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 CERTIFICATES, SERIES
2006-AF2, by HSBC Bank USA, National Association, as Trustee and 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 AMICUS CURIAE THE SECURITIES
INDUSTRY AND FINANCIAL MARKETS ASSOCIATION
IN SUPPORT OF DEFENDANT-APPELLANT
SHAHZEB LARI
PAUL HASTINGS LLP
200 Park Avenue
New York, New York 10166
Tel.: (212) 318-6000
Fax: (212) 319-4090
TIMOTHY D. REYNOLDS
PAUL HASTINGS LLP
515 South Flower Street, 25th Floor
Los Angeles, California 90071
Tel.: (213) 683-6000
Fax: (213) 627-0705
Attorneys for Amicus Curiae
Dated: February 2, 2017
RULE 500.1(0 CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 500.1(±), amicus curiae SIFMA states that it has no
parents, subsidiaries, or affiliates.
Dated: February 1, 20 1 7
By:
Counsel for the Securities Industry
and Financial Markets Association
TABLE OF CONTENTS
Page
STATEMENT OF INTEREST OF AMICUS CURIAE ........................................... 1
PRELIMINARY STATEMENT .............................................................................. 3
BACKGROUND ...................................................................................................... 4
ARGUMENT ........................................................................................................... 8
I. The Appellate Division's Order Is Contrary To Black-Letter
New York Law ..................................................................................... 8
II. Affirmance of the Appellate Division's Order Would Upset the
Carefully Structured Allocation of Risk in RMBS Contracts ........... 11
CONCLUSION ...................................................................................................... 19
TABLE OF AUTHORITIES
CASES
ACE Sec. Corp. Home Equity Loan Trust, Series 2007-HE3 v. DB
Structured Prods., Inc.,
Page(s)
5 F. Supp. 3d 543 (S.D.N.Y. 2014) .................................................................... 11
Am. Tel & Tel. Co. v. NY. City Human Res. Admin.,
833 F. Supp. 962 (S.D.N.Y. 1993) ..................................................................... 17
Ambac Assurance Corp. v. EMC Mortg. LLC,
121 A.D.3d 514 (1st Dep't 2014) ................................................................. 10, 14
Ambac Assurance Corp. v. Nomura Credit & Capital,
No. 651359/13 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
Assured Guar. Corp. v. EMC Mortg., LLC,
No. 650805/2012,2013 WL 1442177 (Sup. Ct. N.Y. Cnty. Apr. 4,
2013) ................................................................................................................... 10
Baidu, Inc. v. Register. com, Inc.,
760 F. Supp. 2d 312 (S.D.N.Y. 2010 ................................................................... 9
Bailey v. Fish & Neave,
8 N.Y.3d 523 (2007) .......................................................................................... 19
BankofNew York Mellon v. WMC Mortg., LLC,
No. 654464/12 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
Bluebird Partners v. First Fid. Bank, NA.,
94 N.Y.2d 726 (2000 .................................................................................... 12, 16
Chelsea, LLC v. Seventh Chelsea Assocs., LLC,
304 A.D.2d 498 (1st Dep't 2003) ......................................................................... 9
Deutsche Bank Nat '1 Trust Co. v. Equifirst Corp.,
No. 651957/13 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
Deutsche Bank Nat 'l Trust Co. v. Quicken Loans, Inc.,
No. 563048/13 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
11
TABLE OF AUTHORITIES
(continued)
Eisen v. Carlisle & Jacquelin,
Page(s)
479 F.2d 1005 (2d Cir. 1973), vacated, 417 U.S. 156 (1974) ........................... 17
Fed Hous. Fin. USA, Nat 'lAss '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.) ................................................................. 15
Holy Props. Ltd., L.P. v. Kenneth Cole Prods.,
87 N.Y.2d 130 (1995) ........................................................................................ 17
J Zeevi and Sons, Ltd. v. Grindlays Bank (Uganda) Ltd,
37 N.Y.2d 220 (1975) ........................................................................................ 18
Laidlaw Transp., Inc. v. Helena Chern. Co.,
255 A.D.2d 869 (4th Dep't 1998) ...................................................................... 17
Metro. Life Ins. Co. v. Noble Lowndes Int'l, Inc.,
84 N.Y.2d 430 (1994) .................................................................................... 9, 16
Moore v. Microsoft Corp.,
293 A.D.2d 587 (2d Dep't 2002) ......................................................................... 9
Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley
Mortg. Capital Holdings LLC,
143 A.D.3d 1, 7 (1st Dep't 2016) ....................................................................... 15
Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley
Mortg. Capital Holdings LLC,
No. 653429/12 (Sup. Ct. N.Y. Cnty.) ........................................................... 15, 16
Muzak Corp. v. Hotel Taft Corp.,
1 N.Y.2d 42 (1956) ........................................................................................ 9, 11
Nomura Asset Acceptance Corp. Alternative Loan Trust Series 2006-
S3, by HSBC Bank USA, Nat'! Ass 'n, in its capacity as Trustee v.
