC exclusion order. In the government’s response, the Justice Department cited a host of supposed procedural deficiencies in Microsoft’s suit, including the district court’s lack of jurisdiction to hear a case that should have been brought as an administrative proceeding.

But that’s not all. Justice said Microsoft’s suit is against public policy – and against Microsoft’s own arguments in other smartphone litigation. The U.S. Supreme Court’s test for injunctions requires a showing that the injured party would otherwise suffer irreparable harm. Here, the government brief said, damages based on a reasonable licensing fee from Motorola are a perfectly adequate redress for Microsoft. When the shoe has been on the other foot and Microsoft has been accused of infringing Motorola smart device IP, the Justice Department said, Microsoft itself has contended that relief should come through money damages. (I’m sure that Microsoft would argue that the situations are different in the two cases, since the Motorola technology at stake in the Microsoft case being litigated in federal district court in Seattle is standard-essential IP and the ITC exclusion order Microsoft is suing Customs to enforce concerns non-essential tech.)

Litigation funder feared Chevron case would taint fledgling industry

Alison Frankel
Aug 2, 2013 20:43 UTC

Regardless of what you think of the business of litigation funding, it’s here to stay. There are now hundreds of millions, if not billions, of dollars of capital invested in commercial litigation and arbitration in the United States, Britain and Australia, and some of the biggest litigation funding firms in the United States have begun to show a good enough return for their investors to justify the risk of taking sides in inherently lengthy and uncertain cases. Business groups that oppose investment in litigation tried mightily, but they simply haven’t managed to stem the industry’s steady spread, either through legislation or regulation.

For leading litigation financiers, the most significant impediment to growth is probably vestigial suspicion of their business by the big companies and major law firms they want to partner with. That’s why a newly released unredacted version of a filing by Patton Boggs in Chevron’s Manhattan federal court fraud litigation against the onetime lawyer for Ecuadorians with a $19 billion judgment against the oil company is so interesting. (Ted Folkman at Letters Blogatory was the first to spot the unredacted filing.)

The Patton Boggs brief addresses the relationship between the law firm, which is counsel to the Ecuadorian claimants in some of the multipronged litigation between them and Chevron, and Burford Capital, which once invested in the Ecuadorians’ case but has since alleged that it was deceived into taking part in the litigation. Precisely what Burford knew, and when it knew it, is yet another treacherous cul de sac on the long and ugly road of the Chevron litigation; Burford principal Christopher Bogart and Chevron itself present an abundance of contemporaneous evidence to rebut Patton Boggs’s premise that Burford knew more about flaws in the Ecuadorians’ case than Bogart said in a declaration to U.S. District Judge Lewis Kaplan in April. But the newly released brief quotes internal Burford communications showing the funder’s fear that the taint of its investment in the Chevron litigation would hurt not only its prospects but those of the entire litigation finance industry.

Mortgage investors’ inevitable constitutional challenge to eminent domain

Alison Frankel
Aug 2, 2013 15:44 UTC

On Tuesday, the small California city of Richmond announced that it has sent notices to 624 homeowners whose houses are worth less than they owe on their mortgages. Richmond said it intended to buy their mortgages for 80 percent of the fair value of their houses and to help them refinance with new, more affordable mortgages. In the event homeowners don’t want to participate in the program, Richmond said it would use its power of eminent domain to seize the mortgage loans.

Yes, the much-discussed eminent domain mortgage seizure idea is finally being realized, despite vehement opposition from just about the entire financial industry. It’s been more than a year since a San Francisco outfit called Mortgage Resolution Partners first floated the concept of partnering with troubled cities to reduce foreclosures by using the city’s eminent domain power to seize mortgages of underwater homeowners in the name of the public good. (MRP’s role is to provide cities with capital for the eminent domain purchases, issue modified mortgages to homeowners and then bundle and resell the new loans as mortgage-backed securities.) Proponents have pitched the plan as a public boon, a way to keep homeowners in their houses and preserve neighborhoods that would otherwise be blighted with foreclosures. The concept was alluring enough that over the last year, officials in several California cities, as well as North Las Vegas and even Chicago, have toyed with using eminent domain to stave off foreclosures.

