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National Credit Union Administration Board v. RBS Securities, Inc.

United States District Court, Tenth Circuit

September 12, 2013




This matter comes before the Court on the motions to dismiss the amended complaint filed by defendants RBS Securities, Inc., RBS Acceptance, Inc., and Financial Asset Securities Corp. (collectively “RBS”) (Doc. # 146); NovaStar Mortgage Funding Corporation (“NovaStar”) (Doc. # 144); Nomura Home Equity Loan, Inc. (“Nomura”) (Doc. # 150); and Wachovia Mortgage Loan Trust, LLC (“Wachovia”) (Doc. # 153).

For the reasons set forth below, the Court denies the motions.[1]

I. Background

Plaintiff National Credit Union Administration Board brings this suit as conservator and liquidating agent of U.S. Central Federal Credit Union (“U.S. Central”). The suit relates to 20 offerings involving 29 different residential mortgage-backed securities (“RMBS” or “certificates”) purchased by U.S. Central. By the present suit, plaintiff brings claims under the federal Securities Act of 1933 and a Kansas statute, based on alleged untrue statements or omissions of material facts relating to each RMBS. Defendant RBS Securities, Inc. was the underwriter or seller for the certificates, while the other defendants issued the certificates.

A number of defendants filed motions to dismiss plaintiff’s original complaint, and Judge Rogers of this Court granted the motion in part and denied it in part. See National Credit Union Admin. Bd. v. RBS Sec., Inc., 900 F.Supp.2d 1222 (D. Kan. 2012) (“RBS”).[2] Plaintiff was granted leave to file an amended complaint, and it did so.

The instant motions to dismiss the amended complaint were then filed.[3] The case was subsequently reassigned to the undersigned judge. (There are now eight other similar suits, involving different certificates, pending before the undersigned, one of which has been consolidated with this action.)

II. Analysis

A. Lack of Originator-Specific Allegations

Plaintiff’s central allegation is that the originators for the loans underlying the certificates systematically abandoned underwriting guidelines, and that the certificates’ offering documents failed to disclose that fact or misrepresented that guidelines were followed. In the original motions to dismiss, defendants argued that plaintiff’s allegations were not sufficiently detailed to state a plausible claim that originators had abandoned underwriting guidelines with respect to these particular loans. In resposne to that argument, Judge Rogers held as follows: “For those MBS certificates involving originators who have been alleged to have abandoned underwriting standards or recklessly deviated from underwriting standards without compensating factors, the court finds that the claims in the complaint are not too conclusory.” See RBS, 900 F.Supp.2d at 1253. Judge Rogers distinguished such certificates, however, from those certificates involving originators about whose conduct there were no specific allegations (other than general originate-to-distribute (“OTD”) percentages). See Id. at 1253-54. Judge Rogers held that with respect to certificates without originator-specific allegations, “it is implausible to infer that the originators of the loans must have systematically abandoned the underwriting standards or that there is a reasonable expectation that discovery would prove this allegation.” See Id. at 1254. More specifically, Judge Rogers stated that he did not believe “that evidence of defaults and delinquencies and the evidence of later credit ratings downgrades, in combination with the general observations of the mortgage industry at the time, is adequate to state a plausible claim absent specific allegations against the loan originators for the MBS certificates.” See Id. (citing Plubmers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 773-74 (1st Cir. 2011)). Based on that conclusion, Judge Rogers dismissed claims based on nine certificates from six offerings for which plaintiff had failed to make originator-specific allegations. See Id. at 1254-55. Judge Rogers did give plaintiff leave to amend to cure that deficiency, however. See Id. at 1262.

In its amended complaint, plaintiff added new originator-specific allegations for the sole originator for one offering (FFMLT 2006-FF16) and for the originator of 17% of the loans backing a second offering (HVMLT 2006-10), but it did not add specific allegations about the conduct of the other originators for the other four dismissed offerings. Thus, RBS and Wachovia[4] argue that the Court should now dismiss plaintiff’s claims based on those four offerings, in accordance with Judge Rogers’s requirement of originator-specific allegations.[5]

In response, plaintiff relies on its new allegations that, based on a forensic analysis of 13, 708 loans from the six dismissed offerings, average loan-to-value (“LTV”) and owner-occupancy ratios were significantly understated and thus misrepresented in the offering documents for those six offerings. Plaintiff argues that such allegations, tied to the specific loans involved in these offerings, provide the same link effected by originator-specific allegations and thus help to state plausible claims based on those offerings. Plaintiff notes that Judge Rogers has already accepted this same argument in ruling on a motion to dismiss filed in the consolidated case, No. 11-2649, by defendant Wachovia Capital Markets, LLC. In that case, the complaint did not contain originator-specific allegations, but it did contain allegations based on a similar forensic analysis of LTV and owner-occupancy ratios for the loans at issue. See Id. at 1263. Judge Rogers concluded that, despite the absence of originator-specific allegations, the forensic analysis suggested that misrepresentations were made regarding LTV and owner-occupancy ratios, and that such information with a direct connection to the particular loan pools, together with the other allegations, stated a plausible claim for relief. See Id. at 1264.

RBS and Wachovia argue that this ruling from the consolidated case should not be applied in this case as well. They have not explained, however, why this Court should not reach the same conclusion here, other than to argue that Judge Rogers seemed to require originator-specific allegations in this case and that claims that have survived in other courts have involved originator-specific allegations. Judge Rogers explained in this case that a court may not plausibly infer that originators systematically abandoned underwriting guidelines for the loans underlying the certificates in this case based only on information about the conduct of originators generally or even based on high OTD percentages for these particular originators. See Id. at 1253-54. The inference does become plausible with allegations of specific underwriting conduct by these originators, as such allegations provide the necessary tie to the underwriting at issue in this case. See Id. In the consolidated case, Judge Rogers reasoned that plaintiff’s LTV and owner-occupancy analysis similarly made a “direct connection to the loan pools” for the particular certificates at issue. See Id. at 1264. That analysis suggested independent misrepresentations, tied to the particular certificates, which combined with plaintiff’s other allegations to state a plausible claim based on the abandonment of underwriting guidelines.

Judge Rogers’s reasoning is sound. In the present case, plaintiff’s forensic analysis, based on the particular loans underlying the six dismissed offerings, support a plausible claim of misrepresentations involving the LTV and owner-occupancy ratios. Not only are those alleged misrepresentations independently actionable, they provide a connection to the particular certificates at issue and thus support a plausible claim based on the abandonment of underwriting guidelines. That is true for claims based on these six offerings, even ...

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