TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ............................................................................... 1
STATEMENT OF THE QUESTIONS PRESENTED .............................................. 7
STATEMENT OF THE NATURE OF THE CASE ................................................. 7
A. The Transaction ........................................................................... 7
B. WMC’s and JPMMAC’s Respective Warranties ....................... 8
C. BONY’s Claims and Allegations ..............................................13
D. The Motion Court’s Decision ...................................................14
STANDARD ON THIS APPEAL ........................................................................... 17
ARGUMENT ........................................................................................................... 19
I. THE MOTION COURT ERRED IN REFUSING TO INTERPRET
JPMMAC’S MORTGAGE LOAN SCHEDULE WARRANTY IN
ACCORDANCE WITH ITS PLAIN LANGUAGE. .................................... 19
A. The Motion Court’s Reading Renders Part of the
Contract Language Pure Surplusage. ........................................19
B. The Motion Court Grounded Its Flawed Interpretation On
an Erroneous Factual Supposition. ...........................................21
C. The Motion Court Improperly Relied on Extrinsic
Evidence. ...................................................................................22
D. The Motion Court’s Reading Ignores the Different
Parties’ Roles in the Transaction and the Structure of the
PSA. ..........................................................................................25
II. IN THE ALTERNATIVE, IF THIS COURT FINDS THE
CONTRACT LANGUAGE AMBIGUOUS, THEN IT SHOULD
REMAND THE MATTER TO THE MOTION COURT FOR
CONSIDERATION OF PERTINENT EXTRINSIC EVIDENCE. .............. 27
CONCLUSION ........................................................................................................ 30
TABLE OF AUTHORITIES
Page(s)
Cases
150 Broadway N.Y. Assocs., L.P. v. Bodner,
14 A.D.3d 1 (1st Dep’t 2004) ............................................................................. 17
Am. Express Bank, Ltd. v. Uniroyal, Inc.,
164 A.D.2d 275 (1st Dep’t 1990) ....................................................................... 23
Barnes v. Dungan,
261 A.D.2d 797 (3d Dep’t 1999) ........................................................................ 17
Beal Savings Bank v. Sommer,
8 N.Y.3d 318 (N.Y. 2007) ........................................................................ 5, 18, 19
Broadway Maint. Corp. v. City of New York,
19 A.D.2d 96 (1st Dep’t 1963) ........................................................................... 24
Coventry Real Estate Advisors, L.L.C. v. Developers Diversified Realty Corp.,
84 A.D.3d 583 (1st Dep’t 2011) ................................................................... 18, 23
Equivalent Pharm. Indus. Corp. v. Sec. Pac. Bus. Credit, Inc.,
177 A.D.2d 351 (1st Dep’t 1991) ....................................................................... 24
Finest Invs. v. Sec. Trust Co. of Rochester,
96 A.D.2d 227 (4th Dep’t 1983) ................................................................... 18, 20
Greenfield v. Philles Records,
98 N.Y.2d 562 (N.Y. 2002) ...................................................................... 6, 18, 23
LoFrisco v. Winston & Strawn LLP,
42 A.D.3d 304 (1st Dep’t 2007) ....................................................... 18, 23, 27, 28
Matter of Lipper Holdings, LLC v. Trident Holdings, LLC,
1 A.D.3d 170 (1st Dep’t 2003) ..................................................................... 18, 26
Maxine Co., Inc. v. Brink’s Global Servs. USA, Inc.,
94 A.D.3d 53 (1st Dep’t 2012) ..................................................................... 18, 28
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TABLE OF AUTHORITIES
(continued)
Page(s)
Merrill Lynch Mortg. Inv. Trust, Series 2006-RM4 v. Merrill Lynch Mortg.
Lending, Inc.,
No. 654403/2012, 2013 WL 5085006 (Sup. Ct. N.Y. Cty. Sept. 10, 2013) ...... 28
Merrill Lynch Mortg. Inv. Trust, Series 2006-RM4 v. Merrill Lynch Mortg.
Lending, Inc.,
118 A.D.3d 555 (1st Dep’t 2014) ................................................................. 28, 29
Orlich v. Helm Bros. Inc.,
160 A.D.2d 135 (1st Dep’t 1990) ....................................................................... 21
Ruttenberg v. Davidge Data Sys. Corp.,
215 A.D.2d 191 (1st Dep’t 1995) ................................................................... 5, 19
State of New York v. R.J. Reynolds Tobacco Co.,
304 A.D.2d 379 (1st Dep’t 2003) ....................................................................... 20
Tap Holdings, LLC v. Orix Fin. Corp.,
109 A.D.3d 167 (1st Dep’t 2013) ....................................................................... 17
Vectron Int’l, Inc. v. Corning Oak Holding, Inc.,
106 A.D.3d 1164 (3d Dep’t 2013) ...................................................................... 27
Yoi-Lee Realty Corp. v. 177th St. Realty Assocs.,
208 A.D.2d 185 (4th Dep’t 1983) ....................................................................... 20
Rules
CPLR 3211 ..................................................................................................... 1, 14, 17
CPLR 5501 ............................................................................................................... 17
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Defendants-Appellants J.P. Morgan Mortgage Acquisition Corp.
(“JPMMAC”) and JPMorgan Chase Bank, N.A. (“JPMC Bank”) (together, “the
JPMorgan Defendants”) appeal from a Decision and Order of the Supreme Court
of the State of New York for the County of New York (Kornreich, J.), dated
November 21, 2013 and entered on November 22, 2013 (the “Order”), to the extent
that the motion court denied the JPMorgan Defendants’ motion, pursuant to Rules
3211(a)(1) and (7) of the New York Civil Practice Law and Rules (“CPLR”), to
dismiss the third, fourth and seventh causes of action in the complaint filed in this
action on February 24, 2013 (the “Complaint”) by plaintiff The Bank of New York
Mellon (“BONY”), in its capacity as Securities Administrator for the J.P. Morgan
Mortgage Acquisition Trust 2006-WMC4 (the “Trust”), based on the motion
court’s interpretation of a disputed contractual warranty as a matter of law.
