Nomura Asset Capital Corporation, et al., Respondents-Appellantsv.Cadwalader, Wickersham & Taft LLP, Appellant-Respondent.BriefN.Y.Sep 8, 2015To be Argued by: DAVID R. MARRIOTT (Time Requested: 30 Minutes) APL-2014-00171 New York County Clerk’s Index No. 116147/06 Court of Appeals of the State of New York NOMURA ASSET CAPITAL CORPORATION and ASSET SECURITIZATION CORPORATION, Plaintiffs-Respondents-Cross-Appellants, – against – CADWALADER, WICKERSHAM & TAFT LLP, Defendant-Appellant-Cross-Respondent. BRIEF FOR DEFENDANT-APPELLANT- CROSS-RESPONDENT CRAVATH, SWAINE & MOORE, LLP Attorneys for Defendant-Appellant- Cross-Respondent Worldwide Plaza 825 Eighth Avenue New York, New York 10019 Tel.: (212) 474-1000 Fax: (212) 474-3700 Date Completed: August 18, 2014 i TABLE OF CONTENTS TABLE OF AUTHORITIES ................................................................................... iii CORPORATE DISCLOSURE STATEMENT ......................................................... v STATEMENT OF JURISDICTION......................................................................... vi TABLE OF AUTHORITIES .................................................................................. vii PRELIMINARY STATEMENT ............................................................................... 1 STATEMENT OF THE CASE .................................................................................. 9 A. Nomura and the CMBS Industry. .......................................................... 9 B. Real Estate Mortgage Investment Conduits. ....................................... 10 C. Perry Gershon and the Securitization Group. ..................................... 12 D. The Doctors Hospital Loan. ................................................................ 13 E. Retention of Cadwalader. .................................................................... 14 F. The D5 Securitization. ......................................................................... 17 G. Cadwalader’s REMIC Opinion. .......................................................... 19 H. The DHL’s Default and the Trustee Action. ....................................... 21 I. This Lawsuit. ....................................................................................... 22 J. First Department Decision. ................................................................. 25 K. Remand Before Present Appeal. ......................................................... 28 LEGAL STANDARDS ........................................................................................... 28 A. Summary Judgment. ............................................................................ 28 B. Legal Malpractice. ............................................................................... 29 ARGUMENT ........................................................................................................... 30 ii I. THE FIRST DEPARTMENT ERRED IN HOLDING THAT THE DEAL HIGHLIGHTS DOCUMENT RAISED A POTENTIAL RED FLAG. ............................................................................................................ 30 A. The Deal Highlights Document Is Consistent with a Finding of REMIC Eligibility. .............................................................................. 30 B. In the Context of the D5, Cadwalader Had No Reason To View the Deal Highlights Document as a Red Flag. .................................... 33 C. Nomura’s Only Remaining Claim Depends on Hindsight. ................ 38 II. THE FIRST DEPARTMENT ERRED IN FINDING A TRIABLE ISSUE WHERE THE UNDISPUTED EVIDENCE SHOWS THAT CADWALADER MET THE STANDARD OF CARE. ............................... 40 A. The Burden Was on Nomura, Not Cadwalader. ................................. 40 B. Taken as a Whole, the Undisputed Evidence Showed That Cadwalader Acted Reasonably and Did Not Commit Malpractice. ......................................................................................... 45 C. The First Department Misapprehended the Implications of Resolving Nomura’s Claim as a Matter of Law. ................................ 50 III. THE FIRST DEPARTMENT ERRED IN ALLOWING NOMURA’S CLAIM TO PROCEED, BECAUSE THE ALLEGED MALPRACTICE COULD NOT HAVE CAUSED THE ALLEGED INJURY. ...................... 52 A. Cadwalader’s Opinion Was Undisputedly Correct. ............................ 52 B. Nomura’s Breach of Representation 24 Would Have Required It To Repurchase the DHL. ................................................................. 54 C. Nomura Would Have Owned the DHL if the Loan Had Not Been Securitized. ................................................................................. 58 CONCLUSION ........................................................................................................ 60 iii TABLE OF AUTHORITIES Page(s) Cases Alvarez v. Prospect Hosp., 68 N.Y.2d 320 (1986) ................................................................................... 28, 41 AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428 (2007) ...................................................................23, 38, 46, 49, 59 Darby & Darby, P.C. v. VSI Int’l, Inc., 95 N.Y. 2d 308 (2000) ............................................................................ 38, 49, 54 Dombrowski v. Bulson, 19 N.Y.3d 347 (2012) ............................................................................. 29, 52, 58 Kosson v. Algaze, 84 N.Y.2 1019 ..................................................................................................... 29 Leder v. Spiegel, 9 N.Y.3d 836 (2007) ........................................................................................... 29 Merritt Hill Vineyards Inc. v. Windy Heights Vineyard, Inc., 61 N.Y.2d 106 (1984) ......................................................................................... 29 Orchard Motorcycle Distribs., Inc. v. Morrison Cohen Singer & Weinstein, LLP, 49 A.D.3d 292 (1st Dep’t 2008) ......................................................................... 43 Rosner v. Paley, 65 N.Y.2d 736 (1985) ............................................................................. 38, 49, 52 Schadoff v. Russ, 278 A.D.2d 222 (2d Dep’t 2000) ........................................................................ 42 Tinter v. Rapaport, 253 A.D.2d 588 (1st Dep’t 1998) ....................................................................... 52 Twn. of N. Hempstead v. Winston & Strawn, LLP, 28 A.D.3d 746 (2d Dep’t 2006) .......................................................................... 54 iv Williams v. New York, 18 N.Y.3d 981 (2012) ......................................................................................... 59 Statutes & Rules CPLR § 5602(b)(1) ................................................................................................... vi 26 U.S.C. § 860G(a)(3) ............................................................................................ 17 26 U.S.C. § 860G(a)(3)(A) ................................................................................ 10, 31 26 U.S.C. § 860D(a)(4) ............................................................................................ 10 26 C.F.R. § 1.856-3(d) ............................................................................................. 11 26 C.F.R. § 1.860G-2(a)(1)(i) ..........................................................10, 31, 32, 35, 36 26 C.F.R. § 1.860G-2(a)(3)(i) .................................................................................. 11 26 C.F.R. § 1.860G-2(a)(3)(ii) ................................................................................. 11 26 C.F.R. § 1.860G-2(a)(3)(iii) ................................................................................ 11 26 C.F.R. § 1.860G-2(a)(4) ...................................................................................... 11 26 C.F.R. § 1.860G-2(f)(2) ................................................................................ 11, 17 NYCRR 500.1(f) ........................................................................................................ v v CORPORATE DISCLOSURE STATEMENT Pursuant to NYCRR 500.1(f), Defendant-Appellant-Cross- Respondent Cadwalader, Wickersham & Taft LLP (“Cadwalader”) states that it has no parent company or subsidiaries, and is affiliated with Cadwalader, Wickersham & Taft MNP LLP, a New York limited liability partnership, and with Joseph P.C. Lee & Associates, a sole proprietorship organized under Hong Kong law. vi STATEMENT OF JURISDICTION This Court has jurisdiction pursuant to CPLR § 5602(b)(1), because the appeal is taken by permission of the Appellate Division from a non-final order of the Appellate Division not appealable as of right in an action originating in the Supreme Court, New York County. On February 13, 2014, the First Department correctly reversed, in part, the Supreme Court’s denial of summary judgment to Cadwalader, but also affirmed in part, thereby declining to dismiss the last part of Nomura’s malpractice claim and remanding that part of Nomura’s case to the Supreme Court for trial. (A-5.a-58.a.) Cadwalader timely moved for reargument of Nomura’s due diligence claim or, in the alternative, leave to appeal to the Court of Appeals; Nomura cross- moved for reargument of Nomura’s advice claim or, in the alternative, leave to appeal to the Court of Appeals. On June 19, 2014, the First Department issued an order denying the parties’ motions to reargue, but granting both parties’ motions for leave to appeal to the Court of Appeals. vii QUESTIONS PRESENTED Cadwalader respectfully submits the following questions for review by this Court on Cadwalader’s appeal. Citations are provided in the last paragraph of this section to the particular portions of the record where these questions were raised and preserved for review. 1. Did the Appellate Division err in affirming the denial of summary judgment on Nomura’s claim that Cadwalader fell below the standard of care in performing due diligence concerning a tax opinion it rendered in connection with a 1997 securitization? 2. Can a law firm be required to stand trial for malpractice for failing to perform a function that its highly sophisticated client deliberately instructed the firm not to perform? 3. Does a law firm subject itself to liability for malpractice when, in preparing a tax opinion, it relies, as a predicate for its opinion, on its highly sophisticated client’s own representation as to the value of the underlying asset? 4. Is a law firm required to second-guess its client, and prohibited from relying on the client’s representation, as to the value of real property, where the law firm knows that the client has been properly advised about how to make the representation and has hired other experts to assist it, where there is independent evidence demonstrating that the representation is not only true but viii conservative, and where the client instructed the law firm not to undertake an independent investigation but rather to rely on the client’s representation? 5. Can a law firm be held liable for legal malpractice in rendering an opinion where the opinion was undisputedly correct, where the client’s breach of a separate underlying representation would have independently caused the alleged harm, and where the client would have suffered the same losses even if the transaction had not closed? These issues were raised in Cadwalader’s motions and memoranda of law in the Supreme Court, its briefs on appeal and its motion for reargument and/or leave to appeal, and thus were preserved for review. (See Def. Cadwalader’s Mem. of Law in Support of its Mot. for Summ. J. on Pls.’ First Cause of Action (Mar. 2, 2011); Def. Cadwalader’s Reply Mem. of Law in Further Support of its Mot. for Summ. J. (July 5, 2011); Br. for Def.-Appellant (Nov. 5, 2012); Reply Br. for Def.