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

Filing 232

MEMORANDUM AND ORDER denying defendants' various motions to dismiss the amended complaint 144 146 150 153 . Signed by District Judge John W. Lungstrum on 9/12/2013. (ses)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

NATIONAL CREDIT UNION
ADMINISTRATION BOARD,

)
)
)
Plaintiff,
)
)
v.
)
)
RBS SECURITIES, INC.;
)
RBS ACCEPTANCE, INC.;
)
FINANCIAL ASSET SECURITIES CORP.; )
FREEMONT MORTGAGE SECURITIES
)
CORP.;
)
RESIDENTIAL FUNDING
)
MORTGAGE SECURITIES II, INC.;
)
NOVASTAR MORTGAGE FUNDING
)
CORP.;
)
NOMURA HOME EQUITY LOAN, INC.;
)
LARES ASSET SECURITIZATION, INC.;
)
and WACHOVIA MORTGAGE LOAN
)
TRUST, LLC,
)
)
Defendants.
)
)
_______________________________________)

Case No. 11-2340-JWL
(Consolidated with
Case No. 11-2649-JWL)

MEMORANDUM AND ORDER
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.

1

Because these motions may be resolved upon consideration of the parties’
multiple briefs, the Court denies RBS’s request for oral argument.
2

Certain defendants were permitted to take an interlocutory appeal from Judge
Rogers’s rulings with respect to particular limitations issues, but the Tenth Circuit
affirmed those rulings. See National Credit Union Admin. Bd. v. Nomura Home Equity
Loan, Inc., __ F.3d __, 2013 WL 4516997 (10th Cir. Aug. 27, 2013).
2

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

3

Defendant Lares Asset Securitization, Inc. has not filed a motion to dismiss.
Defendant Residential Funding Mortgage Securities II moved to dismiss the original
complaint, but subsequently declared bankruptcy. Judge Rogers dismissed all claims
against defendant Freemont Mortgage Securities Corp., and plaintiff has reasserted its
claims against that defendant in the amended complaint only to preserve them for appeal.
Plaintiff has voluntarily dismissed its claims against defendants Saxon Asset Securities
Co. and IndyMac MBS, Inc.
3

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
4

offerings. Thus, RBS and Wachovia4 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 originatorspecific allegations, but it did contain allegations based on a similar forensic analysis of

4

These six offerings do not include the offerings involving NovaStar or Nomura,
as plaintiff’s original complaint included specific allegations about the originators for
those defendants’ offerings. NovaStar argues that plaintiff has not included allegations
about its originator’s conduct specifically with respect to these loans. The Court is not
persuaded, however, to reconsider Judge Rogers’s conclusion that plaintiff made
sufficient originator-specific allegations to support a claim based on NovaStar’s offering.
5

RBS argues that the Court should also dismiss the claims relating to the HVMLT
2006-10 offering because plaintiff did not include specific allegations relating to all of
that offering’s loan originators. The Court rejects that argument; as plaintiff points out,
even one originator’s systematic abandonment of underwriting guidelines could make
untrue a representation that the guidelines were generally followed with limited
exceptions. For the same reason, the fact that NovaStar purchased some of its loans from
other originators does not provide a basis for dismissal.
5

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 owneroccupancy 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 owneroccupancy 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
6

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 without originator-specific allegations. Accordingly, the Court denies
the motion by RBS and Wachovia to dismiss certain claims on this basis.6
B.

Owner-Occupancy Ratio Allegations

RBS, Nomura, and Wachovia also seek to dismiss any claims based on plaintiff’s
new allegations that owner-occupancy ratios were misrepresented. They argue that they
cannot be liable merely for repeating misrepresentations by borrowers on the underlying
loans. The Court has already rejected this same argument in a one of the similar cases

6

Wachovia also argues that plaintiff’s allegations are not sufficient to show that
its forensic analysis involved a sufficient sample size for each certificate. At this stage,
the Court rejects that argument, which is better presented in the context of a Daubert
motion. Plaintiff has alleged an analysis based on 13,708 loans, a very significant
portion of all of the loans involved in these certificates. Thus, the case of Tsereteli v.
Residential Asset Securitization Trust 1006-A8, 697 F. Supp. 2d 546 (S.D.N.Y. 2010),
cited by Wachovia, is easily distinguishable. See id. at 547-48 (inferences not plausible
where based on inspection that did not involve loans at issue in the case and that
involved only 22 out of 63,935 loans).
7

brought in this Court by plaintiff. See National Credit Union Admin. Bd. v. Credit Suisse
Sec. (USA) LLC, __ F. Supp. 2d __, 2013 WL 1411769, at *15-16 (D. Kan. Apr. 8,
2013). The Court adopts that analysis in this case as well, and thus it denies the motion
to dismiss plaintiff’s owner-occupancy claims.
C.

