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
Court of Appeals
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,
—against—
NOMURA CREDIT & CAPITAL, INC.,
Defendant-Appellant.
BRIEF FOR DEFENDANT-APPELLANT
d
JOSEPH J. FRANK
AGNÈS DUNOGUÉ
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
Date completed: March 4, 2016
i
CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 500.1(f) of the Court of Appeals State of New York Rules
of Practice, Nomura Credit & Capital, Inc. provides its Disclosure Statement as
follows:
Defendant-Appellant Nomura Credit & Capital, Inc. is a 100% owned
subsidiary of Nomura America Mortgage Finance, LLC, which is also the parent
company and 100% owner of Nomura Asset Acceptance Corporation and Nomura
Home Equity Loan, Inc. Nomura America Mortgage Finance, LLC is a 100%
owned subsidiary of Nomura Holding America Inc. Nomura Holding America Inc.
is a 100% owned subsidiary of Nomura Holdings, Inc., a publicly held corporation.
ii
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES .................................................................................... iv
PRELIMINARY STATEMENT ............................................................................... 1
QUESTION PRESENTED ...................................................................................... 11
JURISDICTIONAL STATEMENT ........................................................................ 12
STATEMENT OF THE CASE AND OF THE FACTS ......................................... 13
A. Overview of RMBS Securitizations .................................................... 13
B. The Governing Contracts, Representations and Warranties, and
Contractual Sole Remedy for Breaches of Mortgage Loan-Related
Representations and Warranties .......................................................... 15
1. The MLPAs ............................................................................... 16
2. The PSAs ................................................................................... 21
C. The Trustee Brings Claims for Alleged Breaches as to the
Mortgage Loans, Including Claims for Repurchases Under the
Sole Remedy Provision and Damages Purportedly Based on the
No Untrue Statement Provision........................................................... 24
1. RMBS Litigation ....................................................................... 24
2. The Trustee’s Claims ................................................................ 28
D. The IAS Court Dismisses the Damages Claims for Alleged
Breaches Related to the Mortgage Loans Brought Under the No
Untrue Statement Provision ................................................................ 31
E. The Appellate Division Reverses the IAS Court to Reinstate the
Causes of Action for Damages for Alleged Breaches Related to
the Mortgage Loans, Brought Under the No Untrue Statement
Provision .............................................................................................. 33
ARGUMENT ........................................................................................................... 35
iii
I. Under New York Law, a Court Cannot and Should Not Render
Meaningless a Contractual Limitation on Remedies ..................................... 35
II. Plaintiff’s Contention That It Is Entitled to Damages For Alleged
“Aggregate,” “Transaction-Wide” Loan Breaches—While Conceding It
Is Entitled Only to Cure or Repurchase for Each Individual Loan
Breaches—Is Unavailing ............................................................................... 41
III. The Appellate Division Erred In Allowing the Trustee to Avoid the Sole
Remedy to Which It Agreed as a Party If It Recasts Its Loan Breach
Claims as Alleged Violations of the No Untrue Statement Provision of a
Separate Agreement ....................................................................................... 42
A. The Relevant Contractual Language Here, and in the Appellate
Division’s Previously Directly Contrary Holding, Limit the
Trustee To The Sole Remedy of Cure Or Repurchase for Any
Breaches Pertaining to the Mortgage Loans ....................................... 42
B. The Sole Remedy For Breaches Pertaining to Mortgage Loans,
Expressly Set Forth in the Contracts, Cannot Be Circumvented
Through a Generic Statement that Remedies Are Cumulative ........... 48
CONCLUSION ........................................................................................................ 51
iv
TABLE OF AUTHORITIES
Page
Cases
ACE Sec. Corp. v. DB Structured Prods., Inc., 112 A.D.3d at 522, 523
(1st Dep’t 2013) ................................................................................................. 25
ACE Sec. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581 (2015) ..................... 1
Ambac Assurance Corp. v. EMC Mortg. LLC, 39 Misc. 3d 1240(A),
2013 N.Y. Slip Op. 50954(v) (Sup. Ct. N.Y. Cnty. June 13, 2013) ............... 8, 45
Ambac Assurance Corp. v. First Franklin Fin. Corp., No.
651217/2012, 40 Misc. 3d 1214(A), 2013 N.Y. Slip Op. 51180(v)
(Sup. Ct. N.Y. Cnty. July 18, 2013) ............................................................passim
Assured Guar. Corp. v. EMC Mortg., LLC, 39 Misc. 3d 1207(A),
2013 N.Y. Slip. Op. 50519(v) (Sup. Ct. N.Y. Cnty. Apr. 4, 2013) .................... 38
Assured Guar. Corp. v. EMC Mortg., LLC, No. 650805/2012, 2013
WL 1442177 (Sup. Ct. N.Y. Cnty. Apr. 4, 2013) ........................................... 5, 42
Assured Guar. Mun. Corp. v. Flagstar Bank, No. 11 Civ. 2375, 2011
WL 5335566 (S.D.N.Y. Oct. 31, 2011) .............................................................. 37
Bank of Tokyo-Mitsubishi, Ltd. v. Kvaerner a.s., 243 A.D.2d 1 (1st
Dep’t 1998) ......................................................................................................... 51
Chelsea, LLC v. Seventh Chelsea Assocs., LLC, 304 A.D.2d 498 (1st
Dep’t 2003) ......................................................................................................... 36
Jade Realty LLC v. Citigroup Commercial Mortg. Trust 2005-EMG,
83 A.D.3d 567 (1st Dep’t 2011) ......................................................................... 39
Maxine Co. v Brinks’s Global Servs., USA, Inc., 94 A.D.3d 53 (1st
Dep’t 2012) ......................................................................................................... 38
Metro. Life Ins. Co. v. Noble Lowndes Int’l, Inc., 84 N.Y.2d 430 (1994) ............... 36
Morgan Stanley Mortg. Loan Trust 2006-10SL v. Morgan Stanley
Mortg, Capital Holdings LLC, No. 652612/2012, slip op. (Sup. Ct.
N.Y. Cnty. Aug. 12, 2014) ............................................................................ 4,5,39
v
Morgan Stanley Mortg. Loan Trust 2006-14SL v. Morgan Stanley
Mortg. Capital Holdings LLC, No. 652763/2012, 2013 WL
4488367 (Sup. Ct. N.Y. Cnty. Aug. 16, 2013) ............................................... 5, 39
Morgan Stanley Mortg. Loan Trust 2006-4SL v. Morgan Stanley
Mortg. Capital Inc., No. 650579/2012, 2014 WL 3924616 (Sup.
Ct. N.Y. Cnty. Aug. 8, 2014) .......................................................................... 4, 39
Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42 (1956) ........................................ 7, 36
Reiss v. Fin. Performance Corp., 97 N.Y.2d 195 (2001) ........................................ 39
RM 14 FK Corp. v. Bank One Trust Co., N.A., 37 A.D.3d 272 (1st
Dep’t 2007) ......................................................................................................... 40
Ronnen v. Ajax Elec. Motor Corp., 88 N.Y.2d 582 (1996) ................................. 7, 37
U.S. Bank, N.A. v. Greenpoint Mortgage Funding, Inc., 26 Misc. 3d
1234(A) (Sup. Ct. N.Y. Cnty. Mar. 3, 2010) ...................................................... 40
U.S. Bank Nat’l Ass’n v. Countrywide Home Loans, Inc., No.
652388/2011, 2014 WL 617548 (Sup. Ct. N.Y. Cnty. Feb. 13,
2014) ................................................................................................... 5, 39, 40, 42
William Higgins & Sons, Inc. v. State, 20 N.Y.2d 425 (1967) ................................ 49
Statutes and Rules
CPLR § 213(2) ......................................................................................................... 25
Other Authorities
Affirmation of Darrell S. Cafasso in Support of Defendants’ Motion
to Dismiss the First Amended Complaint (“Cafasso Aff.”) Ex. B-
1,C-1 Ambac Assurance Corp. v. EMC Mortg. LLC, 39 Misc. 3d
1240(A), 2013 N.Y. Slip Op. 50954(v) (Sup. Ct. N.Y. Cnty. June
13, 2013) ........................................................................................................ 8, 44
HSBC Bank USA, Nat’l Ass’n Memorandum in Support of Motion to
Dismiss, Deutsche Bank Nat’l Trust Co. v. HSBC Bank USA, Nat’l
Ass’n, No. 652001/2013, 2014 WL 5543592 (Sup. Ct. N.Y. Cnty.
Jan. 13, 2014) ...................................................................................................... 36
vi
NERA ECONOMIC CONSULTING, Credit Crisis Litigation Update:
Significant Settlement Activity in 2014 and New Cases against
RMBS Trustees and Mortgage Lenders (Feb. 19, 2015) .................................... 25
1
PRELIMINARY STATEMENT
This appeal concerns a contracting party’s attempt to circumvent the sole
remedy provided in RMBS securitization agreements for breaches relating to
mortgage loans. The governing agreements unambiguously provide that, for any
breaches pertaining to mortgage loans, the sole remedy is the cure of the breach or
the repurchase of the defective loan. The express “sole remedy” provision in these
actions—and across a multitude of other RMBS securitizations—is a fundamental
and standard component of the agreements and the transactions. See, e.g., ACE
Securities Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581, 590 (2015)
(“Importantly, the Trust’s ‘sole remedy’ in the event [the sponsor of the RMBS
securitizations] ‘breach[ed] . . . any of the representations and warranties contained
in’ the MLPA [regarding the credit quality and characteristics of the pooled loans]
was for [the defendant] to cure or repurchase a non-conforming loan.”) (emphasis
in original).
In each of these actions, the Appellate Division held that the Plaintiff—the
Trustee of each of the RMBS trusts, and a party to one of the governing
agreements, the Pooling and Servicing Agreement (the “PSA”)—can avoid the sole
remedy limitation to which it agreed, by bringing duplicative claims for breaches
of representations regarding the characteristics of identified mortgage loans sold
and securitized in the RMBS trusts under a general clause in the other governing
2
agreement, the Mortgage Loan Purchase Agreement (the “MLPA”), providing that
the contract and related documents contain no untrue statements (referred to as the
“No Untrue Statement Provision”).
The Appellate Division did not question in any way the lower court’s
finding that all of the Plaintiff’s claims in each action are based on alleged
breaches as to representations and warranties concerning the mortgage loans—for
which the sole remedy is undisputedly the cure or repurchase of the breaching
loans. Indeed, the Complaints are clear: The basis of each of the actions is that the
mortgage loans were allegedly not what they were represented to be by Nomura
(the seller of the loans and “sponsor” of the securitizations), and that as a result the
trusts—and therefore investors in the certificates issued by the trusts—suffered
losses.
