U.S. Southern District Judge Deborah A. Batts shut down underwriter defendants’ attempt to avoid proceeding with discovery in a $7.7 billion mortgage-backed securities fraud action, by arguing that an automatic bankruptcy stay applied to the underwriter defendants in addition to the debtor defendants.
The current discovery dispute arises from a proposed class action lawsuit against the now bankrupt NovaStar Mortgage Inc. (“NMI”) and NovaStar Mortgage Funding Corporation (“NMFC”) and the investment banks that underwrote $7.7 billion of NovaStar mortgage-backed securities issued in 2006. The underwriter defendants include RBS Securities Inc., Deutsche Bank Securities Inc., and Wells Fargo Securities LLC. The class action alleges that the offering documents failed to disclose that NovaStar had abandoned its underwriting standards in the wake of the 2009 housing crisis, which caused significant losses for investors.
Two former Deutsche Bank traders accused of manipulating the London InterBank Offered Rate (“LIBOR”) were indicted by the Department of Justice (“DOJ”) on June 2, 2016. Dubbed “the world’s most important number,” LIBOR is a benchmark for global short-term interest rates that underpins trillions of dollars in mortgages and other debt. The case against the two indicted individuals, Matthew Connolly and Gavin Campbell Black, occurs more than a year after Deutsche Bank resolved its role in the LIBOR scheme by agreeing to pay $2.5 billion in regulatory and criminal penalties, and signals increased DOJ vigilance in the years-long probe into the manipulation of benchmark rates.
The global financial crisis that began over a decade ago has shaped how market participants, the government, and the public at large conceptualize and respond to risk. The crisis has also shaped the law in the most prominent financial center in the country, if not the world–New York.
Historically, in the days before securitization–i.e., the bundling of debt instruments such as residential mortgage loans–the primary risk accompanying a mortgage loan inured to the lending bank. The lending bank therefore had a vested interest in the borrower’s creditworthiness and the value of her collateral. If the borrower defaulted, then the bank suffered the loss. Structured products coupled with derivatives exponentially multiplied and expanded the risk accompanying residential mortgage loans. In the modern financial system, individual borrowers’ defaults crippled not only banks, but pension funds and their investors, insurance companies and their stakeholders, sovereign wealth funds and their citizens, down the line.
Now, more than a decade after the crisis began, the litigation brought in its wake has ambled its way through the courts, resulting in binding precedent–stare decisis–that will resonate for decades. A number of legal issues that reached the highest courts in New York have wide-ranging impact beyond the structured products space, including issues of contract interpretation, statutes of limitations, and privilege.
This article addresses several issues decided in the wake of the crisis, all of which arose from cases involving securitized mortgage loans, and all of which have applications that extend well beyond those particular financial products and the crisis.
Defenses–Statute of Limitations
Perhaps the most impactful decisions in New York emanating from the crisis are those involving New York’s statute of limitations.
In 2015, the New York Court of Appeals harmonized two cases with different outcomes that it decided in the late nineteenth century, over a hundred years earlier, by holding that even where a demand with a cure period is contractually required to invoke a remedy for breach of representations and warranties, the cause of action accrues not when the demand is made and refused, but when the initial representations and warranties were made. This is so, the Court added, irrespective of whether, when, and how the claimant became aware that the representations and warranties were false. Emphasizing the importance of certainty and predictability, the Court concluded that the defendant’s breach of contract occurred, if at all, on the closing date and not when it subsequently refused to repurchase breaching mortgages and New York’s six-year statute of limitations for breach of contract ran from that date. The case is ACE Securities Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581 (2015).
Then in late 2018, the New York Court of Appeals in a split decision went a step further when it addressed whether parties can contractually define when a cause of action for breach of representations and warranties accrues. The Court affirmed the lower courts’ rulings dismissing the case as time-barred, even though the parties had an “Accrual Clause” in their agreement conditioning the accrual of a cause of action on demand for compliance with the parties’ agreement. Although the case would have been timely had that provision been enforced, the Court of Appeals held that to the extent the parties intended to delay the commencement of the statute of limitations by agreeing when a cause of action “shall accrue,” their attempt to do so was prohibited by New York law and its public policy. In a biting dissent, Judge Rowan D. Wilson wrote:
Both here and in our prior decision in ACE we have fundamentally misinterpreted the structure of RMBS agreements and, as a result, have created bad law: bad because it neither hews to the intent of the contracting parties nor of the investors in securities issued thereby; bad because it serves no public policy; bad because it disserves a very important public policy–the preservation of New York’s role as the commercial center of the nation.
