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National Credit Union Administration Board v. UBS Securities, LLC

United States District Court, D. Kansas

January 31, 2017

NATIONAL CREDIT UNION ADMINISTRATION BOARD, Plaintiff,
v.
UBS SECURITIES, LLC, et al., Defendants. NATIONAL CREDIT UNION ADMINISTRATION BOARD, Plaintiff,
v.
CREDIT SUISSE SECURITIES USA LLC, et al., Defendants.

          MEMORANDUM AND ORDER

          John W. Lungstrum United States District Judge

         Plaintiff National Credit Union Administration Board brings these related suits as conservator and liquidating agent of credit unions. The suits relate to a number of offerings involving different residential mortgage-backed securities ("RMBS" or "certificates") purchased by the credit unions. Plaintiff asserts claims under federal and state law against sellers, underwriters, and issuers for the certificates, based on alleged untrue statements or omissions of material facts relating to each certificate.[1]

         These two cases (hereafter referred to as UBS and Credit Suisse) presently come before the Court on various motions by plaintiff for summary judgment and to exclude expert testimony.[2] As more fully set forth herein, the Court rules as follows:

         Plaintiff s motion for summary judgment on certain defenses (Doc. # 442 in UBS, Case No. 12-2591; Doc. # 401 in Credit Suisse, Case No. 12-2648) as it relates to defendants' knowledge defenses and certain of defendants' limitations defenses is granted, and plaintiff is awarded judgment on those defenses, as set forth herein.[3]

         Plaintiff s motion for summary judgment on UBS's due diligence and reasonable care defenses (Doc. # 435 in UBS, Case No. 12-2591) is granted in part and denied in part. Summary judgment is granted against defendant Mortgage Asset Securitization Transactions, Inc. (MASTR) and with respect to the NAA 2006-AR4 securitization. The motion is otherwise denied.

         Plaintiffs motion for summary judgment on Credit Suisse's due diligence and reasonable care defenses (Doc. # 393 in Credit Suisse, Case No. 12-2648) is granted in part and denied in part. Summary judgment is granted against defendant Credit Suisse First Boston Mortgage Securities Corp. (CSFB) and with respect to the IND YL 2006-L2 securitization. The motion is otherwise denied.

         Plaintiffs motion to exclude expert testimony by Gary Lawrence and Charles Grice (Doc. # 419 in UBS, Case No. 12-2591; Doc. # 383 in Credit Suisse, Case No. 12-2648) is denied.

         I. Summary Judgment - Knowledge

         By a single motion filed in both cases, plaintiff seeks summary judgment on any knowledge defense asserted by defendants. Section 11 of the Securities Act provides for a claim by an acquirer of a security based on an untrue statement of material fact or omission of material fact "unless it is proved that at the time of such acquisition he knew of such untruth or omission." See 15 U.S.C. § 77k(a). Thus, Section 11 provides an affirmative defense of knowledge on which the defendant bears the burden of proof. See New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group, PLC, 709 F.3d 109, 127 n.12 (2d Cir. 2013). Similarly, the relevant California statute provides for liability "unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission." See Cal. Corp. Code § 25501. Section 12(a)(2) and Kansas law make the absence of the purchaser's knowledge an element of the plaintiffs claim. See 15U.S.C. § 77/(a)(2) (qualifying the requirements for liability as follows: "the purchaser not knowing of such untruth or omission"); K.S.A. § 17-12a509(b) (qualifying the requirements for liability as follows: "the purchaser not knowing the untruth or omission").

