FILED: APPELLATE DIVISION - 1ST DEPT 11/02/2020 07:01 PM
`To be Argued by:
`RECEIVED NYSCEF: 04/26/2021
`NYSCEF DOC. NO. 65
`DAVID M. SHEEREN, ESQ.
`(of the bar of the State of Texas)
`by permission of the Court
`(Time Requested: 15 Minutes)
`
`2020-02716
`
`New York Supreme Court
`
`
`
`Appellate Division—First Department
`
`
`
`
`
`In the Matter of the Application of WELLS FARGO BANK,
`
`(For Continuation of Caption See Inside Cover)
`
`
`
`JOINT OPENING BRIEF FOR THE INSTITUTIONAL INVESTORS,
`AIG PARTIES, AND ELLINGTON AND DW PARTIES
`
`Appellate
`
`Case No.:
`
`2020-02716
`
`
`BAILEY DUQUETTE P.C.
`104 Charlton Street, Suite 1-W
`New York, New York 10014
`(212) 658-1946
`david@baileyduquette.com
`
`
`PERRY, JOHNSON, ANDERSON, MILLER
`& MOSKOWITZ LLP
`438 First Street, 4th Floor
`Santa Rosa, California 95401
`(707) 525-8800
`gradman@perrylaw.net
`nicholls@perrylaw.net
`allinson@perrylaw.net
`Attorneys for Appellants-Respondents
`DW Partners LP and Ellington
`Management Group, L.L.C. (the
`“Ellington and DW Parties”)
`
`
`QUINN EMANUEL URQUHART
`& SULLIVAN, LLP
`51 Madison Avenue
`New York, New York 10017
`(212) 849-7000
`kevinreed@quinnemanuel.com
`Attorneys for Appellants-Respondents
`American General Life Insurance
`Company, American Home Assurance
`Company, Lexington Insurance Company,
`National Union Fire Insurance Company
`of Pittsburgh, Pa., The United States Life
`Insurance Company in the City of New
`York, The Variable Annuity Life Insurance
`Company (the “AIG Parties”)
`
`
`
`WARNER PARTNERS, P.C
`950 Third Avenue, 32nd Floor
`New York, New York 10022
`(212) 593-8000
`kwarner@warnerpc.com
`
`GIBBS & BRUNS LLP
`1100 Louisiana, Suite 5300
`Houston, Texas 77002
`(713) 650-8805
`dsheeren@gibbsbruns.com
`Attorneys for Appellants-Respondents
`AEGON USA Investment
`Management, LLC, BlackRock
`Financial Management, Inc.,
`Cascade Investment, LLC, Federal
`Home Loan Bank of Atlanta,
`Federal Home Loan Mortgage
`Corp., Federal National Mortgage
`Association, Goldman Sachs Asset
`Mgmt L.P., Voya Investment Mgmt
`LLC, Invesco Advisers, Inc., Kore
`Advisors, L.P., Metropolitan Life
`Ins. Co., Pacific Investment Mgmt
`Company LLC, Teachers Ins. and
`Annuity Assoc. of America, TCW
`Group, Inc., Thrivent Financial for
`Lutherans, Western Asset Mgmt.
`Co. (the “Institutional Investors”)
`
`
`New York County Clerk’s Index No. 657387/17
`
`
`
`

