First Department Reinstates Contract Claims for Gross Negligence Against RMBS Securitizer

On August 11, 2016, the First Department issued a decision in Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, 2016 NY Slip Op. 05781, reinstating a claim for gross negligence against an RMBS securitizer, explaining:

In support of its claim for gross negligence, the complaint alleges that Morgan Stanley acted with reckless indifference. It alleges there were widespread breaches across the loans being held by the Trust and that Morgan Stanley failed to adhere to even minimal underwriting standards or to verify basic and critical information about potential buyers; it further alleges that Morgan Stanley had access to the underlying loan files and that more than half of the loans later reviewed by plaintiff's forensic analysts revealed rampant breaches of the warranties Morgan Stanley made. It further alleges that Morgan Stanley simply ignored its contractual obligations, disregarded the known or obvious risks that the loans sold to the Trustee were defective and then failed to notify the Trustee of any breaches or effectuate a cure/repurchase. We hold that these allegations are sufficient to withstand dismissal at the pleading stage.

In other contexts, we have recognized that allegations of serious and pervasive misrepresentations regarding the level of risk in an investment with widespread, massive failures will support a claim for contractual gross negligence. In yet other contexts, we have recognized that this type of alleged conduct in substantially similar investments would even support a claim of fraud. Consistent with these decisions, the allegations in this case are sufficient to support a claim of gross negligence. We recognize that some trial courts have taken different approaches when faced with issues involving the scope of the sole remedies clauses in residential mortgage put-back actions. Given that this case is only at a pleading stage, and consistent with our own precedent however, we believe that the allegations of gross negligence should not be dismissed.

(Internal quotations and citations omitted) (emphasis added).