To be Argued by:
CHRISTOPHER P. JOHNSON
Attorney for the Trustee for
NHELI 2006-FM2 and NHELI 2007-3
(Time Requested: 5 Minutes)
To be Argued by:
MICHAEL S. SHUSTER
Attorney for the Trustee for
NHELI 2007-2 and NAAC 2006-AF2
(Time Requested: 25 Minutes)
APL 2016-00024
New York County Clerk’s Index Nos. 653783/12, 651124/13, 652614/12 and 650337/13
Court of Appeals
of the
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
(For Continuation of Caption See Inside Cover)
JOINT BRIEF FOR PLAINTIFFS-RESPONDENTS IN
RESPONSE TO BRIEFS ON BEHALF OF AMICI CURIAE
CHRISTOPHER P. JOHNSON
ZACHARY W. MAZIN
URI A. ITKIN
KASOWITZ BENSON TORRES
& FRIEDMAN LLP
1633 Broadway
New York, New York 10019
Tel.: (212) 506-1700
Fax: (212) 506-1800
Attorneys for Plaintiffs-Respondents
Nomura Home Equity Loan, Inc., Series
2006-FM2 and Nomura Home Equity
Loan, Inc., Series 2007-3, by HSBC
Bank USA, N.A., as Trustee
MICHAEL S. SCHUSTER
DANIEL M. SULLIVAN
ADAM T. KIRGIS
HOLWELL SHUSTER
& GOLDBERG LLP
750 Seventh Avenue, 26th Floor
New York, New York 10019
Tel.: (646) 837-5151
Fax: (646) 837-5150
Attorneys for Plaintiffs-Respondents
Nomura Home Equity Loan, Inc.,
Series 2007-2 and Nomura Asset
Acceptance Corporation Mortgage
Pass-Through Certificates, Series
2006-AF2, by HSBC Bank USA,
N.A., as Trustee
Date Completed: March 3, 2017
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.
i
TABLE OF CONTENTS
PRELIMINARY STATEMENT .............................................................................. 1
ARGUMENT ............................................................................................................ 2
I. The Policy Arguments SIFMA Raises Cannot Justify Applying
The Sole Remedy Clause Beyond Its Clear Terms ........................................ 2
II. The Trustee Can Enforce The No Untrue Statement Provision, And
Sand Canyon’s Contrary Arguments Misread The Agreements.................... 4
CONCLUSION....................................................................................................... 10
ii
TABLE OF AUTHORITIES
Page(s)
Cases
FHFA v. Nomura Holding Am., Inc.,
68 F. Supp. 3d 439 (S.D.N.Y. 2014) .....................................................................9
Kenford Co., Inc. v. Cnty. of Erie, 73 N.Y.2d 312 (1989) ........................................7
Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42 (1956) .............................................4
People v. Ford, 69 N.Y.2d 775 (1987).......................................................................3
Statutes
26 U.S.C. §860F.........................................................................................................3
1
PRELIMINARY STATEMENT
This appeal raises a simple question of contract construction. The
securitizations underlying these cases are each governed by a Mortgage Loan
Purchase Agreement and a Pooling and Servicing Agreement. Those agreements
each contain a Sole Remedy Clause, which states that, should a mortgage loan
breach the loan-specific representations and warranties in Section 8 of the MLPA,
certain remedies, including repurchase of the loan, “constitute the sole remedies
. . . respecting . . . a breach of the representations and warranties contained in
Section 8.” E.g., R3158.1 The Sole Remedy Clause does not state that it limits
relief for a violation of any other part of the MLPA, such as the separate,
transaction-wide representations in Section 7 of that contract. The question on
appeal is: Even though the Sole Remedy Clause says nothing about the MLPA’s
Section 7 representations, does it nonetheless preclude alternative relief for breach
of one of those representations, referred to as the No Untrue Statement Provision?
The Appellate Division gave the only answer consistent with the language of the
Sole Remedy Clause—no. In its two briefs, Defendant-Appellant Nomura Credit
& Capital, Inc., the sponsor of the securitizations, offers no good reason to expand
the Sole Remedy Clause beyond its clear terms.
