Class Certification Denied in RMBS Investor Suit

A judge in the U.S. District Court for the Southern District of New York denied certification to two proposed classes of residential mortgage-backed securities certificateholders in their suit against a large bank, finding that the plaintiffs did not show that common issues would predominate over individual issues.  In particular, the court held that individual issues would predominate because (1) many class members acquired their beneficial interests in the securities after the alleged injuries occurred; and (2) there would be a need for individualized inquiries about certain certificateholders’ standing to sue and the appropriate statute of limitations. Accordingly, certifying the class would be “inefficient or unfair.”

The case concerns certificateholders of RMBS trusts who raised breach of contract and breach of trust claims against the trustee bank for its alleged violations of various agreements outlining the bank’s trustee obligations, warranties, and representations.

To obtain class certification under Federal Rule of Civil Procedure 23(b)(3), a plaintiff must also show that “the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for failure and efficiently adjudicating the controversy.”  The predominance requirement is satisfied if “resolution of some of the legal or factual questions that qualify each class member’s case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than the issues subject only to individualized proof.”

Here, the court explained that a certificateholder has standing to sue “only if every prior transaction in the chain included an assignment of the right to sue along with the underlying certificate.”  Because many of the putative class-members purchased their certificates after the allegedly wrongful conduct, a fact-intensive and individualized inquiry would be required to determine whether such an assignment was made as part of each transaction, making class treatment complicated and nearly impossible.  Further, the court rejected the certificateholders’ argument that the certificates at issue “incorporate by reference” the New York choice-of-law provisions in the bank’s various agreements, which require the application of New York law to all transfers of the certificates.  Rather, because these choice-of-law provisions did not apply to the separate contracts between buyers and sellers of the certificates, the interpretation of those separate contracts would also pose individualized issues.  Finally, the court found that a similarly complicated and individualized inquiry would need to be performed in order to determine the statute of limitations for each claim.

Because these individualized issues overwhelmed any common questions of law or fact, the certificateholders could not establish predominance, and the court denied class certification.

The cases are Royal Park Investments SA v. HSBC Bank USA, N.A., No. 14-cv-8175, and Blackrock Balanced Capital Portfolio (FI) v. HSBC Bank USA, N.A., No. 14-cv-9366 (S.D.N.Y.).