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Sealink Funding Ltd. v. UBS AG

Supreme Court, New York County, New York.
Jul 9, 2014
997 N.Y.S.2d 101 (N.Y. Sup. Ct. 2014)

Opinion

No. 653102/12.

07-09-2014

SEALINK FUNDING LIMITED, Plaintiff, v. UBS AG, UBS Americas Inc., UBS Real Estate Securities Inc., UBS Securities LLC and Mortgage Asset Securitization Transactions Inc., Defendants.

Joel H. Bernstein, Esq., of Labaton Sucharow LLP, for Plaintiff. Christopher Malloy, Esq., Esq. and Jay B. Kasner, Esq., of Skadden, Arps, Meagher & Flom, for Defendants.


Joel H. Bernstein, Esq., of Labaton Sucharow LLP, for Plaintiff.

Christopher Malloy, Esq., Esq. and Jay B. Kasner, Esq., of Skadden, Arps, Meagher & Flom, for Defendants.

Opinion

CHARLES E. RAMOS, J.

This is an action by Sealink Funding Limited (Sealink) alleging fraud, in connection with three residential mortgage backed securitizations (RMBS) in 2006 and 2007. Defendants UBS AG, UBS Americas Inc., UBS Real Estate Securities Inc. (UBS Real Estate), UBS Securities LLC (UBS Securities) and Mortgage Asset Securitization Transactions Inc. (MAST) move, pursuant to CPLR 3016(b) and 3211(a)(1),(3),(5) and (7), for an order dismissing the complaint. For the reasons stated below, the motion is granted and the complaint is dismissed.

Parties

According to the complaint, Sealink is an Irish special-purpose vehicle that was established to receive, hold and manage toxic RMBS assets.

Defendant UBS AG is a Swiss corporation that maintains a New York Branch and is an international financial services group engaged primarily in banking, investment banking, and asset management. UBS AG is the ultimate parent company of each of the other defendants.

Defendant UBS Americas is a Delaware corporation with a principal place of business in Stamford, Connecticut and offices in New York City. It is the parent company of defendants UBS Real Estate, UBS Securities and MAST.

Background

This action arises from alleged misstatements and omissions by defendants in connection with approximately $158 million worth of certificates (Certificates) that were purchased from three RMBS securitizations in 2006 and 2007. The securitizations are known as MABS 2006–WMC3 and MABS 2007–HE1 (UBS Securitizations), and INDS 2006–2B (the IndyMac Securitization).

With respect to the UBS Securitizations, the complaint alleges that UBS Securities, UBS Real Estate and MAST acted as lead underwriter, depositor and sponsor, respectively. It further alleges that UBS Securities acted as one of several underwriters of the IndyMac Securitization. The Certificates were purchased by four special purpose vehicles which were formed in Ireland and known as Ormond Quay Funding Plc, Eden Quay Asset Management Ltd., Ellis Quay Asset Management Ltd. and Merchants Quay Asset Management Ltd. (collectively, the Irish SPVs). The Irish SPVs were created by Sachsen LB Europe plc (SLBE), which was a wholly owned subsidiary of Landesbank Sachsen Girozentrale (Sachsen LB), a German bank founded in 1992.

SLBE's primary business purpose was managing the purchase of asset-backed securities, including RMBS, and it did so through the use of, among others, the Irish SPVs. The complaint states that the primary purpose of the Irish SPVs was to purchase asset-backed securities, including those of supposedly the highest quality and lowest risk.

In 2007, SLBE created three SPVS under the laws of the Cayman Islands, known as Castleview Asset Management Ltd, (Castleview 1) Castleview 2 Asset Management Ltd (Castleview2) and Castleview3 Asset Management Ltd (Castleview3)(collectively, the Cayman SPVs). The Cayman SPVS were created to provide “independent repo financing” for the Irish SPVs' portfolios. Complaint, ¶ 291.

