To Be Argued By:
JOSEPH J. FRANK
Time Requested 30 Minutes
APL-2016-00024
New York County Clerk's Index Nos. 653783/12, 651124/13,
652614/12 and 650337/13
@llltrt nf J\pp.eals
STATE OF NEW YORK ....
NOMURA HOME EQUITY LOAN, INC., SERIES 2006-FM2, by HSBC BANK USA,
NATIONAL ASSOCIATION, solely in its capacity as Trustee; NOMURA HOME
EQUITY LOAN, INC., SERIES 2007-3, by HSBC BANK USA, NATIONAL
ASSOCIATION, solely in its capacity as Trustee; NOMURA ASSET ACCEPTANCE
CORPORATION MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2006-AF2,
by HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee; NOMURA HOME
EQUITY LOAN, INC., HOME EQUITY LOAN TRUST, SERIES 2007-2, by HSBC
BANK USA, NATIONAL ASSOCIATION, as Trustee,
Plaintiffs-Respondents,
May 5, 2016
-against-
NOMURA CREDIT & CAPITAL, INC.,
Defendant-Appellant.
REPLY BRIEF FOR DEFENDANT-APPELLANT
JOSEPH J. FRANK
AGNES DUNOGUE
MATTHEW L. CRANER
SHEARMAN & STERLING LLP
599 Lexington Avenue
New York, New York 10022
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
Attorneys for Defendant-Appellant
ii
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ................................................................................................. iv
PRELIMINARY STATEMENT ............................................................................................ 1
ARGUMENT .............................................................................................................................. 5
I. Plaintiff Has Brought This Breach of Contract Action to Recover for
Nomura’s Securitization of Allegedly Defective Loans ...................................... 5
II. The Governing Contracts Establish That the Sole Remedy for Defective
Loans, Whether Few or Many, Is Cure or Repurchase of Such Loans ............ 9
A. The Contracts Do Not Provide for Fundamentally Different
Remedies If Defective Loans Are Few or Numerous ........................... 9
1. The No Untrue Statement Provision’s Reference to “In The
Aggregate” Does Not Nullify the Sole Remedy of Cure or
Repurchase for Loan Defects ...................................................... 9
2. The No Untrue Statement Provision Is Not Rendered
Superfluous or Meaningless by Enforcing the Sole Remedy . 11
3. The Sole Remedy of Cure or Repurchase for Loan Defects
Is Mandated by the Status of the Trusts as Real Estate
Mortgage Investment Conduits ................................................. 12
4. The Appellate Division’s Erroneous Holding Is Not
Justified by the Specific Contractual Language Here as
Compared to That in Ambac ..................................................... 14
B. The Contracts’ Sole Remedy Provision Is Not Nullified by a
Separate Provision, Taken Out of Context, Which Refers to
Remedies Being Distinct and Cumulative .......................................... 16
iii
III. Allowing Plaintiff to Circumvent the Applicable Sole Remedy
Limitation by Renaming Its Claims Would Depart From, and
Undermine, Fundamental Principles of New York Law .................................... 18
A. Plaintiff’s Contention That It Can Avoid the Sole Remedy
Provision Notwithstanding the Essential Nature of Its Claims Is
Inconsistent with New York Law ....................................................... 18
B. Plaintiff’s Approach Could Potentially Allow It to Recover Twice
for Alleged Loan Defects—A Result Barred by New York Law ....... 22
C. Plaintiff’s Attempt to Turn a Purported Breach of Contract Claim
into a Quasi-Federal Securities Law Disclosure Claim Must Be
Rejected ............................................................................................... 24
D. Plaintiff Ignores the Role of This Court When Contending That It
May Not Hold That, as a Matter of Law, Plaintiff Cannot Pursue
General Contract Damages for Its Claims .......................................... 25
CONCLUSION .............................................................................................. 27
iv
TABLE OF AUTHORITIES
Page
Cases
Ambac Assurance Corp. v. EMC Mortg. LLC, 121 A.D.3d 514 (1st
Dep’t 2014) ................................................................................................... 14-15
Aramony v. United Way of Am., 254 F.3d 403 (2d Cir. 2001) ................................ 17
Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259 (1937) ........................................... 1, 21
Eden Roc, LLLP v. Marriott Int’l, Inc., 116 A.D.3d 486 (1st Dep’t 2014) ............. 24
Erie Ins. Co. of N.Y. v. AE Design, Inc., 104 A.D.3d 1319 (4th Dep’t
2013) ................................................................................................................... 21
Findlay v. Duthuit, 86 A.D.2d 789 (1st Dep’t 1982) ......................................... 21-22
Hartford Acc. & Indem. Co. v. Chartrand, 239 N.Y. 36 (1924) ............................. 23
Indus. Risk Insurers v. Port Auth. of N.Y. and N.J., 387 F. Supp. 2d
299 (S.D.N.Y. 2005) ............................................................................................. 2
Israel v. Chabra, 12 N.Y.3d 158 (2009) .................................................................. 25
J. D’Addario & Co. v. Embassy Indus., Inc., 20 N.Y.3d 113 (2012) .................. 1, 19
Kalisch–Jarcho, Inc. v. City of New York, 58 N.Y.2d 377 (1983) ...................... 1, 18
Kass v. Kass, 91 N.Y.2d 554 (1998) ............................................................ 16, 17, 26
Montoya v. Cousins Chanos Casino, LLC, No. 651353/11, 2012 WL
118475 (Sup. Ct. N.Y. Cnty. Jan. 12, 2012) ....................................................... 21
Morrison v. Nat’l Broad. Co., 19 N.Y.2d 453 (1967) ............................................. 21
Richter v. 210 Equities Corp., 216 A.D.2d 106 (1st Dep’t 1995) ........................... 22
Rolnick v. Rolnick, 24 N.Y.2d 805 (1969) .............................................................. 22
People ex rel. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105 (2008) ............ 3, 23
v
Tourtellot v. Harza Architects, Engr’s & Constr. Managers, 55
A.D.3d 1096 (3d Dep’t 2008) ............................................................................. 21
Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352 (2003) ....................passim
Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir. 1998) .................................... 8
Statutes and Rules
26 U.S.C. §§ 860A-860G ............................................................................. 12, 13, 14
1
PRELIMINARY STATEMENT
In assessing whether a claim may proceed as a matter of law, this Court
“look[s] for the reality, and the essence of the action and not its mere name.” Brick
v. Cohn-Hall-Marx Co., 276 N.Y. 259, 264 (1937). Further, this Court has made
clear that “‘[a] written contract will be read as a whole, and every part will be
interpreted with reference to the whole,’” such as “‘to give effect to its general
purpose.’” Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358 (2003)
(quoting Empire Props. Corp. v. Mfrs. Trust Co., 288 N.Y. 242, 248 (1942))
(further internal citations and quotation marks omitted). Otherwise, “‘[t]he
meaning of a writing may be distorted where undue force is given to single words
or phrases.’” Id. Moreover, contractual provisions that “clearly, directly and
absolutely” limit liability for “any act or omission” must be enforced, “especially
when entered into at arm’s length by sophisticated contracting parties.” Kalisch–
Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384 (1983) (emphasis in the
original).
