January 23, 2015

Rulings deny request to increase potential liability by several billion dollars. 

Willkie has scored a series of significant victories on behalf of client Lehman Brothers Holdings Inc. In a series of rulings, the United States District Bankruptcy Court for the Southern District of New York denied RMBS Trustees’ request to increase the potential liability of Lehman Brothers by more than $7 billion. In addition, the court approved the protocol requested by Lehman requiring the RMBS Trustees to establish liability through a loan-by-loan review, rather than the Trustees’ request to estimate liability through sampling. See Reuters: Ruling Crushes Lehman RMBS Investors Hopes.

Following Lehman’s 2008 bankruptcy filing, various financial institutions that served as trustees to RMBS Trusts into which Lehman sold residential mortgage loans filed proofs of claims alleging that Lehman was required to repurchase the loans due to the presence of breaches of representations and warranties. The RMBS Trustees also alleged various document defects in the mortgage loan files provided by Lehman. Pursuant to a 2012 Bankruptcy Court order, Lehman established a $5 billion reserve to cover the claims.

In August 2014, four RMBS Trustees (representing 405 separate RMBS Trusts) filed a motions to increase the reserve from $5 billion to $12.143 billion, which the court denied. The Trustees had sought approval to estimate and allow their claims against the Lehman estate in that amount pursuant to section 502(c) of the Bankruptcy Code. In support of their motions, the RMBS Trustees presented a statistical sampling analysis of 5,000 loans, an analysis which they claimed valued their claims at $12.143 billion.

Represented by Willkie, Lehman opposed the motions, arguing that estimation of the claims under section 502(c) was inappropriate because the claims were neither “contingent” nor “unliquidated.” In response, Willkie also presented its own expert analysis, which demonstrated the flaws in the RMBS Trustees’ sampling methodology. Lehman cross-moved for an order requiring the RMBS Trustees to prove their claims on a loan-by-loan basis pursuant to a detailed claim resolution protocol. In support of Lehman’s cross-motion, Willkie argued that the underlying agreements required loan-level proof.

On December 10, 2014, the Court held a full-day evidentiary hearing to hear arguments on various pending motions. After argument, the Court denied the RMBS Trustees’ motion to estimate and allow their mortgage loan repurchase claims against the Lehman estate at $12.143 billion. The Court also ruled that the RMBS Trustees would, at this point, be unable to rely on statistical sampling to prove their claims for alleged breaches of representations and warranties across 209,000 mortgage loans. The Court later issued an order on December 29, 2014 accepting Lehman's position that the RMBS Trustees be required to prove those claims on a loan-by-loan basis. The RMBS Trustees now must begin a loan-level review of all the loans in the various trusts to prove their breach of representation and warranty claims. Pursuant to the court's order, the RMBS Trustees have until March 31, 2016 to complete their review of all the loan files at issue and submit their claims to Lehman.

Lehman was represented at the hearing by a multidisciplinary Willkie team, including partners Todd Cosenza, Paul Shalhoub, Joseph Baio, Roger Netzer, Brian O’Connor and Tom French, and associates Chris Miritello, Cristina Hagglund, Michael Ispass, Nicolas Heliotis, John Joy and Gail Hyman.