Trustees In Mortgage Securitizations May Begin Finding Themselves In The Crosshairs As "Joint Venturers" In Lawsuits Seeking To Impose Fraud Liability

The New York Times reports on the hot water facing many of those big institutions who played any part in the creation and peddling of mortgage securitized interests in toxic loans:

• Some legal experts point to a number of cases in which plaintiffs contend that firms involved in the securitization process, like trustees hired to oversee the pools of loans backing securities, worked so closely with the lenders that they should face liability as members of a joint venture. And these experts see a rising receptiveness to this argument by some courts.(1)

Among the cases referred to in the story is current litigation brought by the Atlanta Legal Aid Society on behalf of a couple fighting foreclosure of an allegedly abusive and predatory loan. They seek punitive damages from the lender, NovaStar Mortgage Inc., as well as from the original trustee (JPMorgan Chase) and the subsequent trustee (Bank of New York Mellon).(2)

Another lawsuit referred to in the story was one targeting lender First Alliance, in which its main backer, Lehman Brothers, found itself hammered with some of the liability.(3)

A third lawsuit referred to involving the issue of liability for abusive lending going beyond the original lender resulted in a settlement after the court denied two motions to dismiss it.(4)

For the story, see Looking for the Lenders’ Little Helpers.

(1) From the story:

• “As we are unpeeling what was happening on Wall Street, we may see that Wall Street didn’t find the safety from litigation risk that it hoped to find in securitization,” said Kathleen Engel, a professor at Cleveland-Marshall College of Law at Cleveland State University. “I think there is potential for liability if borrowers can engage in discovery to see exactly how much the sponsors were shaping the practices of the lenders.”

(2) From the story:

• “We contend that the trustee has direct liability on the theory that even though they were not sitting at the loan closing table, they were involved in the securitization and profited from it,” said Sarah E. Bolling, a lawyer in the Home Defense Program at the Atlanta Legal Aid Society who represents the [homeowners]. “The prospectus had been written before the loan was closed. If this loan was not going to be assigned to a trust, it would not have been made.”

(3) From the story:

• More than 7,500 borrowers had successfully sued First Alliance for fraud, and in 2003 a jury found that Lehman, which had lent First Alliance roughly $500 million over the years to finance its lending, “substantially assisted” it in its fraudulent activities. Lehman was ordered to pay $5.1 million, or 10 percent of damages in the case, for its role.

(4) From the story:

• That matter turned on the language in the securitization’s pooling and servicing agreement, which provides details not only on the types of loans in a pool but also on the relationships of various parties involved in it. Diane Thompson, a lawyer with the National Consumer Law Center, said that the meaning of the agreement was that “the trustee was a joint venture with the originator and was therefore responsible for everything that happened in that joint venture.” Many such agreements, she said, create a joint venture by force of law. “Everybody I know that has tried this argument has had pretty good success. Absolutely we are going to see more of these cases.”