Thus, when parties agree to an “exclusive remedy” in connection with a
breach of contract, “the exclusive remedy that the parties fashioned . . . should be
honored.” J. D’Addario & Co. v. Embassy Indus., Inc., 20 N.Y.3d 113, 118-19
(2012). Contracting parties do and should be able to rely upon the general New
York rule that enforces contracts that provide for limitations on liability and
2
remedies. See Indus. Risk Insurers v. Port Auth. of N.Y. and N.J., 387 F. Supp. 2d
299, 307 (S.D.N.Y. 2005).
If the essential nature of plaintiff’s claims render them subject to an
exclusive remedy provided by a contract read “as a harmonious and integrated
whole,” then this Court will reject the plaintiff’s attempt to “subvert th[e]
‘exclusive remedies’” and to “circumvent” that contractual limitation.
Westmoreland Coal, 100 N.Y.2d at 358-59. Here, Plaintiff is attempting to do just
that and this Court should reject Plaintiff’s attempt to evade the sole remedy by
which it is bound.
These actions are for breach of contract based on alleged defects in
mortgage loans that were securitized into the trusts of which Plaintiff is the
Trustee. The Complaints—notwithstanding Plaintiff’s impermissible attempts to
rewrite its pleadings in its Opposition Brief on appeal—expressly allege breaches
of representations about the characteristics of the loans. The governing agreements
indisputably provide that the sole remedy for such breaches is the cure or
repurchase of the defective loans. Yet, the Appellate Division allowed Plaintiff to
circumvent the sole remedy by pointing to a catch-all representation contained in
related agreements that makes various warranties about Nomura’s corporate status
and ability to enter into and execute the agreements, and which also states that the
transaction documents, taken together, do not contain material misrepresentations
3
and are not materially misleading. This provision, referred to as the “No Untrue
Statement Provision” by Plaintiff, says nothing about undoing the sole remedy for
breach of representations concerning loan characteristics. Nor does the No Untrue
Statement Provision, contrary to Plaintiff’s contention, create a multi-tiered
remedy whereby “individual” loan breaches are subject to an exclusive remedy but
“numerous” claims for loan breaches are not subject to the exclusive remedy when
aggregated. Indeed, the No Untrue Statement Provision does not refer to loans “in
the aggregate” at all, but rather to “documents,” furnished by Nomura, “taken in
the aggregate.”
Interpreting the No Untrue Statement Provision—or another phrase plucked
by Plaintiff from another provision, referring to the granting of security interests—
in isolation, to nullify the sole remedy provision, is inconsistent with fundamental
principles of contract interpretation. Such an interpretation could also be construed
to allow Plaintiff effectively to recover twice for the same alleged loan defect—
once for an individual breach, and then again when that loan breach is aggregated
with others. “‘[C]ourts can and should preclude double recovery’” by a plaintiff,
People ex rel. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105, 125 (2008)
(quoting EEOC v. Waffle House, Inc., 534 U.S. 279, 297 (2002)), and nothing in
the governing agreements suggests that the parties intended such a nonsensical
result. Moreover, to the extent that Plaintiff is effectively attempting to transform
4
a breach of contract claim into a disclosure claim under federal securities laws, this
Court should disallow it and hold Plaintiff to the terms of the agreements.
Contrary to Plaintiff’s contention that this Court cannot decide this issue as a
matter of law, this Court can and, respectfully, should hold that Plaintiff is bound
by the unambiguous sole remedy provisions of the contracts at issue for any claim
based on alleged misrepresentations about loan characteristics—and Plaintiff
cannot evade that sole remedy by asserting its claim under the purported cover of
the No Untrue Statement Provision.
5
ARGUMENT
I. Plaintiff Has Brought This Breach of Contract Action to Recover for
Nomura’s Securitization of Allegedly Defective Loans
It is undisputed that the gravamen of Plaintiff’s actions—including its claim
as to the No Untrue Statement Provision—is that a large number of loans
transferred into the trusts at issue, of which Plaintiff is the Trustee, were allegedly
defective. See, e.g., Opp. at 10, 11, 18, 19, 33. To the extent Plaintiff contends
that any “transaction documents” contained false statements and breached the No
Untrue Statement Provision, it is on the alleged basis that those documents
misrepresented the characteristics of the loans. See, e.g., Opp. at 18, 19.
