M&T sues banking giants over contract
By Jonathan D. Epstein NEWS BUSINESS REPORTER
Updated: 07/04/08 6:59 AM
M&T Bank Corp. filed suit Thursday against units of Bank of America Corp. and Royal Bank of Scotland Group Plc, accusing the banking giants of breaching a contract and fiduciary duty to pay M&T interest on a $50 million high-risk mortgage-backed security.
The 19-page lawsuit charges that LaSalle Bank of Chicago and affiliate LaSalle Global Trust Services broke the agreement governing the purchase of the security, known as a “collateralized debt obligation.”
It also says Greenwich Capital Markets, an RBS brokerage unit in Greenwich, Conn., helped and even “induced” LaSalle into violating its duty to M&T.
Greenwich sold M&T the note in February 2007, and bought a higher level note issued by the same entity, known as Cairn.
LaSalle, which was acquired last year by Bank of America, was the trustee for the entity that issued the investment notes, responsible for administering the trust, holding the loans and forwarding interest and principal payments to investors like M&T.
According to the lawsuit, filed in state Supreme Court in Erie County, LaSalle was supposed to pay M&T $466,666 in interest on May 13. Instead, the suit said, the trust that issued the security defaulted, and LaSalle diverted $6.5 million in available interest to a reserve account at the behest of Greenwich, which claimed it was entitled to it.
“LaSalle’s actions in maintaining possession of, and withholding, those funds from the noteholders, including M&T, were wrongful and unlawful,” the suit said.
M&T is seeking to rescind its purchase and get the full $50 million purchase price back, with interest. If not, it’s at least seeking the payment of the $466,666 it says it is owed.
The lawsuit marks the second attempt by M&T to recoup part or all of the unusual losses it suffered on a trio of collateralized debt obligations purchased in early 2007. M&T originally purchased the three complex securities for a total of $132 million, but was forced to write them down to just $4.4 million by the end of the year, as the mortgage crisis nationwide made them virtually worthless.
“Collateralized debt obligations,” or CDOs, are sophisticated debt securities issued by a trust that is holding mortgage-backed bonds or other debt as collateral. In turn, that other debt is backed by a multitude of loans — in this case, subprime mortgages to borrowers with bad credit. The securities represent pieces of the income stream or a right to join in the cash flow from the trust, with varying levels of risk.
Based on offering documents from Greenwich, M&T bought a AAA-rated Cairn security paying 5.8176 percent interest — the second-highest priority class of Cairn debt. Only Greenwich bought the higher class.
LaSalle notified M&T of a default by Cairn on April 25. On May 6, LaSalle issued a report on Cairn saying the trust had earned $8.09 million in available interest, but $1.58 million was used to pay fees.
That left $6.5 million, which was diverted instead of being used to pay interest to M&T. M&T said that violated the terms of the contract and offering documents, but LaSalle said it believed the agreement required it to withhold interest to benefit the highest class of security — owned by Greenwich.
M&T could not convince La- Salle that its reading of the agreement was wrong. The bank says it is either owed the interest under the agreement or, if the agreement was “misleading and false,” a full refund.
