A long-running lawsuit accusing HSBC’s U.S. arm of failing to protect investors in pre-2008 residential mortgage-backed securitization trusts that it oversaw has become the latest such case against a bank to founder in New York federal court on champerty grounds.
In an opinion Thursday, Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York granted summary judgment to HSBC Bank USA NA at a critical bellwether phase of a larger residential mortgage-backed securities suit, ruling that the plaintiffs at issue had been assigned their claims with a litigious intent that violated New York’s ban on champerty — loosely, transactions contrived for the sole purpose of suing.
Those plaintiffs are several offshore investment vehicles, including Phoenix Light SF Ltd., whose similar cases against U.S. Bank NA, Bank of New York Mellon and Deutsche Bank National Trust Co. have suffered analogous defeats on the issue of champerty, which was found to be fatal to their standing.
“Plaintiffs have had a full and fair opportunity to litigate the issue of standing and champerty,” Judge Schofield wrote in her opinion. “No competing policy considerations counsel in favor of litigating these issues again.”
The investment vehicles’ suit against HSBC dates back to 2014 and focuses on the bank’s role as trustee for roughly 30 securities trusts formed before the 2008 financial crisis. As part of the bellwether phase, the proceedings were narrowed to a subset of several trusts.
The suit alleged that HSBC had failed as a trustee to properly police the rusts when shoddy loan underwriting and other problems with the underlying assets began to emerge, causing the plaintiffs’ certificates in the trusts to lose hundreds of millions of dollars in value.
But Phoenix Light and the other investment vehicle plaintiffs are issuers of collateralized debt obligations, which essentially resecuritized these certificates. In 2015, it was ruled that the litigation rights on these certificates belonged not to the plaintiffs, but to the trustees of their debt obligations.
Although the plaintiffs got the trustees to reassign these litigation rights back to them and filed an amended complaint reflecting this, Judge Schofield said Thursday that this reassignment ran afoul of New York’s champerty ban because it was clearly done “for the purpose of bringing this lawsuit.”
“Plaintiffs maintain that they have standing because the litigation rights were reassigned back to plaintiffs,” the judge wrote in her ruling. “This argument fails because the reassignment was champertous under New York law and therefore void.”
Counsel for the plaintiffs and an HSBC spokesperson declined to comment Friday.
Phoenix Light and the other plaintiffs are represented by David H. Wollmuth, Steven S. Fitzgerald, Ryan A. Kane and Sean P. McGonigle of Wollmuth Maher & Deutsch LLP.
HSBC Bank USA is represented by George A. Borden, Kevin M. Hodges, Andrew W. Rudge and Edward C. Reddington of Williams & Connolly LLP.
The case is Phoenix Light SF Ltd. et al. v. HSBC Bank USA NA, case number 1:14-cv-10101, in the U.S. District Court for the Southern District of New York.