PRELIMINARY STATEMENT
This is a breach-of-warranty action relating to a residential mortgage-
backed securities (“RMBS”) transaction known as J.P. Morgan Mortgage
Acquisition Trust 2006-WMC4. BONY alleges, inter alia, that defendants WMC
Mortgage, LLC (“WMC”), the originator and/or owner of the mortgage loans that
were deposited into the Trust, and JPMMAC, the sponsor of the transaction, are
contractually required to repurchase from the Trust thousands of supposedly
defective loans. BONY alleges that WMC and JPMMAC made representations
and warranties (hereinafter, “warranties”) concerning the quality and
characteristics of the loans and that they breached those warranties. (R. 27.) The
narrow issue on this appeal is whether the motion court erred by adopting, as a
matter of law, an interpretation of one warranty provided by JPMMAC, which then
led the motion court to conclude that BONY had adequately alleged breaches of
that warranty. As explained below, far from being the only plausible reading of
this warranty compelled by its plain language, the motion court’s interpretation
renders part of the warranty language mere surplusage, conflicts with the motion
court’s reading of the same language in other warranties in the same contract and is
based on disputed (and erroneous) factual assumptions and extrinsic evidence.
Such a reading offends basic canons of contract construction and constitutes clear
error.
On this particular RMBS transaction, WMC made extensive
warranties and agreed to assume the primary repurchase obligation for any material
defects or fraud in its loans. WMC made most of its warranties as of December
20, 2006, the closing date of the transaction. WMC made a few others, however,
as of dates prior to closing, leaving a gap in warranty coverage between the
effective date of WMC’s warranties and the closing of the securitization.
JPMMAC agreed to fill the gap in warranty coverage by making this sub-set of
WMC’s warranties “[w]ith respect to the period from [the date of WMC’s
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warranties] to and including the Closing Date.” (R. 225.) In this way, WMC and
JPMMAC created seamless, but not overlapping, warranty protection.
As the motion court recognized, “[u]nlike WMC’s representations,
most of [JPMMAC’s] representations . . . contain a temporal limitation”—i.e., the
“with respect to the period” qualifying language—such that they do not constitute
warranties about the conditions of WMC’s loans at the time of origination, but
only “represent[] certain facts to be true within a specified time period.” (R. 20.)
For these so-called “gap” warranties (also referred to as “bring down” warranties
in the court below), JPMMAC simply warranted that nothing had transpired during
the brief gap period—after the “as of” date of WMC’s warranties but before
closing—with respect to the loans that would constitute a breach of the original
warranties. Thus, to state a valid repurchase claim against JPMMAC, it is not
enough for BONY to allege, as it has done, that WMC’s loans were plagued by
underwriting defects and fraud. (See, e.g., R. 29, 47-48.) Such allegations go to
the origination of the loans and thus might state a claim against WMC, but they do
not relate to the gap period and thus do not state a claim against JPMMAC.
In the court below, BONY did not dispute that its Complaint nowhere
alleges that any alleged defects in the loans occurred during the brief gap period
rather than at origination. Instead, BONY argued that JPMMAC’s warranties,
despite their explicit temporal limitation, are not gap warranties at all and are no
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different than WMC’s warranties attesting to the conditions of the loans at the time
of origination. (R. 511, 537-539.) With respect to all but one of JPMMAC’s
warranties, the motion court rightly rejected BONY’s proposed reading, finding
that JPMMAC’s warranties “contain a temporal limitation.” (R. 511.) But the
motion court reached a different conclusion with respect to a single warranty in the
same section of the contract—representation “(a)” in Section 2.06(a)(iii) of the
PSA, which provides that specified data about the loans obtained from the loan
files and transcribed on the mortgage loan schedule is “true, correct and complete.”
(See R. 225, 402.) The motion court found that this warranty “does not appear to
have a temporal limitation”—despite acknowledging that it is qualified by the
same “with respect to the period” language as the other warranties—and “in two
lines” rendered JPMMAC liable for origination defects just as if JPMMAC had
issued “40 or 60 separate warranties . . . tantamount to WMC’s.” (R. 20, 21.)
In so finding, the motion court did not point to any difference in
contract language justifying a different reading of this single warranty—because
there is none—but rather grounded its interpretation on a factual assumption about
the contents of the mortgage loan schedule and loan tape (used interchangeably by
the motion court), without receiving evidence that would bear upon its correctness.
Specifically, the motion court surmised that “[e]ither the loan tape accurately
reflected reality at origination, or it did not” and that “it is hard to see the logic of a
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‘bring down’ loan tape warranty, since the accuracy of the loan tape cannot
change.” (R. 22.) In fact, this is not true—data on the mortgage loan schedule can
change because, for example, the outstanding balance of each loan changes
monthly. But more fundamentally, the motion court’s reading renders the “with
respect to the period” language meaningless. The motion court offered no
alternative reading of this language; it simply excised it from the contract,
contravening the basic axiom “that a court should not adopt an interpretation which
will operate to leave a provision of a contract . . . without force and effect.”
Ruttenberg v. Davidge Data Sys. Corp., 215 A.D.2d 191, 196 (1st Dep’t 1995)
(alteration in original) (internal quotations and citation omitted); see Beal Savings
Bank v. Sommer, 8 N.Y.3d 318, 324 (N.Y. 2007) (“A reading of a contract should
not render any portion meaningless[.]”).
