Page 7 - Commercial Litigation

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Commercial Litigation | MONDAY, AUGUST 10, 2015 | S7
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Glatt, one of many class actions around the country challenging the status of unpaid interns, will certainly impact internship pro- grams in a variety of industries.
Statute of Limitations
In a June decision, New York’s highest court reestablished that certainty in con- tract actions outweighs other policy consid- erations. In Ace Securities v. DB Structured Products, the trustee for a trust of pooled resi- dential mortgage loans brought a breach of contract action against the transaction spon- sor for failing to repurchase loans allegedly in nonconformance with its representations and warranties. -- N.E.3d --, N.Y. Slip Op. 04873, 2015 WL 3616244 (N.Y. June 11, 2015).
Defendant DB Structured Products (DBSP) purchased 8,815 mortgage loans, which were sold to ACE Securities through a Mortgage Loan Purchase Agreement (MLPA), and then transferred to a Home Equity Loan Trust. The Trust issued $500 million in certificates, which had the individual mortgage loans as collat- eral. Certificateholders were paid principal and interest on their certificates when bor- rowers made payments on their loans.
DBSP made more than 50 representations and warranties in the MPLA regarding the loans’ characteristics and credit quality. The MPLA, dated March 28, 2006, allowed the Trust to examine and exclude any loan that did not comply with the representations and warranties, but also disclaimed any obligation by the Trust or certificateholders to conduct any due diligence. The Trust’s sole remedy for breach of these was for DBSP to cure or repurchase the nonconforming loan. If DBSP failed to cure the breach within 60 days after notice, the trustee was authorized to enforce the repurchase obligation.
A few years after the MPLA was executed, borrowers began defaulting and certificate- holders lost nearly $330 million. Two cer- tificateholders had the loans reviewed as against the representations and warranties; 99 percent of them allegedly failed to con- form with at least one. The certificateholders gave notice of the breach to the Trust and asked the Trust to seek DBSP repurchase. The trustee filed a complaint against DBSP on Sept. 13, 2012.
DBSP moved to dismiss the action as time- barred because it was brought more than six years from the MPLA’s execution. The Court of Appeals affirmed the First Department’s decision granting the motion.
The court noted its longstanding policy to enforce statutes of limitation for finality, certainty and predictability. Because the rep- resentations and warranties were stated in the contract, the last day to bring an action for breach would have been March 28, 2012, nearly six months before the Trustee’s com- plaint. The court squarely rejected the notion that the MPLA required DBSP to guarantee the future performance of the loans and found that if the MPLA was breached, it was breached on the date the contracts were executed, not when DBSP allegedly failed to cure or repurchase the loans as the Trustee argued.
The Court of Appeals has again shown its favor for a bright-line rule with respect to the six-year limitations period in contract actions,
even against the interests of investors. The decision may impact investors’ willingness to invest in these securities or at least the type of due diligence they will undertake before purchasing.
Insider Trading
The Second Circuit recently changed the landscape for insider trading actions, over- turning two high-profile government con- victions against former hedge fund traders Todd Newman and Anthony Chiasson. United States v. Newman, 773 F.3d 438 (2d Cir. 2014). The government had alleged that analysts at various hedge funds and investment firms obtained material, nonpublic information from insiders of publicly-traded technology
New York state and federal courts routinely decide significant commercial disputes in a variety of industries and continue to play an impor- tant role in New York’s sustained status as a commercial center.
companies, shared it amongst each other, and then with their companies’ portfolio man- agers. Defendants were charged and found guilty of trading on the insider information obtained by the analysts.
The Second Circuit relied heavily on Dirks v. SEC, 463 U.S. 646 (1983), which requires that the tipper in an insider trading case receive a personal benefit for providing the inside infor- mation. Dirks outlined three requirements for tippee liability: (1) the trader’s liability derives from the tipper’s breach of fiduciary duty; (2) the insider does not breach that duty unless he receives a personal benefit from disclosure; and (3) a tippee is liable only if he knows or should have known of the breach. The last prong is critical. Dirks was standard in insider trading law prior to Newman, but Newman redefined the law by requiring that the tippee know of the personal benefit to the tipper to be liable. Knowledge of an insider’s breach of a duty of confidentiality is not enough. Based on this standard, the Second Circuit determined that the district court’s jury instruction was deficient in not advising the jury that defendants had to know the insider acted for personal benefit. Although the government argued that this instruction was harmless error, the Second Circuit disagreed and overturned defendants’ convictions.
Case law has a large effect on shaping the law on insider trading because insider trading is not specifically prohibited by statute. New- man may well lead to fewer insider trading prosecutions. It has already impacted pending cases; several convictions have been over- turned based on Newman and more motions have been filed.
International Arbitration
The Southern District recently addressed the interplay between sovereign » Page S11
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