Deutsche Bank has failed to secure the dismissal of four US lawsuits demanding it cover damages or buy back the troubled home loans it had bundled into residential mortgage-backed securities, prior to the 2008 financial crisis.
The cases concern securitisation trusts backed by about $2.9bn (£1.7bn, €2.1bn) of home loans, and are among six lawsuits in New York, accusing the German bank's DB Structured Products division of going back on its contractual obligations to address problem loans, court papers showed.
HSBC USA NA, a unit of HSBC Holdings, has accused Deutsche Bank of dumping a "massive number" of home loans into the four trusts that it knew breached its representations and warranties, and ignoring its contractual obligation to buy back, fix or substitute for the bad loans.
Deutsche Bank has argued that buybacks were the only solution and that HSBC failed to identify which loans were covered.
The German bank has also said HSBC was suing purely at the request of Amherst Advisory & Management, a "distressed debt" specialist that purchased the securities at massive discounts to pursue the claims for breaches of representations and warranties. Amherst is not a party to the lawsuit, reported Reuters.
In a 35-page ruling on 20 March, US District Judge Alison Nathan in Manhattan allowed HSBC, acting as trustee for the four trusts, to pursue damages claims and to determine to what extent Deutsche Bank knew of problems in the underlying loans at the time of the securitisations.
In her decision, Judge Nathan said it was early to dismiss HSBC's damages claims, saying that several courts allowed damages when loan buybacks were impossible, even if such buybacks were the "sole" contractual fix available.
She also said HSBC was entitled to find out how early Deutsche Bank might have been aware of problems and become obligated to address them.
The judge, however, dismissed as unnecessary an HSBC request that Deutsche Bank cover its litigation costs. She said HSBC could seek reimbursement "as part of the coercive remedy it is pursuing under its breach of contract claims".
Pursued by Reuters, spokeswomen for Deutsche Bank and HSBC refused to comment. Lawyers representing the banks did not immediately respond to requests for comment.
The lawsuit is one of several accusing banks of misleading investors about how mortgages that had been bundled into securities were underwritten, resulting in losses when market conditions worsened.
The cases, all in the US District Court, Southern District of New York, are: ACE Securities Corp Home Equity Loan Trust, Series 2007-HE3, by HSBA Bank USA NA as Trustee versus DB Structured Products Inc, No. 13-1869; Series 2007-WM2, No. 13-2053; Series 2007-HE4, No. 13-2828; and Series 2007-HE5, No. 13-3687.