COMPLAINT | PHOENIX LIGHT SF LIMITED vs THE GOLDMAN SACHS GROUP, INC | NY - Goldman Sachs disseminated offering documents containing false and misleading information regarding collateral quality and underwriting standards

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PHOENIX LIGHT SF LIMITED vs THE GOLDMAN SACHS GROUP, INC | NY – Goldman Sachs disseminated offering documents containing false and misleading information regarding collateral quality and underwriting standards

PHOENIX LIGHT SF LIMITED vs THE GOLDMAN SACHS GROUP, INC | NY –  Goldman Sachs disseminated offering documents containing false and misleading information regarding collateral quality and underwriting standards

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK

X

PHOENIX LIGHT SF LIMITED, BLUE
HERON FUNDING II LTD., BLUE HERON
FUNDING V LTD., BLUE HERON
FUNDING VI LTD., BLUE HERON
FUNDING VII LTD., BLUE HERON
FUNDING IX LTD., SILVER ELMS CDO II
LIMITED and KLEROS PREFERRED
FUNDING V PLC,
Plaintiffs,

vs.

THE GOLDMAN SACHS GROUP, INC.,
GOLDMAN SACHS & CO., GOLDMAN
SACHS MORTGAGE COMPANY and GS
MORTGAGE SECURITIES CORP.,
Defendants.

EXCERPT:

E. Defendants Materially Misrepresented that Title to the Underlying
Loans Was Properly and Timely Transferred

539. An essential aspect of the mortgage securitization process is that the issuing trust for
each RMBS offering must obtain good title to the mortgage loans comprising the pool for that
offering. This is necessary in order for the plaintiffs and other certificate holders to be legally
entitled to enforce the mortgage and foreclose in case of default. Two documents relating to each
mortgage loan must be validly transferred to the trust as part of the securitization process – a
promissory note and a security instrument (either a mortgage or a deed of trust).

540. The rules for these transfers are governed by the law of the state where the property is
located, by the terms of the pooling and servicing agreement (“PSA”) for each securitization, and by
the law governing the issuing trust (with respect to matters of trust law). Generally, state laws and
the PSAs require that the trustee have physical possession of the original, manually signed note in
order for the loan to be enforceable by the trustee against the borrower in case of default.

541. In addition, in order to preserve the bankruptcy-remote status of the issuing trusts in
RMBS transactions, the notes and security instruments are generally not transferred directly fromthe
mortgage loan originators to the trusts. Rather, the notes and security instruments are generally
initially transferred from the originators to the sponsors of the RMBS offerings. After this initial
transfer to the sponsor, the sponsor in turn transfers the notes and security instruments to the
depositor. The depositor then transfers the notes and security instruments to the issuing trust for the
particular securitization. This is done to protect investors fromclaims thatmight be asserted against
a bankrupt originator. Each of these transfers must be valid under applicable state law in order for
the trust to have good title to the mortgage loans.

542. Moreover, the PSAs generally require the transfer of themortgage loans to the trusts
to be completed within a strict time limit – three months – after formation of the trusts in order to
ensure that the trusts qualify as tax-free real estate mortgage investment conduits (“REMICs”). In
order for the trust to maintain its tax free status, the loans must have been transferred to the trust no
later than three months after the “startup day,” i.e., the day interests in the trust are issued. See
Internal Revenue Code §860D(a)(4). That is, the loans must generally have been transferred to the
trusts within at least threemonths of the “closing” dates of the offerings. In this action, all of closing
dates occurred in 2005, 2006 or 2007, as the offerings were sold to the public. If loans are
transferred into the trust after the three-month period has elapsed, investors are injured, as the trusts
lose their tax-free REMIC status and investors like plaintiffs face several adverse draconian tax
consequences: (1) the trust’s income is subject to corporate “double taxation”; (2) the income from
the late-transferred mortgages is subject to a 100% tax; and (3) if late-transferred mortgages are
received through contribution, the value of the mortgages is subject to a 100% tax. See Internal
Revenue Code §§860D, 860F(a), 860G(d).

543. In addition, applicable state trust law generally requires strict compliance with the
trust documents, including the PSAs, so that failure to strictly comply with the timeliness,
endorsement, physical delivery, and other requirements of the PSAs with respect to the transfers of
the notes and security instruments means the transfers would be void and the trust would not have
good title to the mortgage loans.

544. To this end, all of the Offering Documents relied upon by plaintiffs stated that the
loans would be timely transferred to the trusts. For example, in the GSAA 2006-13 offering, the
Goldman Sachs Defendants represented that “[p]ursuant to the trust agreement, the Depositor will
sell, without recourse, to the trust, all right, title and interest in and to each mortgage loan.” GSAA
2006-13 Pros. Supp. at S-74. The Offering Documents for each of the offerings at issue herein
contained either the same or very similar language, uniformly representing that defendants would
ensure that the proper transfer of title to the mortgage loans to the trusts occurred in a timely fashion.

545. However, defendants’ statements were materially false and misleading when made.
Rather than ensuring that they legally and properly transferred the promissory notes and security
instruments to the trusts, as they represented they would do in the Offering Documents, defendants
instead did not do so. This failure was driven by defendants’ desire to complete securitizations as
fast as possible and maximize the fees they would earn on the deals they closed. Because ensuring
the proper transfer of the promissory notes and mortgages hindered and slowed defendants’
securitizations, defendants deliberately chose to disregard their promises to do so to plaintiffs.

546. Defendants’ failure to ensure proper transfer of the notes and the mortgages to the
trusts at closing has already resulted in damages to investors in securitizations underwritten by
defendants. Trusts are unable to foreclose on loans because they cannot prove they own the
mortgages, due to the fact that defendants never properly transferred title to the mortgages at the
closing of the offerings. Moreover, investors are only now becoming aware that, while they thought
they were purchasing “mortgaged-backed” securities, in fact they were purchasing non-mortgagedbacked
securities.

[…]

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