Actual and Expected Loss Allegations

Finally, the moving defendants argue that plaintiff’s amended allegations
concerning actual and expected losses demand dismissal of its claims as implausible.
The Court rejects this argument as well.
In its original complaint, plaintiff alleged as follows: “The actual losses to the
mortgage pools underlying the RMBS U.S. Central purchased have exceeded expected
losses so quickly and by so wide a margin (see infra Figure 2) that a significant portion
of the mortgages could not have been underwritten as represented in the Offering
Documents.” Plaintiff defined “actual loss” as losses to the collateral pool because of
borrower defaults, less any amounts recovered from foreclosure sales. Plaintiff alleged
that estimates of expected loss, based on historical data for similar mortgage pools, are
used to determine the amount of credit enhancement needed to achieve a particular credit
rating. Thus, it appeared that plaintiff calculated expected losses for these certificates
by working backwards from credit ratings, which are associated with a multiple that was
then applied to the amount of an offering’s available credit enhancement to determine
an expected loss for that certificate. Plaintiff provided figures and graphs (Figure 2)
showing that during the first 12 months after issuance, the “actual gross losses”
8

exceeded the “expected gross losses” (although those terms were not defined or
explained separately from “actual loss” or “expected loss”) for each offering by
significant amounts. See generally Complaint ¶¶ 76-88.
In ruling on the original motions to dismiss, Judge Rogers noted these allegations
as one of six categories of allegations on which plaintiff relied to support its claim that
originators abandoned underwriting standards. See RBS, 900 F. Supp. 2d at 1232, 1253.
As noted above, Judge Rogers found plaintiff’s allegations to be sufficient with respect
to certificates for which plaintiff had included originator-specific allegations.
Plaintiff altered these allegations in its amended complaint. Although plaintiff
has not changed its figures and graphs, the amended complaint now makes clear that the
“actual loss” and “expected loss” used for its comparison for each certificate actually
represent “actual gross loss” and “expected gross loss,” in the sense that they refer to the
amount of principal remaining on defaulted loans prior to any recovery through a
foreclosure sale. The amended complaint further explains that the expected gross loss
figures were derived from the expected net loss figures (calculated as described in the
original complaint) by applying an estimated recovery rate of 85% after default (by
foreclosure sale and otherwise). Thus, plaintiff has changed its allegations concerning
its “actual loss” versus “expected loss” comparison to show that it has actually compared
gross, pre-recovery default figures, and not post-recovery figures as indicated in the
original complaint. See generally First Amended Complaint ¶¶ 75-88.
Defendants argue that this amendment by plaintiff renders its claims implausible.
9

Defendants note that Judge Rogers relied on plaintiff’s original allegations in concluding
that plaintiff’s allegations were sufficient, and that the amendment thus undermines that
conclusion. Defendants stress that plaintiff’s new allegations make clear that it has
merely measured amounts in default at various times, and they argue that such prerecovery figures say nothing about the amount of loss actually realized with respect to
the loans. To emphasize that point, defendants point to reports indicating that the actual
amount of realized losses for these certain certificates are far less that the “loss” figures
cited by plaintiff (or are even zero).7 Thus, defendants argue that plaintiff’s comparison
is meaningless.
The Court agrees that plaintiff’s use of the term “loss” in this context is a bit
misleading, as those figures actually represent only the amounts in default at particular
times, before recovery allows the actual realized loss to be determined. Nevertheless,
the Court agrees with plaintiff that the fact that actual defaults exceeded expected
defaults within a short time after issuance has relevance. Although such evidence may
not be as strong as a surge in actual over expected losses, it nevertheless does support
the inference that the loans were not underwritten properly.
Defendants also attack plaintiff’s method of calculating the expected “gross loss”
or defaults, including its use of an 85% rate for recoveries and its method of calculating
credit enhancement. Defendants note the absence of any allegations that plaintiff’s

7

The Court grants defendant RBS’s request that the Court take judicial notice of
certain materials, which request plaintiff has not opposed.
10

method is used by credit ratings agencies or by anyone else. The Court is not persuaded,
however, that plaintiff’s figures should be discarded as implausible. The fact that
plaintiff may have used its own method of calculation, created just for this litigation, is
not material, as parties often rely on their own experts’ calculations to support their
theories. Plaintiff is not required at this stage to justify its methodologies, as it must at
the time of its expert disclosures pursuant to Fed. R. Civ. P. 26(a)(2). Defendants’
objections to plaintiff’s figures and estimates, including NovaStar’s argument that
plaintiff should have accounted for more forms of credit enhancement, are more
appropriately raised in a Daubert motion.
Similarly, the Court rejects NovaStar’s argument based on reports of the actual
realized losses for its offering. A rise in defaults may support an inference of improper
underwriting, whether or not the alleged misrepresentation ultimately caused damages.
Moreover, any dispute about whether plaintiff’s figures are accurate should not be
resolved at the pleading stage.
Finally, the Court rejects defendants’ argument that the weakening of plaintiff’s
allegations, with the change from a comparison of losses to a comparison of defaults,
renders its claims implausible. Contrary to defendants’ assertions, Judge Rogers’s
opinion does not indicate that he valued plaintiff’s loss comparison allegations
particularly highly or that he especially relied on those allegations in finding plaintiff’s
claims to be plausible. Those allegations were listed as part of the information on which
plaintiff relied. Defendants have not argued that Judge Rogers erred in his original
11

conclusion. This Court concludes that the fact that the alleged losses were actually
alleged defaults does not so weaken plaintiff’s allegations, taken as a whole, including
originator-specific allegations and/or a forensic analysis indicating misrepresentations
about LTV and owner-occupancy ratios, that those allegations change from plausible to
implausible. Accordingly, the Court denies this basis for defendants’ motions to
dismiss.8

IT IS THEREFORE ORDERED BY THE COURT THAT defendants’ various
motions to dismiss the amended complaint (Doc. ## 144, 146, 150, 153) are denied.

IT IS SO ORDERED.

Dated this 12th day of September, 2013, in Kansas City, Kansas.

s/ John W. Lungstrum
John W. Lungstrum
United States District Judge

8

Wachovia also reasserts its limitations arguments from its original motion to
dismiss, in order not to waive those arguments. Those arguments are rejected pursuant
to the Tenth Circuit’s opinion in the interlocutory appeal and for the reasons cited by the
Court in rejecting those arguments in this case and in the similar cases.
12