Compounding its hermeneutical mistake, the motion court supported
its reading of this warranty by relying on extrinsic evidence—the language of a
separate RMBS contract entered into by different parties. (See R. 22.) In the
motion court’s view, the fact that other parties worded their gap warranties
differently “highlight[ed] how JPMMAC might have drafted its PSA if it did not
intend to insure loan level defects.” (R. 22.) Of course, resort to extrinsic
evidence would have been appropriate only if the warranty language was found to
be ambiguous, in which case the motion court should not have interpreted the
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warranty as a matter of law. See Greenfield v. Philles Records, 98 N.Y.2d 562,
569 (N.Y. 2002) (“Extrinsic evidence of the parties’ intent may be considered only
if the agreement is ambiguous[.]”). Rather, the motion court should have
concluded that interpretation of the disputed warranty requires a full evidentiary
record that would include all pertinent extrinsic evidence from both parties as to
the purpose, meaning and context of the disputed warranty. Either the warranty
language compels the JPMorgan Defendants’ interpretation or it is ambiguous: In
no event could this warranty language, which includes the same “with respect to
the period” qualifier that the motion court found to impose temporal limits with
respect to other warranties, unambiguously favor BONY’s strained interpretation.
In short, the motion court erred by adopting an interpretation that
renders part of the contract language meaningless—under this interpretation, the
warranty would mean the same thing with or without the “with respect to the
period” language. That reading cannot be correct, and certainly is not the only
plausible reading as a matter of law. Had the motion court given effect to the plain
language of the warranty, as it should have done, then it would have concluded that
this warranty has the same temporal limitation as the other warranties in the same
section and does not insure against loan-level defects at origination. Correcting for
this flawed interpretation, the motion court should have dismissed BONY’s third
and fourth causes of action in their entirety and its seventh cause of action to the
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extent it is predicated on alleged breaches of JPMMAC’s warranties. Its contrary
ruling is infected with legal error and requires reversal.
STATEMENT OF THE QUESTIONS PRESENTED
1. Whether the motion court erred by finding that BONY
adequately alleged breaches of JPMMAC’s mortgage loan schedule warranty
based on the motion court’s interpretation that the warranty, despite its plain
language, lacks any temporal limitation and “in two lines” rendered JPMMAC
liable for origination defects just as if it had issued “40 or 60 separate warranties
. . . tantamount to WMC’s.” (R. 21.)
2. Whether the motion court erred by adopting, as a matter of law,
an interpretation of JPMMAC’s mortgage loan schedule warranty that cannot
constitute the only plausible reading of the warranty given that it (i) renders part of
the contract language meaningless; (ii) conflicts with the motion court’s
interpretation of the same contract language in other warranties; and (iii) is based
on disputed factual assumptions and extrinsic evidence.
STATEMENT OF THE NATURE OF THE CASE
A. The Transaction
To effectuate the transaction, the parties entered into several
interlocking agreements, starting with WMC’s sale of a pool of loans to JPMMAC
pursuant to a Mortgage Loan Sale and Interim Servicing Agreement dated July 1,
2005 (the “MLSA”). (R. 33-34.) The MLSA includes extensive warranties from
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WMC about the nature and quality of the loans. (R. 34-35.) JPMMAC then sold a
substantial portion of the loans it acquired from WMC to J.P. Morgan Acceptance
Corporation I (the “Depositor”) pursuant to an Assignment, Assumption and
Recognition Agreement dated as of December 20, 2006. (R. 34.) The Depositor,
in turn, entered into the PSA with, among others, U.S. Bank, N.A. as “Trustee,”
JPMMAC as “Seller,” JPMC Bank as “Servicer” and BONY as “Securities
Administrator.” (R. 34.)
The PSA transferred the Depositor’s ownership of the loans, and the
Depositor’s related rights, including WMC’s warranties, to the Trustee, for the
benefit of certificateholders. (R. 37.) In the PSA, JPMMAC also made certain
limited warranties concerning the loans, apart from those previously made by
WMC and passed through to the Trustee. Under the PSA, BONY, as the Securities
Administrator, has the right to bring claims for repurchase on behalf of the Trustee
for alleged breaches of warranties. (R. 37.)
B. WMC’s and JPMMAC’s Respective Warranties
The parties to RMBS transactions may establish warranty coverage in
different ways. In some deals, the “sponsor” or “seller” acquires loans from third-
party mortgage originators and obtains contractual warranties about the loans from
those originators. It then securitizes the loans and makes separate, independent
warranties for the benefit of the trust through separate contracts. Under this “back-
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to-back” arrangement, the trustee has no direct recourse against the originators for
breaching loans, but rather has recourse against the seller, which, in turn, has
recourse against the originators to the extent the alleged breaches violate both sets
of warranties. Alternatively, the parties may decide to simply pass through the
originator’s warranties to the trustee rather than have the sponsor make
independent warranties. Under this “pass-through” structure, the trustee has direct
recourse against the originator for breaching loans.
Here, as explained below, the parties agreed upon a modified “pass-
through” structure in which WMC’s warranties were passed through to the Trust,
giving the Trustee (and the Securities Administrator) direct recourse against WMC
for breaching loans. Because some of WMC’s warranties were “passed through”
only as of dates before the closing of the deal, JPMMAC filled those temporal gaps
in warranty coverage by making some of the same warranties that WMC made, but
only for expressly defined periods of time, so as to create seamless warranty
coverage.
WMC’s Warranties. In the MLSA, WMC made over 60 warranties
“concerning the nature, characteristics, history and quality of the Mortgage Loans”
and the underlying mortgage loan files. (R. 34-35.) As originator and/or owner of
the loans, WMC represented, among other things, that (i) the loans had complied
with the relevant underwriting guidelines used at origination; and (ii) there was no
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fraud or misrepresentation by any party in the origination of the loans. (R. 35-36.)
As noted above, WMC’s warranties, originally made to JPMMAC, were ultimately
assigned to the Trustee, and BONY, as Securities Administrator, now seeks to
enforce them against WMC. (R. 36-37.)
JPMMAC’s Warranties. In the PSA, JPMMAC made three
categories of supplemental warranties regarding the loans. First, to specify the
effective dates of each party’s warranties in the PSA, JPMMAC warranted, without
attesting to their truth or accuracy, that WMC had made its warranties in the
MLSA (which were repeated verbatim in Schedule 4 of the PSA) as of three
specified dates: (i) the “Closing Date” (December 20, 2006) (PSA § 2.06(a)(i));
(ii) the “Whole Loan Sale Date” (October 30, 2006) (PSA § 2.06(a)(ii)); or (iii) the
“Servicing Transfer Date” (December 1, 2006) (PSA § 2.06(a)(iv)). (See R. 225.)
