Wells Fargo Obtains Summary Judgment in MBS Suit Against Schwab

Munger, Tolles & Olson LLP obtained summary judgment on Nov. 10, 2014 in favor of Wells Fargo Asset Securities Corporation in a lawsuit brought by The Charles Schwab Corporation.

In a suit alleging violations of the California Corporations Code, Schwab contended that misrepresentations had been made in connection with Schwab’s June 2007 purchase of a $50 million mortgage-backed security issued by Wells Fargo.

At issue in the motion was the calculation of prejudgment interest that would be due to Schwab in the event it prevailed on its claim and obtained rescission of the investment. Schwab contended that the Corporations Code entitled it to prejudgment interest on the full purchase price of the security from the date of purchase until the date of its subsequent sale, regardless of any payments received on the security. Wells Fargo argued that, under the “interest on the balance rule,” prejudgment interest on an amortizing, interest-bearing instrument such as a mortgage-backed security should accrue only on the difference between the amount initially invested in the security and the total amount of principal and interest payments generated by the security as of a given point in time, and that prejudgment interest should stop accruing when all investment capital has been returned to the investor.

Munger Tolles successfully argued before the San Francisco Superior Court that, under the “interest on the balance rule,” Schwab had already received more in payments on its security than it could recover under the California Corporations Code, even if it prevailed on the question of liability, resulting in zero damages and summary judgment in favor of Wells Fargo.

In its ruling, the court found that the method of calculating prejudgment interest advocated by Wells Fargo was “consistent with the principles of rescission underlying Section 25501 [of the Corporations Code]” and that “not deducting payments made to Schwab” would “doubly compensate Schwab by giving it both the use and benefit of those payments and the additional compensation of continuing prejudgment interest on the very same funds.”

The Munger Tolles team representing Wells Fargo includes Marc T.G. Dworsky, James C. Rutten and Christian K. Wrede.