Nomura Credit & Capital, Inc.,
No. 652619112 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
111
TABLE OF AUTHORITIES
(continued)
Peluso v. Tauscher Cronacher Prof'! Eng 'rs, P. C.,
Page(s)
270 A.D.2d 325 (2d Dep't 2000) ......................................................................... 9
RM 14 FK Corp. v. Bank One Trust Co., NA.,
37 A.D.3d 272 (1st Dep't 2007) ......................................................................... 10
Scott v. Palermo,
233 A.D.2d 869 (4th Dep't 1996) ...................................................................... 17
Tunkl v. Regents of Univ. of Cal.,
383 P.2d 441 (Cal. 1963) ................................................................................... 10
US. Bank Nat'! Ass 'n v. Citigroup Global Markets Realty Corp.,
No. 653816/13 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
US. Bank Nat 'lAss 'n v. Citigroup Global Mkts. Realty Corp.,
No. 653919114 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
US. Bank Nat'! Ass 'n v. Countrywide Home Loans, Inc.,
No. 652388/2011, 2014 WL 617548 (Sup. Ct. N.Y. Cnty. Feb. 13,
2014) ................................................................................................................... 11
US. Bank Nat'! Ass 'n v. DLJ Mortg. Capital, Inc.,
No. 650369/2013, 2013 WL 6997183 (Sup. Ct. N.Y. Cnty. Jan. 14
2013), aff'd, 121 A.D.3d 535 (1st Dep't 2014) .................................................. 10
US. Bank Nat'! Ass 'n v. Morgan Stanley Mortg. Capital Holdings
LLC,
No. 650339/13 (Sup. Ct. N.Y. Cnty.) ................................................................. 15
Xerox Corp. v. Graphic Mgmt. Servs. Inc.,
959 F. Supp. 2d 311 (W.D.N.Y. 2013) .............................................................. 17
STATUTES
6 Del. C. §2-719 ...................................................................................................... 10
26 U.S.C. § 860F ..................................................................................................... 13
13 Pa. Cons. Stat. Ann.§ 2719 ................................................................................ 10
IV
OTHER AUTHORITIES
TABLE OF AUTHORITIES
(continued)
Chief Judge's Task Force on Commercial Litigation In the 21st
Century, Report and Recommendations to the Chief Judge of the
State ofNew York (June 2012), available at
http://www.nycourts.gov/courts/comdiv/PDFs/ChiefJudgesTaskFo
Page(s)
rceOnCommercialLitigationinThe21 stpdf.pdf .................................................. 18
Final Report of the New York State Bar Association's Task Force on
New York Law in International Matters (June 25, 2011), available
at
https://www.nysba.org/WorkArea/DownloadAsset.aspx?id=49552 ................. 12
Office of Fed. Hous. Enter. Oversight, A Primer on the Secondary
Mortgage Market, Mortgage Market Note 08-3 at 8 (July 21,
2008), available at http://l.usa.gov/18vin Wn ..................................................... 6
Robert T. Miller, The RMBS Put-Back Litigations and the Efficient
Allocation of Endogenous Risk Over Time, 34 REV. BANKING &
FIN. L. 255, 291 (2014) ..................................................................... 7, 12, 13, 14
Theodore Eisenberg & Geoffry P. Miller, The Flight to New York: An
Empirical Study of Choice of Law and Choice of Forum Clauses in
Publicly-Held Companies' Contracts, 30 CARDOZO L. REV.
