McKool Smith Achieves Landmark Judgment for Bondholders in RMBS Case
Recently, McKool Smith has achieved a significant victory in a trial that will resonate throughout the residential mortgage-backed securities (RMBS) market. The firm represented junior bondholders, including 400 Capital Management, La Verdad Holdings, Solula LLC, and Robert Dechert, in a noteworthy case concerning 34 RMBS trusts. The ruling tackles critical issues around how deferred principal should be treated, particularly in light of loan modifications initiated under various programs aimed at providing relief to distressed homeowners.
Background of the Case
In the wake of the financial crisis, the 34 trusts involved in this case saw their bondholders suffer approximately $400 million in losses due to principal forbearance granted to homeowners participating in loan modification initiatives, such as the U.S. Treasury's Home Affordable Modification Program (HAMP). The contracts that controlled these RMBS trusts were established before the existence of such modification programs, causing ambiguity in how to account for the forborne principal regarding modified loans.
The Role of Trust Administrators
As homeowners began resuming repayments years down the road, administrators of these trusts took varied approaches in accounting for these recoveries. In this specific situation, the RMBS trustee, Wells Fargo, categorized them as "subsequent recoveries," aligning them with other types of loss recoveries. However, many of the senior bondholders raised objections, particularly due to the way these recoveries affected the principal balance of junior bonds instead of senior ones.
Trial Proceedings
In a 17-day bench trial, the arguments presented led Justice Andrew Borrok to agree with the junior bondholders, affirming that loss recoveries due to loan modifications are indeed subsequent recoveries. The ruling also dismissed the notion that subsequent recoveries should only apply to fully liquidated loans. Most importantly, it reaffirmed that trustees must adhere to contractual preferences that favor junior bonds over senior ones.
Impact of the Ruling
This ruling holds monumental significance for the RMBS sector, as it clarifies the prolonged uncertainties regarding the accounting for loans modified under HAMP. According to McKool Smith Principal Courtney Statfeld, who was one of the key trial counsels, the decision sets a precedent that will aid Wells Fargo and other trust administrators in understanding how to handle the complexities surrounding billions of dollars in principal forbearance across various RMBS trusts governed by similar arrangements.
The McKool Smith Team
Representing the junior bondholders were not only Ms. Statfeld and Principal Robert Scheef but also other highly skilled attorneys from McKool Smith, including Jennifer Truelove and Daniel Hendler. Along with Associate attorneys Hal Shimkoski and Lauren Simenauer, the firm showed formidable expertise and coordination in presenting the case before the court.
About McKool Smith
With a dynamic team of over 130 trial lawyers across major U.S. cities, McKool Smith has garnered acclaim as one of the leading trial firms in the nation. Notably, the firm has achieved a remarkable track record, including 18 nine-figure jury verdicts and additional top-ranking recognitions from recognized legal publications. Their expertise lies in diverse areas such as complex commercial litigation, intellectual property issues, bankruptcy, insurance recovery, and defense matters involving white-collar crimes.
Frequently Asked Questions
What was the recent victory secured by McKool Smith?
McKool Smith achieved a landmark trial victory for junior bondholders in an RMBS trustee proceeding, clarifying how deferred principal is treated.
Why is the treatment of deferred principal significant?
The treatment of deferred principal affects millions in accounting practices, particularly regarding loss recoveries from loans modified under programs like HAMP.
Who were the principal bondholders represented in court?
The junior bondholders included notable entities such as 400 Capital Management, La Verdad Holdings, Solula LLC, and Robert Dechert.
What impact does this ruling have on the RMBS industry?
The ruling clarifies accounting practices for loan modifications, directly affecting how trust administrators manage billions in principal forbearance.
How is McKool Smith positioned within the legal industry?
McKool Smith is recognized as a leading trial firm, with a reputation for securing significant jury verdicts and excelling in various areas of law.
