In two separate decisions, two courts issued opinions in cases that each related in different ways to Credit-Based Asset Servicing and Securitization, LLC, also known as C-Bass. As discussed below, Judge Rakoff has issued an opinion substantiating his prior dismissal motion rulings in the C-Bass subprime-related class action securities litigation, and in a separate opinion, Judge Mary McLauglin has dismissed with prejudice the subprime-related ERISA class action involving Radian Group and its investment in C-Bass.
The C-Bass Subprime-Related Securities Suit
As previously noted here, in a two-page March 31, 2010 order (here), Southern District of New York Judge Jed Rakoff issued an order denying in part and granting in part the defendants’ motions to dismiss in the C-Bass subprime-related securities suit. Judge Rakoff did not issue an opinion detailing his reasons for his rulings at the time. However, on June 1, 2010, Judge Rakoff issued his opinion substantiating his rulings. The opinion can be found here.
The most noteworthy aspect of Judge Rakoff’s decision is that he granted the rating agency defendants’ motion to dismiss, following Judge Kaplan’s ruling in the Lehman Brothers subprime-related securities suit that the rating agencies cannot be held liable under the ’33 Act as “underwriters.” Andrew Longstreth’s June 1, 2010 Am Law Litigation Daily article discussing this aspect of Judge Rakoff’s opinion can be found here.
Judge Rakoff said that similar reasoning requires him to dismiss three defendants (including C-Bass itself) who were merely “sponsors” of the offerings referenced in the plaintiffs’ complaint, as these defendants merely originated the mortgages underlying the securitizations, and therefore did not qualify as statutory underwriters. Judge Rakoff dismissed without prejudice the plaintiffs’ complaints against Merrill Lynch, holding that the specific allegations in the plaintiffs’ complaint were not sufficient to state a Section 11 claim against Merrill as an underwriter.
As to the defendants who actually were offering underwriters in connection with the offerings in dispute, Judge Rakoff said that the plaintiffs’ allegations that the mortgage originators had, contrary to representations in the offering documents about the originators compliance with underwriting guidelines, were sufficient to state a claim under the ’33 Act.
However, Judge Rakoff also granted the motion to dismiss plaintiffs’ claims as to 65 of the 84 securities offerings, in which the named plaintiffs had not purchased securities, on the basis of lack of standing.
One particularly interesting part of Judge Rakoff’s opinion is his ruling rejecting the defendants’ motion to dismiss on statute of limitations grounds. The defendants had argued that the plaintiffs were on inquiry notice prior to December 5, 2007 (that is, more than a year before the first complaint was filed) of their claims, and therefore the plaintiffs’ claims were time-barred.
In making this argument, the defendants had argued, as paraphrased by Judge Rakoff, that prior to December 2007, “questions about the bona fides of mortgage-backed securities were the subject of news reports, government investigations, public hearings, and civil complaints.” The plaintiffs argued that virtually none of these references referred to the defendants or to the securities at issue. Judge Rakoff said that at most, plausible inferences might be drawn for either side, making the issue inappropriate for resolution at the dismissal motion stage.
In reaching this ruling, Judge Rakoff expressly referenced the Supreme Court’s recent statute of limitations-related opinion in the Merck case (about which refer here). Judge Rakoff noted that Merck had addressed statutes of limitations issues under the ’34 Act, adding that the Second Circuit had not yet had occasion to determine how Merck might change statute of limitations issues under the ’33 Act.
However, with respect to Merck, Judge Rakoff noted that the Supreme Court had “rejected arguments of the defendants quite similar to the arguments made by the defendants here,” summarizing the Supreme Court’s ruling in Merck as holding that “a plaintiff would not be barred by the statute of limitations unless a reasonably diligent plaintiff similarly situated would have actually discovered facts showing the violations alleged in the plaintiffs’ complaint.”
Judge Rakoff’s ruling, though not dependent on the Merck case, is at least consistent with the general view that Merck itself could have a beneficial impact for plaintiffs in other securities class action lawsuits.
The Radian Group Suprime-Related ERISA Class Action
In a May 26, 2010 order (here), Eastern District of Pennsylvania Judge Mary McLaughlin granted with prejudice the defendants’ motion to dismiss in the Radian Group subprime-related ERISA class action.
The plaintiffs had alleged, on behalf of participants in the Radian Group benefits plan, that the defendants had misled the plan participants about the risks associated with investments in the plan in Radian stock due to Radian’s investment in C-Bass. The plaintiffs claimed that the plan participants were harmed with the value of the plan investments in Radian stock fell in value after Radian announced that its investment in C-Bass was materially impaired.
Judge McLaughlin had previously granted defendants’ motion to dismiss, without prejudice, and the plaintiffs amended their complaint. In her May 26 opinion, Judge McLaughlin granted the motions with prejudice, finding that the plaintiff has “once again failed to plead a breach of fiduciary duty.”
Judge McLaughlin specifically held that the plaintiff’s new allegations “do not demonstrate the inapplicability of the presumption of prudence, nor do they rebut the presumption.” She also found that the plaintiff had failed to state a claim for breach of the duty of disclosure.
I have added both of these rulings to my running tally of subprime-related litigation dismissal motion rulings, which can be accessed here.
Fifth Circuit Makes a Hash of the Climate Change Case: As I noted in a prior post, the October 2009 Fifth Circuit opinion in the Comer v. Murphy Oil Co. case, overturning the district court’s dismissal of the plaintiffs’ climate change related claims, raised the possibiltiy that other climate change cases might follow. However, the Fifth Circuit granted the defendants’ petition for rehearing en banc, in the process vacating the October 2008 opinion of the initial Fifth Circuit panel.
That’s when things started to get messy. One by one, different Fifth Circuit judges recused themselves, evenutally reaching the point where there weren’t enough judges left to take up the en banc rehearing.
As discussed in Alison Frankel’s June 1, 2010 Am Law Litigation Dailiy article here, the lack of a quorum for en banc review has left the case in a procedural netherword that she aptly describes as "weird." It seems that the Fifth Circuit has dismissed the appeal, effectively reinstating the ruling of the district court. In its order dismissing the appeal, the Fifth Circuit expressly declined to reinstate the opinion of the three-judge panel. The Fifth Circuit said that there is no rule permitting them to reinstate a vacated opinion.
(You are excused if you feel a bit confused right now.)