None of these warranties is at issue on this appeal.
Second, with respect to WMC’s warranties made as of either the
Whole Loan Sale Date or Servicing Transfer Date, JPMMAC separately made
those warranties for the brief period from their effective date to and including the
closing of the transaction. Because WMC had made those prior warranties as of a
date before closing, it left a gap in warranty coverage from either October 30, 2006
or December 1, 2006, depending on the warranty, to the closing date of December
20, 2006. JPMMAC agreed to cover those gaps. As there was no gap for WMC’s
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warranties made as of closing, JPMMAC did not make those warranties for any
period, as reflected in Section 2.06(a) of the PSA.
JPMMAC’s gap warranties are found in PSA §§ 2.06(a)(iii) and (v).
Section 2.06(a)(iii) refers to those warranties made by WMC as of the Whole Loan
Sale Date (repeated verbatim in Schedule 4 of the PSA) and states as follows:
With respect to the period from such Whole Loan Sale
Date [October 30, 2006] to and including the Closing
Date [December 20, 2006], [JPMMAC] hereby makes
the representations and warranties contained in paragraph
(a), (bb) and (vv) of Schedule 4 attached hereto to and for
the benefit of the Depositor, the Trustee, the Securities
Administrator and the Trust Fund.
(R. 225 (emphasis added).) Representation “(a)” above is the mortgage loan
schedule warranty, which states that “[t]he information set forth in the Mortgage
Loan Schedule and the tape delivered by the Seller to the Purchaser is true, correct
and complete in all material respects.” (R. 402.) The mortgage loan schedule
includes specified data about the loans, including, as described in Part I.B., infra,
several data fields that can change after origination or are not knowable until some
date after origination. (R. 74-76.)
Section 2.06(a)(v) refers to those WMC warranties made as of the
Servicing Transfer Date and states as follows:
With respect to the period from such Servicing Transfer
Date [December 1, 2006] to and including the Closing
Date [December 20, 2006], [JPMMAC] hereby makes
the representations and warranties contained in
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paragraphs (b), (c), (e), (g), (k), (l), (m), (p), (x), (kk),
(mm), (nn), (pp), (tt) and (zz) of Schedule 4 attached
hereto to and for the benefit of the Depositor, the Trustee,
the Securities Administrator and the Trust Fund.
(R. 225 (emphasis added).) As the contract language in Sections 2.06(a)(iii) and
(v) reveals, all of the warranties referenced therein—including representation
“(a)”—are preceded by the “with respect to the period” qualifier. For these
warranties, JPMMAC represented only that nothing had changed with regard to the
loans from either October 30, 2006 or December 1, 2006 to December 20, 2006
that would constitute a breach—it did not warrant anything about the loans at the
time of origination. (See R. 470-472.)
Third, JPMMAC made a single warranty that was not made with
respect to a limited time period. In PSA § 2.06(b), JPMMAC warranted that, “as
of the Closing Date,” the loans complied with law and were not subject to certain
“‘high-cost’” or “‘predatory’” lending laws. Unlike the gap warranties in Section
2.06(a)(iii) and (v), this warranty, often a rating agency requirement, is not limited
by the “with respect to the period” qualifier. There is accordingly no dispute that
this warranty extends to the time of origination.1
1 As argued below, although the warranty in Section 2.06(b) lacks any
temporal limitation, BONY does not adequately allege a breach of this warranty.
(See R. 37.) The motion court never reached this question because it had
concluded that BONY adequately alleged a breach of JPMMAC’s mortgage loan
schedule warranty, which, in the motion court’s view, constitutes an all-
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C. BONY’s Claims and Allegations
BONY asserts three causes of action against the JPMorgan
Defendants that are impacted by this appeal: (i) breach of warranties against
JPMMAC (third cause of action); (ii) failure to repurchase breaching loans against
JPMMAC (fourth cause of action); and (iii) failure to notify other contractual
parties of alleged breaches against JPMMAC and JPMC Bank (seventh cause of
action).2 (R. 53-54, 56-57.) In its 129-paragraph Complaint, BONY hardly
mentions JPMMAC’s warranties, devoting just two conclusory paragraphs to
JPMMAC’s alleged breaches. (R. 37.) Further, BONY nowhere alleges that any
of the alleged defects in the loans occurred during any of the gap periods rather
than at origination. Rather, BONY wholly ignores the temporal limitation of
JPMMAC’s gap warranties and lumps JPMMAC and WMC together as if they
made the exact same warranties and assumed the same repurchase risk on this
transaction.
encompassing warranty against origination defects “tantamount to WMC’s
[warranties],” rendering other warranties mostly redundant. (R. 21.)
2 BONY also asserts a claim for failure to provide loan files against JPMC
Bank (sixth cause of action) (R. 55-56), which is not part of this appeal, and had
asserted a claim for declaratory judgment against JPMMAC (eighth cause of
action) (R. 58-59), which was dismissed by the motion court and so likewise forms
no part of this appeal (R. 18 n.6, 24).
