United States District Court, D. Massachusetts
MEMORANDUM AND ORDER REGARDING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT ON DEFENDANT DEUTSCHE BANK'S DUE DILIGENCE AFFIRMATIVE DEFENSE (Dkt. No. 333)
MARK G. MASTROIANNI, District Judge.
Massachusetts Mutual Life Insurance Company ("Plaintiff") brought eleven related actions against various defendants, asserting violations of MASS. GEN. LAWS ch. 110A, § 410, the Massachusetts Uniform Securities Act ("MUSA"), for misstatements and omissions contained in the offering documents of certain residential mortgage-backed securities ("RMBS"). The instant action (11-cv-30039-MGM), brought against Deutsche Bank Securities Inc. ("DBSI"), Anilesh Ahuja, Michael Commaroto, Richard D'Albert, and Richard Ferguson (together, "Defendants"), was designated a "bellwether" case by Judge Saris on December 4, 2013. (See Dkt. No. 225.) Accordingly, it is scheduled to proceed through summary judgment and trial while the other cases are stayed.
Presently before the court is Plaintiff's motion for partial summary judgment to preclude DBSI from asserting a due diligence affirmative defense (Dkt. No. 333). For the following reasons, the court concludes that, for nine of the ten securitizations, the reasonableness of DBSI's due diligence is a question for the fact-finder and, therefore, will deny Plaintiff's motion as to those securitizations. For the ACE 2007-HE3 securitization, however, the court concludes that DBSI's due diligence was inadequate as a matter of law, since over 80% of the loans comprising the securitization derived from loan pools which were not subjected to in-depth diligence reviews at the time of acquisition, nor anytime thereafter. Accordingly, the court will grant Plaintiff's motion as to the ACE 2007-HE3 securitization.
II. STANDARD OF REVIEW
"Summary judgment is appropriate if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'" Bellone v. Southwick-Tolland Regional School Dist., 748 F.3d 418, 422 (1st Cir. 2014) (quoting Fed.R.Civ.P. 56(a)). An issue is "genuine" when the evidence is such that a reasonable fact-finder could resolve the point in favor of the non-moving party, and a fact is "material" when it might affect the outcome of the suit under the applicable law. Morris v. Gov't Dev. Bank, 27 F.3d 746, 748 (1st Cir. 1994). At summary judgment, the court looks "to all of the record materials on file, including the pleadings, depositions, and affidavits." Hicks v. Johnson, 755 F.3d 738, 743 (1st Cir. 2014). The court must then view these facts and all reasonable inferences that might be drawn from them in the light most favorable to the non-moving party. Pac. Ins. Co., Ltd. v. Eaton Vance Mgmt., 369 F.3d 584, 588 (1st Cir. 2004). "The non-moving party bears the burden of placing at least one material fact into dispute after the moving party shows the absence of [any disputed] material fact." Mendes v. Medtronic, Inc., 18 F.3d 13, 15 (1st Cir. 1994) (discussing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)).
The parties do not dispute the following facts, which are construed in the light most favorable to Defendants, the non-moving parties.
DBSI acted as the underwriter and its affiliate, DB Structured Products, Inc. ("DBSP"), acted as the sponsor for the ten securitizations at issue in this action. As sponsor, DBSP acquired the mortgage loans backing the securitizations from three sources: bulk whole loan purchases from third-party originators, individual loans and small loan pools obtained through its correspondent lending group ("CLG"),  and originators affiliated with DBSI (namely, Chapel Funding, LLC ("Chapel"), and Mortgage IT, Inc. ("Mortgage IT")). (Dkt. No. 376, Defs.'s Local Rule 56.1 Reply to Plaintiff's Statement of Undisputed Material Facts ("Defs.'s Reply SOF") ¶ 88.) Two securitizations (ACE 2006-ASAP4 and ACE 2007-ASAP1) were comprised of loans from the CLG. (Id. ¶ 89.) The other eight securitizations were comprised largely of loans acquired from bulk whole loan purchases, and three of these securitizations (DBALT 2006-AR5, DBALT 2006-AR6, and ACE 2007-HE4) included loans from originators affiliated with DBSI. (Id. ¶ 90; Dkt. No. 481, Decl. of Molly Stephens ("Stephens Decl."), Exs. 56, 119-121.) DBSP performed due diligence on loans acquired through the bulk whole loan and CLG channels at the time of acquisition ("Acquisition Diligence"). (Dkt. No. 347, Pl.'s Statement of Material Undisputed Facts ("Pl.'s SOF") ¶ 1; Defs.'s Reply SOF ¶ 114; Dkt. No. 377, Declaration of Meredith Duffy ("Duffy Decl."), Exs. 5-6.) Much of the parties' dispute in this motion comes down to whether it was unreasonable as a matter of law for DBSI to rely on this Acquisition Diligence performed by DBSP.