Plaintiff’s Complaints could not be clearer in basing Plaintiff’s No Untrue
Statement Provision claim on alleged breaches of representations about the
characteristics of the loans. In 2006-FM2 and 2007-3,
1
Plaintiff alleges
2
:
1
All references to “R__” are to the Record on Appeal. Nomura Home
Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, National Association,
solely in its capacity as Trustee v. Nomura Credit & Capital, Inc., No. 653783/12
is referred to as “2006-FM2.” Nomura Home Equity Loan, Inc., Series 2007-3, by
HSBC Bank USA, National Association, solely in its capacity as Trustee v. Nomura
Credit & Capital, Inc., No. 651124/13 is referred to as “2007-3.” Nomura Home
Equity Loan, Inc., Home Equity Loan Trust Series 2007-2, by HSBC Bank USA,
National Association, as Trustee v. Nomura Credit & Capital, Inc., No. 650337/13
is referred to as “2007-2.” Nomura Asset Acceptance Corporation Mortgage Pass-
Through Certificates, Series 2006-AF2, by HSBC Bank USA, National Association,
as Trustee v. Nomura Credit & Capital, Inc., No. 652614/12 is referred to as
“2006-AF2.” Each of these actions is brought by HSBC Bank USA, National
Association, as trustee for the relevant trust (“Plaintiff” or “Trustee”). References
6
“[T]he No Untrue Statement Covenant applied to: (a) the
mortgage loan files . . . and (b) the mortgage loan data tape (the
“Mortgage Loan Schedule”), which provided detailed
information about the characteristics of each Mortgage
Loan . . .” 2006-FM2 Compl. ¶ 5 [R 69]; see also id. ¶ 35 [R
79].
“[T]he presence of material and widespread misrepresentations
and misstatements in the Mortgage Loan Files and the
Mortgage Loan Schedule . . . is a breach of the No Untrue
Statement Covenant.” 2006-FM2 Compl. ¶ 9 [R 70-71].
The entire section, in two of the Complaints, entitled “Nomura
Breached the Mortgage Representations and the No Untrue
Statement Covenant,” sets forth alleged breaches of specific
mortgage representations one after the other and, in the sub-
section entitled “Breaches of the No Untrue Statement
Covenant,” alleges that as a result numerous documents,
including the Mortgage Loan Files, Mortgage Loan Schedule,
and Prospectus Supplement, contained alleged
misrepresentations and omissions. 2006-FM2 Compl. ¶¶ 37-68
[R 80-93].
“The Mortgage Loan Files, Mortgage Loan Schedule, and the
Prospectus Supplement, among other documents provided to
the Trust by Nomura, contained widespread, pervasive and
material misrepresentations and omissions with respect to the
Mortgage Loans. These misrepresentations and omissions
breached the No Untrue Statement Covenant.” 2006-FM2
Compl. ¶ 90 [R 97].
As for Plaintiff’s actions in 2006-AF2 and 2007-2, Plaintiff does not purport
to assert a separate claim based on the No Untrue Statement Provision. Rather, as
to “Nom. Br.” are to Nomura’s opening brief, and references to “Opp.” are to the
Joint Brief for Plaintiffs-Respondents.
2
Plaintiff’s Complaints in 2006-FM2 and 2007-3 are substantively identical
to each other; so too are Plaintiff’s Complaints in 2006-AF2 and 2007-2.
7
set forth in Nomura’s Opening Brief, Plaintiff’s Complaints in those actions are
based on alleged misrepresentations as to the characteristics of the mortgage loans,
and Plaintiff invokes the No Untrue Statement Provision only when seeking to
circumvent the sole remedy of cure or repurchase for such allegedly defective
loans. Nom. Br. at 28, 30; 2006-AF2 Compl. ¶ 94 [R 2038-39].
Indeed, as Plaintiff expressly admits: Plaintiff’s “allegations of
misrepresentations underlying the complaints . . . revolve around the
mortgage loans.” Opp. at 31. Plaintiff is thus bound by the sole remedy
provision—which plainly applies to breaches as to the mortgage loans.
To the extent Plaintiff inconsistently and halfheartedly also attempts to
suggest—in opposing this appeal—other potential bases for a claim based on the
No Untrue Statement Provision, Plaintiff has not actually pled any. Plaintiff
egregiously mischaracterizes its own Complaints in suggesting that, in 2006-FM2
and 2007-3, it asserted breaches of the No Untrue Statement Provision by
“alleg[ing] that the Prospectus Supplement contained false statements about the
business operations of Nomura and its originators, such as mortgage loan
originator ResMAE Corporation, their general approach to underwriting loans, and
their ‘quality control’ procedures.” Opp. at 18-19. The allegations to which
Plaintiff points clearly pertain to the alleged breaches of representations as to the
8
loans.
3
In no way does Plaintiff, in any of its Complaints in these actions, even
purport to assert some type of entity-level misrepresentation—distinct from
allegations as to defective loans—as a basis for an alleged breach of the No Untrue
Statement Provision. Plaintiff cannot change its pleadings in its opposition brief
on appeal. See, e.g., Wright v. Ernst & Young LLP, 152 F.3d 169, 178 (2d Cir.
1998) (noting well-established principle that a party may not amend its complaint
through its briefs).
4
3
The 2006-FM2 and 2007-3 Complaint paragraphs which Plaintiff cites
contain the following allegations, in their entirety:
“The results of the Investigation—including the AVM Analysis, the
Owner-Occupancy Analysis, and the Loan File Review—make clear
that Nomura’s breaches of the Mortgage Representations are systemic
in nature and adversely affect the vast majority of the Mortgage Loans
in the Trust.” 2007-3 Compl. ¶ 62 [R 1146]; 2006-FM2 Compl. ¶ 62
[R 90].