-Appellant (Jan. 25, 2013); Mem. of Law in Support of Cadwalader’s Mot. for Reargument or, in the Alternative, Leave to Appeal (Mar. 17, 2014); Cadwalader’s Mem. of Law in Further Support of its Mot. for Reargument or Leave to Appeal and in Opp’n to Nomura’s Mot. for Reargument or Leave to Appeal (Apr. 18, 2014).) Defendant-Appellant-Cross-Respondent Cadwalader respectfully submits that the order of the Appellate Division dated February 13, 2014, should be reversed, insofar as it requires the firm to stand trial on part of a claim of legal malpractice, and that summary judgment should be entered in favor of Cadwalader and against Plaintiffs-Appellees Nomura Asset Capital Corporation (“NACC”) and Asset Securitization Corporation (“ASC” and together with NACC, “Nomura”). PRELIMINARY STATEMENT This case concerns a Real Estate Mortgage Investment Conduit (“REMIC”) securitization of commercial mortgage loans completed in 1997. Nomura seeks to hold Cadwalader liable for malpractice in rendering a tax opinion on the ground that the firm did not independently determine the value of the real property securing one of the loans. However, Nomura instructed the firm not to assess the property’s value independently and represented to the Cadwalader, both orally and in binding legal documents, that Nomura had hired an appraiser and had itself determined the value of the property. Nomura further requested that Cadwalader rely on Nomura’s representation in rendering its opinion. Nomura was a market leader in REMIC securitizations, had considerable experience in making REMIC value determinations and wished to avoid the unnecessary expense of having a law firm duplicate the due diligence performed by Nomura or its other 2 advisors. The First Department committed reversible error in ruling that Nomura’s claim could proceed to trial. In the fall of 1997, Nomura securitized a pool of commercial mortage loans in a transaction known as the Nomura Series 1997-D5 (the “D5”). The D5 was a REMIC, a securitization vehicle that is exempt from federal income tax. One of the 156 loans in the pool was a $50 million loan to the Doctors Hospital of Hyde Park (the “DHL”). The DHL was included in the D5 based on Nomura’s determination, supported by an appraisal (the “Appraisal”) by a Member of the Appraisal Institute (“MAI”), that the DHL was secured by real property equal to at least 80% of the amount of the loan or $40 million. Cadwalader advised Nomura in connection with the D5 and rendered a tax opinion concerning the trust’s REMIC eligibility. At Nomura’s direction, however, Cadwalader did not independently determine the value of the real property concerning the loans in the D5 prior to issuing its opinion. Instead, Cadwalader primarily relied on Nomura’s representation as to the value of the real property. When the DHL defaulted, the D5 trustee sued Nomura in federal court in New York in November 2000 for allegedly breaching certain of the representations and warranties Nomura had made concerning the REMIC eligibility of the DHL, including Nomura’s representation that the DHL was secured by real property equal to at least 80% of the amount of the loan. The 3 federal district court dismissed the suit, granting summary judgment in favor of Nomura, but the Second Circuit reversed in part, and the case was remanded for trial. Before trial, Nomura settled the suit for $67.5 million and, as part of the settlement, repurchased the loan. Nomura commenced this action on October 27, 2006, seeking to shift the cost of its settlement onto Cadwalader. Nomura asserted a number of claims against the firm concerning several of the loans in the D5, but only Nomura’s claim concerning the DHL remains. The only remaining part of that claim is Nomura’s theory that Cadwalader failed to exercise due care in the preparation of its tax opinion because the firm relied on Nomura’s representation as to the value of the real property in the D5. This is exactly what Nomura had instructed it to do, instead of redoing diligence Nomura had done itself with the assistance of other advisors. Despite its instruction to Cadwalader not to examine the appraisals underlying the loans in the D5, Nomura now contends both that Cadwalader should have looked at the Appraisal of the DHL and that that Appraisal does not evidence real property security of $40 million as Nomura had represented to Cadwalader. Cadwalader moved for summary judgment on the grounds that it had acted reasonably in issuing its opinion related to the D5 because Nomura had instructed Cadwalader to rely on Nomura’s representation and not to review appraisals or undertake an independent investigation as to the value of the real 4 property securing the DHL; Nomura had represented to Cadwalader that the value of the real property securing the loan was at least $50 million ($10 million—or 20%—above the REMIC threshold); and Cadwalader had no reason, in light of Nomura’s sophistication and experience and the firm’s long track record of successfully working with Nomura on REMIC securitizations, to doubt Nomura’s representation. The motion court denied Cadwalader’s motion based in part on a document concerning the “Deal Highlights” of the DHL (the “Deal Highlights document”).1 Nomura had not mentioned or cited the Deal Highlights document in its pleadings or its memorandum in opposition to Cadwalader’s summary judgment motion. Indeed, Nomura did not even include the document among the more than 1,200 exhibits Nomura submitted with its opposition brief. However, the motion court saw mention of the document in a deposition excerpt and asked for a copy of it after oral argument. In denying summary judgment, the court reasoned that “[f]rom a REMIC standpoint, Cadwal[a]der had in its files a document that contained certain information about the DHL, particularly the $40.6 million cost- 1 The Deal Highlights document was not a single document, but rather was a collection of documents. (Compare, e.g., A-2174, A-2177, A-2190, A-2196.) It was not prepared for REMIC purposes and was not an appraisal; rather, it was prepared for the rating agencies in connection with certain disclosures Nomura was required to make concerning litigation related to the Doctors Hospital. (A-2174-75, A-2177-94, A-1492.) Nomura sent the document not to its securitization counsel at Cadwalader, but to Lisa Post, the attorney who was responsible for the litigation disclosures. (A-2174-2211.) 5 based value which brought the loan perilously close to the 80% Test, and which indeed could be viewed as a ‘red flag’ that this loan needed to be further scrutinized for REMIC-eligibility.” On appeal, the First Department correctly rejected much of Nomura’s claim concerning the DHL, including its theory that Cadwalader had failed properly to advise Nomura concerning the REMIC rules. However, the majority concluded that it could not reject Nomura’s due diligence theory in its entirety in view of the Deal Highlights document and simply narrowed the theory instead. The First Department properly rejected Nomura’s contention that Cadwalader had a generalized duty to review the appraisals underlying the loans in the D5, but the majority found that the Deal Highlights document might have raised a red flag requiring Cadwalader to inquire further concerning Nomura’s Appraisal of the DHL, and therefore there was a question of fact as to whether Cadwalader acted reasonably in not second-guessing Nomura’s instruction to rely on its representations about the loan. In a dissenting opinion, Justice Friedman criticized the majority for seeking to hold Cadwalader accountable for not performing a task that its sophisticated client, Nomura, had told it specifically not to perform: “the implication of the majority’s position is . . . that Cadwalader was obligated to conduct due diligence concerning the REMIC-qualification of each of the 156 6 loans, notwithstanding Nomura’s decision not to retain the law firm for that purpose. . . . Nomura should not be allowed to recover from Cadwalader for a loss that was caused by Nomura’s own negligence in performing due diligence— negligence that consisted in overlooking a warning sign in a[nother] document [the Appraisal] that Nomura had chosen not to provide to Cadwalader.” Justice Friedman opined that Nomura’s case should be dismissed as a matter of law, pointing to the fact that the Deal Highlights document was not submitted in connection with Nomura’s summary judgment opposition, was barely mentioned in the appellate briefing and was not mentioned by either side during oral argument. For the reasons articulated by Justice Friedman, among others, the First Department’s decision should be reversed insofar as it requires Cadwalader to stand trial on Nomura’s narrowed, due-diligence theory. First, the First Department erred in concluding that the Deal Highlights document raised a triable issue. The document on its face is consistent with Nomura’s representation concerning the value of the real property securing the DHL, and it confirms that Nomura had obtained an appraisal (evidencing an overall valuation of $68 million) and thus corroborates the representation. Moreover, in the context of the D5, Cadwalader had no reason to view the Deal 7 Highlights document as a red flag.2 Despite more than a decade of litigation about the DHL, Nomura never itself viewed the document as giving rise to a red flag. Nomura did not even include the document with the 1,200 documents cited in its opposition to Cadwalader’s original motion for summary judgment. Requiring Cadwalader to stand trial on the theory that the Deal Highlights document was a red flag subjects the firm not to a standard of professional care but of perfect vision and hindsight. (See Section I below.) Second, even if the Deal Highlights document could be said to have raised a potential red flag, the undisputed evidence shows that Cadwalader acted reasonably, i.e., it met the applicable standard of care. In permitting Nomura’s due diligence claim to proceed to trial, the First Department misplaced the parties’ respective burdens. Cadwalader met its prima facie burden by proffering admissible evidence from four leading experts and several fact witnesses, including Nomura executives, that Cadwalader did as it had been instructed and did so well. In response, Nomura offered no evidence to show that Cadwalader departed from the standard of care, thus failing to meet its burden. While that alone is fatal to 2 For example: Cadwalader had numerous discussions with Nomura’s securitization team about REMIC requirements and provided Nomura with detailed advice as to how to satisfy the 80% test (A-1619, A-15.a-16.a); the DHL borrower contractually represented (and Nomura itself confirmed) that the real property securing the loan was equal to at least $50 million, although the 80% test required only $40 million of real property value (A-1807, A-1805, A-81-82); and Cadwalader specifically asked Nomura to confirm that the real property securing the DHL was equal to at least $40 million, as evidenced by an MAI appraisal, and Nomura did so (A-1468, A-1473-74, A-1935-39). 8 Nomura’s case, Nomura’s claim also fails because the undisputed evidence, taken as a whole, shows that Cadwalader had no reason in 1997 to doubt the accuracy of Nomura’s representation.3 Thus, the First Department misapprehended the implications of resolving Nomura’s claim as a matter of law as allowing counsel to blindly rely on the representations of its client. Here the undisputed evidence shows that despite any information in the Deal Highlights document, Cadwalader’s continued reliance on Nomura’s representations was reasonable. (See Section II below.) Third, summary judgment was also required because Nomura failed to prove causation. The alleged malpractice could not have caused the alleged injury because it was associated with an opinion that was undisputedly correct. In addition, Cadwalader demonstrated that Nomura had breached an independent representation in the securitization agreements that would have obligated it to repurchase the loan even in the absence of the alleged malpractice. Finally, Cadwalader showed that Nomura still would have owned the DHL even if Cadwalader had advised Nomura not to include it in the securitization; thus, 3 For example: Nomura was a REMIC industry leader that had successfully valued REMIC real property hundreds of times (A-579, A-820, A-1619); the parties agreed that Nomura would come to Cadwalader if Nomura had any trouble determining REMIC values, and Nomura never did so (A-2163, A-1942); Cadwalader had given Nomura correct and conservative advice about how to make its representations (A-1466-68, A-1619, A-1816); Nomura had retained other advisors to help it ensure that the real property securing the DHL was equal to at least $40 million (A-1465); and there were independent, objective indicators that Nomura’s representation was correct (see, e.g., A-1935, A-1468-69, A-837, A-578, A-1801, Ex. 542). 