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Lehman Brothers Seeks to Expand Lawsuits Against Loan Originators

Last week, Lehman Brothers Holdings Inc. (“LBHI”) filed two new motions in its ongoing Southern District of New York Bankruptcy Court litigation against approximately 130 loan originators and brokers: (1) an Omnibus Motion for Leave to File Third Amended Complaints Pursuant to Rule 7015 of the Federal Rules of Bankruptcy Procedure (“Motion for Leave to Amend Complaint”); and (2) a Motion for Leave to Amend and Extend the Scope of the Alternative Dispute Resolution Procedures Orders for Indemnification Claims of the Debtors against Mortgage Loan Sellers (“ADR Motion”).  This firm currently represents more than a dozen of the defendants.

In the Motion for Leave to Amend Complaint, LBHI seeks to add new claims to its current suit against each defendant.  Specifically, it plans to add new indemnification claims resulting from the Court’s Order Estimating Allowed Claim Pursuant to RMBS Settlement Agreement, dated March 15, 2018, and from LBHI’s related settlement of proofs of claim filed by various RMBS trustees (collectively, the “RMBS Settlement”).  The RMBS settlement resulted in the RMBS trustees having allowed claims against LBHI for more than $2.45 billion. LBHI will now seek to recoup, via contractual indemnification claims, as much of that amount as it can from mortgage loan sellers and brokers.

With regard to the ADR Motion, LBHI seeks to amend and expand the scope of the ADR order previously entered by the bankruptcy court to require the defendants, as well as other non-party mortgage originators, to submit to ADR in connection with the loans that were part of the settled RMBS claims. LBHI asserts that with the inclusion of the “RMBS Indemnification Claims,” LBHI now holds indemnification claims against approximately 6,200 sellers arising out of more than 72,000 mortgage loans.  This is perhaps the most striking aspect of LBHI’s recent filings, because the reference to “6,200 originators” strongly suggests that there may end up being thousands of new defendants sued by LBHI as a result of the RMBS settlement.

The proposed ADR process is largely the same as the original process with a couple of variances. As it did previously, LBHI will designate a dispute as to any indemnification claim by serving on a seller (1) a copy of the ADR order and (2) the ADR notice containing sufficient information regarding LBHI’s affirmative claim and its demand for settlement (the “ADR Package”). Upon receipt of the ADR Package, the seller would have fifteen days to respond in writing with its position with respect to LBHI’s demand as opposed to the twenty days previously provided for.

LBHI will then have fifteen days to serve an “optional” reply. This is also a change from the prior order which required a reply. The reply may include:

  • a modification of the LBHI’s  demand in the ADR notice,

  •  a response to the seller’s counteroffer,

  •  additional information or briefing supporting the demand made in the ADR Notice, or

  •  a rejection of any counteroffer in which case the ADR dispute would automatically proceed to the mediation stage within 15 days. If LBHI does not serve a reply within the allotted time frame, the ADR dispute would automatically proceed to the mediation stage.

Like before, the parties may request an initial telephonic settlement conference  (or in person if the parties agree), before the mediation stage, to be held within five days after the receipt of such request. Under the proposed procedures, the parties would allocate approximately one hour for the initial settlement conference, in which only LBHI and its representatives and the seller and its representatives would participate.

LBHI proposes that the Court select a slate of mediators to hear and preside over all mediations. Once a matter reaches the mediation stage, LBHI proposes to select the mediator. LBHI seeks to amend the prior order to include a provision that if the parties are unable to agree on a date for the mediation, the mediator would fix a date at his or her discretion. The mediation would likely occur in New York City. It is also important to note that this ADR process would occur concurrently with litigation. The presiding judge, U.S. Bankruptcy Judge Shelley C. Chapman, has expressed her desire to move things along, and has advised the parties to begin discussing the contours of the next phase of the litigation.

The ADR Motion is also set for hearing on October 29th, with a caveat. The bankruptcy court has required LBHI to provide an identification of loans and outstanding amounts/damages sought against each defendant well in advance of the hearing in order to allow the defendants an opportunity to formulate a meaningful response to the ADR Motion. To the extent the defendants are not provided this information well in advance of the hearing, Judge Chapman has indicated that she will postpone the hearing until the defendants have that opportunity.

© 2020 Bilzin Sumberg Baena Price & Axelrod LLP


About this Author

Philip R. Stein, Complex Commercial Litigation Attorney Bilzin Sumberg, Law Firm

Philip R. Stein, a Partner in Bilzin Sumberg's Litigation Group, focuses his practice on complex commercial litigation. He regularly acts as lead counsel to mortgage companies, financial services companies, and large national homebuilders on a broad range of issues of importance to companies in those industries. Phil is currently devoting a substantial part of his practice to representing originators and sellers of mortgage loans throughout the country as they defend against loan repurchase claims made by banks and other investors. He also regularly assists companies...

Of Counsel

Enza handles complex commercial litigation with particular emphasis within the banking, real estate, insurance, and entertainment industries. She has litigated high stakes cases across several jurisdictions around the country with precedent-setting victories. Her understanding of the intricate legal parameters governing these industries makes her a valuable advocate.

As a bilingual litigator, Enza is also able to handle every phase of litigation in Spanish.