As alleged in its Complaints, Plaintiff’s “action[s] arise[] out of Nomura’s
breaches of contract relating to a pool of . . . mortgage loans . . . that Nomura
securitized and sold to the Trust, and from which the Certificates derive their
value. . . . To ensure that the Certificates would be marketable securities, Nomura
(i) made numerous representations and warranties concerning the origination and
characteristics of each and every one of the Mortgage Loans, and (ii) promised . . .
to . . . cure or repurchase any loan that breached its representations and warranties
(where the breaches materially and adversely affect the value of the Mortgage
3
Loan or the interests of the Trust or the holders of the Certificates . . . ).” 2006-
AF2 Am. Compl. ¶ 1 [R 2003-2004].1 Plaintiff alleges that many loans securitized
in the RMBS trusts did not conform to their represented characteristics. See id.2
Plaintiff brought claims for alleged breaches of Nomura’s representations and
warranties concerning the mortgage loans, seeking to compel Nomura to cure or
repurchase the allegedly breaching loans. See 2006-FM2 Compl. ¶¶ 74-79 [R 95-
96]; 2007-3 Compl. ¶¶ 74-79 [R 1151]; 2006-AF2 Am. Compl. ¶¶ 124-31 [R 2047-
2048]; 2007-2 Compl. ¶¶ 123-29 [R 2896-97]. Plaintiff also claims, however, that
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. 651124/12 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”).
2 See also, e.g., 2006-FM2 Compl. ¶ 1 [R 68] (“This is an action for breach
of contract arising out of Nomura’s failure to comply with its unambiguous
contractual obligations associated with . . . residential mortgage loans . . . that
Nomura purchased and ultimately sold to the Trust.”); 2006-FM2 Compl. ¶ 3 [R
69] (“In connection with the sale of the Mortgage Loans, Nomura made numerous
representations and warranties concerning, among other things, the integrity of the
information provided by individual borrowers, the underwriting standards
employed at origination, the accuracy of the information provided to rating
agencies, and other characteristics of the [m]ortgage [l]oans).
4
it is entitled to damages for breaches concerning the characteristics of the mortgage
loans—despite the sole remedy of loan cure or repurchase which, Plaintiff
acknowledges, the governing agreements expressly set forth. See, e.g., 2006-FM2
PSA § 2.03(c) [R 181].3 Plaintiff claims it can seek damages because the loan
breaches which it alleges also constitute a violation of a more general
representation—made by Nomura in the MLPA to which only Nomura and the
depositor of the loans are parties—that the MLPA and certain related documents
(including the mortgage loan “schedule” listing the loans and their characteristics,
and the prospectus supplement also setting forth loan information) did not contain
any untrue statements.
Until the Appellate Division’s Order in this case, New York cases
addressing the issue of whether the Trustee (or other RMBS contracting party)
could obtain damages for claims brought under a “no untrue statement”
provision—based on alleged misrepresentations pertaining to the mortgage loans,
for which the contracts similarly provided for a sole remedy of cure or
repurchase—uniformly answered no.4 The lower court rejected Plaintiff’s attempt
3 The language of each of the MLPAs and PSAs at issue in the four relevant
matters is substantially identical.
4 See Ambac Assurance Corp. v. EMC Mortg. LLC, 121 A.D.3d 514 (1st
Dep’t 2014); see also Morgan Stanley Mortg. Loan Trust 2006-4SL v. Morgan
Stanley Mortg. Capital Inc., No. 650579/2012, 2014 WL 3924616, at *6 (Sup. Ct.
N.Y. Cnty. Aug. 8, 2014); Morgan Stanley Mortg. Loan Trust 2006-10SL v.
5
to circumvent the sole remedy of cure and repurchase in these actions as well. As
the IAS Court explained: “The complaint does not allege any breach of the No
Untrue Statement provision that was not also a breach of the Mortgage
Representations to which the sole remedy provisions apply.” Nomura Asset
Acceptance Corp. Alternative Loan Trust, Series 2006-S4, by HSBC Bank USA,
Nat’l Ass’n v. Nomura Credit & Capital, Inc., No. 653390/2012, slip op. at 18
(Sup. Ct. N.Y. Cnty. June 26, 2014) (“IAS Related Order”)5 [R 1083]. Thus, “the
sole remedy provision establishing the repurchase protocol for breaches of
Mortgage Representations would be rendered meaningless if the duplicative
representations in the Mortgage Loan Schedule were not subject to that protocol,
and could support an independent breach of the No Untrue Statement provision.”
Id. at 19. The IAS Court therefore dismissed the Plaintiff’s claims for damages for
alleged breaches of the No Untrue Statement Provision.
Morgan Stanley Mortg. Capital Holdings LLC, No. 652612/2012, slip op. at 15
(Sup. Ct. N.Y. Cnty. Aug. 8, 2014); U.S. Bank Nat’l Ass’n v. Countrywide Home
Loans, Inc., No. 652388/2011, 2014 WL 617548, at *5 (Sup. Ct. N.Y. Cnty. Feb.
13, 2014); Morgan Stanley Mortg. Loan Trust 2006-14SL v. Morgan Stanley
Mortg. Capital Holdings LLC, No. 652763/2012, 2013 WL 4488367, at *7 (Sup.
Ct. N.Y. Cnty. Aug. 16, 2013); Assured Guaranty Corp. v. EMC Mortg., LLC, No.
650805/2012, 2013 WL 1442177, at *4 (Sup. Ct. N.Y. Cnty. Apr. 4, 2013).
5 The IAS Court’s orders in 2006-FM2, 2007-3, 2006-AF2, and 2007-2
relied on the authority and reasoning of the IAS Related Order. [R 33, 35, 37-40,
42-45.]
6
The Appellate Division reversed those holdings. The Appellate Division
found that the sole remedy provision contained in the MLPA applied only to
breaches of the representations and warranties as to mortgage loans, set out in one
section of that agreement, and did not apply to general representations and
warranties set out in a separate section of the MLPA, including the No Untrue
Statement Provision. The Appellate Division also found that the sole remedy
provision set out in the other governing agreement—the PSA, to which the Trustee
is a party—referred only to representations and warranties pertaining to the
mortgage loans, and not to the No Untrue Statement Provision. The Appellate
Division distinguished its prior decision in Ambac Assurance Corporation v. EMC
Mortgage LLC, 121 A.D.3d 514 (1st Dep’t 2014) (“Ambac”)—in which the court
held that the plaintiff could not circumvent the sole remedy provision in the RMBS
contracts for claims, related to representations concerning the loans, that were
purportedly brought under a “no untrue statement” clause—on the purported basis
that the relevant provisions in Ambac varied from those at issue here, insofar as the
Ambac sole remedy provisions referred to all representations and warranties, rather
than just representations and warranties related to the mortgage loans.
The Appellate Division erred. The Appellate Division completely ignored
the fundamental point here: that the Plaintiff’s claims brought under the No
Untrue Statement Provision are for the same alleged misrepresentations that
7
underlie Plaintiff’s claims brought in connection with the mortgage loan
representations and warranties. These are the same claims, repackaged to try to
avoid the sole remedy that is at the heart of the structure of the RMBS contracts.
As the IAS Court and numerous other courts have correctly found, to allow the
Plaintiff to pursue damages for these same claims would read the sole remedy
provision completely out of the contracts and eviscerate the parties’ agreed-to
bargain. This is impermissible under basic principles of New York contract law.
See, e.g., Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 (1956) (making clear
that when a court is called upon to resolve a contractual dispute, “no provision of a
contract should be left without force and effect”); Ronnen v. Ajax Elec. Motor
Corp., 88 N.Y.2d 582, 589 (1996) (provisions should not be rendered
meaningless).
Nor, contrary to what the Appellate Division erroneously concluded, is this a
matter of a particular contract being drafted in such a way that it allows a party to
go beyond the sole remedy for duplicative claims related to allegedly breaching
loans. The relevant contractual provisions here do not differ from those at issue in
Ambac in a way that would justify allowing the Trustee to evade the sole remedy
provision here, while properly barring the Trustee from circumventing the sole
remedy provision in Ambac, for claims that pertain to alleged breaches as to the
characteristics of the mortgage loans. The “sole remedy” of cure and repurchase of
8
loans provided in the MLPAs at issue in Ambac was contained in the same section
as, and was expressly tied to, breaches of any representations and warranties as to
the characteristics of the mortgage loans.6 The Ambac Mortgage Loan Purchase
Agreements also contained a separate section which, like the equivalent agreement
here, contained general representations by the seller, including a provision similar
to the No Untrue Statement Provision. Id. The Pooling and Servicing Agreement
in Ambac stated, just as the PSAs do here, that cure or repurchase of loans would
be the sole remedies for loan breaches.7 The Appellate Division’s holding here
rendered these sole remedy provisions superfluous and meaningless—and could
have repercussions across cases involving the No Untrue Statement Provision, as
well as other RMBS cases, and contract disputes more generally.
For the first time, because of the Appellate Division’s Order, parties to
currently pending RMBS cases, as well as parties currently negotiating RMBS
securitization contracts, face the possibility that sole remedy provisions may be
circumvented by plaintiffs bringing duplicative claims, for purported losses
6 See Affirmation of Darrell S. Cafasso in Support of Defendants’ Motion to
Dismiss the First Amended Complaint (“Cafasso Aff.”) Ex. B-1 (excerpt of the
Bear Stearns Mortgage Funding Trust 2006-AR2 Mortgage Loan Purchase
Agreement, dated as of September 29, 2006), Ambac Assurance Corp. v. EMC
Mortg. LLC, 39 Misc. 3d 1240(A), 2013 N.Y. Slip Op. 50954(v) (Sup. Ct. N.Y.
Cnty. June 13, 2013).
7 See Cafasso Aff. Ex. C-1 (excerpt of the Bear Stearns Mortgage Funding
Trust 2006-AR2 Pooling and Servicing Agreement, dated as of September 1,
2006), Ambac Assurance Corp. v. EMC Mortg. LLC, 39 Misc. 3d 1240(A).
9
resulting from allegedly “defective” loans, as violations of general representations.
