PHOENIX LIGHT SF LIMITED vs THE GOLDMAN SACHS GROUP, INC | NY - Goldman Sachs disseminated offering documents containing false and misleading information regarding collateral quality and underwriting standards
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK
X PHOENIX LIGHT SF LIMITED, BLUE HERON FUNDING II LTD., BLUE HERON FUNDING V LTD., BLUE HERON FUNDING VI LTD., BLUE HERON FUNDING VII LTD., BLUE HERON FUNDING IX LTD., SILVER ELMS CDO II LIMITED and KLEROS PREFERRED FUNDING V PLC, Plaintiffs, vs. THE GOLDMAN SACHS GROUP, INC., GOLDMAN SACHS & CO., GOLDMAN SACHS MORTGAGE COMPANY and GS MORTGAGE SECURITIES CORP., Defendants. EXCERPT: E. Defendants Materially Misrepresented that Title to the Underlying Loans Was Properly and Timely Transferred 539. An essential aspect of the mortgage securitization process is that the issuing trust for each RMBS offering must obtain good title to the mortgage loans comprising the pool for that offering. This is necessary in order for the plaintiffs and other certificate holders to be legally entitled to enforce the mortgage and foreclose in case of default. Two documents relating to each mortgage loan must be validly transferred to the trust as part of the securitization process – a promissory note and a security instrument (either a mortgage or a deed of trust). 540. The rules for these transfers are governed by the law of the state where the property is located, by the terms of the pooling and servicing agreement (“PSA”) for each securitization, and by the law governing the issuing trust (with respect to matters of trust law). Generally, state laws and the PSAs require that the trustee have physical possession of the original, manually signed note in order for the loan to be enforceable by the trustee against the borrower in case of default. 541. In addition, in order to preserve the bankruptcy-remote status of the issuing trusts in RMBS transactions, the notes and security instruments are generally not transferred directly fromthe mortgage loan originators to the trusts. Rather, the notes and security instruments are generally initially transferred from the originators to the sponsors of the RMBS offerings. After this initial transfer to the sponsor, the sponsor in turn transfers the notes and security instruments to the depositor. The depositor then transfers the notes and security instruments to the issuing trust for the particular securitization. This is done to protect investors fromclaims thatmight be asserted against a bankrupt originator. Each of these transfers must be valid under applicable state law in order for the trust to have good title to the mortgage loans. 542. Moreover, the PSAs generally require the transfer of themortgage loans to the trusts to be completed within a strict time limit – three months – after formation of the trusts in order to ensure that the trusts qualify as tax-free real estate mortgage investment conduits (“REMICs”). In order for the trust to maintain its tax free status, the loans must have been transferred to the trust no later than three months after the “startup day,” i.e., the day interests in the trust are issued. See Internal Revenue Code §860D(a)(4). That is, the loans must generally have been transferred to the trusts within at least threemonths of the “closing” dates of the offerings. In this action, all of closing dates occurred in 2005, 2006 or 2007, as the offerings were sold to the public. If loans are transferred into the trust after the three-month period has elapsed, investors are injured, as the trusts lose their tax-free REMIC status and investors like plaintiffs face several adverse draconian tax consequences: (1) the trust’s income is subject to corporate “double taxation”; (2) the income from the late-transferred mortgages is subject to a 100% tax; and (3) if late-transferred mortgages are received through contribution, the value of the mortgages is subject to a 100% tax. See Internal Revenue Code §§860D, 860F(a), 860G(d). 543. In addition, applicable state trust law generally requires strict compliance with the trust documents, including the PSAs, so that failure to strictly comply with the timeliness, endorsement, physical delivery, and other requirements of the PSAs with respect to the transfers of the notes and security instruments means the transfers would be void and the trust would not have good title to the mortgage loans. 544. To this end, all of the Offering Documents relied upon by plaintiffs stated that the loans would be timely transferred to the trusts. For example, in the GSAA 2006-13 offering, the Goldman Sachs Defendants represented that “[p]ursuant to the trust agreement, the Depositor will sell, without recourse, to the trust, all right, title and interest in and to each mortgage loan.” GSAA 2006-13 Pros. Supp. at S-74. The Offering Documents for each of the offerings at issue herein contained either the same or very similar language, uniformly representing that defendants would ensure that the proper transfer of title to the mortgage loans to the trusts occurred in a timely fashion. 545. However, defendants’ statements were materially false and misleading when made. Rather than ensuring that they legally and properly transferred the promissory notes and security instruments to the trusts, as they represented they would do in the Offering Documents, defendants instead did not do so. This failure was driven by defendants’ desire to complete securitizations as fast as possible and maximize the fees they would earn on the deals they closed. Because ensuring the proper transfer of the promissory notes and mortgages hindered and slowed defendants’ securitizations, defendants deliberately chose to disregard their promises to do so to plaintiffs. 546. Defendants’ failure to ensure proper transfer of the notes and the mortgages to the trusts at closing has already resulted in damages to investors in securitizations underwritten by defendants. Trusts are unable to foreclose on loans because they cannot prove they own the mortgages, due to the fact that defendants never properly transferred title to the mortgages at the closing of the offerings. Moreover, investors are only now becoming aware that, while they thought they were purchasing “mortgaged-backed” securities, in fact they were purchasing non-mortgagedbacked securities. [...]