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Lehman Brothers Holdings Inc. Files New Adversary Proceedings Against Mortgage Brokers

Philip R. Stein & Enza G. Boderone

If you thought Lehman Brothers Holdings Inc. (“LBHI”) was done suing lenders as a result of its settlements with RMBS trustees years ago, think again. LBHI recently filed a new wave of lawsuits against approximately 60 defendants, mostly mortgage brokers, in the bankruptcy proceedings currently pending in the U.S. Bankruptcy Court for the Southern District of New York, and more may still be to come. As it did with the nearly 190 mortgage originators that it sued in 2018 in the same bankruptcy proceedings (the “2018 Adversary Proceedings”), LBHI seeks the remedy of contractual indemnification, alleging breaches of representations and warranties at the time certain loans were sold or brokered.

The difference between these proceedings and the 2018 Adversary Proceedings (some of which are still being litigated) is that many of these new lawsuits target entities that entered into Broker Agreements with LBHI’s affiliate, Lehman Brothers Bank. These Broker Agreements contain more advantageous provisions for the defendants than the Loan Purchase Agreements, which should make these proceedings significantly harder for LBHI to litigate successfully. The broker agreements generally contain “prevailing party” provisions regarding attorneys’ fees, and representations and warranties that may require “knowledge” by the broker of any alleged misrepresentation (including alleged borrower misrepresentations) concerning the loans. In the 2018 Adversary Proceedings, LBHI’s claims of defective loans have mirrored the claims asserted against it by the RMBS trustees, claims that in many instances were backed by types of arguments and evidence that the bankruptcy judge characterized at the time as weak and “flimsy.” In the recently filed cases against brokers, even if LHBI were able to prove that the loans contained misrepresentations, it might still have to show, among other things, that the broker knew about the misrepresentations.

In its pleadings (and other papers served in the 2018 Adversary Proceedings), LBHI states that its claims will be limited to (1) what it considers the four principal misrepresentation types, which are (a) income, (b) employment, (c) occupancy, and (d) debt, plus (2) claims that LBHI conceded in the underlying proceeding against the RMBS trustees, which included not only “misrepresentation” claims but also some “regulatory” claims and “particularly egregious” underwriting claims. As for the “misrepresentation” claims, LBHI states that it will exclude loans from this group that (a) performed for more than three years, (b) have breaches supported by “less reliable” evidence, or (c) involved solely “missing document” claims.

It is not clear at this time whether LBHI will attempt to consolidate these new proceedings with the 2018 Adversary Proceedings, which have now gone through more than two years of document productions and written discovery. That seems implausible — but, then again, so did the notion that new lawsuits would still be getting filed about loans sold or brokered 14 to 18 years ago.

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