Provisions similar to the No Untrue Statement Provision are present in over twenty
other RMBS cases, currently pending in New York courts, in which operative
contracts likewise contain sole remedy provisions of cure or repurchase for
breaches relating to mortgage loans.8 More broadly, the Appellate Division’s
8 See, e.g., Morgan Stanley Mortg. Loan Trust 2006-14SL v. Morgan Stanley
Mortg. Capital Holdings, No. 652763/12 (Sup. Ct. N.Y. Cnty.); Morgan Stanley
Mortg, Loan Trust 2006-10SL v. Sterling Stamos Morgan Stanley Mortg. Capital
Holdings, No. 652612/12 (Sup. Ct. N.Y. Cnty.); Morgan Stanley Mortg. Loan
Trust 2006-4SL v. Morgan Stanley Mortg. Capital Inc., No. 650579/12 (Sup. Ct.
N.Y. Cnty.); U.S. Bank Nat’l Ass’n v. Countrywide Home Loans, No. 652388/11
(Sup. Ct. N.Y. Cnty.); SACO I Trust 2006-5 v. EMC Mortg., No. 651820/12 (Sup.
Ct. N.Y. Cnty.); U.S. Bank Nat’l Ass’n v. Equifirst Corp. & Barclays, No.
650692/13 (Sup. Ct. N.Y. Cnty.); Deutsche Bank Nat’l Trust Co. v. Morgan
Stanley ABS Capital I Inc., No. 650291/13 (Sup. Ct. N.Y. Cnty.); Wilmington Trust
Co. v. Morgan Stanley Mortg. Capital Holdings LLC, No. 352686/13 (Sup. Ct.
N.Y. Cnty.); Deutsche Bank Nat’l Trust v. Barclays Bank PLC & WMC Mortg.,
No. 651789/13 (Sup. Ct. N.Y. Cnty.); U.S. Bank Nat’l Ass’n v. Greenpoint Mortg.
Funding, Inc., No. 651954/13 (Sup. Ct. N.Y. Cnty.); Bank of New York Mellon v.
WMC Mortg., LLC, No. 654464/12 (Sup. Ct. N.Y. Cnty.); Morgan Stanley Mortg.
Loan Trust 2006-13ARX v. Morgan Stanley Mortg. Capital Holdings LLC, No.
653429/12 (Sup. Ct. N.Y. Cnty.); Deutsche Bank Nat’l Trust Co. v. Equifirst
Corp., No. 651957/13 (Sup. Ct. N.Y. Cnty.); U.S. Bank Nat’l Ass’n v. Citigroup
Global Markets Realty Corp., No. 653816/13 (Sup. Ct. N.Y. Cnty.); U.S. Bank
Nat’l Ass’n v. Citigroup Global Markets Realty Corp., No. 653919/14 (Sup. Ct.
N.Y. Cnty.); U.S. Bank Nat’l Ass’n v. Morgan Stanley Mortg. Capital Holdings
LLC, No. 650339/13 (Sup. Ct. N.Y. Cnty.); Deutsche Bank Nat’l Trust Co. v.
Quicken Loans, Inc., No. 563048/13 (Sup. Ct. N.Y. Cnty.); U.S. Bank Nat’l Ass’n
v. DLJ Mortg. Capital, Inc., No. 654147/12 (Sup. Ct. N.Y. Cnty.); Fed. Hous. Fin.
Agency v. HSBC Fin. Corp., No. 651627/13 (Sup. Ct. N.Y. Cnty.); HSBC Bank
USA, Nat’l Ass’n, in its Capacity as Trustee of Merrill Lynch Alternative Note
Asset Trust, Series 2007-A3 v. Merrill Lynch Mortg. Lending, Inc., No. 652727/14
(Sup. Ct. N.Y. Cnty.); Nomura Asset Acceptance Corp. Alternative Loan Trust,
Series 2006-S3, by HSBC Bank USA, Nat’l Ass’n, in its capacity as Trustee v.
10
approach departs from and undermines New York contract law and could be
invoked in many other situations to avoid a contractual remedy limitation.
Defendant-Appellant respectfully asks this Court to reconfirm basic principles of
New York contract law and reverse the Appellate Division’s holdings allowing the
Plaintiff to pursue damages in connection with the No Untrue Statement Provision.
Nomura Credit & Capital, Inc., No. 652619/12 (Sup. Ct. N.Y. Cnty.); Nomura
Asset Acceptance Corp. Alternative Loan Trust, Series 2006-S4, by HSBC Bank
USA, Nat’l Ass’n, in its capacity at Trustee v. Nomura Credit & Capital, Inc. No.
653390/12 (Sup. Ct. N.Y. Cnty.); Ambac Assurance Corp. v. Nomura Credit &
Capital, Inc., No. 651359/13 (Sup. Ct. N.Y. Cnty.).
11
QUESTION PRESENTED
1. Where a party has agreed to a contractual sole remedy for any breach of
representations regarding the characteristics of identified mortgage loans,
and where that sole remedy expressly limits the party to cure, substitution or
repurchase of any breaching loans, may that party avoid the sole remedy
provision by seeking damages for the same alleged breaches regarding the
characteristics of the identified mortgage loans under a general clause
contained in a separate contract, providing that that contract and related
documents contain no untrue statements?
The Appellate Division erred in holding that Plaintiffs-Respondents could
evade the sole remedy provision to which they expressly agreed by bringing
claims pursuant to a general clause, contained in a separate contract, that
provides that that contract and related documents contain no untrue
statements.
12
JURISDICTIONAL STATEMENT
The Court has jurisdiction over this appeal pursuant to CPLR § 5602(b)(1)
because the underlying actions originated in the Supreme Court, New York County
[R 67, 1121, 2003, 2852]; the nonfinal decision below is an order of the Appellate
Division, First Department, entered on October 13, 2015[R 5]; and the Appellate
Division, First Department granted Defendant-Appellant’s motion for leave to
appeal to this Court on January 5, 2016 [R 3].
13
STATEMENT OF THE CASE AND OF THE FACTS
A. Overview of RMBS Securitizations
Each of these actions9 arose in the context of residential mortgage-backed
securities (“RMBS”) transactions, from just prior to the onslaught of the worst
financial crisis to face the nation since the Great Depression. In RMBS
securitizations, securities (called “certificates”) are issued by a trust that holds a
pool of residential mortgage loans. Investors in the certificates (the
“certificateholders”) receive distributions of principal and interest income collected
in connection with the mortgage loans held by the trust. The securitization process
provides for the injection of capital to facilitate lending by enabling the
diversification of risk. Securitization of mortgage loans has been a critical part of
housing finance in the United States. As of the 2014 fourth quarter, there were
approximately $8.7 trillion outstanding RMBS securities, see Securities Industry
and Financial Markets Association, 2015 FACT BOOK, available at
file:///C:/Users/sf24537/Downloads/US-Fact-Book-2015.pdf.
9 The four actions have the same plaintiff (HSBC Bank USA, N.A., in its
capacity as the trustee of four separate trusts) and defendant (Nomura Credit &
Capital, Inc.) and involved substantially identical issues. Accordingly, HSBC
requested that oral argument for the actions be consolidated, and the Appellate
Division issued one Decision and Order, entered on October 13, 2015, for all four
actions. Nomura Credit & Capital, Inc. was the Appellant/Cross-Respondent in the
2006-FM2 and 2007-3 actions and the Respondent/Cross-Appellant in the 2006-
AF2 and 2007-2 actions.
14
Nomura Credit & Capital, Inc. (“Nomura”) acted as what is typically
referred to as a “Sponsor” or “Seller” in the RMBS securitization process: it
purchased, aggregated, and sold mortgage loans (the “Mortgage Loans”) to a
“Depositor” pursuant to an MLPA.10 [R 445-466, 1399-1410, 2052-2076, 3141-
3167.] Once the Depositor was the owner of the loans, it entered into a PSA,
pursuant to which the Depositor conveyed the loans to a trust for which the
Plaintiff in these cases, HSBC Bank USA, National Association, acted as the
trustee (“HSBC” or “Trustee”). [R 101-444, 1157-1398, 2077-2338, 2901-3140.]
Under the PSAs, the Depositors also assigned to the Trustee their rights under the
MLPAs “to the extent of the Mortgage Loans sold.” [R 175, 1198, 2175, 2976.]11
The four trusts involved in the actions here hold the Mortgage Loans for the
benefit of investors in the certificates issued by the trusts. Distributions of
10 Many major financial institutions and their affiliates—including HSBC,
the plaintiff here—have served, like Nomura, as a sponsor in RMBS
securitizations.
11 Nomura purchased and aggregated approximately 5,714, 5,292, 2,717,
and 5,136 residential mortgage loans that were originated by third parties in 2006-
FM2, 2007-3, 2006-AF2, and 2007-3, respectively. [See R 67, 1123, 2003, 2853.]
Nomura sold the loans to a Depositor, Nomura Home Equity Loan, Inc.
(“NHELI”), or Nomura Asset Acceptance Corporation (“NAAC”), pursuant to an
MLPA. Pursuant to a PSA, the depositor, NHELI or NAAC, conveyed the loans to
a trust, for which HSBC is the Trustee. [R 101, 175, 1157, 1198, 2078, 2175,
2902, 2976.]
15
principal and interest income collected in connection with the Mortgage Loans in
the trust are made to these investors.
B. The Governing Contracts, Representations and
Warranties, and Contractual Sole Remedy for Breaches
of Mortgage Loan-Related Representations and
Warranties
The two types of contracts that govern the securitization transactions at
issue—the MLPA and the PSA—were separate and involved different parties.12
These contracts were each negotiated and entered into by sophisticated parties.
The Trustee is a party to the PSAs, but is not a party to the MLPAs. The
Depositors assigned to the Trustee their rights under the MLPAs specifically “to
the extent of the Mortgage Loans sold.” [See R 175, 1198, 2175, 2976 (emphasis
added).] The PSAs are stand-alone contracts, which refer to certain specific
provisions of the MLPAs, but do not incorporate the MLPAs as a whole. In
particular, although the PSAs expressly incorporate the loan representations and
warranties made in the MLPAs, the PSAs do not incorporate the general
representations and warranties made by the Seller/Sponsor in the MLPAs. Rather,
the PSAs contain separate general representations and warranties by the
Seller/Sponsor—which do not include a No Untrue Statement Provision. Further,
the MLPA and PSA each contain a “sole remedy” provision of cure or repurchase
12 Each of the MLPAs in the four actions, and each of the PSAs in the four
actions, are substantively identical to each other.
16
for breaches pertaining to the mortgage loans. [R 181, 458, 1202, 1405, 2067,
2185, 3158.]