9 Nomura would have suffered the same losses it alleges here when the loan defaulted. The First Department failed to address any of these points. (See Section III below.) For these reasons, as explained more fully below, Defendant- Appellant-Cross-Respondent Cadwalader respectfully requests that this Court reverse the decision of the First Department insofar as it requires Cadwalader to stand trial for legal malpractice, and enter summary judgment dismissing Nomura’s complaint. STATEMENT OF THE CASE A. Nomura and the CMBS Industry. In 1997, Nomura was a leader in the market for commercial mortgage backed securities (“CMBS”). (A-579, A-820.) Nomura sourced and funded mortgages on commercial properties with the objective of periodically aggregating these mortgages into securitization pools. (A-1594, A-1619, A-1783-84.) To securitize the loans, Nomura sold them to a special-purpose entity (“SPE”), which sold the loans to a trust. (A-1619.) The trust issued fixed-income securities (“Certificates”) that entitled holders to the cash flow from mortgage repayments. (Id.) The Certificates were ranked into classes based on priority of repayment. (Id.) Between 1993 and 1998, Nomura made over $1.4 billion in profits 10 from CMBS transactions and, in fiscal 1997 alone, over $500 million. (A-824, A-827.) B. Real Estate Mortgage Investment Conduits. Nomura typically structured its multiple-class mortgage loan securitizations as Real Estate Mortgage Investment Conduits or REMICs, which are generally exempt from federal income tax. (A-1006.) To qualify as a REMIC, a pool of mortgages must satisfy certain tests under federal income tax law. (A-964, A-1006.) One of these tests concerns the assets held in the trust.4 (A-964- 65.) Under the Internal Revenue Code (the “Code”), substantially all the assets of a REMIC must consist of “qualified mortgages and permitted investments.” 26 U.S.C. § 860D(a)(4); (see also A-964-65). A “qualified mortgage” is one that is, among other things, “principally secured by an interest in real property.” 26 U.S.C. § 860G(a)(3)(A); (see also A-965). Treasury regulations provide that a mortgage satisfies the “principally secured” standard if “the fair market value of the interest in real property securing” the mortgage is “at least equal to 80 percent of the adjusted issue price” of the mortgage, either on the date the mortgage is originated or at the time the REMIC sponsor contributes it to the REMIC (the “80% Test”). See 26 C.F.R. § 1.860G-2(a)(1)(i); (see also A-965). 4 The remaining tests concern the nature of the interests in the trust and the transferability of the residual interest. (A-964.) 11 For purposes of the 80% Test, “real property” means “land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures)” and includes “interests in real property.” 26 C.F.R. §§ 1.856-3(d), 1.860G-2(a)(4). It does not include personal property. 26 C.F.R. § 1.856-3(d).5 Nomura sought to determine the REMIC eligibility of its loans before origination, as it planned to securitize most (if not all) of the loans it originated in REMIC transactions. (A-1464, A-1471.) To that end, Nomura typically engaged an appraisal firm to assist it in ensuring that the real property securing a loan to be securitized was equal to at least 80% of the amount of the loan. (A-1465.) By agreement of the parties, Nomura, not Cadwalader, was responsible for determining whether each loan to be included in a REMIC trust was secured by 80% real property. (A-1468, A-1940, A-1814.) This determination was the responsibility of Nomura’s internal staff and Nomura’s 5 The applicable regulations provide a safe harbor to REMIC sponsors, under which a mortgage is “deemed” to be “principally secured by an interest in real property” if the sponsor “reasonably believes” that it is so secured at the time the sponsor contributed it to the REMIC. 26 C.F.R. § 1.860G-2(a)(3)(i); (see also A-965-66, 1030-31). The sponsor’s reasonable belief may be based on, among other things, “[r]epresentations and warranties made by the originator of the obligation” or “[e]vidence indicating that the originator of the obligation typically made mortgage loans in accordance with an established set of parameters” that would ensure satisfaction of one of the “principally secured” tests. 26 C.F.R. § 1.860G-2(a)(3)(ii); (see also A-1030-31). If it is later discovered that the mortgage is not “principally secured by an interest in real property,” the defect must be cured or the mortgage must be removed from the trust within 90 days or the trust will lose its REMIC status. 26 C.F.R. § 1.860G-2(a)(3)(iii), (f)(2); (see also A-965-66, A-1030-31). 12 origination counsel, and was done at the time the loan was originated. (A-1476, A-1930, A-1814.) C. Perry Gershon and the Securitization Group. The head of Nomura’s securitization group was Perry Gershon, a Managing Director at Nomura. (A-622, A-1463-64.) He exercised “broad supervisory authority over all aspects” of Nomura’s securitizations and was “in charge” of the D5 Securitization. (A-1463-64.) According to Ethan Penner, NACC’s president at the time, “Gershon at Nomura was most responsible for the securitization process.” (A-1597.) Perry Gershon and Nomura’s securitization group had considerable experience with REMICs. By the time of the D5, Nomura had securitized hundreds of loans in numerous REMIC securitizations, including the Nov. 1993 1, Mar. 1994 MD1, July 1994 MD2, Nov. 1994 C3, Mar. 1995 MD3, Aug. 1995 D1, Oct. 1995 MD4, Feb. 1996 D2, Mar. 1996 MD5, Oct. 1996 D3, Dec. 1996 MD6, and Mar. 1997 D4. (A-1887.) Prior to and in connection with the D5, as the First Department held, Cadwalader properly advised Nomura that to be a REMIC-eligible asset, a mortgage loan must be principally secured by an interest in real property; that only real property (not personal property) counted toward satisfying the REMIC principally secured test; that real property included land and improvements such as 13 buildings or other permanent structures; and that the principally secured test was best proved by an independent third-party appraisal that measured real property separately.6 (A-1467-68.) Based on this experience and the advice of counsel, Gershon and others at Nomura understood and routinely applied the REMIC rules. (A-1466-68, A-1816.) Nomura’s business depended on successful application of these rules, as evidenced by Nomura’s routine, extensive disclosures about them. (See, e.g., A-106, A-153.) D. The Doctors Hospital Loan. In the months leading up to the D5, Nomura negotiated and originated a number of REMIC loans, including the DHL, a $50 million loan to the Doctors Hospital of Hyde Park, Chicago, IL, that closed on August 28, 1997. (A-1392, A-372.) The DHL was originated by Nomura banker Ray Anthony and approved by Gershon. (A-1464-65.) Nomura originated the DHL for the purpose of including it in the D5. (A-1464-65.) Given the amount of the loan ($50 million), it had to be secured by 6 Prior to the D5’s closing, Cadwalader provided detailed advice to Nomura regarding how to satisfy the 80% Test. (A-1619.) As part of that advice, a rule of thumb communicated by Cadwalader to Nomura was that the value of what was plainly real property (such as land and structural improvements) should be added up by Nomura to see if it amounted to at least 80% of the loan amount. (A-1619-20, A-1816.) If those items alone satisfied the 80% Test (and they usually did), then the 80% Test would be satisfied. (A-1620, A-1816.) If not, then Nomura needed to inquire further to determine whether the loan met the 80% Test. (Id.) 14 real property equal to at least $40 million (80% of the amount of the loan) to qualify for inclusion in the D5. Before originating the DHL, Nomura engaged a valuation firm (Valuation Counselors) and an accounting firm (Coopers & Lybrand (“Coopers”)) to assist it in determining the value of the property securing the DHL. (A-1465.) Valuation Counselors provided Nomura with an Appraisal of the property securing the DHL. (Id.; see also A-82.) Nomura later represented to Cadwalader and others that the Appraisal evidenced that the REMIC-eligible real property securing the DHL was equal to at least 80% of the value of the loan, i.e., at least $40 million. (A-82, A-1815, A-1391, A-1936-39.) Indeed, Nomura required the DHL borrower to represent that the real property securing the DHL was equal to at least $50 million and thus exceeded the REMIC threshold of $40 million by $10 million or 20%. (A-1807, A-1805.) Nomura represented to Cadwalader and others that the borrower’s representation was correct. (A-82, A-578.) Nomura’s origination counsel in connection with the DHL was Dechert Price & Rhoads (now Dechert LLP) (“Dechert”). (A-1392.) Cadwalader played no role in the origination of the DHL. (A-1472.) E. Retention of Cadwalader. While Cadwalader played no role in the origination of the DHL, the firm was engaged by Gershon to serve as securitization counsel for the D5. 15 (A-1522-23.) Gershon managed the scope of the firm’s work and served as its “lead interface” with Nomura. (A-1590, A-1597.) By the time of the D5 in fall 1997, Nomura had a long and successful track record working with Cadwalader on REMIC securitizations. (A-1468, A-1815-16.) In particular, Nomura was advised by Anna Glick, a capital markets partner, Charles Adelman, a tax partner, and Lisa Post, who was married to Perry Gershon. (A-1787-88, A-1790, A-1925, A-1929, A-2023, A-2025, A-1815, A-1619.) As securitization counsel, Cadwalader’s role in the D5 was to assist Nomura in securitizing the loans proposed for inclusion in the D5 Trust. (A-1472.) Cadwalader coordinated with Nomura and its other advisors to prepare the documentation necessary to close the securitization, including the Mortgage Loan Purchase and Sale Agreement (“MLPSA”), the Pooling and Servicing Agreement (“PSA”) and an opinion that the D5 was eligible for tax treatment as a REMIC. (A-1470, A-1468, A-1144.) Consistent with Cadwalader’s general practice with Nomura, Cadwalader communicated with Nomura in connection with the D5 to discuss the information Nomura was providing, including the value of the real property securing the loans at issue. (A-1468-69, A-1473-74, A-2026.) In the course of those communications, Nomura informed Cadwalader that the real property 16 securing the DHL was equal to at least 80% of the amount of the loan and that it had an independent appraisal supporting this statement. (A-1815, A-2026.) Cadwalader and Nomura agreed that Cadwalader would render its REMIC opinion on the basis of Nomura’s representations. (A-1473, A-1465, A-1467-68, A-1814- 15, A-1941, A-1619-20, A-1526.) Nomura did not ask, expect or want Cadwalader to replicate the due diligence undertaken by Nomura and its other advisors. (A-1469-70, A-1473-74, A-1815; see A-1465-66.) Asking outside securitization counsel to replicate that work would not, on balance, have been a value-added enterprise, given the associated delay and expense. (A-1469-70, A-1814-15.) Nomura did not ask Cadwalader to review the appraisals underlying the real property securing the loans in the D5, for REMIC-eligibility purposes or otherwise. (A-1469-70, A-1815, A-1941-42.) They had already been reviewed and re-reviewed by Nomura and other Nomura advisors. (A-1469-70, A-1473-74, A-1941-42, A-1814-15.) Cadwalader obtained from Nomura a written representation that the real property securing the DHL had a fair market value of at least 80% of the amount of the loan, as evidenced by the Appraisal. (A-82-83.) This provided comfort that Nomura had independent support for its representation. (A-2228.) Cadwalader also received certifications from Nomura’s officers stating that Nomura’s representation was true and correct. (A-578, A-1801, Ex. 542.) 17 F. The D5 Securitization. The D5 closed on October 24, 1997, two months after origination of the DHL. (A-56.) Pursuant to the PSA and MLPSA, NACC sold a pool of 156 loans to its affiliate, ASC. (A-73-98, A-99-351.) ASC then transferred the mortgages to a trust fund, known as the “D5 Trust,” and sold to investors Certificates representing interests in the trust. (A-56.) The D5 Trust was designed to be eligible for REMIC tax treatment. (A-56-57.) In the MLPSA and PSA, Nomura made representations and warranties for the benefit of the investors in the D5 Trust. (A-74-90, A-176-87.) One such warranty, the “Qualified Mortgage Warranty,” represented that each mortgage loan Nomura placed in the D5 Trust was “qualified” for inclusion in a REMIC, without reliance on the REMIC safe harbor: Each Mortgage Loan constitutes a “qualified mortgage” within the meaning of Section 860G(a)(3) of the Code (but without regard to the rule in Treasury Regulations 1.860 G-2(f)(2) that treats a defective obligation as a qualified mortgage, or any substantially similar successor provision). (A-83.) As noted above, one way for a mortgage loan to “qualify” for inclusion in a REMIC is to satisfy the 80% Test. In a related but distinct provision, Nomura represented that the real property securing each mortgage loan, as evidenced by the Appraisal, had a fair 18 market value of at least 80% of the principal amount of the loan at the time the mortgage was originated or contributed: The Mortgage Loan is directly secured by a Mortgage on a commercial property or multifamily residential property, and . . . the fair market value of such real property as evidenced by an MAI appraisal conducted within 12 months of the origination of the Mortgage Loan, was at least equal to 80% of the principal amount of the Mortgage Loan (a) at origination . . . or (b) at the Closing Date. . . . (A-82-83.) In addition, Nomura made a representation (“Representation 24”) in the MLPSA that there was no default or breach concerning the DHL: There is no default, breach, violation or event of