This has been a busy week in ABS news.
- The Court of Appeals heard oral argument in U.S. Bank v. DLJ on Tuesday. I will post links to the video and transcript when they are made public. I think that there are problems with both sides’ arguments (notwithstanding that Kathleen Sullivan lived up to her reputation for excellence) and it will be interesting to see what the Court of Appeals does with all of this.
- The SDNY issued a summary judgment decision in Phoenix Light and Commerzbank v. Deutsche Bank. The court held:
— Phoenix Light could not re-litigate a prior holding that it did not have standing to pursue claims because the way the claims were assigned to it violated New York’s laws against champerty.
— Plaintiffs did not have standing to sue on three trusts because there was no evidence that they owned the certificates.
— Phoenix Light did not have standing to sue on two bonds where they did not have the consent of the bond insurer before bringing suit.
— Plaintiffs did not have standing to sue on three trusts where they sold their certificates before bringing suit.
— Most of Plaintiffs’ claims were barred by the German statute of limitations.
— Plaintiffs could not sue Deutsche Bank for failing to pursue repurchase claims on trusts where the party with the repurchase obligation went bankrupt or where such claims were settled.
— Plaintiffs’ tort claims were dismissed as duplicative of their contract claims.
— Deutsche Bank had no duty to investigate whether there were breaches of representations and warranties before there was an event of default.
— Deutsche Bank complied with its obligation to give notice of breaching loans.
— Deutsche Bank was not obligated to cure representation and warranty breaches for certain trusts where the Depositor had to direct that the cure be effected.
— A claim against a trustee for failing to enforce repurchase violations accrues a reasonable period after the first day the trustee could have enforced them.
— Despite agreeing to exercise the trusts’ repurchase rights, Deutsche Bank was not obligated to do so (the decision acknowledged that other courts, including New York state courts, have come to a different conclusion).
- Commerzbank settled its trustee action with U.S. Bank. As usual, the details of the settlement are not public.
- The First Department issued a decision in Matter of U.S. Bank N.A., an Article 77 proceeding “regarding the timing for distributing proceeds from the sale of securities of three CDOs.” The decision affirmed Justice Reed’s decision holding that the indenture required quarterly, rather than monthly, payments.
- The First Department issued a decision in Matter of Bank of N.Y. Mellon v BlackRock Fin. Mgt., Inc., an Article 77 proceeding regarding the interest rates to be used “when calculating the interest due to interest-only senior certificate holders of certain” RMBS trusts. The court affirmed Justice Cohen’s ruling that the governing PSAs were ambiguous and so relied on the “parties’ consistent course of conduct” in holding that the way the trustee had been calculating interest was the correct one. The First Department affirmed the decision based on course of conduct even though Justice Cohen had refused to allow discovery.
I have not reviewed the PSAs to draw my own conclusions on whether they were ambiguous or what they require. My main reaction to the opinion is that once again, the courts seem to ignore the reality of how securitizations work. Without discovery, the court held that the parties were bound by their course of conduct in how BoNYM calculated interest (that is, that a certificateholder not challenging how payments were calculated was binding on the party that purchased the certificate). Applying a rule of contract interpretation that usually would be applied to, for example, how a manufacturer and a vendor calculated the price of monthly widget deliveries to a trustee’s calculation of payments on a certificate makes little sense to me. The certificateholder has little insight into what the trustee does or why it does it and few ways to find out. Indeed, the certificateholder is not a party to the PSA; it is a third-party beneficiary. And, the course of conduct the court examined was that of the prior owner of the certificate, not the owner raising a dispute over the payment calculation. Finally, the financial stakes in looking into how a waterfall is calculated might vary over time. What a certificateholder acquiesced to (or maybe was unaware of) should have no bearing on what a PSA requires.
- I plan to go to SFVegas 2022 (July 17 – 20). If you will be there, let’s meet.