1. The MLPAs
Each MLPA provides for the sale of identified mortgage loans from the
Sponsor to the Depositor, which are the only two parties to the contract. In
connection with that sale, the MLPAs contain representations about the Mortgage
Loans. Specifically, Nomura made dozens of representations and warranties
relating to characteristics of the loans and the processes by which the loans were
originated (the “Mortgage Representations”). [R 451-57, 1401-05, 2060-66, 3149-
57.] These representations and warranties are contained in Section 8 of the
MLPAs, entitled “Representations and Warranties of the Seller Relating to
Mortgage Loans.” They include, for example, that:
• “The information set forth in the applicable part of the Prepayment
Penalty Schedule relating to the existence of a Prepayment Loan
Charge is complete, true and correct in all material respects at the date
or dates on which such information is furnished . . . ,” see, e.g., 2006-
FM2 MLPA §8(51) [R 456].
• “Information provided to the Rating Agencies, including the loan
level detail, is true and correct,” see, e.g., 2006-FM2 MLPA§ 8(1) [R
451].
• “No fraud has taken place on the part of the Mortgagor or any other
party involved in the origination or servicing of the Mortgage Loan,”
see, e.g., 2006-FM2 MLPA §8(2) [R 451].
• “There is no material default, breach, violation event or event of
acceleration existing under the Mortgage or the Mortgage note and no
17
event which, with the passage of time or with notice and expiration of
any grace or cure period, would constitute a material default, breach,
violation or event of acceleration, and the Seller has not, nor has its
predecessors, waived any material default, breach, violation or event
of acceleration,” see, e.g., 2006-FM2 MLPA §8(14) [R 452].
• “The Mortgage File contains an appraisal of the related Mortgaged
Property which was made prior to the approval of the Mortgage Loan
by a qualified appraiser . . . ,” see, e.g., 2006-FM2 MLPA §8(29) [R
454].
• “Each Mortgage Loan is and will be a mortgage loan arising out of
the originator’s practice in accordance with the originator’s
underwriting guidelines,” see, e.g., 2006-FM2 MLPA §8(42) [R 455].
• “Any and all requirements of any federal, state or local law . . . have
been complied with in all material respects . . . ,” see, e.g., 2006-FM2
MLPA §8(8) [R 451].
The MLPAs provide that “[t]he representations and warranties contained in
Section 8 . . . shall inure to the benefit of any assignee, transferee or designee of
the [Depositor], including the Trustee for the benefit of the Certificateholders.”
MLPA § 9(a) [R 457, 1405, 2066, 3157].
In the next succeeding Section, entitled “Repurchase Obligation for
Defective Documentation and for Breach of Representation and Warranty,” the
MLPA provides for a remedy of cure, loan repurchase, or loan substitution for any
loan that breaches the loan representations and warranties (and that meets certain
materiality requirements):
[u]pon discovery . . . of a breach of any of the representations and
warranties contained in Section 8 that materially and adversely affects
the value of any Mortgage Loan or the interest therein of the
[Depositor] or the [Depositor]’s assignee, transferee or designee, the
18
party discovering such breach shall give prompt written notice to the
Seller” and “within 120 days of any such breach of a representation
and warranty, the Seller promptly shall . . . cure such defect or breach
in all material respects or, in the event the Seller . . . cannot cure such
defect or breach, the Seller shall, . . . within 120 days of any such
breach of a representation and warranty, either (i) repurchase the
affected Mortgage Loan at the Purchase Price (as such term is defined
in the Pooling and Servicing Agreement) or (ii) pursuant to the
provisions of the Pooling and Servicing Agreement, cause the removal
of such Mortgage Loan from the Trust Fund and substitute one or
more Replacement Mortgage Loans.
MLPA § 9(a) [R 457, 1405, 2066, 3158].13
The MLPAs expressly state that Nomura’s obligation to cure, repurchase, or
substitute any loan that materially breaches Nomura’s loan representations and
warranties is the sole remedy available for such breaches under the contract: “It is
understood and agreed that the obligations of the Seller set forth in this Section 9 to
cure or repurchase a defective Mortgage Loan . . . constitute the sole remedies of
the Purchaser against the Seller respecting . . . a breach of the representations and
warranties contained in Section 8.” MLPAs § 9(c) [R 458, 1405, 2067, 3158]
(emphasis added).
The MLPAs also contain, in a separate section, a collection of general
representations Nomura made about itself as the Seller, not the characteristics of
13 Pursuant to the PSA, the Seller was only permitted to substitute a
conforming loan, rather than repurchase the relevant loan, within two years of
securitization. See, e.g., 2006-FM2 PSA § 2.03(c) [R 180-181].
19
the Mortgage Loans (the “Seller Representations”). For example, Nomura
represented that:
• “The Seller is a corporation duly organized, validly existing and in
good standing . . .,” see MLPA § 7(i) [R 449, 1401, 2058, 3147].
• “The Seller does not believe, nor does it have any reason or cause to
believe, that it cannot perform each and every covenant contained in
this Agreement,” see MLPA § 7(vii) [R 450, 1401, 2059, 3148].
• “The consummation of the transactions contemplated by this
Agreement are in the ordinary course of business of the Seller . . .,”
see MLPA § 7(x) [R 450, 1401, 2059, 3149].
As part of the Seller Representations, Nomura warranted that:
This Agreement does not contain any untrue statement of material fact
or omit to state a material fact necessary to make the statements
contained herein not misleading. The written statements, reports and
other documents prepared and furnished or to be prepared and
furnished by [defendant] pursuant to this Agreement or in connection
with the transactions contemplated hereby taken in the aggregate do
not contain any untrue statement of material fact or omit to state a
material fact necessary to make the statements contained therein not
misleading.
See MLPA § 7(v) [R 450, 1401, 2059, 3148]. This is referred to herein as the “No
Untrue Statement Provision.” Unlike the express statement as to the Mortgage
Representations, the MLPA does not provide that any of these Seller
representations and warranties, including the No Untrue Statement Provision,
“inure to the benefit” of the Trustee.
The MLPAs include as well a provision concerning the sale and delivery of
the loans, which states:
20
SECTION 13. Mandatory Delivery; Grant of Security Interest.
The sale and delivery on the Closing Date of the Mortgage Loans
described on the Mortgage Loan Schedule in accordance with the
terms and conditions of this Agreement is mandatory. It is
specifically understood and agreed that each Mortgage Loan is unique
and identifiable on the date hereof and that an award of money
damages would be insufficient to compensate the Purchaser for the
losses and damages incurred by the Purchaser in the event of the
Seller’s failure to deliver the Mortgage Loans on or before the Closing
Date. The Seller hereby grants to the Purchaser a lien on and a
continuing security interest in the Seller’s interest in each Mortgage
Loan and each document and instrument evidencing each such
Mortgage Loan to secure the performance by the Seller of its
obligation hereunder, and the Seller agrees that it holds such
Mortgage Loans in custody for the Purchaser, subject to the
Purchaser’s (i) right, prior to the Closing Date, to reject any Mortgage
Loan to the extent permitted by this Agreement and (ii) obligation to
deliver or cause to be delivered the consideration for the Mortgage
Loans pursuant to Section 3 hereof. Any Mortgage Loans rejected by
the Purchaser shall concurrently therewith be released from the
security interest created hereby. All 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.
Notwithstanding the foregoing, if on the Closing Date, each of the
conditions set forth in Section 10 hereof shall have been satisfied and
the Purchaser shall not have paid or caused to be paid the Purchase
Price, or any such condition shall not have been waived or satisfied
and the Purchaser determines not to pay or cause to be paid the
Purchase Price, the Purchaser shall immediately effect the redelivery
of the Mortgage Loans, if delivery to the Purchaser has occurred, and
the security interest created by this Section 13 shall be deemed to have
been released.
MLPA § 13 [R 459, 1406, 2068-2069, 3160].
2. The PSAs
21
Separately from the MLPAs, each PSA—each a stand-alone contract, and
the only operative agreement to which the Trustee is a party—governs the pooling
of the loans into a securitization trust and their subsequent servicing, and addresses
obligations and rights of multiple parties, including the Trustee, the Servicer, the
Sponsor (referred to as the “Seller” in the MLPA) and the Depositor (referred to as
the “Purchaser” in the MLPA). For example, Article III of each PSA pertains to
the “administration and servicing of the mortgage loans,” see PSA § 3 [R 186-208,
1205-1216, 2193-2244, 2995-3026], and Article V pertains to “advances and
distributions” to the certificateholders, see PSA § 5 [R 214-242, 1219-1233, 2233-
2276, 3035-3074].
In the PSAs, Nomura, the Sponsor, made certain specific representations and
warranties to the other parties, including the Trustee. As in the MLPA, Nomura
made representations and warranties concerning the characteristics of the Mortgage
Loans, and, separately, general representations about itself as a Sponsor. The PSA
did not incorporate any of the MLPA’s general Seller representations and, unlike
the MLPA, the PSA does not include a No Untrue Statement Provision from
Nomura.
Concerning the Mortgage Loans, Nomura represented in the PSA that “[t]he
representations and warranties set forth in Section 8 of the Mortgage Loan
Purchase Agreement are true and correct as of the Closing Date,” and made three
22
other discrete representations (that the loans are not subject to certain specific
statutes pertaining to “high cost” loans and that certain other applicable legal
requirements concerning origination and servicing of the loans were complied with
in all material respects). See, e.g., 2006-FM2 PSA § 2.03 (b)(vii)-(x) [R 180].
Concerning itself as the Sponsor, Nomura made representations in the PSA such
as: “[t]he Sponsor is duly organized, validly existing and in good standing under
the laws of the State of Delaware”; “[n]o litigation is pending . . . against the
Sponsor that would materially and adversely affect the execution, delivery or
enforceability of this Agreement”; “[t]he execution and delivery of this Agreement
by the Sponsor . . . are in the ordinary course of business of the Sponsor and will
not (A) result in a material breach of any term or provision of the charter or bylaws
of the Sponsor or (B) materially conflict with . . . the terms of any other material
agreement or instrument to which the Sponsor is a party . . . or (C) constitute a
material violation of any statute, order or regulation applicable to the Sponsor of
any court, regulatory body, administrative agency or governmental body”; and
similar statements about its capacity to fulfill its obligations under the Agreement.
See, e.g., 2006-FM2 PSA § 2.03 (b)(i)-(vi) [R 179-180]. These general
representations do not include a “No Untrue Statement” provision and do not
expressly refer to the MLPA’s No Untrue Statement Provision.