1479, 1485 (2009) ......................................................................................... 17-18
Thomas P. Lemke et al., Mortgage-Backed Securities§ 1.1 (2014) .................... 5, 7
v
STATEMENT OF INTEREST OF AMICUS CURIAE
The Securities Industry and Financial Markets Association ("SIFMA") is a
securities industry trade association representing the interests of hundreds of
securities firms, banks, and asset managers. SIFMA's mission is to support a
strong financial industry while promoting investor knowledge, capital formation,
job creation, economic growth, and trust and confidence in the financial markets.
SIFMA has offices in New York and Washington, D.C., and is the United States'
regional member of the Global Financial Markets Association. Although it is
judicious in its case selection, SIFMA regularly files amicus curiae briefs in cases
that raise matters of vital concern to participants in the securities industry--cases
that raise important policy issues that impact the markets represented by SIFMA,
or that otherwise concern common practices in the financial services industry.
This case presents important issues regarding the application of "sole
remedy" provisions created to limit the remedies available for breaches of
contractual representations and warranties in issuances of residential mortgage-
backed securities ("RMBS"). This appeal will determine whether standard
contractual terms used across the securities industry in RMBS contracts between
sophisticated parties will be enforced as written, or instead judicially rewritten to
permit scores of potential litigants to seek economic damages far exceeding those
contemplated in the original bargain. This Court's resolution of the issue will
likely have financially significant implications for SIFMA' s members. SIFMA
therefore respectfully submits this brief as amicus curiae to present the position of
SIFMA' s members on this important issue, and to provide the Court with
information about the RMBS marketplace, as well as the practical consequences of
affirming or reversing the Appellate Division's decision below.
2
PRELIMINARY STATEMENT
This case is one of the many currently pending complex cases involving
RMBS repurchase (or put-back) claims that have proliferated in the years
following the 2008 financial crisis. Issuances ofRMBS-which, in a nutshell, are
securities that provide their holders with the right to cash flows from pools of
mortgage loans-are governed by standardized contracts such as the contracts at
issue here.
These contracts-mortgage loan purchase agreements and pooling and
servicing agreements-typically contain extensive representations and warranties
made by the sponsor of the RMBS transaction (here, Defendant-Appellant Nomura
Credit & Capital, Inc.) about the loan characteristics of the thousands of mortgage
loans in each pool. The contracts also contain "sole remedy" provisions which, in
the event there is a breach of loan-related representations, limit the aggrieved
party's remedy to requiring the sponsor to repurchase the offending loan-no
further remedy or redress is allowed.
Despite the plain language of the governing contracts, the Appellate
Division inexplicably permitted Plaintiff the opportunity to pursue additional
damages for alleged breaches of representations and warranties pertaining to
characteristics of the underlying mortgage loan pools. The Appellate Division's
decision is contrary to black-letter New York law requiring the enforcement of
3
contractual limitations and exclusive remedy provisions agreed to by sophisticated
parties. 1 New York law likewise precludes courts from rendering a contractual
provision ineffective, which is precisely what the Appellate Division's Order does.
Indeed, recent cases before New York tribunals that have considered the precise
provisions at issue here have universally enforced the contracts as drafted-
prohibiting plaintiffs from recovering damages that were never part of the bargain.
Affirming the Appellate Division's contrary decision would have far-
reaching consequences. Not only would it reshape RMBS litigation, it would
create substantial uncertainty in other complex commercial transactions in which
parties routinely make use of limitation of liability and exclusive remedy
provisions to efficiently allocate risk and establish certainty. The Court should not
allow such an outcome. Rather, it should reconfirm longstanding New York law
providing that contracts will not be rewritten ex post, that contractual limitations
and exclusive remedies will be upheld in contracts, and that fundamental fairness
requires that parties abide by the terms of their agreed-upon bargain.
BACKGROUND
The securitization of residential mortgage loans has been the bedrock of
housing finance for several decades. Prior to the creation of the RMBS structure
1 Every state in the nation permits private parties to-with certain exceptions for
fraud, oppression, or intentionally harmful conduct-limit liability in contract.
4
that is now ubiquitous across the industry (nearly $9 trillion in RMBS were
outstanding in 2014), a bank making a mortgage loan to a family for the purchase
of a residential property had to consider the investment benefits and risks of
keeping that single loan on the bank's balance sheet for the term of the mortgage
(frequently, 30 years). Under this system, any bank or financial institution would
require a substantial return on its investment in order to compensate it for
committing its capital in this way for an extended period of time.
