Nomura Asset Capital Corporation, et al., Respondents-Appellantsv.Cadwalader, Wickersham & Taft LLP, Appellant-Respondent.BriefN.Y.September 8, 2015APL-2014-00171 New York County Clerk’s Index No. 116147/06 Court of Appeals 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 PLAINTIFFS-RESPONDENTS- CROSS-APPELLANTS CONSTANTINE CANNON LLP Attorneys for Plaintiffs-Respondents- Cross-Appellants 335 Madison Avenue, 9th Floor New York, New York 10017 212-350-2700 Of Counsel: James T. Potter Amianna Stovall Joel A. Chernov Date Completed: October 3, 2014 To Be Argued By: James T. Potter Time Requested: 30 Minutes i 296833.1 TABLE OF CONTENTS Page(s) PRELIMINARY STATEMENT ............................................................................... 1 STATEMENT OF THE CASE ................................................................................ 11 A. Nomura’s Business Model .................................................................. 11 B. Nomura Engaged Cadwalader As Counsel ......................................... 12 C. The Requirements Of The Securitization Business ............................ 13 D. Nomura’s Process For Originating REMIC-Qualified Loans ............ 14 1. Cadwalader advised Nomura to originate loans within overall LTV parameters ................................................. 14 2. Nomura’s appraisals did not typically separate real from personal property ....................................................... 17 3. Nomura used the bottom-line appraisal numbers for REMIC purposes ................................................................. 20 4. Cadwalader reviewed the Prospectus Supplement for REMIC compliance ............................................................. 22 E. The DHL .............................................................................................. 23 F. The D5 Securitization .......................................................................... 25 1. The REMIC Representations. .................................................... 25 2. The First Opinion Letter ............................................................. 27 G. The Federal Action .............................................................................. 27 H. The Instant Action ............................................................................... 29 ii 296833.1 I. The Trial Court Decision ..................................................................... 29 J. The First Department Decision ........................................................... 31 THE RELEVANT LEGAL STANDARDS ............................................................ 32 A. Summary Judgment Is A Drastic Remedy .......................................... 32 B. Legal Malpractice ................................................................................ 36 POINT I NOMURA’S ADVICE CLAIM SHOULD BE REINSTATED AS THERE ARE GENUINE ISSUES OF MATERIAL FACT WITH RESPECT TO WHETHER CADWALADER GAVE NOMURA PROPER REMIC ADVICE ............................................. 37 A. The Testimony Of Glick, Adelman And Gershon Raises Material Issues Of Fact ............................................. 38 1. Questions of fact exist with respect to the REMIC-related advice that Glick provided Nomura ................ 38 2. Questions of fact exist with respect to the REMIC-related advice that Adelman provided Nomura. ......... 42 a. Adelman’s testimony is inconsistent ................................... 42 b. Adelman’s testimony is also conclusory and inadmissible .................................................................. 49 3. Gershon’s testimony raise issues of credibility that cannot be resolved on a motion for summary judgment. ................................................................... 52 a. Gershon’s testimony is inconsistent .................................... 52 b. Gershon is biased ................................................................. 54 B. The First Department Failed To Address The Testimony Of Nomura’s Former Employees ............................... 57 iii 296833.1 C. The First Department Failed To Address The Testimony Of Biafore, One Of Nomura’s Experts ............................. 60 POINT II CADWALADER’S FAILURE TO CONDUCT THE REQUISITE DUE DILIGENCE PRESENTS AND ISSUE OF FACT FOR THE JURY ................................................................ 62 1. Cadwalader could not rely on a representation that was tantamount to the REMIC Opinion ................................... 65 2. Cadwalader could not rely on representations of value from Nomura without ensuring that Nomura had the knowledge and ability to make those representations .......................................................................... 68 POINT III CADWALADER’S PURPORTED JUSTIFICATIONS FOR BLIND RELIANCE ON NOMURA’S REPRESENTATIONS RAISE ISSUES OF FACT ........................... 76 1. Questions of fact exist with respect to the scope of Cadwalader’s obligations and Nomura’s purported instruction that Cadwalader should not review the appraisals ................................................................................... 77 2. Questions of fact exist with regard to whether Nomura understood how to apply the REMIC rules .............................. 81 3. Cadwalader has misstated the First Department’s findings ...... 83 4. Questions of fact exist with regard to Cadwalader’s contention that it justifiably relied on Nomura’s Representations because Nomura was responsible for determining the value of the REMIC real property securing the loans ...................................................................... 84 5. Questions of fact exist with regard to whether Nomura undertook to determine the value of the REMIC real property securing the DHL ....................................................... 86 6. Questions of fact exist with regard to Nomura’s iv 296833.1 origination procedures and Cadwalader’s purported understanding thereof ................................................................ 88 7. Questions of fact exist as to whether Cadwalader confirmed the truth of Nomura’s DHL representations ............................. 93 8. Questions of fact exist with regard to Cadwalader’s purported reliance on the DHL borrower’s representation ....................... 94 9. Cadwalader’s four experts failed to establish as a matter of law that Cadwalader acted reasonably ...................................... 95 10. The First Department determined only that Cadwalader had no obligation to review each of the 156 appraisals ............ 99 POINT IV THE DEAL HIGHLIGHTS DOCUMENT RAISED “RED FLAGS” PRECLUDING CADWALADER FROM RELYING ON NOMURA’S REPRESENTATIONS ...................... 103 1. The Deal Highlights document raises a red flag with respect to the value of the REMIC real property securing the DHL ................................................................................... 106 2. Cadwalader has failed to explain why the Deal Highlights document was not brought to Adelman’s attention and he failed to submit an affidavit addressing the document ........... 107 3. Nomura had no experience with loans secured by acute care hospitals ........................................................................... 108 4. The cost approach to valuation includes value that is not REMIC real property ........................................................ 110 5. Nomura provided Cadwalader with the Deal Highlights document three weeks before the D5 Securitization closed as a stand-alone document ...................................................... 111 POINT V THE RECORD CONTAINS SUBSTANTIAL EVIDENCE THAT CADWALADER’S NEGLIGENCE PROXIMATELY CAUSED NOMURA’S DAMAGES ................................................................. 115 v 296833.1 A. Proximate Cause Is A Question For The Jury ................................... 115 B. Cadwalader Has Failed To Demonstrate That Its REMIC Opinion Was Correct ......................................................................... 121 1. Adelman testified that, in issuing the REMIC Opinion, he was opining that each of the loans in the D5 Trust was REMIC-eligible ....................................................................... 121 2. Biafore testified that the DHL is not REMIC-qualified and the REMIC Opinion is not accurate ................................. 123 3. Nomura’s arguments in the Federal Action raise issues of fact that cannot be resolved on a motion for summary judgment .................................................................. 125 4. Nomura’s Representations do not release Cadwalader from its independent due diligence obligations ............................... 128 C. Cadwalader’s Efforts To Assert A Claim For Breach Of Representation 24 Were Properly Rejected By The District Court .. 131 D. Nomura Would Have Disposed Of The DHL By No Later Than March 1998 .............................................................................. 134 CONCLUSION .......................................................................................................................138 vi 296833.1 TABLE OF AUTHORITIES Cases Page(s) Acker v. Wilger, No. 12 Civ. 3620, 2014 WL 100013 (S.D.N.Y. Jan. 10, 2014) .........................116 AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428 (2007) .................................................................................... 77, 137 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ............................................................................................. 35 Arnav Indus. Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder & Steiner, 96 N.Y.2d 300 (2001) .........................................................................................116 Baje Realty Corp. v. Cutler, 32 A.D.3d 307 (1st Dep't 2006) ................................................................. 126-127 Barnett v. Schwartz, 47 A.D.3d 197 (2d Dep't 2007) .................................................................. 116-117 Bingham v. New York City Trans. Auth., 99 N.Y.2d 355 (2003) .........................................................................................122 Birnbaum v. Hyman, 43 A.D.3d 374 (1st Dep't 2007) ..................................................................... 32-33 Bistricer v. Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP, 14 A.D.3d 468 (1st Dep't 2005) .................................................................... 34, 63 Bonaventura v. Galpin, 119 A.D.3d 625 (2d Dep't 2014) .......................................................................... 35 Boudreau v. Ivanov, 154 A.D.2d 638 (1989) .......................................................................................116 Burgos v. Aqueduct Realty Corp., 92 N.Y.2d 544 (1998) .........................................................................................116 vii 296833.1 Chock Full O'Nuts Corp. v. NRP LLC I, 47 A.D.3d 189 (1st Dep't 2007) .........................................................................127 Corley v. Miller, 133 A.D.2d 732 (2d Dep't 1987) .......................................................................... 34 Darby & Darby v. VSI Int'l, Inc., 95 N.Y.2d 308 (2000) .........................................................................................128 Degen v. Steinbrink, 202 A.D. 477 (1st Dep't 1922) ............................................................................. 36 Derdiarian v. Felix Contracting Corp., 51 N.Y.2d 308 (1980) ................................................................................. 115-116 DiGiantomasso v. City of New York, 55 A.D.3d 502 (1st Dep't 2008) ..................................................................... 35-36 Equitable Life Assurance Soc'y of the United States v. Nico Constr. Co., Inc., 245 A.D.2d 194 (1st Dep't 1997) .......................................................................117 Estate of Nevelson v. Carro, Spanbock, Kaster & Cuiffo, 259 A.D.2d 282 (1st Dep't 1999) ............................................................ 34, 36, 63 Ferrante v. Am. Lung Ass'n, 90 N.Y.2d 623 (1997) ........................................................................................... 35 Food Pageant, Inc. v. Consol. Edison Co., Inc., 54 N.Y.2d 167 (1981) ........................................................................................... 63 Forte v. Weiner, 200 A.D.2d 421 (1st Dep't 1994) ......................................................................... 64 Freese v. Schwartz, 203 A.D.2d 513 (2d Dep't 1994) ........................................................... 34, 63, 116 Garten v. Shearman & Sterling LLP, 52 A.D.3d 207 (1st Dep't 2008) ........................................................................... 86 viii 296833.1 GJF Constr., Inc. v. Sirius Am. Ins. Co., 89 AD3d 622 (1st Dep't 2011) ...........................................................................126 Harding v. Noble Taxi Corp., 182 A.D.2d 365 (1st Dep't 1992) .......................................................................117 Hill v. Arnold, 226 A.D.2d 232 (1st Dep't 1996) .................................................................. 36, 57 Jackson v. Montefiore Med. Ctr., 109 A.D.3d 762 (1st Dep't 2013) .................................................................. 50, 53 JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373 (2005) ...................................................................................... 32, 33 Kirk v. Heppt, No. 05 Civ. 9977, 2009 WL 2870167 (S.D.N.Y. Sept. 3, 2009) .......................117 LaSalle Bank Nat'l Ass'n. v. Nomura Asset Capital Corp., No. 00 Civ. 8720, 2004 WL 2072501 (S.D.N.Y. Sept. 14, 2004) ................ 25, 28 Matter of Excelsior 57th Corp. (Kern), 218 A.D.2d 528 (1st Dep't 1995) .......................................................................127 Melendez v. Dorville, 93 A.D.3d 528 (1st Dep't 2012) ........................................................................... 63 Misicki v. Caradonna, 12 N.Y.3d 511 (2009) .........................................................................................122 Mortensen v. Mem'l Hosp., 105 A.D.2d 151 (1st Dep't 1984) .......................................................................117 Nat'l Enters. Corp. v. Dechert Price & Rhoads, 246 A.D.2d 481 (1st Dep't 1998) ......................................................................... 34 Nomura Asset Capital Corp. v. Cadwalader Wickersham and Taft LLP, 951 N.Y.S. 2d 87 (Sup. Ct. N. Y. Co., 2012) ............................................... passim ix 296833.1 Nomura Asset Capital Corp. v. Cadwalader, Wickersham & Taft LLP, 115 A.D.3d 228 (1st Dep't 2014) ................................................................. passim One Beacon Ins. Co. v. Espinoza, 2007 N.Y. Slip Op. 01304, 2007 WL 466042 (2d Dep't Feb. 13, 2007) ...........126 Orchard Motorcycle Distrib., Inc. v. Morrison Cohen Singer & Weinstein, LLP, 49 A.D.3d 292 (1st Dep't 2009) .......................................................................... 65 Ostrander v. Ostrander, 280 A.D.2d 793 (3d Dep't 2001) ................................................................... 50, 53 People v. Abney, 31 Misc.3d 1231(A) .............................................................................................. 64 People v. Reger, 13 A.D.2d 63 (1st Dep't 1961) ............................................................................. 50 Powell v. HIS Contractors, Inc., 75 A.D.3d 463 (1st Dep't 2010) ........................................................................... 35 Rahman v. Smith, 40 A.D.3d 613 (2d Dep't 2007) ..........................................................................127 Rosner v. Paley, 65 N.Y.2d 736 (1985) .........................................................................................118 RTC v. Latham & Watkins, 909 F. Supp. 923 (S.D.N.Y. 1995) .....................................................................131 Rudolf v. Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d 438 (2007) ............................................................................................. 36 Schadoff v. Russ, 278 A.D.2d 222 (2d Dep't 2000) ......................................................................... 65 Schultz v. Third Ave. R.R., 89 N.Y. 242 (1882) ........................................................................................ 36, 57 x 296833.1 Selkowitz v. Cnty. of Nassau, 45 N.Y.2d 97 (1978) ............................................................................................. 64 Serradilla v. Lords Corp., 50 A.D.3d 345 (1st Dep't 2008) .................................................................... 34, 63 Smartix Int'l Corp. v. Garrubbo, Romankow & Capese, P.C., No. 06 Civ. 1501, 2009 WL 857467 (S.D.N.Y. Mar. 31, 2009) ....... 116, 118, 137 Sommer v. Fed. Signal Corp., 79 N.Y.2d 540 (1992) ........................................................................................... 35 Sumitomo Mutsui Banking Corp. v. Credit Suisse, 89 A.D.3d 561 (1st Dep't 2011) .......................................................................... 34 Sweeney v. Bruckner Plaza Assocs., 57 A.D.3d 347 (1st Dep't 2008) .........................................................................116 Swift v. Choe, 242 A.D.2d 188 (1st Dep't 1998) ......................................................................... 34 Tinter v. Rapaport, 253 A.D.2d 588 (1998) .......................................................................................118 TLC Beatrice Int'l Holdings, Inc. v. CIGNA Ins. Co., No. 97-Civ. 8589, 1999 WL 33454 (S.D.N.Y. Jan. 27, 1999) ...........................127 TM Patents, L.P. v. Int'l Bus. Machs. Corp., 72 F. Supp. 2d 370 (S.D.N.Y. 1999) ..................................................................127 Town of N. Hempstead v. Winston & Strawn, LLP, 28 A.D.3d 746 (2006) .........................................................................................129 Utica Cutlery Co. v. Hiscock & Barclay, LLP, 109 A.D.3d 1161 (4th Dep't 2013) .....................................................................117 Vega v. Restani Constr. Corp., 18 N.Y.3d 499 (2012) ................................................................................... passim xi 296833.1 Weiss v. SEC, 468 F.3d 849 (D.C. Cir. 2006) .............................................................................. 