Discovery will move forward in a pair of lawsuits involving securitization trusts that held troubled residential mortgage loans issued by a Credit Suisse Holdings subsidiary, a Manhattan Supreme Court judge has ruled.
Justice Melvin Schweitzer, in a Nov. 8 order in the cases Home Equity Mortgage Trust v. DLJ Mortgage Capital, 653787/2012 and Home Equity Mortgage Trust Series 2006-1 v. DLJ Mortgage Capital, 156016/2012, denied the defense’s request for a discovery stay in light of a pending appeal before the Appellate Division, First Department on the question over New York’s statute of limitations for a breach of contract claim in a separate RMBS case.
Attorneys at Orrick, Herrington & Sutcliffe, which is representing DLJ Mortgage Capital and Select Portfolio Servicing, which respectively sold and serviced 28,500 residential mortgage loans which Home Equity alleges violated underwriting standards, argued that the crux of the appeal in Ace Securities v. Deustche Bank Structured Products, 650980/2012, “mirror” the arguments in these cases.
On Nov. 5, defense counsel moved for a stay, citing judicial economy and the need to preserve resources, after producing nearly 1.7 million pages of documents thus far.
Schweitzer, though, was unconvinced, stating that while he has discretion to grant a stay under CPLR 2201, the defendants failed to satisfy the “requisite elements” to justify one under Hope’s Windows v. Albro Metal Prods. Corp., 93 AD2d (1st Dept. 1983), which held that a stay due to another action is proper only by a “complete identity of parties, causes of action and judgment sought.”
Schweitzer also held that DLJ Capital had not shown that the Ace appeal would resolve a ‘point of law applicable’ to these cases or settle the matter. Furthermore, the judge said “there is no guarantee that a decision would be ‘imminent,’” despite the November 27 argument date, when it’s well settled that a stay should be issued only when a decision appears “imminent” from an appellate court.
The Ace appeal, filed by Simpson Thacher & Bartlett, against respondent Kasowitz Benson Torres & Friedman, primarily concerns whether New York’s six-year statute of limitations begins to accrue on the date the underlying representations and warranties for these mortgage loans were made or the date in which loan servicers refused to cure or repurchase these loans based on demands by the trustees.
DLJ Mortgage Capital, in seeking dismissal of Home Equity’s complaints, posits, like the appellant in Ace, that the trustee is time-barred from filing breach of contract claims since the lawsuits were filed six years after the pooling and servicing agreements became effective.
In a separate order dated Nov. 8, Schweitzer granted the plaintiff’s request to compel discovery of certain documents from DLJ Capital, including settlement agreements between DLJ and any loan originators, certain documents turned over to government investigators regarding DLJ’s mortgage loan sale and securitization business between 2005 and 2007 and documents relating to DLJ’s re-underwriting, due diligence and quality control practices in that same time frame.
The judge held that these documents, which plaintiff’s attorney Erica Taggart of Quinn Emanuel Urquhart & Sullivan argued were winnowed down to the “most necessary categories,” would be demonstrative of DLJ’s practices at the time.
“The sheer volume of defaults, and the fact that DLJ entered into settlements with multiple Originators over these Loans indicate a possibility, if not a likelihood, of systemic problems with the Originators’ underwriting, as well as the accuracy of their representations to DLJ,” Schweitzer wrote. “The relevance of these agreements, with respect to the loan included in the three securitizations, makes them discoverable.”
Credit Suisse came under investigation by the New York Attorney General regarding its mortgage loan underwriting practices in People of the State of New York v. Credit Suisse (USA), 451802/2012, and has been subject to a Nov. 16, 2012 cease and desist order by the Securities and Exchange Commission.
Although the trustee sought all documents turned over to the government, Schweitzer denied the request, calling it “over-broad and unduly burdensome,” and directed the plaintiff to identify only those specific documents it wants.
Likewise, Schweitzer ruled that plaintiffs are entitled to documents from Select Portfolio, such as communications the servicer had with third parties relating to the servicing of its loans and documents relating to its general servicing policies and procedures.
The judge reasoned that these materials are “directly related to discovering what [SPS] knew, when it knew it, and what it did about it.”
Defense counsel, which opposed the motion to compel by equating it to a “fishing expedition,” is required to turn over these documents by Jan. 11, 2014.
In an Oct. 16 letter to the court, Orrick partner Richard Jacobsen said handing over these materials would “unnecessarily and materially add to DLJ’s already exorbitant legal fees” and delay prompt resolution of the case.