Fed. Home Loan Bank of Seattle v. RBS Sec., Inc.

418 P.3d 168

FEDERAL HOME LOAN BANK OF SEATTLE, a bank created by federal law, Appellant,

v.RBS SECURITIES, INC., f/k/a Greenwich Capital Markets, Inc., a Delaware corporation; Greenwich Capital Acceptance, Inc., a Delaware corporation; and RBS Holdings USA, Inc., f/k/a Greenwich Capital Holdings, Inc., a Delaware corporation, Respondents.

No. 76326-1-I

Court of Appeals of Washington, Division 1.

FILED: May 21, 2018

Matthew Aaron Carvalho, Diana Siri Breaux, Yarmuth Wilsdon PLLC, 1420 5th Ave. Ste. 1400, Seattle, WA, 98101-3336, David Grais, Grais & Ellsworth LLP, 950 Third Avenue, 24th Floor, New York, NY, 10022 for Appellant.

Catherine Wright Smith, Howard Mark Goodfriend, Smith Goodfriend PS, 1619 8th Ave. N, Seattle, WA, 98109-3007, Ana-Maria Popp, Cairncross & Hempelmann PS, 524 2nd Ave. Ste. 500, Seattle, WA, 98104-2323, Thomas Rice, Alan Turner, Simpson Thatcher & Bartlett LLP, 425 Lexington Ave., New York, NY, 10017 for Respondents.

Cox, J.

¶ 1 Under the Washington State Securities Act (WSSA), an investor who sues for violation of this act must prove reasonable reliance on statements or omissions by a defendant.¹ Here, Federal Home Loan Bank of Seattle (FHLBS) sued, as an investor, defendants Royal Bank of Scotland Securities Inc., Greenwich Capital Markets, Inc., Greenwich Capital Acceptance, Inc., and RBS holdings USA, Inc., formerly known as Greenwich Capital Holdings, Inc. (collectively, RBS) for violating the WSSA. There is no genuine issue of material fact whether FHLBS relied on the prospectus supplement for the security that is the basis of its claim. It could not have relied on the prospectus supplement, which was issued after the purchase of the security. And FHLBS’s new arguments, first raised in response to RBS’s motion for reconsideration, were not properly before the trial court. The trial court did not abuse its discretion in granting reconsideration and dismissing this action. We affirm.

¶ 2 This is the third of a number of consolidated actions under the WSSA by FHLBS to reach this court. As in the two prior cases, this case arises out of FHLBS’s purchase of a residential mortgage backed security (RMBS).² In our prior decisions, we explained the process of securitization and sale of the pool of residential loans that comprise these types of securities.³ The same principles apply here. In essence, the stream of income generated by the individual loans in the pool funds the return on investment made by the purchaser of the security. Accordingly, much of the information about the characteristics of the loans in the pool may be material to an investor’s decision whether to purchase the security.

¶ 3 On June 29, 2006, FHLBS purchased the security at issue in this case for $200,000,000.⁴ As it turns out, the prospectus supplement for this security was issued one day after this purchase.⁵

¶ 4 On December 23, 2009, FHLBS commenced this action based solely on the WSSA. In its amended complaint, it set forth the allegations supporting its claim for rescission and other relief. Essentially, FHLBS claimed that RBS had made "Untrue or Misleading Statements" about the characteristics of the loans in the security pool. Specifically, these statements concerned the loan to value (LTV) ratios of the loans, the originator’s underwriting practices, and the appraisals of the properties securing the loans.

¶ 5 In August 2015, RBS moved for summary dismissal of this action. The trial court denied this motion on the basis that whether FHLBS received the HVMLT 2006-5 prospectus supplement for the security certificate before purchasing the certificate was a material issue of fact.

¶ 6 RBS then moved for reconsideration of the denial of summary judgment. It did so on the basis that the prospectus supplement was not issued until one day after the sale of the security.⁶ The court granted this motion, dismissing this action.

¶ 7 This appeal followed.

REASONABLE RELIANCE IN MARKETING A SECURITY

¶ 8 FHLBS argues in its briefing on appeal that a plaintiff in an action under RCW 21.20.010(2) of the WSSA need not prove that it relied on an untrue or misleading statement of material fact that a defendant made in connection with the sale of a security. We hold that this argument is without merit.

