Fed. Home Loan Bank of Seattle v. Barclays Capital, Inc.

• Decision Date: 11 December 2017
• Docket Number: No. 75913-2-I,75913-2-I
• Citation: 406 P.3d 686
• Court: Washington Court of Appeals
• Parties: FEDERAL HOME LOAN BANK OF SEATTLE, a bank created by federal law, Appellant, v. BARCLAYS CAPITAL, INC., a Connecticut corporation; BCAP LLC, a Delaware limited liability company; and Barclays Bank PLC, a public limited company registered in England and Wales, Respondents.

406 P.3d 686

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

v.BARCLAYS CAPITAL, INC., a Connecticut corporation; BCAP LLC, a Delaware limited liability company; and Barclays Bank PLC, a public limited company registered in England and Wales, Respondents.

No. 75913-2-I

Court of Appeals of Washington, Division 1.

FILED: December 11, 2017

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

Louis David Peterson, Brian Corker Free, Hillis Clark Martin & Peterson PS, 999 3rd Ave., Ste. 4600, Seattle, WA, 98104-4084, Agnes Dunogue, Joseph Frank, Matthew Craner, Shearman & Sterling, LLP, 599 Lexington Ave., New York, NY, 10022, for Respondents.

PUBLISHED

Cox, J.

¶1 Under the Washington State Securities Act ("WSSA"), an investor who sues on the basis that a prospectus contains either untrue statements or omissions of material facts must prove reasonable reliance on these statements or omissions.¹ Here, the Federal Home Loan Bank of Seattle ("FHLBS") purchased two residential mortgage backed securities ("RMBSs") in 2008 that were described in prospectus supplements. In 2009, FHLBS commenced this action under the WSSA against Barclays Capital, Inc., BCAP LLC, and Barclays Bank PLC (collectively, "Barclays"). The essence of its claim for rescission and other relief is that the prospectus supplements contain untrue statements or omissions of material facts about the securities FHLBS purchased.

¶2 The trial court granted Barclays's motion for summary judgment. In this appeal, FHLBS fails in its burden to show that there are genuine issues of material fact. Barclays is entitled to judgment as a matter of law. We affirm the summary dismissal of these claims.

¶3 Some background about the nature of the transactions at issue in this case may be helpful to provide context. In early 2008, FHLBS purchased the two RMBSs that are the subjects of this action. These securities were created by a process known as "securitization."²

¶4 The subjects of this securitization are 1,643 loans that IndyMac Bank made to various residential borrowers throughout the country. IndyMac decided whether to make each loan by a process called "underwriting." After each loan approval, each borrower began making monthly payments to IndyMac. For purposes of securitization, IndyMac was the "originator" of these loans.

¶5 After IndyMac originated these loans, it pooled them together and transferred them to a Barclays subsidiary. The subsidiary then deposited them in a trust in exchange for investment certificates. The trust issued certificates that were then sold to FHLBS.

¶6 In sum, the stream of income from the monthly payments by borrowers for the loans from IndyMac, the originator, was transferred to FHLBS, the investor.

¶7 On February 13, 2008, FHLBS purchased the first security for $189,416,000. This RMBS is comprised of 951 of the 1,643 loans originated by IndyMac. This security is known as BCAP 2008-IND1 ("IND1").

¶8 On April 15, 2008, FHLBS purchased the second security for $232,438,000. This RMBS is comprised of the remaining 692 of the 1,643 loans originated by IndyMac. This is known as BCAP 2008-IND2 ("IND2").

¶9 During the underwriting process, most of these loans were characterized as "Alt-A", falling between "Prime" and "Subprime" loans in terms of creditworthiness. As their names suggest, Prime loans are those issued to borrowers who are the most credit worthy. Subprime loans, on the other hand, are to borrowers at the other end of the creditworthiness spectrum.

¶10 FHLBS purchased these securities at a time that one respected financial commentator has described as "the mortgage debacle—in 2008. That one brought world economies to the precipice and wiped out Lehman Brothers and a raft of troubled banks."³

¶11 In 2009, FHLBS commenced this action against Barclays to rescind these transactions and for further relief. In 2011, the trial court first ruled that reasonable reliance on the statements in the prospectus supplements is an element of an investor's claim under the WSSA. In 2016, following extensive discovery by the parties, the trial court granted Barclays's motion for summary judgment on lack of reasonable reliance as to the IND1 and IND2 transactions. The court necessarily decided that FHLBS failed to show any genuine issue of material fact on this element and that Barclays was entitled to judgment as a matter of law.