“Moreover, ResMAE, which originated over 77 percent of the
Mortgage Loans between 2005 and 2007, has faced scrutiny over its
poor lending practices and the high rate of foreclosures in its 2005-
2007 originations. As such, given the number of Defective Loans
identified in the Investigation and Nomura’s practice of ‘waiving in’
non-conforming mortgage loans—including, potentially, loans that
breached Nomura’s contractual representations and warranties—it is
likely that the breaches of the Mortgage Representations and the No
Untrue Statement Covenant pervade a significant number of the
Mortgage Loans in the Trust.” 2007-3 Compl. ¶ 67 [R 1148-1149];
2006-FM2 Compl. ¶ 67 [R 92-93] (substantively identical but
referring to Fremont and its originations).
4
Furthermore, Plaintiff could not plead claims under the No Untrue
Statement Provision that are not tied to the mortgage loans (even assuming
9
II. The Governing Contracts Establish That the Sole Remedy for Defective
Loans, Whether Few or Many, Is Cure or Repurchase of Such Loans
A. The Contracts Do Not Provide for Fundamentally Different
Remedies If Defective Loans Are Few or Numerous
1. The No Untrue Statement Provision’s Reference to “In The
Aggregate” Does Not Nullify the Sole Remedy of Cure or
Repurchase for Loan Defects
Contrary to Plaintiff’s central contention, the No Untrue Statement Provision
does not refer to loans “in the aggregate.” Rather, it refers to “documents,”
prepared and furnished by Nomura, “taken in the aggregate.” MLPA § 7(v) [R
450, 1401, 2059, 3148]. The plain and unambiguous words of the provision do not
create the type of “loan pool-level” representation that Plaintiff claims is distinct
from “loan-level” representations. Rather, the clause is a catch-all provision that
provides that the documents, taken together, do not contain material misstatements
and are not materially misleading. It is intended to address any material
arguendo that it can plead any claims under that provision at all—an issue as to
which Nomura reserves all rights). Plaintiff baselessly contends that Nomura has
somehow waived the point that the No Untrue Statement Provision is only in the
MLPAs and Plaintiff is a party only to the PSAs. In fact, Nomura highlighted
below that Plaintiff is a party only to the PSAs. It is an undisputed fact. See, e.g.,
2007-3 Compl. ¶ 76 [R 1151]. The point is that, as a party to the PSAs, the
Plaintiff is the beneficiary of a limited assignment of the Depositor’s rights under
each of the MLPAs. The Trustee received “all of [Depositor’s] rights and interest
under the Mortgage Loan Purchase Agreement, to the extent of the Mortgage
Loans sold under the Mortgage Loan Purchase Agreement.” PSA § 2.01
(emphasis added) [R 175, 1198, 2175, 2976]. Any attempt to plead some entity-
level claim pursuant to the No Untrue Statement Provision would, therefore, fail.
But, in any event, Plaintiff expressly admits—as it must—that its claims are tied to
the mortgage loans.
10
misstatements or omissions not covered in the agreement’s more specific
provisions.
Even if, contrary to its plain terms, the No Untrue Statement Provision did
refer to loan pools or loans “in the aggregate,” it would not nullify the governing
agreements’ limitation on the remedy allowed for loan breaches. The contracts do
not provide a carve-out from the sole remedy provision if a certain threshold
number of loan breaches are alleged. Nor do any words in the No Untrue
Statement Provision—or anywhere else in the four corners of the agreements—
nullify the sole remedy for loan misrepresentations and allow a general damage
claim if many loan misrepresentations are alleged. As set forth in Nomura’s
Opening Brief, the agreements must be read as a whole, giving words their plain
and practical meaning, and in a way that does not render meaningless any of their
terms, including the sole remedy provisions—crucial limitations negotiated by
sophisticated parties. Nom. Br. at 35-36.
In short, Plaintiff’s claims are based on allegations of many loan breaches.
Each alleged loan breach is subject to the exclusive remedy of cure or repurchase
of the loan. That adds up, for all the alleged breaches, to the cure or repurchase of
all the allegedly defective loans. It does not add up to the entirely different remedy
of general contract damages.
11
2. The No Untrue Statement Provision Is Not Rendered
Superfluous or Meaningless by Enforcing the Sole Remedy
Contrary to Plaintiff’s erroneous assertion, Nomura has explained how the
various relevant provisions of the governing agreements interact, including the No
Untrue Statement Provision and the sole remedy provisions. Nom. Br. at 44-48.
Furthermore, Nomura does not claim that all possible breaches of the No Untrue
Statement Provision are subject to the sole remedy of curing or repurchasing
defective loans. Nomura does not assert, for example, that the sole remedy of cure
or repurchase could have any application to a claim based on allegations that
Nomura entered the contract without proper corporate authority.
The No Untrue Statement Provision covers issues that are not related to the
loans themselves and their characteristics, including entity-level representations, as
well as providing a catch-all for material misrepresentations or omissions that are
not addressed by specific representations and warranties. Id. The sole remedy of
cure or repurchase does not apply to alleged breaches that are unrelated to the
mortgage loans. But that is irrelevant here because Plaintiff is suing about
allegedly defective loans.
12
3. The Sole Remedy of Cure or Repurchase for Loan Defects
Is Mandated by the Status of the Trusts as Real Estate
Mortgage Investment Conduits
Plaintiff makes the baseless suggestion that, due to the purported “market
reality” of RMBS securitizations, the governing agreements involve a distinction
between representations and remedies as to “individual” loans, on the one hand,
versus “aggregate” loans, on the other. Opp. at 7-10. Plaintiff can point to nothing
in the contracts or otherwise to support this contention—which, in fact,
contravenes the market and legal reality of the RMBS securitization structure. The
sole remedy of substitution, cure or repurchase for any breaching loans is not only
a negotiated limitation on an RMBS securitization sponsor’s liability for defective
loans. It is an essential element of the overall structure of RMBS and is mandated
by the tax code: the loan-by-loan sole remedy of substitution, cure or repurchase
mandated by the governing agreements here is necessitated by Real Estate
Mortgage Investment Conduit (“REMIC”) statutory requirements and reflects the
parties’ clear intention to preserve the trusts’ tax-exempt REMIC status.