         The plain language of these statutes requires that the knowledge relevant to this defense be actual knowledge of the purchaser, not mere constructive knowledge. See New Jersey Carpenters Health Fund, 709 F.3d at 127 n. 12 (affirmative defense under Section 11 requires proof of actual knowledge); MidAmerica Fed. Sav. and Loan Ass'n v. Shearson/American Express, Inc., 886 F.2d 1249, 1257 (10th Cir. 1989) (under Section 12, purchaser must prove a lack of actual knowledge); Comeau v. Rupp, 810 F.Supp. 1127, 1158 (D. Kan. 1992) (predecessor to Section 12a509(b) focused on the plaintiffs actual knowledge, not constructive knowledge, which interpretation is consistent with that given to federal Section 12); see also NCUAB v. UBS Sec, LLC, 2016 WL 7373857, at *3 (D. Kan. Dec. 20, 2016) (Lungstrum, J.) (Kansas statute was modeled after federal Section 12). Defendants do not dispute that this defense under each of the statutes refers to the purchaser's actual knowledge.

         In these cases, plaintiff asserts claims based on representations that the underlying loans were originated in compliance with certain underwriting guidelines and representations that the loans had certain characteristics. Under any of these statutes, and whichever party bears the ultimate burden of proof, plaintiff has satisfied its initial summary judgment burden to provide evidence showing an absence of material fact with respect to the credit unions' lack of knowledge of the alleged misrepresentations. For instance, plaintiff has cited testimony from credit union employees to the effect that the credit unions did not know that the offering documents for these certificates contained misrepresentations. Plaintiff has also cited evidence that the credit unions used offering documents' data regarding the underlying loans for other purposes, which evidence supports a reasonable inference that the credit unions believed the data to be accurate. In seeking summary judgment, plaintiff argues that there is no evidence that the credit unions did have actual knowledge of the alleged misrepresentations concerning the loans underlying the certificates.

         In opposition to summary judgment, defendants have not cited any evidence that the credit unions knew that the particular representations concerning the specific pools of loans underlying the certificates were actually false. Rather, defendants rely on generalized evidence that there were well-known and widespread problems in the industry with respect to the improper origination of loans and the abandonment or loosening of underwriting guidelines and that certain risks were inherent in the purchase of RMBS. Defendants note that plaintiff itself warned credit unions about these problems, and they cite to media reports and other public information about the problems. Defendants also cite evidence, for example, that these credit unions were sophisticated, repeat purchasers of RMBS; performed their own reviews of originators, which revealed underwriting issues; understood the origination process and the need for verification of information from the borrowers; knew that defendants' and the underwriters' due diligence analyses did not involve every loan; were aware of the trends regarding bad underwriting by originators and the loosening of underwriting standards; and appreciated the risk of borrower misrepresentations and fraud with respect to the certificates they purchased. Defendants argue that such circumstantial evidence gives rise to a reasonable inference that the credit unions had actual knowledge of the misrepresentations alleged here.

         The Court disagrees, and it concludes that defendants' evidence is not sufficient to create a genuine issue of material fact concerning the credit unions' actual knowledge that the representations concerning specific loans were actually false. The statutes tie the required knowledge of the purchaser to the particular misrepresentations and omissions alleged by the plaintiff. Indeed, defendants concede in their opposition brief that the knowledge must relate to the particular misrepresentation alleged. In these cases, the alleged misrepresentations relate to specific loan pools underlying the certificates. Defendants' evidence, however, does not relate to the specific loans, but rather relates only to general problems with originations in the industry and risks in purchasing certificates. Thus, defendants have not provided evidence of knowledge of issues within the specific loan pools. For example, the credit unions' knowledge of general risks might support an inference that they knew these loan pools might contain defective loans (a risk of defects), but it does not support a reasonable inference that they actually knew that these specific loans actually were defective. Similarly, the credit unions' awareness that originators generally-or even the originators of these loans-were loosening underwriting standards or sometimes did not comply with underwriting guidelines does not support a reasonable finding that they actually knew that these specific loans were not originated in compliance with the guidelines.[4]

         Allowing defendants to rely only on generalized evidence of industry problems and risks would undermine the defense's requirement of actual knowledge instead of constructive knowledge, as defendants are arguing in essence that, based on the state of the industry, the credit unions should have known that these specific loans would have defects. Such an argument also runs the risk of imposing a requirement that the purchaser have acted reasonably, although the law is clear that there is no reasonable reliance requirement. Defendants chose to make the representations that they did concerning these loans, and purchasers should be able to rely on such representations (and on due diligence performed with respect to the loans), including to provide some assurance that the specific loans underlying the certificates satisfied certain standards despite problems in the industry generally. Thus, defendants here must produce evidence tied to the specific loans in order to provide evidence of the credit unions' actual knowledge that these particular representations were false.