1 In this brief, the Trustee uses the abbreviations defined in its answering brief.
2
Now, two non-parties—the Securities Industry and Financial Markets
Association (“SIFMA”) and Sand Canyon Corporation—have submitted briefs as
amici curiae in support of Nomura. Yet neither amicus addresses the key language
of the Sole Remedy Clause that controls this appeal. Instead, SIFMA advances
various policy arguments that ignore the clear terms of the governing agreements.
Sand Canyon, for its part, selectively quotes the contracts in offering an alternative
basis to decide the case, one not properly before this Court and meritless in any
event. This Court can resolve this appeal without addressing these arguments.
However, to the extent the Court considers the arguments amici make, Plaintiff-
Respondent, the Trustee of the securitizations, submits this response.
ARGUMENT
I. The Policy Arguments SIFMA Raises Cannot Justify
Applying The Sole Remedy Clause Beyond Its Clear Terms
SIFMA spills much ink reciting various core principles of New York
contract law, such as that limitations on liability should generally be enforced
according to their terms. But no one disputes those principles here. The question
is the scope of the liability limitation here (the Sole Remedy Clause). And the
language of the Sole Remedy Clause answers that question clearly: The Clause
limits remedies “respecting . . . the representations and warranties contained in
Section 8” of the MLPA, and says nothing about the Section 7 representations,
such as the No Untrue Statement Provision.
3
The policy arguments SIFMA advances simply cannot alter the meaning of
the Sole Remedy Clause. For example, SIFMA worries about ensuring
predictability, honoring settled expectations, and maintaining New York’s place as
a reliable expositor of contract law by enforcing contractual limitations on liability.
SIFMA Br. at 9–10, 12, 13, 16–18. But there is no better guarantee of New York’s
reputation as the preeminent forum for the enforcement of contracts than to enforce
the Sole Remedy Clause as far as its terms—and no further. That is what
“provides each party with a predictable outcome” and “lowers the transaction costs
of entering into the RMBS transaction.” Id. at 12.
SIFMA’s final policy argument is that the Sole Remedy Clause should limit
the Trustee’s remedies for breaches of the No Untrue Statement Provision in order
to “avoid jeopardizing” the status of the Trusts under federal tax law as Real Estate
Mortgage Investment Conduits or REMICs. Id. at 13. SIFMA appears to suggest
that the damages the Trustee might receive for breaches of the No Untrue
Statement Provision, if not limited by the Sole Remedy Clause, might not be the
kind of income a REMIC trust is permitted to receive. See id. (citing 26 U.S.C.
§860F). This tax-law argument is not properly before this Court because Nomura
failed to raise it until its reply brief. People v. Ford, 69 N.Y.2d 775, 777 (1987)
(refusing to consider argument “improperly raised for the first time in appellant’s
reply brief to this court”). The argument is also premature because this appeal
4
concerns the sufficiency of the Trustee’s pleadings; the parties have not exchanged
damages theories. The federal tax consequences of awarding damages to the Trust
can await resolution, if appropriate, for when specific damages proposals are made.
In any event, SIFMA’s REMIC argument proves too much: If repurchase of
breaching loans or equivalent money damages were the Trustee’s only relief, then
there would be no remedy for any breach of representations that did not involve a
defective loan. For example, the Sponsor could lack proper corporate form and
authority to enter the transaction in violation of PSA §§ 2.03(d)(i) and (ii) and, no
matter the harm to the Trust, the Trustee could not obtain a remedy on behalf of
certificateholders without stripping their investment of REMIC status. New York
law does not assume that sophisticated, counseled parties put such toothless terms
in their contracts. See Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 (1956)
(“[N]o provision of a contract should be left without force and effect.”).
Thus, none of SIFMA’s policy arguments engages with, or can justify
evasion of, the key contract language: The Sole Remedy Clause’s clear application
to breaches of certain terms, but not to the No Untrue Statement Provision.
