I did a double take Wednesday, when I noticed a pair of new
suits by Lehman Brothers Holdings in federal court in Colorado.
The complaints, which are almost identical, claim that the
mortgage originator Universal American Mortgage breached
representations and warranties about loans it sold to Lehman,
which subsequently suffered losses as a result of those
breaches. But here's the thing: Each suit addresses only one
supposedly deficient loan! Lehman's lawyers at Akerman
Senterfitt allege that Lehman sustained about $100,000 in
damages on one of the loans and $120,000 on the other -- numbers
that are light years apart from the multibillion-dollar claims
we've seen from groups of mortgage-backed securities investors
who band together to assert contract breaches in thousands of
loans at a time.
The Lehman complaints each also contained a curious
paragraph, noting that the claims at issue were previously
asserted as counts in an eight-loan put-back case Lehman was
litigating in federal court in Miami. The judge in that case,
Lehman said, had decided after a pretrial conference last week
that "each loan must be filed separately, rather than joined
within one action."
That notation sent me to the docket in the Florida case, and
to the order entered by U.S. District Judge James King on Jan.
9. It's true: King ruled that every allegedly deficient loan has
to be addressed in its own suit, not in a block case. "The lack
of commonality among the various factual circumstances pertinent
to each of the eight individual loans makes them all but
impossible to be adjudicated together," King wrote. "That lack
of commonality flows from, among other things, the facts that
each of these loans was made at a different time, to different
borrowers, in different locations involving different purchases
of different real properties; most fundamentally, each loan
requires separate proof as to whether a breach occurred, what
damages, if any, flowed from any such breach, and what the
amounts of any such damages are."
So even though discovery was complete, summary judgment
motions had been fully briefed and the eight-loan case was
scheduled for a March trial, the judge dismissed claims based on
all but one of the loans in the original suit. He said Lehman
could refile the other seven as separate cases in Miami federal
court. (I called Lehman counsel Kelly Garcia of Akerman to ask
why the new complaints were filed in Colorado, not Florida, but
didn't hear back.)
Universal American's lawyer, Philip Stein of Bilzin Sumberg
Baena Price & Axelrod, told me Wednesday that if other judges
following King's lead, the ruling could have profound
implications for put-back litigation, since it significantly
increases the cost of asserting breach-of-contract claims.
(Stein also blogged about the order at Bilzin's Mortgage Crisis
Watch site.) Few put-back cases, Stein said, have reached final
pretrial conferences, so few judges have considered the kind of
commonality challenges he raised back in 2011 in Universal
American's motion to dismiss the Lehman suit. The judge denied
the dismissal motion in order to permit discovery, Stein said,
but was receptive when Universal American revived its argument
at a pretrial hearing on Jan. 4.
"This is a big development, perhaps a bellwether," Stein
said, because it shifts the economic burden of put-back
litigation. In this case, he told me, Lehman resold the loans it
acquired from Universal American to Fannie Mae, which
subsequently claimed Lehman had breached its representations
about the mortgages. Lehman sued the mortgage originator to
recover its own put-back payments to Fannie Mae. Stein, who
represents several mortgage originators in put-back cases, said
he's noticed that the banks that aggregated and securitized
mortgage loans espouse different views of put-back obligations,
depending on whether they're suing originators or being sued by
MBS investors. "They talk out of both sides of their mouth," he
King's severance order, he said, may lessen banks'
enthusiasm for bringing claims. "Once the Lehmans of the world
realize they're facing eight mini-trials instead of one big
trial, they may reconsider," he said.
(Reporting by Alison Frankel)
Follow us on Twitter: @AlisonFrankel, @ReutersLegal | Like us on Facebook