accelaration existing under the related Mortgage or the related Note and, to the Seller’s knowledge, no event which, with the passage of time or with notice and the expiration of any grace or cure period, would and does constitute a default, breach, violation or event of acceleration. (A-81.) By this provision, Nomura represented, among other things, that the DHL borrower had not breached or violated its representation that the value of the real property securing the DHL was equal to at least $50 million. (A-1805, A-1807.) Nomura understood that it was responsible for confirming that all of its representations were true. (A-1472-73, A-1941-42, A-1815.) Nomura relied on its own due diligence when making those representations, and not Cadwalader’s REMIC Opinion. (Id.) 19 G. Cadwalader’s REMIC Opinion. On the day the D5 Transaction closed, Cadwalader rendered an opinion (the “Opinion”) to the trustee of the D5 Trust (the “D5 Trustee”) concerning its REMIC qualification. (A-582-86.) The purpose of the Opinion was to opine that the entire Trust was REMIC qualified; it was not a guarantee that each loan in the Trust was a REMIC qualified mortgage. (A-978, A-1814.) The Opinion was based on certain assumptions expressly set forth within its text, including in particular the facts provided by Nomura about the value of the real property securing the DHL. (A-1468, A-1941-42, A-1814.) The Opinion lists the documents Cadwalader relied on in rendering it, including the MLPSA and PSA: As to any facts material to such opinions [that] were not known to us, we have relied upon statements, certificates and representations of officers and other representatives of ASC [and] NACC . . . included in the Agreements and other documents, certificates and opinions delivered at the Closing and of public officials. (A-583-84.) Before issuing the Opinion, Cadwalader received a certificate from an officer of NACC certifying that NACC had “carefully examined” the MLPSA and that all representations and warranties Nomura made were “true and correct.”7 (A-578.) 7 The securitization team at Nomura, including Perry Gershon, understood that it was responsible for ensuring that each loan to be placed in the D5 was REMIC compliant. (A-1941- 42, A-1468, A-1817.) When Nomura signed the D5’s MLPSA, PSA and officer’s certificate, it 20 Nomura expected Cadwalader to rely on the facts Nomura provided, and Nomura knew it would have to buy back the DHL if those facts were untrue. (A-1468, A-1941, A-1814.) Nomura did not ask or want Cadwalader to review appraisals or otherwise redo the valuation process undertaken by Nomura and its other advisors or to conduct a more involved analysis in rendering its REMIC opinion. (A-1470, A-1473-74, A-1941-42, A-1814.) As Perry Gershon testified, “[t]o undertake work not requested of Nomura because it had been assigned to others would have been inconsistent with the scope of Cadwalader’s retention in connection with the D5.” (A-1470.) The parties agreed that Nomura would come to Cadwalader with questions if it was having trouble applying the 80% Test or determining the value of the real property securing the loans in the D5. (A-1526, A-1467, A-1930.) Nomura had successfully applied the 80% Test hundreds of times in the past, and at no point did Nomura come to Cadwalader with any questions or indicate that it was having difficulty applying the REMIC rules. (A-579, A-820, A-827, A-1619, A-2163, A-1942.) From the day Cadwalader issued the Opinion through the present, “the D5 trust has enjoyed treatment for federal income tax purposes as a REMIC.” was relying on the expertise of Nomura representatives, not on any advice from Cadwalader or Cadwalader’s REMIC Opinion. (A-1470, A-1472, A-1941-42, A-1817.) Nomura knew what it needed to do to make sure each representation was true and correct and knew that it might be exposed to a repurchase obligation if anything turned out to be wrong. (A-1941, A-1817.) 21 (A-1273.) Despite its argument in this litigation, Nomura cannot dispute that the Opinion was entirely correct. (A-1845-46.) H. The DHL’s Default and the Trustee Action. Over two years after the D5 closed, the DHL defaulted in the spring of 2000. (A-60.) After the default, the D5 Trustee filed a lawsuit against Nomura in federal district court (the “Trustee Action”). (A-542-58, 559-77.) The D5 Trustee alleged that Nomura breached certain of its representations and warranties in the MLPSA and PSA relating to the DHL, including (but not limited to) the 80% Warranty and the Qualified Mortgage Warranty. (A-568-71.) Throughout the litigation, Nomura maintained that the DHL was a REMIC-qualified loan. (See, e.g., A-356, 792-93.) The federal district court granted summary judgment dismissing the suit. (A-367.) The court held, in part, that Nomura relied in good faith on Cadwalader’s opinion regarding the REMIC-qualified status of the D5 Securitization, and that the statutory safe harbor thus applied. (A-364-66.) The district court did not address whether the DHL was, in fact, secured by sufficient real property. On appeal, the Second Circuit reversed the district court based on an issue not relevant here and remanded the case for trial. (A-379-86.) 22 After the Second Circuit’s remand, but prior to trial, Nomura settled the Trustee Action by repurchasing the DHL, after which it collected the proceeds from a sale of the collateral to the University of Chicago. (A-1978.) I. This Lawsuit. After settling the Trustee Action, Nomura commenced this action in October 2006, seeking to collect its settlement costs from Cadwalader. (See A-55- 72.) Nomura asserted three causes of action, each regarding a different loan, but only Nomura’s claim regarding the DHL remains. (A-63-64.) With respect to that loan, Nomura originally alleged that Cadwalader committed malpractice by (i) drafting and including in the MLPSA the 80% Warranty, separate and apart from the Qualified Mortgage Warranty; (ii) failing to advise Nomura of a basic REMIC principle, namely, that the 80% Test is concerned with only the value of the real property securing the loan at issue; and (iii) failing to confirm Nomura’s representations regarding the value of the real property securing the loans in the D5 Trust before Cadwalader relied on these representations in delivering the Opinion. (Id.) Cadwalader moved for summary judgment on each of Nomura’s theories, pointing the court to undisputed evidence that (i) Cadwalader properly included the 80% Warranty in the MLPSA; (ii) Cadwalader properly advised Nomura concerning the REMIC rules; and (iii) Cadwalader acted reasonably in 23 following Nomura’s instruction regarding due diligence and in relying on Nomura’s representation as to the value of the real property securing the DHL. (See Def. Cadwalader’s Mem. of Law in Support of its Mot. for Summ. J. (Mar. 2, 2011) at 11-37.) Cadwalader also showed that Nomura was unable to establish causation under this Court’s precedent in AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428 (2007). (Id. at 38-46.) In response, Nomura abandoned its theory regarding the 80% Warranty, but argued that there were fact questions as to its advice and due diligence theories. (See Pls.’ Mem. of Law in Opp’n to Def.’s Mot. for Summ. J. on Pls.’ First Cause of Action (May 10, 2011) at 14-25, 26-38.) Unable to dispute that Cadwalader had properly advised Nomura concerning the REMIC rules and that Cadwalader had been expressly told by Nomura not to review appraisals, Nomura directed the motion court to more than 1,200 exhibits—including depositions taken in the Trustee Action—and claimed that this evidence created a fact question. (Id.) Notably, Nomura made no mention of the Deal Highlights document.8 (Id.) 8 As stated, the Deal Highlights document is a collection of several different documents, each prepared by Nomura and/or Nomura advisors (other than Cadwalader). (Compare, e.g., A-2174, A-2177, A-2190, A-2196.) None of the components is an actual appraisal. The document was prepared and compiled for the purpose of originating the DHL and describing it to the rating agencies, as evidenced by the fact that the document describes the highlights of the loan transaction, provides financial, operational and statistical data concerning the loan, and identifies related litigations. (A-2174-75, A-2177-94, A-1492.) The document was not created for the purpose of facilitating a REMIC analysis, as evidenced by the fact that it does not include 24 Despite stating that Cadwalader had presented a “fairly compelling case” for summary judgment, the motion court denied Cadwalader’s motion. (A-29, A-49.) It held that evidence suggesting that certain Nomura employees (mostly bankers) did not understand the 80% Test rebutted direct evidence that Nomura had been properly advised, and thus raised an issue of fact regarding the advice theory. (A-19-29.) With respect to the due diligence theory, the motion court concluded that while the applicable professional standard did not require examination of appraisals generally, an issue of fact remained as to whether Cadwalader had committed malpractice by failing to examine the DHL Appraisal in light of the DHL’s unusual characteristics. (A-29-39.) The court also held that Nomura’s failure to submit expert evidence of the prevailing professional standard was not fatal to its claim—notwithstanding that such failures generally are fatal in legal malpractice cases—on the ground that the “ordinary experience of the fact finder” would be sufficient to determine whether Cadwalader’s failure to examine the Appraisal of the Doctors Hospital constituted malpractice. (A-37.) Finally, the court held that material issues of fact precluded summary judgment on causation grounds. (A-39-48.) any itemized breakdown and valuation of the property securing the DHL and was not addressed to Nomura’s REMIC counsel at Cadwalader, who never saw the document. (A-2174-2211.) 25 J. First Department Decision. On February 13, 2014, the First Department issued a decision (i) rejecting Nomura’s theory that Cadwalader failed to render appropriate legal advice concerning the REMIC rules and application of the 80% Test (A-6.a, A-14.a-19.a) and (ii) narrowing but declining to reject Nomura’s final theory that Cadwalader had failed to perform adequate due diligence in connection with the issuance of its REMIC Opinion (A-6.a, A-28.a). Regarding Nomura’s advice theory, the First Department properly found that “Nomura was [correctly] instructed that an appraisal of REMIC real property should exclude the going-concern value of an operating business,” that “Glick . . . and Adelman had numerous discussions with Nomura’s securitization team about REMIC requirements,” and that “before the D5 Securitization closed, Cadwalader provided Nomura with ‘detailed advice’ as to how to satisfy the 80% test.” (A-15.a.) The First Department also properly found that Gershon’s testimony “confirmed that Cadwalader properly advised Nomura of the REMIC rules”: “Cadwalader told him, and he understood, that a REMIC loan needed to be secured by real property worth at least 80% of the loan, that real property includes land and buildings, but not personal property, and that the appraisals of the collateral securing the mortgage loans in the trust had to separately value the real property.” (A-16.a.) 26 Regarding Nomura’s due diligence claim, the First Department also properly concluded that “Cadwalader had no generalized duty to review the underlying appraisals for all of the loans in the securitization.” (A-21.a.) However, it held that “if Cadwalader received information that would call into question the REMIC-eligibility of one of the loans, it had a duty to make further inquiry and raise the issue with Nomura.” (A-22.a.) Although Nomura did not even cite the Deal Highlights document in its memorandum in opposition to Cadwalader’s summary judgment motion, the First Department determined that “a jury could reasonably conclude that the ‘Deal Highlights’ document, on its face, contains warning signs that the [DHL] may not have qualified for REMIC treatment.” (Id.) According to the First Department, (1) the document describes the loan as being secured in part by operations (i.e., the value of the going concern); and (2) the $40.6 million cost valuation revealed that the loan included “a substantial amount of non-REMIC-eligible property.” (Id.) Finally, the First Department rejected Cadwalader’s arguments that the undisputed evidence showed that the alleged malpractice did not cause the alleged injury. (A-29.a-30.a.) Cadwalader’s primary arguments on causation were rejected without discussion. (Id.) In a lengthy dissent, Justice Friedman opined that both of Nomura’s claims (its advice claim and its due diligence claim) should be dismissed as a 27 matter of law. (A-34.a-35.a, A-56.a-57.a.) The dissent disapproved of the “epochal significance” with