II. The Trustee Can Enforce The No Untrue Statement Provision,
And Sand Canyon’s Contrary Arguments Misread The Agreements
Sand Canyon does not even attempt to address the Appellate Division’s
holding that the Sole Remedy Clause does not apply to breaches of the No Untrue
Statement Provision. Instead, Sand Canyon—an originator of mortgage loans
5
involved in similar repurchase litigation of its own (Sand Canyon Br. at 1)—argues
that the warranties in Section 7 of the MLPA, including the No Untrue Statement
Provision, “were never made or transferred to the Trustee.” Id. at 3. This
argument was not raised below and therefore is not properly before this Court. Tr.
Br. at 30. In any event, although Nomura hinted at this point in its opening brief, it
all but abandoned it on reply (Reply at 8–9 n.4), and for good reason: The
argument is meritless.
Sand Canyon asserts that the Trustee only received the rights in the MLPA
that relate to the mortgage loans, and that the Trustee’s claim that Nomura
breached the No Untrue Statement Provision does not fall within the scope of that
assignment. Sand Canyon Br. at 10–12. Sand Canyon’s assertion contradicts both
the plain language of the governing agreements and the Trustee’s allegations.
As a threshold matter, the Trustee’s claims that Nomura breached the No
Untrue Statement Provision do relate to the mortgage loans. The No Untrue
Statement Provision warrants that the transaction documents “prepared or
furnished” by Nomura contain no material misstatements or misleading omissions
“taken in the aggregate.” R3148. And, of course, the transaction that the
documents describe is a securitization of a pool of mortgage loans. Thus, as one
would expect given the scope of the No Untrue Statement Provision and the nature
of the transactions, the Trustee’s allegations that Nomura breached the Provision
6
are based on Nomura’s mischaracterization of the loan pools underlying the
securitizations in several contract documents—including the Prospectus
Supplements, the Mortgage Loan Schedule, and the governing agreements
themselves. See Tr. Br. at 18–19 (summarizing allegations). The Trustee’s claims
that Nomura breached the No Untrue Statement Provision are therefore within the
scope of the rights that even Sand Canyon accepts were transferred to the Trustee.
In any event, Sand Canyon misreads the governing agreements. Among
other things (see id. at 30–31), the PSA states that the depositor (the Nomura
vehicle that acquired the loans from Nomura in the MLPA and sold the loans to the
Trustee in the PSA) conveyed to the Trustee “all the right, title and interest of the
Depositor in and to the Trust Fund.” E.g., R2976 (PSA §2.01). The “Trust Fund”
is defined to include “the assets of REMIC I,” which is defined to include “the
rights under the [MLPA].” E.g., R2968 (PSA §1.01 (definition of “Trust Fund”);
2955 (definition of REMIC I, (v)). The meaning of this chain of definitions is
confirmed by the MLPA itself, which states in Section 3(c) that, “Pursuant to the
Pooling and Servicing Agreement, the Purchaser will assign all of its right, title
and interest in and to the Mortgage Loans, together with its rights under this
Agreement, to the Trustee for the benefit of the Certificateholders.” R3143
(emphasis added).
7
Sand Canyon’s answer to this clear language is to assert that “the Section 7
representations and warranties are not ‘rights;’ they are representations and
warranties.” Sand Canyon Br. at 13. But by transferring to the Trustee “all” the
rights under the MLPA, the depositor transferred the right to sue for breach of its
terms. Sand Canyon appears to recognize this, and can only muster a plea that the
Court construe the term “rights” in the definition of Trust Fund as equivalent to the
loans themselves (id. at 15 n.7), which flatly contradicts the contractual definition.
Similarly, Sand Canyon’s characterization of the Trustee’s remedy for
breach of the No Untrue Statement Provision as “extra-contractual” (id. at 15, 16
n.10) gets it exactly backwards. Suing for ordinary contract-law remedies is not
seeking something extra—black-letter contract law allows an appropriate remedy
for a breach without need for the contract to specifically provide for one. See
Kenford Co., Inc. v. Cnty. of Erie, 73 N.Y.2d 312, 319 (1989). Contracts can, of
course, limit common-law remedies, and the Sole Remedy Clause is such a
limitation. It, however, does not apply to the No Untrue Statement Provision.
In an effort to rescue its argument, Sand Canyon advances a new and
elaborate theory about the purposes of the transaction-wide representations in
Section 7 of the MLPA and the No Untrue Statement Provision in particular. See
Sand Canyon Br. at 17–26. Such speculations from an amicus should be rejected.
