Lehman Brothers Holdings Inc. initiates new adversarial proceedings against mortgage brokers | Bilzin Sumberg
If you thought Lehman Brothers Holdings Inc. (“LBHI”) had finished suing lenders following its settlements with the RMBS Trustees years ago, think again. LBHI recently filed a new wave of lawsuits against around 60 defendants, mostly mortgage brokers, in bankruptcy proceedings currently underway in the U.S. Bankruptcy Court for the Southern District of New York, and others may yet to be coming. As it did with the nearly 190 mortgage creditors it sued in 2018 in the same bankruptcy proceedings (the “2018 adversarial proceedings”), LBHI seeks compensation for contractual compensation, alleging breaches of representations and guarantees at the time certain loans were sold or negotiated.
The difference between these proceedings and the adversarial proceedings of 2018 (some of which are still pending) is that many of these new lawsuits target entities that have entered into brokerage agreements with LBHI’s subsidiary, Lehman Brothers Bank. These brokerage agreements contain more advantageous provisions for defendants than loan purchase agreements, which should make these procedures much more difficult for LBHI to successfully litigate. Brokerage contracts generally contain “dominant party” provisions regarding attorneys’ fees, as well as representations and warranties that may require the broker to “know” of any suspected misrepresentation (including alleged misrepresentation by borrower) regarding loans. In the adversarial proceedings of 2018, LBHI’s claims for defective loans mirrored the claims made against it by the RMBS trustees, claims which in many cases were supported by the types of argument and evidence the judge bankruptcy at the time called weak and “weak.” “In recent cases against brokers, even if LHBI was able to prove that the loans contained incorrect statements, it may still have to demonstrate, among other things, that the broker was aware of the incorrect statements.
In its oral submissions (and other documents served in the adversarial proceedings of 2018), LBHI states that its claims will be limited to (1) what it considers to be the four main types of misrepresentation, which are (a) income , (b) employment, (c) occupation, and (d) debt, plus (2) claims that LBHI conceded in the underlying proceeding against the trustees of RMBS, which included not only claims for “false declarations”, but also certain “regulatory” claims and “particularly flagrant” subscription claims. Regarding claims for “misrepresentation”, LBHI states that it will exclude loans in this group which (a) have been executed for more than three years, (b) have violations supported by “less reliable” evidence , or (c) involved only documenting complaints.
It is not clear at this time whether LBHI will attempt to consolidate these new proceedings with the adversarial proceedings of 2018, which have now gone through more than two years of document production and written discovery. It sounds implausible – but, again, the idea that new lawsuits would still be brought for loans sold or negotiated 14-18 years ago was also.