Residential mortgage loan securitization solved this economic dilemma. A
product of private contracts between sophisticated parties, RMBS lowered
transaction costs associated with individual loans, providing individuals and
families seeking financing with greater flexibility and lower costs. Under the
RMBS structure, a financial institution, usually called the "sponsor" or "seller,"
purchases, aggregates, and then sells thousands of residential mortgage loans to a
depositor, which then conveys the mortgage loans to a trust. The trust then issues
securities-or "certificates"-that entitle the purchaser of each certificate to cash
flows generated by the loans in the trust.2 The purchasers of the certificates are
typically sophisticated parties, including "banks, insurance companies, hedge
2 See Thomas P. Lemke et al., Mortgage-Backed Securities§ 1.1 (2014).
5
funds, mutual funds, foreign central banks, and sovereign wealth funds, as well as
Fannie Mae and Freddie Mac."3
The certificates are freely bought and sold because the terms of the contracts
negotiated among the sponsor and trust, defining the rights of the certificates and
their purchasers, are fully disclosed and standardized across the industry. As is the
case here, the contracts typically include mortgage loan purchase agreements
("MLP As") and pooling and servicing agreements ("PSAs"). The MLP As and
PSAs typically contain numerous representations and warranties regarding the
mortgage loans securitizing the certificates. The MLP As also typically contain
general representations about the sponsor unrelated to the mortgage loans (e.g., the
sponsor's corporate standing arid organization).
While the representations and warranties concerning the underlying loans in
the mortgage pool are numerous, there is an important provision in the vast
majority of-if not all-PSAs: a limited and exclusive remedy for a breach of
representations or warranties regarding the loans. Specifically, the PSAs
(including the one at issue here) provide that the sole remedy available if there is a
breach of a loan-related representation or warranty is the repurchase of the
particular loan that is the subject of the representation or warranty. Therefore, the
3 Office of Fed. Hous. Enter. Oversight, A Primer on the Secondary Mortgage
Market, Mortgage Market Note 08-3 at 8 (July 21, 2008), available at
http://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/2008072
1_ MMNote _ 08-3 _ N508.pdf.
6
trustee, acting on behalf of the certificate-holder, can require the sponsor to buy
back an offending loan, but the certificate-holder cannot rescind its purchase, seek
general damages from the seller, or pursue any other remedies normally available
for breach of contract. 4
This structure carefully limits the sponsor's exposure by ensuring that
sponsors do not bear open-ended liability for investors' damages or losses on the
mortgage portfolio undergirding the certificates. If a loan breaches the
representations and warranties made in the PSA or MLP A, that loan is repurchased
and thereby removed from the mortgage pool, without disturbing the rest of the
portfolio or the RMBS issuance as a whole. This is consistent with the
fundamental structure of"[t]he mortgage securitization process," which is
"designed to distribute risk."5
The enforceability of the sole remedy provision has become increasingly
important since the financial crisis of 2008, which saw a rise in mortgage
delinquencies and the collapse of the RMBS market. Unsurprisingly, this led to a
wave ofRMBS litigation, including actions brought by hedge funds specializing in
distressed debt opportunities (so-called "vulture funds"), which-after purchasing
RMBS at steeply discounted prices-have encouraged RMBS trustees to assert
4 Robert T. Miller, The RMBS Put-Back Litigations and the Efficient Allocation of
Endogenous Risk Over Time, 34 REv. BANKING & FIN. L. 255, 291 (2014).
5 See, e.g., Mortgage-Backed Securities§ 1.
7
buy-back claims. Consistent with the profit-maximizing imperative of these
entities, they have sought ways to avoid the sole remedy provisions applicable to
most RMBS issuances. As discussed below, those attempts were uniformly
rejected by the courts of this state, until the Appellate Division's Order in this
action.
ARGUMENT
I. The Appellate Division's Order Is Contrary To Black-Letter New York
Law
The Appellate Division found that the sole remedy provisions contained in
the MLP A and PSA do not bar Plaintiff from seeking damages for breaches of
representations and warranties that clearly relate to perceived loan deficiencies.6 In
other words, the Appellate Division's Order permits Plaintiff to pursue remedies,
other than a repurchase of specific loans or, potentially, the payment of the
repurchase price in the case of liquidated loans, for alleged misstatements
concerning those loans. Such a result cannot be reconciled with the governing
New York law, or the terms of the governing contracts.