¶ 9 This issue is controlled by two of our recent decisions: Federal Home Loan Bank of Seattle v. Barclays Capital, Inc. ⁷ and Federal Home Loan Bank of Seattle v. Credit Suisse Securities (USA) LLC.⁸ In Barclays Capital, Inc., FHLBS made the same arguments that it makes here. We rejected all of them and do so again.

¶ 10 We held that the legislative intent of the WSSA is evident in the words of the statute, its substantial similarity to its federal counterpart, and an unbroken line of controlling cases holding that reliance is an essential element of this statute. Based on this analysis, we concluded in that case that there were no genuine issues of material fact whether FHLBS’s reliance on the prospectus supplement in that case was reasonable. It was not reasonable, and summary dismissal of its claim was proper.

¶ 11 In Credit Suisse Securities (USA) LLC, we applied this legal principle of reasonable reliance to hold that FHLBS failed to show that necessary element of its claim. That was because it purchased the security in question before the issuance of the prospectus supplement on which it allegedly relied. Because it was impossible to rely on something that was not issued until after the purchase of the security, there was no genuine issue of material fact on reliance on the supplement. Summary dismissal of its claim was accordingly also proper.

¶ 12 Here, it is undisputed that FHLBS purchased the security at issue before the related prospectus supplement was issued. Specifically, FHLBS alleged in its amended complaint that it purchased the security on June 29, 2006. But this record shows that the prospectus supplement for that security was not issued until the day following the purchase. Thus, FHLBS could not have relied on that prospectus supplement to purchase the security in this action.

¶ 13 We adhere to the principles we articulated in those earlier cases. FHLBS fails to persuasively argue why we should reach any different conclusions here. Reasonable reliance is an essential element of this state securities act claim that FHLBS must prove.

RECONSIDERATION MOTION

¶ 14 While FHLBS argues that reliance is not an essential element of the state securities act claim, it now also argues that it relied on "offering documents" that it received "before settlement and before the final prospectus supplement was received." It further argues that "market practice and the course of dealing between the parties" about what was to be in the prospectus supplement supports its position. We hold that FHLBS fails to establish that the trial court abused its discretion in rejecting these new arguments, granting reconsideration, and dismissing this action.

¶ 15 We will affirm a summary judgment order "where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. A ‘material fact’ is one on which the outcome of the litigation depends. We review de novo orders of summary judgment."⁹

¶ 16 But we review for abuse of discretion a trial court decision on a reconsideration motion.¹⁰ The trial court’s decision is manifestly unreasonable if it exceeds the range of acceptable choices, in light of the facts and applicable law.¹¹ "[I]t is based on untenable grounds if the factual findings are unsupported by the record."¹² And "it is based on untenable reasons if it is based on an incorrect standard or the facts do not meet the requirements of the correct standard."¹³

¶ 17 We begin our analysis of the trial court’s decision on RBS’s motion for reconsideration by examining that motion’s context. At that time in the litigation of the consolidated cases, two defendants were similarly situated due to special circumstances: Credit Suisse Securities (USA) LLC and RBS. The special circumstances were that, in each case, the respective prospectus supplement was issued after consummation of FHLBS’s purchase of the related security. These facts appear to have been unknown to the parties throughout the six years of litigating the case below and only discovered shortly before trial.

¶ 18 At the hearing on RBS’s motion for reconsideration, counsel for FHLBS candidly explained these circumstances:

Your Honor, I think it’s worth pausing for a moment to understand why these issues have come out now, because Credit Suisse in particular suggests that the plaintiff has sloughed off the issue, that at the last minute it’s helping itself to amend the complaint to include much broader evidence of usage and practice. But in fact, the reason why these arise now is a good deal more complicated than that.

As your Honor is aware, all prospective supplements had a date. Throughout the course of this litigation, Seattle

Bank and its counsel, certainly including myself, assumed that the defendants filed the prospective [sic] supplement with the SEC on the date when it was dated which proved to be correct in most cases. Credit Suisse must have made the assumption that it filed its prospective supplements with the SEC on the date it was dated, because it wasn’t until its reply brief in support of its individual motion for summary judgment that Credit Suisse first thought to check the filing records of the SEC and discovered, apparently for the first time, that it actually did not file its prospective supplements for two of the offerings on time.

Now, RBS came to that realization even more belatedly because they didn’t check that out until they read the Court’s ruling granting summary judgment to Credit Suisse on the grounds that their prospective supplements were filed after the defective dates.

So it is true that this issue arises late in the case, but it arises late for one reason which applies to all three parties that are interested in it, which

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