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D. The Motion Court’s Decision
On April 26, 2013, the JPMorgan Defendants moved to dismiss all
claims against them pursuant to CPLR 3211(a)(1) and (a)(7).3 The JPMorgan
Defendants argued—and BONY did not dispute—that JPMMAC is not
contractually liable for any alleged breaches by WMC. The JPMorgan Defendants
also argued that, to the extent BONY alleged that JPMMAC breached its own
separate warranties in the PSA, there is no allegation that any of the supposed
defects or fraud in the loans occurred during the short gap period applicable to
JPMMAC’s warranties rather than at origination. Because BONY failed to allege
a “breach” against JPMMAC, the JPMorgan Defendants argued that the motion
court should dismiss BONY’s third and fourth causes of action in their entirety
(and, concomitantly, its seventh cause of action to the extent that it is based on
JPMMAC’s alleged breaches).4 (R. 487-90.) BONY opposed the motion,
principally by arguing that the JPMorgan Defendants were “reading into these
representations nonexistent temporal limitations,” (R. 511) and that JPMMAC’s
3 On the same day, WMC filed its own motion to dismiss the Complaint.
4 The JPMorgan Defendants also argued that the failure to notify claim
(seventh cause of action) is barred by the terms of the PSA and inadequately
pleaded (R. 493-94), and that the failure to produce loan files claim (sixth cause of
action) has no legal basis and is otherwise moot (R. 491-93). The motion court
rejected these arguments. (R. 18 n.6.) Although the JPMorgan Defendants
respectfully submit that the motion court should have dismissed these claims in
their entirety, these aspects of the November 21, 2013 Order are not the subject of
this appeal.
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representations and warranties “are no different from WMC’s . . . Representations
and Warranties.” (R. 538.)
In its November 21, 2013 Order, the motion court correctly found
that, “[u]nlike WMC’s representations, most of the representations [by JPMMAC]
in Section 2.06 contain a temporal limitation” and that “JPMMAC was only
representing certain facts to be true within a specified time period,” because
“[e]ach subsection states the applicable time period and then references sections in
an attached ‘Schedule 4,’ which contains a list of representations.” (R. 20.) The
motion court explained that, by way of example:
Section 2.06(a)(v)’s time period is the Servicing Transfer
Date to the Closing Date (December 1 to December 20,
2006). One of the listed representations, ‘(e),’ is a
warranty about properties having certain insurance
coverage. In other words, JPMMAC is warranting that,
for the stated time period, a particular fact (the existence
of coverage) is true.
(R. 20.) Despite understanding the import of these express temporal limitations
and giving effect to them as to all other warranties, the motion court found that
JPMMAC’s warranty about the mortgage loan schedule guaranteed the truth of
certain facts at the time of origination. (R. 22.) The motion court concluded that
this warranty, which contains the exact same timing language as other warranties,
must be treated differently because “it is hard to see the logic of a ‘bring down’
loan tape warranty.” (R. 22.)
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The motion court grounded this interpretation on its assumption that,
as a factual matter, “[e]ither the loan tape accurately reflected reality at origination,
or it did not.” (R. 22.) The motion court also relied upon extrinsic evidence to
justify its reading of the warranty, noting that “plaintiff submits an example of
another bank’s PSA, which has a ‘bring down’ warranty stating that ‘no event has
occurred in [a specified time period],’” and found that this difference illustrates
“how JPMMAC might have drafted its PSA if it did not intend to insure loan level
defects.” (R. 22.) According to the motion court, “[i]f JPMMAC did not intend to
warrant loan-level defects, it should have drafted the PSA differently,” presumably
using that other formulation. (R. 22.)
The motion court explained that, “[r]ather than list 40 or 60 separate
warranties about borrower income, occupancy, credit scores, and so forth, in two
lines, JPMMAC issued a warranty tantamount to WMC’s.” (R. 21.) In other
words, the motion court found that this single warranty exposed JPMMAC to the
same repurchase risk assumed by WMC in “40 or 60 warranties.” Based on that
interpretation, the motion court concluded that BONY adequately alleged breaches
of JPMMAC’s warranty and thus refused to dismiss the third, fourth and seventh
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causes of action of the Complaint, to the extent they are based on alleged breaches
of JPMMAC’s warranties. (See R. 18 n.6.) This appeal followed.5
STANDARD ON THIS APPEAL
This Court reviews de novo the denial of a motion to dismiss. See
CPLR 5501(c); Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d 167, 173-74
(1st Dep’t 2013) (citing Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994)); Barnes v.
Dungan, 261 A.D.2d 797, 797 (3d Dep’t 1999). Dismissal is appropriate under
CPLR 3211(a)(1) where “a defense is founded upon documentary evidence,” and
under CPLR 3211(a)(7) where “the pleading fails to state a cause of action.”
Where, as here, “a written agreement . . . unambiguously contradicts the
allegations supporting a litigant’s cause of action for breach of contract, the
contract itself constitutes documentary evidence warranting the dismissal of the
complaint.” 150 Broadway N.Y. Assocs., L.P. v. Bodner, 14 A.D.3d 1, 5 (1st Dep’t
5 On February 5, 2014, the JPMorgan Defendants moved for leave to reargue
the motion court’s decision to the extent it found that “‘representation ‘(a)’ in
Section 2.06(a)(iii) [of the PSA] does not appear to have a temporal limitation’
because ‘the accuracy of the loan tape cannot change.’” (R. 737 (quoting the
Order (R. 18 n.6, 20-22).) The JPMorgan Defendants argued that, in fact, the
mortgage loan schedule contains several items that can change prior to closing and
that there is therefore nothing illogical about interpreting that warranty in the same
manner as the other warranties in the same section. (R. 741-44.) The JPMorgan
Defendants also argued that, if the motion court considers the clause ambiguous,
then it should afford both parties the opportunity to present all pertinent extrinsic
evidence on the meaning of the disputed warranty. (R. 852-53.) The motion court
denied that motion on July 29, 2014. (R. 855-859.)
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2004); see also Coventry Real Estate Advisors, L.L.C. v. Developers Diversified
Realty Corp., 84 A.D.3d 583, 586 (1st Dep’t 2011) (on a motion to dismiss, a court
should “consider[] only the allegations of the complaint, as well as the plain
meaning of the documents appended to the complaint itself”).