which the majority viewed the Deal Highlights document in light of the fact that (i) Nomura did not include the document “among the more than 1,200 exhibits it submitted with its original opposition to the summary judgment motion”; (ii) Nomura did not show the document to either of its experts who were retained to opine on the standard of care, and neither expert referred to it in his report; (iii) Nomura “barely touched upon [the document] in its appellate brief”; and (iv) neither side mentioned the document at oral argument. (A-33.a-34.a.) According to the dissent, nothing in the Deal Highlights document could have raised a red flag concerning the REMIC eligibility of the DHL, particularly because Nomura had specifically instructed Cadwalader not to review appraisals. (A-57.a.) Justice Friedman stated that “[i]t is troubling that that the majority’s decision requires a law firm to stand trial for malpractice in failing to perform a function for which, as is undisputed, its highly sophisticated client, in order to minimize the costs of the transaction, deliberately chose not to engage it.” (Id. (emphasis added).) On March 17, 2014, Cadwalader filed a Motion for Reargument or, in the Alternative, Leave to Appeal concerning Nomura’s due diligence claim. (See Cadwalader’s Mot. for Reargument or, in the Alternative, Leave to Appeal (Mar. 17, 2014).) On April 4, 2014, Nomura cross-moved for reargument and/or 28 leave to appeal. (See Nomura’s Cross-Mot. for Reargument, or in the Alternative, Leave to Appeal, and Opp’n to Cadwalader’s Mot. for Reargument, or in the Alternative, Leave to Appeal (Apr. 4, 2014).) In an order dated June 19, 2014, the First Department denied the parties’ motions for reargument but granted their motions for leave to appeal. (A-3.a.) K. Remand Before Present Appeal. Upon remand of the case to the Supreme Court, but before the First Department granted the parties’ motions for leave to appeal, Cadwalader again moved, on May 19, 2014, for summary judgment and/or to renew its prior motion for summary judgment. (See Def. Cadwalader’s Mot. for Summ. J. and/or to Renew its Mot. for Summ. J. (May 19, 2014).) After the First Department granted the parties’ motions for leave to appeal, Nomura requested a stay of briefing on Cadwalader’s summary judgment motion, and the Supreme Court entered an order granting a temporary stay of the case while either party sought a stay from the Court of Appeals. (See Interim Order (Jun. 24, 2014).) LEGAL STANDARDS A. Summary Judgment. The proponent of a summary judgment motion “must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact.” Alvarez v. 29 Prospect Hosp., 68 N.Y.2d 320, 324 (1986). Once the proponent makes this showing, “the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action.” Id. A defendant’s motion for summary judgment is properly granted when the plaintiff fails to adduce evidence demonstrating “facts sufficient to require a trial of any issue of fact.” Kosson v. Algaze, 84 N.Y.2d 1019, 1020 (1995). On appeal from a summary judgment ruling, the function of the court is “to review the record to determine if any issues of fact existed.” Merritt Hill Vineyards Inc. v. Windy Heights Vineyard, Inc., 61 N.Y.2d 106, 110 (1984). B. Legal Malpractice. A claim for legal malpractice requires proof of three elements: that the attorney was negligent, that the attorney’s negligence was the proximate cause of the plaintiff’s injuries, and that the plaintiff incurred actual damages. Dombrowski v. Bulson, 19 N.Y.3d 347, 350 (2012). To establish negligence, the plaintiff must show that the attorney did not “exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession.” Leder v. Spiegel, 9 N.Y.3d 836, 837 (2007). To establish causation, the plaintiff must show that he “would have succeeded on the merits of the underlying action ‘but for’ the attorney’s negligence.” Id. 30 ARGUMENT I. THE FIRST DEPARTMENT ERRED IN HOLDING THAT THE DEAL HIGHLIGHTS DOCUMENT RAISED A POTENTIAL RED FLAG. The First Department allowed Nomura’s due diligence claim to proceed to trial on the ground that the Deal Highlights document raised a potential red flag regarding REMIC eligibility. In so doing, the First Department overlooked or misapprehended undisputed evidence that forecloses Nomura’s due diligence claim as a matter of law and allowed Nomura to predicate a claim of alleged malpractice on hindsight. A. The Deal Highlights Document Is Consistent with a Finding of REMIC Eligibility. Nomura’s due diligence claim fails because the Deal Highlights document is consistent with a finding of REMIC eligibility and thus could not raise a red flag. In finding that there was a question of fact as to whether the Deal Highlights document raised a potential red flag, the First Department stated that the document (1) indicates that the appraised value of the property securing the DHL may have included non-REMIC real property; and (2) refers to an alternate valuation (based on the cost approach) that brought the DHL close to the REMIC threshold. (A-22.a-25.a.) Properly understood, however, the Deal Highlights document is consistent with the REMIC eligibility of the DHL. 31 The REMIC eligibility of the DHL turned, in relevant part, on whether the real property securing the DHL was equal to at least $40 million. See 26 U.S.C. § 860G(a)(3)(A); 26 C.F.R. § 1.860G-2(a)(1)(i). Nothing in the Deal Highlights document indicates that the real property securing the DHL did not have a fair market value of $40 million. To the contrary, it confirms that Nomura had obtained an appraisal evidencing that the value of the real property securing the DHL was equal to at least $40 million and also concludes that the final appraised value of the collateral was $68 million. (A-2177.) This amount, while not limited to real property, was far enough above the REMIC threshold to give comfort that the real property component was equal to at least $40 million. Although the Deal Highlights document was not sent to Adelman, his testimony was clear that an appraised value of $68 million did not give him reason to question the REMIC classification of the DHL.9 Although the Deal Highlights document indicates that the appraised 9 (A-2228 (“I formed a judgment that [the DHL] was valued at $68 million. Even in my experience and judgment, even if it consisted of a significant part of some personal property as well as real property . . . [it] would not have been consistent with [my] experience that the real property portion was less than $40 million”); A-2237 (Adelman stating that he reached a “comfort level” that the loan was REMIC-qualified based on the client’s examination and his “own examination of the relationship and size between the [$]68 million and the [$]50 million and the loan to value ratio that was implied”); A-2228 (stating that in light of the $68 million figure, “[i]t would have been highly unusual for it to have resulted in a real property value of less than $40 million for a going business in a particular building and location”); see also A-967-70 (articulating a list of factors showing that Cadwalader “had good reasons (and certainly a sufficient basis) to conclude that Nomura reasonably believed that the real property securing the loan was worth at least $40 million”).) 32 value of the property securing the DHL may have included certain non-REMIC real property, there is nothing surprising about that. Nomura had a successful track record of securitizing business loans (A-1887) and the DHL was not the only business loan in the D5 (A-1464, A-1619). More importantly, the mere fact that a loan is secured in part by operations is no impediment to REMIC eligibility. (A.40.a (noting that collateral for all of the loans included “operations”).) The “real property” requirement (for REMIC purposes) is satisfied so long as the loan is secured by real property equal to at least 80% of the loan amount. See 26 C.F.R. § 1.860G-2(a)(1)(i); (see also A-965). This is true regardless of whether the loan is also secured by other (non-real) property. (Id.; A-1029.) That the Deal Highlights document also refers to a cost approach valuation near the REMIC threshold (here, $40 million) does not call into doubt the accuracy of Nomura’s representation that the DHL was secured by real property equal to at least $40 million as evidenced by the Appraisal. The cost approach valuation referenced in the Deal Highlights document ($40.6 million) is unquestionably not the “reconciled”10 valuation of the property securing the DHL. (A-2184.) It is merely one of several inputs in an analysis resulting in a “reconciled” valuation far in excess of $40.6 million. (Id.) Moreover, the cost 10 The “reconciled” valuation is “a final value estimate that produces the most reliable indication for the subject property”; it is derived from value assessments based on a cost approach, a sales comparison approach and an income capitalization approach. (A-476.) 33 approach excludes value attributable to property that clearly qualifies as “real property” for REMIC purposes.11 (A-476; A-1093.) B. In the Context of the D5, Cadwalader Had No Reason To View the Deal Highlights Document as a Red Flag. Even if (contrary to fact) the Deal Highlights document could be said, in isolation, to have raised a potential red flag about the REMIC eligibility of the DHL, Cadwalader had no reason to view the Deal Highlights document as a red flag in the context of the D5. While Nomura might have sent the Deal Highlights document to Cadwalader in a single fax, Nomura did not forward it in a vacuum. In the years leading up to the D5 Securitization, Nomura had successfully securitized hundreds of mortgage loans through REMICs in at least twelve separate securitizations. (A-1619, A-1887.) Nomura routinely securitized loans secured by going concerns, including properties such as hotels and nursing homes. (A-1887, A-2026, A-2057.) Cadwalader represented Nomura in a number of these transactions and, based on that experience, reasonably understood that Nomura was sophisticated in its understanding and application of the REMIC rules. (A-1619, A-1397, A-579, 11 For example, the cost approach does not include value attributable to having a fully functioning business capable of being operated (e.g., intangibles that are inextricably linked to real property) and thus understates the REMIC value of the property. (A-476.) Thus, even if the document had been addressed to Adelman, it would not have altered his analysis. 34 A-820, A-824, A-827 (showing that Nomura was a market leader that made over $1.4 billion in profits from CMBS transactions between 1993 and 1997).) As the Appellate Division has ruled, Cadwalader provided detailed and sufficient advice to Nomura concerning application of the REMIC rules, including the 80% test, and Nomura understood how to apply the REMIC rules to satisfy the 80% test. (A-15.a-16.a; A-1619-20.) Nothing in the Deal Highlights document suggests that Cadwalader should have asked whether Nomura had forgotten how to do so. In view of Nomura’s experience and Cadwalader’s prior advice, the parties reached an agreement about who would be responsible for determining the value of the real property securing the loans in the D5. (A-1468, A-1814-15.) It was understood that Nomura would determine the value of the real property securing the loans to be included in the D5, and that if it had any questions or encountered any difficulties, it would raise the issue with Cadwalader or other counsel. (A-1814-15, A-1526, A-1467, A-1930.) For purposes of its REMIC Opinion, Cadwalader was to rely on Nomura’s representation as to the value of real property; it was not supposed to review appraisals or undertake its own separate investigation, which would have been duplicative and costly for Nomura. (A-1814-15.) Consistent with the parties’ agreement, Nomura itself undertook to 35 determine the value of the real property securing the DHL. (Id.) It commissioned and obtained the Appraisal. (A-82, A-1468, A-1473-74, A-1516.) It obtained a representation from the borrower that the value of the real property securing the DHL was no less than $50 million—20% more than the value required to meet the REMIC test. (A-1805, A-1807, A-51); 26 C.F.R. § 1.860G-2(a)(1)(i). It provided Cadwalader with a representation and warranty that it had an Appraisal evidencing that the real property securing the DHL was equal to at least $40 million. (A-1468, A-1473-74, A-1935-39.) And its officers certified that the representation and warranty were correct. (A-578, A-1801, Ex. 542.) Nomura’s representation was not the only indication that the real property securing the DHL was equal to at least $40 million. Cadwalader understood that Nomura only originated the DHL for inclusion in the D5 and that Nomura would only originate such a loan if it had been determined from the outset that it was secured by real