         In this regard, the Court finds persuasive the thorough opinions by which Judge Cote reached the same conclusion in similar cases in New York. See FHFA v. UBS Americas Inc., 2013 WL 3284118, at * 14-19 (S.D.N.Y.June 28, 2013) (Cote, J.);FHFA v. HSBCN. Am. Holdings Inc., 33 F.Supp.3d 455, 476-91 (S.D.N.Y.2014) (Cote, J.). Defendants have not identified any flaw in Judge Cote's reasoning; instead they merely argue that her conclusions are against the weight of authority. The supposedly contrary authority cited by defendants, however, is not particularly helpful. Those cases involve whether the issue of knowledge predominated for purposes of class certification, and thus those courts did not consider whether such generalized evidence as that on which defendants rely may provide sufficient evidence of actual knowledge relating to particular misrepresentations. See UBS Americas, 2013 WL 3284118, at *15 (distinguishing In re Initial Public Offerings Sec. Litig, 471 F.3d 24 (2d Cir. 2006), on this basis); HSBC, 33 F.Supp.3d at 484 (same). In fact, in the appeal from one case cited by defendants, the Second Circuit seemingly rejected the proposition for which defendants cited the lower court opinion. See New Jersey Carpenters Health Fund v. Rali Series 2006-QO1 Trust, 477 F.App'x 809, 813 (2d Cir. 2012) (noting that although the defendants' generalized evidence of knowledge indicated that individual knowledge inquiries might be necessary, such evidence "surely would not have sufficed to prove each knowledge defense on the merits"), affg New Jersey Carpenters Health Fund v. Residential Capital, LLC, 272 F.R.D. 160 (S.D.N.Y. 2011).

         Defendants have not attempted to distinguish the present cases from the cases before Judge Cote. Nor have defendants attempted to explain how their evidence satisfies the standard applied by Judge Cote (and now adopted by this Court) that requires evidence relating to the credit unions' knowledge of problems with these specific loans. Therefore, the Court concludes that defendants have failed to provide evidence sufficient to create a genuine issue of material fact with respect to any defense based on the credit unions' knowledge.

         Finally, defendants argue that such a motion for summary judgment is premature until the representations and their material falsity have been established (presumably at trial). The Court rejects this argument. As with any issue or defense, summary judgment on the knowledge defense may be granted if defendants are unable to produce sufficient evidence in support of that defense. In making this ruling, the existence of materially false misrepresentations may be assumed, and defendants have not produced the required evidence. Accordingly, summary judgment is appropriate at this time, and the Court grants the motion and awards judgment to plaintiff on any knowledge defense asserted by defendants in these actions.