`

`
`
`
`
`NATIONAL ASSOCIATION, U.S. BANK NATIONAL ASSOCIATION, THE BANK
`OF NEW YORK MELLON, THE BANK OF NEW YORK MELLON TRUST
`COMPANY, NA, WILMINGTON TRUST, NATIONAL ASSOCIATION, HSBC
`BANK USA, N.A., and DEUTSCHE BANK NATIONAL TRUST COMPANY (as
`Trustees, Indenture Trustees, Securities Administrators, Paying Agents, and/or
`Calculation Agents of Certain Residential Mortgage-Backed Securitization Trusts),
`
`Petitioners,
`
`For Judicial Instructions under CPLR Article 77
`on the Distribution of a Settlement Payment
`
`Appellants-Respondents
`
`AEGON USA INVESTMENT MANAGEMENT, LLC, BLACKROCK FINANCIAL
`MANAGEMENT, INC., CASCADE INVESTMENT, LLC, FEDERAL HOME LOAN
`BANK OF ATLANTA, FEDERAL HOME LOAN MORTGAGE CORP., FEDERAL
`NATIONAL MORTGAGE ASSOCIATION, GOLDMAN SACHS ASSET MGMT L.P.,
`VOYA INVESTMENT MGMT LLC, INVESCO ADVISERS, INC., KORE
`ADVISORS, L.P., METROPOLITAN LIFE INS. CO., PACIFIC INVESTMENT
`MGMT COMPANY LLC, TEACHERS INS. AND ANNUITY ASSOC. OF AMERICA,
`TCW GROUP, INC., THRIVENT FINANCIAL FOR LUTHERANS
`and WESTERN ASSET MGMT. CO.
`(the “Institutional Investors”)
`
`– and –
`
`Appellants-Respondents
`
`AMERICAN GENERAL LIFE INSURANCE COMPANY, AMERICAN HOME
`ASSURANCE COMPANY, LEXINGTON INSURANCE COMPANY, NATIONAL
`UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., THE UNITED
`STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK and THE
`VARIABLE ANNUITY LIFE INSURANCE COMPANY
`(the “AIG Parties”)
`
`– and –
`
`Appellants-Respondents
`
`ELLINGTON MANAGEMENT GROUP, L.L.C. and DW PARTNERS LP
`(the “Ellington and DW Parties”)
`
`– and –
`
`Appellants-Respondents
`
`TILDEN PARK INVESTMENT MASTER FUND LP on behalf of itself
`and its advisory clients, TILDEN PARK MANAGEMENT I LLC
`on behalf of itself and its advisory clients and TILDEN PARK CAPITAL
`MANAGEMENT LP on behalf of itself and its advisory clients
`(the “Tilden Park Parties”)
`
`– and –
`
`Appellants-Respondents
`
`

`

`PROPHET MORTGAGE OPPORTUNITIES LP, POETIC HOLDINGS VI LLC,
`POETIC HOLDINGS VII LLC and U.S. BANK NATIONAL ASSOCIATION, solely in
`its capacity as Indenture Trustee for the Prophet and Poetic Trusts
`(the “Prophet and Poetic Parties”)
`
`– and –
`
`Appellant-Respondent
`
`AMBAC ASSURANCE CORPORATION
`(“Ambac”)
`
`– and –
`
`Appellants-Respondents
`
`U.S. BANK NATIONAL ASSOCIATION, as NIM Trustee, U.S. Bank, solely in its
`capacity as Indenture Trustee for the HBK Trusts
`(the “HBK Parties”)
`
`– against –
`
`Respondent
`
`NOVER VENTURES, LLC
`(“Nover”)
`
`– and –
`
`Respondent
`
`D.E. SHAW REFRACTION PORTFOLIOS, L.L.C.
`(“D.E. Shaw”)
`
`– and –
`
`Respondent
`
`STRATEGOS CAPITAL MANAGEMENT, LLC
`(“Strategos”)
`
`– and –
`
`Respondents
`
`OLIFANT FUND, LTD., FFI FUND LTD. and FYI LTD.
`(the “Olifant Parties”)
`
`– and –
`
`Respondents
`
`GMO OPPORTUNISTIC INCOME FUND
`and GMO GLOBAL REAL RETURN
`(the “GMO Parties”)
`
`
`
`