6 Plaintiffs contention that its claims are not subject to the sole remedy provisions
because they relate to the underlying transaction as a whole ignores the substance
of Plaintiffs claims which, by its own admission, is that specific loans in the
mortgage pools were deficient. The fact that Plaintiff is contending that a large
number of these loans were deficient does not change the nature of its claim.
8
New York law is clear that contractual provisions limiting liability or
restricting available remedies are binding and enforceable--contracting parties are
free to delineate the scope of their liability and remedies in the event of a breach,
and courts must enforce such liability-limiting provisions. As this Court has
explained, "a limitation on liability provision in a contract represents the parties'
[a ]greement 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."
Metro. Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 436 (1994); see
Moore v. Microsoft Corp., 293 A.D.2d 587, 588 (2d Dep't 2002) (enforcing waiver
of liability clause); Chelsea, LLC v. Seventh Chelsea Assocs., LLC, 304 A.D.2d
498, 498 (1st Dep't 2003) ("The limitation of remedies clause in the parties'
agreement, which restricted plaintiff buyer's remedies to cancellation of the
contract, specific performance or closing without reduction or abatement in the
purchase price, precluded plaintiff from closing and then seeking monetary
damages for breach of contract[.]").7
The enforceability of such provisions is a necessary corollary to the equally
fundamental tenet of New York contract law: contracts must be construed to give
effect to each and every provision, and no provision should be rendered
7 See also, e.g., Baidu, Inc. v. Register.com, Inc., 760 F. Supp. 2d 312, 317
(S.D.N.Y. 2010) ("Contractual provisions that clearly, directly and absolutely limit
liability ... are enforceable, especially when entered into at arm's length by
sophisticated contracting parties.") (internal quotation marks omitted).
9
meaningless. See Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 (1956) ("no
provision of a contract should be left without force and effect"); Peluso v.
Tauscher Cronacher Prof'! Eng'rs, P.C., 270 A.D.2d 325 (2d Dep't 2000) (courts
will not read ineffectual a provision limiting the liability of the parties); RM 14 FK
Corp. v. Bank One Trust Co., N.A., 37 A.D.3d 272,274 (1st Dep't 2007) ("contract
should not be interpreted so as to render any clause meaningless"). 8
These principles have been uniformly applied by New York courts in the
RMBS context, including in numerous decisions finding that a plaintiff cannot
circumvent a sole remedy provision by invoking a "no untrue statement" clause.
See, e.g., Ambac Assurance Corp. v. EMC Mortg. LLC, 121 A.D.3d 514, 520 (1st
Dep't 2014) (rejecting plaintiffs attempt to pursue general damages for a no
untrue statement provision as barred by the contract's sole remedy provision); US.
Bank Nat'! Ass 'n v. DLJ Mortg. Capital, Inc., No. 650369/2013,2013 WL
6997183 (Sup. Ct. N.Y. Cnty. Jan. 14 2013), aff'd, 121 A.D.3d 535 (1st Dep't
2014) (sole remedy provision agreed upon by the parties precludes compensatory,
consequential and rescissory damages); Assured Guar. Corp. v. EMC Mortg., LLC,
8 Every state in the country permits private parties to limit liability and/or limit the
remedies available for a particular breach when entering into a contract. See, e.g.,
6 Del. C. §2-719 (upholding limitations of liability and limiting remedies absent
unconscionability); 13 Pa. Cons. Stat. Ann. § 2719 (permitting limitation of
liability clauses so long as provision is not unconscionable); Tunkl v. Regents of
Univ. of Cal., 383 P.2d 441, 446 (Cal. 1963) ("no public policy opposes private,
voluntary transactions in which one party, for a consideration, agrees to shoulder a
risk which the law would otherwise have placed upon the other party").
10
No. 650805/2012, 2013 WL 1442177, at *6 (Sup. Ct. N.Y. Cnty. Apr. 4, 2013)
("courts cannot, under the guise of interpretation, rewrite parties' agreements to
impose additional terms or relieve parties from the consequences of their bargain")
(internal citations omitted); US. Bank Nat 'I Ass 'n v. Countrywide Home Loans,
Inc., No. 652388/2011, 2014 WL 617548, at *6 (Sup. Ct. N.Y. Cnty. Feb. 13,
2014) (plaintiffs reading of the RMBS agreements to permit general damages for
a violation of a "no untrue statement" provision in the contracts rendered the sole
remedy provision of cure or repurchase "superfluous"); see also ACE Sec. Corp.
