Chase Lets Loose a Barrage of New Indemnification Demand Letters

By Philip R. Stein on Posted in Banking, Residential Mortgage-Backed Securities (RMBS)

Ten years after the financial crisis, mortgage companies and regional/local banks are still getting hit with new breach of contract and indemnification claims related to loans sold before the crisis. The latest case in point involves demand letters that JPMorgan Chase is sending out to lenders throughout the country. The letters pertain to loans sold by originators to EMC, Bear Stearns and Chase prior to 2008. Chase then pooled those loans with loans it originated on a retail basis, depositing the pools into residential mortgage-backed securities (RMBS) trusts. Institutional investors and monoline insurers subsequently sued Chase, alleging securities fraud and other causes of action.

Chase ultimately settled with 21 institutional investors for $4 billion. Now it is seeking to recoup from originators sums that it claims to be owed as a result of the settlement payments it agreed to make. The kinds of claims that Chase is making — particularly given that these are “indemnification” claims made in the aftermath of settlement of RMBS-related allegations against Chase, which structured the RMBS transactions, selected the loans for inclusion in each “pool” of loans, and made representations, warranties and other disclosures to investors and insurers about the loans that Chase selected — raise several interesting issues, and potentially strong defenses (legally and factually), for the originators now receiving the demand letters. Originators are thus well advised to carefully and thoroughly evaluate their legal options when they receive these letters. There are a lot of grounds on which to defend against this type of threatened claim.

A Decade on, Crisis-Era Litigation Still Bedevils Banks

By Philip R. Stein on Posted in Banking, Legal Battle, Residential Mortgage-Backed Securities (RMBS), Too Big to Fail

Banks and other financial institutions might reasonably have expected that, 10 years after the collapse of Bear Stearns and the demise of Lehman Brothers, they would finally be free and clear of lawsuits spawned by the financial crisis.

That has not come to pass. Nor does freedom from legal actions rooted in the events of that era appear imminent.

This circumstance should be seen not just as an annoyance for banks, or another indication of how slowly our judicial system and claims resolution processes often operate. Instead, it is an opportunity for proactive, potentially curative action. Banks can take steps now that would minimize, or at least expedite resolution of, certain types of legal claims that tend to proliferate in the aftermath of a crisis. Continue Reading

EB-5 Program Extension Allows Developers More Time to Obtain Financing

By Robert M. Siegel on Posted in Financial & Other Transactions, Legislation/Regulation

Last week H.R.1625 – Consolidated Appropriations Act, 2018 was enacted. The Act includes a continuation of funding, until September 30, 2018, for the EB-5 Regional Center Program.

EB-5 financing has been a low cost financing alternative for real estate developers when compared to other capital sources. EB-5 credit facilities are typically structured as staged funding vehicles for pre-vertical costs and expenses. While the projects differ as to concept (eg., high rise, mixed-use, single family, and condo projects), EB-5 financing has played a vital role in allowing our developer clients to move projects forward, while at the same time allowing developers to recoup sizable portions of their initial outlays, including for land acquisition. In two of the transactions we recently handled, the EB-5 financings were extended before a senior mortgage loan facility and other components of the capital stack had been finalized. Continue Reading

Lehman RMBS Settlement Likely to Spur Additional Claims

By Philip R. Stein on Posted in Banking, Fannie Mae/Freddie Mac, Legal Battle, Residential Mortgage-Backed Securities (RMBS), Too Big to Fail

On March 8, the Bankruptcy Court for the Southern District of New York concluded a lengthy “claims estimation” trial to determine the appropriate final settlement price for a resolution of lawsuits filed on behalf of investors in residential mortgage-backed securities (RMBS) created by Lehman Brothers Holdings prior to its bankruptcy in September 2008. The judge determined that the final settlement value of this particular set of claims was $2.38 billion – down from the $37 billion initially demanded, and the $11.4 billion sought by the plaintiffs in this claims estimation trial.  A separate group of plaintiffs that had previously settled with Lehman Brothers Holdings had resolved their claims for approximately $2.4 billion.

