Case Studies

Settlement for Financial Guarantee Company in RMBS Suit

In March 2014, Patterson Belknap secured a settlement on behalf of its client, a leading financial guarantee insurance holding company, in a lawsuit against a mortgage corporation subsidiary of a major multinational bank over misrepresentation of the risks of the bank’s residential mortgage-backed securities (RMBS) and the quality of the underlying loans. The $400 million settlement covered several cases that the firm’s client brought against the bank to recover losses on securities created and sold by a defunct global investment bank and securities trading and brokerage firm, as well as by the bank’s mortgage affiliate.

Particularly, in connection with two litigations relating to an RMBS transaction, the firm secured significant victories on several core legal issues, leading to the landmark settlement of both litigations.

First, the firm represented the financial guarantee company in a breach-of-contract action against the mortgage subsidiary, alleging breaches of numerous contractual warranties relating to the characteristics of the underlying loan pool, as well as due diligence and securitization practices, thereby causing the firm’s client to issue a financial guarantee policy on a collateral pool that was far riskier than warranted.

Second, the firm also represented its client in a common-law fraud action brought against the defunct global investment bank, alleging that it knowingly encouraged the securitization of a mortgage-loan pool infiltrated by fraud and poor underwriting, and made numerous material misrepresentations regarding the loan pool in order to induce the firm’s client to issue its financial guarantee policy.


Second Circuit Victory in Complex Financial Case

In 2013, the firm obtained a complete victory for an instrumentality of the Federal Reserve Bank of New York created in connection with the 2008 rescue of American International Group, in the U.S. Court of Appeals for the Second Circuit. The firm had prevailed in the District Court on summary judgment before Judge Jed Rakoff, and an appeal was taken by some of the parties. The case involved the interpretation of two CDO indentures, which were the subject of interpleader actions brought by the successor indenture trustee. The trustee sought a determination as to the proper allocation of funds to Class A-1 and Class A-2 noteholders. The indentures contained apparent inconsistencies and gaps in their waterfall provisions, which created uncertainty for the trustee in making its distributions.

The firm successfully argued to Judge Rakoff, and on appeal to Judges Pooler, Parker and Livingston, that (i) the apparent inconsistency should be resolved for the benefit of the Class A-1 noteholders as a result of a "notwithstanding" clause found in the waterfall (citing Bank of N.Y. v. First Millennium, Inc., 607 F.3d 905 (2d Cir. 2010)), and (ii) a gap in the indenture provisions should be filled by the Court for the benefit of the Class A-1 holders as a matter of law and without discovery, based upon the clear intent found in the document to subordinate the more junior noteholders' interests (relying in substantial part upon the Restatement (Second) of Contracts).