`

`
`
`TABLE OF CONTENTS
`
`
`PRELIMINARY STATEMENT ............................................................................ 1
`
`QUESTIONS PRESENTED ................................................................................... 4
`
`STATEMENT OF THE CASE AND RELEVANT FACTS ............................... 7
`
`A.
`
`B.
`
`Factual Background ............................................................................... 7
`
`The Proceedings Below .......................................................................15
`
`ARGUMENT ..........................................................................................................18
`
`A.
`
`THE PSAS FOR THE SUBJECT EXHIBIT E TRUSTS
`UNAMBIGUOUSLY PERMIT SENIOR CERTIFICATE WRITE-
`UPS. .....................................................................................................18
`
`B.
`
`1.
`
`2.
`
`3.
`
`Section 6.02(h) is silent as to Senior Certificate write-ups and
`contains no prohibition on the write-up of Senior Certificates.19
`
`A Full Reading Of The PSAs And Their Related ProSupps
`Makes Clear That All Certificates Are Eligible For Realized
`Loss Reversals and Certificate Write-Ups. ...............................19
`
`The Court Ignored the Senior/Subordinate Structure and Failed
`to Recognize the Absurd Consequences That Would Result
`from Prohibiting Senior Certificate Write-Ups. .......................24
`
`IF THE SECTION 6.02(H) PROVISION IS DEEMED TO PROHIBIT
`SENIOR CERTIFICATE WRITE-UPS, THE PSAS FOR THE
`SUBJECT EXHIBIT E TRUSTS ARE RENDERED AMBIGUOUS
`AND THE UNCONTROVERTED EVIDENCE OF THE PARTIES’
`COURSE OF PERFORMANCE COMPELS THE CONCLUSION
`THAT SENIOR CERTIFICATE WRITE-UPS ARE REQUIRED. ...27
`
`1. Where Contract Terms Are Inconsistent or Ambiguous,
`Extrinsic Evidence of Course of Performance Is the Strongest
`Evidence of Their Meaning. .....................................................28
`
`2.
`
`3.
`
`In Light of the IAS Court’s Interpretation of the Section 6.02(h)
`Provision, Inconsistencies and Ambiguities Within the PSAs
`Existed, Requiring Review of Extrinsic Evidence of Course of
`Performance. .............................................................................30
`
`The Evidence of Course of Performance in the Record
`Establishes Conclusively that the Parties Intended that Senior
`
`i
`
`

`

`
`
`Certificates Be Written Up Upon the Receipt of Subsequent
`Recoveries. ................................................................................32
`
`C.
`
`TO THE EXTENT THIS COURT DOES NOT AGREE THAT THE
`EVIDENCE OF COURSE OF PERFORMANCE IN THE RECORD
`IS UNEQUIVOCAL AND DISPOSITIVE, IT SHOULD REMAND
`FOR FURTHER CONSIDERATION OF SAME. ..............................36
`
`CONCLUSION .......................................................................................................39
`
`
`
`
`
`
`
`
`
`ii
`
`

`

`
`
`Cases
`
`TABLE OF AUTHORITIES
`
`Amusement Bus. Underwriters v. American Intl. Group,
`66 NY2d 878 [Ct. App. 1985] ............................................................................ 36
`
`Matter of Bank of New York Mellon as Tr. for 278 Residential Mortg.-
`Backed Securitization Trusts,
`68 Misc 3d 1206(A), 129 NYS3d 628 [N.Y. Sup. Ct. 2020] ............................. 33
`
`Bank of New York Mellon v. WMC Mortg., LLC,
`12CV7096 DLC, 2015 WL 4597540, [SDNY July 30, 2015] ........................... 23
`
`Bianculli v Bianculli,
`242 A.D.2d 647 [2nd Dept 1997] ....................................................................... 28
`
`CDO, Ltd. v. Morgans Group LLC,
`84 A.D.3d 614 [1st Dept 2011] .......................................................................... 22
`
`Chimart Assocs. v. Paul,
`66 N.Y.2d 570 [1986] ......................................................................................... 30
`
`Collins v. Harrison-Bode,
`303 F.3d 429 [2d Cir 2002] ................................................................................ 30
`
`Ender v. National Fire Ins. Co. of Hartford,
`169 A.D.2d 420 [1st Dept 1991] ........................................................................ 37
`
`Fed. Ins. Co. v. Americas Ins. Co.,
`258 A.D.2d 39, 691 NYS2d 508 [1st Dept 1999] .......................................passim
`
`Friedman v Smithfield, Inc.,
`146 A.D.2d 567 [2nd Dept 1989] ....................................................................... 29
`
`Fundamental Long Term Care Holdings, LLC v. Cammeby’s Funding
`LLC, 20 N.Y.3d 438 [2013] ................................................................................ 23
`
`LoFrisco v. Winston & Strawn LLP,
`42 A.D.3d 304 [1st Dept 2007] .......................................................................... 37
`
`Luver Plumbing and Heating, Inc. v Mo's Plumbing and Heating,
`144 A.D.3d 587 [1st Dept 2016] ........................................................................ 25
`
`iii
`
`