The resolution of the claims estimation trial is significant for businesses that sold residential mortgage loans to Lehman, for at least two reasons.  First, lawsuits that Lehman filed against more than 100 loan originators and sellers in this same bankruptcy court had essentially been on hold for the last several months while the estimation trial was proceeding.  We can reasonably expect that those existing cases, which relate to Lehman’s 2014 settlements of claims against it by Fannie Mae and Freddie Mac, will become more active once again with that trial now completed.   Continue Reading

The Eighth Circuit Raises the Bar for Would-Be Indemnitees

By Philip R. Stein and Shalia M. Sakona on Posted in Insurance, Legal Battle, Mortgage Insurance

Here is a situation that comes up quite a bit in the world of business contracts containing indemnification provisions, and in the insurance industry as well. First, a party (“Party A”) gets sued, or threatened with a suit, and settles the claims against it.  Party A then seeks indemnification from another party (“Party B”) for all, or a portion of, the settlement payment that Party A made.  Party B, in addition to challenging in other ways whether it owes Party A anything at all, believes it is able to show that some portion of the settlement payment relates to issues outside the scope of the indemnification provision, and/or that other parties are the ones truly responsible for some or all of whatever amount of indemnification Party A might be owed. This fairly common situation raises a host of complex issues, requiring analysis of all potentially applicable contracts, the specific claims that were asserted against Party A, the basis for its settlement, and other legal considerations like causation.

In late 2017, the U.S. Court of Appeals for the Eighth Circuit issued an order dealing with indemnification for prior settlements, and it could have a hugely beneficial impact on potential indemnitors, including sellers of mortgage loans as well as insurers. UnitedHealth Group Inc. v. Executive Risk Specialty Insurance Company, 870 F.3d 856 (8th Cir. 2017) (rehearing and rehearing en banc denied) addressed an insured’s burden to allocate between “covered” and “non-covered” claims when seeking reimbursement from its insurer for settlement payments. The Eighth Circuit affirmed the District of Minnesota’s holding that, when an insured seeks indemnification for settlements that encompassed both covered and non-covered claims, the insured must present sufficient evidence to establish with reasonable certainty the value that the settling parties attributed to the covered claims.  Moreover, the insured’s allocation must be predicated on “what the parties knew at the time of settlement.” Id. at 863.  In other words, the insured cannot point to evidence or case law identified or arising after the settlement in order to justify an allocation that deviates from the settling parties’ reasonable valuation of the various claims at the time of settlement. Continue Reading

CFPB Arbitration Rule Eliminated by Congress and President

By Philip R. Stein on Posted in Banking, Consumer Financial Protection Bureau (CFPB), Financial & Other Transactions, Legal Battle, Legislation/Regulation

On November 1, President Trump formally did away with a Consumer Financial Protection Bureau (CFPB) arbitration rule that would have given consumers the opportunity to file class actions against banks and other companies in the financial services industry.

The CFPB rule was released in July 2017. It sought to prohibit and eliminate bans against class actions that had become a staple of arbitration clauses in consumer financial agreements.

The president signed a resolution, passed by both houses of Congress under the Congressional Review Act (CRA), that nullified the CFPB rule. The House of Representatives had moved quickly in July in response to the CFPB rule, voting to overturn it. The Senate followed suit in October, passing by the narrowest of margins (51-50, with Vice President Pence casting the deciding vote to break the deadlock) its version of CRA resolution disapproving the rule. Continue Reading

You Are the Target: 75 Different Ways Your Company Can Be Hacked

By Bilzin Sumberg on Posted in Uncategorized

Target redone

Join us on Thursday, June 15th from 12:00PM to 1:00PM for an in-depth webinar as Philip R. Stein, a partner in Bilzin Sumberg’s Litigation Practice, and Ray Vasquez, a director in Enterprise Risk Management’s Cybersecurity and IT Risk Management practice, discuss primary cybersecurity risks and leading practices.

They will discuss the reasons why a business may be targeted by cybercriminals, steps that can be taken to better safeguard private data, and fiduciary or professional responsibility obligations associated with protecting confidential information. Learn about best practices following a data breach, including certain actions that should be part of a company’s response.