Home Equity Loan Trust, Series 2007-HEJ v. DB Structured Prods., Inc., 5 F.
Supp. 3d 543, 553 (S.D.N.Y. 2014) (parties in RMBS contract may expressly limit
the remedies available as a result ofbreach).9
II. Affirmance of the Appellate Division's Order Would Upset the
Carefully Structured Allocation of Risk in RMBS Contracts
New York precedent is rooted in a recognition of the importance of
maintaining predictability in contractual relations, efficiently allocating risk, and
allowing sophisticated commercial actors to negotiate the terms of their business
9 It is equally well-established that a specific contractual provision controls over a
mere general provision. See Muzak Corp., 1 N.Y.2d at 46 ("Even if there was an
inconsistency between a specific provision and a general provision of a contract
... , the specific provision controls."). Here, as detailed in Defendant-Appellant's
briefing, that principle means that the sole remedy provision-which specifically
governs the recourse available for loan-related deficiencies-controls over the
more general "no untrue statement" and cumulative remedy provisions relied upon
by the Appellate Division.
11
transactions without judicial intervention-concerns which are of particular
importance to RMBS transactions, given their complexity and financial scope.10
First, limiting contractual liability provides each party with a predictable
outcome in the event of breach. With regards to RMBS transactions, the sponsor,
the trustee and the certificate-holders know exactly what is required in the event of
a breach of the representations and warranties that materially and adversely affects
the interests of the certificate-holders--cure or repurchase of the offending loan or
loans.
Second, limiting the contractual remedies lowers the transaction cost of
entering into the RMBS transaction. 11 Each RMBS transaction consists of a pool
of thousands of loans that are aggregated together for purposes of the transaction.
Calculating the damages associated with a particular breach would be time-
consuming and inefficient. 12 Moreover, permitting damages claims for a breach in
10 See, e.g., Final Report of the New York State Bar Association's Task Force on
New York Law in International Matters 6 (June 25, 2011), available at
https:/ /www.nysba.org/W orkArea/DownloadAsset.aspx?id=495 52 ("The New
York Legislature and its courts have developed New York law with the policy in
mind of ensuring predictability in commercial transactions").
11 See Miller, The RMBS Put-Back Litigations and the Efficient Allocation of
Endogenous Risk Over Time, 34 REv. BANKING & FIN. L. at 291 (noting that
determining the value of an individual loan in a pool of mortgages for purposes of
calculating damages would incur substantial transaction costs).
12 ('!' "d 0ee z .
12
any individual loan out of thousands would drive up the costs of securitization and
have the concomitant impact of increasing the costs of borrowing for consumers.
Third, the contractual mechanisms in RMBS transactions to limit liability
and provide for a sole remedy for breach enable the efficient allocation of risk. 13
In the RMBS context, the sponsor selects the individual mortgage loans to be
aggregated into the mortgage pools that are sold to the depositor and eventually
conveyed to the trust. The sponsor then makes extensive representations and
warranties about the loans and opens itself to liability for breach of contract if the
loans do not, in fact, have the characteristics provided for in the representations
and warranties. But no sponsor would be willing to do so if it would expose it to
monetary damages claims that are unrestricted by the contractual sole remedy.
Fourth, the sole remedy effectuates the parties' intent to maintain a trust's
status as a tax-exempt Real Estate Mortgage Investment Conduit or "REMIC."
The PSAs provide for the substitution or repurchase of a defective loan because
those remedies are designed to avoid jeopardizing that REMIC status. See, e.g., 26
U.S.C. § 860F.
13 See id. at 293 ("To deal with [the highly inefficient allocation of risk], parties to
securitization transactions have developed an elegant contractual mechanism that
generates efficient incentives for the parties, as expectation damages normally
would do, but that avoids the high transaction costs that such damages would
occasion in the securitization context.").
