Saturday, September 14, 2019
Emily Strauss at Duke has posted a fascinating new paper, Crisis Construction in Contract Boilerplate (Law & Contemp. Probs., forthcoming). She examines how judges interpreted the boilerplate in RMBS contracts during the financial crisis, and finds that they relaxed their reading of certain provisions in order to enable injured investors to recover their losses, and then reverted to more strict readings when the crisis had passed.
Specifically, the RMBS contracts provided that the “sole remedy” available for loans that did not conform with quality specifications was for trust sponsors to repurchase the noncompliant loan. Of course, during the crisis, investors alleged that huge percentages of loans backing the trusts were noncompliant, and a loan-by-loan repurchase requirement would have been, as a practical matter, impossible to pursue. Strauss finds that judges interpreted the clause to permit investors to use sampling to identify noncompliant loans and claim damages, but only in the years following the crisis. By 2015, they reverted to a stricter reading of the contracts. She cites this an example of “crisis construction,” namely, the way that courts alter their readings of contracts during times of calamity in order to further some economic policy. (Strauss discusses that phenomenon in her paper, and Mitu Galati also describes it in this blog post spotlighting Strauss’s work ).
The part that really fascinates me, though, is how this trend strikes me as the opposite of what I experienced when I litigated these cases not as a matter of contract construction, but as a matter of securities law violations. As I posted a few years ago (with additional discussion here and here), I believe that courts adopted a narrow – and nonsensical – approach to class action standing when investors started suing en masse after the crisis, and they did so as a way of managing what would otherwise be incomprehensibly large liabilities for Wall Street’s major players. So I’m intrigued that when it came to securities liability, courts shut the door to plaintiffs, but when it came to contract liability, they opened it.