`

`
`
`MPEG LA, LLC v Samsung Elecs. Co., Ltd.,
`166 A.D.3d 13 [1st Dept 2018], lv denied, 32 N.Y.3d 912 [2018] .................... 18
`
`Nau v. Vulcan Rail & Construction Co.,
`286 N.Y. 188 [1941] ........................................................................................... 22
`
`Old Colony Trust Co. v. City of Omaha,
`230 U.S. 100 [1913] ............................................................................................ 30
`
`Rachel Bridge Corp. v. Dishi,
`819 N.Y.S.2d 212 [1st Dept. 2006] .................................................................... 36
`
`Reape v New York News,
`122 A.D.2d 29, lv denied 68 NY2d 610 ............................................................ 29
`
`Sutton v. East Riv. Sav. Bank,
`55 N.Y.2d 550 [1982] ......................................................................................... 29
`
`This Is Me, Inc. v. Taylor,
`157 F.3.d 139 [2d Cir 1998] ............................................................................... 22
`
`Tougher Heating & Plumbing Co. v. State of New York,
`73 A.D.2d 732 [3d Dept 1979] ........................................................................... 29
`
`In re Trusteeship Created by Am. Home Mortg. Inv. Trust
`2005-2, No. 14 Civ. 2494, 2014 WL 3858506 (S.D.N.Y. July 24,
`2014) ................................................................................................................... 23
`
`Matter of U.S. Bank N.A. v. Federal Home Loan Bank of Boston,
`2015 Slip Op. 32846 (U), 2016 WL 9110399 [Sup. Ct., N.Y. Cty.,
`Aug. 12, 2016] (“JPMorgan I”) ............................................................... 7, 15, 36
`
`In re U.S. Bank National Association,
`51 Misc.3d 273 [NY Sup 2015] .......................................................................... 36
`
`Walrich v. Security Mut. Ins. Co.,
`96 A.D.2d 658 [3rd Dept 1983] .......................................................................... 37
`
`Webster’s Red Seal Publs. v. Gilberton World–Wide Publs.,
`67 A.D.2d 339 [1st Dep’t 1999] aff’d 53 NY2d 643 .......................................... 29
`
`Wells Fargo Bank, N.A. v. Fin. Sec. Assur. Inc.,
`504 Fed. Appx. 38 [2d Cir 2012] ........................................................................ 23
`
`iv
`
`

`

`
`
`Yanuck v. Simon Paston & Sons Agency, Inc.,
`209 A.D.2d 207 [1st Dept. 1994] ....................................................................... 36
`
`Other Authorities
`
`CPLR Article 4 ......................................................................................................... 36
`
`CPLR Article 77 ....................................................................................................... 36
`
`Restatement [Second] of Contracts .................................................................... 28, 30
`
`
`
`
`
`v
`
`

`

`
`
`Pursuant to the Briefing Schedule Stipulation dated September 24, 2020, the
`
`below-signed Institutional Investors1, AIG Investors2, DW Partners LP (“DW”), and
`
`Ellington Management Group, L.L.C. (“Ellington”) (collectively, the “Investors”)
`
`submit this Opening Brief in support of their appeal from the Decision and Order of
`
`the Honorable Marcy S. Friedman, Supreme Court of New York, New York County,
`
`dated February 13, 2020, which was entered in the Office of the Clerk of New York
`
`County, and for which notice of entry was provided, on February 14, 2020 (the
`
`“Decision and Order”).
`
`PRELIMINARY STATEMENT
`
`
`This appeal arises from an Article 77 proceeding in which Petitioners, the
`
`trustees or securities administrators of the 270 residential mortgage-backed
`
`securities (“RMBS”) trusts named in the Petition (the “Settlement Trusts”),
`
`petitioned the Supreme Court of the State of New York, County of New York
`
`(Friedman, J.) (the “IAS Court”) for judicial guidance concerning the manner in
`
`
`1 The sixteen Institutional Investors are: AEGON USA Investment Management, LLC, BlackRock
`Financial Management, Inc., Cascade Investment, LLC, Federal Home Loan Bank of Atlanta,
`Federal Home Loan Mortgage Corp., Federal National Mortgage Association, Goldman Sachs
`Asset Mgmt L.P., Voya Investment Mgmt LLC, Invesco Advisers, Inc., Kore Advisors, L.P.,
`Metropolitan Life Ins. Co., Pacific Investment Mgmt Company LLC, Teachers Ins. and Annuity
`Assoc. of America, TCW Group, Inc., Thrivent Financial for Lutherans, and Western Asset Mgmt.
`Co.
`
`2 The AIG Investors are: American General Life Insurance Company, American Home Assurance
`Company, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh,
`Pa., The United States Life Insurance Company in the City of New York, and The Variable
`Annuity Life Insurance Company.
`
`1
`
`

