Rulings on Standing and Statute of Limitations Deliver Huge Blow to RMBS Investors

Last week, the U.S. District Court for the Southern District of New York dealt a major blow to mortgage investors in two parallel actions pending for the past few years. The impact proved to be fatal to one of the actions, which was dismissed in its entirety. The other one was barely left standing. The plaintiffs in each case received devastating statute of limitations and standing rulings that can be expected to have serious implications for similar types of suits yet to be filed.

Phoenix Light SF Ltd. and Commerzbank AG, together with their related special purpose entities, filed separate suits in 2014 and 2015, respectively, against Deutsche Bank National Trust Co. and other Deutsche entities (collectively, “Deutsche Bank”) for indemnification.  They alleged, among other things, that Deutsche Bank, as trustee for certain residential mortgage-backed securities (“RMBS”) trusts, breached its contractual and fiduciary duties by failing to seek remedies against the loans’ servicers and sellers for breaches of representations and warranties, among other failures. These actions were brought to recover losses sustained following the 2008 real estate/RMBS collapse.

Deutsche Bank moved for summary judgment in both actions seeking to dismiss the investors’ claims. It argued that (1) the investors lacked standing to raise claims related to certain RMBS certificates; (2) many of the investors’ claims were time-barred; and (3) certain of the claims failed on the merits as a matter of law. The court agreed with Deutsche Bank’s arguments. 

In finding that the Phoenix Light investors did not have standing to bring their claims, the court relied on a Second Circuit Court of Appeals ruling affirming the district court’s grant of summary judgment dismissing another case, one in which Phoenix Light filed claims against U.S. Bank based on the same assignments of claims. The district court ruled in the U.S. Bank case that there was no genuine issue of material fact that the assignments of the claims from the indenture trustees to the Phoenix Light investors were executed “for the sole purpose of pursuing claims against U.S. Bank, and for no other reason.” Accordingly, the district court concluded in that earlier case, and the Second Circuit agreed, that the assignments were “champertous,” and, as a consequence, the Phoenix Light investors lacked Article III and prudential standing to assert claims arising out of the at-issue RMBS certificates. Champerty is an illegal agreement in which a party with no previous interest in a lawsuit finances it with a view to sharing the disputed property if the suit succeeds. 

The court in the Deutsche Bank matter collaterally estopped Phoenix Light from re-litigating the issue of assignments of claims and likewise precluded it from making the same type of standing arguments against Deutsche Bank that had failed in the earlier U.S. Bank matter. The court also agreed with Deutsche Bank that the Phoenix Light and Commerzbank investors lacked standing to assert claims arising out of certain RMBS certificates because the certificates were sold prior to the commencement of these actions or because there was no evidence that the investors ever held the certificates.

Perhaps of even greater significance, the court also found that the majority of the investors’ claims were barred by the applicable statute of limitations. Deutsche Bank argued that a set of claims alleged by Commerzbank investors was time-barred because those claims accrued in Germany and were untimely under the applicable German three-year statute of limitations. As for claims brought by Phoenix Light investors, the court found that they were barred under New York’s borrowing statute, CPLR 202, which provides that when a non-New York resident sues on a cause of action accruing outside New York, the complaint must be filed timely under the statute of limitations of both New York and the jurisdiction where the cause of action accrued. Further, the court noted that when a claim has been assigned (as was the case with the investors’ claims), the question of where and when the cause of action accrued focuses on the original assignor, and not the new assignee. In addition, when the injury of a nonresident plaintiff is purely economic, the cause of action accrues where the plaintiff resides and sustains the economic impact of the loss, rather than where the defendant committed the wrongful act.

The court found that the claims accrued in Germany because the entities sustaining the loss were German entities. Thus, the court concluded that Phoenix Light’s claims must be timely under both New York and German law, and they were not.

Deutsche Bank pointed to evidence in the record showing that the investors had knowledge of their claims well over three years before filing their lawsuits.  The court agreed. It found the record was clear that the investors knew of allegations of breached representations and warranties (“R&W”) and knew that Deutsche Bank had neither declared any events of default relating to R&W breaches, nor pursued the repurchase remedies provided for in the governing agreements. In addition, the court noted that the investors received monthly remittance reports showing that few, if any, loans had been put back to parties’ making representations and warranties regarding the at-issue loans. The court also observed that, by 2010 and 2011, the investors “had become sufficiently concerned about possible R&W breaches that they sought to coalesce support among other investors to direct DB to take action.” 

Likewise, the Commerzbank investors were aware of the likelihood of significant declines in the market value of certain RMBS certificates based on the analyses of internal and third-party valuation specialists.  Commerzbank had written off the value of certain RMBS certificates by January 1, 2012.  Moreover, the court found that in 2011, “Commerzbank was in communication with legal counsel and other RMBS certificateholders to develop an understanding of their options to pursue legal actions relating to alleged R&Ws breaches relating to underlying mortgages.” The investors had made claims in connection with defective mortgage files and failures by the servicer of the loans. In this regard, the court found that the record “clearly” established that prior to 2011 the investors had sufficient knowledge of these claims. It was “undisputed that DB publicly disseminated allegations of servicer robo-signing and real estate owned (‘REO’) property and foreclosure issues, and that Deutsche Bank reminded certificateholders of their power to direct Deutsche Bank to take action, including in letters from October 2010.” At that time, Deutsche Bank did not declare events of default based on such servicer issues.

However, the crux of the investors’ claims related to the loans in which events of default were declared. The investors claimed that Deutsche Bank failed to do anything after they declared events of defaults and failed to pursue remedies in a manner consistent with that of a “prudent person.” The court held that given that the investors had notice from Deutsche Bank of the events of default in 2010 and 2012, the investors “clearly had sufficient knowledge — or were grossly negligent in failing to acquire knowledge — of the fact that despite the declared events of default, Deutsche Bank was not taking the steps that the Plaintiffs would have preferred DB [Deutsche Bank] to take.” As such, any claim based on the events of default were time-barred under the three-year statute of limitations.

Based on this overwhelming evidence of knowledge, the court ruled that the statute of limitations barred claims even under New York’s six-year statute of limitations, reiterating that the limitations period on a claim for breach of contract begins to run when the cause of action accrues. A cause of action for breach of contract ordinarily accrues and the limitations period begins when the breach occurs, regardless of whether the plaintiff has knowledge of the breach. Any alleged breach by Deutsche Bank occurred and accrued when the notices to investors regarding the event of defaults were circulated between 2009 and 2011. 

This ruling is significant because during the past decade, loan purchasers and sellers and securitization trusts, have been the subject of a number of indemnification and repurchase lawsuits based on alleged breaches of representations and warranties concerning the quality of the mortgage loans. Notwithstanding their knowledge of the quality of the loans, the purchasers of such loans have routinely not brought actions against loan originators or sellers until they have been faced with lawsuits and entered into settlements involving these loans. Only then have these owners searched for a reason to sue loan originators/sellers for alleged breaches of representations and warranties in an attempt to recover some of the payments made in settlement. This ruling should serve to curtail lawsuits by purchasers of loans who waited many years to take action based on issues that they knew about, or should have known about, long before filing suit.