In July 2014, Quinn Emanuel obtained a landmark victory on a question of first impression in New York regarding whether an RMBS indenture can be reformed nine years after execution to correct a scrivener’s error that reversed the priority of two classes of notes. The case was initiated by Wells Fargo Bank, N.A., as Securities Administrator of the RMBS Trust governed by the Indenture, seeking judicial instruction on how to handle a discrepancy that had become apparent between the Indenture and the related marketing materials regarding the allocation of losses as between two classes of notes. The firm’s client, Sceptre, LLC, had purchased Class I-A-2 Notes governed by the Indenture, which were intended to be senior to the Class I-A-3 Notes in the capital structure. Under the Indenture, the Class I-A-2 Notes and Class I-A-3 Notes received distributions of principal and interest on a pari passu basis and, consequently, such distributions created no difference in the risk profile of these two classes of Notes. The factor that differentiated the Class I-A-2 and Class I-A-3 Notes in terms of risk was the allocation of losses to these notes. The notes were marketed pursuant to offering materials, including a Prospectus Supplement, which provided that any losses attributable to these two classes of notes would be allocated first to the Class I-A-3 Notes and then to the Class I-A-2 Notes, evincing the intended seniority of the Class I-A-2 Notes. However, the Indenture governing the notes inadvertently reversed the loss allocation as between these two classes, allocating losses first to the Class I-A-3 Notes and then to the Class I-A-2 Notes, in apparent contradiction to the offering materials pursuant to which the notes were marketed and sold.
Quinn Emanuel successfully argued, over the course of a three-day bench trial, that the Indenture’s loss allocation provision was the result of a scrivener’s error and that the Indenture should be reformed to allocate losses first to the Class I-A-3 Notes and then to the Class I-A-2 Notes, in accordance with the Prospectus Supplement. Reformation was opposed by a Class I-A-3 Noteholder on the basis that the inconsistency between the Prospectus Supplement and the Indenture had been publicly-available in the market for years and that reformation was inappropriate now that secondary note purchasers had acquired the notes with knowledge of the inconsistency. Quinn Emanuel nonetheless convinced the court that there was “clear and convincing” evidence that the Indenture’s loss allocation provision was the result of a scrivener’s error that did not reflect the true intent of the deal and that there were no inequities to secondary market purchasers that would result from reforming the Indenture to correctly allocate losses as per the intent of the original dealmakers. The firm also successfully argued, and the Court concluded, that the Indenture, when read together with the offering materials, was ambiguous on its face and should be construed to provide for losses to be allocated first to the Class I-A-3 Notes and then to the Class I-A-2 Notes, as set forth in the Prospectus Supplement. Based on Quinn Emanuel’s presentation at trial, the court issued a decision requiring the Securities Administrator to reform the Indenture to allocate losses first to the Class I-A-3 Notes and then to the Class I-A-2 Notes, as set forth in the Prospectus Supplement, thereby restoring the seniority of Sceptre, LLC’s Class I-A-2 Notes.