66 Wheeler v. Citizens Telecomms. Co. of New York, Inc., 18 A.D.3d 1002 (3d Dep't 2005) ........................................................................127 Williams v. New York, 18 N.Y.3d 981 (2012) .........................................................................................138 Yaziciyan v. Blancato, 267 A.D.2d 152 (1st Dep't 1999) ......................................................................... 36 Statutes and Regulations 26 U.S.C. § 860D ..................................................................................................... 13 26 U.S.C. § 860G ........................................................................................ 13, 26, 66 Treas. Reg. § 1.856-3 ............................................................................................... 13 Treas. Reg. §1860G-2 .............................................................................................. 13 CPLR 3212 ............................................................................................................... 33 xii 296833.1 CORPORATE DISCLOSURE STATEMENT Pursuant to 22 NYCRR Part 500.1(f), Plaintiffs-Respondents-Cross- Appellants Nomura Asset Capital Corporation (“NACC”) and Asset Securitization Corporation (“ASC”) herby certify that NACC is a wholly owned subsidiary of non-party Nomura Holding America Inc., which is a wholly owned subsidiary of non-party Nomura Holdings, Inc. a publicly held corporation. ASC is a wholly owned subsidiary of NACC. xiii 296833.1 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 Commercial Division of the Supreme Court, New York County. On February 13, 2014, the Appellate Division, First Department, properly affirmed the denial of Cadwalader’s motion for summary judgment on Nomura’s legal malpractice claim for failing to do the appropriate due diligence in connection with the issuance of a legal opinion concerning certain Treasury Department rules and regulations; but improperly reversed the decision of the trial court denying Cadwalader’s motion for summary judgment concerning Nomura’s legal malpractice claim for failing to properly and sufficiently advise Nomura with respect to certain Treasury Department rules and regulations. Cadwalader moved for reargument of Nomura’s due diligence claim or, in the alternative, for 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. xiv 296833.1 COUNTER-STATEMENT OF QUESTIONS PRESENTED Nomura respectfully submits the following questions for review by this Court on Nomura’s appeal and its opposition to 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 granting Cadwalader summary judgment on Nomura’s advice claim where Cadwalader failed to come forward with nonconclusory evidence in admissible form? 2. Did the Appellate Division err in finding that no issues of credibility exist concerning a key witness put forth by Cadwalader who (i) explicitly stated that he wanted to see Cadwalader prevail; and (ii) is married to one of the three Cadwalader lawyers who worked on the transaction at issue and whose conduct is in question. 3. Did the Appellate Division err in finding as a matter of law that Cadwalader properly advised Nomura with respect to determining the REMIC eligibility of the mortgage loans where Nomura’s former employees testified that they received altogether different REMIC advice and the documentary evidence is consistent with the testimony from those employees? 4. Did the Appellate Division err in finding as a matter of law that Cadwalader properly advised Nomura with respect to REMIC eligibility where xv 296833.1 Nomura introduced expert testimony that such advice was not proper? 5. Did the Appellate Division err in disregarding the opinion of Nomura’s expert, who was well qualified on the issue of third-party legal opinion letters, concerning the due diligence necessary in order to issue a REMIC Opinion that was incorporated in a third-party legal opinion letter? 6. Was Cadwalader free to rely on Nomura’s REMIC-related representations where one of the mortgage loans at issue was secured by an acute care hospital? 7. Did the Appellate Division properly affirm the trial court’s determination that the Deal Highlights document potentially raised warning signs as to the REMIC tax value of the mortgage loan at issue? 8. Did the Appellate Division properly affirm the trial court’s determination that genuine issues of material fact exist with respect to whether Cadwalader proximately caused Nomura’s damages? 9. Did the Appellate Division properly affirm the trial court’s determination that genuine issues of material fact exist with respect to the REMIC real property value of the Doctors Hospital? These issues were raised in Nomura’s memoranda of law in opposition to Cadwalader’s motion for summary judgment in the Supreme Court, in its brief on appeal, its opposition to Cadwalader’s motion for reargument and/or leave to xvi 296833.1 appeal and Nomura’s cross-motion for reargument and/or leave to appeal , and thus, were preserved for review. See Plaintiffs’ Memorandum Of Law In Opposition To Defendant’s Motion For Summary Judgment On Plaintiffs’ First Cause Of Action (May 10, 2011); Brief For Plaintiffs-Respondents (December 28, 2012); Memorandum Of Law In Support Of Nomura’s Cross-Motion For Reargument, Or In The Alternative, Leave To Appeal And In Opposition To Cadwalader’s Motion For Reargument, Or In The Alternative, Leave To Appeal (April 4, 2014); Memorandum Of Law In Further Support Of Nomura’s Cross- Motion For Reargument, Or In The Alternative, Leave To Appeal (April 25, 2014). 296791.1 PRELIMINARY STATEMENT At issue on appeal in this malpractice case is whether the two claims of Plaintiffs-Respondents-Cross-Appellants Nomura Asset Capital Corporation (“NACC”) and Asset Securitization Corp. (“ASC”) (collectively “Nomura”) against Defendant-Appellant-Cross-Respondent Cadwalader, Wickersham and Taft (“Cadwalader”) raise triable issues of fact. In or around 1992, Nomura retained Cadwalader to assist it in setting up its commercial mortgage-backed securities (“CMBS”) business. Cadwalader then represented Nomura for more than five years, drafting the operative legal documents and providing legal advice on securitizing pools of commercial mortgage loans worth billions of dollars. As relevant here, Nomura retained Cadwalader to see to it that the mortgage loans that Nomura originated qualified for pass-through tax treatment under the Treasury Department’s rules and regulations for Real Estate Mortgage Investment Conduit (“REMIC”) trusts, and to identify for Nomura any problems that Cadwalader saw or should have seen. In other words, Cadwalader was retained to do what lawyers are supposed to do, advise and protect the client. Nomura retained Cadwalader because it was considered the pre-eminent law firm in the field of securitization of asset-backed securities and touted itself as 2 296791.1 such. Over the five-plus year period, Nomura paid Cadwalader tens of millions of dollars for its legal services. Despite its much vaunted experience and expertise, Cadwalader failed to do what is expected of lawyers in at least two respects. First, while there is no dispute that Cadwalader advised Nomura that the REMIC regulations required mortgage loans to be secured by real property equal to 80% of the loan amount (the “80% Test”), what is very much in dispute, and what should not have been resolved as a matter of law on a motion for summary judgment, is whether Cadwalader properly and sufficiently advised Nomura about how to apply the 80% Test. Both in this action and in the underlying proceeding before the United States District Court (the “Federal Action”), Nomura’s former employees testified that Cadwalader advised them to use an altogether different “rule of thumb” to meet the 80% Test than that which Cadwalader now claims it advised Nomura to use. The rule of thumb that Nomura used provided that so long as Nomura underwrote loans using its internal underwriting guidelines that looked only at the loan to value ratio, the 80% Test would be met. That rule of thumb failed to account for loans where the borrower’s obligations were secured by an operating business, or a “going concern,” as opposed to a traditional property type for securitization purposes, such as an office or apartment building. 3 296791.1 In this case, Nomura applied that rule of thumb to a loan secured by a going concern, an acute care hospital in Chicago known as the Doctors Hospital of Hyde Park (the “Doctors Hospital”). Unbeknownst to Nomura at the time, the Doctors Hospital Loan (the “DHL”) failed the 80% Test because a going concern such as an acute care hospital, unlike an apartment building or commercial office, includes value that does not qualify as real property for purposes of REMIC. With going concerns, such as an acute care hospital, particular care must be exercised to ensure that the value attributable to the business being conducted on the property is excluded from the REMIC real property value. Not only did Cadwalader fail to advise Nomura about going concern issues in general, but it also failed to advise Nomura with respect to the particular issues posed by an acute care hospital. Although Cadwalader was well aware that the DHL was the first time Nomura had made a loan secured solely by acute care hospital, it never advised Nomura that an appraiser’s conclusion as to the value of a property (i.e., the bottom-line number) should not be used for determining REMIC eligibility. Further, Cadwalader never advised Nomura how to meet the 80% Test using industry standard appraisals that were prepared for purpose of evaluating whether sufficient collateral existed to assure repayment of the loan, not for the purpose of evaluating REMIC eligibility. These failures form the basis of Nomura’s “Advice Claim”. 4 296791.1 Nomura’s second claim, referred to by the lower courts as the Due Diligence Claim, arises out of the legal opinion that Cadwalader issued, and upon which the third-party participants to the transaction relied, that each of the loans in the October 1997 securitization known as the “Series 1997-D5” (the “D5 Securitization”) satisfied the 80% Test (the “REMIC Opinion”). Cadwalader issued the REMIC Opinion even though, as both the trial court and the Appellate Division correctly determined, Cadwalader had in its possession a document (the “Deal Highlights document”) that raised red flags about the REMIC qualification of the DHL. In ruling on the Due Diligence Claim on this narrow ground, the First Department erred in overlooking or disregarding the opinion of Nomura’s REMIC expert, who opined that the nature of the DHL required Cadwalader to perform greater due diligence. It also overlooked or disregarded the opinion of Nomura’s third-party legal opinion expert that the REMIC Opinion, which is part of a legal third-party opinion letter (the First Opinion Letter), is governed by the customary standards applicable to such opinion letters, and that Cadwalader could not simply rely on Nomura’s statement of the DHL loan value without performing the due diligence needed to determine that Nomura’s statement were made based on appropriate knowledge and care. Questions of fact also exist concerning Cadwalader’s compliance with those standards. 5 296791.1 By virtue of Cadwalader’s negligence, Nomura included the DHL in the D5 Securitization unaware that it failed to comply with the 80% Test. After Doctors Hospital defaulted on its obligations, the Trustee for the D5 Securitization, LaSalle Bank National Association (the “Trustee”), sued Nomura in the Federal Action, demanding that Nomura repurchase the DHL. Ultimately, Nomura was left with no choice but to settle the Federal Action and repurchase the DHL for approximately $67.5 million. Nomura commenced this legal malpractice action against Cadwalader in the Commercial Division of the Supreme Court, New York County. This appeal stems from a summary judgment motion made by Cadwalader. The Honorable Melvin L. Schweitzer denied the motion in its entirety, holding that material issues of fact precluded summary judgment on both the Advice and the Due Diligence Claims. Nomura Asset Capital Corp. v. Cadwalader Wickersham and Taft LLP, 951 N.Y.S. 2d 87 (Sup. Ct. N. Y. Co., 2012); (RA1-43).1 On appeal, the Appellate Division, First Department, modified Justice Schweitzer’s order, granting Cadwalader’s motion to dismiss the Advice Claim. Nomura Asset Capital Corp. v. Cadwalader, Wickersham & Taft LLP, 115 A.D.3d 228 (1st Dep’t 2014) (A-14.a-19.a). The court (with one Justice dissenting) 1 References to Nomura’s Appendix are cited as “RA__;” references to Cadwalader’s Appendix are cited as “A-__.” 6 296791.1 affirmed the Supreme Court’s denial of Cadwalader’s motion for summary judgment on Nomura’s Due Diligence Claim, holding that whether Cadwalader performed the required due diligence presented triable issues of fact. A-19.a-32.a. Following the Appellate Division’s decision, both sides sought leave to appeal, which the Appellate Division granted. It is respectfully submitted that the Appellate Division erred in reversing Justice Schweitzer’s denial of summary judgment on the Advice Claim, by concluding that Cadwalader provided Nomura with proper legal advice as a matter of law. The Court misconstrued the record evidence and erred in concluding, as a matter of law, that Cadwalader corporate partner Anna Glick advised Nomura to use a “land and structural improvements” or a “sticks and bricks” “rule of thumb” when making REMIC determinations. A-15.a-16.a. One can search the record on appeal with the finest comb and not find a shred of testimony from Glick that she ever gave Nomura such advice. Glick never claimed that she advised Nomura to use a sticks and bricks’ rule of thumb. Further, she never identified who from Cadwalader allegedly provided that advice, when that advice was provided, or the manner in which that advice purportedly was provided. While Glick asserted that Charles M. Adelman, the Cadwalader tax partner responsible for the REMIC Opinion, provided Nomura with substantive REMIC tax advice, she never stated that Adelman told Nomura that it should use a “sticks and bricks” rule of thumb. 7 296791.1 Moreover, Adelman himself never testified that he advised Nomura to use a sticks and bricks approach. To the contrary, he testified that a land and structural improvements or a sticks and bricks approach to REMIC is “inappropriate.” RA979 (Adelman 262:9-263:6).2 In addition, Nomura came forward with relevant admissible evidence demonstrating the existence of material issues of fact. The Appellate Division misapprehended and improperly disregarded the testimony of Nomura’s former employees, who stated that they never used a sticks and bricks test because they were told by Cadwalader that they could follow underwriting guidelines that looked only at the loan to value ratio.3 The Appellate Division improperly disregarded this testimony by noting that it constituted “isolated sections of deposition testimony.” (A-18.a). In so ruling, the Appellate Division resolved issues of credibility and bias that are the province of the jury. 2 While Glick supplied an affidavit in support of Cadwalader’s summary judgment motion, Adelman did not. The absence of any affidavit from Adelman coupled with the absence of any details with regard to the purported advice from Glick is telling. Glick herself is, of course, a lawyer, and her affidavit was submitted through eminent counsel. The inference is that her carefully worded affidavit, in large measure consisting of only hearsay, provides the entirety of the details to which she can testify. 3 Even Perry Gershon, the head of Cadwalader’s securitization group, testified to having this same understanding of the applicable rule of thumb. See infra pp. 15-16. While Gershon also testified that Adelman advised him with regard to the REMIC rules in general and the 80% Test in specific, Adelman’s testimony is to the contrary. See infra pp. 41-51. Further, as shown below in more detail, Gershon is married to a Cadwalader lawyer actively involved with the events of this case. In such circumstances, as Justice Schweitzer ruled, Nomura is entitled to argue his bias to the jury. RA16, RA23. 8 296791.1 The Appellate Division also overlooked the documentary evidence in the record showing that the appraisals that Nomura regularly obtained were entirely consistent with Cadwalader’s advice that Nomura could use its loan to value test. What is not in the record is any writing of Cadwalader demonstrating that it actually advised someone at Nomura as Cadwalader now claims. Certainly, one would have expected Cadwalader, the self-acknowledged leader in securitizations, to have reduced its REMIC-related advice to writing and to have provided it to Nomura in the years before the events giving rise to this lawsuit. Yet, there is no such writing or testimony about such writing in the record. In finding that no questions of fact exist concerning the appropriateness of Cadwalader’s advice to Nomura, the Appellate Division also ignored the expert report and testimony of Thomas J. Biafore, an undisputed REMIC tax expert. Biafore expressed the expert opinion that Cadwalader should have advised Nomura to request the assistance of specialized tax counsel whenever it originated a non- traditional loan, such as the DHL at issue here. While the Appellate Division improperly granted summary judgment on Nomura’s Advice Claim, it properly recognized that questions of fact exist with respect to Nomura’s Due Diligence Claim. In particular, the court found that Cadwalader could not have issued its REMIC Opinion in reliance on Nomura’s representation as to the REMIC value of the properties securing the mortgage loans 9 296791.1 when warning signs or “red flags” existed with respect to those values. The Appellate Division determined that the Deal Highlights document potentially raised such red flags with respect to the DHL, and that the question of Cadwalader’s due diligence presents issues of fact that must be resolved by a jury. A-22.a-29.a. Cadwalader’s main argument on this appeal is that it was free to ignore those warning signs 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 property securing the DHL; Nomura had represented to Cadwalader that the value of the real property securing the [DHL] was at least $50 million … 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. Brief For Defendant-Appellant-Cross Respondent (cited as “Def. Br.”) at 3-4. As both Justice Schweitzer and the Appellate Division determined, whether Cadwalader was free to ignore the Deal Highlights document cannot be determined as a matter of law. Rather, it is an issue for the jury, as are numerous factual disagreements concerning Nomura’s actual instructions to Cadwalader, whether Cadwalader was free to review whatever it deemed necessary to issue its REMIC Opinion, and Nomura’s sophistication or lack thereof with regard to REMIC in general and going concerns in particular. 