Pursuant to the underlying PSAs, each trust is treated as a REMIC for
federal income tax purposes. See PSA Prelim. Stmt. [R 109-18, 1160-68, 2084-94,
2908-15]. As a REMIC, each trust operates as a pass-through vehicle and is
exempt from corporate tax. See 26 U.S.C. §§ 860A-860G. But, as explained
below, contributions and income that are not permitted by federal income tax law
13
are subject to a 100 percent tax and may imperil REMIC status. The acquisition
and maintenance of REMIC status is thus a critical aspect of the securitization and
is of great value ex ante to certificateholders. Indeed, the very first statement in the
PSA following the conveyance of the trust fund reflects the requirement to “make
an election” to treat the trust fund as a REMIC. See PSA Prelim. Stmt. [R 109,
1160, 2084, 2908]. Likewise, the PSA contains several provisions designed to
ensure and protect REMIC treatment. See, e.g., 2007-3 PSA §§ 2.05, 3.09, 4.04 [R
1203, 1207-08, 1217] (prohibiting various acts and transactions that would be
inconsistent with REMIC status). The all-important sole remedy at issue here is
one such provision.
In order to qualify as a REMIC, the trust must be passively managed, and
“substantially all” of the trust’s assets must consist of “qualified mortgages”—
including obligations which are principally secured by an interest in real
property—as well as income received on such mortgages, and properties acquired
due to mortgage foreclosures. See 26 U.S.C. §§ 860D, 860F, 860G. Other income
received by the trust—including income not derived from specific loans or related
assets—is prohibited and is subject to a 100 percent tax. See id. § 860F(a).
Further, if a prohibited transaction alters the balance of a REMIC’s assets such that
“substantially all” of those assets no longer consist only of qualified mortgages and
14
permitted investments, the trust’s REMIC status can be revoked. See id.
§§ 860D(a)(4), (b)(2).
The statute provides an exception, however, which applies when qualified
mortgages are later found to be defective. Specifically, it permits the substitution
of a defective loan with a qualified replacement mortgage or the repurchase in lieu
of substitution of a defective loan. See id. § 860F(a)(2)(A)(i). Thus, the loan-by-
loan sole remedy of cure or repurchase is required by the relevant REMIC statutory
provisions, and the agreements reflect the parties’ intention to maintain the trusts’
REMIC status. See, e.g., 2007-3 PSA § 2.05(a) [R 1203] (“[N]o repurchase or
substitution pursuant to Sections 2.02 or 2.03 shall be made unless the Sponsor
delivers to the Trustee an Opinion of Counsel, addressed to the Trustee, to the
effect that such repurchase or substitution would not (i) result in the imposition of
the tax on ‘prohibited transactions’ . . . or contributions after the Closing Date, as
defined in sections 860F(a)(2) and 860G(d) of the Code, respectively or (ii) cause
any [trust] to fail to qualify as a REMIC at any time that any Certificates are
outstanding.”).
4. The Appellate Division’s Erroneous Holding Is Not Justified
by the Specific Contractual Language Here as Compared to
That in Ambac
As set forth in detail in Nomura’s Opening Brief, the relevant contractual
provisions here do not substantively differ from those in Ambac Assurance Corp.
15
v. EMC Mortg. LLC, 121 A.D.3d 514 (1st Dep’t 2014) (“Ambac”). Nom. Br. at
42-46. Although Plaintiff plucks out isolated words and professes a lack of clarity
regarding the structure and scope of the relevant Ambac provisions (see Opp. at 25-
27), the Ambac PSAs provide that: “The obligations of the Sponsor to substitute or
repurchase, as applicable, a Mortgage Loan shall be the Trustee’s and the
Certificateholders’ sole remedy for any breach thereof.”
5
The Ambac PSAs also
state that: “Enforcement of the obligation of the Sponsor to purchase (or substitute
a Substitute Mortgage Loan for) any Mortgage Loan or any property acquired with
respect thereto (or pay the Repurchase Price as set forth in the above proviso) as to
which a breach has occurred and is continuing shall constitute the sole remedy
respecting such breach available to the Certificateholders or the Trustee on their
behalf.”
6
Furthermore, the Ambac MLPAs expressly incorporate the sole remedy
into the loan representations and warranties provision and state that cure and
repurchase constitute the sole remedy for breaches of loan representations and
5
See Affirmation of Darrell S. Cafasso in Support of Defendants’ Motion to
Dismiss the First Amended Complaint (“Cafasso Aff.”) Ex. C-1 (excerpt of the
Bear Stearns Mortgage Funding Trust 2006-AR2 Pooling and Servicing
Agreement, dated September 1, 2006) at § 2.03(a), Ambac Assurance Corp. v.
EMC Mortg. LLC, 39 Misc. 3d 1240(A), 2013 N.Y. Slip. Op. 50954(U) (Sup. Ct.
N.Y. Cnty. June 13, 2013); see also Nom. Br. at 45-47.
6
See Cafasso Aff. Ex. C-1 (excerpt of the Bear Stearns Mortgage Funding
Trust 2006-AR2 Pooling and Servicing Agreement, dated September 1, 2006) at
§ 2.03(b), Ambac Assurance Corp. v. EMC Mortg. LLC, 39 Misc. 3d 1240(A); see
also Nom. Br. at 45-47.
16
warranties. Nom. Br. at 43-45. Thus, like the relevant provisions here, the Ambac
provisions provided a sole remedy of cure or repurchase of breaching loans, and
there is no basis for treating the contractual provisions at issue here differently
from the substantively equivalent provisions in Ambac.