Before Richmond, however, all of the cities that considered the scheme have been dissuaded, in part by concerted financial industry opposition. Investors in mortgage-backed securities hate the eminent domain idea. No mystery there: The vast majority of the mortgage loans that cities want to seize belong to MBS trusts. When cities talk about buying mortgages for 80 percent of the current value of a house, they’re not accounting for the value of the seized loan to the MBS trust that actually owns the mortgage, especially because these eminent domain proposals call for the takeover of performing loans, not mortgages on which homeowners have already defaulted. (More than 440 of the homeowners that received notices from the city of Richmond are up-to-date on their mortgage payments.) So as Timothy Cameron, the head of the Asset Management Group of the Securities Industry and Financial Markets Association, explained to me on Thursday, MBS investors believe that they’re twice injured by mortgage seizures under eminent domain plans. First, they’re shortchanged on the value of the revenue stream from a performing loan; and second, they’re damages by the decline in the value of their mortgage-backed securities, which are worth less when performing loans are terminated.

How limited is liability of limited-partner private equity funds?

Alison Frankel
Jul 31, 2013 19:26 UTC

The California Public Employees’ Retirement System, the largest public pension fund in the United States, rarely takes a stand as an amicus in trial court. But in an amicus brief filed earlier this month, Calpers warned that the future of private investment in California is at stake in a dispute over a few million dollars in unpaid bonuses to former employees of the now-defunct HRJ Capital. Unless a state-court judge overturns a colleague’s ruling that limited-partner investment funds are on the hook for liabilities of the general partner and fund manager, Calpers said, California risks losing its stature as an incubator of start-up business.

Lawyers for the former employees, meanwhile, contend that Calpers and the funds are drastically overstating the significance of a narrow, fact-based opinion with no precedential impact. On Thursday, both sides will make their cases to Judge Patricia Lucas of Santa Clara Superior Court.

Here’s the much-condensed backstory on the litigation that may – or may not – change the private equity industry. Darren Wong and Duran Curis once held coveted jobs with HRJ Capital and HRJ Capital Management, a fund-of-funds established by former San Francisco football stars Harris Barton and Ronnie Lott. But HRJ, which managed 22 limited-partner private equity funds, ran into trouble in the financial crisis. When management of the funds was eventually assumed by another company, Capital Dynamics, Wong and Curis lost their jobs. Their lawyers at Kirkland & Ellis eventually claimed Wong and Curis were owed about $4 million in unpaid bonuses and millions more in unpaid management fees.

Underemployed Cooley Law grads lose the war, but win the battle

Alison Frankel
Jul 30, 2013 20:07 UTC

Jesse Strauss of Strauss Law had two goals when he filed a fraud suit on behalf of 12 graduates of Thomas M. Cooley Law School. The first was to win compensation for the Cooley grads, who had paid tens of thousands of dollars of tuition in the misguided expectation that a Cooley law degree would lead to a full-time legal career. The second, he told me, was to dispel similar misguided expectations by anyone else considering enrollment at Cooley. A ruling Tuesday by the 6th Circuit Court of Appeals will probably spell the end of the hope that Cooley graduates can get any of their money back from the school, but it should also expose the law school as a highly questionable investment for prospective lawyers.

“Based on my clients’ reactions, everyone is proud of their involvement in this suit,” Strauss said. “We’ve done real justice.”

The Cooley suit, like 14 other class actions Strauss and co-counsel have filed against law schools that purportedly misrepresented employment and salary data about their graduates, claimed that the school deceived prospective students about their future job prospects. In reporting on the job status of its graduates, the grads alleged, Cooley failed to distinguish between those with legal careers and those with other kinds of jobs; a graduate working at Starbucks, for instance, would be counted in Cooley’s survey as employed in business. The school also claimed that its salary data was an average of all graduates’ incomes, but as the 6th Circuit noted, the reported number was actually an average of the salaries of graduates who responded to the law school’s survey.

Class action activist asks SCOTUS to review charity-only settlements

Alison Frankel
Jul 29, 2013 20:59 UTC

The doctrine of cy pres – from the French for ‘cy pres comme possible,’ or ‘as near as possible’ – may have originated in trust law, but it has had its full flowering in class actions. Both defendants and plaintiffs lawyers have good reasons to resolve cases involving potentially large numbers of claimants with minuscule damages by directing money to charity instead of tracking down class members. Cy pres settlements wipe cases off the docket, which is good for defendants. And they generate fee awards, which is good for the class action bar. Class actions are, of course, overseen by federal judges, and the practice of naming a particular judge’s favorite charity as the recipient of cy pres funds in order to boost the odds of court approval has fallen into disrepute. Nevertheless, it’s the rare cy pres settlement that is rejected. Judges may ask for money to go to a different charity or may restrict attorneys’ fees, but courts usually conclude that there’s a benefit to class members in supporting charity rather than risking a trial of their claims.