10 296791.1 The standard of care applicable to Cadwalader’s REMIC Opinion also raises a question that cannot be resolved as a matter of law, but rather is for the jury to determine. Nomura submitted expert testimony that the REMIC Opinion, which was part of a legal third-party closing opinion letter, is subject to and governed by customary practice applicable to legal third-party closing opinion letters. Cadwalader contends that it was subject to some lesser standard, pursuant to which it could blindly rely on Nomura’s representation as to the REMIC value of an acute care hospital. In advancing this contention, Cadwalader ignores that the REMIC Opinion was but one of eight opinions in Cadwalader’s third-party closing opinion letter, and the Trustee and rating agencies would not have allowed the Securitization to close without Cadwalader’s REMIC Opinion. If Nomura’s representation as to the REMIC values of each of the loans (including the DHL) was sufficient, there would have been no need for their insistence on the REMIC Opinion. Finally, as a matter of public policy, New York is one of the financial capitals of the world. As such, this Court should expect that, when issuing legal opinions in connection with the sale of securities upon which third-parties will rely, tax lawyers will do a bare minimum of due diligence. At the very least, a jury should be allowed to hear and address the issue. 11 296791.1 STATEMENT OF THE CASE A. Nomura’s Business Model From 1993 to 1998, Nomura originated and securitized commercial mortgage loans. See RA292 (Gershon ¶ 2); RA1668 (Penner 13:7-17). Nomura’s business model was to keep loans on its balance sheet only until securitization, because holding loans for extended periods tied up capital necessary to originate new loans and Nomura’s cost of funds increased over time. See RA1252-53 (Findlay ¶¶ 5-6); RA1617-18 (Penner ¶ 7). As a result, other than in very limited circumstances not present here, Nomura sought to securitize each of its commercial mortgage loans promptly. See id.; see also RA1259 (Funt 34:8-21); RA1328 (Gershon 215:22-25); RA1339 (Gershon 575:18-576:2); RA1384 (Gershon 266:17-267:7); RA1399-40 (Glick 229:9-230:17); RA1633 (Penner 44:13-25); RA1674 (Penner 37:4-39:24). Typically, Nomura securitized the commercial mortgage loans that its bankers originated. See RA1617 (Penner ¶ 6); RA1626 (Penner 10:20-24). Perry Gershon, who reported to Ethan Penner, NACC’s President and CEO, was the head of Nomura’s securitization group and responsible for coordinating and preparing the securitization documents. See RA292-93 (Gershon ¶¶ 3, 6); RA1345 (Penner 8:18-9:9). Working with Gershon were Marlyn Marincas, Chris Tokarski, and various junior-level employees. See RA1333 (Gershon 401:9-403:25); RA1539 12 296791.1 (Marincas 36:3-5); RA1550 (Marincas 95:14-18); RA809 (Tokarski 22:6-22). Also involved as relevant here was Nomura’s General Counsel, Barry Funt. B. Nomura Engaged Cadwalader As Counsel Cadwalader is a prominent law firm with annual revenues of hundreds of millions of dollars and, in some years, profits-per-partner as high as $3 million. See RA1940 (Glick 19:15-20; 21:3-23:5). The securitization of assets was “big business” for Cadwalader, and in its own words, it was the preeminent securitization law firm. See RA974 (Adelman 210:5-9; see also RA438; RA943 (Adelman 63:13-64:4); RA1942-44 (Glick 26:5-18, 27:24-30:15, 37:8-23). As noted above, Nomura retained Cadwalader to set up Nomura’s CMBS program. See RA438-47; RA974 (Adelman 210:5-9); RA1942-43 (Glick 27:24- 30:15); RA1944 (Glick 37:8-23). From 1993 through 1998, Cadwalader acted as origination counsel for a substantial number of Nomura’s loans and as securitization counsel for virtually every Nomura securitization. See RA1908 (Adelman 61:13-21); RA1945 (Glick 41:4-7); RA1958 (Glick 236:6-237:13). Nomura paid Cadwalader annual fees that ranged from $1 to $10 million, including $300,000 for the D5 Securitization alone. See RA1956 (Glick 218:15-219:11). Anna Glick headed the team responsible for Nomura’s engagement and was principally assisted by Lisa Post-Gershon, who was Perry Gershon’s wife; Charles Adelman, a tax and REMIC specialist; and Cadwalader real estate counsel. See 13 296791.1 RA1945 (Glick 39:12-40:25); RA1733 (Post-Gershon 22:24-23:8). C. The Requirements Of The Securitization Business Nomura securitized commercial mortgage loans through REMIC trusts, which enjoy pass-through tax treatment. See 26 U.S.C. § 860D; see also RA1617 (Penner ¶ 5). Each loan in a REMIC trust must be a “qualified mortgage,” meaning that it must be at least 80 percent secured by “REMIC real property” within the meaning of the applicable “REMIC Regulations.” See 26 U.S.C. § 860G(a)(3). REMIC real property is defined as “land or improvements thereon, such as buildings or other inherently permanent structures” excluding “assets accessory to the operation of a business, such as machinery, printing press, transportation equipment … refrigerators … furnishings … etc. … even though such items may be termed fixtures under local law.” Treas. Reg. § 1.856-3(d). The REMIC “Safe Harbor” provides that an obligation is “deemed” to meet the 80% Test if the REMIC “sponsor” “reasonably believes” that to be so at the time it contributes the loan to the REMIC trust. Treas. Reg. § 1.860G-2(a)(3)(i). If it is discovered that the loan does not meet the 80% Test, however, the loan is a “defective obligation” and the REMIC trust has 90 days to cure the breach or dispose of the loan or the REMIC tax status of the trust will be jeopardized. Treas. Reg. §§ 1.860G-2(a)(3)(iii) and 1.860G-2(f)(2). 14 296791.1 D. Nomura’s Process For Originating REMIC-Qualified Loans 1. Cadwalader advised Nomura to originate loans within overall LTV parameters. In setting up Nomura’s securitization program, Glick advised Nomura that all of its mortgage loans would satisfy the 80% Test (which provides for a value- to-loan ratio (“VTL”)) provided Nomura originated loans within its own underwriting guidelines. See RA1266 (Funt 119:8-25); RA1261 (Funt 100:5- 101:9); RA1262 (Funt 102:5-19, 103:8-104:15); see also RA1276-77 (Funt 48:19- 50:6); RA1297-98 (Funt 324:23-325:12); RA1349-50 (Gershon 41:5-42:2); RA1358 (Gerhson 92:3-23); RA1542 (Marincas 47:10-22). An 80% VTL is the equivalent of a 125% Loan-to-Value ratio (“LTV”), and Nomura’s underwriting guidelines provided for loans to be underwritten with LTVs of 80 percent or less.4 See id. LTVs reflect the overall value of a property, not merely the REMIC real property as defined by the REMIC Regulations. For example, Nomura’s General Counsel testified that, when he joined Nomura, Glick advised him of the 80% Test, telling him that the following three requirements, or “tests,” had to be met: (i) each loan had to be secured by a 4 For example, under the REMIC Regulations, a loan of $100 must be secured by at least $80 in REMIC real property. As a matter of prudent underwriting, however, Nomura’s guidelines required that a loan of $100 be secured by collateral of not less than $125. Accordingly, complying with the underwriting guidelines normally results in real property security that easily satisfies the 80% Test. As the DHL demonstrates, however, that result is far from certain. 15 296791.1 mortgage, (ii) each loan had to be in the form of debt, and (iii) the LTV for each loan could not exceed 125 percent. See RA1261-62 (Funt 100:5-101:9); RA1266 (Funt 103:8-104:15); RA1266 (Funt 119:8-25; RA1266 (Funt 121:5-12). Nomura’s General Counsel explained that, by reason of his discussions with Cadwalader, he understood that the REMIC Regulations would never be an issue: I think the best way to characterize them is what I described earlier; just generally what are the REMIC requirements sort of those three prongs that we had discussed, and again, knowing what our general underwriting practices were, concluding that – as a general rule, this would never be an issue, the way we originated. Basically, every loan that we would do would become REMIC eligible. RA1261 (Funt 103:8-104:15) (emphasis added). The General Counsel further explained: Well, those three tests that I just gave you were pretty easy tests. Every loan would be REMIC eligible because we were required to have mortgages or deeds of trust on the property. We were required to – they were required to be a legal form of debt, and based on our typical underwriting practices, we never would have been within the range of not – failing the test that I just laid out, that 80 percent test, or the way I say it, the 125 percent test. Id. (Funt 102:5-19); see also RA1287 (Funt 202:11-204:5); RA1294 (Funt 294:3- 21). Gershon had the same understanding, testifying that “100 percent of the loans were 100 percent LTV or less, which in and of itself meant they were all in compliance.” RA1349-50 (Gershon 41:5-42:2). Gershon also testified: 16 296791.1 A. … And we did the analysis similar to what I did earlier in this deposition where we said the 80 percent rule means that all loans are 125 percent loan to value or less. And we are comfortable making that representation. It was an easy conclusion to get to, yes, because we had recent appraisals and spoke of the value of the loans. And we believed they were all less than 100 and generally less than 80 percent which meant they had to be less than 125 percent loan to value. Q. When you had that conversation … did you discuss the notion that the LTVs that you were looking at did not break out … real property from personal property? A. No. RA1358 (Gershon 92:5-23).5 Similarly, Marincas, who reported directly to Gershon, testified “in assessing that the loan didn’t have an LTV greater than 80 percent, [NACC’s bankers] would also, coincidentally, be making sure that it didn’t have an LTV greater than 125 percent, but they weren’t doing it for the purposes of assessing REMIC eligibility.” RA1544 (Marincas 53:25-54:13); see also RA1542 (Marincas 46:24-47:22) (Nomura was not concerned with REMIC compliance because it made loans on real estate assets that were originated to have LTVs lower than 80 percent); RA1800-01 (Funt 367:5-369:12) (confirming that Marincas’ testimony is consistent with his understanding of how REMIC eligibility was determined at 5 Unless otherwise noted, all deposition question-and-answer quotations omit intervening objections or colloquy. 17 296791.1 Nomura); RA1838 (Tokarski 112:4-7); RA1839 (Tokarski 218:4-18). Accordingly, based on Cadwalader’s advice, Nomura’s banking teams assessed overall LTVs to meet Nomura’s underwriting standards. In so doing, Nomura understood that they were coincidentally ensuring that every loan also necessarily satisfied the 80% Test. See RA1287 (Funt 202:11-204:5); RA1294 (Funt 294:3-21); RA1300-01 (Funt 367:5-369:12); RA1542 (Marincas 46:24- 47:22); RA1543 (Marincas 51:3-52:14); RA1544 (Marincas 53:25-54:13); RA1552 (Marincas 220:11-19); RA812 (Tokarski 218:4-17). 2. Nomura’s appraisals did not typically separate real from personal property. In accordance with Cadwalader’s advice to get an “independent appraisal” (RA1915 (Adelman 142:11-143:24)), Nomura obtained MAI appraisals to determine the LTVs for the loans that it made. But, Nomura obtained these appraisals primarily for credit purposes, and only secondarily to ensure compliance with the REMIC Regulations. See RA1010 (Biafore ¶ 7) (citing Gershon 32:20- 33:19) (with respect to appraisals: “The first priority was making sure your credit was okay. Among the secondary things you were looking at is whether it was REMIC-compliant or not.”)). See also RA441-47; RA1908 (Adelman 61:13-21); RA1945-47 (Glick 39:12-47:18). As a result, and as Cadwalader was well aware, these appraisals provided a total value and typically did not distinguish between 18 296791.1 real and personal property. See, e.g., RA1796 (Rodgers ¶ 10). The appraisals did address the three traditional approaches to valuation: the income approach, the cost approach and the sales approach. The income approach – often referred to as the “as-is” or “occupied value” approach (RA976 (Adelman 252:6-253:19); RA983 (Adelman 280:18-281:5)) – is “based on the premise that the value of the property can be estimated by the worth of its net income stream” (RA1196) and, thus, a value is derived for the property by “converting anticipated returns (i.e., cash flows) into an expected value at which the property would be bought and sold.” RA1011 (Biafore ¶ 9). The cost approach – often referred to as the “dark value” or the “bricks and mortar value” (RA976 (Adelman 252:6- 253:19); RA983 (Adelman 280:18-281:5)) – “bases value on the estimated replacement cost of the property ….” RA1012 (Biafore ¶ 10). The sales approach “attempts to value the property based on comparisons to similar properties ….” Id. (Biafore ¶ 11). While appraisals may speak of real property values, those values are not necessarily REMIC real property values because each of the valuation approaches may include property that does not constitute real property for purposes of the REMIC Regulations. For example, “‘fixtures’ and other less permanent structures” may be considered “real property” under local law definitions, but do not constitute real property for purposes of the REMIC Regulations. RA1010-11 (Biafore ¶ 8). 19 296791.1 Charles Adelman, Cadwalader’s tax partner, testified that for REMIC purposes it was appropriate to use the income approach (which is typically the primary approach upon which commercial property appraisals rely) even though it may include non-REMIC real property, because it provides, if not an actual REMIC real property value, something very close thereto. He stated that the income approach provides “the closest approximation of the ability of the real property to generate the income to support the loan.” RA977 (Adelman 257:2-5). In contrast, he explained that the cost approach “isn’t appropriate [because] it does not provide sufficient information to make a judgment as to the value of the property.” RA978 (Adelman 260:16-19); see also RA977-79 (Adelman 256:9- 263:6); RA1003-04 (Adelman 446:19-448:16). Consistent with Adelman, Gershon testified that he understood that the income approach as reflected in the bottom-line number was “indicative of the value of an asset, particularly for REMIC purposes.” RA1314 (Gershon 104:7-14); see also RA1360 (Gershon 116:11-25) (“the approach we relied on primarily was the income approach which generally would only look at the real property value”); RA1361 (Gershon 127:24-128:7) (the income approach reflects real property value); RA1368-69 (Gershon 173:14-174:3) (“we look at and we pay attention to” the income approach). 20 296791.1 3. Nomura used the bottom-line appraisal numbers for REMIC purposes. Having obtained an appraisal for a property, based on Cadwalader’s advice, Nomura understood (albeit incorrectly) that the appraiser’s conclusion as to property’s value, the “bottom-line” number, covered real property only. See RA1617 (Penner ¶ 6); RA1288 (Funt 207:8-208:2); RA1358 (Gershon 92:17- 93:12); RA814 (Tokarski 227:1-8). For example, Penner testified that he did not believe that Nomura’s bankers “knew that the total value of the appraisal for a mortgage[d] property could not be used for REMIC purposes” and that he certainly “had no such knowledge at the time.” RA1617 (Penner ¶ 6) (emphasis added). Nomura’s General Counsel similarly testified that he was unaware that (i) the appraised values of certain properties included components that did not constitute real property, and (ii) only real property could be considered in determining the 80% Test. RA1285 (Funt 188:25-189:13; RA1287 (Funt 204:6-15); RA1287 (Funt 205:6-13) (unaware that 80 percent of the appraised value needed to be for REMIC real property); RA1288 (Funt 206:12-207:2). Specifically, Mr. Funt testified: Q. Did you ever discuss the real property component versus the personal property component with anyone from Cadwalader? A. No, we would just discuss, my only conversations I recall would be loan to value, how value was determined, what pieces were put together to determine that value. 