property equal to at least 80% of the loan amount. (A-1465, A-1471.) Prior to the securitization of the D5, Cadwalader met with Nomura to review and confirm Nomura’s representations and warranties. (A-1814-15.) Cadwalader confirmed with Nomura the truth of each of Nomura’s representations concerning the value of the real property underlying the loans in the D5 securitization—including the DHL—and obtained from Nomura a written certification to that effect. (Id.; A-578, A-1801, Ex. 542.) The borrower of the 36 DHL expressly represented that the loan was secured by real property equal to no less than $50 million, which placed the value of the real property securing the DHL well beyond the REMIC threshold of $40 million. (A-81, A-1805, A-1807); 26 C.F.R. § 1.860G-2(a)(1)(i). Thus, not only did Nomura give Cadwalader no reason to doubt the borrower’s promise, but Nomura embraced and thus endorsed it. (A-81.) Notably, Nomura never notified Cadwalader that it was having difficulty determining the value of the real property securing the DHL. (A-2163, A-2230, A-1930, A-1045.) The Deal Highlights document was one of thousands (if not tens of thousands) of documents provided to Cadwalader. (See A-50-54, A-1800-01, and summary judgment exhibits generally.) While the record does not contain a lot of information about the document (as Nomura made essentially nothing of it below or on appeal), there is no question that it was not provided to Cadwalader for purposes of its REMIC Opinion. The document was not sent to Nomura’s REMIC advisor at Cadwalader (Adelman). (See A-2241.) The document was prepared, in pertinent part, by Nomura bankers for use by the rating agencies. (A-1492.) Gershon confirmed this at his deposition, and the Bates numbers affixed to the document reflect that it was produced from the files of Standard & Poor’s, which 37 likely received the document from Cadwalader.12 (A-2171-2212; A-1492, A-1792 (discussing Lisa Post’s routine conversations with rating agencies).) Even if the Deal Highlights document had been prepared for Cadwalader (instead of the rating agencies) and for the purpose of a REMIC analysis (instead of an analysis of whether Nomura should originate the loan and how the rating agencies should rate the securities), it could not have been a red flag for Cadwalader. Cadwalader had ample reason to believe that Nomura knew how to compute REMIC real property values, and no reason to believe that Nomura had misrepresented that the real property securing the DHL was equal to at least $40 million.13 Simply put, no reasonable jury could conclude, based on the totality of the undisputed evidence, that the Deal Highlights document created a red flag. 12 While there is no evidence that Adelman saw the Deal Highlights document before the D5 closed (in fact, he did not (cf. A-2241)), there is no question that it would not have altered his approach if he had. Adelman already knew that the Doctor’s Hospital was a going concern (see A-2238) and that Nomura had obtained an appraisal of it (A-2215, A-2169). While he had not seen the appraisal—because Nomura instructed its lawyers to rely on Nomura’s representations about appraisals, rather than examine them independently (A-1935, A-1936)— Adelman would have expected that it would include a cost-approach valuation (which does not represent the “reconciled” value of the property) and that the valuation could be near the REMIC threshold; that is the nature of a cost valuation (A-476, A-493, A-971). 13 If Nomura had had a question for Cadwalader about the valuation of the real property securing the DHL, it would have raised the issue with Adelman directly; it would not have faxed a non-REMIC document to a securitization associate without any hint of seeking REMIC guidance. The parties had already agreed Nomura would ask questions if the 80% test could not be met based on a “sticks and bricks” basis alone. (A-1526, A-1467, A-1930.) The record is clear that Nomura did not ask Cadwalader any questions about the value of the DHL. (A-2163, A-2230, A-1930, A-1045.) 38 To hold otherwise is (i) to elevate the Deal Highlights document to a significance well beyond any assigned to when it was created, sent to Cadwalader, or used during the course of this or the underlying litigation; (ii) to ignore the context in which the document was provided (by a sophisticated client to counsel who had properly advised its client concerning the REMIC rules and had been instructed by its client not to review appraisals); and (iii) to assume a properly advised client was unable to follow the advice it was given, misrepresented its own Appraisal, and provided a false certification. C. Nomura’s Only Remaining Claim Depends on Hindsight. In allowing this case to proceed to trial on the basis of the Deal Highlights document, the First Department majority impermissibly evaluated Cadwalader’s conduct on the basis of hindsight, by assigning the document an importance that Nomura never ascribed to it during the D5 or the many years of litigation that followed the D5. Legal malpractice is a departure from the “ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession.” See Ambase, 20 N.Y.3d at 434. A mere error in judgment is not enough to constitute malpractice, Rosner v. Paley, 65 N.Y.2d 736, 738 (1985), and cannot be evaluated with “the perfect vision and wisdom of hindsight,” Darby & Darby, P.C. v. VSI Int’l, Inc., 95 N.Y.2d 308, 315 (2000). Yet Nomura’s only remaining claim, as 39 narrowed by the lower courts, is at best a pure product of hindsight, applied by the motion court after the oral argument of Cadwalader’s summary judgment motion. Nomura made no issue of the Deal Highlights document until more than four years after filing this lawsuit, and even then only after the motion court asked for a copy of the document after oral argument on Cadwalader’s motion for summary judgment. Tellingly, Nomura’s experts who opined on the issue of Cadwalader’s due diligence made no mention of the document in their expert reports or affidavits. As Justice Friedman noted in dissent, Nomura’s purported experts on the standard of care for the preparation of legal opinion letters never even saw the document. (A-48.a.) Nomura “did not include [it] among the more than 1,200 exhibits it submitted with its original opposition to the summary judgment motion.” (A-33.a.) And Nomura never argued it was a red flag until the Appellate Division ruled on Cadwalader’s appeal. For Nomura to suggest now, more than fifteen years after the fact and only after being prompted by the motion court, that Cadwalader should have recognized the Deal Highlights document as a red flag and should have dealt with it differently, is to ignore the scope of the retention to which the parties had agreed, reinvent the circumstances that existed at the time of the D5, and subject Cadwalader to a standard that can only be met by those with perfect hindsight. Also fatal to Nomura’s case is the fact that even the perfect vision and wisdom of 40 hindsight show that the Deal Highlights document was not a red flag and Cadwalader had no reason to view it as such. II. THE FIRST DEPARTMENT ERRED IN FINDING A TRIABLE ISSUE WHERE THE UNDISPUTED EVIDENCE SHOWS THAT CADWALADER MET THE STANDARD OF CARE. Even if the Deal Highlights document could be said to have potentially raised a red flag, it does not follow that Nomura demonstrated a departure from the standard of care. In fact, because the undisputed evidence showed that Cadwalader met the standard of care, the First Department’s Decision denying Cadwalader’s motion for summary judgment on Nomura’s due diligence claim should be reversed, and summary judgment should be entered in favor of Cadwalader. A. The Burden Was on Nomura, Not Cadwalader. In permitting Nomura’s due diligence claim to proceed to trial, the First Department stated that Cadwalader had not “met its burden of establishing, as a matter of law, that the Deal Highlights document contained no ‘red flags’ to suggest that the loan was not REMIC-qualified.” (A-25.a.) In so doing, the First Department misplaced the parties’ respective burdens; overlooked Cadwalader’s proof, which shifted the burden to Nomura; and disregarded Nomura’s failure of proof. 41 To obtain summary judgment, Cadwalader bore the burden to offer prima facie evidence that it satisfied the standard of care in its approach to due diligence. See Alvarez, 68 N.Y.2d at 324. If and when Cadwalader made that showing, the burden shifted to Nomura “to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action.” (A-17.a (quoting Alvarez, 68 N.Y.2d at 324).) Cadwalader met its prima facie burden by proffering admissible evidence from four leading experts. (See A-1008-10, A-1041-46, A-1066-75 (Peaslee); A-962-78, A-993-1002 (Lyden); A-1077-78, A-1083-1085, A-1127-28 (Rodgers); A-1141, A-1144-48 (Weinberger).) David Rodgers, who took account of the Deal Highlights document in rendering his opinion, rejected Nomura’s due diligence claim and found no fault with Cadwalader’s work. (A-1078-90, A-1116.) James Peaslee testified that “Cadwalader acted reasonably and in a manner consistent with the skill and knowledge possessed by an experienced securitization counsel in connection with the D5.” (A-1008.) Michael Weinberger testified that “Cadwalader acted reasonably in . . . performing due diligence prior to the issuance of its REMIC Opinion.” (A-1141.) And Thomas Lyden reached the same conclusion based upon a nine-factor analysis.14 (A-967-70.) 14 Cadwalader offered expert evidence that “[t]he precise responsibilities of securitization counsel depend on counsel’s understanding with its client” and that “counsel and its client can agree to allocate responsibility between them in any number of ways, depending on factors such 42 Cadwalader also offered evidence from several fact witnesses, including Nomura executives, that Cadwalader performed exactly as expected. For example, Gershon, who addressed the Deal Highlights document at his deposition, testified that “Cadwalader did what it was asked to do and did it well,” and that, in his view, as the person who had engaged Cadwalader, this litigation against Cadwalader was unwarranted. (A-1476, A-1522.) Gershon further testified that “Nomura specified a scope of work to Cadwalader. Cadwalader was Nomura’s vendor. And Cadwalader, to the best of my knowledge, complied with that scope of work.” (A-1522.) Likewise, Barry Funt, Nomura’s general counsel, admitted that “[n]othing that I know would lead me to conclude” that Cadwalader had “failed to do its job in connection with the D5 securitization.” (A-2424.) Thus, the burden shifted to Nomura to show otherwise. Even though the burden shifted, Nomura offered no competent evidence that Cadwalader departed from the standard of care.15 Nomura submitted as the nature of the transaction, the time allocated for its completion, and the sophistication of the parties.” (A-1144.) More to the point, Cadwalader offered specific expert evidence that “[r]esponsibility for ascertaining the value of collateral securing a specific loan ultimately falls to the client”; that the role of securitization counsel was not to “guarantee facts, particularly facts relating to the amount of real property securing a given loan”; and that the role of securitization counsel was limited to confirming with its client that the client “had determined that the fair market value of the real property securing each loan was equal to at least 80% of the amount of the loan.” (A-1145-46.) 15 Where, as here, a defendant in a legal malpractice action offers expert testimony against an allegation of malpractice, the plaintiff can only survive summary judgment if it counters with its own expert testimony “delineating the appropriate standard of professional care and skill that the defendants were required to adhere to” under the facts of a particular case. Schadoff v. Russ, 43 the testimony of a supposed expert witness, Arthur Field, who purported to opine on the professional standard governing attorneys who issue REMIC opinions. (A-2269.) However, as the First Department observed, “Field opines on the general practice of rendering closing opinions, but has no expertise in REMIC issues. He has never practiced in the securitization or REMIC fields, has never advised a client on REMIC matters, and has never studied the standards governing tax attorneys with respect to REMIC opinions. Nor does Field sufficiently address one of the most critical facts here—that Nomura specifically instructed Cadwalader to not review the appraisals.” (A-21.a.) This rejection of the Field opinion, standing alone, is fatal to Nomura’s due diligence claim. The First Department majority focused on Adelman’s testimony that he would typically inquire further if a valuation came close to REMIC eligibility, and that his practice was to request the underlying appraisal if he believed further inquiry was required. (A-24.a.) However, there is no evidence that Adelman’s practice was equal to the minimum standard of care,16 and even if there were, the undisputed evidence shows that Adelman followed his typical practice in 278 A.D.2d 222, 223 (2d Dep’t 2000) (internal citation and quotation marks omitted); Orchard Motorcycle Distribs., Inc. v. Morrison Cohen Singer & Weinstein, LLP, 49 A.D.3d 292, 292-93 (1st Dep’t 2008). 