¶12 FHLBS appeals.

REASONABLE RELIANCE

¶13 Whether reasonable reliance is a necessary element of an investor's claim under the WSSA is a core issue in this case. FHLBS argues that the WSSA does not require that it prove that it reasonably relied on the statements in the prospectus supplements that it now challenges. We disagree and hold that such reliance is an essential element of an investor's claim under RCW 21.20.010(2).

¶14 We will affirm an order granting summary judgment where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.⁴ A material fact is one on which the outcome of the litigation depends.⁵ We review de novo orders of summary judgment.⁶ We also review de novo a trial court's legal conclusions.⁷

¶15 In construing a statute, we seek to ascertain and carry out the legislature's intent.⁸ When the legislature enacts a state statute substantially verbatim from a federal statute, " 'it carries the same construction as the federal law and the same interpretation as federal case law.' "⁹ When the legislature passes an "amendment to a statute without alteration of a section previously interpreted by the courts," such action may "evidence[ ] legislative acquiescence in the interpretation."¹⁰

¶16 Here, FHLBS focuses its arguments on two statements in the prospectus supplements for the two RMBSs that it purchased.

¶17 The first challenged statement states:

Mortgage loans that are acquired by IndyMac Bank are underwritten by IndyMac Bank according to IndyMac Bank's underwriting guidelines, which also accept mortgage loans meeting Fannie Mae or Freddie Mac guidelines regardless of whether such mortgage loans would otherwise meet IndyMac's guidelines, or pursuant to an exception to those guidelines based on IndyMac's procedures for approving such exceptions.^{[11 ]}

¶18 The essence of FHLBS's claim is that the statement is untrue or misleading because IndyMac allegedly did not follow "its own guidelines and procedures in making [these] loans."¹²

¶19 The other challenged statement deals with the loan to value ("LTV") ratios of these loans. FHLBS claims that many appraisals that determined the LTV ratios were not made in accordance with the Uniform Standards of Professional Appraisal Practice, the national standard of the appraisal profession. The numerator of this LTV ratio is the amount of a loan and the denominator is the appraised value of the property securing that loan. The purpose of this measure is to evaluate how much equity a borrower has in the property securing the loan.

¶20 RCW 21.20.010 states the elements of a claim under the WSSA:

It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:

....

(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the

statements made, in the light of the circumstances under which they are made, not misleading.

....

¶21 The question is whether the legislature intended reasonable reliance to be an element of a claim under this provision of the WSSA. We hold that it did.

¶22 We begin our analysis by noting the substantial similarity of this state provision with its federal counterpart. As the following chart shows, the provisions of these statutes are substantially the same.

SEC Rule 10b-5

RCW 21.20.010

"It shall be unlawful for any person ... in connection with the purchase or sale of any security...(a) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person ... ."[13]

"It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:(1) To employ any device, scheme, or artifice to defraud;(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person."[14]'

[Editor's Note: The preceding image contains the references for footnotes^{13 ,14} ]

¶23 The state supreme court has determined that RCW 21.20.010"is patterned after and restates in substantial part the language of the federal Securities Exchange Act of 1934."¹⁵ And this court has clarified that RCW 21.20.10 is "related" to Section 10(b) of that act, as well as SEC Rule 10b-5.¹⁶

¶24 The words "reasonable reliance" do not appear in Rule 10b-5 or in RCW 21.20.010(2), its state counterpart. But the United States Supreme Court has long required reliance in Rule 10b-5 actions.¹⁷ And Washington law holds that once a court makes a controlling interpretation of a statute, that interpretation controls what the statute has always meant.¹⁸ Thus, Rule 10b-5 has always required a showing of reasonable reliance, and did so when this state's legislature drew upon it to craft RCW 21.20.010(2).

¶25 Accordingly, we conclude that the state legislature enacted RCW 21.20.010(2) with the intent that it be construed in the same way...