The Acquisition Diligence included loan-level credit, compliance, and property valuation reviews between the time DBSP bid on a given loan-pool trade and the settlement of the trade. (Duffy Decl., Ex. 3 ¶ 21.) As an initial step, however, DBSP performed a counter-party assessment, which was a general review of the originator prior to purchasing any loans, including a review of the originator's corporate records, financial information, and underwriting policies. (Defs.'s Reply SOF ¶ 119.) For bulk whole loan purchases, DBSP also reviewed a potential originator's corporate structure, investor information, credit management policies, and policies and practices related to underwriting and pricing. (Id. ¶ 120.) DBSP also had a policy to monitor approved originators, including any changes to the originator's guidelines. (Id. ¶ 122.) For potential CLG originators, DBSP conducted a comprehensive review prior to approval, including a review of information about its finances and operation, government sponsored enterprise approval, and licensing and insurance coverage. (Id. ¶¶ 123-24.)
DBSP also instructed third-party diligence vendor, Clayton Holdings LLC ("Clayton"), to perform a data integrity review for potential bulk whole loan purchases. (Id. ¶ 127.) After receiving the "bid tape" from a potential originator, DBSP would have Clayton compare data in the tape with the loan files and report any discrepancies to DBSP. (Id. ¶¶ 126-27.)
A. Credit and Compliance Diligence
Next, DBSP performed loan-level credit and compliance due diligence. For bulk whole loan acquisitions, DBSP usually reviewed a sample of loans for credit compliance, which would include re-underwriting the mortgage loans against the originator's underwriting guidelines and assessing whether the borrower had the ability to repay the loan. (Id. ¶ 128; Stephens Decl., Ex. 13 at 159-60.) DBSP's compliance due diligence involved reviewing a sample of loans to determine compliance with federal, state, and local laws and regulations. (Id. ¶ 129.) Although DBSP sometimes performed credit and compliance due diligence on 100% of the loans in a pool, (id. ¶¶ 121, 128), it usually employed "adverse sampling, " which involved selecting loans for the sample based on potentially high risk credit characteristics. (Id. ¶ 131.) DBSP also sometimes used targeted sampling, through which it identified loans to include in the sample based on specific issues, such as loans with comparatively large balances. (Id. ¶ 132.) In addition, DBSP occasionally used random sampling. (Id. ¶ 133.) After selecting the sample, DBSP would have Clayton perform an in-depth loan-level review. (Id. ¶ 142.) In addition to re-underwriting the loans to the originator's guidelines, Clayton also applied a set of additional screening criteria, or "overlays, " developed by Joe Swartz, the head of DBSP's due diligence group, in response to trends in mortgage product types and origination practices. (Id.)
After evaluating the loan files against applicable guidelines and overlays, Clayton used a grading system of 1 to 3 to grade each loan based, separately, on its credit and compliance due diligence findings. (Id. ¶ 144.) A grade of 1 meant that the loan fully met the originator's underwriting guidelines and did not trigger one of DBSP's overlays. (Id.) A grade of 3 signified a preliminary evaluation that the loan had a material exception to the originator's guidelines, met the originator's guidelines but triggered one of DBSP's overlays, or was missing documentation or had other curable exceptions. (Id.) Initially, Clayton graded loans as 2 in the case of immaterial exceptions; eventually, DBSP instructed Clayton to stop grading loans as 2 and, instead, to only give grades of 1 or 3. (Id. ¶ 145.) DBSP did not review loans Clayton graded as 1 and only began reviewing loans with grades of 2 in the mid-to-late 2006. (Pl.'s SOF ¶ 32.) After reviewing the grades, members of DBSP's due diligence group discussed the results with the relevant originator and, if they learned additional information or received additional documentation about ...