2nd Circuit addresses preclusion standard in dismissal of RMBS actions

Courts Appellate Second Circuit RMBS Securities

On April 26, the U.S. Court of Appeals for the Second Circuit upheld the dismissal of three residential mortgage-backed securities lawsuits tied to losses incurred during the 2008 financial crisis. The plaintiffs, issuers of collateralized debt obligations secured by RMBS certificates, sued several trust entities in separate lawsuits over the losses. According to the opinion, the district courts in each action assumed the plaintiffs had Article III standing but determined that they “were precluded from relitigating the issue of prudential standing” due to a related case they had previously brought against a different bank.

The 2nd Circuit explained that the district court in the related case had determined that the plaintiffs lacked standing because they had “conveyed all right, title, and interest in the RMBS certificates”—including the full power to file lawsuits—to third parties when issuing their notes, which were secured by certificates in RMBS trusts, among other assets. Following the decision, the third parties reassigned the litigation rights associated with the RMBS certificates back to the plaintiffs, but the court granted summary judgment in favor of the bank, holding that the plaintiffs lacked both Article III and prudential standing. The 2nd Circuit “affirmed on the ground that the assignments were champertous and that [p]laintiffs thus lacked prudential standing,” assuming but not deciding the issue of Article III standing.

With respect to the current lawsuits, the district court premised its dismissal on the finding that the plaintiffs were precluded from relitigating the issue of prudential standing by the holding in the related action. “In resolving an issue of first impression in this Circuit, we join the [9th] Circuit in concluding that the district courts permissibly bypassed the question of Article III standing to address issue preclusion, which offered a threshold, non-merits basis for dismissal,” the appellate court wrote. “In short, we fully agree with the district courts that [p]laintiffs were not entitled to a second bite at the prudential-standing apple after the [related] action. The district courts therefore did not err in taking this straightforward, if not ‘textbook,’ path to dismissal.”