Davis+Gilbert's Subprime Auto Loan Risk Chronometer has not signaled significant market risk for some time, but new litigation has commenced that is of the type that had been anticipated and may be an indication of what is to come if the labor market deteriorates further and contributes to weaker performance.
In litigation recently filed in federal court in California, a group of noteholders in a 2022 subprime auto loan ABS transaction have brought suit against underwriter Credit Suisse Securities. Plaintiffs, including River Canyon and other investment funds, allege securities fraud, and intentional and negligent misrepresentation.
The sponsor and seller of the deal at issue was U.S. Auto Finance Inc., an affiliate of originator U.S. Auto Sales, Inc. In 2023, these and other U.S. Auto entities filed for bankruptcy. Plaintiffs' complaint emphasizes that U.S. Auto was "on the verge of bankruptcy" and Credit Suisse's earlier access to the books and records "would have revealed its dire financial condition." Yet, Credit Suisse allegedly failed to disclose the serious financial trouble of the U.S. Auto entities and impairment of the Trust's collateral.
Not surprisingly, Credit Suisse has filed a motion to dismiss the action, arguing that plaintiffs' omissions-based claims are barred by the U.S. Supreme Court's recent decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. 257. Credit Suisse also argues that the noteholders fail adequately to allege scienter in that an underwriter's "mere access" to reports on U.S. Auto's financial condition cannot establish a sufficient inference of knowledge of same. The briefing schedule on Credit Suisse's motion to dismiss will continue into September.
This litigation raises a range of legal issues that could be of concern to other participants in subprime ABS transactions beyond underwriters, including servicers, which arguably are in prime position to be aware of operational defects of seller/sponsors, if not their financial condition, which can have a material adverse effect on collateral.
We've seen litigation spread throughout a market and how plaintiffs' claims can expand to encompass ABS participants when losses are incurred. Click here to read the top five things to know to prepare for the new landscape of consumer ABS litigation.
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