23
Each PSA specifically limits Nomura’s liability and obligations to the other
parties to the PSA in case of any breaches pertaining to the Mortgage Loans. The
PSA lays out in specific detail how the cure or repurchase protocol works. “Upon
discovery by any of the parties hereto of a breach of a representation or warranty
set forth in Section 2.03(b)(viii), (ix) and (x) and Section 8 of the Mortgage Loan
Purchase Agreement”—i.e., Nomura’s representations as to the loans set forth in
the PSA—“that materially and adversely affects the interests of the
Certificateholders in any Mortgage Loan,” the discovering party “shall give prompt
written notice thereof to the other parties.” See, e.g., 2006-FM2 § 2.03(c) [R 180-
181]. The Sponsor covenants, with respect to loan breaches, that “it shall cure
such breach in all material respects” or “repurchase the affected Mortgage Loan or
Mortgage Loans from the Trustee at the Purchase Price in the manner” further
described in the PSA. See, e.g., 2006-FM2 PSA § 2.03(c) [R 180-181].
Each PSA makes clear that cure or repurchase of the loan (to the extent the
requisite contractual conditions are met) is the sole remedy available for any
alleged breach relating to the Mortgage Loans:
It is understood and agreed that the obligation under this Agreement
of the Sponsor to cure, repurchase or replace any Mortgage Loan as to
which a breach has occurred or is continuing shall constitute the sole
remedies against the Sponsor respecting such breach available to . . .
the Trustee.
24
See, e.g., 2006-FM2 PSA § 2.03(c) [R 181]. This sole remedy provision does not
allow the Trustee to seek damages in any way in connection with any alleged
breaches as to the Mortgage Loans.
C. The Trustee Brings Claims for Alleged Breaches as to the
Mortgage Loans, Including Claims for Repurchases Under the
Sole Remedy Provision and Damages Purportedly Based on the
No Untrue Statement Provision
1. RMBS Litigation
Subsequent to the securitization and issuance of the certificates, the United
States found itself mired in the worst financial crisis since the Great Depression.
Nowhere was this collapse more evident than in the real estate market. Home
values plummeted, unemployment soared, and many borrowers could no longer
pay their mortgages. Rating agencies began downgrading RMBS, which lost much
of their value. As with thousands of similarly risky RMBS investments, the
certificates at issue here suffered as a result of the financial crisis.
Numerous parties—including hedge funds purchasing certificates for the
sole purpose of pursuing litigation—have brought claims against financial
institutions involved with RMBS for each role they played in the securitization.
According to one estimate, there were 1,120 financial crisis-related lawsuits filed
between January 2007 and the end of November 2014, including lawsuits against
RMBS sponsors and trustees, mortgage lenders and servicers, and other parties
25
involved in the creation and administration of RMBS.14 Distressed-debt investors,
looking to capitalize on the economic upheaval, purchased certificates in the trusts
at issue here years after they were first sold, and demanded that HSBC bring
numerous claims against Nomura.
a. 2006-FM2
In 2006-FM2, the Trustee filed a summons with notice on October 29,
2012—two days short of the six-year anniversary of the closing of the
securitization.15 It did so at the direction of made-for-litigation investment
vehicles called LBF International I, LLC and LBF International II, LLC (the “LBF
Funds”), created by a distressed debt hedge fund to buy RMBS in order to pursue
repurchase (sometimes called “put-back”) claims like those at issue here against
RMBS sellers. The LBF Funds are not parties to the PSA or the MLPA. Further,
the LBF Funds did not invest in the certificates when they were issued in 2006 and
14 Faten Sabry, Sungi Lee, Joseph Mani & Linh Nguyen, NERA ECONOMIC
CONSULTING, Credit Crisis Litigation Update: Significant Settlement Activity in
2014 and New Cases against RMBS Trustees and Mortgage Lenders 4 (Feb. 19,
2015). HSBC, for example, has been sued by certificateholders for alleged
breaches of RMBS agreements, both in its role as a trustee and its role as a sponsor
of RMBS.
15 Any claims for breach of Mortgage Representations accrued when they
were made on October 31, 2006, the date of the MLPA. See ACE Sec. Corp. v. DB
Structured Prods., Inc., 112 A.D.3d at 522, 523 (1st Dep’t 2013). Thus, New
York’s six-year statute of limitations for such breach of contract claims would
have expired on October 31, 2012. See, e.g., CPLR § 213(2) (statute of limitations
in breach of contract action is six years).
26
did not experience the losses that the certificates incurred due to the financial
crisis. Indeed, the LBF Funds were not even created until April 2011.16 On April
16, 2013, at the direction of the LBF Funds, the Trustee filed its Complaint.
b. 2007-3
The Trustee filed this lawsuit on March 28, 2013. It did so again at the
direction of the made-for-litigation investment vehicles called the LBF Funds. The
LBF Funds are not parties to the PSA or the MLPA. Further, the LBF Funds did
not invest in the certificates when they were issued in 2007 and did not experience
the losses that the certificates incurred due to the financial crisis. Indeed, the LBF
Funds were not even created until April 2011.17
c. 2006-AF2
The Trustee commenced this lawsuit by filing a summons with notice on
July 27, 2012—one day short of the six-year anniversary of the closing of the
securitization. It did so at the direction of Amherst Advisory & Management, LLC
(“Amherst”), a hedge fund manager that espoused litigation-as-investment
strategy. See Craner Aff., Ex. F, at 2 [R 2672] (“The Partnerships’ investment
16 See Affirmation of Matthew L. Craner in Support of Defendant
Nomura’s Motion to Dismiss the Complaint, dated June 4, 2013 (“Craner Aff.”)
Exs. B, C [R 712-713].
17 See Affirmation of Matthew L. Craner in Support of Defendant Nomura’s
Motion to Dismiss the Complaint, dated May 21, 2013 (“Craner Aff.”) Exs. B, C
[R 1685-1686].
27
objective is to achieve consistently high risk-adjusted returns by making
opportunistic investments in residential mortgage-backed securities.”); id. at 5 [R
2675] (“The success of the Partnerships’ investment activities depends to a
significant degree on [Amherst’s] ability to identify and exploit investment
opportunities in RMBS and negotiating, litigating or otherwise taking action to
enforce the rights of security holders under the RMBS Governing Documents.”).
Amherst did not invest in the certificates when they were issued in 2006 and did
not experience the losses that the certificates incurred due to the financial crisis.
On December 28, 2012, at the direction of Amherst, the Trustee filed its
Complaint. On February 15, 2013, Nomura filed a motion to dismiss the
Complaint. Instead of opposing the motion, on February 26, 2013, Plaintiff filed
its Amended Complaint.
d. 2007-2
The Trustee commenced this lawsuit by filing a summons with notice on
January 30, 2013—one day short of the six-year anniversary of the closing of the
securitization. It did so at the joint direction of Amherst, which did not invest in
the certificates when they were issued in 2007 and did not experience the losses
that the certificates incurred due to the financial crisis, and Federal Home Loan
Mortgage Corporation.
2. The Trustee’s Claims
28
The gravamen of each of the Trustee’s actions is that the Mortgage Loans
were allegedly not what they were represented to be and that the Trust has suffered
losses as a result.
The Trustee alleges, in 2006-AF2 and 2007-2, that:
• “This action arises out of Nomura’s breaches of contract relating to a
pool of . . . mortgage loans that Nomura securitized and sold to the
Trust, and from which the Certificates derive their value. . . . To
ensure that the Certificates would be marketable securities, Nomura
(i) made numerous representations and warranties concerning the
origination and characteristics of each and every one of the Mortgage
Loans, and (ii) promised . . . to cure or repurchase any loan that
breached its representations and warranties (where the breaches
materially and adversely affected the value of the Mortgage Loan or
the interest therein of the holders of the Certificates).” 2006-AF2 Am.
Compl. ¶ 1 [R 2003-2004].
• “After an exhaustive (and expensive) forensic review initiated by
certain investors, managed by Amherst Advisory & Management,
LLC, the Trustee received notice indicating that a substantial number
. . . of the Mortgage Loans breached Nomura’s representations and
warranties and that these breaches materially and adversely affected
the value of the Mortgage Loans or the interests of the Trust or the
Certificateholders in the loans. Upon receiving notice, the Trustee
promptly notified Nomura of the breaches specified therein,
furnishing it with considerable supporting detail—despite no
obligation to do so—and demanding that it fulfill its obligations to
cure the breaches or repurchase the loans. Nomura has failed to do
so.” 2006-AF2 Am. Compl. ¶ 2 [R 2004].
• “Nomura’s breaches go to the very heart of the relevant agreements.
Among other things, its representations and warranties concerning the
Mortgage Loans played a central role in allocating risk between
Nomura and the Trust.” 2006-AF2 Am. Compl. ¶ 5 [R 2005-2006].
Similarly, the Trustee alleges, in 2006-FM2 and 2007-3, that:
29
• “This is an action for breach of contract arising out of Nomura’s
failure to comply with its unambiguous contractual obligations
associated with . . . residential mortgage loans (the “Mortgage Loans”
or “Loans”) that Nomura purchased and ultimately sold to the Trust
. . . .” 2006-FM2 Compl. ¶ 1 [R 67].
• “In connection with the sale of the Mortgage Loans, Nomura made
numerous representations and warranties concerning, among other
things, the integrity of the information provided by individual
borrowers, the underwriting standards employed at origination, the
accuracy of the information provided to rating agencies, and other
characteristics of the Mortgage Loans (the “Mortgage
Representations”). The Mortgage Representations were critical to the
Securitization . . . . If Nomura had not (a) warranted that the Mortgage
Loans met certain quality and legal standards and (b) accepted the
obligation to make the Trust whole in the event that the Loans did not
meet those standards, the Securitization would not have been
consummated . . . .” 2006-FM2 Compl. ¶ 3 [R 68].
• “To ensure that the credit quality of the loans in the collateral pool is
as the parties agreed, the sponsor and/or originator(s) of the loans
make detailed representations and warranties about the characteristics
of individual loans. These representations and warranties are made to
the trustee for the benefit of the investors in the certificates issued by
the trust. The representations and warranties are critical to the
securitization because investors cannot perform loan-by-loan due
diligence prior to purchasing the certificates and therefore, rely on the
representations and warranties for information regarding the risk
associated with, and quality of, each mortgage loan in the collateral
pool.” 2006-FM2 Compl. ¶ 22 [R 74].
• “An investigation of the Mortgage Loans . . . revealed that [a number
of] Mortgage Loans . . . did not conform with one or more of the
Mortgage Representations.” 2006-FM2 Compl. ¶ 37 [R 80] (the
alleged numbers of “defective” loans varies in each action).