Between September of 2006 and May of 2007 approximately $158 million worth of certificates were transferred from the Irish SPVs to the Cayman SPVs. The Complaint alleges that the transfer of the Certificates from the Irish SPVs to the Cayman SPVs was effected pursuant to trade tickets and/or sales confirmations.

On June 11th and June 12th of 2008, Sealink purchased approximately $158 million in Certificates from the Cayman SPVs. This was done pursuant to a series of Sale and Purchase Agreements (SPAs) and a Master Framework and Definitions Schedule (Master Framework). The Master Framework provided a common set of definitions and interpretations applicable to the various transaction documents, including the SPAs.

Sealink commenced the instant action in April of 2013, asserting six causes of action sounding in fraud and negligent misrepresentation against defendants.

The gravamen of the complaint is that, in order to induce the Irish SPVs to purchase the Certificates, defendants made numerous misrepresentations and omissions about the quality of the loans underlying the securitizations. Specifically, they made misrepresentations with respect to the credit quality and characteristics of the pools of loans backing the Certificates, including loan-to-value and combined loan-to-value ratios, owner-occupancy rates and the creditworthiness of the borrowers of the underlying loans.

They also allegedly misrepresented that the loans in the pools were originated consistent with the originators' underwriting guidelines. Sealink alleges that, in fact, defendants and the originators of the loans systematically departed from, or even abandoned, the stated underwriting guidelines and repeatedly granted exceptions on loans that lacked compensating factors. Complaint, ¶ 10.

The complaint also alleges that the offering materials falsely represented that the credit ratings of the Certificates would reasonably relate to the Certificates being offered.Further, it alleged that the offering materials falsely represented that all mortgage loans would be validly transferred to the trust associated with a given securitization, at or before the closing date for such securitization, and that such securitization was backed with the mortgages represented to be in the loan pools in the Trust. Sealink alleges that, in fact, many of the underlying loans were never properly transferred to the trusts, or were transferred after the close of the securitization. This prevented the trust from legally collecting the principal and interest payments from the borrowers and either impaired the trust's ability to foreclose in a timely manner, or even eliminated the trust's ability to foreclose on the mortgaged property in the event of a borrower default. The result was impaired cash flow to the trust, which diminished the value of the certificates issued from the trust. Complaint, ¶ 15.

Sealink alleges that, as of March 2013, “loans representing between 8.64% and 44.61% of the currently outstanding pool balance of the Securitizations are no longer performing because the borrower is either delinquent, in foreclosure or bankruptcy, or the Trust has assumed ownership of the mortgaged property.” Complaint, ¶ 18. Further, “[t]he credit ratings assigned to the Certificates have been severely downgraded. When purchased, all of the Certificates were rated triple-A, the highest investment grade. All of the Certificates have since been rated as below investment-grade, or junk.” Id. As such, “[w]ith the underlying loans performing poorly or not at all, the values of the Certificates have fallen precipitously, causing Plaintiff to suffer significant losses.” Id.

Sealink alleges that these losses were caused by defendants' “knowing failure to securitize the loans in accordance with the stated underwriting guidelines and the representations in the UBS Offering Materials, and their knowledge and enabling of the underwriting violations in the loans underlying the IndyMac Securitization.” Id.

Defendants now move to dismiss the complaint on the grounds that: 1) Sealink lacks standing to assert such claims; 2) its claims are untimely; and 3) the complaint fails to state a cause of action.

Standing

The threshold issue here is whether Sealink has standing to maintain this action. It is undisputed that any claims for fraud or negligent misrepresentation would have originally belonged to the Irish SPVs, which were the original purchasers of the Certificates. In order for Sealink to maintain this action, those claims had to have been transferred from the Irish SPVs to the Cayman SPVs, and then from the Cayman SPVs to Sealink.

Transfer from Cayman SPVs to Sealink

Defendants argue that the complaint must be dismissed because the Cayman SPVs never assigned any tort claims they may have had to Sealink. On this basis, they contend that Sealink has no standing to assert any such claims.

