District Court says NY champerty statute bars RMBS suit

Courts RMBS Mortgages Champerty Appellate Second Circuit New York State Issues

On February 8, the U.S. District Court for the Southern District of New York issued an opinion granting in part and denying in part defendants’ motion for summary judgment and denying plaintiffs’ motions for partial summary judgment in parallel actions concerning pre-2008 residential mortgage-back securities (RMBS) trusts. In both cases, plaintiffs—RMBS certificateholders—filed suit alleging breaches of contractual, fiduciary, statutory, and common law duties with respect to certificates issued by RMBS trusts for which two of the defendants’ units served as trustee. Both plaintiffs alleged that the defendants failed to follow through on obligations to monitor the pre-2008 RMBS trusts that they administered. However, the court partially ruled in favor of the defendants, concluding that one set of plaintiffs could not avoid their loss in an RMBS trustee case brought against a different national bank, in which the court deemed the plaintiffs lacked a valid legal right to sue. In that matter, the U.S. Court of Appeals for the Second Circuit issued an opinion last October, agreeing with a different New York judge that “found the assignments champertous under New York law, rendering them invalid and leaving Plaintiffs without standing.” According to the 2nd Circuit, district court findings showed it was clear that the assignments were champertous “as they were made ‘with the intent and for the primary purpose of bringing a lawsuit.’”

The district court noted that the assignments of all the claims in the current matter were essentially identical to the issue already decided by the 2nd Circuit, and saw sufficient overlap to find the plaintiffs’ vehicles “collaterally estopped” from relitigating the issues of prudential standing and champerty. “The issues decided by the court of appeals relating to champerty and prudential standing are dispositive of the present action,” the court wrote. “Without prudential standing, the [] plaintiffs cannot assert claims arising out of the certificates and the entire [] action must be dismissed.” With respect to the other set of plaintiffs, while the court allowed certain claims to stand, it declined to grant any portion of the joint partial summary judgment related to the defendants’ alleged responsibilities as trustee, ruling that plaintiffs must prove those claims at trial.