Editor’s Note: This article has been corrected to reflect that Quinn Emanuel Urquhart & Sullivan was retained by the directing certificateholder, not the trustee, to construct the appeal.
The losing side in Ace II, the Appellate Division, First Department decision that has halted scores of lawsuits seeking to recoup investors’ losses from defaulted mortgage loans, has hired one of the most high-profile appellate litigators in the country to argue its case before a higher court.
Paul Clement, former U.S. Solicitor General and partner at the Washington, D.C. firm Bancroft, will argue the appeal for plaintiff HSBC Bank USA, in its capacity as trustee for certificate-holders of a residential mortgage-backed securitization.
HSBC’s decision to recruit Clement, whose experience includes leading the states’ challenge of the Affordable Care Act before the U.S. Supreme Court in March 2012 and representing the U.S. House of Representatives in defending the Defense of Marriage Act last year, underscores the high-stakes litigation this case has become.
The First Department’s Dec. 19 ruling in the case, Ace Securities, Series 2006-SL2 v. DB Structured Products, known as Ace II, set the clock back for when claims alleging breaches of representations and warranties of underlying mortgage loans start to accrue.
Reversing Manhattan State Supreme Court Justice Shirley Kornreich, the unanimous four-judge panel held that the six-year statute of limitations sets in not when a financial institution that sold such loans to a depositor fails to cure or repurchase defective loans, but when the transaction between the two parties took place.
In the case at hand, mortgage loan defaults caused an alleged $330 million in losses to the trust and certificate-holders. Because the trust brought its complaint six months past the six-year anniversary of that transaction, DB Structured Products, through its counsel at Simpson Thacher & Bartlett, argued the claims were time-barred.
A motion filed Tuesday with the First Department seeking re-argument of the panel’s decision or, in the alternative, leave to appeal to the Court of Appeals, highlights the dissatisfaction felt by HSBC regarding the panel’s analysis of the issues.
The motion argues that the panel’s “brief decision fails to grapple” with existing New York precedent “in a meaningful way.”
Emphasizing the “risk-shifting provision” inherent in these RMBS transactions, the trustee argues that Deutsche Bank was under “a continuing obligation to cure or repurchase if and when it discovered or was notified of defective loans.”
The motion argues that the First Department panel “did not even address, let alone attempt to reconcile” its decision with other New York cases relating to continuing obligations.
The trustee’s motion rests on two premises—that the panel’s decision conflicts with settled principles of New York law and also affects “hundreds of pending cases involving hundreds of billions of dollars in RMBS losses.”
“As a result of this Court’s Decision, whether similarly situated plaintiffs can seek recourse for massive RMBS losses may depend entirely on the forum in which they initially brought their claims—even though the relevant arguments are all ostensibly governed by the same New York laws,” the motion states.
“That disparate treatment cries out for resolution, if not by this Court, then by the highest court of the State,” it continues.
Indeed, divergent opinions have emerged in the RMBS litigation space on this issue—including two last week in the Southern District of New York.
The trustee’s brief points out that “the problem is compounded by the fact that multiple federal courts applying New York law have rejected precisely the reasoning this Court adopted, meaning materially analogous lawsuits ostensibly governed by the same New York laws now will be permitted to proceed in some courts but not others.”
It’s seldom when the appellate divisions grant leave for motion to reargue. The standard is that the court “overlooked or misapprehended” the underlying facts or law. Leave to appeal, on the other hand, may be granted when the issue concerns one of “novel or public importance” or furthers “the interest of substantial justice.”
The trustee’s motion is signed by Marc Kasowitz of Kasowitz, Benson, Torres & Friedman, who argued the appeal before the First Department back in December. Clement’s name, as well as those of Bancroft partners Erin Murphy and Stephen Potenza, appear as well.
Although its name does not appear in the motion papers, Quinn Emanuel Urquhart & Sullivan has been retained by the directing certificateholder to construct the appeal in Ace II. Due to a conflict arising from the firm’s litigation against trustee HSBC in unrelated RMBS actions, however, Clement was hired to argue the appeal, in part through his connections to Quinn Emanuel partner Kathleen Sullivan.
Clement did not respond to CLI’s request for comment Wednesday.