Thousands of mortgage lenders across the country either recently received, or will soon be receiving, this document from Lehman Brothers Holdings, Inc. (LBHI). It is a notice of a motion to approve a proposed settlement of Residential Mortgage-Backed Securities (RMBS) claims asserted by trustees and investors against LBHI over the last few years. The notice of proposed settlement refers to proposed findings of fact, sets a deadline (June 22) for objections to the settlement, and schedules a hearing date (July 6) for approval of the RMBS settlement.
The companies receiving this document are apparently those that LBHI believes originated and sold loans that are now part of the proposed settlement, which sets an estimated settlement price of $2.416 billion to be paid by LBHI to settle the claims against it. It is therefore a prelude to new payment demands (for alleged breaches of contractual representations and warranties) by LBHI against the mortgage lender/correspondent at some point after the bankruptcy court approves the settlement. This notice likely is also specifically motivated by LBHI’s desire to cut off one of the potential defenses to an indemnity claim, “failure to give notice.” Paragraph 3 of the proposed order appears to relate to that issue.
As regular readers of this blog are aware, I have spent a tremendous amount of time since the 2008 financial crisis defending companies against RMBS-related claims for contractual indemnification or repurchase (a.k.a. “mortgage buyback” or “mortgage put-back” claims). Our litigation and dispute resolution team has always believed that there are numerous strong defenses, legally and factually, to this type of claim. That belief has translated into a number of precedent-setting victories that we have obtained for our clients, as well as favorable settlements before and after lawsuits were filed.
With regard to LBHI in particular, the RMBS settlement, once it is approved by the bankruptcy court (LBHI has been in bankruptcy since September 2008), will likely usher in a “fourth wave” of lawsuits by LBHI against the lenders that sold it residential mortgage loans. First, LBHI typically sued lenders in venues close to the lenders’ headquarters. They then shifted strategies, filing claims in Colorado, close to the headquarters of their affiliate Aurora. After setbacks in each of those first two waves, LBHI began bringing lawsuits against lenders in the Bankruptcy Court for the Southern District of New York. It commenced a third wave of litigation seeking reimbursement for settlement payment commitments it made to Fannie Mae and Freddie Mac. Now, the fourth wave—seeking reimbursement for RMBS settlement payment commitments—appears to be on the horizon. Significant legal and financial challenges lie ahead for all who are sued, or threatened with suit. Again, however, strong defenses are also very much part of the potential equation for anyone sued.
A “service list” exists, identifying all companies that LBHI believes must be notified about the RMBS settlement.