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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