The Certificates at issue were sold to Sealink under the terms of the SPAs and the Master Framework. The SPAs provided that the Cayman SPVs transferred certain “Assets” to Sealink, and it stated that the term “Asset” was defined as meaning each of the certificates listed in a schedule which was appended to the SPAs. The Master Framework stated that the term “assets”, when used in any of the transaction documents, included “present and future properties, revenues and rights of every description.”

The parties sharply dispute whether the definitions of the terms “Assets” and “assets”, as set forth above, included any tort claims which the Cayman SPVs might have possessed. Plaintiff relies on the definition in the Master Framework and contends that this definition expressly assigned the tort claims because it contains “very wide wording, well capable of extending to the causes of action against UBS.” Plaintiff's Memorandum of Law at 6. Plaintiff also contends that, in the alternative, an assignment can be inferred “in light of the commercial context where the SLBE SPVs were transferring RMBS worth much less than par, at par, and then dissolving and retaining no assets.”

Defendants contend that no assignment occurred because: a) there is no express language in either the SPAs or the Master Framework assigning legal claims relating to the Irish SPVs' purchase transactions; and b) the phrase “rights of every description” only transfers “rights in and to the Certificates themselves, not litigation claims of a distant assignor arising from the initial purchase.”

The parties do agree that English law applies to the issue of whether such claims were transferred, pursuant to the governing clauses of the SPAs and the Master Framework.

A recent decision addressed this very issue, in a case nearly identical to the instant action, and found that the definition of the term “assets” did not include assignment of tort claims. See Sealink v. Morgan Stanley, Index Number 650196/12 (N.Y. Sup Ct, 2014).

In that case, SLBE formed certain Irish SPVs, which purchased certificates for ten mortgage backed securities from the defendants. Id. at 3. The certificates were then sold to certain Cayman Islands SPVs, which, in turn, sold them to Sealink, just as in the instant action. Id. at 4. The Master Framework in that transaction contained an identical definition of the term “assets” as the definition in the instant action. Id. at 11.

Defendants moved to dismiss the complaint, under English law, for lack of standing. The court granted the motion, finding that no tort claims had been assigned by the Cayman SPVs to Sealink.

The court noted that, under English law, there are two types of assignments: 1) a legal assignment, pursuant to statute, which requires an express notice, in writing, of an intent to make the assignment; or 2) an equitable assignment, in which a court could infer an intent to make an assignment, based on the circumstances of the transaction. Id. at 8.

The court first found that, although plaintiffs asserted that the language at issue would be sufficient to support an express assignment, they failed to demonstrate the existence of an express assignment. Id. at 10.

After extensively examining English case law, the court further concluded that plaintiff failed to demonstrate the existence of an equitable assignment because the definition in the Master Agreement of the term “assets” did not specifically mention the assignment of tort claims. Id. at 14.

The court reviewed numerous English cases and found that, under English law, in the absence of an express reference to the property to be assigned, the usual inference to be drawn was that the parties did not intend such an assignment. “If the parties had intended something to happen, the instrument would have said so ...” Id., quoting Attorney General v. Belize Telecom, 1 WLR 1988 ¶ 17 (Privy Council 2009). Id.

Thus, “an English court would not find an equitable assignment of tort claims in the sale of complex securities by sophisticated financial institutions without any reference to those claims.” Id . “[P]laintiff has submitted no judicial authority of an equitable assignment without express reference to claims, or their fruits.” Id.

The court also rejected the argument that such an assignment could be inferred in the context of the transaction at issue. The court noted that, before finding an implied term in a contract, an English court would examine whether the event at issue was foreseeable. Id. In that context, the court found that, in a transaction transferring distressed assets through a number of different entities, into an entity created to receive them, it was foreseeable that the final purchasing entity might wish to pursue claims against the issuer. Id. at 15. As such, if the parties intended to transfer such causes of action, they would have done so through express language. Id.