• The Trustee sent purported “Breach Notices” that “identified the
[alleged] Defective Loans” to Nomura, but Nomura did not “cure any
of the breaches” or “repurchase a single Defective Loan,” 2006-FM2
Compl. ¶¶ 71-72 [R 94-95].
30
Accordingly, in each of the actions, the Trustee asserted causes of action for
breaches of the PSA and the MLPA, based upon alleged breaches of Mortgage
Representations, and sought specific performance of the cure and repurchase
remedy. See 2006-AF2 Third Cause of Action [R 2047-2048]; 2006-FM2 First
Cause of Action [R 95-96].
The Trustee also sought to assert claims for damages for alleged breaches of
the No Untrue Statement Provision contained in the MLPA—but each breach
alleged relates to the characteristics of the Mortgage Loans. In two of the actions,
the Trustee invoked the No Untrue Statement Provision as an integrated part of its
purported cause of action for damages based on breaches of the Mortgage
Representations. See 2006-AF2 Second Cause of Action [R 2041-2046.] Nowhere
in its Complaints in those actions does the Trustee assert any way in which
Nomura allegedly breached the No Untrue Statement Provision other than by
providing loans that allegedly did not conform to the characteristics that Nomura
represented and warranted. See 2006-AF2 [R 2033-2050]. In the two other
actions, the Trustee purported to assert a separate cause of action for damages
based on the No Untrue Statement Provision. See 2006-FM2 Third Cause of
Action [R 97]. There as well, however, the bases of the alleged breaches of the No
Untrue Statement Provision are the alleged misrepresentations as to the
characteristics of the Mortgage Loans. See, e.g., 2006-FM2 Compl. ¶ 90, Third
31
Cause of Action [R 97]; 2007-3 Compl. ¶ 90, Third Cause of Action [R 1152-
1153] (alleging that the No Untrue Statement Provision was breached because the
“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.”).18
D. The IAS Court Dismisses the Damages Claims for Alleged
Breaches Related to the Mortgage Loans Brought Under the No
Untrue Statement Provision
Nomura moved to dismiss each of the operative complaints pursuant to
CPLR 3211(a)(1) and (a)(7). The IAS Court (Justice Marcy S. Friedman) issued
orders granting in part and denying in part Nomura’s motions to dismiss. See R
32-45. Each order relied on the reasoning of the IAS Related Order.
The IAS Court granted the motions to dismiss with respect to the Trustee’s
causes of action and claims for damages under the No Untrue Statement
Provision.19 As the IAS Court explained: “The complaint does not allege any
breach of the No Untrue Statement provision that was not also a breach of the
18 The Trustee additionally asserted other claims which are not at issue in
this appeal.
19 The IAS Court granted and denied other portions of Nomura’s motions to
dismiss, which are not at issue in this appeal. See 2006-FM2 Order; 2007-3 Order;
2007-AF2 Order; 2007-2 Order [R 32-45].
32
Mortgage Representations to which the sole remedy provisions apply.” IAS
Related Order at 18 [R 1083]; see also 2006 FM2 Order; 2007-3 Order; 2006-AF2
Order; 2007-2 Order [R 32-45]. As noted by the IAS Court, as purported bases for
their claims of breaches of the No Untrue Statement Provision, the complaints
alleged either pervasive breaches of the representations made as to the Mortgage
Loans, or that documents such as the Mortgage Loan Schedule contained
inaccuracies about the characteristics of the Mortgage Loans. Related Order at 18-
19 [R 1083-1084]; see also 2006 FM2 Order; 2007-3 Order; 2006-AF2 Order;
2007-2 Order [R 32-45].
The IAS Court went on to state:
It is a settled precept of contract interpretation that [a]ll parts of an
agreement are to be reconciled, if possible, in order to avoid
inconsistency. Thus, where two seemingly conflicting contract
provisions reasonably can be reconciled, a court is required to do so
and to give both effect. Here, the sole remedy provision establishing
the repurchase protocol for breaches of Mortgage Representations
would be rendered meaningless if the duplicative representations in
the Mortgage Loan Schedule were not subject to that protocol, and
could support an independent breach of the No Untrue Statement
provision.
IAS Related Order at 19 (internal citations and quotations omitted) [R 1084]; see
also 2006 FM2 Order; 2007-3 Order; 2006-AF2 Order; 2007-2 Order [R 32-45].
E. The Appellate Division Reverses the IAS Court to Reinstate the
Causes of Action for Damages for Alleged Breaches Related to the
Mortgage Loans, Brought Under the No Untrue Statement
Provision
33
The Trustee, in each of the four actions, appealed (or cross-appealed) the
IAS Court’s dismissal of its causes of action20 pursuant to the No Untrue Statement
Provision.21
On October 13, 2015, the Appellate Division issued the Order, which,
among other things, overturned the IAS Court’s dismissal of the Trustee’s causes
of action and claims pursuant to the No Untrue Statement Provision. [R 5-31].
The Order noted that the IAS Court had dismissed the claims based on the
alleged breaches of the No Untrue Statement Provision (section 7 of the MLPA) as
duplicative of the alleged breaches of the Mortgage Representations provision
(section 8 of the MLPA). Order at 13 [R 20]. The Order did not state, at any
point, that the Appellate Division disagreed with the IAS Court’s finding that the
Complaints do not allege any breach of the No Untrue Statement Provision that
was not also a breach of the Mortgage Representations. Nevertheless, the Order
held that the Trustee should be allowed to seek damages for such alleged breaches
20 The Trustee filed a notice of appeal in 2006-AF2 and 2007-2 on August
21, 2014. It filed a notice of cross-appeal in 2006-FM2 and 2007-3 on September
2, 2014. [See R 1982, 2831, 58, 1117.]
21 The Trustee, in each of the actions, appealed other aspects of the IAS
Court orders. Nomura also appealed portions of the IAS Court orders. Nomura
filed its notices of appeal in 2006-FM2 and 2007-3 on August 20, 2014, and filed
its notices of cross-appeal in 2006-AF2 and 2007-2 on August 21, 2014. [See R
52, 1111, 1990, 2839.]
34
of the No Untrue Statement Provision, notwithstanding the sole remedy provisions
of the PSA and MLPA. Id. at 18-19 [R 25-26].
The Appellate Division acknowledged the PSA’s and MLPA’s provisions
setting forth the sole remedy of cure or repurchase for any breaches as to the
Mortgage Loans. The Appellate Division held that the sole remedy provisions of
the PSA and the MLPA, however, apply only to alleged breaches of Section 8 of
the MLPA. Id.22 Furthermore, the Appellate Division also held that, despite the
sole remedy provision, the Trustee could seek damages for the same alleged
breaches as to the Mortgage Loans under the No Untrue Statement Provision
because “section 13 of the MLPA provides that remedies are cumulative.” Order
at 19 [R 26].23
ARGUMENT
I. Under New York Law, a Court Cannot and Should Not Render
Meaningless a Contractual Limitation on Remedies
22 The court stated that, in the sole remedy provision of the PSA (which
states: “[i]t is understood and agreed that the obligation under this Agreement of
the Sponsor to cure, repurchase or replace any Mortgage Loans as to which a
breach has occurred or is continuing shall constitute the sole remedies against the
Sponsor respecting such breach available to . . . the Trustee”) (Section 2.03 of the
PSA), the reference to “such breach” “refers back to a ‘breach of any
representation or warranty set forth [in Section 8 of the MLPA] that materially and
adversely affects the interests of the Certificateholders in any Mortgage Loan.’”
Order at 19 [R 26].
23 The Appellate Division affirmed and reversed other holdings of the IAS
Court’s orders; those portions of the Appellate Division’s Order are not at issue in
this appeal.
35
The Appellate Division departed from fundamental principles of New York
contract law when it allowed Plaintiff to evade the sole remedy of cure or
repurchase for breaching loans—a remedy limitation to which the contractual
parties expressly agreed—by bringing fundamentally duplicative claims for loan
breaches under the guise of the No Untrue Statement Provision. Crucially, the
Appellate Division did not question in any way—but rather seemed to accept as a
given—that, as the IAS Court found, Plaintiff does not allege any breach of the No
Untrue Statement Provision that was not also a breach of the Mortgage
Representations. Indeed, the claims asserted by Plaintiff under the No Untrue
Statement Provision, in each of these actions, are fundamentally claims for alleged
breaches of representations concerning the Mortgage Loans. See supra 28-31.
Under New York law, parties to a contract may limit the remedies available
for breaches of that contract, and courts must enforce such contractual limitations
on remedies for breaches. See Metro. Life Ins. Co. v. Noble Lowndes Int’l, Inc., 84
N.Y.2d 430, 436 (1994) (“A limitation on liability provision in a contract
represents the parties’ Agreement on the allocation of the risk of economic loss in
the event that the contemplated transaction is not fully executed, which the courts
should honor.”); see also Chelsea, LLC v. Seventh Chelsea Assocs., LLC, 304
A.D.2d 498, 498 (1st Dep’t 2003) (“The limitation of remedies clause in the
36
parties’ agreement . . . precluded plaintiff from . . . seeking [remedies outside of
those listed in the clause.]”).24
Furthermore, this Court has long made clear that, when a court is called
upon to resolve a contractual dispute, “no provision of a contract should be left
without force and effect.” Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46
(1956); see also Ronnen v. Ajax Elec. Motor Corp., 88 N.Y.2d 582, 589 (1996)
(provisions should not be rendered meaningless).25
Until the Order, New York cases addressing the issue of whether the Trustee
could obtain damages for claims brought under the No Untrue Statement Provision
24 Indeed, “New York courts ‘have long held that parties to a commercial
contract, absent any question of unconscionability, may agree to limit the seller’s
liability for damages.’ Mom’s Bagels of N.Y., Inc. v. Sig Greenebaum, Inc., 164
A.D.2d 820, 822 (1st Dep’t 1990). Parties ‘may later regret’ agreeing to such a
limitation, but New York courts ‘let them lie on the bed they made.’ Metro Life
Ins. Co. v. Noble Lowndes Int’l, Inc., 84 N.Y.2d 430, 436 (1994) (quoting 5 Arthur
L. Corbin, Corbin on Contracts § 1068, at 386 (1964)).” HSBC Bank USA, Nat’l
Ass’n Memorandum in Support of Motion to Dismiss, Deutsche Bank Nat’l Trust
Co. v. HSBC Bank USA, Nat’l Ass’n, No. 652001/2013, 2014 WL 5543592 (Sup.
Ct. N.Y. Cnty. Jan. 13, 2014), at 20.
