In late summer of this year, a New York appellate court revived the breach
of contract and negligence suit filed against Morgan Stanley. U.S. Bank
National Association, who was acting as a trustee for investors in residential
mortgage-backed securities (RMBS), first introduced the suit in 2012.
U.S. Bank alleged that Morgan Stanley breached its contractual duty to
notify the trustee of the defective loans which resulted in alleged losses
of $140 million from the sale of the allegedly defective loans.
In issuing its opinion, the court stated that the lower court erred in
their 2014 decision to dismiss the case, holding that the alleged failure
by a seller to notify securitization counterparties of material breaches
it discovers in the underlying loans constitutes an independently breached
contractual obligation that allows plaintiff to pursue separate damages.
The court also reversed the dismissal of the plaintiff’s gross negligence
claims noting that the facts alleged in the amended complaint were sufficient
to constitute a claim for gross negligence.
According to the complaint, as part of a larger securitization deal, Mortgage
Stanley Mortgage Loan Trust 2006-13ARX (“Trust”), the trust
holding the underlying loans, purchased over $609 million in debt from
1,873 residential mortgage loans. The RMBS pool was then offered out to
investors as certificates by the Trust, which used the proceeds to pay
for the underlying loans. In the agreement, Morgan Stanley was required
to confirm to the trustee that the loans did not contain any default,
breach or violation, and none were not in danger of being accelerated
or impending foreclosure. However, it is alleged that Morgan Stanley knowingly
included at least 371 loans that violated one or more of the agreed upon
eligibility terms which resulted in breaches that hurt the value of the
loans and the interests of the investors. It is further alleged that when
the Trust notified Morgan Stanley of the violations, Morgan Stanley failed
to honor its promise to repurchase the defaulted loans.
Based on these allegations and citing to a similar case,
Nomura Home Equity Loan Inc. vs. Nomura Credit & Capital Inc., among others, the appellate court stated that the allegations were sufficient
to support plaintiff claims for failure to notify and gross negligence
at the pleading stage.
The case is Morgan Stanley Mtge. Loan Trust 2006-13ARX v. Morgan Stanley
Mtge. Capital Holdings LLC, case number 2016 NY Slip Op 05781, in the
New York Supreme Court, Appellate Division, First Department.
Contact Geraci Law Firm at (949) 298-8050 today, or contact
Jenny Park directly for more information.