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Susan M. Greenwood | Bloomberg LawIn re Washington Mutual Mortgage-Backed Securities Litig., No. 09-CV-00037 (W.D. Wa. Oct. 21, 2011) The U.S. District Court for the Western District of Washington certified in part a class of investors that purchased mortgage-backed securities (MBS) created and sold by Washington Mutual Bank (WMB), Washington Mutual Asset Acceptance Corporation (WAAC), and certain officers and directors of the companies (collectively, Defendants). The Court, however, limited the class that it certified under Federal Rules of Civil Procedure 23(a) and (b)(3) to 13 tranches of MBS purchased by plaintiffs. It granted Defendants' motion for judgment on the pleadings as to the remaining 110 tranches.
Standing under Securities Act Section 11As the Court explained, WMB originated and acquired loans that it sold to WAAC. WAAC divided the loans into six trusts. Within each trust, WAAC created certificates that represented interests in the income streams of the underlying loans. Next, the certificates were grouped into tranches that "'represented specific rights and claims to the receipt of principal and interest payments from the pools of mortgages that they were collateralized by and associated with." Finally, WAAC sold the certificates back to WMB, who underwrote six offerings of the certificates. Plaintiffs purchased certificates in only 13 of the 123 separate tranches created and sold by Defendants. Nevertheless, they sought to represent purchasers of all 123 tranches. Noting that Section 11 of the Securities Act of 1933 "require[s] the plaintiff to have actually purchased the security upon which it seeks to sue," the Court held that each tranche is an individual security. While the tranches could be viewed as related to one another, the Court declined to ignore that each tranche "has its own CUSIP, credit rating, risk profile, payment rights, payment priority, principal balance, and interest rate." It further observed that "[t]he very point of pooling mortgages and creating tranches is to create different securities whose credit and risk profiles attract different purchasers." Moreover, the Court said that plaintiffs did not suffer any "personal injury stemming from the tranches of MBS in the six offerings that they did not purchase." Suffering a similar injury was insufficient, and the Court dismissed plaintiffs' claims relating to the 110 tranches they did not purchase.
"One-size-fits-all formula" Applies to Remaining Tranches"Rule 23 'provides a one-size-fits-all formula for deciding the class-action question,'" said the Court. Plaintiffs, it continued, met all the requirements necessary for class certification. Beginning with numerosity, the Court rejected Defendants' suggestion that a tranche-by-tranche examination produces an insufficient number of purchasers. Instead, the Court examined the class as a whole and found that the 701 unique purchasers of the 13 remaining tranches makes joinder impractical. Defendants did not contest commonality and the Court easily found "that a common legal question binds the class together: did the offering documents contain material, false or misleading statements as to the existence or quality of underwriting guidelines that caused them harm?" Plaintiffs' claims are also typical of the class, the Court held. They allege that Defendants' misleading statements concerning underwriting guidelines injured purchasers in all 13 tranches. As the Court explained, "Plaintiffs' theory of the case shows that the action is based on conduct that is not unique to them and that the class members were harmed by the same conduct." Defendants' contention, that Plaintiffs "had 'specific knowledge of loan origination practices generally, and WMB's practice in particular,'" was insufficient to defeat typicality since Defendants provided no "competent evidence" of plaintiffs' supposed knowledge and "general knowledge of the mortgage industry or [the] ability to have reviewed loan data is insufficient." The Court also rejected as a "red herring" Defendants' argument that purchasers within each tranche needed to demonstrate how they were deceived by the offering documents. According to the Court, there is no need for a tranche-by-tranche analysis as Plaintiffs alleged that all class members were deceived by the absence of statements setting forth the underwriting guidelines (or lack thereof). Turning to adequacy, the Court found no conflict based upon the potential for differing damages models among the tranches. Noting first that "calculation of damage is not generally a reason to defeat class certification," the Court discerned "no legitimate reason why Plaintiffs will present a valuation model that does not maximize damages for the entire class." Alleged competing damages valuations also did not deter a finding of predominance. Rather, common questions prevailed because all class members ask "three key questions"—whether Defendants' statements were false or misleading, whether the statements were material, and what role did Defendants play in the offerings. According to Defendants, predominance is defeated because two of the named plaintiffs purchased certificates more than a year after the release of trustee reports and, thus, are required to show individual reliance. The Court however, explained that the reliance rule of Section 11(a) applies only to earnings statements, which do not include trustee reports. As for the final requirement of superiority, the Court observed that "[i]t is beyond dispute that having all claims of a class litigation at once will serve judicial economy and efficiency."
Limited Fund Rule InapplicableFinally, the Court held that the class could not be certified under Plaintiffs' alternate theory of the limited fund rule under Federal Rule of Civil Procedure 23(b)(1)(B) because Plaintiffs failed to show that Defendants' funds are inadequate to satisfy the class's claims. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
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