Judge Wilson concluded, “were I advising a party to a prospective RMBS agreement today, I would tell my client that the law of Delaware is clear ..., and the law of New York is not.” The case is Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., 32 N.Y.3d 139 (2018).
Separately, in 2018, the New York Court of Appeals decided that the statute of limitations for non-scienter based enforcement actions brought by the New York Attorney General pursuant to the Martin Act (N.Y. GBL § 23-A) is three years, not six as argued by the government. The Court thus dismissed as time-barred the government’s non-scienter based claims. The case is People v. Credit Suisse Sec., 31 N.Y.3d 622 (2018). On August 26, 2019 Governor Cuomo signed into law a bill passed by the New York legislature in June amending the C.P.L.R. to codify that the statute of limitations for Martin Act claims is six years. In effect, this law reverses the Court of Appeals’ decision in People v. Credit Suisse.
Finally, the New York Court of Appeals is presently considering a case that will define the bounds of New York’s borrowing statute, N.Y. C.P.L.R. 202. The borrowing statute requires, in the case of a non-resident plaintiff suing in New York, that the court apply the shorter of New York’s statute of limitations or that of the place where the claim arose. And generally, under New York law, a claim arises where the plaintiff is injured, which is typically the plaintiff’s place of residence. Here, the trial court applied an exception to that general rule, finding that in the case of a securitization trustee suing for the benefit of investors concerning a New York common law trust that was created in New York, the place of injury if not New York is fact intensive and could not be decided on a pleadings motion. The Appellate Division, First Department disagreed and found that the claim arose in California where the trustee maintained its principal place of business and where a number of the securitized mortgage loans were issued. The Court of Appeals granted certification of the issue and is expected to hear the case in the fall of 2019. The case is entitled Deutsche Bank National Trust Company, solely in its capacity as Trustee of Securitized Asset Backed Receivables LLC Trust 2007-BR1 v. Barclays Bank PLC, Index No. 651338/2013 (N.Y. Sup Ct.)).
Contractual Interpretation–Reimbursement of Attorneys’ Fees
Three recent New York appellate decisions have upheld trustees’ rights to recover their attorneys’ fees and litigation expenses from the defendants, who are securitization sponsors and mortgage originators. These decisions add clarity to New York’s application of the “American Rule” under which, absent a statutory or contractual mandate, parties bear their own attorneys’ fees. In these cases, the Appellate Division, First Department concluded that the operative contractual language was sufficiently clear to evidence intent that defendants reimburse plaintiff trustees for their litigation fees and expenses. The cases are U.S. Bank National Association v. DLJ Mortgage Capital, Inc., 34 N.Y.S.3d 428, 429 (1st Dep’t 2016) (“HEAT”), Wilmington Trust Co. v. Morgan Stanley Mortgage Capital Holdings LLC, 152 A.D.3d 421 (1st Dep’t 2017) (“MSM”), and Deutsche Bank National Trust Co. v. EquiFirst Corp., 154 A.D.3d 605 (1st Dep’t 2017) (“EQLS”), and have not been appealed to New York’s Court of Appeals. As such, they are binding law in New York County–i.e., in Manhattan.
The Common Interest Privilege
In 2016, the New York Court of Appeals was called upon to consider whether the common interest privilege extended to protect communications between parties with a common business interest, even if there were no litigation pending or anticipated. This trend has evolved in the recent developments in the Second, Third, Seventh and Federal Circuits, where litigation is not required to establish the application of common interest. The Court declined to expand the privilege, holding that litigation must be reasonably anticipated in order to invoke the privilege. The case is Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616 (2016).
Finding a mentor or sponsor isn’t always easy, and can be especially difficult for women and people of color. In Part 1 of a two-part series, two millennial women attorneys offer advice for younger professionals on how to step out of a comfort zone to ask for help.
We all know that both mentors and sponsors can be extraordinarily important to a young lawyer’s success, whether it be in a law firm, a corporate legal department, a government agency, or other contexts.
Mentors take you under their wing by offering advice and support. They help you build, refine, and expand skills as well as formulate your vision for your career. They make suggestions about how to expand your network and they share the “unwritten” rules of how your organization works. A sponsor, on the other hand, is someone with an influential voice at the table, who is convinced of your potential, and who is willing to put some (or a lot) of her or his political capital on the line for you.
It has been reported that 43 percent of all licensed lawyers are millennials. A lot has been written for and about this generation, including how we can or should go about finding a mentor or sponsor.