Click here to register for this CLE-accredited webinar.

New Wave of Lehman Litigation Appears to Be Imminent

By Philip R. Stein on Posted in Legal Battle, Legislation/Regulation, Mortgage Insurance, Residential Mortgage-Backed Securities (RMBS)

woman is signing contract with business man in backgroundThousands of mortgage lenders across the country either recently received, or will soon be receiving, this document from Lehman Brothers Holdings, Inc. (LBHI). It is a notice of a motion to approve a proposed settlement of Residential Mortgage-Backed Securities (RMBS) claims asserted by trustees and investors against LBHI over the last few years. The notice of proposed settlement refers to proposed findings of fact, sets a deadline (June 22) for objections to the settlement, and schedules a hearing date (July 6) for approval of the RMBS settlement.

The companies receiving this document are apparently those that LBHI believes originated and sold loans that are now part of the proposed settlement, which sets an estimated settlement price of $2.416 billion to be paid by LBHI to settle the claims against it. It is therefore a prelude to new payment demands (for alleged breaches of contractual representations and warranties) by LBHI against the mortgage lender/correspondent at some point after the bankruptcy court approves the settlement. This notice likely is also specifically motivated by LBHI’s desire to cut off one of the potential defenses to an indemnity claim, “failure to give notice.” Paragraph 3 of the proposed order appears to relate to that issue. Continue Reading

Supreme Court Ruling Permits City Lawsuits Against Banks Under FHA to Proceed

By Philip R. Stein on Posted in Banking, Legal Battle

0501_SupremeCourtThe U.S. Supreme Court ruled today, in Bank of America Corp. v. City of Miami, Case No. 15-1111 that cities may qualify as “aggrieved persons” under the Fair Housing Act (“FHA”), thus placing them within the “zone of interests” covered by that federal statute.  As such, they are permitted to sue banks for the secondary effects of predatory lending practices or discrimination.  Miami argued that, because the lending practices of banks — including the petitioner, Bank of America — were skewed to place unfair or racially discriminatory burdens on minorities, and because those loans were far more likely to default, minority neighborhoods have suffered an overwhelming number of foreclosures and vacancies.  That outcome “impaired the City’s effort to assure racial integration, diminished the City’s property-tax revenue, and increased demand for police, fire, and other municipal services.”

Normally, actions brought under the FHA seek relief for individual borrowers or those directly harmed by predatory lending.  Now, for the first time, the Court concluded that a municipality’s financial injuries are protected by the FHA.  Congress defined an “aggrieved person” under the FHA as one who “claims to have been injured by a discriminatory housing practice” or believes that such an injury is “about to occur.”  According to the Court, that definition is broad enough to show a “congressional intention to define standing as broadly as is permitted by Article III of the Constitution.”  (Slip. Op. at 6.)  Because municipalities are empowered to sue under Article III, they may pursue remedies against the banks. Continue Reading

The New Administration’s Plans for the CFPB Take Shape

By Philip R. Stein on Posted in Legislation/Regulation, Uncategorized

Facade of courthouse with columns.

For those who have been wondering—as I did in a previous post—what the new presidential administration would mean for the Consumer Financial Protection Bureau (CFPB), an agency that has been in Republicans’ crosshairs virtually since it came into existence, we now have at least the beginnings of a concrete answer. Claiming that the CFPB’s leadership structure is unconstitutional, the Trump administration asked the U.S. Court of Appeals for the D.C. Circuit last week to allow the president to fire the bureau’s director, Richard Cordray, at will. The administration did not go so far as to ask the court to authorize elimination of the agency, however.

In its brief to the appeals court, the U.S. Department of Justice (DOJ) argued that an October split ruling by a three-judge panel of the D.C. Circuit correctly determined that the CFPB’s single-director leadership structure violated the U.S. Constitution’s separation of powers clause. And, according to the DOJ, giving the president the power to fire the director at will rather than for cause, as was required by the 2010 Dodd-Frank Act, would serve to remedy the alleged structural problem. Continue Reading

LexBlog