25 See also, e.g., Assured Guar. Mun. Corp. v. Flagstar Bank, No. 11 Civ.
2375, 2011 WL 5335566, at *5 (S.D.N.Y. Oct. 31, 2011) (stating that “it is a
cardinal principle of contract construction that a document should be read to give
effect to all its provisions and to render them consistent with each other, and
accordingly all provisions of a contract should be read together as a harmonious
whole” and after considering the applicable sections of the operative contract “in
tandem,” holding that plaintiffs are bound by the sole remedy provision on the
applicable contract) (internal citations and quotation marks omitted).
37
—based on alleged misrepresentations pertaining to the Mortgage Loans, for which
the contracts provided for a sole remedy of cure or repurchase—have uniformly
answered no. In addition to the Appellate Division’s prior decision in Ambac
Assurance Corp. v. EMC Mortgage LLC, 121 A.D.3d 514 (1st Dep’t 2014)—in
which the court held that the plaintiff could not circumvent the sole remedy
provision by invoking a “no untrue statement clause” for claims related to
statements as to the loans—which is further discussed infra, New York courts have
repeatedly rejected plaintiffs’ attempts to circumvent the sole remedy provision by
invoking a “no untrue statement” provision.
In Assured Guaranty Corp. v. EMC Mortgage, LLC, the court rejected the
plaintiff’s attempt to side-step a sole remedy provision by alleging breaches of
broader “transaction” warranties. 39 Misc. 3d 1207(A), 2013 N.Y. Slip. Op.
50519(v), at *4 (Sup. Ct. N.Y. Cnty. Apr. 4, 2013). The court noted that all of
plaintiff’s transaction-level claims “largely relate[d] to, and overlap[ed] with” the
representations and warranties as to the mortgage loans. Id. at *6. The court held
that any claims for breaches of representations “pertaining to characteristics of the
pooled loans”—including the alleged transaction-level breaches—were limited to
the sole remedy of cure or repurchase provided by the agreements. Noting that
“courts cannot, under the guise of interpretation, rewrite parties’ agreements to
impose additional terms or relieve parties from the consequences of their bargain,”
38
the court concluded that the plaintiff was “limited to the remedy of compelling [the
sponsor] to repurchase defective loans that breach any representations and
warranties pertaining to characteristics of the pooled loans.” Id. at *5 (citing
Maxine Co. v Brinks’s Global Servs., USA, Inc., 94 A.D.3d 53, 56 (1st Dep’t
2012).
Similarly, in another series of cases, the trial court repeatedly dismissed
plaintiffs’ claims for breach of a no untrue statement provision, finding that “the
parties’ agreements foreclosed any argument that the sole remedy provisions
applied to a single breach of loan representations but not to a ‘pervasive’ breach,”
and that “allowing a second remedy would defeat the concept of a ‘sole’ remedy.”
Morgan Stanley Mortg. Loan Trust 2006-4SL v. Morgan Stanley Mortg. Capital
Inc., No. 650579/2012, 2014 WL 3924616, at *7 (Sup. Ct. N.Y. Cnty. Aug. 8,
2014); accord Morgan Stanley Mortg. Loan Trust 2006-14SL v. Morgan Stanley
Mortg. Capital Holdings LLC, No. 652763/2012, 2013 WL 4488367, at *7 (Sup.
Ct. N.Y. Cnty. Aug. 16, 2013); Morgan Stanley Mortg. Loan Trust 2006-10SL v.
Morgan Stanley Mortg. Capital Holdings LLC, No. 652612/2012, slip op. at 15
(Sup. Ct. N.Y. Cnty. Aug. 12, 2014). The court concluded that“[t]here [was] no
ambiguity as to the remedy to be applied for untrue statements,” and noted that
“‘courts may not by construction add . . . terms . . . and thereby make a new
contract of the parties under the guise of interpreting the writing.’” Morgan
39
Stanley Mortg. Loan Trust 2006-4SL, 2014 WL 3924616, at *6-7 (quoting Jade
Realty LLC v. Citigroup Commercial Mortg. Trust 2005-EMG, 83 A.D.3d 567, 568
(1st Dep’t 2011) (quoting Reiss v. Fin. Performance Corp., 97 N.Y.2d 195, 199
(2001))); accord Morgan Stanley Mortg. Loan Trust 2006-14SL, 2013 WL
4488367, at *7; Morgan Stanley Mortgage Loan Trust 2006-10SL, slip op. at 7.
Finally, in U.S. Bank National Association v. Countrywide Home Loans,
Inc., No. 652388/2011, 2014 WL 617548, at *5 (Sup. Ct. N.Y. Cnty. Feb. 13,
2014), the court rejected yet another attempt to bring a claim for breach of a no
untrue statement provision. In granting defendant’s motion to dismiss this claim,
the court found that “regardless of the number of documents repeating the alleged
misrepresentations,” the breach asserted was “simply a ‘pervasive breach’ of the
Mortgage Representations,” for which the remedy under the agreements was
repurchase. Id. The court noted that the plaintiff’s reading of the governing
agreements would have rendered the repurchase remedy for loan-level breaches
“superfluous” and was thus “unsupportable.” Id. at *6 (citing RM 14 FK Corp. v.
Bank One Trust Co., N.A., 37 A.D.3d 272, 274 (1st Dep’t 2007) (rejecting
contractual interpretation that “vitiates the principle that a contract should not be
interpreted so as to render any clause meaningless”)). 26
26 Two other trial court decisions have addressed claims under “no untrue
statement” provisions and reached different conclusions, but those involved either
(i) claims that went beyond alleged loan misrepresentations, or (ii) agreements that
40
Permitting Plaintiff to pursue damages for breaches as to the Mortgage
Loans, as the Appellate Division has now done, reads out of the contracts—for the
first time—the sole remedy that they expressly provide for such breaches. Such a
holding is entirely inconsistent with fundamental precepts of New York contract
law, as set forth by this Court, and would create significant uncertainty for
contracting parties if allowed to stand.
did not contain sole remedy provisions. Ambac Assurance Corp. v. First Franklin
Financial Corp., No. 651217/2012, 40 Misc. 3d 1214(A), 2013 N.Y. Slip Op.
51180(v) (Sup. Ct. N.Y. Cnty. July 18, 2013) (which predated the Appellate
Division’s decision in Ambac) involved allegations as to the originator’s general
business operations, including the alleged abandonment of its underwriting
guidelines. Id. at 31-35. The court noted that these breaches “had nothing to do
with the loan pool that would underlie the certificates.” Id. at 13. In U.S. Bank, N.A.
v. Greenpoint Mortgage Funding, Inc., 26 Misc. 3d 1234(A) (Sup. Ct. N.Y. Cnty.
Mar. 3, 2010), the mortgage agreement did not contain sole remedy provisions.
41
II. Plaintiff’s Contention That It Is Entitled to Damages For Alleged
“Aggregate,” “Transaction-Wide” Loan Breaches—While Conceding It
Is Entitled Only to Cure or Repurchase for Individual Loan Breaches—
Is Unavailing
Plaintiff has never disputed, and cannot dispute, that the express “sole
remedy” for breaches of representations and warranties concerning the Mortgage
Loans is cure or repurchase. See supra at 17-18, 23-24 and R 177-182, 1200-1203,
2178-2187, 2979-2989. Nor can Plaintiff dispute that its claims for alleged
breaches of the No Untrue Statement Provision are based on alleged
misrepresentations concerning the Mortgage Loans. See supra at 28-31. Plaintiff
argues instead that it can evade the sole remedy provisions of the PSA (and of the
MLPA) because its claims under the No Untrue Statement Provision are for
alleged “aggregate” and “transaction-wide” breaches. The Appellate Division did
not rely on this argument in its Order, and, if advanced again by Plaintiff here, it
should be rejected by this Court, as it has no basis in the contracts or in New York
law.
No provisions in the MLPAs—including the No Untrue Statement Provision
—or the PSAs provide that, if breaches concerning the characteristics of the loans
are pervasive or widespread, then the sole remedy provision does not apply. Nor
does New York contract law support the proposition that express contractual
limitations on remedies can be ignored for allegedly cumulative breaches. To the
contrary, as set forth supra at 35-37, contractual provisions must be enforced as
42
written. In this context, New York courts have repeatedly held that plaintiffs
cannot avoid contractual sole remedies by claiming alleged “pervasive” or
“transaction-wide” loan representation breaches under a no untrue statement
provision or similar general representation or warranty.27
III. The Appellate Division Erred In Allowing the Trustee to Avoid the Sole
Remedy to Which It Agreed as a Party If It Recasts Its Loan Breach
Claims as Alleged Violations of the No Untrue Statement Provision of a
Separate Agreement
A. The Relevant Contractual Language Here, and in the Appellate
Division’s Previously Directly Contrary Holding, Limit the
Trustee To The Sole Remedy of Cure Or Repurchase for Any
Breaches Pertaining to the Mortgage Loans
The Appellate Division, in previously addressing the same issue, recognized
that a party to RMBS contracts may not circumvent the sole remedy provision for
alleged breaches of loan representations, by using a “no untrue statement”
provision. The Appellate Division squarely held that the remedy limitation must
be enforced. See Ambac Assurance Corp. v. EMC Mortg. LLC, 121 A.D.3d 514
(1st Dep’t 2014)(cited in Order at 19). In reaching a contrary holding here, the
27 See, e.g., U.S. Bank Nat’l Ass’n v. Countrywide Home Loans, Inc., No.
652388/2011, 2014 WL 617548, at *5-6 (Sup. Ct. N.Y. Cnty. Feb. 13, 2014)
(rejecting the application of a broader remedy under a no untrue statement
provision even though the breaches of mortgage representations were allegedly
“pervasive”); Assured Guar. Corp. v. EMC Mortg., LLC, 2013 WL 1442177, at *4-
5 (rejecting plaintiff’s argument that broad “Transaction Warranties” [similar to a
no untrue statement provision] could be used to provide relief beyond the
contractual sole remedies for breaches of specific loan-level representations
[similar to the Mortgage Representations]).
43
Appellate Division created drastically different consequences for contractual
provisions that are fundamentally similar.
In Ambac, the MLPA contained a section which set forth “a series of
representations and warranties by [the sponsor] concerning the characteristics of
the individual mortgage loans.” Ambac, 121 A.D.3d at 515. That section—setting
forth the loan representations and warranties—also included a “sole remedy”
provision (see id. at 515-17), as follows:
SECTION 7. Representations and Warranties of Mortgage Loan
Seller Concerning the Mortgage Loans.
