On Tuesday, Bank of America broke what I believe is new ground
in mortgage-backed securities litigation. The bank brought a
declaratory judgment suit against Wells Fargo, the trustee in a
commercial MBS offering by BofA predecessor LaSalle Bank,
requesting a judicial ruling that BofA is not required to comply
with the trustee's put-back demand. The complaint, filed in
federal district court in Chicago by Aronberg Goldgehn and
Cadwalader, Wickersham & Taft, contends that Wells Fargo didn't
comply with the terms of the governing contract, and, moreover,
that some of the underlying loans the trustee wants BofA to buy
back are performing just fine.
The MBS trust is backed by commercial rather than
residential mortgages, so it's not necessarily a harbinger of
declaratory judgment claims in response to the rash of RMBS trustee suits we've seen lately. But Wells Fargo's put-back
demand, as BofA describes it in the complaint, was based on the
same kind of alleged underwriting deficiencies cited by
investors in RMBS put-backs. Wells Fargo has been notably quick
and aggressive about asserting put-backs on mortgages underlying
LaSalle commercial MBS offerings, even going to trial against
BofA in federal court in Oklahoma last year in a 2008 case
claiming that LaSalle's underwriting process was systemically
tainted. Perhaps when BofA has had as much experience with RMBS
trustees as it has had with Wells Fargo on commercial MBS, we'll
see similar declaratory judgment actions. (I left a phone
message for Gregory Markel of Cadwalader but didn't hear back.)
According to BofA's complaint, Wells Fargo sent a demand
notice in September, claiming that LaSalle's systemic
underwriting deficiencies meant that BofA was responsible for
repurchasing all of the 47 remaining mortgages underlying a 2006
CMBS offering. (The other loans have already been paid off.)
BofA asserted that the demand was improper, since the MBS trust
contract called for the repurchase only of specific loans that
breached LaSalle's representations and warranties. Wells Fargo
responded with a letter citing specific problems with each of
the loans. Bank of America then filed the declaratory judgment
suit, arguing that the trustee's two different theories -- that
there were systemic flaws in LaSalle's underwriting and that
each of the loans breached reps and warranties -- were
internally inconsistent. The bank also said that the jury in
Oklahoma "implicitly rejected" the trustee's claims of systemic
problems when it found that BofA had to buy back some but not
all of the loans in a different but similar LaSalle CMBS
offering.
It's unusual to see Wall Street firms representing banks in
suits against other banks, so Cadwalader's appearance for BofA
is noteworthy. The firm also represented BofA in the Oklahoma
trial of Wells Fargo's claims, though, so it is familiar with
both the LaSalle commercial MBS and with Wells Fargo's demands
as trustee.
I emailed a Wells Fargo representative for comment, but she
did not respond.
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