B. The Contracts’ Sole Remedy Provision Is Not Nullified by a
Separate Provision, Taken Out of Context, Which Refers to
Remedies Being Distinct and Cumulative
Plaintiff’s contention that Section 13 of the MLPA nullifies the sole remedy
for breaching loans is likewise contrary to the words of that contract and well-
established principles of contract interpretation. First, this Section unambiguously
pertains to the “Mandatory Delivery” of, and “Grant of Security Interest” in, the
loans. Nom. Br. at 48-50; [R 459, 1406, 2068-69, 3160]. The effort by Plaintiff
(and the First Department) to pluck the sentence regarding cumulative and distinct
remedies at the end of that Section—and suggest that it eviscerates the specific sole
remedy provision as to breaches regarding characteristics of the mortgage loans—
does violence to the parties’ agreement and departs from well-established rules of
contract interpretation. In examining an agreement, “‘[p]articular words should be
considered, not as if isolated from the context, but in the light of the obligation as a
whole and the intention of the parties as manifested thereby. Form should not
prevail over substance and a sensible meaning of words should be sought.’” Kass
v. Kass, 91 N.Y.2d 554, 566 (1998) (quoting Atwater & Co. v Panama R.R. Co.,
17
246 N.Y. 519, 524 (S.D.N.Y. 1927)). Thus, “[w]here the document makes clear
the parties’ over-all intention, courts examining isolated provisions ‘should then
choose that construction which will carry out the plain purpose and object of the
[agreement].’” Id. at 567 (quoting Williams Press v. State of New York, 37 N.Y.2d
434, 440 (1975)) (further internal quotation marks omitted; second alteration in
Kass). Further, “it is a fundamental rule of contract construction that ‘specific
terms and exact terms are given greater weight than general language.’” Aramony
v. United Way of Am., 254 F.3d 403, 413 (2d Cir. 2001) (quoting Restatement
(Second) of Contracts § 203(c) (1981) and further citing Arthur Linton Corbin,
Corbin on Contracts §§ 545–54, at 521 (1952) (“[W]ords of general description
should generally yield to words that are more specific.”)).
Under Plaintiff’s interpretation, the isolated statement in Section 13
7
would
mean that, even as to claims that Plaintiff does not dispute fall squarely under
Section 8, Plaintiff could pursue other remedies it may have at law or equity in
connection with such breaches. Indeed, although Plaintiff avoids expressly stating
this, it is the logical conclusion of Plaintiff’s argument. Such an interpretation—
7
The first paragraph of Section 13 concludes with the provision that “[a]ll
rights and remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded by
law or equity and all such rights and remedies may be exercised concurrently,
independently or successively.” MLPA § 13 [R 459, 1406, 2069, 3160]; see also
Nom. Br. at 48-50. Section 13 of the MLPA is not incorporated into the PSA.
18
which renders the sole remedy provisions of both the MLPA and PSA utterly
meaningless—clearly does not comport with the agreements as a whole, which
unambiguously provide that the sole remedy for any misrepresentations and
defects as to the loans is the cure or repurchase of such defective loans.
III. Allowing Plaintiff to Circumvent the Applicable Sole Remedy
Limitation by Renaming Its Claims Would Depart From, and
Undermine, Fundamental Principles of New York Law
Plaintiff erroneously contends that allowing it to pursue general damages for
alleged breaches of the No Untrue Statement Provision will not cause uncertainty
and inconsistency regarding important principles of contractual interpretation and
enforcement. To the contrary: the Appellate Division’s holding in this regard
contravenes numerous precepts established by this Court.
A. Plaintiff’s Contention That It Can Avoid the Sole Remedy
Provision Notwithstanding the Essential Nature of Its Claims Is
Inconsistent with New York Law
As this Court has made clear, contractual provisions that “clearly, directly
and absolutely” limit liability for “any act or omission” (other than intentional
wrongdoing or gross negligence) must be enforced, “especially when entered into
at arm’s length by sophisticated contracting parties.” Kalisch–Jarcho, 58 N.Y.2d
at 384 (emphasis in the original). Thus, “‘when parties set down their agreement
in a clear, complete document,’” and decide on an “exclusive remedy” in
19
connection with a breach of contract, then “the exclusive remedy that the parties
fashioned . . . should be honored.” J. D’Addario, 20 N.Y.3d at 118-19.
Specifically, when a contractual party seeks to evade the contractual
limitation to which it agreed—through attempts to tie its claims to other provisions,
even though the allegations fundamentally relate to the issues as to which the sole
remedy applies—the Court will enforce the exclusive remedy. This Court’s
decision in Westmoreland Coal Co. v. Entech, Inc. provides an instructive
illustration. In Westmoreland Coal, the governing agreement, relating to a stock
purchase, provided an exclusive remedy for breaches of representation or
warranty—i.e., litigation in a court of competent jurisdiction, with a cap on any
indemnification by the seller to the buyer, for such breaches, of $1.75 million. 100
N.Y.2d at 356-57. Other provisions in the contract specified different procedures
if one of the parties sought a purchase price adjustment—i.e., review by an
independent accountant whose decision would be binding and was not subject to
any monetary cap. Id. at 355-56. The plaintiff buyer claimed an adjustment in its
favor of about $74 million, which represented more than half the purchase price,
on the basis that many of the asset values in the closing certificate allegedly did not
comply with GAAP—and then sought to compel the seller to submit the dispute to
an independent accountant, pursuant to the purchase price adjustment provisions in
the stock purchase agreement. Id. at 355, 357.
20
This Court—after (i) “[r]eading the [a]greement as a harmonious and
integrated whole,” and (ii) examining the underlying nature of the plaintiff’s
claims—concluded that the plaintiff’s claims were, fundamentally, for a breach of
a representation or warranty and therefore were subject to the exclusive remedy to
which the plaintiff had agreed for such breaches. Id. at 358-59. The Court rejected
plaintiff’s contention that the defendant was “seek[ing] to rewrite” the provisions
under which the plaintiff proposed to bring its claims “to insert specific words
limiting these provisions to changes in value occurring between the acquisition and
closing dates.” Id. at 360. It found instead that, “the words of these provisions,
when read in the context of the entire [a]greement rather than in isolation, are plain
enough.” Id.
