German Bank Seeks to Amend Morgan Stanley RMBS Suit

April 7, 2016

Corban S. Rhodes Argues the Dismissed Fraud Claims in RMBS Suit

Represented by Labaton Sucharow, HSH Nordbank recently asked a judge to reevaluate its lawsuit against Morgan Stanley over $524 million worth of toxic residential mortgage-backed securities, claiming that adding more accurate allegations will show that the German lender has standing to bring its claims.

During oral arguments before Judge Friedman in Manhattan, Firm attorney, Corban S. Rhodes, cited the doctrine of equitable subrogation, which applies to cases where a party is obligated to pay the debt of a third person to protect their own rights or to save their own property. Under New York law, equitable subrogation claims are not allowed where the payment was voluntary.

Rhodes told Judge Friedman that HSH was financially intertwined with the SPVs, and its equitable subrogation claims stem from the fact that it was compelled to buy the RMBS from the SPVs during the financial crisis at or near par value in order to protect HSH’s financial interests.

“When HSH made that payment and discharged Morgan Stanley’s fraud liability, it obtained the claims the SPV otherwise would have had against Morgan Stanley, which it no longer has since it doesn’t have any loses,” Rhodes said. “HSH has now absorbed those losses, and by doing so, has stepped into the shoes of the SPV and obtained their claims.”

HSH was was compelled to buy the RMBS from the SPVs, Rhodes said, because if the SPVs failed, HSH’s investment would have been completely wiped out.

“There were no other viable options for HSH to protect itself economically,” Rhodes said. “Selling these kind of assets on the open market in some sort of a fire sale situation simply would not have been sufficient.”