21 296791.1 I never got into that kind of detail or even thought about it. It was just what’s the value, as the appraiser says, what’s the mortgage loan, do the math. Q. The value would have been the basic value that you would see at the very beginning of the appraisal? A. Whatever number they gave us, yes. Id. (Funt 207:8-208:2); see also RA1546 (Marincas 63:23-64:4) (unaware that “80% of the appraised value need[ed] to be for real [property]”); RA1841 (Tokarski 227:1-8) (“I think the industry norm … is … the fair market value … divided by the loan …. [T]he fair market value [is] the appraised value on the front page of an appraisal … that’s the way the industry works.”). Gershon likewise testified that he had the same basic, but incorrect, understanding: Q. When you had that conversation … did you discuss the notion that the LTVs that you were looking at did not break out … real property from personal property? A. No. Q. Are you aware your LTVs didn’t make that distinction, weren’t you, Mr. Gershon? A. It is my understanding the appraised values were the real property values. RA1358 (Gershon 92:17-93:12).6 6 Nomura’s other employees were similarly unaware of the real versus personal property distinctions for REMIC purposes. See RA1544 (Marincas 54:15-24) (Nomura’s bankers were not familiar with what was necessary for a loan to be REMIC compliant); RA1546 (Marincas 63:23-64:4) (“I don’t know the REMIC guidelines that intimately”); RA1546 (Marincas 64:18- 23) (“what we were doing was making mortgage loans secured by real estate”); RA1829 22 296791.1 4. Cadwalader reviewed the Prospectus Supplement for REMIC compliance. Cadwalader was responsible for identifying any Nomura loan that potentially ran afoul of the 80% Test. See RA1265 (Funt 116:20-117:10) (Cadwalader was the “final arbiter” with respect to REMIC compliance; therefore, “[t]hey were the ones who would have caught any loan that was outside” of the 80% Test); RA1617 (Penner ¶ 6); RA1645 (Penner 92:21-93:3); RA1650 (Penner 113:18-21); RA1669 (Penner 19:20-20:19); RA1542 (Marincas 45:11-23, 46:16- 22); RA1547 (Marincas 73:13-74:5). Accordingly, before Nomura closed each securitization, it provided Cadwalader with detailed information about the characteristics of each loan. The information was set out in “asset summaries” and annexes to the Prospectus Supplements. See RA778-93; RA803-05; RA858-96. See also RA27 (“Post [Gershon] testified that Cadwalader ‘tried to collect all of the asset summaries,’ but did not read every one.”). Adelman, who was responsible for issuing Cadwalader’s REMIC Opinion, reviewed the information in the annexes line-by-line to ensure that the figures and descriptions of property type did (Tierney 190:20-22) (“You say ‘value to loan,’ not loan to value? What do you mean by value to loan?”); id. (Tierney 191:4-11) (did not “understand that in order to qualify as a REMIC loan, a certain portion of that value had to be real [property]”); RA1837 (Tokarski 106:23-107:1) (unaware of requirements necessary for REMIC compliance); RA1838 (Tokarski 109:8-110:8) (unaware of real property requirements under REMIC); RA1840 (Tokarski 222:21-223:22) (unaware that appraisals have real and personal property components); RA1841-42 (Tokarski 228:7-230:7) (unaware as to whether certain categories of property constituted REMIC real property). Nomura’s employees understood that the appraiser’s conclusion as to value could be used for purposes of the 80% Test and if the LTV was less than 125 percent no REMIC issue existed. 23 296791.1 not raise questions as to the compliance of each loan with the 80% Test. And, if a loan raised a question, Adelman would request and examine the appraisal. See RA957-63 (Adelman 126:17-151:15). Adelman was aware, however, that the information contained in the annexes reflected the overall LTV for each property – i.e., Nomura had used the appraisers’ bottom-line numbers and the LTVs, thus, potentially included non-REMIC real property. See RA949-51 (Adelman 88:18-95:4); RA959 (Adelman 135:19- 137:15); RA960-61 (Adelman 141:24-142:7); RA982-83 (Adelman 276:15-278:5). Yet, unless the overall LTV of any given property exceeded 90 percent, Adelman made no further inquiry, wrongly assuming that the cushion between a 90% LTV and the 125% LTV allowed for by the REMIC Regulations was always more than sufficient. See RA961-62 (Adelman 145:24-146:16). E. The DHL Nomura closed the DHL, a $50 million loan secured by the Doctors Hospital, on August 28, 1997. See RA356-57 (RFA 131(f)); RA345 (RFA 98). In connection with the underwriting of the loan, Nomura had hired an appraiser, Eric Dost of Valuations Counselors, who appraised the hospital at $68 million, valuing the land at $3,000,000, “improvements” at $27,960,000, “equipment” at $9,640,000, and “intangibles” at $27,400,000 (the “Appraisal”). See RA278. In the appraisal, Dost primarily relied on the income approach. See id.; RA1922 24 296791.1 (Adelman 180:9-13). Based on the $68 million value, the overall LTV was calculated to be 73 percent. See RA804-05. Pursuant to Cadwalader’s request, on September 30, 1997, three and a half weeks before the D5 Securitization closed, Nomura faxed to Post-Gershon at Cadwalader the asset summary for the DHL, i.e., the “Deal Highlights document.” The document summarized various relevant aspects of the loan, including Dost’s determination that, using the cost approach, the property was worth $40.6 million, and the assessed and market value of the hospital in 1996 were $2,132,211 and $1,003,724, respectively, using an equalization factor of 2.1243. See RA816-57. The Deal Highlights document also notes that a weakness of the loan is “relatively older physical plant and equipment.” RA822. Neither Post-Gershon, nor Adelman, nor Glick made any effort to review the Deal Highlights document even though (i) acute care hospitals were (and are) non- standard properties for securitizations (see RA962 (Adelman 146:17-148:22); RA1922 (Adelman 179:2-9); RA1396 (Glick 136:21-22); RA1952 (Glick 195:18- 196:3); RA1309 (Gershon 73:20-74:9); RA1361 (Gershon 127:22-23)); (ii) Glick and Adelman were aware that Nomura intended to put a loan secured by an acute care hospital into the securitization (see RA1395-96 (Adelman 146:17-148:25); RA1922 (Adelman 179:2-9); RA1395-96 (Glick 130:12-16, 136:21-22); RA1952 (Glick 195:18-196:3); RA1317 (Gershon 132:11-17); RA1335 (Gershon 432:5- 25 296791.1 14); RA1337-38 (Gershon 140:21-141:7); RA1361 (Gershon 127:21-23); RA27)); and (iii) Cadwalader had no prior experience with a loan where the primary security was an acute care hospital. See RA962 (Adelman 146:17-148:22); RA1952 (Glick 195:18-196:3); RA1317 (Gershon 132:11-17); RA1335 (Gershon 432:5-14); RA1361 (Gershon 127:21-23). F. The D5 Securitization The DHL was included in the D5 Securitization, which closed as of October 24, 1997. The Securitization included 156 commercial mortgage loans secured by first liens on 220 commercial and multi-family properties. LaSalle Bank Nat’l Ass’n. v. Nomura Asset Capital Corp., No. 00 Civ. 8720, 2004 WL 2072501, at * 1 (S.D.N.Y. Sept. 14, 2004) (A-357) (“District Court Decision”), aff’d in part, rev’d in part, 424 F.3d 195 (2d Cir. 2005) (A-368) (“Second Circuit Decision”). 1. The REMIC Representations Cadwalader drafted the operative documents for the D5 Securitization, including the Mortgage Loan Purchase Sale Agreement, dated as of October 24, 1997 (the “MLPSA”). The MLPSA contains certain representations and warranties, including two that were designed to assure investors that each loan was a “REMIC-qualified” mortgage. See RA71-72 (§§ 2(b)(xxix) and (xxxi)). The “Qualified Mortgage (“QM”) Representation” provides that: Each Mortgage Loan constitutes a “qualified mortgage” within the 26 296791.1 meaning of Section 860G(a)(3) of the [Internal Revenue] 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) …. The “80% Representation” provides that: (1) The Mortgage Loan is directly secured by a Mortgage on a commercial property or multifamily residential property, and (2) 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 …. Id. Before the D5 Securitization closed, pursuant to the request of Post- Gershon, Dechert LLP (the real estate counsel that Nomura retained to assist it in originating the DHL), advised her that Dechert would not confirm the accuracy of either the QM or the 80% Representation as they related to the DHL. See RA1457-69; RA1453-54 (Heil ¶¶ 6-7); RA1739 (Post-Gershon 54:2-9). Thus, Cadwalader was aware that Dechert was not advising Nomura with respect to whether the DHL was REMIC-qualified. See RA1743 (Post-Gershon 100:14- 101:10).7 7 Post-Gershon contends that she so notified her husband, Gershon (RA1739 (Post-Gershon 54:2-9)), but he denied ever receiving such notification, stating that he was not aware that Dechert “was passing the buck” (RA1368 (Gershon 171:11-25)) and if he had known, he would have “call[ed] them on it, as was [his] style.” RA1371 (Gershon 182:7-11). 27 296791.1 2. The First Opinion Letter In connection with the closing, Cadwalader, as securitization counsel, issued a legal “closing opinion” for the D5 Securitization – the “First Opinion Letter” – that encompassed eight legal opinions, including the REMIC Opinion that opined that each loan in the trust was REMIC-qualified. RA272 (¶ 5); RA970 (Adelman 188:13-189:8); RA25.8 Along with the First Opinion Letter, Cadwalader issued a “Reliance Letter” permitting the Trustee, the rating agencies, and the fiscal agent for the D5 Securitization to rely on certain paragraphs of the First Opinion Letter, including the portion of the opinion addressing REMIC, i.e., the REMIC Opinion. RA1904. G. The Federal Action On April 17, 2000, the DHL borrower filed for Chapter 11 bankruptcy relief, and by June 2000, the DHL was in default. See RA363 (RFA 143). Pursuant to the remedies provisions of the operative documents, on June 1, 2000, the Trustee provided Nomura with written notice of a breach of representations, contending, inter alia, that the DHL was not REMIC-qualified because the $50 million loan 8 The opinions included, inter alia, that (i) each of the governing agreements had been duly executed and delivered and was legal, valid, and binding; (ii) the Certificates were validly issued and outstanding and entitled to the benefits provided by the governing agreements; (iii) the Registration Statement was effective; and (iv) the Registration Statement and the Prospectus complied with the requirements of the Securities Act. See RA271-73. 28 296791.1 was not secured by $40 million in REMIC real property.9 See RA175-76. On June 30, 2000, Nomura responded by providing the Trustee with a “Second Opinion Letter” from Cadwalader purportedly confirming that the DHL was REMIC-qualified, and a letter from Dost (the “Appraisal Supplement”), stating that $45 million of the hospital’s overall market value of $68 million constituted REMIC real property. See RA239-40; RA186-87; RA188. Nevertheless, on November 14, 2000, the Trustee commenced the “Federal Action” in the Southern District of New York based, inter alia, on Nomura’s alleged breach of the QM and 80% Representations. See RA203-19; see also RA189-93; RA194-95. Following discovery, the District Court granted summary judgment in favor of Nomura concluding, inter alia, that (i) Nomura could rely on the REMIC Safe Harbor, and (ii) the 80% Representation was co-extensive with the QM Representation, and thus lacked “independent significance.” A-366. On appeal, the Second Circuit reversed in part and remanded the action, concluding that due to a carve out in the QM Representation, the REMIC Safe Harbor was not applicable; the 80% and QM Representations had to be given independent effect; and issues of fact existed with respect to the Doctors Hospital’s REMIC real property value. See 9 The DHL was a $50 million loan. See RA524. Pursuant to the 80% Test, it had to be secured by $40 million in REMIC real property. Based on Cadwalader’s advice, Nomura understood that the entire $68 million appraised value constituted REMIC real property, and that, for purposes of REMIC, the loan could have been for as much as $85 million. 29 296791.1 A-379-83. As a direct and proximate result of Cadwalader’s malpractice, upon remand to the District Court, Nomura was left with no viable alternative but to settle the Federal Action for in excess of $67.5 million.10 See RA52 (¶ 29); RA1964-66 (Prahofer 74:6-83:6); RA1979 (Prahofer 261:9-16). H. The Instant Action On October 27, 2006,11 Nomura commenced the instant action asserting, as relevant here, a cause of action for legal malpractice based on (i) Cadwalader’s failure to properly advise Nomura with respect to the REMIC Regulations (the “Advice Claim”), and (ii) Cadwalader’s failure to comply with customary third-party closing opinion practice in issuing the REMIC Opinion (the “Due Diligence Claim”). See RA53 (¶¶ 31-35). Nomura sued Cadwalader for damages equal to the amount of its settlement with the Trustee plus additional expenses incurred in connection with the same. See id.; see also RA52 (¶ 29); RA60 (¶ A). I. The Trial Court Decision On March 2, 2011, following motion practice and discovery before Justice Schweitzer, Cadwalader moved for summary judgment. See A-50-54. Before 10 The operative documents include a repurchase formula pursuant to which Nomura was responsible for interest and certain other costs and expenses. 11 Nomura and Cadwalader had entered into a tolling agreement, and several extensions thereof, to avoid airing their dispute while the Federal Action was pending. 30 296791.1 deciding the motion, Justice Schweitzer more than once invited Cadwalader to “comment” on the “relevance or lack thereof” of the Deal Highlights document. See RA897. In response, Cadwalader made the strategic decision not to submit any affidavits, submitting instead a letter containing arguments that failed to respond to the Justice Schweitzer’s inquiry. See A-26.a-27.a. On January 11, 2012, Justice Schweitzer issued his decision, denying Cadwalader’s summary judgment motion in its entirety, finding that “issues of fact abound … regarding whether Cadwalader’s REMIC advice was negligent, whether the First Opinion Letter was issued after performing sufficient due diligence, and whether Cadwalader’s legal representation of Nomura in the D5 Securitization proximately caused Nomura compensable damages.” RA42-43. In particular, Justice Schweitzer concluded that Nomura’s Advice Claim was “unsuited for dismissal as a matter of law” because the testimony upon which Cadwalader relied was inconsistent and potentially biased, and the documentary evidence propounded by Cadwalader did not establish “that Cadwalader properly advised [Nomura] about the REMIC rules.” RA22-23. Justice Schweitzer held that Nomura’s Due Diligence Claim was equally unsuited for summary judgment because Cadwalader had the Deal Highlights document in its files that raised red flags with regard to the need to further scrutinize the DHL for REMIC eligibility. See RA28. Justice Schweitzer further 31 296791.1 found the Due Diligence claim unsuited for dismissal because there is “conflicting testimony as to just what Cadwalader’s role was with respect to REMIC due diligence,” as well as conflicting expert testimony such that “when all of this evidence is viewed in the light most favorable to Nomura, there is no doubt that triable issues of fact have been raised ….” RA24-33. With respect to proximate cause, Justice Schweitzer rejected Cadwalader’s argument that, notwithstanding its negligence, Nomura would have been required to repurchase the DHL by virtue of a breach of a different representation contained in the operative documents – “Representation 24.” RA35. Justice Schweitzer further held that genuine issues of material fact exist with respect to Cadwalader’s remaining proximate cause arguments, concluding that these issues must be determined by a jury. RA36-42. J. The First Department Decision On appeal, the First Department affirmed the denial of Cadwalader’s motion for summary judgment on Nomura’s Due Diligence Claim, but reversed the trial court and granted summary judgment on Nomura’s Advice Claim. The First Department concluded as a matter of law that that the “testimony of Adelman, Glick and Gershon satisfied Cadwalader’s prima facie burden on summary judgment ….” on the Advice Claim and that Nomura had not sustained its burden of demonstrating the existence of material issues of fact. A-16.a. In so holding, 32 296791.1 the First Department failed to address or discounted (i) the inconsistencies in the testimony of Adelman, Gershon, and Glick; (ii) Gershon’s credibility issues; and (iii) the testimony of Nomura’s other employees. In connection with Nomura’s Due Diligence Claim, while the First Department rejected the assertion that “Cadwalader had a generalized duty to review all of the appraisals” (A-21.a), it found that the Deal Highlights document was a potential red flag requiring Cadwalader to perform additional due diligence and otherwise affirmed the trial court’s decision (A-21.a-23.a).12 THE RELEVANT LEGAL STANDARDS A. Summary Judgment Is A Drastic Remedy “Summary judgment is a drastic remedy, to be granted only where the moving party has ‘tender[ed] sufficient evidence to demonstrate the absence of any material issues of fact.’” Vega v. Restani Constr. Corp., 18 N.Y.3d 499, 503 (2012) (emphasis added, citations omitted); see also JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373, 384 (2005) (“The proponent of a motion for summary judgment ‘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.’”) (citations omitted); Birnbaum v. Hyman, 43 A.D.3d 12 Nomura moved this Court for a stay of the proceedings remanded to the trial court pending resolution of the instant appeal, which was granted by an Order issued September 16, 2014. 