Did you catch that “we”? As two senior members of the millennial generation, we have grown and evolved in our careers, but are not far removed from our early days as attorneys. We’ve been there. We’ve learned the importance of mentors and what it takes to earn sponsorship—and have been fortunate to experience the benefits of both.
Women and people of color report a variety of challenges in their access to mentoring opportunities. While progressive workplace policies and cultures can be beneficial, they do not guarantee effective mentorship or sponsorship for all.
According to a recent report by the American Bar Association’s Commission on Women in the Profession and the Minority Corporate Counsel Association, women of color had the lowest level of agreement when asked whether they have access to quality mentorship. According to the study cited in that report, only 57 percent of women of color indicated that they had access to good mentors, compared with over 68 percent of white men.
In fact, a widely cited study by the Harvard Business Review entitled, “The Sponsor Effect,” found that many talented women experience impediments to career success due to a failure to recognize the key role that sponsorship plays in advancing within the organization. A lack of mentorship and/or sponsorship can—and does—impact a junior lawyer’s ability to advance professionally.
So, how do you find a mentor? Fellow millennials, you’re not going to like this answer. It’s on you. Ask for what you need, want, and deserve. Speak up! Preferably in person. And if you’re overly reliant on formalized mentoring/sponsorship programming, you are going to lose out.
Our conversation below takes a look at our experiences and aims to shed light on what we learned from our career steps.
Jennifer: “Early in my career, I was more soft-spoken and less direct about my desire to be mentored (and then as I became more senior, sponsored). I realized after a few years that there were willing mentors around me—I just had to raise my hand.”
Jewel: “I agree. I learned early on in my career that I am responsible for my own development. It was incumbent on me to build my network and to ask for help when I needed it. I also learned that I shouldn’t limit the audience that I was speaking to. I had to expand my audience of prospective mentors inside, outside, and adjacent to organizations that I was affiliated with. Once I expanded my audience, I was fortunate to develop relationships with many leaders who were willing to contribute to my development, including the head of a practice group at my former firm. And one mentor oftentimes begets another.”
But what if you're being direct, and it's not working?
Jewel: “I know how that can feel. However, all is not lost. Consider whether or not you are showing the value you bring to a prospective mentoring relationship. People want to invest in those who are committed to their own development. Do not shy away from your accomplishments, but ensure that you embrace feedback and follow through on the advice you receive from others.”
“I have also learned that, just as potential mentees can be overlooked, so can potential mentors. Step outside of your comfort zone. Some of your best mentors will be those who view the world through a different lens, and who will challenge you to do the same. Focus on what you want to learn rather than the package the learning comes in. And don’t overlook your peers. Peers can also be excellent mentors from whom you can seek guidance. Effective mentorship is about developing authentic relationships. They come in all shapes and sizes.”
Jennifer: “I’m also reminded of advice I received early on in my career from my baby boomer father. He told me that I should make sure to get to the office before my boss arrived, and wait to leave until he or she left for the day. Fast-forward a few years later, I learned that I was likely to get long periods of uninterrupted time with a specific partner I was working with in the early evenings and on Fridays, when his schedule tended to be less packed with meetings and court appearances. As a result of these opportunities I quietly carved out for myself, he became an invaluable mentor and sponsor, and now he is my partner.”
“Bottom line, genuine relationships do not develop and grow over an exchange of emails; therefore, even in an office environment with flexible work arrangements, don’t underestimate the importance of face-to-face meetings. And it is critical that you understand the work habits of the individuals you are seeking out as mentors and sponsors.”
How does mentorship and sponsorship differ outside of the law firm setting?
Jewel: “I’ll take this one. I left law firm life two years ago and moved to an in-house position. It is different, but the basics still apply. What I want to stress in response to this question, though, is that it is critical when interviewing for a new opportunity to use the interview process to ensure that you are joining an organization with a strong and inclusive culture that values diversity and inclusion and is committed to talent development.”
“One of my mentors, a seasoned black partner, once told me that corporate culture tends to measure success by a manager’s ability to develop talent and, therefore, managers are encouraged to actively provide mentorship and development opportunities for all of their attorneys. His comments helped me to streamline my focus during the interview process when deciding between two Fortune 100 in-house offers. I accepted the offer with the company I believed had more of a talent-development mindset, so that finding mentors to aid in my development would not be as difficult a task. And two years in, I have not been disappointed. I remember going through the interview process and being intentional about interviewing the companies as much as they were interviewing me.”