`

`
`
`which a $4.5 billion settlement payment should be distributed among the
`
`certificateholders (i.e., investors) of those trusts. More specifically, the Petition
`
`asked the IAS Court to resolve a number of distinct issues with respect to the
`
`construction of the settlement agreement pursuant to which portions of the $4.5
`
`billion payment allocated to each of the Settlement Trusts (the “Settlement
`
`Agreement”) were to be distributed to those trusts, in light of the terms of the Trusts’
`
`governing documents.
`
`The Court, in the Decision and Order, correctly resolved all but one of the
`
`issues presented by the Petition. Its error arose out of the question of whether the
`
`governing documents for certain of the Settlement Trusts allowed for the senior-
`
`most and least risky certificates issued by those Trusts to have their prior losses
`
`reversed—the precise losses that the settlement at issue was intended to remedy. In
`
`particular, the IAS Court ruled that the governing documents precluded these senior-
`
`most certificates from having their certificate balances “written up,” which would
`
`have allowed them to receive settlement funds paid to compensate the Trusts for the
`
`losses that had caused those certificates to have been written down in the first place.
`
`In this limited but vital respect, the IAS Court erred by depriving the Trusts’ safe,
`
`senior certificates of a key contractual entitlement—the entitlement to have their
`
`losses reversed by settlement recoveries—with the result that such recoveries would
`
`instead wrongfully accrue to the Trusts’ riskier “subordinate” certificates.
`
`2
`
`

`

`
`
`On this issue, the IAS Court erred by misconstruing the relevant contracts,
`
`myopically focusing on (and misreading) a single provision, while failing properly
`
`to account for other provisions that compelled a different result because they
`
`decisively demonstrate the parties’ intent to write up senior certificates that had
`
`suffered losses. Compounding this error, the IAS Court also erred by ignoring
`
`uncontroverted evidence showing that, since the Settlement Trusts were created over
`
`a decade ago, Petitioners have consistently written up the senior certificates’
`
`balances in substantively identical circumstances. To do otherwise now sharply
`
`changes how Petitioners administer certificate write-ups and upsets the settled
`
`expectations of the parties. Tellingly, out of the myriad investors that hold
`
`certificates issued by the impacted Settlement Trusts, just one investor, Nover
`
`Ventures, endorsed the IAS Court’s holding that only the subordinate certificates
`
`issued by those Trusts are eligible for write-ups.
`
`The IAS Court’s erroneous decision on this issue turns the Trusts’ seniority
`
`structure upside down, with the Trusts’ senior certificates continuing to suffer from
`
`billions of dollars in realized losses, while the Trusts’ far riskier, subordinate
`
`certificates have their past realized losses reversed through certificate write-ups.
`
`That result is impossible to reconcile with the text, intent, or structure of the
`
`contracts. Although the IAS Court should be commended for its careful analysis in
`
`resolving an admittedly complex dispute affecting billions of dollars of securities,
`
`3
`
`

`

`
`
`and for getting it right on nearly all of the issues, the Court’s error in depriving the
`
`Trusts’ most senior certificates of a key benefit of the settlement defeats the basic
`
`bargain struck in the contracts, and must be reversed.
`
`QUESTIONS PRESENTED
`
`Do the governing documents for the Settlement Trusts at issue on this
`
`1.
`
`appeal permit senior certificates issued by those Trusts to have their certificate
`
`balances “written-up” in a manner that reverses some or all of the reduction of those
`
`balances when the Trusts receive funds previously written off by the Trusts?
`
`Answer: The IAS Court erred by answering this question no—it construed the
`
`governing documents to prohibit such write-ups because it misconstrued and
`
`failed to consider relevant provisions of the governing documents and failed
`
`to consider whether its reading of those documents was consistent with their
`
`purpose and structure.
`
`2.
`
`In the event the at-issue Settlement Trusts’ governing documents are
`
`deemed ambiguous on the matter of whether senior certificates issued by those
`
`Trusts may have their certificate balances “written up” in a manner that reverses
`
`some or all of their prior losses when the Trusts receive funds previously written off,
`
`does extrinsic evidence of the course of performance under those governing
`
`documents demonstrate that they were intended to permit such “write-ups”?
`
`4
`
`