Ted Frank of the Center for Class Action Fairness is not so sure. On Friday, Frank and lawyers from Baker Hostetler filed a petition for a writ of certiorari at the U.S. Supreme Court, asking the justices to review the 9th Circuit Court of Appeals’ approval of a $9.5 million settlement of class action allegations that Facebook’s now-dismantled “Beacon” program violated users’ privacy by revealing their online purchases. More than $6 million of that money was directed to the establishment of a new Internet privacy foundation with an advisory board that includes a Facebook representative and a plaintiffs’ lawyer from the case. Class counsel were also awarded $2.3 million in fees. Class members, meanwhile, received no direct compensation at all from the settlement. The new cert petition contends that the 9th Circuit’s split ruling in the case conflicts with cy pres decisions from the 2nd, 3rd, 5th, 7th and 8th Circuits.

“If allowed to stand, the circuit split created by the 9th Circuit’s decision creates an enormous incentive for forum-shopping by plaintiffs’ attorneys seeking to sue and settle nationwide class actions like this one,” the petition said. “Bringing suit within the 9th Circuit’s footprint now guarantees that minor things like compensating class members for their injuries, holding defendants liable to the extent the law allows, and preventing defendants from injuring class members in the exact same manner will not stand in the way of reaching a quick settlement to the mutual benefit of defendants and class counsel, at the expense of class counsel’s putative clients. The court should grant certiorari to resolve this circuit conflict, provide guidance to the lower courts on the use of cy pres awards, and correct a serious abuse of the class action mechanism that puts the interests of those it is intended to benefit, class members, dead last.”

Morgan Stanley could be to blame for Detroit’s blight: N.Y. judge

Alison Frankel
Jul 26, 2013 19:08 UTC

In 2012, five African-American Detroit homeowners and a Michigan legal services group asserted a notably creative legal theory in a class action against Morgan Stanley. Their lawyers at Lieff Cabraser Heimann & Bernstein and the American Civil Liberties Union acknowledged that Morgan Stanley didn’t write the supposedly predatory mortgages that victimized African-American borrowers in Detroit. Those housing-bubble mortgages were originated by New Century, a notorious subprime lender that went under in 2007. But the suit argued that New Century was writing loans to feed Morgan Stanley’s securitization machine. Because Morgan Stanley wanted to bundle certain types of subprime loans into its mortgage-backed securities, the theory went, its policies guided New Century’s predatory practices. So according to the homeowners’ suit, Morgan Stanley was actually responsible for the disparate impact of New Century’s discriminatory lending.

Morgan Stanley seemed downright incredulous at the audacity of the suit. Its lawyers at Wilmer Cutler Pickering Hale and Dorr moved to dismiss the class action, stacking up argument after argument about flaws in the homeowners’ legal theory. They’re pretty good arguments, too. The overarching theme of the bank’s defense is that New Century, not Morgan Stanley, is responsible for the loans it wrote. Morgan Stanley didn’t even buy the mortgages of four of the five homeowners who are name plaintiffs in the suit, the motion says, so how can its securitization policies be to blame?

The bank goes on to assert all sorts of technical deficiencies in the plaintiffs’ claims. The homeowners don’t have standing, the Morgan Stanley brief says, because they can’t show they would have qualified for loans on better terms absent discrimination. The plaintiffs waited too long to assert claims, it said, because the statute of limitations under the Fair Housing Act is two years (and under the Equal Credit Opportunity Act, three years), yet the most recent mortgage in the case dates back to 2006. Anti-housing discrimination laws, the bank said, apply to mortgage lenders but not securitizers. And even putting aside all of those arguments, the brief said, the plaintiffs cannot show that Morgan Stanley policies produced a disparate impact on African-Americans in Detroit. Morgan Stanley’s securitization policies were nationwide, not targeted to any racial group in any geographic area, the bank contends, so plaintiffs lawyers improperly cherry-picked Detroit. They also erred in analyzing all New Century lending in Detroit because not all of New Century’s subprime loans were purchased by Morgan Stanley, according to the brief. And finally, any disparate impact from New Century lending, the bank said, is the result of New Century practices that cannot be tied to a specific Morgan Stanley policy.

