On March 8, 2018, U.S. Bankruptcy Court Judge Shelley Chapman held after 22 days of trial that the claims brought by RMBS trustees in Lehman Brother Holdings, Inc.’s (LBHI) bankruptcy were valued at around $2.38 billion, agreeing with LBHI’s estimate, not the trustees’ estimate of $11.4 billion. This is the beginning of round three of claims LBHI will be making against lenders and brokers, which are understood to be much larger than LBHI’s claims relating to its settlements with the GSEs that are now pending before Judge Chapman in New York.
Judge Chapman’s 100-page decision, which took six hours to read into the record, rejected the RMBS trustees’ accounting of the claims primarily because the trustees failed to meet their evidentiary burden of establishing the breaches and connecting them to credible evidence.
Judge Chapman issued her decision on March 8 following a trial that began in November 2017 and wrapped up in early February 2018.
The trial was a Bankruptcy Court-assisted process to evaluate claims against Lehman Brothers for allegedly selling billions of dollars of loans containing misrepresentations that were securitized before its 2008 collapse. Around 70,000 loan files were at-issue in the dispute. The trustees asserted that $8.8 billion of their $11.4 billion estimate consisted of alleged contractual breaches based on alleged misrepresentations borrowers made in their mortgage applications regarding their income, debt and occupancy, or the big four breaches. The trustees asserted an additional $370 million of their claim consisted of alleged breaches related to misrepresentations regarding borrowers’ ratio of debt to income, and other breaches related to additional representations and warranties Lehman Brothers made to the trustees. The trustees withdrew many missing document claims, but some of those claims remained in dispute.
Earlier in LBHI’s Bankruptcy Court proceedings, a group of 14 sophisticated institutional investors including a Goldman Sachs Group, Inc. unit agreed to resolve the claims for $2.4 billion, but LBHI fought to prevent the Court from enhancing that figure. Deutsche Bank National Trust Co., Law Debenture Trust Co. of New York, U.S. Bank NA and Wilmington Trust Co. had been given until June 1 to accept or reject the deal. Originally, the settlement that is now final was constructed to cover 244 trusts, but six of those didn’t make the final sign-off. For five of those six trusts, there were no alleged breaches of representations and warranties in the trustees’ claims, and the sixth is defunct.
In her decision, Judge Chapman went through in great detail her view of the evidence and witness testimony and did not find the trustees’ expert credible. Judge Chapman criticized how the expert managed the loan review process and stated it was flawed because the expert only utilized exemplar loans and did not provide the Court with enough loan by loan detail that had the proper evidentiary foundation to be reliable. Judge Chapman explained in detail how the trustees failed to meet their evidentiary burden of establishing the breaches and connecting them to credible evidence, not just conjecture and speculation, to establishes the breach. For example, Judge Chapman called attention to the ambiguities in the meaning of terms in the loan application which could cause a borrower to answer the question wrong without intending to lie.
American Mortgage Law Group’s Senior Litigation Counsel, who has been defending brokers and lenders against LBHI since 2014, attended some of the hearings. AMLG will be ordering the transcripts and using the information to aid current LBHI-GSE and future LBHI-RMBS clients to use the valuable information gained from this trial to reach early effective resolutions and successful litigation outcomes. For example, one expert testified that if a loan is “seasoned”, or performing for over 18 months, then the burden of proof on the loan can only be met 6% of the time. This could translate to a very low settlement number for that loan. In April, AMLG will be providing that information to those that opt into receiving it and sharing in the cost. If you would like more information regarding the above, please contact Senior Litigation Counsel Tracy Henderson at Tracy Henderson.