33 296791.1 374, 374 (1st Dep’t 2007) (“It is axiomatic that summary judgment is a drastic remedy and should not be granted where there is any doubt as to the existence of factual issues ….”). A motion for summary judgment must be denied when the non-moving party establishes “‘the existence of material issues of fact which require a trial of the action.’” Vega, 18 N.Y.3d at 503 (denying summary judgment when the moving party failed to meet its prima facie burden and, even if it had, the non-moving party “set forth evidence sufficient to establish that there are genuine issues of material fact necessitating a trial”) (citations omitted). To be granted, a motion for summary judgment must be supported by admissible evidence offered by a person having knowledge of the facts. CPLR 3212 (b) (“The affidavit shall be by a person having knowledge of the facts; it shall recite all the material facts; and it shall show that there is no defense to the cause of action or that the cause of action or defense has no merit.”). JMD Holding Corp., 4 N.Y.3d at 384-85. “A conclusory affidavit or an affidavit by an individual without personal knowledge of the facts does not establish the proponent’s prima facie burden.” Id. (denying summary judgment when the conclusory affidavit of movant’s president provided no factual basis to support summary judgment); see also Vega, 18 N.Y.3d at 504 (summary judgment denied when movant’s principal lacked personal knowledge of the relevant facts). A party moving for summary 34 296791.1 judgment must thus come forward with admissible non-hearsay evidence. See, e.g., Sumitomo Mitsui Banking Corp. v. Credit Suisse, 89 A.D.3d 561, 564 (1st Dep’t 2011). Summary judgment is particularly inappropriate when legal malpractice is alleged. See Corley v. Miller, 133 A.D.2d 732, 735 (2d Dep’t 1987) (“whether malpractice has been committed is normally a factual determination to be made by the jury”)) (citation omitted); see also Serradilla v. Lords Corp., 50 A.D.3d 345, 347 (1st Dep’t 2008) (attorney’s motion for summary judgment denied when question was raised as to standard of care); Bistricer v. Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP, 14 A.D.3d 468, 469 (1st Dep’t 2005) (attorney’s motion for summary judgment denied when issues were raised with respect to propriety of attorney’s opinion); Estate of Nevelson v. Carro, Spanbock, Kaster & Cuiffo, 259 A.D.2d 282, 284 (1st Dep’t 1999) (attorney’s motion for summary judgment denied when a question was raised with respect to whether the attorney’s conduct fell below the applicable standard of care); Nat’l Enters. Corp. v. Dechert Price & Rhoads, 246 A.D.2d 481, 482 (1st Dep’t 1998) (same); Swift v. Choe, 242 A.D.2d 188, 192, 194 (1st Dep’t 1998) (same); Freese v. Schwartz, 203 A.D.2d 513, 514 (2d Dep’t 1994) (same). Inconsistent testimony by a witness raises an issue of credibility precluding summary judgment. As this Court recently explained: “It is not the function of a 35 296791.1 court deciding a summary judgment motion to make credibility determinations or findings of fact, but rather to identify material triable issues of fact ….” Vega, 18 N.Y.3d at 505; see also Ferrante v. Am. Lung Ass’n, 90 N.Y.2d 623, 631 (1997) (“It is not the court's function on a motion for summary judgment to assess credibility.”); Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554-55 (1992) (citations omitted) (“The court’s role on a motion for summary judgment is to determine whether there is a material factual issue to be tried, not to resolve it .... Where different conclusions can reasonably be drawn from the evidence, the motion should be denied.”); Bonaventura v. Galpin, 119 A.D.3d 625, 625 (2d Dep’t 2014) (credibility issue exists where defendant’s affidavit and plaintiff’s deposition testimony presented “conflicting accounts as to how and why the subject accident occurred”); Powell v. HIS Contractors, Inc., 75 A.D.3d 463, 465 (1st Dep’t 2010) (“credibility issues should not be resolved on a summary judgment motion”). “Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge, whether he [or she] is ruling on a motion for summary judgment or for a directed verdict.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). See also DiGiantomasso v. City of New York, 55 A.D.3d 502, 503 (1st Dep’t 2008) (“To the extent that plaintiff’s deposition testimony … was vague or inconsistent with her [prior] testimony, a credibility issue is raised to be decided by the jury, not the 36 296791.1 court on a motion for summary judgment.”); Yaziciyan v. Blancato, 267 A.D.2d 152, 152 (1st Dep’t 1999) (summary judgment denied because “deponent's arguably inconsistent testimony … presents a credibility issue properly left for the trier of fact”). In addition, “[e]vidence tending to show a witness’s bias, hostility or motive to lie is not collateral but directly probative of credibility.” Hill v. Arnold, 226 A.D.2d 232, 233 (1st Dep’t 1996); see also Schultz v. Third Ave. R.R., 89 N.Y. 242, 250 (1882) (“Inquiry into the state of the feelings of a witness toward either party is not collateral, and may always be made.”). B. Legal Malpractice To recover damages for legal malpractice, a plaintiff must demonstrate that the attorney was negligent and that the plaintiff sustained actual damages as a proximate cause of the negligence. Estate of Nevelson, 259 A.D.2d at 283 (“Negligence or malpractice exists where the attorney failed to exercise that degree of skill commonly exercised.”); see also Rudolf v. Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d 438, 442 (2007); Degen v. Steinbrink, 202 A.D. 477, 481 (1st Dep’t 1922) (“to prepare documents that have no legal potency” constitutes negligence), aff’d, 236 N.Y. 669 (1923). 37 296791.1 POINT I NOMURA’S ADVICE CLAIM SHOULD BE REINSTATED AS THERE ARE GENUINE ISSUES OF MATERIAL FACT WITH RESPECT TO WHETHER CADWALADER GAVE NOMURA PROPER REMIC ADVICE The First Department reversed the trial court and determined, as a matter of law that Cadwalader had provided Nomura with proper advice concerning the REMIC Regulations. Specifically, the First Department determined that Adelman and Glick provided Nomura with detailed advice concerning REMIC and “how to satisfy the 80% test.” A-14.a-15.a. As demonstrated below, in dismissing Nomura’s Advice Claim, the First Department failed to address (i) the inconsistent, conclusory, and inadmissible testimony of Adelman, Glick, and Gershon; (ii) the consistent testimony and the accompanying consistent documentary evidence of Nomura’s former employees, including that of Gershon, about the advice that Nomura did receive; and (iii) the testimony of Nomura’s REMIC expert, Biafore. Therefore, the decision of the First Department dismissing the Advice Claim should be reversed. 38 296791.1 A. The Testimony Of Glick, Adelman And Gershon Raises Material Issues Of Fact 1. Questions of fact exist with respect to the REMIC- related advice that Glick purportedly provided Nomura. The First Department determined that Glick, the Cadwalader corporate partner in charge of the D5 Securitization, gave Nomura the following advice concerning the 80% Test: Glick told Nomura to add together the value of what was plainly REMIC real property, such as land and structural improvements. If that sum amounted to at least 80% of the loan amount, the 80% test would be met. If not, Glick advised Nomura it should make further inquiries to determine whether the loan met the 80% test. A-15.a-16.a. The First Department made the foregoing determination even though Glick conceded that she had no expertise with respect to applying the 80% Test. RA1953 (Glick 198:24-199:3). Further, Glick does not contend that she gave the foregoing advice to Nomura. In the February 11, 2011 affidavit that Cadwalader submitted in support of its motion for summary judgment, she simply says: Prior to the D5’s closing, Cadwalader provided detailed advice to Nomura regarding how to satisfy the 80% Test. 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, or “sticks and bricks”), should be added up by Nomura to see if it amounted to at least 80% of the loan amount. If those items alone satisfied the 80% Test (and they usually did), then the 80% Test would be satisfied. If not, then Nomura needed to inquire further to determine whether the loan met the 80% Test. 39 296791.1 A-1619-20 (Glick ¶ 8). Thus, Glick stated that not she, but Cadwalader instructed Nomura to use just such an approach as a “rule of thumb” while failing to identify who from Cadwalader provided the advice, to whom at Nomura it was given, how it was communicated, or the words that were actually used. Yet, in reliance on that affidavit, the First Department concluded that Glick herself told Nomura to use a land and structural improvements or a sticks and bricks approach to valuation. See A-15.a-16.a. Further, at her 2010 deposition, Glick did not testify that Cadwalader communicated this purported rule of thumb. Rather, she then testified only that she thought Nomura understood that it should use a “sticks and bricks” valuation approach, stating as follows: “I think both Marlyn [Marincas] and Perry [Gershon] understood real property means land and buildings” not that Cadwalader actually gave such advice to Nomura. RA1953 (Glick 199:11-12) (emphasis added).13 Plainly, Glick’s unsubstantiated belief as to what Marincas and Gershon “understood” is but another conclusion without the requisite facts for establishing her personal knowledge. See supra pp. 15-16. 13 Marincas, along with Tokarski, worked directly with Gershon in the securitization group at Nomura. See RA1333 (Gershon 402:9-403:25); RA1539 (Marincas 36:3-5); RA1550 (Marincas 95:14-18); RA1836 (Tokarski 22:9-22). 40 296791.1 One thing is certain – Glick herself did not advise Nomura to use a “sticks and bricks” measure of value for REMIC purposes. Nowhere in her affidavit (or her deposition testimony for that matter) does Glick claim that she advised Nomura about this purported rule of thumb. To the contrary, she readily admits that if she were asked a question about REMIC Regulations and whether real estate was only land and buildings, she would have referred the question to Adelman, testifying as follows: “If someone came to me and said, Are other things other than land and buildings, are they real property, I would boot the question to [Adelman].” RA1953 (Glick 198:24-199:3); see also RA1947 (Glick 47:12-18) (it was “primarily” Adelman that advised Nomura “with respect to the tax-related or REMIC-related issues.”); A-2026 (Glick 179:9-13) (if anyone was going to discuss the need for an “appraisal to exclude personal property and the going-concern value of the operating business,” it would have been Adelman, not her). There is, therefore, simply no testimony or other evidence in the record that Glick herself “told Nomura to add together the value of what was plainly REMIC real property, such as land and structural improvements” such that if the “sum amounted to at least 80% of the loan amount, the 80% test would be met ….” A- 15.a. See Vega, 18 N.Y.3d at 504 (affiant’s “failure to recall (and [defendant’s] apparent failure to document) whether it was involved in concrete disposal as part of the Loreto Park project is insufficient to meet [defendant’s] burden of 41 296791.1 demonstrating that there are no triable issues and that it is accordingly entitled to summary judgment.”). Further, while the First Department discounted the testimony of Nomura’s former General Counsel as an “isolated section[] of deposition testimony” (A- 18.a), he made plain that the actual “rule of thumb” Glick communicated was that, so long as Nomura met its internal underwriting guidelines, all of its loans would be REMIC compliant. See RA1261 (Funt 100:5-101:9); RA1262 (Funt 102:5-19, 103:8-104:15); RA1266 (Funt 119:8-25, 121:5-12); RA1287 (Funt 202:11-204:5); RA1294 (Funt 294:3-21). As set forth below, in addition to Nomura’s General Counsel, each of Nomura’s former employees – including Gershon – testified to knowing and applying that as the “rule of thumb.” See infra pp. 14-17, 57-60. Accordingly, questions of fact exist with regard to whether Glick (or anyone else at Cadwalader) advised Nomura to use a sticks and bricks’ rule of thumb, or, alternatively, if the rule of thumb that Glick and Adelman communicated was that Nomura would not have a REMIC problem so long as it originated loans that complied with its own internal underwriting guidelines. 42 296791.1 2. Questions of fact exist with respect to the REMIC- related advice that Adelman provided Nomura. a. Adelman’s testimony is inconsistent. The Appellate Division “summarized” (in more words than Adelman actually used) the advice that Adelman purportedly gave, stating as follows: (i) loans in a REMIC-eligible trust must be secured by real property with a value of at least 80% of the loan amount; (ii) real property for REMIC purposes includes land, buildings and permanent structures; (iii) only real property can be considered, and personal property does not count; and (iv) the REMIC 80% test is best proved by an independent third-party appraisal that should separately measure the real property components of the asset. In that regard, Nomura was instructed that an appraisal of REMIC real property should exclude the going-concern value of an operating business. A-14.a-15a. Even assuming that Adelman so testified in response to his counsel’s questions in 2010, other testimony that he gave at that same deposition, as well as the testimony that he gave in 2003 (which was obviously far closer in time to the events in question and was given before Cadwalader was sued for malpractice), is inconsistent, thereby raising genuine issues of fact. For example, when questioned in 2010 by Nomura’s counsel, Adelman conceded that the only advice he gave Nomura with respect to making the distinction between real and personal property for REMIC purposes was to get appraisals, testifying as follows: Q. And did you give them any advice as to how they were supposed to go about making that determination [distinguishing 43 296791.1 between the value of the REMIC real property and the value of the business itself]? A. Because they were real estate lenders, and they knew what facts they needed, I pretty much left [it] in their province how to determine how they would arrive at the answer, other than the fact that I gave them guidance that real property values, or any elements of value, are best shown by an appraisal, an independent appraisal. Q. So other than telling them to get an MAI appraisal, you gave them no other guidance? Is that fair? A. Well, I myself did not know how to determine those values. I just knew that they were determinable.14 RA1915 (Adelman 143:5-24). The record is devoid of any evidence that Adelman or anyone else from Cadwalader ever advised Nomura that the appraisal itself should separate the value of the real from the personal property, much less that it should do so in accordance with the REMIC Regulations. 14 While Adelman claimed not to know how to determine REMIC real property “values,” he conceded in both this action and in the Federal Action that he is an expert in making determinations as between real and personal property for REMIC purposes, which is what Nomura understood he was doing. See RA937 (Adelman 30:10-13) (“I consider myself an expert on the information conveyed in an appraisal as it pertains to qualification of assets for a REMIC trust.”); RA937 (Adelman 31:19-23) (testifying that he can read an appraisal to determine real versus personal property allocations); RA947-48 (Adelman 81:20-82:4) (he considers himself an appraisal expert insofar as being able to determine which elements of an appraisal constitute real and personal property); RA952 (Adelman 99:25-100:12) (same); RA979 (Adelman 264:5-20) (testifying that he has the experience necessary to understand the information presented in an appraisal to determine “whether or not it leads to the ability to render the legal opinion that the loan is qualified”) (emphasis added); see also RA994 (Adelman 363:15-20) (“I believe I have some expertise in reading and understanding appraisals as they relate to determinations of REMIC qualified loans, but I do not have any – I don’t claim any expertise in the methodology of arriving at those numbers.”); RA1910-12 (Adelman 125:19- 130:17) (testifying that he had “expertise” with respect to making REMIC real property determinations based on his review of appraisals, but that he was not an “expert” as he had previously testified). 44 296791.1 Indeed, it is evident both from the testimony and the documentary evidence that Cadwalader in general, and Adelman specifically, advised Nomura that an appraisal prepared for underwriting (as opposed to REMIC) purposes was appropriate to use for REMIC determinations so long as the appraiser used an income or “as-is” approach to valuing the property as opposed to a “sticks and bricks” approach to valuation as Glick now espouses.15 That evidence consists of Adelman’s 2003 deposition testimony where he emphatically stated that the appropriate valuation methodology for REMIC purposes is the income or “as-is” or “occupied value” approach to valuation. Such an approach makes no distinction between real and personal property and provides, if not an actual REMIC real property value, something very close to it. See RA976 (Adelman 252:6-253:19); see also RA983 (Adelman 280:18-281:5); RA977 (Adelman 257:2-5) (the income approach provides “the closest approximation of the ability of the real property to generate the income to support the loan”). In 2003, Adelman further unequivocally testified that Glick’s sticks and bricks or “bricks and mortar” approach to valuation was an inappropriate means for determining REMIC real property values: 15 As set forth above, the income approach accounts for the income that a property is generating. See RA976 (Adelman 252:6-253:19); see also RA983 (Adelman 280:18-281:5); RA1010-12 (Biafore ¶¶ 6-9); RA1177. In contrast, a “sticks and bricks,” “bricks and mortar,” or “dark value” approach takes into account the value of the property on an empty stand-alone basis without considering that income. See RA976 (Adelman 252:6-253:19); RA978 (Adelman 258:8- 259:13). 45 296791.1 A. [There] are two different recognized methodologies for valuing real property, and one is accepted for securitization purposes as adequate and the other is not accepted for securitization as adequate. Q. What are the two methodologies? A. The dark value and the as-is or occupied value. Q. The dark value, has that also been referred in this deposition as the bricks and mortar value? A. Yes. RA976 (Adelman 252:18-253:5). Q. Which methodology [is] appropriate? A. [The m]ethodology that is regarded by myself and others … is an as-is appraisal is the correct type of appraisal. Q. Why? A. Because it is the closest approximation of the ability of the real property to generate the income to support the loan …. The easiest example is an office building and an appraiser typically will present only an as is value …. RA977 (Adelman 256:16-257:9). Q. Is a bricks and mortar appraisal approach to valuing a property, appropriate or inappropriate, for securitization purposes in your opinion? Q. It is a yes or no answer. A. No. Q. The answer is no? A. The answer is no. Q. It is inappropriate? A. Without any – it is an incomplete answer, but the answer to the question on a yes or no basis is no. Q. The appropriate way to do an appraisal for a securitized loan is on an as-is basis? 