400 Capital Management Secures Legal Victory In $400 Million RMBS Case

400 Capital Management LLC (“400CM”), an alternative credit manager specializing in asset-based credit strategies with over $7.7 billion of assets under management, announced a significant legal victory in a long-running residential mortgage-backed securities (“RMBS”) trustee case involving 34 legacy RMBS trusts. The ruling, issued by the New York Supreme Court, delivered long-awaited clarity on the allocation of recoveries related to modified loans and affirms the rights of junior bondholders under legacy RMBS documents.

The dispute centered on approximately $400 million in losses from principal forbearance, also referred to as deferred principal, which was granted to distressed homeowners following the 2008 Global Financial Crisis. Years later, as borrowers began to repay those forborne amounts, disputes emerged between holders of the trusts’ junior bonds, including 400CM, and holders of the senior bonds over how to allocate the resulting recoveries within the capital structures of the affected trusts.

Wells Fargo, the trustee of the 34 disputed RBMS trusts, treated repaid principal forbearance amounts as “subsequent recoveries”, the same treatment as all other loss recoveries. In 2021, Justice Marcy Friedman in the New York Supreme Court held that in trusts with subsequent recovery provisions that provided for the write-up of junior bonds, and not senior bonds, the trustee should follow the unambiguous language of the contracts to write up junior, and not senior, bonds. The trustee changed its write-up practices for the trusts in April 2021. In response to the change in write-ups, senior bondholders asserted that such recoveries should not benefit junior tranches, which led to this litigation. Wells Fargo filed a lawsuit later in 2021 seeking the court’s guidance on how to account for repaid principal forbearance.

Ultimately, the court ruled in favor of 400CM and its fellow junior bondholders, ruling that loss recoveries from modified loans are indeed “subsequent recoveries”—even if the loans are not fully liquidated—and should be distributed according to the express provisions of the governing trust agreements.

“This ruling represents a significant positive outcome for 400 Capital Management, our investors, the market for subordinated risk, and all investors as they benefit from the law being clear and enforced,” said Todd Leih, Partner and Chief Data Scientist and Head of Quantitative Research at 400CM. “In addition to resolving the treatment of forbearance recoveries for these specific trusts, the decision establishes critical precedent for the broader RMBS market. While the decision is appealable by the senior bondholders who were party to the litigation, we are confident that we will ultimately prevail if an appeal is filed and will continue to protect the interests of our investors.”

400CM was represented by Principals Courtney Statfeld and Robert Scheef of McKool Smith.

About 400 Capital Management LLC

Founded in 2008, 400CM is an alternative credit asset manager led by a management team with over three decades of experience investing and trading in credit markets. The firm is an established, process-oriented investment platform with a demonstrated ability to consistently generate competitive returns, develop capital markets businesses and create innovative solutions utilized throughout the market. The firm offers investors a global platform that accesses differentiated credit investment opportunities through total and absolute return strategies in flagship funds and customized portfolio solutions. The team consists of 78 professionals across offices in New York and London, who collectively manage over $7.7 billion for global institutional investors. To learn more about 400CM, please visit www.400capital.com.

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