In construing a contract, the court must “give effect to each and every
part” of the contract language, Maxine Co., Inc. v. Brink’s Global Servs. USA, Inc.,
94 A.D.3d 53, 56 (1st Dep’t 2012), and should avoid interpretations that are
“commercially unreasonable” or “contrary to the reasonable expectations of the
parties,” Matter of Lipper Holdings, LLC v. Trident Holdings, LLC, 1 A.D.3d
170,171 (1st Dep’t 2003). If contractual language “is reasonably susceptible to
more than one interpretation, and the difficulty is not resolved by reading the
agreement as a whole, the provision is ambiguous and neither side is entitled to [a
decision] as a matter of law.” LoFrisco v. Winston & Strawn LLP, 42 A.D.3d 304,
307 (1st Dep’t 2007). It is only upon a finding of ambiguity that the trier of fact
may consider extrinsic evidence. Greenfield, 98 N.Y.2d at 569. A court should
not adopt an interpretation that renders part of the contract surplusage, see, e.g.,
Beal Sav. Bank, 8 N.Y.3d at 324, or that treats the same words used in different
parts of a writing in different ways, see, e.g., Finest Invs. v. Sec. Trust Co. of
Rochester, 96 A.D.2d 227, 230 (4th Dep’t 1983). Because the motion court’s
-18-
interpretation runs afoul of these basic rules of contract construction, its ruling
constitutes reversible error.
ARGUMENT
I. THE MOTION COURT ERRED IN REFUSING TO INTERPRET
JPMMAC’S MORTGAGE LOAN SCHEDULE WARRANTY IN
ACCORDANCE WITH ITS PLAIN LANGUAGE.
A. The Motion Court’s Reading Renders Part of the Contract
Language Pure Surplusage.
In finding that “representation ‘(a)’ in Section 2.06(a)(iii) does not
appear to have a temporal limitation, despite the stated time period of the Whole
Loan Sale Date to the Closing Date (October 30 to December 20, 2006)[,]” (R. 20
(emphasis added)), the motion court adopted an interpretation that disregards the
plain language of the PSA. The “with respect to the period” clause qualifies all of
the warranties in Section 2.06(a)(iii), including “representation ‘(a)’.” The motion
court did not offer an alternative reading of the “with respect to the period”
qualifier as it pertains to representation “(a)”; it simply excised it from the
warranty altogether. Under the motion court’s reading, the warranty would mean
the same thing with or without the “with respect to the period” qualifier. Such a
reading violates the basic rule of contract construction that courts should avoid
interpretations that render contractual phrases superfluous or meaningless. See,
e.g., Beal Sav. Bank, 8 N.Y.3d at 324 (“A reading of the contract should not render
any portion meaningless.”); Ruttenberg, 215 A.D.2d at 196 (“An interpretation that
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gives effect to all the terms of an agreement is preferable to one that ignores terms
or accords them an unreasonable interpretation.”); Yoi-Lee Realty Corp. v. 177th St.
Realty Assocs., 208 A.D.2d 185, 190 (4th Dep’t 1983) (“[C]ontracts should be
construed to give force and effect to their provisions . . . and not in a manner so as
to render them meaningless.”).
Further, the motion court’s ruling leads to the anomalous and
internally inconsistent conclusion that the same phrase in the same provision—
“[w]ith respect to the period from such Whole Loan Sale Date to and including the
Closing Date”—means different things depending on the warranty. The same
clause appears in front of three different warranties in Section 2.06(a)(iii), and yet
the motion court says that for two of the warranties, it imposes a temporal limit,
but for the third, the mortgage loan schedule warranty, it does not. (See R. 21-22.)
The same clause cannot mean two different things at the same time. See State of
New York v. R.J. Reynolds Tobacco Co., 304 A.D.2d 379, 380 (1st Dep’t 2003)
(the same phrase, appearing several times in a contract, “should presumptively be
given the same meaning” in each location); Finest Invs., 96 A.D.2d at 230
(4th Dep’t 1983) (“We may presume that the same words used in different parts of
a writing have the same meaning.”). There is no basis in the contract language to
construe this one warranty in a different manner from the others that are preceded
by the same temporal limitation.
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B. The Motion Court Grounded Its Flawed Interpretation On an
Erroneous Factual Supposition.
The motion court also erred in relying on a factual assumption to
override the plain language of the contract. In particular, the court below assumed
that “the accuracy of the loan tape cannot change” and that “[e]ither the loan tape
accurately reflected reality at origination, or it did not.” (R. 22.) Based on this
conjecture, the motion court believed that it would strain “logic” to read
JPMMAC’s mortgage loan schedule warranty as applying only to a limited period
of time after origination, and treated one warranty as different from others that
contain the same express temporal limitation. (R. 21-22.) But the motion court
should not have made a factual assumption without receiving evidence that would
bear upon its correctness. Cf. Orlich v. Helm Bros. Inc., 160 A.D.2d 135, 141 (1st
Dep’t 1990) (holding that the lower court had erred by going “outside the record to
fashion theories of liability” and relying “on materials and factual assumptions not
found anywhere in the record”). This is essential here, because the factual
assumption on which the motion court’s decision is founded—that the mortgage
loan schedule cannot change—is incorrect.
In fact, the motion court failed to consider that the mortgage loan
schedule contains several items that can change prior to closing or that are not even
knowable until sometime after origination. No fewer than nine loan-specific fields
listed in the definition of “Mortgage Loan Schedule” in the MLSA represent data
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that could change, or only become known, after the origination of the loans. These
include, among others:
• the next due date of the Mortgage Loan;
• a twelve month history for the Mortgage Loan and the number of
times thirty, sixty, and ninety days delinquent in the past twelve
months;
• a code indicating the payment status of the Mortgage Loan (i.e.
bankruptcy, foreclosure, REO);
• the actual principal balance of the Mortgage Loan as of the close of
business on the related Cut-off Date, after deduction of payments of
principal actually collected on or before the related Cut-off Date.
(R. 74-76.) For example, with each passing month, the “twelve month history” of
each loan will change, as might its payment status. From one month to the next, a
borrower might become delinquent, declare bankruptcy, or pay off the entire loan
early. Thus, contrary to the motion court’s finding, there is nothing illogical about
construing this one warranty in Section 2.06(a)(iii) of the PSA as having the same
temporal limitation that applies to the other warranties in that same section.