13
It is in the joint interest of the parties to a RMBS transaction to contract for a
predictable and cost efficient remedy that provides assurances to the purchaser
regarding the underlying loans and expressly limits the sponsor's liability to cure
or repurchase any offending loan(s). 14 The sole remedy provision achieves that
goal: it excludes undefined liability for investors' damages or losses; limits the
sponsor's liability while providing a fair remedy for injured purchasers; provides
certainty regarding both the substance and mechanics of that remedy; and does so
without disturbing the rest of the loans in the pool or jeopardizing the RMBS
issuance as a whole. 15
Failure to reverse the Appellate Division's Order would jeopardize this
carefully constructed structure, not solely in the RMBS issuances in question in
this case but across the RMB S market. The contractual language at issue is
standard language that is found in nearly every RMBS transaction across the
industry. 16 In fact, there are numerous RMBS actions currently pending in New
14s .d ee z .
15 !d. at 292-94.
16 See, e.g., 2006-FM2 PSA § 2.03(c) [R 181]; Ambac Assurance Corp. v. EMC
Mortg. LLC, 121 A.D.3d at 516 (substantively similar sole remedy provision); see
Miller, The RMBS Put-Back Litigations and the Efficient Allocation of Endogenous
Risk Over Time, 34 REv. BANKING & FIN. L. at 276 (noting the general language of
sole remedy provisions throughout the RMBS market).
14
York courts where provisions virtually identical to the sole remedy provisions at
issue here are being litigated. 17
Indeed, the Appellate Division further demonstrated its disregard for sole
remedy provisions in Morgan Stanley Mortgage Loan Trust 2006-13ARX v.
Morgan Stanley Mortgage Capital Holdings LLC. There, the Appellate Division
left open the possibility that sole remedy provisions contained in a MLP A and PSA
might not apply to breach of contract claims if the breach was committed through
"gross negligence," where the allegations of "gross negligence" were based on the
very same allegations of pervasive breaches in the loan pool. 18 Amongst other
errors, the Appellate Division (i) treated the sole remedy provision, which provides
a complete remedy by requiring the repurchase of any breaching loan (and which
17 See, e.g., Fed Hous. Fin. USA, Nat 'lAss '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. Nomura Credit & Capital, Inc., No. 652619/12 (Sup. Ct.
N.Y. Cnty.); Ambac Assurance Corp. v. Nomura Credit & Capital, No. 651359/13
(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 BankNat'l Trust Co. v. Equifirst Corp., No. 651957/13 (Sup. Ct.
N.Y. Cnty. ); US. Bank Nat 'lAss 'n v. Citigroup Global Mkts. Realty Corp., No.
653816/13 (Sup. Ct. N.Y. Cnty.); US. BankNat'lAss'n v. Citigroup Global Mkts.
Realty Corp., No. 653919114 (Sup. Ct. N.Y. Cnty.); US. 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.).
18 143 A.D.3d 1, 7 (1st Dep't 2016).
15
courts have repeatedly found to be enforceable), like the type of exculpatory
clauses that violate New York public policy because they either fully or almost
fully exonerate a party from liability for tortious misconduct; and (ii) ignored this
Court's holding in Metro. Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d at
439 that even intentional breaches of contract do not invoke that public policy if
there is no tortious intent to inflict harm on the other party at least in part through
means ofbreaching the contract.19 The Appellate Division's decision in Morgan
Stanley further highlights that the Order-if left intact- may lead to a slippery
slope where this industry standard provision designed by highly-sophisticated
parties to provide a complete remedy to the Trust can be swallowed whole by
artful legal pleadings made in hindsight. 20
The ramifications of the Appellate Division's Order go well beyond RMBS
litigation. The Order would "engender uncertainties [for] untold numbers of
sophisticated business transactions-a not insignificant potentiality in the State that
harbors the financial capital of the world." Bluebird Partners v. First Fid. Bank,
NA., 94 N.Y.2d 726, 739 (2000). Sole remedy provisions and limitations of
liability provisions can routinely be found in complex business contracts
19 The Appellate Division's decision in Morgan Stanley Mortgage Loan Trust
2006-13ARX is currently before this Court on appeal.
20 Morgan Stanley Mortgage Loan Trust 2006-13ARX, 143 A.D.3d at 9.
16
negotiated in New York.21 The purpose of those provisions is to promote
efficiency and forestall litigation. If such provisions could be rendered superfluous
through the careful crafting of breach of contract claims, the doors to liability in
this state would be thrown open. 22
Moreover, affirming the Appellate Division's Order would undermine
settled expectations in the law of contracts dramatically.23 That is no small matter
21 See, e.g., Scott v. Palermo, 233 A.D.2d 869 (4th Dep't 1996) (enforcing
contractual provision limiting damages in a contract for the purchase and sale of
perishable goods); Am. Tel & Tel. Co. v. NY. City Human Res. Admin., 833 F.
