594 F.3d 383 (5th Cir. 2010), 08-11038, Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC

Docket Nº:08-11038.
Citation:594 F.3d 383
Opinion Judge:EDITH H. JONES, Chief Judge:
Party Name:LONE STAR FUND V (U.S.), L.P.; LSF5 Bond Holdings LLC, Plaintiffs-Appellants, v. BARCLAYS BANK PLC; Barclays Capital, Inc., Defendants-Appellees.
Attorney:David E. Keltner (argued), Marianne Marsh Auld (argued), Kelly, Hart & Hallman, L.L.P., Fort Worth, TX, for Plaintiffs-Appellants. Mark Tad Josephs, William Ross Forbes, Jr., Jackson Walker, L.L.P., Dallas, TX, Kathleya Chotiros, Evan A. Davis (argued), Rachel Anne Goldbrenner, Mitchell A. Lowent...
Judge Panel:Before JONES, Chief Judge, and GARZA and STEWART, Circuit Judges.
Case Date:January 11, 2010
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 383

594 F.3d 383 (5th Cir. 2010)

LONE STAR FUND V (U.S.), L.P.; LSF5 Bond Holdings LLC, Plaintiffs-Appellants,

v.

BARCLAYS BANK PLC; Barclays Capital, Inc., Defendants-Appellees.

No. 08-11038.

United States Court of Appeals, Fifth Circuit

January 11, 2010

Page 384

[Copyrighted Material Omitted]

Page 385

David E. Keltner (argued), Marianne Marsh Auld (argued), Kelly, Hart & Hallman, L.L.P., Fort Worth, TX, for Plaintiffs-Appellants.

Mark Tad Josephs, William Ross Forbes, Jr., Jackson Walker, L.L.P., Dallas, TX, Kathleya Chotiros, Evan A. Davis (argued), Rachel Anne Goldbrenner, Mitchell A. Lowenthal, Cleary, Gottlieb, Steen & Hamilton, New York City, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before JONES, Chief Judge, and GARZA and STEWART, Circuit Judges.

EDITH H. JONES, Chief Judge:

Lone Star Fund V (U.S.), L.P. and LSF5 Bond Holdings, LLC (collectively " Lone Star" or " Appellants" ) allege that Barclays Bank PLC and Barclays Capital, Inc. (collectively " Barclays" or " Appellees" ) engaged in a $60 million fraud relating to mortgage-backed securities that Barclays sold to Lone Star. The district court dismissed the case for failure to state a claim. Because Lone Star fails to allege a misrepresentation in light of the " repurchase or substitute" clauses in the parties' mortgage-backed securities contracts, we affirm the district court's dismissal.

I. BACKGROUND

Among its other enterprises, Barclays sells mortgage-backed securities. As their name suggests, mortgage-backed securities are secured by pools of mortgages. To grossly simplify the series of transactions involved here, mortgage-backed securities work in the following manner: Mortgages are collected into a trust, mortgage payments are sent to that trust, then pooled, and then paid out to the holders of the securities. The quality of the mortgage pool is crucial. If the mortgage pool comprises loans whose borrowers consistently pay in a timely manner, securities holders will receive a steady stream of income. In contrast, if the mortgage pool is " sub-prime," or at risk for missed payments, then securities holders may not receive the forecast income stream. Delinquent mortgages result in smaller payment streams and smaller payments to securities holders.

This dispute involves two sets of mortgage-backed securities that Barclays sold to Lone Star. To create the securities, in 2006, Barclays purchased residential mortgages from NC Capital Corporation (" New Century" ) pursuant to the Mortgage Loan Purchase Agreement (" MLPA" ). According to the MLPA's terms, New Century agreed to indemnify and hold harmless Barclays (or provide contribution rights where indemnity might not be available) against all losses, claims, damages, and liabilities in a variety of circumstances, including any breach of a representation about the mortgages (such as payment defaults), and any claims made against Barclays by third parties.1 This allowed Barclays to serve as an effective distributor of mortgage-backed securities. New Century would bear the risk of having sold bad mortgage loans, while Barclays could focus on packaging the loans into securities

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and marketing them to potential investors.

After purchasing the mortgages from New Century, Barclays pooled them into two separate trusts: the BR2 Trust and the BR3 Trust. The BR2 and BR3 Trusts issued the securities to Lone Star in two separate transactions. In May 2007, Barclays Capital, Inc. as underwriter, sold approximately $45 million in securities backed by the BR2 Trust mortgages to LSF5 Bond Holdings, LLC pursuant to a prospectus and prospectus supplement (the " BR2 Supplemental Prospectus" ). In June 2007, in a similar transaction, Barclays Capital, Inc. underwrote approximately $16 million of securities backed by the BR3 Trust to LSF5 Bond Holdings, LLC pursuant to a prospectus and prospectus supplement (the " BR3 Supplemental Prospectus" ). Both the BR2 and BR3 Supplemental Prospectuses included, inter alia, representations and warranties guaranteeing the quality of the mortgage pools, which together contained more than ten thousand residential mortgages.2

Shortly after the purchases, Lone Star discovered that 290 mortgages in the BR2 Trust were more than thirty days overdue (" delinquent" ) at the time of purchase. In a letter dated November 7, 2007, Barclays admitted that 144 of the mortgages were delinquent and promptly substituted new mortgages to replace any that were still delinquent. Lone Star investigated the BR3 Trust further and found that 848 of the loans in the BR3 Trust had been delinquent at the time of purchase.

In January 2008, Lone Star sued Barclays under both state and federal law for material misrepresentations and fraud in a Dallas, Texas state court. Lone Star alleged that, contrary to Barclays' representations, the BR2 and BR3 Trusts had a substantial number of delinquent loans, and that the...

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