C. The Motion Court Improperly Relied on Extrinsic Evidence.
The motion court also relied, at least in part, upon extrinsic evidence
submitted by BONY—a separate securitization contract entered into among
different parties—in construing JPMMAC’s mortgage loan schedule warranty.
(See R. 22 (stating that the difference between JPMMAC’s language and that of
-22-
another company’s RMBS contract “does highlight how JPMMAC might have
drafted its PSA if it did not intend to insure loan level defects”).) This reliance was
misguided for at least three reasons:
First, BONY never cited or referenced this other contract in its
Complaint, and thus it should not have been considered at all in adjudicating
defendants’ dismissal motion. Coventry, 84 A.D.3d at 586 (on a motion to
dismiss, a court should “consider[] only the allegations of the complaint, as well as
the plain meaning of the documents appended to the complaint itself”).
Second, and perhaps more fundamentally, reliance on extrinsic
evidence is only appropriate if the agreement is ambiguous. Greenfield, 98 N.Y.2d
at 569. But if an agreement is ambiguous, its meaning should not be decided as a
matter of law on a motion to dismiss. LoFrisco, 42 A.D.3d at 307. Yet, in
construing the warranty as a matter of law, the motion court heard extrinsic
evidence from only one party, and relied on that evidence to support its reading.
This was error, because extrinsic evidence cannot negate the plain language of a
contract. Am. Express Bank, Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 278 (1st
Dep’t 1990) (“Resort to either of these sets of extrinsic facts is inappropriate,
however, because the language of the contract is plain and unambiguous.”).
Third, aside from the inappropriateness of considering this evidence at
all, the mere fact that another party wrote its agreement differently does not mean
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that this other formulation is the only permissible way to write a gap warranty. As
this Court has held, “[t]here is no reason to refer to any other agreements in order
to determine the intent of the [contract]” because “other agreements . . . to which
defendant was not a party . . . have no relevance under the circumstances.”
Equivalent Pharm. Indus. Corp. v. Sec. Pac. Bus. Credit, Inc., 177 A.D.2d 351,
352 (1st Dep’t 1991) (internal citations omitted). Yet, both BONY and the motion
court seem to think that the only way JPMMAC could have made a gap warranty
was to use language similar to that found in a Morgan Stanley securitization
contract, stating that “no event has occurred in the period from the . . . Servicing
Transfer Date to the Closing Date that would render such representations and
warranties to be untrue.” (R. 560.) That is perhaps one way to draft a “gap”
warranty, but it is not the only way. Again, the motion court did not offer an
alternative reading of the “with respect to the period” qualifier preceding the
disputed warranty in the actual contract before it. Rather, it elected to rewrite the
contract to omit the clause, apparently because it did not match Morgan Stanley’s
language. That is an impermissible result. Cf. Broadway Maint. Corp. v. City of
New York, 19 A.D.2d 96, 99 (1st Dep’t 1963) (noting that, “[I]f ambiguity exists[,]
other contracts made between the same parties may be examined if thereby the
ambiguity is clarified”) (emphasis added).
-24-
D. The Motion Court’s Reading Ignores the Different Parties’ Roles
in the Transaction and the Structure of the PSA.
The motion court’s reading is wrong for another reason: It turns the
economics of this transaction on its head. In construing JPMMAC’s mortgage loan
schedule warranty as unbounded in time, the motion court ignored that WMC and
JPMMAC made very different warranties reflective of their distinct roles in the
transaction. Whereas, in the MLSA, WMC—the originator and/or owner of the
loans—made more than sixty different warranties about its loans, in the PSA,
JPMMAC made only a handful of secondary representations, expressly limited in
time. (R. 225.) JPMMAC and WMC assumed very different repurchase
obligations on this transaction. Yet, under the motion court’s reading of
JPMMAC’s mortgage loan schedule warranty, JPMMAC effectively assumed the
same repurchase exposure as WMC. Were that the case, there would be no reason
to include temporal limitations on JPMMAC’s warranties. WMC’s warranties are
not so limited.
Further, the limited nature of JPMMAC’s warranties in Section
2.06(a) is confirmed by a parallel provision of the PSA. As previously noted, in
Section 2.06(b), JPMMAC warranted that “as of the Closing Date,” the loans in the
Trust were not “high-cost” or “predatory,” as defined by various laws. In contrast
to Sections 2.06(a)(iii) and (v), there is no “with respect to the period” qualifier for
this warranty. That is no mere drafting oversight. When the parties intended for
-25-
JPMMAC to be liable for certain kinds of breaches, regardless of when they
occurred, they knew how to do so.
According to the motion court, however, a single representation, made
with respect to a limited period of time, was “in two lines,” equivalent to all of
WMC’s “40 or 60 separate warranties.” (R. 21.) This result is “commercially
unreasonable” and “contrary to the reasonable expectations of the parties” in these
circumstances. Lipper Holdings, LLC, 1 A.D.3d at 171. Sophisticated commercial
parties, represented by experienced counsel, simply do not draft agreements in
which a single, expressly limited representation by one party is somehow worth
scores of more specific, and temporally unlimited, representations by another.
* * *
In sum, the motion court’s reading cannot be the correct reading
because it contravenes basic canons of contract interpretation. The only sensible
way to read this warranty, without creating surplusage, is to hold that it is a gap
warranty, just like the other warranties in the same section of the PSA. The motion
court should be reversed to the extent that it denied the JPMorgan Defendants’
motion to dismiss the third, fourth and seventh causes of action based on its
incorrect interpretation of JPMMAC’s mortgage loan schedule warranty.
-26-
II. IN THE ALTERNATIVE, IF THIS COURT FINDS THE CONTRACT
LANGUAGE AMBIGUOUS, THEN IT SHOULD REMAND THE
MATTER TO THE MOTION COURT FOR CONSIDERATION OF
PERTINENT EXTRINSIC EVIDENCE.