         II. Summary Judgment - Certain Limitations Defenses

         In the related case involving RBS, the Court ruled that the limitations period imposed by the Extender Statute, 12 U.S.C. § 1787(b)(14), supplanted any other unexpired limitations or repose period; and that because the certificates in that case had been sold within three years of March 20, 2009, when plaintiff became conservator of U.S. Central, plaintiff s claims were not barred by the federal Securities Act's three-year statute of repose. SeeNCUAB v. RBS Sec, Inc., 900 F.Supp.2d 1222, 1237-43 (D. Kan. 2012) (Rogers, J.). This Court endorsed and applied those rulings in the present cases. See NCUAB v. Credit Suisse Sec. (USA) LLC, 939 F.Supp.2d 1113, 1124-25 (D. Kan. 2013) (Lungstrum, J.); NCUAB v. UBS Sec, LLC, 2013 WL 4736240, at *2 (D. Kan. Sept. 3, 2013) (Lungstrum, J.). The Tenth Circuit subsequently affirmed the Court's rulings in RBS, and after the Supreme Court vacated and remanded for further consideration, the Tenth Circuit reinstated its previous affirmance. See NCUAB v. Nomura Home Equity Loan, Inc., 727 F.3d 1246 (10th Cir. 2013), vacated and remanded, 134 S.Ct. 2818 (2014), aff'd on remand, 764 F.3d 1199 (10th Cir. 2014), cert, denied, 135 S.Ct. 949 (2015).

         In these cases, it is undisputed that the credit unions purchased the certificates within five years of the date on which the particular credit union was placed into conservatorship by plaintiff; and with respect to the certificates on which plaintiff asserts federal claims, the certificates were offered or sold within three years of the conservatorship date. Based on the Court's prior rulings discussed above, plaintiff seeks summary judgment on any affirmative defense based on the three-year federal statute of repose or the five-year statute of repose applicable to the California and Kansas claims. See 15 U.S.C. § 77m; Cal. Corp. Code § 25506; K.S.A. § 17-12a509(j)(2).

         With respect to its state-law claims based on four particular certificates, [5] plaintiff seeks summary judgment on any affirmative defense based on the applicable two-year discovery limitations period. See Cal. Corp. Code § 25506; K.S.A. § 17-12a509(j)(2). Plaintiff bases that portion of its motion on the fact that each of those certificates was sold within two years of the applicable conservatorship date (meaning that the credit unions must have discovered any claim within the limitations period).

         In response to the motion, defendants have preserved their right to appeal the Court's prior rulings, but they do agree that, if those rulings (as affirmed by the Tenth Circuit) are applied here, summary judgment is appropriate as requested by plaintiff. Accordingly, the Court grants the motion and awards plaintiff judgment on defendants' limitations defenses to the extent requested in the motion.

         III. Summary Judgment - Due Diligence and Reasonable Care

         In separate motions in the two cases, plaintiff seeks summary judgment on any affirmative defenses of due diligence or reasonable care as asserted by defendants. As set forth more fully below, the motions are granted in part and denied in part.

         A. Statutory Issuers

         Plaintiff has asserted claims only under federal Section 11 against defendant MASTR (in UBS) (based on eight certificates from five securitizations) and defendant CSFB (in Credit Suisse) (based on seven certificates from five securitizations). Plaintiff seeks summary judgment on any due diligence defense asserted by those defendants on the basis of Section 11 's express exclusion of issuers from its affirmative due diligence defense. See 15 U.S.C. § 77k(b). Those defendants do not dispute that they acted as issuers for purposes of Section 11, and they have not opposed summary judgment on the defense. Accordingly, plaintiffs motion is granted with respect to defendants MASTR and CSFB, and plaintiff is awarded judgment on any due diligence or reasonable care defense asserted by those defendants.

         B. Reasonable Care Standard

         The Court then turns to plaintiffs motion as it relates to defendant UBS Securities, LLC (hereafter referred to as "UBS") and defendant Credit Suisse Securities (USA) LLC (hereafter referred to as "Credit Suisse"). In UBS, plaintiffs claims are based on 22 certificates from 11 securitizations underwritten by UBS. The five principal securitizations were issued by an affiliate of UBS, while the six third-party securitizations were issued by an entity unrelated to UBS. In Credit Suisse, plaintiffs claims are based on20 certificates from 15 securitizations underwritten by Credit Suisse. The six principal securitizations were sponsored and issued by Credit Suisse's affiliates, and the underlying loans came from Credit Suisse's own inventory. The remaining nine third-party securitizations were sponsored and issued by unaffiliated entities, and the ...


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