`

`
`
`Answer: The IAS Court erred by failing to address this question—it failed to
`
`recognize that its reading of the governing documents rendered them
`
`ambiguous and thus further failed to consider uncontroverted course of
`
`performance evidence that the parties have consistently interpreted the at-
`
`issue Settlement Trusts’ governing agreements to permit the “write-up” of
`
`senior certificates.
`
`3.
`
`In the event the at-issue Settlement Trusts’ governing documents are
`
`deemed ambiguous as to whether senior certificates issued by those Trusts may have
`
`their certificate balances “written up” in a manner that reverses some or all of the
`
`reduction of those balances when the Trusts receive funds previously written off by
`
`the Trusts, and this Court declines to make a finding as to the import of the
`
`uncontroverted evidence of the course of performance under those governing
`
`documents, should this case be remanded to the IAS Court?
`
`Answer: The IAS Court erred by failing to recognize that its reading of the
`
`governing documents rendered them ambiguous, and thus did not reach this
`
`question. Accordingly, in the event the at-issue Settlement Trusts’ governing
`
`documents are deemed ambiguous and this Court does not find the
`
`uncontroverted course of performance evidence dispositive, the case should
`
`be remanded to the IAS Court with instructions to resolve the factual question
`
`5
`
`

`

`
`
`
`
`concerning the proper interpretation of the governing documents by reference
`
`to extrinsic evidence.
`
`
`
`6
`
`

`

`
`
`STATEMENT OF THE CASE AND RELEVANT FACTS
`
`
`A.
`
`Factual Background
`
`This appeal involves six central disputed issues in connection with the
`
`distribution methodology for a $4.5 billion settlement of representation and warranty
`
`claims for over three hundred RMBS trusts. The settlement at issue was negotiated
`
`between the below-signed sixteen Institutional Investors and JPMorgan in
`
`November 2013; and was accepted by the Settlement Trusts’ trustees in July 2014,
`
`following a period during which the trustees reviewed the settlement offer and
`
`revised the Settlement Agreement. (R.26-27.) The settlement was approved by the
`
`New York Supreme Court (Friedman, J.) in August 2016.3
`
`The Settlement Trusts were created in the lead-up to the financial crisis
`
`through the packaging of mortgage loans into trusts that issued securities in the form
`
`of certificates for sale to investors. The certificates represent interests in the income
`
`stream the Settlement Trusts were expected to receive on the mortgage loans they
`
`owned. The Settlement Trusts’ assets are the obligations owed by the borrowers on
`
`the mortgages, and the Settlement Trusts’ liabilities are their payment obligations to
`
`holders of their certificates. The terms and conditions of the Settlement Trusts are
`
`set forth in lengthy contracts, called “Indentures” or “Pooling and Servicing
`
`
`3 See Matter of U.S. Bank N.A. v. Federal Home Loan Bank of Boston, 2015 Slip Op. 32846 (U),
`2016 WL 9110399, at *1 [Sup. Ct., NY Cty, Aug. 12, 2016] (“JPMorgan I”).
`
`7
`
`

`

`
`
`Agreements” (collectively, “PSAs”), which spell out, among other things, the
`
`manner in which the Settlement Trusts’ cash flows and losses are allocated and
`
`distributed to the Trusts’ certificates. The Settlement Trusts offer their certificates
`
`to investors through documents known as prospectus supplements, or “ProSupps,”
`
`which disclose the certificates’ material terms and conditions, on which the investors
`
`based their investment decisions.
`
`When individual mortgages owned by a Settlement Trust default, and proceed
`
`through a foreclosure sale or other “liquidation” event, the difference between the
`
`amount still owed on the mortgage, and the amount recovered through the
`
`foreclosure or other liquidation event, is deemed a “Realized Loss.” (R.5905.4) That
`
`Realized Loss is passed on to the certificates held by investors by reducing, or
`
`“writing down” the amount owed on the certificates (referred to as such certificate’s
`
`“principal balance”), thereby lowering investors’ remaining claims against the
`
`Settlement Trust for payment. (Id.5) In this way, whenever the Settlement Trusts’
`
`
`4 A typical definition of “Realized Loss” is found in the PSA for GPMF 2005-AR4: “Realized
`Loss: Any (i) Bankruptcy Loss or (ii) as to any Liquidated Mortgage Loan, (x) the Outstanding
`Principal Balance of such Liquidated Mortgage Loan plus accrued and unpaid interest thereon at
`the Mortgage Interest Rate through the last day of the month of such liquidation, less (y) the related
`Net Liquidation Proceeds with respect to such Mortgage Loan and the related Mortgage Property.
`In addition, to the extent the Servicer receives Subsequent Recoveries with respect to any
`Mortgage Loan, the amount of the Realized Loss with respect to that Mortgage Loan will be
`reduced to the extent such recoveries are applied to reduce the Current Principal Amount of any
`Class of Certificates on any Distribution Date.”
`
`5 Section 6.02(b) of PSA for GPMF 2005-AR4 provides for reduction of certificate balances of
`senior certificates by the amount of Realized Losses: “With respect to any Certificates [on] any
`
`
`8
`
`

