WE’RE HEARING…some mortgage-backed securities risks may seem larger and draw more attention, but the so-called scrivener’s error—where a mistake in a legal agreement is considered contrary to intent and subsequently used to further legal arguments—should not be overlooked because of them.
As a recent case illustrates, a mistake in drafting an agreement can initially seem like a small detail, but it can have some significant ramifications.
Earlier this year, for example, an Orange County, Calif., Superior Court judge approved an order in favor of buy-side market participants in MBS litigation involving an alleged scrivener’s error, according to a law firm that represented three institutional investors involved.
The law firm,
The alleged error was a concern to buyers of securities from three private-label MBS deals issued between 2006 and 2007 because it directed how payments of principal and interest must be made to investors. According to Venable, which represented three of the senior-most institutional investors, more than $100 million was at issue.
Legal documents provided to this publication by the law firm show the alleged error specifically occurred in the prospectus supplement used to market the securitizations. The pro supp contained a “trigger provision” that indicated “in layman’s terms” that “upon the occurrence of a specified economic event…certain payments of principal to senior certificateholders are to be made on a pro rata basis rather than sequentially, as set forth in the [pooling and servicing agreements].
“The PSAs do not contain the trigger provision,” a court document added.
The issuer “had to convince the court by clear and convincing evidence that a mutual mistake [contrary to the intention of the parties] was made in the agreement when it was drafted” in order to prevail and “reform the PSAs to insert the Trigger Provision.” It claimed the provision was omitted due to a scrivener’s error. The trustee took no position on the error but asked the court for direction.
According to a civil complex minute order from the Superior Court of California, “the court reached the conclusion that the requested modification of the PSAs was not legally or factually justified.”
The judge had asked the law firm and attorneys from two other firms to draw up a “proposed decision and order” in line with these findings and, according to Venable, earlier this year the firm received notification that the judge had adopted the proposal in its entirety.
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.
