McKool Smith Principals Robert Scheef, Courtney Statfeld and David Schiefelbein, on behalf of their clients 400 Capital Management, Solula, LLC, La Verdad Holdings, and Robert Dechert, obtained another key victory for junior bondholders.
The New York Supreme Court case determined rights to over $400 million in principal recoveries stemming from the modification of mortgage loans underlying 36 RMBS trusts. To reduce struggling homeowners’ monthly payments, the federal government implemented the Home Affordable Modification Program (“HAMP”), which deferred billions of dollars of mortgage principal payments until the end of the mortgage term, thereby lowering the borrowers’ monthly payment obligations. At the time of the modification, the deferred amounts were written off as a loss. With housing market having since recovered, homeowners can sell or refinance their homes, resulting in the repayment of the deferred principal amounts. Wells Fargo, as trustee, treated the repayment of these deferred amounts as a recovery of prior losses but, upon receipt, wrote up the balances of senior bonds—notwithstanding that the 36 at-issue RMBS trust agreements expressly provide only for the write up of junior bonds. Wells Fargo did this notwithstanding a 2020 ruling by the New York Supreme Court (another McKool Smith win) that senior bonds in these very trusts were not entitled to be written up from subsequently recovered principal. After junior bondholders called Wells Fargo to task, Wells Fargo corrected its procedures and initiated the instant trust instruction proceeding in the New York Supreme Court, Commercial Division seeking court approval of its historically (incorrect) write ups and blessing its change in policy to write up junior bonds consistent with the New York Supreme Court’s 2020 ruling.
An array of senior bondholders, including PIMCO, American International Group, Ellington Management, DW Partners, Axonic Capital and Deer Park Capital, opposed the change in policy. Justice Andrew Borrok disagreed. After the issues were fully briefed and shortly before trial was set to begin, Justice Borrok determined that no trial was needed: deferred mortgage principal stemming from the HAMP modifications was properly treated as a “Subsequent Recovery” and, under the trust documents, only subordinate certificates may be written up upon receipt of a Subsequent Recovery.
McKool Smith’s victory follows a string of other recent victories in the financial services space.