`

`
`
`assets (the mortgage loans) are written down, the Trusts’ liabilities (the obligations
`
`owed on their certificates) are written down by the same amount. This ensures that
`
`the Trusts’ assets and liabilities stay in balance.
`
`The Settlement Trusts issued certificates with varying levels of risk attached
`
`to them. The safest certificates are known as “Senior Certificates,” and the riskiest
`
`certificates are known as “Subordinate Certificates.” In exchange for taking less
`
`risk, the Senior Certificates generally paid out lower monthly coupon payments to
`
`investors, compared to the Subordinate Certificates. (R.10456.6) The PSAs contain
`
`detailed provisions allocating Realized Losses to the various certificates. To
`
`enhance the safety of the Senior Certificates, Realized Losses are first allocated to
`
`the Subordinate Certificates. (R.10445.7) Once the Subordinate Certificates are
`
`written down to zero, however, the Senior Certificates begin to suffer Realized
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`Losses. (Id.) The Trusts also have a mechanism to reverse previous Realized Losses
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`if cash is received by the Trusts with respect to one or more defaulted mortgages
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`Distribution Date, the principal portion of each Realized Loss on a Mortgage Loan in a Loan Group
`shall be allocated as follows: […] fourteenth, to the Class of Senior Certificates in the related
`Certificate Group as described in Section 6.02(d) hereof.”
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`6 August 2018 monthly remittance report for SAMI 2006-AR5, showing interest rates ranging from
`2.27% to the most senior certificate, the 1-A-1 certificate, up to 4.21%, to the most subordinate
`certificate, the B-11 certificate).
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`7 Section 6.05 of the PSA for BSABS 2006-HE3 provides that Realized Losses are first to be
`allocated to eleven different Subordinate Certificates (Class M1 through M11) in order of
`increasing seniority, and only then, once the Subordinate Certificates have been written down to
`zero, to the Class A Senior Certificates.
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`9
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`after a Realized Loss has already been passed through to the certificates. Such cash
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`receipts “subsequent” to a Realized Loss are called “Subsequent Recoveries.”
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`(R.28-298; R.10395.9) A Subsequent Recovery could be small relative to the
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`previous Realized Loss, such as a single, trailing payment received on a mortgage
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`after a foreclosure has been completed. Or, a Subsequent Recovery could be large,
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`such as a repurchase or settlement payment from the issuer of the Settlement Trust
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`that could make the Trust whole for the entire amount of a prior Realized Loss.
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`Importantly, when a Subsequent Recovery payment is received by the Trusts,
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`one or more of the Trusts’ certificate balances must be “written up,” in order to
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`reverse the Realized Loss previously incurred by the certificates and to keep the
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`Trusts’ assets and liabilities in balance. (R.29; R.10395; R.364.) In this way,
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`Subsequent Recoveries are accounted for as negative Realized Losses. (See, e.g.,
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`R.10456-10458 [showing that upon a trust’s receipt of a Subsequent Recovery in the
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`8 The IAS Court explained at pages 3 to 4 of the Decision and Order that “[a] Trust may receive a
`monetary recovery related to a realized loss previously allocated to the certificates. Most Trusts
`refer to such a recovery as a ‘subsequent recovery,’ and provide that when a subsequent recovery
`is realized, certificate principal balances of previously written down certificates generally must be
`increased, or ‘written up,’ by the amount of the Subsequent Recovery.” See also R.354 (Petition
`describing the general features of subsequent recoveries).
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`9 PSA for SAMI 2007-AR4: “As of any Distribution Date, amounts received during the related
`Prepayment Period by the Servicer … or Surplus amounts held by the Servicer to cover estimated
`expenses (including, but not limited to, recoveries in respect of the representations and warranties
`made by the Sponsor Pursuant to the Mortgage Loan Purchase Agreement) specifically related to
`a Liquidated Mortgage Loan, a Mortgage Loan that has been modified which resulted in a Realized
`Loss or a final disposition of any REO Property prior to the related Prepayment Period that resulted
`in a Realized Loss.”
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`ordinary course, the Senior Certificates are allocated negative Realized Losses to
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`reduce their prior Realized Losses].) This mechanism is expressly set out in the
