McKool Smith has secured a pivotal trial win on behalf of junior bondholders-400 Capital Management, La Verdad Holdings, Solula LLC, and Robert Dechert-in a high-stakes residential mortgage-backed securitization (RMBS) trustee proceeding concerning 34 RMBS trusts.
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After the Financial Crisis, bondholders in the 34 trusts incurred roughly $400 million in losses from principal forbearance, which was granted to distressed homeowners under loan modification programs like the U.S. Treasury's Home Affordable Modification Program (HAMP). The contracts governing thousands of RMBS trusts were written before these modification programs existed and thus were not clear on how to account for the forborne principal on modified loans. As homeowners began to repay those losses years later, trust administrators accounted for these recoveries differently. The RMBS trustee, Wells Fargo, treated them as “subsequent recoveries” as it did all other loss recoveries. In 2021, senior bondholders objected because in the 34 trusts, subsequent recoveries increased the principal balance of junior bonds, not senior bonds. Wells Fargo filed a petition in New York Supreme Court asking the court to resolve the dispute. McKool Smith's clients faced off against an array of RMBS markets leaders, including PIMCO, AIG, Ellington Management, DW Partners, HBK Capital, Axonic Capital, Deer Park Road Management, and One William Street Capital.
Following a 17-day bench trial, Justice Andrew Borrok agreed with the junior bondholders that loss recoveries stemming from loan modifications are subsequent recoveries. The court rejected the position of other bondholders-that subsequent recoveries are limited to loss recoveries on fully liquidated loans. It also reaffirmed that when the governing contract preferences junior bonds over senior bonds, the trustee must follow the contract.
“The ruling has sweeping implications for the RMBS industry and resolves longstanding ambiguity surrounding the accounting treatment for HAMP-modified loans,” said McKool Smith Principal Courtney Statfeld, who served as co-lead trial counsel for the junior bondholders along with firm Principal Robert Scheef.
“This decision not only resolves the dispute regarding the 34 trusts at issue but also provides much-needed guidance to Wells Fargo and other trust administrators on how to account for the billions of dollars of principal forbearance in other RMBS trusts governed by similar agreements,” said Mr. Scheef.
Along with Ms. Statfeld and Mr. Scheef, the McKool Smith team also included firm Principals Jennifer Truelove and Daniel Hendler along with Associates Hal Shimkoski and Lauren Simenauer.
The case is In re Wells Fargo Bank, N.A., Index No. 154984/2021 (N.Y. Sup. Ct.).
With more than 130 trial lawyers across offices in Austin, Dallas, Houston, Los Angeles, Marshall, New York, and Washington, D.C., McKool Smith has established a reputation as one of America's leading trial firms. The firm has secured 18 nine-figure jury verdicts and 16 eight-figure jury verdicts, obtaining more VerdictSearch and The National Law Journal “Top 100 Verdicts” than any other law firm. McKool Smith represents clients in complex commercial litigation, intellectual property, bankruptcy, insurance recovery, and white-collar defense matters.
CONTACT: Keith Hill, khill@mckoolsmith.com, +19039239005
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