Best Bets: Subprime Litigation

By Thomas Brom
     
One year after the first subprime mortgage and credit crisis practice groups formed in California, it's official: This is big. In April, Navigant Consulting reported that in the first quarter of 2008, 170 subprime-related cases had been filed nationwide in federal courts alone. Navigant concluded that the 448 subprime mortgage cases that had been filed since the beginning of 2007 would soon surpass the 559 savings-and-loan cases filed during the early 1990s.
      California's plaintiffs class action bar quickly smelled blood in the water. In the past year Coughlin Stoia Geller Rudman & Robbins has filed dozens of subprime-related suits, including a class action against Countrywide Financial Corp. Bernstein Litowitz Berger & Grossmann, which announced creation of a subprime litigation practice group last December, represents pension funds in the Countrywide litigation and is lead counsel in a class action against New Century Financial Corp., a bankrupt, Irvine-based subprime lender.
      "We're only in the first wave of litigation," says defense attorney Jean Pierre Nogues, cochair of the subprime practice group at Mitchell Silberberg & Knupp in Los Angeles. "Historically, the leading edge of litigation after a financial crisis is not the biggest part."
      Mitchell Silberberg came a bit late to the party, announcing in March the creation of a multidisciplinary practice group of approximately twelve litigation, bankruptcy, and corporate partners, "plus associates as needed," according to Nogues. Many other large firms have formed similar groups, drawing partners from litigation, real estate, securities, and structured finance to create cross-disciplinary teams, primarily in their California and New York offices.
      Pillsbury Winthrop Shaw Pittman announced formation of a multidisciplinary subprime industry group in April 2007. "We recognized early that this was a very complex crisis," says Christine A. Scheuneman, a litigation partner in the firm's Los Angeles office. "We had to be careful to avoid conflicts with existing clients, and not to create conflicts with prospective clients. You have to know who the players are."
      Most large firms created ad hoc teams from their existing practice groups. "No one is going out to find a new group," says Daniel Tyukody, a partner in the Los Angeles office of Orrick, Herrington & Sutcliffe and a member of its Securities Litigation Group. "It's more like reformulating the practice group to match the needs of an industry."
      According to an earlier Navigant Consulting study, about half of all subprime-related cases have been filed in either California or New York. The number of cases doubled during the second half of 2007, from 97 to 181, for a total of 278 cases. Those included borrower class actions (43 percent), securities cases (22 percent), and commercial-contract disputes (22 percent), as well as a mix of bankruptcy, employment, and other matters. Of 191 class actions filed during the year, however, only 4 have been class certified.
      Mortgage bankers and loan correspondents represented 32 percent of defendants in the cases filed to date. Other defendants included mortgage brokers, lenders, appraisers, title companies, home builders, servicers, issuers, underwriting firms, bond insurers, money managers, public accounting firms, and company directors and officers. In addition, several suits have been filed against credit insurers and credit-rating agencies. "Potential litigants will either be encouraged or discouraged by what happens to these suits," says Mitchell Silberberg's Nogues.
      Taken together, the mass of litigation appears to be either a daisy chain of buyers and sellers-each seeking compensation from the party above them on the food chain-or a futile exercise in throwing good money after bad.
      "Volatility begets litigation," says John D. Pernick, a partner in the San Francisco office of Bingham McCutchen who focuses on securities litigation and broker-dealer work. "For the people who lost money, choosing whether to sue depends a lot on what happens to the economy."
      Claims range from nondisclosure or misrepresentation in contract disputes to securities fraud, ERISA violations, shareholder derivative actions, and insurance claims. In California, many of the state court suits include an unfair business practice claim under Civil Code section 17200. "California is a great place to file UCL [unfair competition law] claims," says Nogues.
      William F. Sullivan, a partner in the Los Angeles office of Paul Hastings and chair of its National Securities Litigation Practice Group, says more than 20 auction-rate securities cases have been filed in the Southern District of New York. Sullivan says he anticipates successive waves of litigation. "The subprime-lender cases are now framing up. It's still early in the auction-rate cases, and credit-issuer and rating-agency cases are still possible."
      That adds up to a lot of work for California law firms.
     
      Thomas Brom is a senior editor at California Lawyer.
     

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