46 296791.1 A. That’s my view. RA979 (Adelman 262:9-263:6); see also RA1003-04 (Adelman 446:19-448:16). At his 2003 deposition, Adelman also conceded that appraisers often used only an income or “as-is” approach to valuation and made no efforts whatsoever to break out real and personal property. RA977 (Adelman 257:7-9) (“The easiest example is an office building and an appraiser typically will present only an as-is value ….”) (emphasis added); RA982 (Adelman 276:20-277:6) (appraisals are done on an “as-is” basis and it is “rare” that it is “on any other basis than ‘as is’”). Consistent with Adelman’s 2003 deposition testimony, the documentary evidence, in the form of the bulk of Nomura’s appraisals, only provided as-is values. Nomura obtained appraisals that used the income or “as-is” approach to value, those values were reflected in the appraisers’ bottom-line number, and Nomura’s employees universally understood that it was appropriate to use those numbers for REMIC purposes. Thus, Ethan Penner, Nomura’s president and the architect of the business, testified that Nomura’s bankers did not know “that the total value of the appraisal for a mortgaged property could not be used for REMIC purposes” and he certainly “had no such knowledge at the time.” RA1617 (Penner ¶ 6). Nomura’s General Counsel similarly testified that he was unaware that the appraised values of certain properties included components that did not constitute real property. See RA1285 (Funt 188:25-189:13); RA1287 (Funt 204:6-15; 205:6- 47 296791.1 13). Specifically, he testified in 2003 as follows: Q. Did you ever discuss the real property component versus the personal property component with anyone from Cadwalader? A. No, we would just discuss, my only conversations I recall would be loan to value, how value was determined, what pieces were put together to determine that value. I never got into that kind of detail or even thought about it. It was just what’s the value, as the appraiser says, what’s the mortgage loan, do the math. Q. The value would have been the basic value that you would see at the very beginning of the appraisal? A. Whatever number they gave us, yes. RA1288 (Funt 207:8-208:2); see also RA1841 (Tokarski 227:2-8) (“I think the industry norm … is … the fair market value … divided by the loan …. [T]he fair market value [is] the appraised value on the front page of an appraisal … that’s the way the industry works.”). Even Perry Gershon testified that he had the same basic, but incorrect, understanding: Q. When you had that conversation … did you discuss the notion that the LTVs that you were looking at did not break out … real property from personal property? A. No. Q. Are you aware your LTVs didn’t make that distinction, weren’t you, Mr. Gershon? 48 296791.1 A. It is my understanding the appraised values were the real property values. RA1358 (Gershon 92:17-93:12) (emphasis added). On this point, Gershon’s 2003 deposition testimony was entirely consistent. In 2003, he testified that the income approach as reflected in the bottom-line number was “indicative of the value of an asset, particularly for REMIC purposes.” RA1314 (Gershon 104:7-14). In 2003, Gershon also testified that he used the exact methodology that Adelman stated was appropriate, explaining as follows: I’m telling you that the conclusion that I draw from this appraisal is that the real estate value of the asset is in excess of $40 million based on the income approach showing a value of $68 million. And that is the same methodology that I apply in making this determination on virtually every asset I have securitized. RA1315 (Gershon 107:15-22) (emphasis added); see also RA1360 (Gershon 116:11-25) (“the approach we relied on primarily was the income approach which generally would only look at the real property value”) (emphasis added); RA1361 (Gershon 127:24-128:7) (the income approach reflects real property value); RA1368-69 (Gershon 173:14-174:3) (“we look at and we pay attention to” the income approach). Tellingly, neither in 2003 nor in 2010 did Gershon make any mention whatsoever of being advised to use Glick’s “sticks and bricks” rule of thumb. 49 296791.1 b. Adelman’s testimony is also conclusory and inadmissible. In an effort to address the foregoing inconsistencies in Adelman’s testimony, Cadwalader offered only (i) Adelman’s scripted, leading deposition testimony based on a 12 bullet-point list of purported REMIC advice that counsel for Cadwalader prepared for purposes of this litigation and conveniently entitled “Cadwalader Advice to Nomura” (A-837; see also A-1941 (Adelman 259:9-16)); and (ii) certain other snippets from Adelman’s deposition that are lacking in critical detail. Notably, Cadwalader failed to submit an affidavit from Adelman. Cadwalader’s 12 bullet-point list does not indicate when the purported advice referenced therein was given, who gave the advice, to whom the advice was given, or how the advice was given. The document is an obvious script that Cadwalader prepared to use with its witnesses at their depositions. Adelman’s testimony with respect to that document consisted of no more than the following: Q. Did Cadwalader, over the course of years leading up to and in connection with the D5 securitization, provide Nomura with the advice listed on Exhibit 1126? Mr. Chernov: Objection. A. Yes, I believe that we advised them as to each and every one of the matters described in that exhibit. A-1941 (Adelman 259:9-16). Adelman’s testimony that it is his “belief” that the advice was given 50 296791.1 highlights his lack of personal knowledge, and, of course, his belief is irrelevant. Adelman fails to identify in this testimony who gave the advice or to whom the advice was given. Further, Adelman acknowledged that he did not have “a specific recollection” of advising Nomura with regard to the 80% Test. A-1924 (Adelman 258:4-15). Plainly, whether that advice was given is a central question on this appeal and his absence of memory on this point creates a triable issue of fact. While Cadwalader’s counsel attempted to cure the inconsistencies in Adelman’s testimony by prompting him with the 12 bullet-point list and the leading question reproduced above, there was no proper basis for asking leading questions with regard to that document. See, e.g. Jackson v. Montefiore Med. Ctr., 109 A.D.3d 762, 763 (1st Dep’t 2013); Ostrander v. Ostrander, 280 A.D.2d 793, 793-94 (3d Dep’t 2001). Adelman was neither adverse nor hostile to Cadwalader. Rather, he was a Cadwalader partner represented by its counsel at his deposition. Having him agree with a lawyer prepared document entitled “Cadwalader’s Advice to Nomura” is his lawyer testifying – not him.16 16 Cadwalader’s counsel also had no basis for using that bullet-point list to refresh Adelman’s recollection with respect to the advice he contends Cadwalader gave Nomura. See People v. Reger, 13 A.D.2d 63, 68 (1st Dep’t 1961) (“[I]t must be shown that a witness’ present recollection is exhausted before it is permissible to attempt to refresh such recollection by extraneous means or documents …. Once the witness’ recollection is refreshed he testifies thereafter as a result of such refreshed recollection.”). As the testimony – over objection – plainly demonstrates, counsel for Cadwalader did not lay the proper foundation that Adelman’s memory was exhausted before showing him the bullet-point list; nor did Adelman testify that the bullet-point list refreshed his recollection. 51 296791.1 Equally unavailing to Cadwalader is Adelman’s statement that he gave Nomura “generalized guidance” with respect to the personal property found in certain property types. A-1931-32 (Adelman 140:4-142:23). With respect to skilled nursing care facilities, in particular, Adelman testified that he advised Nomura that a distinction needed to be made between real and personal property.17 A-1932 (Adelman 142:11-143:4). Adelman does not indicate to whom at Nomura this guidance was given. Nor is there any written documentation reflecting this purported advice. Further, as noted above, Adelman acknowledged that he gave Nomura no advice as to how to make the distinction between real and personal property other than to get an “independent appraisal.” Id. (Adelman 143:5-24). While that advice is not here at issue, even with respect thereto, Adelman did not “have a good recollection of the names or personnel who were there.” A-1932 (Adelman 143:5-24). A reasonable inference from this testimony is that Adelman is providing nothing more than conclusory hearsay, which cannot be the basis for summary judgment. See supra pp. 33-34. 17 Tellingly, Adelman himself made no effort to make the distinction between personal and real property with any precision. RA957 (Adelman 126:21-129:6), RA1915-16 (Adelman 144:8- 146:16). Rather, he applied a “rule of thumb” such that if a property had an LTV of 90% or more it “might” cause him to make a further inquiry, but then again, it might not. RA1916 (Adelman 146:10-16). With respect to the DHL, Adelman applied this short-cut even though he had no experience with an acute care hospital. RA1916-17 (Adelman 146:17-150:24). 52 296791.1 3. Gershon’s testimony raises issues of credibility that cannot be resolved on a motion for summary judgment. The First Department concluded that Gershon “confirmed that Cadwalader properly advised Nomura of the REMIC rules,” based on Gershon’s testimony that “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. In making that finding, however, the Court ignored the inconsistencies in Gershon’s testimony and found, as a matter of law, that Mr. Gershon was not biased. See A-16.a-17.a. a. Gershon’s testimony is inconsistent. The First Department failed to address the obvious inconsistencies between the leading, scripted testimony elicited by Cadwalader’s attorneys at Gershon’s 2010 deposition and Gershon’s other sworn testimony at that same deposition, as well as his 2003 testimony. As the trial court recognized, at his deposition, Gershon was shown the same 12 bullet-point list about which Cadwalader’s attorney questioned Adelman (see A-837) and was asked a series of leading, scripted questions. RA14, see also A- 837; A-1466-70 (Gershon 20:19-37:10). But, because Gershon had left Nomura 12 53 296791.1 years earlier and was neither adverse to nor hostile towards Cadwalader (see infra pp. 54-57), its counsel’s leading questioning resulted in inadmissible testimony that should not have been considered on a motion for summary judgment. See, e.g. Jackson, 109 A.D.3d at 763; Ostrander, 280 A.D.2d at 793-94. Further, the First Department disregarded any and all of Gershon’s testimony that contradicted Cadwalader’s scripted testimony, by simply stating “Gershon’s alleged inability to succinctly articulate the REMIC rules during his deposition, which took place more than 10 years after the advice was given, does not refute his unrebutted testimony that Cadwalader advised him of the relevant rules at the time of the D5 Securitization.” A-16.a-17.a. Gershon, however, had no problem articulating the REMIC rules; rather, he was unable to articulate the advice he purportedly received and harmonize that advice with his other deposition testimony and his actual practices. See supra pp. 14-21. Thus, while Gershon testified in 2010 that he understood that he needed to have an appraisal that separately valued real and personal property, he simultaneously stated that he understood the income approach to valuation was altogether proper for REMIC purposes. As Justice Schweitzer concluded: Gershon testified, for example, that 100% of the loans in Annex A to the Prospectus Supplement had 100% LTV’s or less, “which in and of itself meant they were all in compliance” with REMIC requirements. Gershon III Tr. at 41-42 [RA1349-50 (Gershon 41:5-42:2)]. He claimed it was his understanding that “the appraised values were the 54 296791.1 real property values.” Id. at 92-93 [RA1358 (Gershon 92:17-93:12)]. Mr. Gershon also testified that, although appraisers take multiple approaches to determine value, Nomura primarily relied on the income capitalization approach, an approach he believed only looks at the real property value. Id. at 116-117 [RA1360 (Gershon 116:11- 117:8)]. RA17.18 As also noted above, the foregoing testimony from Gershon is consistent with that of Nomura’s other employees. See supra pp. 14-21; see infra pp. 57-60. What is inconsistent is the inadmissible leading and scripted testimony that Gershon provided to Cadwalader’s counsel. b. Gershon is biased. In denying Cadwalader’s motion for summary judgment, Justice Schweitzer determined that Gershon was potentially “a biased witness, because, while in charge of Nomura’s securitization group, he obtained an associate position for his wife, Lisa Post, in Cadwalader’s capital markets group where she worked on all of [Nomura’s] transactions, including the D5 Securitization focusing primarily on due diligence …. There is also evidence that, after Gershon left Nomura in late 1998, he continued to use Cadwalader as securitization counsel, and portions of his 18 At the time of his deposition, Gershon continued to work in the securitization business and the REMIC requirements have not changed since the 1990s. See infra pp. 19-20. Accordingly, Gershon was presumably as conversant with REMIC at that deposition as he was back in the 1990s, if not more so. 55 296791.1 wife’s bonuses from Cadwalader have been attributed to this continuous stream of business from Gershon.” RA16. In reversing Justice Schweitzer’s decision, the First Department addressed Gershon’s potential bias, finding as follows: Nor does the fact that Gershon is married to one of the Cadwalader’s attorneys who worked on the transaction, standing alone, raise an issue of fact. At his deposition, Gershon made clear that his wife’s employment at Cadwalader had no bearing on how he viewed the litigation. Nomura’s current argument to the contrary would only be based on speculation. A-17.a (emphasis added). The First Department’s acceptance of Gershon’s self-serving statement that his wife’s current employment at Cadwalader did not affect his view of the case is a stunning departure from the applicable principles of evidence. Whether Gershon’s statement is true or said just to protect his family’s income is a question for the jury, not a court on summary judgment. In ruling as it did, the First Department improperly minimized Post- Gershon’s involvement with Nomura. She worked on more than “the transaction.” As Justice Schweitzer explained, Gershon obtained the associate position at Cadwalader for his wife where she worked on all of Nomura’s transactions. The First Department also ignored Gershon’s long-standing relationship with 56 296791.1 Cadwalader,19 the financial benefits Gershon has obtained by reason of his use of Cadwalader as his securitization and REMIC counsel,20 and Gershon’s admission that he wanted to see Cadwalader prevail in this litigation. RA1368 (Gershon 173:10-13). Indeed, before his deposition, Gershon met with counsel for Cadwalader in his home at least once and provided Cadwalader with an affidavit for use in this litigation but not to Nomura or its counsel. RA1353-54 (Gershon 62:22-67:6). In addition to all of the foregoing, Gershon had an additional reason to be biased in favor of Cadwalader. It was his wife who received both the Deal Highlights document and the notification from Dechert that it would not opine with respect to the REMIC eligibility of the DHL. See supra pp. 24-26. It is undisputed that she never brought either document to the attention of Glick or Adelman. See id. The conduct of Post-Gershon is thus specifically at issue in this litigation and 19 Gershon has been working with Cadwalader, and Glick and Adelman in particular, for the past 20-plus years. After leaving Nomura, Gershon was hired by Caisse des Depots et Consignations to start a real estate finance group, and while there he retained Cadwalader for 15 to 20 different securitizations. See A-845-47 (Funt 26:21-35:11). By spring 2001, Gershon was working at Greenwich Capital, where he again retained Cadwalader for more than ten different securitizations. See RA1305 (Gershon 51:18-23); RA1355-56 (Gershon 72:7-75:14). His wife worked directly on some of those transactions, Glick worked on virtually all of them, and Adelman worked on all of them. RA1355 (Gershon 73:4-13). At the time of his 2010 deposition, Gershon was employed by Loan Core Capital and had retained Cadwalader in connection with no less than four different securitizations, all of which were staffed with his wife. RA1355-56 (Gershon 72:14-75:14). 20 As Justice Schweitzer found, the bonuses that Cadwalader paid to Gershon’s wife are directly attributed to the “continuous stream of business from [] Gershon.” RA16; see also RA1355 (Gershon 71:14-19); RA1356 (Gershon 75:5-14). 