Apple asks Obama to take a stand on injunctions and essential patents

Alison Frankel
Jul 25, 2013 20:25 UTC

If there were any doubt that the tech world remains transfixed by the question of whether courts should order injunctions based on standard-essential patents, check out the Federal Trade Commission’s newly released response to commenters on the Google antitrust settlement it proposed in January. Many of the 25 letters that the FTC received focused on settlement provisions barring Google from seeking an injunction based on infringement of an essential patent until a fair licensing rate is determined by a court or arbitrator. The FTC said that its final settlement with Google, which was disclosed Wednesday, holds Google accountable for its commitment to license essential technology on fair and reasonable terms. Potential licensees, the agency said, must be protected from “opportunistic behavior” and permitted “to negotiate licensing terms without facing the threat of an injunction.”

It’s no secret that the executive and judicial branches of the U.S. government have recently frowned upon the grant of injunctions to holders of standard-essential patents. In January, as you may recall, the Justice Department and U.S. Patent and Trademark Office issued a joint policy statement recommending “caution in granting injunctions or exclusion orders based on infringement of … patents essential to a standard.” Judge Richard Posner of the 7th Circuit Court of Appeals said flat-out in a case involving cross-allegations by Apple and Motorola that injunctions should not be issued on the basis of essential technology. And when Motorola appealed the ruling to the Federal Circuit, the FTC weighed in with an amicus brief that described the threat of injunction in licensing talks as “the essence of hold-up.”

The White House itself is now confronted with an Aug. 4 deadline on the issue, in the form of a request by Apple to disapprove an exclusion order against certain Apple iPhones and iPads that was entered by the U.S. International Trade Commission on June 4. Apple contends that the ITC order, which was based on the commission’s finding that Apple infringed a Samsung patent covering essential technology for telecom communications, puts the ITC (and, by extension, the United States) at odds with the anti-injunction predisposition of other parts of the U.S. government and the rest of the world. Samsung, meanwhile, contends that “there are no policy reasons” to overrule the commission in this particular case, nor should the administration establish “a bright-line rule prohibiting exclusion orders for SEP infringement” because such a bar would encourage potential licensees to refuse to negotiate reasonable terms. (Hat tip to Florian Mueller of Foss Patents, who was first to write about the Apple and Samsung submissions.)

Judge grants investors rare early discovery in securities case vs SAC

Alison Frankel
Jul 24, 2013 20:23 UTC

It’s safe to say that the besieged hedge fund SAC Capital has lots more to worry about than a class action by investors in Elan Corporation, one of the companies whose shares the fund supposedly traded on the basis of inside information. The New York Times and The Wall Street Journal reported Wednesday that federal prosecutors in New York are on the verge of indicting SAC, the culmination of an insider trading investigation in which four onetime fund employees have pleaded guilty and two more, including the star portfolio manager Michael Steinberg, are facing criminal charges. SAC founder Steven Cohen is busy defending against Securities and Exchange Commission allegations that could knock him out of the industry, and SAC outside investors have pulled $5 billion out of the fund.

Amid those woes, a ruling Tuesday by U.S. Magistrate Kevin Fox of Manhattan – granting Elan investors early access to materials the SEC and the Justice Department have turned over to former SAC portfolio manager Mathew Martoma – is the equivalent of a flea bite. But for the securities class action bar, Fox’s order is big news: It’s a very rare instance of a judge permitting shareholders to obtain discovery before they’ve survived a defense dismissal motion.

As you know, the Private Litigation Securities Reform Act bars investors from serving discovery demands on class action defendants until shareholder pleadings have been tested by a defense dismissal motion and deemed adequate by the judge overseeing the case. In the 18 years since PSLRA was passed, federal judges have generally stuck by that stricture and refused to let shareholder lawyers obtain discovery even from defendants that have already settled with the SEC or the Justice Department. Only in very unusual circumstances – when, for instance, class action plaintiffs are competing with other claimants for a limited pool of resources or when shareholders need trading records to establish their standing – have judges bent the rule on pre-dismissal discovery. For years, class action lawyers have complained long and loud about the consequences of Congress’s restriction on discovery, which has led to the phenomenon of confidential witnesses who later recant accusations against their former employees. But aside from recently persuading U.S. Senior District Judge Jed Rakoff that the securities class action system is awry, they haven’t made much headway.

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