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`definition of Realized Loss, which typically provide as follows:
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`Realized Loss: Any (i) Bankruptcy Loss or (ii) as to any Liquidated
`Mortgage Loan, (x) the Outstanding Principal Balance of such
`Liquidated Mortgage Loan plus accrued and unpaid interest thereon at
`the Mortgage Interest Rate through the last day of the month of such
`liquidation, less (y) the related Net Liquidation Proceeds with respect
`to such Mortgage Loan and the related Mortgage Property. In addition,
`to the extent the Servicer receives Subsequent Recoveries with respect
`to any Mortgage Loan, the amount of the Realized Loss with respect to
`that Mortgage Loan will be reduced to the extent such recoveries are
`applied to reduce the Current Principal Amount of any Class of
`Certificates on any Distribution Date.
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`(R.5905 [PSA for GPMF 2005-AR4]; see also R.5902-5908 [collecting the
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`definitions of Realized Loss for each of the Exhibit E Trusts].) Thus, as set forth in
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`the final sentence of the foregoing definition, to the extent Subsequent Recoveries
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`are received and distributed, they are accounted for as negative or reduced Realized
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`Loss.
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`As has been well documented, investors in RMBS trusts like the Settlement
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`Trusts suffered catastrophic losses during and after the financial crisis, when huge
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`numbers of the mortgages held by these trusts defaulted and went through
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`foreclosures and other liquidations. The Settlement Trusts suffered losses of more
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`than $64.5 billion. R.5882. The magnitude of the losses was so high that, in many
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`of the Settlement Trusts, the principal balances of all of the Subordinate Certificates
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`were written down to zero, with the Senior Certificates also suffering from billions
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`of dollars in Realized Losses.
`
`An example is illustrative. One of the Settlement Trusts, called “Structured
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`Asset Mortgage Trust Investments Inc. Mortgage Pass-Through Certificates Series
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`2006-AR5, or “SAMI 2006-AR5” for shorthand, experienced $186 million in
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`Realized Losses by August 2018. (R.10456.) As a result, all of the Trust’s
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`Subordinate Certificates—denominated the “Class B-1” through “Class B-11”
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`certificates—had been written down to zero. (Id.) However, the Subordinate
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`Certificates were only capable of absorbing $75 million in realized losses through
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`write-downs, because their original certificate balances were only $75 million. (Id.)
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`Accordingly, the Senior Certificates – termed the “Class A” certificates – suffered
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`approximately $111 million of the $186 million in total losses experienced by the
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`Trust. (Id.)
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`The $4.5 billion settlement paid by JPMorgan was meant to compensate the
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`Settlement Trusts for the portion of their losses attributable to mortgages that
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`violated representations and warranties made by JPMorgan in the relevant governing
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`agreements, including that the mortgages were underwritten in accordance with
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`JPMorgan’s underwriting guidelines, and that the homes had proper appraisals, had
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`sufficient value to support the amount of the loans, and were occupied by their
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`owners. (R.64 [Decision and Order].10) Pursuant to Section 3.05 of the Settlement
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`Agreement, the settlement funds were divided among the Settlement Trusts in
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`proportion to the overall losses they had suffered. (R.417-418.)
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`Consistent with the overall purpose of the global Settlement Agreement—
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`compensating the Trusts for their past and future Realized Losses—the Settlement
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`Agreement provides for two essential operations when distributing the settlement
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`funds: (1) the distribution of the settlement payment as though it were a