57 296791.1 Gershon had a strong interest in testifying on her behalf having already admitted that he wanted Cadwalader to win the instant action. See RA1368 (Gershon 173:10-13). In such circumstances, Gershon’s testimony that was adverse to Nomura and very supportive of his wife and her employer raises significant issues of bias that the First Department should not have so cavalierly dismissed. Rather, a jury should be allowed to see and hear Gershon and determine whether he, in fact, is biased. See, e.g., Hill, 226 A.D.2d at 233; Schultz, 89 N.Y. at 250. B. The First Department Failed To Address The Testimony Of Nomura’s Former Employees In finding that Cadwalader properly advised Nomura with respect to the REMIC rules and how to apply them, the First Department also failed to address the testimony of Nomura’s former employees, concluding that Nomura relied on “isolated sections of deposition testimony.” A-18.a. In so ruling, the First Department improperly resolved questions of fact. Far from being “isolated sections of deposition testimony” (id.), Nomura’s former employees – its CEO, its General Counsel, Marincas, Tokarski, and even Gershon – uniformly testified that it was their understanding that the REMIC Regulations would always be satisfied if Nomura originated loans in accordance with its own underwriting guidelines. See RA1617 (Penner ¶¶ 5-6) (it was CEO 58 296791.1 Penner’s “understanding that all of the loans that we originated satisfied the requirements of the Internal Revenue Service”); RA1262 (Funt 102:5-19, 103:8- 104:15) (given Nomura’s general underwriting practices, Nomura’s General Counsel understood that “[b]asically, every loan that we would do would become REMIC eligible”); RA1542 (Marincas 46:24-47:22) (Marincas, who certified that Nomura’s representations and warranties were accurate, understood that REMIC was not an issue because “[a]ll of [the] loans were originated to have LTVs lower than 80 percent. So we were never up against the 125. And the principally secured by real estate, that’s what we made: Loans on real estate.”); RA1839 (Tokarski 218:4-18) (Tokarski understood “[t]he industry standard for what that 80 percent is referencing is the loan-to-value,” not value-to-loan as provided for by the REMIC regulations). As set forth above, Gershon had the same understanding, testifying that “100 percent of the loans were 100 percent LTV or less, which in and of itself meant they were all in compliance.” RA1349-50 (Gershon 41:20-42:2). Other than scripted, leading testimony elicited by Cadwalader’s attorney, Cadwalader has failed to cite deposition testimony from these witnesses that is to the contrary. Indeed, the trial court also noted that “since the Appraisal did, in fact, value the land and buildings of the hospital using a dark or ‘bricks and mortar’ value (see Adelman I Tr. at 252-253) [RA976 (Adelman 252:2-253:19)] and came up with a 59 296791.1 value of only $30,960,000 (Ex. 154, at 2) [RA278], it appears that Nomura was not following Glick’s alleged advice that it needed to inquire further to determine whether the 80% Test was met for the DHL.” RA17. There is, therefore, no basis for the First Department’s conclusion that this testimony is “isolated” or does not raise issues of fact. Based on that testimony, the trial court properly found that issues of fact existed that could not be resolved on a motion for summary judgment. See RA17 (“[a] reasonable inference has been raised that Cadwalader’s REMIC advice was … not sufficient at least with respect to the DHL.”). That reasonable inference is further supported by other evidence, including the fact that Adelman only reviewed property values derived from the income approach as part of the due diligence that he performed before preparing his opinion. See supra pp. 22-23. If Cadwalader had advised Nomura to use a sticks and bricks approach to valuation, why would Cadwalader not have asked Nomura to list those values in Annex A to the Prospectus Supplement, the only document that Adelman reviewed for REMIC purposes? Far from making any such request, Adelman undertook the identical test Glick articulated to Nomura’s General Counsel, and which was applied by every other Nomura employee – he looked at the 73% LTV for the DHL that was based on an income approach to valuation and concluded that there was no REMIC issue. 60 296791.1 See RA949 (Adelman 87:14-88:12); RA957-59 (Adelman 126:17-136:16); RA961-62 (Adelman 142:22-146:16); RA963 (Adelman 151:3-15). Accordingly, at best, Cadwalader’s contention that someone from the firm advised Nomura to use the sticks and bricks’ rule of thumb raises issues of fact that cannot be summarily resolved. C. The First Department Failed To Address The Testimony Of Biafore, One Of Nomura’s Experts In determining that no issues of fact exist with respect to the REMIC advice that Cadwalader contends it provided to Nomura, the First Department also failed to address the expert opinion of Thomas J. Biafore. According to Biafore, Cadwalader should have advised Nomura to request the assistance of specialized tax counsel when it originated a non-traditional loan, stating as follows: In the case of commercial mortgage loans where the borrower’s obligations are secured by non-traditional assets, or “going concerns,” such as, for example, casinos, car washes and hospitals, however, value attributable to the property may not be considered to be “real property” within the meaning of the REMIC Rules. In such cases, it is necessary to make sure that the real property value for REMIC purposes does not include value attributable to the business being conducted on the property. Because this distinction is determined in part by technical tax provisions, distinguishing “real property” for REMIC purposes from “real property” as it might be characterized by an appraiser requires the assistance of specialized tax counsel when these property types are involved. Cadwalader failed to so advise [Nomura]. 61 296791.1 RA1010 (Biafore ¶ 6). In Biafore’s opinion, when dealing with such non- traditional properties, “[a]dvising a client that only real property counts towards the 80% Test or to use a third-party appraisal to ensure that the 80% Test is satisfied, by itself, is insufficient. Third-party appraisals are obtained primarily for credit purposes and only secondarily to ensure compliance with the REMIC Rules.” RA1010 (Biafore ¶ 7). Therefore, by itself, Biafore’s testimony creates an issue of fact with respect to the nature of the advice Cadwalader was obligated to give Nomura. A jury should be allowed to resolve that issue. In sum, Adelman’s 2003 testimony, the testimony of Nomura’s other employees, and the type of appraisals that Nomura actually obtained highlights the discrepancy between the First Department’s finding that Glick advised Nomura to use a sticks and bricks’ rule of thumb and the advice Nomura’s employees uniformly testified that they received. In short, questions of fact plainly exist with regard to whether Glick and Adelman provided Nomura with the REMIC advice that the First Department cited or whether they merely advised Nomura that it could satisfy the REMIC requirement by complying with its own underwriting guidelines that valued properties using an income approach.21 21 The income approach to the DHL that Nomura understood was the proper approach for REMIC purposes did not exclude the going concern value of the operations of the hospital itself. RA1217. And, as the quoted portions of the record establish, Nomura had no knowledge of that fact because Cadwalader never so advised it. 62 296791.1 POINT II CADWALADER’S FAILURE TO CONDUCT THE REQUISITE DUE DILIGENCE PRESENTS AN ISSUE OF FACT FOR THE JURY Nomura also has asserted that Cadwalader committed malpractice by issuing its REMIC Opinion without performing the requisite due diligence. The courts below denied Cadwalader’s motion for summary judgment, determining that an issue of fact is presented on the question of whether Cadwalader performed the necessary due diligence when it had in its possession a document that indicated that the value of the DHL might well be insufficient for REMIC certification purposes. However, Cadwalader’s failure to perform the requisite due diligence is much broader than that. Nomura introduced the expert reports and testimony of Thomas J. Biafore, a leading REMIC expert (RA1008-15, RA1016-32, RA1034-48, RA1050-67), and Arthur N. Field, a leading expert on legal third-party closing opinion practice (see RA1086-95; RA1229-40).22 These experts testified concerning the standard of care applicable to the REMIC Opinion and Cadwalader’s deviation from that standard. As demonstrated below, the order of the Appellate Division affirming the denial of Cadwalader’s motion to dismiss the due diligence claim should be 22 Cadwalader does not challenge Field’s expertise, but rather contends that the REMIC Opinion, although contained in a third-party closing opinion, is not subject to the customary standards applicable to third-party closing opinion letters. 63 296791.1 affirmed, and it is respectfully submitted that this Court should clarify in its opinion that issues of fact also exist on the due diligence that Cadwalader was required to perform before relying on its client’s representations and issuing its legal opinion that each of the loans in the D5 Securitization was REMIC qualified. It is well settled that the applicable standard of care presents an issue of fact for the jury. See, e.g., Food Pageant, Inc. v. Consol. Edison Co., Inc., 54 N.Y.2d 167, 172 (1981) (“the particular standard of care … is a factual matter for the jury”); Melendez v. Dorville, 93 A.D.3d 528, 528 (1st Dep’t 2012) (“experts’ conflicting opinions presented triable issues of fact”); Serradilla, 50 A.D.3d at 347 (attorney’s motion for summary judgment denied when a question was raised as to standard of care); Bistricer, 14 A.D.3d at 469 (attorney’s motion for summary judgment denied when issues were raised with respect to propriety of attorney’s opinion); Estate of Nevelson, 259 A.D.2d at 284 (attorney’s motion for summary judgment denied when a question was raised with respect to whether the attorney’s conduct fell below the applicable standard of care); Freese, 203 A.D.2d at 514 (same). In accordance with this authority, a jury should be allowed to consider Biafore’s expert opinion that Cadwalader violated the applicable standard of care by relying on Nomura’s REMIC representations when faced with the DHL. In that regard, Biafore testified as follows: 64 296791.1 In my opinion, when dealing with a red flag like the Doctors Hospital Loan, tax counsel should have independently reviewed the valuation of the components of the collateral in order to determine what portion of the value was attributable to “real property” for purposes of the REMIC Rules, a task for which Mr. Adelman testified that he has particular expertise (citation omitted). RA1013 (¶ 13). See also RA 1048 (As a result of the unusual nature of the DHL, “Cadwalader could not rely on [Nomura’s] representations … to establish the value of the real property, because they were provided by non-lawyers without relevant training or advice”). A jury should also be allowed to consider Field’s expert opinion that the REMIC Opinion is subject to the standard of care applicable to third-party closing opinion letters and that Cadwalader deviated from that standard.23 As Field explained in his expert reports and testimony, Cadwalader’s First Opinion Letter, 23 While the Appellate Division questioned Field’s specific experience with REMIC Opinions, that is a matter for the jury to consider and for Cadwalader to explore at trial on cross examination. Field’s purported lack of experience may go the weight a jury should give to his testimony, but not to his ability to testify in the first instance. While the Appellate Division questioned Field’s specific experience with REMIC Opinions, that is a matter for the jury to consider and for Cadwalader to explore at trial on cross examination. Field’s purported lack of experience may go to the weight a jury should give to his testimony, but not to his ability to testify in the first instance. Selkowitz v. Cnty. of Nassau, 45 N.Y.2d 97, 101-02 (1978) (“Whether or not expert testimony is admissible on a particular point is a mixed question of law and fact addressed primarily to the discretion of the trial court.”); Forte v. Weiner, 200 A.D.2d 421, 422 (1st Dep’t 1994) (“it is settled that a[n expert] need not be a specialist in a particular field if he otherwise possesses the requisite knowledge to make a determination on the issues presented …, and that the weight to be attached to an expert’s opinion is a matter for the jury.”) (internal citations omitted); People v. Abney, 31 Misc.3d 1231(A) at *12-13 (Sup. Ct. N.Y. Co. May 5, 2011) (“under the flexible and liberal standards applied to the qualifications of expert witnesses in New York” expert qualified to testify in the field of human memory and any lack of expertise goes to the weight of her testimony, not its admissibility). 65 296791.1 which contained its REMIC opinion, is properly considered a third-party closing opinion letter because Cadwalader confirmed, though the Reliance Letter that it issued in connection with the closing, that third-parties could rely on the Opinion Letter.24 Field also opined that because the REMIC Opinion is part of Cadwalader’s First Opinion Letter, it too is subject to the standards applicable to third-party closing practice. And, Field opined that Cadwalader violated the standard of care applicable to issuers of legal closing opinion letters by (i) relying of representations that were legal as opposed to factual in nature; and (ii) relying on representations of value from Nomura without ensuring that Nomura had the knowledge and ability to make those representations. 1. Cadwalader could not rely on a representation that was tantamount to the REMIC Opinion. It is well established that a lawyer issuing a legal opinion cannot rely on a factual statement, whether in the form of a representation or a certification, when the statement is tantamount to the legal opinion itself. As Cadwalader’s own opinion expert, Glazer, states in his treatise: “Lawyers are not entitled to rely on factual information (even if provided by an appropriate source) if the information 24 Cadwalder issued the Reliance letter to the Trustee, the three rating agencies, and the D5 Fiscal Agent, and noted in the letter that they could rely on the opinions set forth in paragraphs 5, 6, 7 and 8 of the First Opinion Letter. See RA1904. The cross-referenced paragraph 5 contained Cadwalader’s REMIC tax opinion. RA272. 66 296791.1 is tantamount to the legal conclusion being expressed ....” RA469. In his expert report, Field similarly explained: Opinion preparers rely on certifiers of fact for the factual elements necessary to render legal opinions. However, they may not rely on certifiers of fact for statements that are tantamount to the legal opinions themselves …. Such a statement, often referred to as a statement of “ultimate fact,” is in reality a conclusion of law. If the opinion giver could rely on it, the diligence the opinion recipient expects the opinion preparers to perform would be lost. See RA1094 (citation omitted). In Weiss v. SEC, 468 F.3d 849, 856 (D.C. Cir. 2006), the court rejected a lawyer’s claim that, in giving a tax opinion, he conducted sufficient due diligence by virtue of his reliance on a client’s representations that he had no reason to believe were false. In rejecting the claim, the court found that the representations were drafted by the lawyer, were conclusory, and contained no relevant facts. Id. Here too, the qualified mortgage and 80% Representations were drafted by Cadwalader, are conclusory, and contain no relevant facts. See RA71-2 ((xxix) and (xxxi)). The qualified mortgage representation is a legal representation stating that each mortgage loan is a “qualified mortgage” within the meaning of § 860G(a)(3) of the Code. RA72 (xxxi). It thus “gives the opinion asked of Cadwalader.” RA1093. The 80% Representation (see RA71 (xxix), is similarly tantamount to the REMIC Opinion because, as Field also explained, “[t]he ‘ultimate fact’ issue is, what constitutes ‘real property’ for REMIC purposes, 67 296791.1 which itself is a legal concept.” RA1093. In addition, the legal concepts involved in identifying REMIC real property are difficult, particularly when dealing with a going concern such as the DHL. See RA1022-27; RA1039-46. If what constitutes real property for purposes of REMIC were a purely factual question, as Cadwalader contends, there would be no reason for the Treasury Department to issue regulations and for the IRS to issue private letter rulings on this very issue. See, e.g., RA471-76. Cadwalader’s tax expert, Peaslee, admitted as much in his report, stating that “at the margins … determining whether the 80% Test has been met may require technical knowledge ....” RA1588-89 (Peaslee ¶ 153) (emphasis added). Rodgers also acknowledged that the exclusion of personal property for purposes of satisfying the REMIC principally secured test is a “nuanced” concept. A-1087 (Rodgers ¶ 35). Nomura’s expert, Biafore concurred: In view of the unique facts at issue in the [Doctors Hospital Loan], I do not believe that even most professional appraisers would be able, without careful and extensive training and advice, to reach an informed conclusion about whether an item of property would be considered “real property” for purposes of the Principally Secured Test.” RA1041. Adelman conceded that the REMIC Representations were tantamount to the legal opinion being requested of him, testifying that: “in my experience, tax 68 296791.1 counsel on securitization matters regularly relies upon the factual representation, in this case, the factual representation amounting to a legal representation that the loan is a qualified mortgage ….” RA954 (Adelman 115:12-17) (emphasis added). Adelman further admitted that in reviewing the Prospectus Supplement for purposes of the 80% Test, he was doing “legal tax work.” RA961 (Adelman 142:22-143:3); see also RA979 (Adelman 264:5-20) ( Adelman has the experience to review an appraisal and determine if it “leads to the ability to render the legal opinion that the loan is qualified”) (emphasis added). Where, as here, a representation includes, in significant part, complex legal determinations, “[i]f there is reliance on such a representation, the result is a legal opinion, the legal diligence for which was not provided by a lawyer.” RA1237. In short, it is plain that the 80% and QM Representations were tantamount to the legal conclusion expressed in the REMIC Opinion. Accordingly, Cadwalader could not rely on those representations to support its REMIC Opinion. 