16 On the contrary, Adelman, one of the country’s leading experts on REMIC tax issues (A-1960), practiced well above the standard of care (A-1938, A-1146-48). A reasonable lawyer could do less than Adelman typically did without committing malpractice. (A-977-78, A-1044, A-1067-68, A-1083-89, A-1146-47.) 44 connection with the D5. (A-1929, A-1935.) It is undisputed that neither he nor anyone else at Cadwalader saw anything that they believed required them to ignore Nomura’s instruction and to review the DHL Appraisal. (A-1935, A-1936, A-2228.) According to Adelman, “[n]o red flag was raised that this loan might have had an unusual amount of personal property, so that no red flag was raised that caused me to inquire further.” (A-2228.) On the contrary, it is undisputed that Cadwalader was privy to information outside the four corners of the Deal Highlights document—such as its extensive dealings with Nomura (in which Nomura unquestionably received correct legal advice) and the borrower’s unquestioned representation of a $50 million valuation—that made clear that Nomura’s representation was reasonable. While there is little in the record about the Deal Highlights document, it is clear that the document was not created by Cadwalader, that it was not sent to Cadwalader for REMIC purposes, and that Nomura (properly) made essentially nothing of it during nearly a decade of litigation. Nomura has never argued—even after the motion court’s decision citing the Deal Highlights document—that the document itself constituted a red flag that required Cadwalader to ignore Nomura’s instruction not to review appraisals. Nomura’s purported expert, Field, did not even mention the document. In light of Nomura’s failure to adduce any evidence that Cadwalader acted unreasonably, Nomura failed to meet its burden of proof. 45 For this reason, the First Department’s Decision should be reversed and summary judgment should be granted in favor of Cadwalader on Nomura’s only remaining claim.17 B. Taken as a Whole, the Undisputed Evidence Showed That Cadwalader Acted Reasonably and Did Not Commit Malpractice. The First Department concluded (correctly) that Cadwalader did not have a general duty to review the Appraisal of the property securing the DHL, but the court construed the Deal Highlights document to create a triable issue as to whether Cadwalader had committed malpractice in rendering its REMIC Opinion without further diligence. (A-21.a-31.a.) Viewed in light of all the undisputed facts and circumstances, however, the Deal Highlights document is no impediment to the entry of summary judgment. No reasonable jury could conclude that the Deal Highlights document made it unreasonable for Cadwalader to rely on Nomura’s representation concerning the value of the real property securing the DHL. As stated, while the Deal Highlights document does not, by itself, contain all the information required fully to evaluate REMIC eligibility, it is 17 The First Department majority stated that Cadwalader was given an opportunity by the motion court to address the Deal Highlights document but “failed” to submit an affidavit from Adelman or any of Cadwalader’s lawyers doing so. (A-26.a-27.a.) However, the document only became an issue when, after oral argument and submission of the case for decision, the motion court raised the document sua sponte. (See NYSCEF Doc. Nos. 92, 93, 97, 98.) The motion court did not offer the parties an opportunity to submit additional evidence on the subject. The motion court asked only if the parties wished to comment on the document, and Cadwalader did so at some length. (NYSCEF Doc. Nos. 92, 97.) 46 consistent with Nomura’s representation that it had obtained an appraisal evidencing that the real property securing the DHL was equal to at least $40 million. Indeed, it corroborates the representation, insofar as it shows that (i) Nomura had obtained, reviewed and analyzed an appraisal evidencing the value of the real property securing the DHL; (ii) the Appraisal would have allowed Nomura to ensure that, as represented, the DHL was secured by real property equal to at least $40 million; and (iii) consistent with Cadwalader’s advice, Nomura was taking account of the distinction between “operations” and other property in evaluating the property securing the DHL. Moreover, Cadwalader’s duty to Nomura was defined by the scope of the engagement, which was Nomura’s decision, as acknowledged by Nomura’s own experts. (E.g., A-2420 (“Q. Is it fair to say that Cadwalader’s duties to Nomura were defined by the scope of the engagement to which the parties agreed? A. Yes.”); A-1382 (“Q. So the scope of diligence done is the client’s call, correct? A. That’s right.”)); AmBase, 8 N.Y.3d at 435 (dismissing complaint where facts established that the alleged acts were “outside the scope of [the] representation”). Again, the parties agreed that Nomura would determine the value of REMIC real property (based on the advice provided by Cadwalader) and that Cadwalader would rely on Nomura’s representation concerning the value of the real property securing the DHL. (A-1468, A-1619-20, A-1473.) It is undisputed that Nomura 47 never notified Cadwalader that it was having difficulty determining the value of the real property securing the DHL or that it required Cadwalader’s assistance to make the DHL value determination.18 (A-1128, A-1942, A-2163.) The Deal Highlights document gave Cadwalader no reason to doubt the truthfulness of Nomura’s representation. On the contrary, Cadwalader had every reason to believe Nomura knew what it was doing, as evidenced by the following undisputed facts: (1) As a leading REMIC industry player, Nomura had previously successfully applied the 80% Test hundreds of times in deals involving Cadwalader (A-579, A-820, A-827, A-1619); (2) Cadwalader “had numerous discussions with Nomura’s securitization team about REMIC requirements” and “provided Nomura with ‘detailed advice’ as to how to satisfy the 80% test” (A-15.a); (3) Nomura advised Cadwalader that (as it had in the past in other securitizations) Nomura would be taking responsibility to determine whether 18 Moreover, Nomura did not look to Cadwalader to conduct its REMIC analysis on the basis of documents like the Deal Highlights document. Prior to the closing of the D5, Cadwalader provided detailed advice to Nomura regarding how to satisfy the 80% Test. (A-1619-20.) It did this so that Nomura could make REMIC value determinations internally (usually upon underwriting a loan) and less expensively. (A-1470.) Nomura did not ask, expect or even want Cadwalader to replicate the valuation process undertaken by Nomura and its other advisors or to conduct a more involved analysis in rendering its REMIC opinion, since doing so would have resulted in undue delay and expense. (A-1473, A-1474.) On the contrary, it was agreed that Cadwalader would render its REMIC opinion on the basis of Nomura’s representations. (A-1473.) The parties understood that Cadwalader was to rely upon the facts provided by Nomura, which had been verified by Nomura, Dechert, Valuation Counselors, and Coopers. (A-1473, A-1465.) 48 the real property securing the loans to be included in the D5 was equal to at least 80% of the value of the loans (A-1468); (4) Cadwalader understood that Nomura had retained other advisors to help it ensure that the real property securing the DHL was equal to at least $40 million (A-1465); (5) Cadwalader knew Nomura had retained Valuation Counselors to conduct the Appraisal of the Doctors Hospital, and Coopers, an accounting firm with expertise relating to hospitals, as well as another law firm, Dechert, to close the loan (A-1465-66, A-1469); (6) Nomura originated the DHL for the purpose of putting it in the D5, and, consistent with Nomura’s procedure when it originated a loan for purposes of putting it in a REMIC, it relied on origination counsel to determine REMIC compliance upon origination (A-1465, A-1471); (7) The DHL’s loan agreement (drafted by origination counsel, not Cadwalader) required the DHL borrower to contractually represent to Nomura that the real property securing the loan was equal to at least $50 million, while the 80% test required only $40 million of real property value (A-1805, A-1807); (8) Cadwalader specifically asked Nomura to represent that the real property securing the DHL was equal to at least $40 million as evidenced by 49 an MAI appraisal, and Nomura did so following careful review (A-1468, A-1473-74, A-1516, A-1391, A-1814-15, A-1799, A-1936-37, A-1938, A-1939); (9) Cadwalader reviewed Annex A to the Prospectus Supplement, which reflected overall LTVs and indirectly confirmed Nomura’s representations about REMIC LTVs (A-1935, A-1468-69, A-837); and (10) Cadwalader obtained certificates from officers of Nomura stating that Nomura’s representations and warranties, including Nomura’s warranty that the property securing the DHL was equal to at least $40 million, were true and that Cadwalader could rely on them (A-578, A-1801, Ex. 542). Again, malpractice is a failure to exercise the “ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession.” See Ambase, 8 N.Y.3d at 434. A mere error in judgment is not enough to constitute malpractice, Rosner, 65 N.Y.2d at 738, which cannot be evaluated with “the perfect vision and wisdom of hindsight,” Darby, 95 N.Y.2d at 315. As stated (in Section I.A above), the First Department’s conclusion that the Deal Highlights document raises a potential red flag is founded at best on hindsight, as is evident from the fact that Nomura made almost no mention of the Deal Highlights document in the motion court and “did not include [it] among the more than 1,200 50 exhibits it submitted with its original opposition to the summary judgment motion.” (A-33.a.) Indeed, as the dissenting opinion points out, “not even Nomura itself, when asked by the motion court to address the Deal Highlights document, made any argument that the alternative $40.6 million ‘cost’ valuation rejected by the appraiser was a ‘red flag’ indicating a potential REMIC problem.” (A-53.a.) C. The First Department Misapprehended the Implications of Resolving Nomura’s Claim as a Matter of Law. Underlying the First Department’s Decision is a concern that counsel not be immunized from liability just because it had a sophisticated client if it ignored “warning signs” and “blindly rel[ied]” on [its] client’s representations” despite “see[ing] something inconsistent with them.” (A-26.a.) However, Cadwalader did not seek summary judgment on the grounds that it was free to ignore any warning sign that it saw in the Deal Highlights document. For the reasons stated, the document does not include any warning sign. (See Section I.A above.) Nor is there any evidence that Cadwalader “ignored” what it perceived to be a REMIC red flag. (See Section I.B above.) As also stated, the Deal Highlights document was not an appraisal and was not prepared for purposes of performing a REMIC analysis; it was used by Nomura to provide information to the rating agencies. (A-1492.) Cadwalader had no reason to doubt Nomura’s ability to value real property or make the representation. 51 Similarly, Cadwalader did not seek summary judgment on the grounds that it was entitled blindly to rely on Nomura’s representations where the firm saw something inconsistent with them. Again, the Deal Highlights document is consistent with Nomura’s representation that the real property securing the DHL was worth at least $40 million, and it confirms that Nomura obtained an appraisal concerning the property and thus took seriously the need to substantiate its representation concerning REMIC value. In fact, the undisputed facts listed above undermine any argument that Cadwalader blindly relied on Nomura. Furthermore, in carrying out its duties as securitization counsel, Cadwalader undertook significant confirmatory work, including reviewing Annex A to the Prospectus Supplement, which listed loan to value ratios for each of the loans.19 Cadwalader sought summary judgment on the basis of undisputed evidence that Cadwalader did what it was asked to do and did it well (A-1008, A-1141, A-981, A-1108, A-1476, A-1522, A-2424), and on the ground (as Justice Friedman stated) that Cadwalader cannot, in fairness, be required to stand trial for malpractice for failing to perform a function for which its highly sophisticated client, in order to minimize the costs of the transaction, deliberately and undisputedly chose not to engage it. To permit this case to proceed to trial on the 19 In this regard, Cadwalader reviewed deal documents (A-2439), examined extensive summaries of massive loan files (A-2436), reviewed “third-party” reports (A-2025, A-2458), and coordinated with origination counsel (A-1464). 