Sand Canyon cannot speak to the purposes of the parties who negotiated these
8
specific agreements (tellingly, Nomura does not make Sand Canyon’s claims), nor
is it proper for Sand Canyon to offer what amounts to an ersatz expert opinion, but
without qualifications or basis in the record, on RMBS contracts in general.
Even taken on its terms, Sand Canyon’s theory goes nowhere. Sand Canyon
asserts that the representations in Section 7 of the MLPA are meant to establish
that the “immediate purchaser” of the loans is “a holder-in-due-course.” Id. at 19–
22. The Trustee, Sand Canyon continues, “does not need” the MLPA’s Section 7
representations “to protect the interest of the investors in the Trust’s securities.”
Id. at 22. But it is not up to Sand Canyon to decide what rights the Trustee
“need[s].” The Trustee may exercise the rights the governing agreements grant it,
whether they serve Sand Canyon’s purposes or not.
Further, Sand Canyon does not connect the No Untrue Statement Provision
to its holder-in-due-course theory. Sand Canyon argues instead that the No Untrue
Statement Provision “helps lay the groundwork for” the underwriters of the
securities offered to investors to assert the due-diligence defense available under
the federal securities laws for liability arising from misstatements in the offering
documents. Id. at 25. Nothing in the contracts supports this theory; indeed, the
underwriters are not even parties to the PSA or the MLPA. R2902, R3142. The
case law, furthermore, suggests that the No Untrue Statement Provision does not
shield underwriters from liability. In the securities-law action involving some of
9
the trusts at issue here, which Sand Canyon refers to, the S.D.N.Y. dismissed the
due-diligence defense of RBS, an underwriter, where it had merely relied on
Nomura’s representations about the loans, rather than investigating itself. See
FHFA v. Nomura Holding Am., Inc., 68 F. Supp. 3d 439, 481–84 (S.D.N.Y. 2014).
Lastly, consider the absurd conclusion to which Sand Canyon’s theory leads.
According to Sand Canyon, Nomura-as-seller made transaction-wide
representations to Nomura-as-depositor that only Nomura-as-depositor can enforce
against Nomura-as-seller. Sand Canyon does not, and cannot, explain how it is
commercially reasonable to expect Nomura to sue itself, or how such an
arrangement “benefit[s] the Certificateholders.” R3143 (MLPA §3(c)).
* * *
At the end of the day, this Court need not wade into these weeds. This
appeal comes on a motion to dismiss and, at most, the amici raise ambiguities
concerning the agreements or the damages to which the Trustee is entitled for
breach. Such issues can be addressed, after discovery, at an appropriate time.
Nomura’s motion was premised on the contention that the Sole Remedy Clause
barred the Trustee from seeking alternative relief under the No Untrue Statement
Provision. The Appellate Division held that the Sole Remedy Clause by its terms
does not apply to the No Untrue Statement Provision. That holding was correct
and should be affirmed.
10
CONCLUSION
For the reasons stated herein and in the Trustee’s answering brief, this Court
should affirm the Appellate Division’s Order.
Dated: New York, New York
March 3, 2017
:~Lc~r~ tH~~(~~:L:Br~G~LLP
I \
Michael S. Shuster .. j
Daniel M. Sullivan
Adam T. Kirgis
750 Seventh Avenue, 26th Floor
New York, New York I 0019
Telephone: (646) 837-5151
Attorneys for Plaintiffs-Respondents HSBC
Bank USA, N.A., as Trustee for Nomura Home
Equity Loan, Inc., Series 2007-2 and Nomura
Asset Acceptance Corporation Mortgage
Pass- Through Certificates, Series 2006-AF2
KASOWITZ, BENSON, TORRES &
FRIEDMAN LLP
Bye//~.-;~
Christopher P. Johnson
Zachary W. Mazin
Uri A. Itkin
1633 Broadway
New York, NY 10019
(212) 506-1700
Attorneys for Plaintiffs-Respondents HSBC
Bank USA, N.A., as Trustee for Nomura Home
Equity Loan, Inc., Series 2006-FM2 and
Nomura Home Equity Loan, Inc.,
Series 2007-3
11