The Mortgage Loan Seller hereby represents and warrants to the
Purchaser as of the Closing Date or such other date as may be
specified below with respect to each Mortgage Loan being sold by
it:
[(i) – (xxv) setting forth representations as to the Mortgage Loans]
. . .
Upon discovery or receipt of notice by the Mortgage Loan Seller, the
Purchaser or the Trustee of a breach of any representation or warranty
of the Mortgage Loan Seller set forth in this Section 7 which
materially and adversely affects the value of the interests of the
Purchaser, the Certificateholders or the Trustee in any of the
Mortgage Loans delivered to the Purchaser pursuant to this
Agreement, the party discovering or receiving notice of such breach
shall give prompt written notice to the others. In the case of any
such breach of a representation or warranty set forth in this
Section 7, within 90 days from the date of discovery by the
Mortgage Loan Seller, or the date the Mortgage Loan Seller is
notified by the party discovering or receiving notice of such
breach (whichever occurs earlier), the Mortgage Loan Seller will
(i) cure such breach in all material respects, (ii) purchase the
affected Mortgage Loan at the applicable Purchase Price or (iii) if
within two years of the Closing Date, substitute a qualifying
Substitute Mortgage Loan in exchange for such Mortgage Loan . .
. . The obligations of the Mortgage Loan Seller to cure, purchase
44
or substitute a qualifying Substitute Mortgage Loan shall
constitute the Purchaser’s, the Trustee’s and the
Certificateholder's sole and exclusive remedies under this
Agreement or otherwise respecting a breach of representations or
warranties hereunder with respect to the Mortgage Loans . . . . 28
The “sole remedy” of cure and repurchase of loans provided in the MLPAs
at issue in Ambac was thus expressly tied to breaches of any representations and
warranties as to the characteristics of the mortgage loans. The Ambac MLPAs also
contained a separate section which, like the MLPA here, contained general
representations by the seller, including a provision similar to the No Untrue
Statement Provision.29
28 See Cafasso Aff. Ex. B-1 (excerpt of the Bear Stearns Mortgage Funding
Trust 2006-AR2 Mortgage Loan Purchase Agreement, dated as of September 29,
2006), Ambac Assurance Corp., 39 Misc. 3d 1240(A); see also Mortgage Loan
Purchase Agreement dated as of September 29, 2006, between EMC, as mortgage
loan seller, and Structured Asset Mortgage Investments II Inc., as purchaser, for
Bear Stearns Mortgage Funding Trust 2006‐AR2, Mortgage Pass‐Through
Certificates, Series 2006‐AR2, attached as Exhibit H to Pooling and Servicing
Agreement for Bear Stearns Mortgage Funding Trust 2006-AR2, Mortgage Pass-
Through Certificates, Series 2006-AR2, at
http://www.sec.gov/Archives/edgar/data/1374883/000106823806001022/bsmf200
6-ar2_psaandex.htm (“Ambac MLPA”).
29 See Ambac, 121 A.D.3d at 515 (referring to Section 8(vii) of the MLPA,
in which the seller/sponsor “represented that the transactions’ prospectus
supplements describing the mortgage loans did not include untrue statements of
material fact”); see also Ambac MLPA, Section 8 (“Representations and
Warranties Concerning the Mortgage Loan Seller,” which also includes
representations such as: “(i) the Mortgage Loan Seller (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and (ii) is qualified and in good standing to do business in each
jurisdiction where such qualification is necessary”; and “(ii) the Mortgage Loan
45
The MLPAs at issue here are substantively similar in relevant part. The
MLPAs contain a section setting forth representations and warranties as to the
mortgage loans. See supra at 16-17 (describing Section 8 of the MLPAs) and R
451-57, 1401-05, 2060-66, 3149-57. The MLPAs also contain a sole remedy
provision. See supra at 18-19 (describing Section 9(c) of the MLPAs) and R 458,
1405, 2067, 3158. Rather than being contained within the section regarding the
loan representations and warranties, as in the Ambac MLPAs, the sole remedy
provision here is in the immediately following section of the MLPAs, and
expressly references the section setting forth the loan representations and
warranties. See id. This is not different in substance from the Ambac MLPAs’
incorporation of the sole remedy language into the section setting forth the loan
representations and warranties and the Ambac MLPAs’ statement that cure and
repurchase constitute the sole remedy “respecting a breach of representations or
warranties hereunder with respect to the Mortgage Loans.” See Cafasso Aff. Ex.
B-1 (Ambac MLPA, Section 7 (xxv).)
The PSAs in Ambac, as here, stated that cure or repurchase would be the
sole remedies for loan breaches. As noted in Ambac: “The PSAs that govern the
transactions relate to the sale of the mortgage loans from the depositor to the
Seller has full corporate power . . . to enter into and perform its obligations under
this Agreement”).
46
securitization trusts. Together, the MLPAs and the PSAs create a repurchase
protocol, or procedure (the repurchase protocol), under which certain parties to the
agreements could compel [the sponsor] to repurchase loans that were in breach of
the MLPAs’ representations or warranties provisions.” Ambac, 121 A.D.3d at 515.
Specifically, in the Ambac PSAs, “Section 2.03 further provide[d] that [the
sponsor]’s obligations to substitute or repurchase a mortgage loan ‘shall be the
Trustee’s and Certificateholder’s sole remedy for any breach thereof.’” Id. at 516.
Similarly, here, the PSAs provide that: “It is understood and agreed that the
obligation under this Agreement of the Sponsor to cure, repurchase or replace any
Mortgage Loan as to which a breach has occurred or is continuing shall constitute
the sole remedies against the Sponsor respecting such breach available to . . . the
Trustee.” See supra 23-24 and R 181, 1202, 2185, 2988. The language of the sole
remedy provision in the PSAs—the only contract to which the Trustee is a party—
is thus very similar to that in the Ambac PSA.
To the extent that the provision is set forth at the conclusion of a section that
focuses on the repurchase protocol for any breaches related to loans—including
any breaches of the loan representations and warranties in Section 8 of the MLPA,
which are expressly incorporated into the PSA, or any of the additional loan
representations and warranties otherwise set forth in the PSA30—that is consistent
30 See supra at 22 and 2006-FM2 PSA § 2.03 (b)(vii)-(x) [R 180].
47
with the fundamental structure of the governing agreements here, in Ambac, and
across RMBS securitizations. For any breaches related to the mortgage loans, the
contracts set forth a protocol that effectuates the sole remedy of curing the breach,
or repurchasing or substituting the loan.
For general seller/sponsor representations and warranties that are in no way
related to the Mortgage Loans, a remedy of curing a loan breach or repurchasing
the loan would presumably not apply (although that issue is not before the Court at
this time and therefore need not be decided). If, for example, the seller/sponsor
was not “duly organized, validly existing and in good standing under the laws of
the State [of its incorporation],” or if litigation was “pending . . . against the
Sponsor that would materially and adversely affect the execution, delivery or
enforceability of this Agreement,” or if “[t]he execution and delivery of this
Agreement by the Sponsor” would “result in a material breach of any term or
provision of the charter or bylaws of the Sponsor,”31 then the sole remedy for
breaches pertaining to the Mortgage Loans—of curing or repurchasing the
defective loans—would presumably not be triggered or relevant. But here, in
Ambac, and across a multitude of RMBS agreements, for breaches stemming from
allegedly “defective” loans, the sole contractual remedy is cure or repurchase of
the loans. Because the Trustee’s claims here are based on allegedly defective
31 See supra at 23; 2006-FM2 PSA § 2.03 (b)(i)-(vi) [R 179-180].
48
loans, the sole remedy to which the Trustee is entitled under the governing
agreements is the cure or repurchase of the loans.
B. The Sole Remedy For Breaches Pertaining to Mortgage Loans,
Expressly Set Forth in the Contracts, Cannot Be Circumvented
Through a Generic Statement that Remedies Are Cumulative
The Appellate Division’s additional basis for its holding—that “[i]n any
event, Section 13 of the MLPA provides that remedies are cumulative,” Order at 8
[R 15], and therefore Plaintiff could circumvent the sole remedy provision—again
departs from the plain language of the contracts and this Court’s precedent.
As an initial matter, the Appellate Division plucked language from Section
13 of the MLPA out of its context, failing to read the contract as a whole. Section
13 pertains to the delivery and sale of the mortgage loans, and provides that the
Seller grants to the Purchaser “a lien on and a continuing security interest in the
Seller’s interest in each Mortgage Loan” to “secure the performance by the Seller”
of its obligations under the MLPA. MLPA § 13 [R 459, 1406, 2068-69, 3160].
The Purchaser also has a “right, prior to the Closing Date, to reject any Mortgage
Loan to the extent permitted by [the MLPA].” Id. The Section immediately goes
on to state: “All 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.” Id. But it then qualifies
49
this, providing: “Notwithstanding the foregoing, if on the Closing Date, each of
the [relevant] conditions . . . shall have been satisfied and the Purchaser shall not
have paid . . . the Purchase Price, . . . the Purchaser shall immediately effect the
redelivery of the Mortgage Loans, if delivery to the Purchaser has occurred, and
the security interest created by this Section 13 shall be deemed to have been
released.” Id. The Appellate Division wrenched the language on which it focused
from its contractual context and applied it to the No Untrue Statement Provision,
and then improperly incorporated it into the PSA—a stand-alone contract which
contains no such language.
Even if Section 13 of the MLPAs is understood as a generic reservation of
rights, the suggestion that it negates a specific limitation on remedies to which the
parties in the MLPA agreed is fundamentally inconsistent with this Court’s prior
decisions. It is well-settled that “[a] specific provision will not be set aside in
favor of a catchall clause.” William Higgins & Sons, Inc. v. State, 20 N.Y.2d 425,
428 (1967). Further, “if there is an inconsistency between a general provision and
a specific provision of a contract, the specific provision controls.” Bank of Tokyo-
Mitsubishi, Ltd. v. Kvaerner a.s., 243 A.D.2d 1, 8 (1st Dep’t 1998). There should
also be no dispute, of course, that an unincorporated provision of the MLPA, such
as Section 13, does not apply to the PSA.
50
Thus, for claims that are fundamentally based on allegedly breaching
Mortgage Loans, the Trustee cannot pursue a remedy beyond the sole remedy of
cure or repurchase expressly set forth in the PSA and MLPA.
51
CONCLUSION
For the foregoing reasons, 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 MLPA) 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
March 4, 2016
SHEARMAN & STERLING LLP
By: t .e 'J_ . r-p._
Jos ph J. Frank
52
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.