Supp. 962, 986 (S.D.N.Y. 1993) (contract for the sale of goods may contain
express warranties limiting remedies to the repair or replacement of the equipment
sold); see also Laidlaw Transp., Inc. v. Helena Chern. Co., 255 A.D.2d 869, 870
(4th Dep't 1998) (contract for lawn services limited recovery to the purchase price
and the court precluded recovery for consequential and incidental damages because
"in cases involving transactions of a commercial nature, it is generally not
unconscionable to allocate the risk to the buyer[.]"); Xerox Corp. v. Graphic Mgmt.
Servs. Inc., 959 F. Supp. 2d 311, 320-21 (W.D.N.Y. 2013) (enforcing exclusive
remedy provision limiting damages in lease agreement).
22 Affirmance of the Appellate Division's decision may create in terrorem effects
similar to those encountered by defendants in securities class actions in the face of
class certification. See Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1019 (2d Cir.
1973), vacated, 417 U.S. 156 (1974) (noting that defendants in large class actions
settle in the face of large damages "as the alternative to complete ruin and disaster,
irrespective of the merits of the claim"). Permitting potential plaintiffs to seek
recovery for damages beyond repurchase of the offending loans may create similar
pressures on defendants to settle rather than face potentially staggering losses.
23 See, e.g., Holy Props. Ltd., L.P. v. Kenneth Cole Prods., 87 N.Y.2d 130, 134
(1995) ("Parties who engage in transactions based on prevailing [New York] law
must be able to rely on the stability of such precedents"); see also Theodore
Eisenberg & Geoffry P. Miller, The Flight to New York: An Empirical Study of
Choice of Law and Choice of Forum Clauses in Publicly-Held Companies'
17
to the State of New York. It "is a financial capital of the world, serving as an
international clearinghouse and marketplace for a plethora of international
transactions, such as to be so recognized by our decisional law .... In order to
maintain its pre-eminent financial position, it is important that the justified
expectations of the parties to the contract be protected." J Zeevi and Sons, Ltd. v.
Grindlays Bank (Uganda) Ltd, 37 N.Y.2d 220, 227 (1975) (citations omitted).
As the Chief Judge's Task Force on Commercial Litigation in the 21st
Century recently observed, "[t]he rule of law [is a] key element[]" in "help[ing]
our State retain its role as the preeminent financial and commercial center of the
world," and "in keeping us competitive in today's global economy."24 New York
is a preeminent commercial center in substantial part because parties can rely on
the dependability and predictability of its respected law of contracts. And the
longstanding, essential principle underlying that dependability and predictability is
a straightforward one, a corollary of the rule of law: New York "courts 'may not
by construction add or excise terms, nor distort the meaning of those used and
Contracts, 30 CARDOZO L. REv. 1479, 1485 (2009) ("Unpredictable courts would
undermine New York's campaign to attract contracts.").
24 Chief Judge's Task Force on Commercial Litigation In the 21st Century, Report
and Recommendations to the Chief Judge of the State ofNew York 1 (June 2012),
available at
http://www.nycourts.gov/courts/comdiv/PDFs/ChiefludgesTaskForceOnCommerci
alLitigationinThe21 stpdf.pdf.
18
thereby make a new contract for the parties under the guise of interpreting the
writing."' Bailey v. Fish & Neave, 8 N.Y.3d 523, 528 (2007) (citations omitted).
Upholding that venerable principle requires reversal of the Appellate Division's
Order.
CONCLUSION
For the foregoing reasons, SIFMA respectfully submits that this Court
should reverse the holdings in the Appellate Division's October 13, 2015 Decision
and Order allowing Plaintiff to pursue monetary damages beyond the contractual
sole remedy to which Plaintiff agreed.
DATED: New York, New York
February 2, 2017
Shahzeb Lari
200 Park Ave.
New York, NY 10166
Telephone: (212) 318-6000
Facsimile: (212) 319-4090
Timothy D. Reynolds
515 South Flower St., 25th Floor
Los Angeles, CA 90071
Telephone: (213) 683-6000
Facsimile: (213) 627-0705
Attorneys for Amicus Curiae the Securities
Industry and Financial Markets Association
19
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