Defendants in second Allstate subprime case request federal jurisdiction
Several businesses accused of selling residential mortgage-backed securities supported by toxic subprime loans to Allstate want the case moved to federal court to ensure the original issuers of the bad debt are forced to indemnify the named defendants in bankruptcy court. This is the second time defendants involved in an Allstate RMBS-related lawsuit have asked for a change of jurisdiction, alleging they acquired the distressed subprime securities from other firms before those firms went into Chapter 11 bankruptcy. The defendants in the most recent case claim they are entitled to indemnification on any losses incurred from Allstate's suit. The request was made after Allstate filed suit against Ace Securities Corp., Deutsche Alt-A Securities Inc., DB Structured Products Inc., and Deutsche Bank Securities Inc. In the original complaint, the insurer accuses Ace Securities and other named defendants of selling RMBS to Allstate without fully disclosing underlying risks associated with the mortgages backing the securities. The securities were not initially originated by the defendants, but by several firms already in bankruptcy court, including People's Choice Home Loan Inc., First NLC Financial Services LLC and American Home Mortgage Holdings Inc. Those entities sold off the securities to the defendants before they, in turn, made a sale to Allstate. Ace Securities and all other similarly situated defendants want the case moved to a federal court — the jurisdiction for bankruptcies — so the named defendants can seek compensation from the initial sellers of the securities as those parties move through the bankruptcy reorganization process. Last week, defense attorneys for JPMorgan Chase (JPM) made the same move, asking a federal court to move a securities lawsuit filed by Allstate to the U.S. District Court for the Southern District of New York, so the defendants could recover from some of the original issuers who are in Chapter 11. Debbie McComas, a partner for Haynes and Boone in Dallas, said the federal courts are the province for handling bankruptcy issues, which could be the motivation behind these transfer requests. Write to Kerri Panchuk.