Counsel for plan administrator Lehman Brothers Holdings Inc., or LBHI, presented closing argument in the RMBS estimation proceeding today before Judge Shelley Chapman. In line with the post-trial briefing submitted by LBHI, the plan administrator’s attorneys argued that the RMBS trustees’ claims arising out of more than 70,000 RMBS loans should be estimated at $2.38 billion, in contrast to the $11.4 billion figure put forward by the trustees. Closing arguments for LBHI were presented by Todd Cosenza of Willkie Farr & Gallagher and Michael Rollin of Rollin Braswell Fisher.
The court is scheduled to hear closing argument from counsel for the RMBS trustees tomorrow, Friday, Feb. 9, at 9 a.m. ET.
Cosenza, speaking for LBHI, thanked the court for its time and attention to the RMBS estimation proceeding. He noted that the trial had been timed to conclude ahead of a March 2018 distribution by the plan administrator. Cosenza called LBHI’s $2.38 billion proposed estimate a “fair and appropriate amount.” He noted that the $2.38 billion figure grew out of the plan administrator’s previous agreement with 14 of the largest institutional investors, which was subsequently rejected by the RMBS trustees. Cosenza also argued that the first two steps of the estimation protocol suggested that the preliminary value of the RMBS trustees’ claims were in the $278 million to $301 million range. He emphasized, however, that LBHI is not seeking to estimate the claims at that lower range in light of the fact that the estimation protocol, if completed, would have involved further steps as well as compromises between the parties. Moreover, “our approach is what’s fair,” he said.
Cosenza also remarked that the RMBS trustees have pursued an 11-figure damages claim for years, but the trustees have failed to establish during this trial that they are entitled to those damages. Rather, the trial made clear that the trustees’ loan breach review process lacked integrity and reliability, he said. Among other defects, the trustees did not properly supervise the five review firms or provide them with uniform guidelines on how to conduct a breach review, Cosenza asserted. He added that the trustees presented seven exemplar loans in their examination of James Aronoff, who testified that the loan review process was valid. Although the trustees presumably “handpicked” those seven loans out of more than 70,000, even those seven suffered from “significant deficiencies,” he said.
Continuing, Cosenza said that the RMBS trustees previously argued that the loan claims should be paid out at the purchase price and without the application of “haircuts or discounts.” However, the trustees have now made a “pivot” in their post-trial brief by including a demonstrative exhibit with a “calculator tool” aimed at aiding the court with adjustment of the value of the asserted claims, said Cosenza. He said that the submission of the calculator in a post-trial brief was “too late.” Later, Rollin, also speaking for LBHI, said that the exhibit is “not even evidence” and that even if the court finds it admissible as evidence, it should be given no weight.
Rollin also emphasized that for their breach claims, the trustees were required to establish a threshold fact and breach of a representation and warranty, and to show that the breach “adversely and materially affects the value of the related Mortgage Loan” – an “AMA” – unless the breach was deemed to materially and adversely affect the loan value, a “Deemed AMA.” The trustees often did not satisfy at least one element of these requirements, and often none of them, he said. Importantly, the trustees made “no attempt” to establish a nexus between the asserted breaches and their losses, which is an “element that governs every breach of contract case,” Rollin argued. He added that the trustees must prove a diminution in loan value, not just an increased risk of loss, and the RMBS trustees have improperly relied on case law about repurchase claims by monoline insurers. Rollin urged the court to reject “monoline creep” by applying the reasoning in these cases.
In addition, counsel for LBHI stressed that the RMBS trustees withdrew 40% of the claims generated by their loan process in the summer of 2017 and never explained the decision to the plan administrator. When LBHI asked about it, the trustees “cloaked that decision in privilege,” he said. Judge Chapman remarked that she seemed to recall the trustees saying that all the breach claims in the original submission “hit the target,” but they later decided to concentrate on the claims that hit the “bull’s eye and the next area out.” Counsel for LBHI said that if this is the trustees’ explanation, it is unconvincing, since the claims that remain “are not different from the ones that were pulled out.” He also reiterated LBHI’s view that the asserted claims are the product of a flawed review process.
The plan administrator’s counsel also pointed out that the trustees had accepted claim valuations for six collapsed trusts performed by an independent appraiser. For each of the collapsed trusts, the appraiser determined that the claim values were equal to or less than the plan administrator’s requested allowance at the estimation proceeding, based on the collapsed trusts’ allocable share of $2.38 billion, he said. The applicable trustees then sold the trusts’ claims using those values, and their acceptance of the appraiser’s claim valuations shows that the court should adopt the $2.38 billion estimation, said LBHI’s attorney. Counsel concluded that the $2.38 billion figure is both “fair and reasonable” under the circumstances of the case.
The full article can be found here.
Learn more about Michael Rollin.