In reaching its holding in Westmoreland Coal, this Court stressed that
[plaintiff’s] interpretation of the purchase price
adjustment provisions to provide a remedy for breach of
a representation or warranty—which is exactly what
[plaintiff] asserts when it objects to an asset value on the
closing date certificate for failure to comply with GAAP,
consistently applied—would subvert th[e] ‘exclusive
remedies’ limitation and waiver, and would allow
[plaintiff] to circumvent the $1.75 million threshold.
Id. at 359. This Court declined to allow plaintiff to evade the exclusive remedy it
had agreed to for the breaches of representations and warranties that constituted the
gravamen of its claims. See id. Here, this Court should similarly decline to allow
21
Plaintiff to subvert and circumvent the sole remedy to which it agreed for breaches
of representations and warranties as to the loans securitized into the trusts at issue.
8
More broadly, this Court “look[s] for the reality, and the essence of the
action and not its mere name” in assessing whether a claim may proceed. Brick,
276 N.Y. at 264 (rejecting plaintiff’s attempt to cast its claim in such a way as to
avoid the applicable statute of limitations); accord, e.g., Morrison v. Nat’l Broad.
Co., 19 N.Y.2d 453, 458-59 (1967) (examining the “reality” and “essence” of the
claim, rather than its name, and concluding that “[t]he harm assertedly sustained by
the plaintiff—injury to his reputation—is precisely the same as that caused by
defamation,” and therefore, notwithstanding plaintiff’s attempt to plead a cause of
action for a separate “intentional wrong,” the statute of limitations for defamation
should apply and the action must be dismissed); see also, e.g., Findlay v. Duthuit,
86 A.D.2d 789, 790 (1st Dep’t 1982) (“looking for the reality and the essence of
8
Disallowing Plaintiff, here, to circumvent the sole remedy provision by
which it is bound is also consistent with New York courts’ enforcement of other
contractual limitations, such as forum selection clauses. See, e.g., Tourtellot v.
Harza Architects, Engr’s & Constr. Managers, 55 A.D.3d 1096, 1098 (3d Dep’t
2008) (holding that a party “cannot circumvent application of the forum selection
clause by pleading parallel and/or additional related noncontractual claims”);
accord Erie Ins. Co. of N.Y. v. AE Design, Inc., 104 A.D.3d 1319, 1320 (4th Dep’t
2013); Montoya v. Cousins Chanos Casino, LLC, No. 651353/11, 2012 WL
118475, at *5 (Sup. Ct. N.Y. Cnty. Jan. 12, 2012) (holding that a party may not
defeat a forum selection clause “by artful pleading of claims not based on the
contract containing the clause if those claims grow out of the contractual
relationship or . . . a breach of that relationship” (internal quotation marks
omitted)).
22
the action and not its mere name,” concluding that the complaint did not provide a
basis for long-arm jurisdiction, and affirming the dismissal of plaintiff’s claims).
Where the plaintiff has a legal remedy to redress the breach which it alleges, the
plaintiff may not seek to evade a limitation on that remedy—such as attempting to
extend the applicable statute of limitations—by attaching a different “label” to its
claim. See, e.g., Rolnick v. Rolnick, 24 N.Y.2d 805, 805 (1969). So too, here,
Plaintiff should not be permitted to evade the sole remedy limitation by attaching
the “No Untrue Statement Provision” label to its claims for alleged loan defects.
This Court should decline to allow Plaintiff to circumvent the sole remedy to
which it agreed, and adhere to the oft-repeated principle—across various legal
contexts—that “[a] party will not be permitted to use artful pleading to salvage, by
rewording, a cause of action that is fatally deficient.” Richter v. 210 Equities
Corp., 216 A.D.2d 106, 106 (1st Dep’t 1995).
B. Plaintiff’s Approach Could Potentially Allow It to Recover Twice
for Alleged Loan Defects—A Result Barred by New York Law
Under Plaintiff’s logic, as set out in its Opposition Brief, it could potentially
recover twice for the same alleged harm resulting from a defective loan: once for
an individual loan breach, and another time when that loan breach is aggregated
with other such loan breaches. New York law does not allow that. To the extent
the Appellate Division’s decision could be construed to permit Plaintiff to pursue
23
such a double recovery for any and all alleged loan defects, the Appellate Division
erred.
9
By setting up a false structure that purports to provide cumulative remedies
for “individual” loan breaches, on the one hand, and “aggregate” loan breaches on
the other, Plaintiff is essentially saying it is free to double-count each alleged
breach and get two separate remedies for it. But, as this Court has repeatedly made
clear, “‘the courts can and should preclude double recovery’” by a plaintiff.
Spitzer, 11 N.Y.3d at 125 (quoting EEOC v. Waffle House, Inc., 534 U.S. 279, 297
(2002)); see also, e.g., Hartford Acc. & Indem. Co. v. Chartrand, 239 N.Y. 36, 41
(1924) (“The law does not favor a double recovery . . . .”). Nothing in the
governing agreements supports the conclusion that the parties intended to allow
Plaintiff to obtain such double recovery.
10
The impermissible implication of
Plaintiff’s approach further underscores that its proposed contractual interpretation
is baseless.
9
Nomura believes that, even if this Court does not reverse the Appellate
Division’s erroneous decisions, Plaintiff should not be permitted to seek double
recovery for alleged loan breaches. Nomura anticipates, however, that Plaintiff
may take the position that the Appellate Division’s decision allows it to do so.