52 basis of the Deal Highlights document is not only to disregard the totality of the undisputed evidence, but it is also to hold Cadwalader to an unfair and unworkable standard.20 III. THE FIRST DEPARTMENT ERRED IN ALLOWING NOMURA’S CLAIM TO PROCEED, BECAUSE THE ALLEGED MALPRACTICE COULD NOT HAVE CAUSED THE ALLEGED INJURY. Finally, Nomura’s due diligence theory fails because Nomura cannot prove that Cadwalader’s alleged negligence caused the alleged damages. See Dombrowski, 19 N.Y.3d at 350. That is true because (1) Cadwalader’s tax (or REMIC) Opinion was undisputedly correct; (2) Nomura’s breach of Representation 24 would have required it to repurchase the DHL; and (3) Nomura would have owned the DHL if the loan had not been securitized. A. Cadwalader’s Opinion Was Undisputedly Correct. A lawyer cannot be held liable for legal malpractice for an alleged failing in connection with rendering an opinion that is correct. See Rosner, 65 N.Y.2d at 738; Tinter v. Rapaport, 253 A.D.2d 588, 590 (1st Dep’t 1998). If 20 The First Department majority discounted the undisputed evidence that Nomura failed to raise with Cadwalader any question about the value of the real property securing the DHL. (A-26.a.) While it might not make sense to expect every client to raise its legal concerns with outside counsel, here Nomura and Cadwalader specifically agreed, in advance, that Cadwalader was to rely on Nomura’s representations about REMIC real property values unless Nomura specifically raised an issue with Cadwalader. (A-1468, A-1473, A-1465.) Thus, to fault Cadwalader for Nomura’s failure to raise any REMIC issues with Cadwalader is not only to ignore the parties’ agreement about the scope of Cadwalader’s engagement, but also to allow Nomura to use its own departure from that agreement against Cadwalader. 53 Cadwalader’s Opinion was correct, then Nomura cannot show that the alleged shortcoming in due diligence caused the alleged injury. Despite Nomura’s argument, there is no evidence that the Opinion was anything but correct. Cadwalader opined simply that the D5 was REMIC qualified. (A-1092.) That is true, as Nomura’s own expert, Thomas Biafore, conceded. (A-1273.) Indeed, Nomura has repeatedly told investors, the IRS, and two federal courts that the D5 is REMIC qualified. (See, e.g., A-73-98, A-352-56.) The IRS has treated the D5 as a qualified REMIC since its inception. (A-1845-46.) That Cadwalader’s REMIC Opinion was based on factual representations by Nomura (as to the value of the real property securing the DHL) from which Nomura now seeks to distance itself does not render the Opinion incorrect. Cadwalader’s Opinion is expressly based upon and subject to the accuracy of the representations made by Nomura in the MLPSA (such as the 80% Warranty): In rendering the opinions set forth below, we have examined and relied upon . . . the [PSA] and the [MLPSA] and all exhibits thereto (collectively [with other documents], the “Agreements”) . . . . As to any facts material to such opinions [that] were not known to us, we have relied upon statements, certificates and representations of officers and other representatives of ASC, NACC . . . included in the Agreements and other documents, certificates and opinions delivered at the Closing . . . 54 (A-583-84.) This express language forecloses any argument that the Opinion backstopped or guaranteed Nomura’s representations. (Id.; see also A-1399 (“Q. And you [general counsel, Funt] understood that insofar as Cadwalader was relying upon the statements, certificates, and representations of Nomura, it wasn’t undertaking any independent investigation of those representations and facts right? . . . A. Right.”).) Contrary to Nomura’s new-found view, a lawyer may reasonably rely on the directions and representations of its client. Lawyers are not insurers, and a claim for malpractice does not lie simply because a transaction does not turn out the way a client would have liked. See Darby, 95 N.Y.2d at 315; see also Twn. of N. Hempstead v. Winston & Strawn, LLP, 28 A.D.3d 746, 748 (2d Dep’t 2006) (finding that “[w]here, as here, a sophisticated client imposes a strategic decision on counsel, the client’s action absolves the attorney from liability for malpractice”). That is particularly so where, as here, the law firm both does what it is asked and does it well. Thus, the alleged malpractice could not have caused the alleged injury; it was associated with an opinion that the record shows was undisputedly correct. B. Nomura’s Breach of Representation 24 Would Have Required It To Repurchase the DHL. Nomura’s malpractice claims are based on its repurchase of the DHL, which it claims resulted from Cadwalader’s alleged negligence in connection with 55 two warranties Nomura made, the Qualified Mortgage Warranty and the 80% Warranty. But Nomura breached a separate representation it made in the MLPSA—Representation 24—that required the repurchase independently of any misfeasance by Cadwalader. While the Qualified Mortgage Warranty and the 80% Warranty would have been satisfied if there was at least $40 million of real property securing the DHL, Representation 24 promised investors in the D5 Trust that the DHL’s real property collateral was worth at least $50 million. Specifically, Nomura affirmed in Representation 24 that no provisions of the underlying DHL agreement had been breached prior to the execution of the MLPSA. (A-81.) In the DHL loan agreement, the borrower had represented that the $50 million loan balance did not exceed the “Tax Fair Market Value” of the “Facility,” which the agreement defined as the real property collateral securing the loan, excluding “the value of any personal property or other property that is not an interest in real property” under the REMIC regulations. (A-1805, 1807.) Representation 24 thus promised that the DHL was secured by at least $50 million of REMIC real property.21 (See A-1149.) 21 As discussed above, NACC had provided a certificate to Cadwalader prior to Cadwalader issuing its Opinion that the MLPSA’s representations and warranties—including Representation 24—were “true and correct”. (A-578.) Representation 24 was thus a separate and independent basis—as verified by Nomura—for Cadwalader not to question Nomura’s representation that the DHL collateral exceeded $40 million. 56 No person or entity has ever maintained, nor is there any appraisal or other evidence suggesting, that the DHL was secured by $50 million of REMIC real property. The borrower, therefore, breached the warranty in the DHL loan agreement prior to the D5 Transaction. (See A-1149, 1805, 1807.) And Nomura thus breached Representation 24 as soon it was made. The motion court, however, improperly rejected Nomura’s breach of Representation 24 as a basis for summary judgment on the ground that the breach never resulted in an obligation to repurchase the loan. (See A-41.) It held that Nomura’s repurchase obligation did not arise because the D5 Trustee never provided proper notice of that breach and never demanded that Nomura repurchase the DHL for that reason. (Id.) The D5 Trustee, however, did provide notice of that breach and a repurchase demand. The D5 Trustee notified Nomura of the breach when it filed a letter brief in the Trustee Action seeking to amend its complaint to add a repurchase claim based on the breach, and when it followed up with a letter to the court copying Nomura. (A-1656.) The D5 Trustee’s letter brief attached the proposed amended complaint, which explained Nomura’s breach of Representation 24 and asked for relief in the form of an order requiring Nomura “to specifically perform under their repurchase obligations.” (A-1682, A-1676-80.) Although the district court in the Trustee Action ultimately denied the D5 Trustee’s motion to 57 amend, its ruling did not change Nomura’s contractual obligation to repurchase the DHL. (See A-41-42, A-1646.) Contrary to the motion court’s decision, which the First Department affirmed without discussion, neither the MLPSA nor the PSA requires any particular form of notice, and neither requires that the D5 Trustee make a repurchase demand. Sections 3(a)-(b) of the MLPSA provide, in relevant part, that Nomura “shall be given notice of . . . any breach of any representation or warranty contained in [among other provisions] Section 2(b) . . . (xxiv),” and that “[w]ithin 90 days of the receipt of the notice . . . [Nomura] shall . . . repurchase the related Mortgage Loan.” (A-90-91.) Sections 2.03(d)-(e) of the PSA similarly require that Nomura be notified of any breach, and that it repurchase the relevant loan within 90 days after it receives notice. (A-180-81.) As the district court in the Trustee Action noted, the term “notice” is not defined in either the MLPSA or PSA, and the agreements thus cannot be characterized as requiring any particular form of notice. (See A-362 (“The term ‘notice’ is not defined in the PSA nor MLPSA. Similarly, neither the PSA nor the MLPSA specifies anything about the form or content of acceptable notice.”); see also A-73-98, A-109-69.) The D5 Trustee’s motion to amend the complaint in the Trustee Action constituted sufficient notice, and Nomura was obligated to repurchase the DHL on the basis of its breach of Representation 24. Because Nomura was 58 required to repurchase the DHL regardless of the alleged negligence, the First Department should have granted summary judgment dismissing the malpractice claims for lack of causation. See Dombrowski, 19 N.Y.3d at 350. C. Nomura Would Have Owned the DHL if the Loan Had Not Been Securitized. Nomura claims that but for the alleged malpractice it would not have included the DHL in the D5 Securitization. But if Nomura had not securitized the DHL, the loan would have remained on its books and it would have suffered the losses that resulted from default. For this additional reason, Nomura’s claims fail for lack of causation. Both Gershon, the head of NACC’s securitization department, and Penner, NACC’s president at the time, testified that had the DHL not been securitized, Nomura would have held the loan on its balance sheet. Gershon testified specifically with respect to the DHL that Nomura would have owned the loan if it had not been included in the D5 Transaction. (A-1527-28 (“Q. If after origination Nomura determined the Doctors Hospital loan was not REMIC-qualified then it would have held that loan on its balance sheet; correct? A. I believe that’s correct.”).) Penner testified more generally that unsecuritized loans were held on Nomura’s balance sheet. (A-1593 (“Q. [W]hat did Nomura do with loans that were not securitized while you were at Nomura? A. We held them in our balance sheet.”).) 59 Despite this testimony making clear that Nomura would have owned the DHL if the loan had not been securitized, the motion court rejected this basis for summary judgment because of opinion evidence suggesting the possibility that Nomura could have disposed of the loan somehow. (A-47-48.) The First Department affirmed this ruling without discussion. However, the evidence on which the court relied is speculative opinion at best. For example, the motion court relied on an affidavit from Penner indicating that if a loan could not be securitized due to a REMIC issue, “NACC’s first course of action would have been to order a new appraisal and try to include it in the next securitization”; that if the “new appraisal failed to remedy the problem, NACC would potentially have restructured the DHL”; and, if that did not work, that “Nomura could potentially have sold the loan in the whole loan market.” (A-47 (emphasis added) (citing A-1784).) Whether or not Nomura “could potentially” have disposed of the DHL, speculation cannot defeat summary judgment. See AmBase, 8 N.Y.3d at 436 (holding that speculative harm “cannot support a legal malpractice claim”); Williams v. New York, 18 N.Y.3d 981, 984 (2012) (holding that claimed causal connection was “too attenuated and speculative to support liability”). The First Department thus erred in denying Cadwalader’s motion. CONCLUSION For the foregoing reasons, Cadwalader respectfully requests that the First Department's Decision denying Cadwalader' s motion for summary judgment on Nomura's due diligence claim be reversed and that summary judgment be granted in favor of Cadwalader. August 18, 2014 CRAVATH, SWAINE & MOORE LLP, By~ G DavidR. arr'ott~ :me:er:t:irm 60 Worldwide Plaza 825 Eighth A venue New York, NY 10019 (212) 474-1000 Attorneys for Defendant- Appellant-Cross-Respondent Cadwalader Wickersham & Taft LLP
