New York Appellate Court Affirms McKool Smith Trial Win on the Treatment of Deferred Principal in RMBS Trusts

NEW YORK, Sept. 18, 2026 /PRNewswire/ -- McKool Smith has secured a unanimous appellate affirmance on behalf of junior bondholders—LA Verdad Holdings, LLC, Robert Dechert and 400 Capital Credit Opportunities Master Fund—in a residential mortgage-backed securities (RMBS) trustee proceeding concerning 34 RMBS trusts and roughly $400 million in principal recoveries.

The New York Supreme Court, Appellate Division, First Department, upheld Justice Andrew Borrok's July 2025 post-trial ruling in full. On appeal, as at trial, McKool Smith's clients faced an array of RMBS market leaders, including PIMCO, HBK Capital, Axonic Capital, Deer Park Road Management and One William Street Capital.

At issue was mortgage principal that servicers deferred when they modified homeowners' loans under the U.S. Treasury's Home Affordable Modification Program (HAMP). The agreements governing the trusts were written before HAMP existed and say nothing about deferred principal. Servicers reported the deferrals as realized losses, and the trustee, Wells Fargo, wrote down certificate balances in reverse order of seniority, in many cases to zero. When borrowers later repaid the deferred principal, the question became how to account for those payments.

The First Department held that although the payments do not fit squarely within the contractual definition of "Subsequent Recoveries" under most of the agreements, they should be treated as such in light of the structure of the agreements and, "more importantly, the parties' course of performance." Subsequent Recoveries write balances back up for subordinate certificates only. The Court found that the trustee had consistently treated the payments that way, that the practice was evident from monthly remittance reports, and that no investor objected.

"The First Department has now settled a question that has hung over the RMBS market for years," said McKool Smith Principal Courtney Statfeld, who served as co-lead trial counsel for the junior bondholders with firm Principal Robert Scheef. "Trustees, administrators and investors have a clear answer on how the repayment of HAMP deferred principal should be accounted for."

"We're pleased the First Department recognized the hard work that our clients, Wells Fargo and the trial court all put into getting this right," said Mr. Scheef.

The decision caps a series of rulings McKool Smith has secured for investors on the treatment of HAMP deferred principal. In August 2023, the firm won summary judgment in California for investors in trusts administered by Deutsche Bank National Trust Co. Four months later, Justice Borrok ruled for the junior bondholders in this proceeding on summary determination. The First Department held that the agreements were ambiguous and directed that the question be resolved at trial. McKool Smith tried the case and won again. Today the First Department affirmed that judgment.

Along with Ms. Statfeld and Mr. Scheef, the McKool Smith team included Principals Jennifer Truelove, Daniel Hendler and David Schiefelbein along with Associates Hal Shimkoski and Lauren Simenauer.

The case is Matter of Wells Fargo Bank, N.A. v. HBK Master Fund L.P., Case No. 2025-04773 (N.Y. App. Div. 1st Dep't Sept. 17, 2026), on appeal from Index No. 154984/2021 (N.Y. Sup. Ct.).

With more than 130 trial lawyers across offices in Austin, Dallas, Houston, Los Angeles, Marshall, New York, and Washington, D.C., McKool Smith has established a reputation as one of America's leading trial firms. The firm has secured 18 nine-figure jury verdicts and 16 eight-figure jury verdicts, obtaining more VerdictSearch and The National Law Journal "Top 100 Verdicts" than any other law firm. McKool Smith represents clients in complex commercial litigation, intellectual property, bankruptcy, insurance recovery, and white-collar defense matters.

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SOURCE McKool Smith