10
To the extent Plaintiff may suggest it would be willing to forego its claims
as to what it refers to as “individual” alleged loan breaches, in favor of seeking
general damages as to those alleged breaches when “aggregated,” this does not
resolve the issue, of course, as it would achieve the circumvention of contractual
limitations that this Court, as set forth above, does not allow.
24
C. Plaintiff’s Attempt to Turn a Purported Breach of Contract
Claim into a Quasi-Federal Securities Law Disclosure Claim Must
Be Rejected
Plaintiff’s implicit attempt to litigate this action as if it were brought under
federal securities laws regarding disclosures to investors must be rejected. See,
e.g., Opp. at 10, 11, 17. This is an action for breach of contract. The claims and
remedies are therefore limited by the four corners of the governing agreements.
Fundamentally, a claim for breach of contract as to representations and warranties
must be tied to specific representations. The express contractual representations
and warranties at issue are those that relate to the characteristics of those loans.
Insofar as Plaintiff is seeking to import federal securities law concepts here, and
create a quasi-securities claim for a vague “broader message” allegedly gleaned
from the transaction documents, based on those same alleged defects, this claim
should be rejected. See, e.g., Eden Roc, LLLP v. Marriott Int’l, Inc., 116 A.D.3d
486, 487 (1st Dep’t 2014) (dismissing a claim “founded on the same allegations
that form the basis of the claims for breach of contract”).
Relatedly, Plaintiff’s implied suggestion that the No Untrue Statement
Provision must be interpreted the same way as federal securities laws also has no
basis. See, e.g., Opp. at 17. This Court has made clear that parties may “craft
specific contract terms governing their rights” and that—unless a statute expressly
and intentionally abrogates a common-law rule related to the interpretation of
25
contracts—the agreement’s words and common-law principles of contractual
interpretation govern.
11
Israel v. Chabra, 12 N.Y.3d 158, 167-68 (2009). Thus,
the federal securities statutory provisions invoked by Plaintiff “play[] no role” in
interpreting the governing agreements, including the No Untrue Statement
Provision. See id. at 168.
D. Plaintiff Ignores the Role of This Court When Contending That It
May Not Hold That, as a Matter of Law, Plaintiff Cannot Pursue
General Contract Damages for Its Claims
Plaintiff mistakenly contends that it would be inappropriate for this Court to
decide that Plaintiff cannot pursue general contract damages for its claims, based
on allegedly defective loans, under the No Untrue Statement Provision. Plaintiff
invokes the notice pleading standards, and argues that possible “factual
development” precludes the dismissal of its claims at this stage. See, e.g., Opp. at
15. Plaintiff contends that this Court should allow its claims to proceed because
discovery is needed to resolve any ambiguity as to the relevant provisions. See,
e.g., Opp. at 17 & n.4.
This Court, of course, is fully able to reverse the Appellate Division’s order
as to this issue. “Whether an agreement is ambiguous is a question of law for the
11
Furthermore, the contractual language on which Plaintiff focuses—“taken
in the aggregate”—is nowhere to be found in the federal statutory provision to
which Plaintiff points. See Opp. at 17 (quoting 15 U.S.C. § 77k).
26
courts.” Kass, 91 N.Y.2d at 566. Thus, this Court can and must decide for itself
whether the relevant contractual provisions are ambiguous. The question here is
whether—based on the contracts and the law—Plaintiff can evade the sole remedy
provisions applicable to alleged breaches of representations concerning loan
characteristics under the MLPA and/or PSA, by styling its claim as one for general
contract damages under the No Untrue Statement Provision.
12
For the reasons set
forth above and in its Opening Brief, Nomura respectfully submits that the
governing provisions are not ambiguous, and that Plaintiff’s claims for general
contract damages should be dismissed.
12
Contrary to Plaintiff’s assertion, Nomura has not conceded that Plaintiff
has adequately pled a claim under the No Untrue Statement Provision; rather, the
question at issue here is whether Plaintiff can seek the remedy of general contract
damages for the claim it purports to bring—regardless of how Plaintiff styles that
claim. As set forth above and in its Opening Brief, Nomura respectfully submits
the answer is no.
27
CONCLUSION
For the foregoing reasons, and the reasons set forth in Nomura’s Opening
Brief, Defendant-Appellant respectfully submits that this Court should reverse the
holdings of the Appellate Division’s October 13, 2015 Decision and Order, which
(i) modified the IAS Court’s orders to deny Defendant’s motion to dismiss the
third causes of action in each of Nomura Home Equity Loan, Inc., Series 2006-
FM2, by HSBC Bank USA, National Association, solely in its capacity as Trustee
v. Nomura Credit & Capital, Inc., No. 653783/12 , and Nomura Home Equity
Loan, Inc., Series 2007-3, by HSBC Bank USA, National Association, solely in its
capacity as Trustee v. Nomura Credit & Capital, Inc., No. 651124/13, and (ii)
modified the IAS Court’s orders to deny Defendant’s motion to dismiss claims for
damages (on the first cause of action) for breach of the No Untrue Statement
Provision (Section 7 of the Mortgage Loan Purchase Agreement) in each of
Nomura Home Equity Loan, Inc., Home Equity Loan Trust Series 2007-2, by
HSBC Bank USA, National Association, as Trustee v. Nomura Credit & Capital,
Inc., No. 650337/13, and Nomura Asset Acceptance Corporation Mortgage Pass-
Through Certificates, Series 2006-AF2, by HSBC Bank USA, National Association,
as Trustee v. Nomura Credit & Capital, Inc., No. 652614/12.
Dated: New York, New York
May 5, 2016
SHEARMAN & STERLING LLP
By:~--<-/~ osePb J :Tank
28
Agnes Dunogue
Matthew L. Craner
599 Lexington Avenue
New York, New York 10022
(212) 848-4000 (tel.)
(212) 848-7179 (fax)
Attorneys for Defendant-Appellant
Nomura Credit & Capital, Inc.