Just when you think you've seen it all in mortgage-backed securities litigation, along comes the likes of Sand Canyon to prove you wrong.

The onetime California mortgage lender, which stopped originating loans in late 2007 and sold its servicing business to American Home Mortgage Servicing in 2008, has filed a complaint in New York State Supreme Court in Manhattan that accuses American Home of making it too easy for MBS trustees and insurers to get hold of underlying loan files. In essence, Sand Canyon's lawyers at Cahill Gordon & Reindel are arguing that the servicer should be helping it thwart claims that it breached representations and warranties about the mortgages it sold to MBS issuers, not smoothing the way for put-back demands.

Sand Canyon's 26-page complaint, filed last month, asserts that American Home pledged to act as an ally when it bought the servicing business in 2008. "Sand Canyon bargained for and obtained (American Home's) cooperation in connection with Sand Canyon's defense," the complaint said. Under their agreement, according to the complaint, American Home was supposed to "refrain from disclosing confidential loan information to third parties except as required by law."

Most pooling and servicing agreements permitted MBS trustees and insurers to see underlying loan files only during regular business hours and at the servicer's offices, according to the Sand Canyon complaint. But American Home, the suit alleged, has provided electronic records in response to demands from trustees and insurers.

"Sand Canyon has repeatedly requested that (American Home) stop providing the information to these third parties electronically and instead enforce the limited access rights Sand Canyon negotiated, and the third parties accepted, as part of the PSAs," the complaint asserted. "(American Home) has refused to do so." The suit claims breach of contract and seeks a declaratory judgment endorsing Sand Canyon's view of the American Home contract, as well as an injunction barring the servicer from turning over electronic loan files to MBS trustees and insurers.

American Home, represented by Hunton & Williams, responded last week with a motion to dismiss the Sand Canyon complaint. The servicer said it never agreed to be Sand Canyon's "accomplice in impeding and preventing claims by trustees and investors." And even if it had signed such a contract, American Home said, it would be unenforceable as contrary to public policy.

"In short, Sand Canyon is claiming that it has bought American Home's complicity in a scheme to help Sand Canyon escape liability to the trustees and investors to whom it sold mortgage loans," the American Home brief said. "But American Home is not Sand Canyon's accomplice in such a scheme."

I left messages with Sand Canyon counsel Joel Kurtzberg of Cahill and American Home counsel Brian Otero of Hunton but didn't hear back.

(Reporting by Alison Frankel)

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