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Getting the most out of a law career mentorship sometimes means looking outside of a law firm. In Part 2 of a two-part series on millennial mentorships, two millennial women attorneys discuss ways to get the most out of the relationship and offer advice for attorneys who want to be mentors.
In our first Insight article, we explored how millennial attorneys can find mentors and sponsors, which are key relationships to a young lawyer’s success. To recap, women and people of color report a variety of challenges even in progressive workplaces.
Therefore, to find a mentor, we need to speak up and actively seek out mentorship and sponsorship relationships—use formal mentorship programs but, focus on opportunities to develop organic relationships with willing mentors and sponsors outside of formalized programs.
Now that you have found a willing mentor or sponsor, how do you utilize such a valuable relationship? Below, we discuss some tips and experiences to guide the way.
Jewel: “A discussion regarding how to utilize a mentor or sponsor requires us to go back to one of the first points we made in our first Insight article—mentors and sponsors serve different purposes.”
“Let’s focus on mentors first. A mentor is someone who can teach or coach to aid in your development. She/he can be a lawyer who is senior to you or a peer who has a skill or a demonstrated mastery in an area you would like to grow in. A mentor can provide advice about how to have difficult conversations or how to navigate your career. A mentor is someone you can bounce ideas off of, or someone who can help you find a mentor for another stage in your journey.”
“A few weeks ago, I had dinner with a mentor who has become a friend (that is likely to happen as the relationship develops). In addition to the time spent catching up and sharing information concerning each of our respective accomplishments since we last spoke, I sought her help with identifying another mentor to help me navigate my in-house journey.”
Jennifer: “Mentors found outside of your organization can also be helpful if you need a fresh perspective that is unencumbered by office politics. When I was about to go out on a 24-week maternity leave, which happened to fall during the first year of my partnership window, I sought guidance from a partner at another law firm with whom I co-chaired a committee in a professional organization. She gave me advice to help me navigate a time of significant transition in my life. My internal mentors and sponsors did that too, but it was helpful to have a perspective from outside of my organization.”
“Sponsors are typically found within your organization, and their function is different. A sponsor has the power to propel your career. As we discussed in our first Insight article, sponsorship requires greater commitment than mentorship in that it requires expenditure of political capital, and a sponsor will be willing to spend that capital on you only if they know you are equally or more committed to your development.”
“Assuming you’ve gotten there and your sponsor knows you’re all in, start having discussions about your career earlier than forced deadlines would require. For example, don’t save those discussions for review time, or for when you have to select your partnership window (in the case of a law firm). And, assuming you have developed an appropriate level of trust, those discussions may also include your career aspirations outside of your current organization.”
Jewel: “Exactly. ‘All in’ as an associate at a law firm does not have to mean that your ultimate goal is to become a partner at a law firm. You have to define what ‘all in’ means for you. I remember when it became pretty clear that ‘all in’ did not include a desire to become a law firm partner, and I shared that with several mentors—how I had defined ‘all in’ for myself.”
“They all had advice to share about my next steps. One mentor in particular sat me down and asked: ‘Jewel, what do you want to do next? Do you want to be a judge? Do you want to go in-house? Do you want to go to the governor’s office or a nonprofit?’ I remember being flattered that I was perceived as someone who could be a judge. That conversation gave me the confidence to think big, but more importantly, my mentor (turned sponsor) used her capital to help me make connections to expand my career opportunities.”
What advice would you give to willing mentors and sponsors?
Jennifer: “Willing mentors and sponsors need to be committed to more than just advancing women in the legal profession—we need to be committed to advancing all types of women. And that needle has further to go. We need to resist the urge to mentor only women who remind us of ourselves, and instead ensure that attorneys of all races, sexual orientations, and gender identities have access to quality mentors and sponsors. If you believe that you’re already sponsoring one or more individuals, why not take a look at your list of proteges and ask yourself whether any of them are different from you in some discernible way. Also, do their skills complement, rather than replicate, yours?”
Jewel: “I agree with that wholeheartedly. Also, I urge would-be mentors and sponsors to meet less seasoned attorneys halfway. If you have the ability to mentor, join your organization’s Women’s Initiative, and be as active as your time permits. Invite a young attorney to have coffee. Get to know the attorneys on your team. Build real relationships and create an opening for them to come to you when they need support or guidance. Think of mentoring as an investment, and as part of your legal legacy. The cases you work on might be forgotten, but the leaders you develop will forever remember you as someone who made a difference.”
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.