For all of the foregoing reasons, the motion court should have
interpreted JPMMAC’s mortgage loan schedule warranty as a gap warranty,
consistent with its plain language. If, however, this Court finds the warranty
language ambiguous, the proper course would be to reverse and remand the
question to the motion court so that the parties have the opportunity to present all
pertinent extrinsic evidence as to the meaning, purpose and context of the disputed
warranty. See Vectron Int’l, Inc. v. Corning Oak Holding, Inc., 106 A.D.3d 1164,
1165 (3d Dep’t 2013) (in the event of ambiguity, both parties should have the
opportunity “to discover and present extrinsic evidence of the parties’ intent”). In
either event, the motion court erred by adopting, as matter of law, an interpretation
that is not compelled by the plain warranty language: it either adopted an
erroneous reading of the warranty given its plain language or it should have found
the warranty language ambiguous.
Contractual language is ambiguous if it “is reasonably susceptible to
more than one interpretation, and the difficulty is not resolved by reading the
agreement as a whole[.]” LoFrisco, 42 A.D.3d at 307. Here, the warranty
language cannot be reasonably susceptible only to the motion court’s reading
because that reading (i) renders part of the contract surplusage; (ii) conflicts with
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the motion court’s reading of the same language with respect to other warranties;
and (iii) is predicated on contested factual assumptions and extrinsic evidence.
The JPMorgan Defendants’ proposed interpretation is certainly at least a
reasonable alternative interpretation. Indeed, it is only the JPMorgan Defendants’
interpretation that gives meaning to each portion of the contract’s language as
required by well-settled principles, see Maxine Co., Inc., 94 A.D.3d at 56, and that
makes sense in light of WMC’s role as the originator and primary maker of
warranties concerning its mortgage loans. As such, the motion court’s ruling that
the JPMorgan Defendants’ interpretation was incorrect and unreasonable as a
matter of law is clearly wrong. See LoFrisco, 42 A.D.3d at 307 (holding that if a
contract “is ambiguous . . . neither side is entitled to [a decision] as a matter of
law”).
Another RMBS repurchase decision, Merrill Lynch Mortgage
Investors Trust, Series 2006-RM4 v. Merrill Lynch Mortgage Lending, Inc., 118
A.D.3d 555, 555 (1st Dep’t 2014), is instructive on this point. In that case, the
motion court denied a motion to dismiss, agreeing with the plaintiffs that an RMBS
contract was “clear and unambiguous on its face,” and required that “if ResMAE
fails to perform, Merrill must step in to satisfy ResMAE’s obligations.” Merrill
Lynch Mortg. Investors Trust, Series 2006-RM4 v. Merrill Lynch Mortg. Lending,
Inc., 2013 WL 5085006, at *7 (Sup. Ct. N.Y. Cty. Sept. 10, 2013). In other words,
-28-
the motion court denied the defendants’ motion to dismiss because it thought that
one party, Merrill, had clearly accepted repurchase liability that was coextensive
with that of another party, ResMAE. This Court disagreed, and ruled that the
motion court’s conclusion that the contract unambiguously favored the plaintiffs
was error. Merrill Lynch, 118 A.D.3d at 555. Instead, this Court affirmed the
denial of the motion to dismiss on the alternative basis that “[t]he contract
provision at issue is ambiguous, and therefore its meaning cannot be determined
without reference to extrinsic evidence.” Id. Here, too, although there should not
be any doubt that the JPMorgan Defendants’ interpretation of the disputed
warranty is the correct interpretation as a matter of law, if there is any such doubt,
the Court should remand the question and allow all parties to present extrinsic
evidence and proffer arguments based on a complete record.
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CONCLUSION
For the foregoing reasons, the Order should be reversed to the extent
that the motion court misconstrued JPMMAC’s mortgage loan schedule warranty,
and BONY’s third and fourth causes of action should be dismissed in their entirety
and its seventh cause of action should be dismissed to the extent that it is based on
alleged breaches of JPMMAC’s warranties.
Dated: November 5, 2014
New York, New York
Respectfully submitted,
SULLIVAN & CROMWELL LLP
Robert A. Sacks
1888 Century Park East
Los Angeles, California 90067-1725
Tel: (310) 712-6600
Fax: (310) 712-8800
Darrell S. Cafasso
125 Broad Street
New York, New York 10004-2498
Tel: (212) 558-4000
Fax: (212) 291-9307
Attorneys for Defendants-Appellants
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APPELLATE DIVISION – FIRST DEPARTMENT
PRINTING SPECIFICATION STATEMENT
This brief was prepared on a computer using Microsoft Word and a proportionally
spaced typeface.
Name of typeface: Times New Roman
Point size: 14
Line spacing: Double
The total number of words in this brief, inclusive of headings and footnotes and
exclusive of pages containing the table of contents, table of authorities and this
Statement is 6,987, as counted by Microsoft Word.
Supreme Court of the State of New York
Appellate Division—First Department
THE BANK OF NEW YORK MELLON, solely as Securities
Administrator for J.P. Morgan Mortgage Acqusition Trust
2006-WMC4,
Plaintiff-Respondent,
-against-
WMC MORTGAGE, LLC
Defendant,
-and-
J.P. MORGAN MORTGAGE ACQUSITION
CORPORATION; and JPMORGAN CHASE BANK, N.A.,
Defendants-Appellants.
Index No. 654464/2012
STATEMENT PURSUANT TO CPLR 5531
1. The Index Number in the trial court was 654464/2012.
2. The full names of the parties are set forth above. WMC Mortgage, LLC, a defendant in
the action below, is not a party to this appeal.
3. The action was commenced in the Supreme Court, New York County.
4. The summons with notice was filed on December 20, 2012, and the complaint was served
on February 24, 2013. Answers were filed on December 17, 2013.
5. The object of the action is to recover damages for alleged injuries arising out of a
securitization contract.
6. The appeal is from a Decision and Order of the Supreme Court, New York County, dated
November 21, 2013, and entered November 22, 2013, issued by the Honorable Justice
Shirley Werner Kornreich.
7. The appeal is being perfected on the full record method.