Article: March 2016 Securities & Structured Finance Litigation Update

Quinn Emanuel Obtains Significant RMBS Sampling Ruling.  Quinn Emanuel recently won a significant ruling permitting the use of statistical sampling to prove liability and damages on loan repurchase claims brought by the trustee of residential mortgage-backed securities (“RMBS”) trusts. SACO I Trust 2006‑5, et al. v. EMC Mortgage LLC, et al., Index No. 651820/2012 (N.Y. Sup. Ct. Nov. 30, 2015). By removing one of the primary obstacles raised by defendants to the trusts’  vindication of their contractual repurchase rights, the decision will facilitate proof of liability and damages in trustee RMBS repurchase suits.

In SACO, the  trustee, represented by Quinn Emanuel, sought to enforce the RMBS sponsor’s contractual obligation to repurchase tens of thousands of loans sold to  the trustee because of materially breached representations and warranties. Like many RMBS contracts, the contracts specified that repurchase was the trustee’s “sole remedy” arising out of a breach of representations and warranties. Defendants argued that the “sole remedy” provision in the SACO contracts required the trustee to prove and identify for repurchase each breaching loan, on a loan-by-loan basis—i.e., not  based on a sample. Given the volume of loans in the trusts (42,000), such proof would have been impractical and would have made the trusts’ proof of their claims inordinately burdensome. As the trusts argued, the repurchase remedy was only intended for deals with a small number of breaching loans, not the systemic breaches present in these trusts.

In this particular  instance,  these  arguments were strengthened because the loans were already liquidated. That is, there is nothing of value left to repurchase. A payment of damages is essentially identical to repurchase. In a separate decision, the New York Appellate Division endorsed this argument, explaining that for liquidated loans, RMBS trusts can obtain damages in lieu of actual repurchase. Nomura Home Equity Loan, Inc., Series 2006‑FM2 v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (2015). Since such damages can be reliably calculated  based on a sample, there is no reason to require loan-by-loan review for such loans. In light of Nomura, and because almost all of the damages sought by the trusts relate to liquidated loans, the SACO trustee elected to confine its sampling motion to liquidated loans.

This focused strategy succeeded. The court noted:“[T]his motion pertains only to liquidated loans—i.e., loans no longer in the Trust.   Therefore, the mortgage loan[s] at issue could not be returned to EMC or substituted.” Nov. 4, 2015 H’r’g Tr. at 10. “Plaintiffs explain the manner in which their experts will calculate a damages figure based on an aggregate purchase price for the liquidated loans in the pool and the breach rate in Plaintiffs’ loan sample.” Id. at 14-15. The court concluded: “There is nothing in the PSA that bar[s] Plaintiffs from proceeding in this manner. … Plaintiffs have demonstrated that as a matter of law, the PSAs’  ‘cure-and-repurchase  provision’ does not bar sampling as a method of proof.” Id.

While numerous courts have approved the use of sampling in RMBS cases, this decision marks the first time a court has specifically approved the use of sampling in an action by a trustee subject to a “sole remedy” provision and expressly held that this method of proof is consistent with the “sole remedy” provision, resulting in a significant victory for trustees in similar situations.