In the instant action, this Court similarly finds that Sealink has failed to demonstrate either an express or implied assignment of any tort claims that might have been possessed by the Irish SPVs.

First, the definition of the term “Assets”, as set forth in the SPAs, clearly does not state that it includes tort claims. It simply states that it includes the Certificates listed in the attached schedule, and that schedule does not mention any such claims.As such, the court finds that there was no express, i.e. legal assignment of such claims under English law.

Sealink has also failed to demonstrate that an equitable assignment occurred here. Sealink puts forth an affidavit from Andrew Oslow, QC, as an expert on English law. Mr. Oslow states that, under English law, for an effective equitable assignment, “[w]hat is required is an outward, objectively ascertained, manifestation or expression of intention.” Oslow Affidavit at ¶ 14. Sealink argues that the Court should find such an expression of intent “by implication in light of the commercial context where the SLBE SPVs were transferring RMBS worth much less than par, at par, and then dissolving and retaining no assets.” Plaintiff's Memorandum of Law at 6.

Sealink's argument is unpersuasive. There is simply no language in the documents to demonstrate an outward expression of intent to assign the tort claims at issue. Although broadly worded, the definition set forth in the Master Agreement does not reference tort claims or suggest that the parties intended to include them in the assignment. Moreover, the context of the transaction suggests that such an assignment was not contemplated by the parties. In a complex transaction such as this, in which the parties are sophisticated and represented by counsel, the failure to make any reference to such claims indicates that the parties did not intend to include them in the assignment.

Furthermore, it was foreseeable here that the final purchasing party, i.e. Sealink, might wish to pursue such tort claims against the issuer. As such, if the parties intended to assign such claims, it would be expected that they would have done so with some express reference to those claims. Therefore, the Court finds that Sealink has failed to demonstrate that such claims were assigned by the Cayman SPVs to Sealink.

Transfer from Irish SPVs to Cayman SPVs

In any event, even if Sealink could demonstrate that the Cayman SPVs intended to assign existing tort claims to Sealink, there is nothing here to indicate that such claims were ever assigned by the Irish SPVs to the Cayman SPVs in the first instance. As such, no transfer of those claims could have been made by the Cayman SPVs to Sealink.

As set forth above, the transfer of the Certificates from the Irish SPVs to the Cayman SPVs was effected pursuant to trade tickets and/or sales confirmations. However, it is undisputed that those documents contain no reference to the assignment of tort claims. Thus, there was no express assignment of tort claims by the Irish SPVs.

Further, Sealink has not put forth evidence to demonstrate an intention on the part of the Irish SPVs to make such an assignment, such as would support an equitable assignment. As discussed above, English law requires some manifestation of an intent to make the assignment and some reference to assets to be assigned.

Here, no such reference was made, despite the fact that it was foreseeable that the Cayman SPVs might want to pursue tort claims against the issuer. As such, the inference to be drawn is that the parties did not intend to assign such claims. Therefore, the Court finds that Sealink does not have standing to assert that claims at issue here.

Accordingly, it is

ORDERED that the motion by defendants UBS AG, UBS Americas Inc., UBS Real Estate Securities Inc., UBS Securities LLC and Mortgage Asset Securitization Transactions Inc. to dismiss the complaint is granted and the complaint is dismissed.


Summaries of

Sealink Funding Ltd. v. UBS AG

Supreme Court, New York County, New York.
Jul 9, 2014
997 N.Y.S.2d 101 (N.Y. Sup. Ct. 2014)
Case details for

Sealink Funding Ltd. v. UBS AG

Case Details

Full title:SEALINK FUNDING LIMITED, Plaintiff, v. UBS AG, UBS Americas Inc., UBS Real…

Court:Supreme Court, New York County, New York.

Date published: Jul 9, 2014

Citations

997 N.Y.S.2d 101 (N.Y. Sup. Ct. 2014)

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