Summary Judgment on “Repo” Financing Issue Has Significant Implications for Securities Market

Kaye Scholer Secures Summary Judgment on “Repo” Financing Issue with Significant Implications for Securities Market

Kaye Scholer is representing U.S. Education Finance Group, a sponsor of government guaranteed student loan backed securitizations, in One William Street Capital Management L.P.  v. U.S. Education Loan Trust IV et al, a suit brought by an institutional investor in those securities claiming that it is owed additional principal and interest payments.

On an issue that has been largely unaddressed to date by New York courts, NY Supreme Court Justice Eileen Bransten granted the client's motion for summary judgment, holding that a repurchase agreement (repo) the investor had with its prime broker transferred ownership of the securities to the repo counterparty, thereby divesting the investor of legal standing to sue the issuer for principal and interest.

“On any given day there are billions of dollars of repo transactions on securities in place and this decision helps clarify the relative rights of those repo counterparties to bring claims relating to the securities,” said Financial Services Litigation partner Eric Whitney, who leads the Kaye Scholer team representing U.S. Education Finance Group. “This is an important decision for our client, which is very pleased with the outcome.”

Repo agreements are a common way for institutional investors to finance securities. Under such agreements, the securities are sold to a broker for cash, subject to an obligation on the part of the investor to repurchase the securities at a later date. In One William Street, the investor had financed its ownership of the securities in question using a repurchase agreement with its prime broker that had been continuously extended, or “rolled,” from inception to present, meaning that the investor had never taken back ownership of the securities.