2. Cadwalader could not rely on representations of value from Nomura without ensuring that Nomura had the knowledge and ability to make those representations. In his expert reports, Field explained that the customary standards applicable to third-party closing opinions required Cadwalader to determine that a sufficient factual basis existed for Cadwalader’s REMIC Opinion. Thus, when a law firm seeks to rely on the representation of its client it must “satisfy itself that the 69 296791.1 [representation] is based on knowledge and not surmise or some approximation.” RA1237. Cadwalader’s own expert, Donald Glazer, in his book on legal opinions, agreed that some inquiry must be made by the attorney into the basis for the client’s representations. He stated: When opinion preparers rely on representations in the agreement, customary practice requires them to conduct the same review with officers of the company that they would have conducted if those officers were executing certificates. If the review leads the opinion preparers to conclude that the representations are based merely on the company’s willingness to risk the consequences of being wrong or that they were not prepared with the requisite care, the opinion preparers are not permitted to rely on them. RA454 (footnotes omitted).25 Here, Field has expressed the opinion that Cadwalader failed to comply with customary standards of practice and meet the standard of care, because it blindly relied on Nomura’s representations of value, without performing the requisite due 25 Tribar Opinion Committee, Third-Party “Closing” Opinions, 53 Bus. Lawyer 591, § 2.1.3 (1998) similarly provides: Opinion preparers typically draft certificates that set forth with precision various key facts. Then they customarily review the certificates with those who will be asked to sign them. In the course of that review, the opinion preparers satisfy themselves that the person providing the factual information understand that the information provided … must be based on knowledge, not on surmise or a willingness to “take the risk” of being wrong. An equivalent process should be followed when reliance is placed on representations in an agreement, oral statements or other information. RA480 (footnotes omitted). 70 296791.1 diligence to confirm the reliability of those representations. Field also expressed the opinion that those standards are far from onerous and that Adelman, who was responsible for the REMIC opinion, simply needed to confirm: (i) Who from Nomura was responsible for determining that the loans in the D5Trust were secured by not less than 80 percent REMIC real property – the banker(s) making the loan, Gershon (who was in charge of the securitization process), Marincas (who signed the PSA), or some other identifiable person; (ii) When did this person (or persons) from Nomura determine that the loans were secured by 80 percent REMIC real property – when the loans were originated, when the loans were being securitized, or at some time between origination and securitization; (iii) What did this person (or persons) from Nomura review in order to conclude that each of the loans was 80 percent secured by REMIC real property; and (iv) To the extent that this person (or persons) from Nomura used appraisals that were prepared for credit (as opposed to REMIC) purposes, how did that person determine that each loan was secured by 80 percent REMIC real property? See RA1090-91; RA1235-39. With respect to the minority of the loans secured by going concerns (i.e., loans where the collateral property’s primary source of income is not rent from tenants but rather revenue from a business of one sort or another), Adelman acknowledged in 2009 in his chapter of Mortgage And Asset Backed Securities Litigation Handbook that certain extra diligence was required, stating as follows: [I]t is important to ascertain that the value of the real property used to 71 296791.1 compute the loan’s LTV ratio does not include value attributable to a going concern when an operating business is conducted on the real property, for example, a nursing home or casino. RA450-51. Before issuing the REMIC Opinion, Adelman (or someone else at Cadwalader), therefore, had to know what the person (or persons) from Nomura had done with respect to the six loans secured by going concerns included in the D5 Trust to exclude the value of the operating businesses from the values for the real properties securing those loans.26 While Cadwalader purports to have issued its REMIC Opinion in reliance on Nomura’s REMIC-related representations, it is undisputed that neither Adelman nor anyone else from Cadwalader performed any of the foregoing due diligence. Adelman conceded that he did not know: Who from Nomura determined that each of loans in the D5 Trust was secured by 80 percent REMIC real property; When that person (or persons) from Nomura determined that each of the loans in the D5 Trust was secured by 80 percent REMIC real property; What that person (or persons) from Nomura reviewed in order to determine that each of the loans in the D5 Trust was secured by 80 percent REMIC real property; and How that person (or persons) from Nomura had determined that the value of the real property used to compute the DHL’s LTV ratio did not include value attributable to the operations of the Doctors Hospital. 26 In his expert report, Field also explains that if Cadwalader did not wish to “discharge its relatively limited … responsibilities as to the establishment of fact,” it could simply have disclosed its lack of diligence. RA1092. 72 296791.1 See RA970 (Adelman 187:13-16) (“I don’t have an understanding as to when they made that determination, whether it was at origination or subsequent to origination.”); RA969 (Adelman 182:6-9) (“I can’t tell you what they did to satisfy themselves whether or not it did qualify” for REMIC treatment); RA1928 (Adelman 234:13-235:4) (Adelman did not know who made the REMIC determination). Cadwalader failed to do any such diligence (or disclose its lack of diligence) even though it was aware that (i) a loan secured by a hospital was being included in the D5 Securitization (see RA962-63 (Adelman 146:17-150:24); RA1395-96 (Glick 130:12-16, 136:21-25); RA1952 (Glick 195:18-196:3)); (ii) Nomura had never before securitized a loan where the primary collateral was an acute care hospital (see RA962 (Adelman 146:17-148:25); RA1952 (Glick 195:18-196:3); RA1317 (Gershon 132:11-17); RA1335 (Gershon 432:5-14); RA1361 (Gershon 127:21-23)); (iii) Cadwalader had never opined on such a transaction (see RA1922 (Adelman 179:2-9)27); (iv) “the manner in which income is generated on the property will have an effect on the appraised value of the property” (RA941 (Adelman 46:8-20)); and (v) the quantity of equipment and the degree to which it 27 Adelman conceded that in “nearly 30 years of legal practice” he reviewed a “grand total of one appraisal for acute care hospitals” – the Doctors Hospital – and that he had done no “legal work in connection with any loans that were part of a securitized pool of loans for any acute care hospitals other than the Doctors Hospital.” RA962 (Adelman 147:5-148:22). 73 296791.1 is involved in generating income makes hospitals different for REMIC valuation purposes than other types of going concerns (see RA1922-23 (Adelman 179:20- 182:7); see also RA1047 (an acute care hospital “raised the sort of issues that only counsel would have reason to know”). Rather than perform any relevant due diligence, Cadwalader relied entirely on Nomura’s REMIC-related representations. It did so even though, as set forth above, the only protocol that Cadwalader had established called for Nomura to obtain “independent appraisals” when determining if a mortgage loan was REMIC eligible. See RA1915 (Adelman 142:11-143:24). Plainly, Cadwalader should have inquired “into the reliability of Nomura’s representations before relying on them.” RA1238. Biafore similarly opined that Cadwalader could not reasonably have concluded that the DHL was a REMIC-qualified mortgage, because it knew that (i) NACC had “a one-size-fits all program for underwriting that focused on LTV without regard to the components that made up the ‘value’ in the LTV” (RA1040); and (ii) the DHL “was an acute-care hospital.” RA1047. Cadwalader, thus, deviated from the standard of care for issuing legal closing opinion letters because, among other things, neither Adelman, nor anyone else at Cadwalader, met with any Nomura employee to determine who reviewed Nomura’s independent appraisals and made the determination of REMIC- eligibility; when the review and determination was made; or what information in 74 296791.1 the independent appraisals was reviewed in order to distinguish between the real property values and the values of the businesses. Absent such basic understanding of what Nomura knew with regard to the 80% Test and what it actually did to comply with that Test, Cadwalader had no basis for relying on Nomura’s representations. As a result of the foregoing, it is evident that Cadwalader failed to comply with customary standards applicable to third-party closing opinions. See RA1092-93. Even if the Court assumes that Cadwalader advised Nomura to determine REMIC eligibility using a “sticks and bricks” valuation approach – and there is no admissible evidence establishing that Cadwalader so advised Nomura (see supra Point I) – Cadwalader failed to come forward with any evidence establishing that Nomura understood or followed that advice by obtaining appraisals that provided such values, much less that any particular Nomura employee reviewed the information in those appraisals and made those distinctions. In fact, the evidence is to the contrary. Nomura often obtained appraisals that provided only overall values for the properties securing the mortgage loans. See RA949-51 (Adelman 89:21-95:4); RA959 (Adelman 135:24-136:2, 137:2-9), RA961 (Adelman 141:24- 142:7): RA982 (Adelman 276:15-277:6); RA1950-51 (Glick 189:17-192:1, 193:13-25) (Nomura did not provide Cadwalader with “REMIC LTVs”). If Nomura had regularly obtained appraisals that separately valued REMIC real 75 296791.1 property (or at the very least provided sticks and bricks values), there would have been no need for Adelman to undertake his “rule of thumb” analysis of Annex A to the Prospectus Supplement that set forth the overall LTVs for each loan.28 See RA957-63 (Adelman 126:17-151:15). In short, the evidence establishes that, as Biafore testified, as a matter of REMIC practice, Adelman was not at liberty to rely on Nomura’s REMIC representations, but instead had to perform his own due diligence because of the nature of the DHL. Further, as a matter of third-party closing opinion practice, Cadwalader could not rely on Nomura’s representations because they were legal in nature and neither Adelman nor anyone else at Cadwalader had any basis for knowing if anyone at Nomura made a REMIC determination – or did so correctly – with regard to the DHL or any of the other loans in the D5 Securitization. As Field opined, without such a basis, Cadwalader could not rely on Nomura’s REMIC- related representations and comply with customary practice applicable to third- party closing letters. See RA1092-93. 28 Cadwalader did not independently determine if the loans in the D5 Securitization were REMIC qualified. Adelman acknowledged that he personally made no such effort. See RA957 (Adelman 126:21-129:6); RA961-62 (Adelman 144:8-146:16). Rather, in issuing his REMIC Opinion he assumed the loans were all REMIC qualified and confirmed that assumption by applying a “rule of thumb” such that if a property had an LTV of 90% or more it “might” cause him to make a further inquiry, but then again, it might not. RA962 (Adelman 146:10-16). And, with respect to the DHL, Adelman made his assumption and applied this short-cut even though he had no experience with an acute care hospital. See RA962-63 (Adelman 146:17-150:24). 76 296791.1 Therefore, the order of the Appellate Division denying the motion to dismiss the Due Diligence Claim should be affirmed, and it is respectfully submitted that the Court should clarify in its opinion that an issue of fact exists concerning the applicable standards of care and whether Cadwalader deviated from those standards by blindly relying on Nomura’s representations. POINT III CADWALADER’S PURPORTED JUSTIFICATIONS FOR BLIND RELIANCE ON NOMURA’S REPRESENTATIONS RAISE ISSUES OF FACT Notwithstanding its failure to obtain any information with respect to the basis for Nomura’s REMIC Representations, Cadwalader argues that “it satisfied the standard of care in its approach to due diligence.” Def. Br. at 41. Significantly, however, Cadwalader never explicitly identifies that standard, apparently contending that appropriate diligence involved no more than uncritical reliance on Nomura’s REMIC-related representation. Id. at 40-41. In support of this contention, Cadwalader offers a litany of unsupported or misleading excuses for its lack of diligence. As demonstrated below, and as both courts below already have concluded, all of these excuses are insufficient to establish a right to summary judgment on Nomura’s Due Diligence Claim.29 29 Cadwalader also makes certain arguments based solely on Cadwalader’s improper citations to the affidavit of Marincas. That affidavit is not properly before the Court for the reasons set forth 77 296791.1 1. Questions of fact exist with respect to the scope of Cadwalader’s obligations and Nomura’s purported instruction that Cadwalader should not review the appraisals. Cadwalader contends that it cannot be faulted for not doing independent due diligence because Nomura purportedly instructed it not to review the underlying appraisals. See Def. Br. at 34, 41-42, and 46. At best, this contention raises issues of fact. Nomura retained Cadwalader to provide a REMIC Opinion. Accordingly, the relevant question is not whether Cadwalader did what Nomura instructed. Rather, the question is: did Cadwalader do what it was legally required to do in order to issue that opinion?30 As the expert testimony of Field and Biafore establish, and as explained above (see supra Point II), it did not. At the very least, questions of fact exist requiring that the matter be heard by in Nomura’s accompanying motion to strike Cadwalader’s references and citations to the Marincas affidavit from its briefs before this Court. 30 Cadwalader’s reliance on AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428 (2007), is entirely misplaced. In that case, plaintiff sued its former law firm, Davis Polk, for legal malpractice, after Davis Polk successfully litigated a tax issue on its behalf with the IRS. Plaintiff alleged that Davis Polk had failed to advise it that it may only have been secondarily liable for the taxes. 8 N.Y.3d at 431-32. In affirming the dismissal of the action, this Court found that “the issue whether plaintiff was primarily or secondarily liable for the subject tax liability was outside the scope of [Davis Polk’s] representation.” Id. at 435. The court further found that plaintiff had taken the position that it was solely responsible for tax obligations for many years before it retained Davis Polk, and that plaintiff’s “speculative assertion as to which entity was primarily liable for the subject taxes” could not support a legal malpractice claim. Id. at 435-36. Here, it is undisputed that Cadwalader was retained with respect to the issues that are the very subject of this malpractice action (i.e., whether Cadwalader properly advised Nomura with respect to the REMIC Regulations and whether the REMIC Opinion conforms to customary closing opinion practice). 78 296791.1 a jury. While Cadwalader cites to certain leading testimony it elicited to support its contention that Nomura would not allow Cadwalader to review appraisals (and in some cases actually scripted by Cadwalader’s counsel and presented to the witness), it ignores the directly contrary testimony of Nomura’s General Counsel, Funt, as well as Gershon, Adelman and others. Nomura’s General Counsel testified that, while he did not expect Cadwalader to review appraisals, he did expect it to review whatever was necessary in order to issue the REMIC Opinion. See RA1280 (Funt 126:23-127:4); RA1282 (Funt 143:10-17). Gershon admitted that he expected Cadwalader “would do whatever they deemed necessary to do in connection with issuing that opinion” (RA1378 (Gershon 211:24-212:4)), and, if Cadwalader had asked to review an appraisal for REMIC purposes, Nomura would have provided it. See RA1374-75 (Gershon 197:22-198:3); RA1361 (Gershon 129:15-18). Cadwalader’s contention that it was prohibited from seeing appraisals also is belied by Adelman’s testimony in the underlying Federal Action, where he testified that, when he wanted to review an appraisal for REMIC purposes, Nomura made it available. See RA957 (Adelman 126:17-20) (“When Cadwalader believed that inquiry was required, that required it to examine an appraisal, it would request a specific appraisal and examine it.”). Notably, Adelman did not testify as to any restriction on his ability to review appraisals. Other testimony, 79 296791.1 both in this action and in the underlying Federal Action, is entirely consistent. See RA1282 (Funt 143:15-17) (“I agree … [Cadwalader] could have looked at anything they wanted to look at.”); RA1282-83 (Funt 145:24-146:5) (If Cadwalader asked to review an appraisal, Nomura would have made it available); RA1283 (Funt 147:18-149:11) (“from time to time [Cadwalader] would ask to review appraisals”); RA1541 (Marincas 44:17-21) (“We would disclose to Charlie [Adelman] everything that was going into the REMIC trust to – he had to issue a REMIC opinion that the assets qualified. So, you know, whatever Charlie asked us for, we would get to him so he could give his opinion.”). In making the argument that Cadwalader was instructed to refrain from reviewing appraisals, Cadwalader fails to distinguish between reviewing an appraisal for credit or underwriting purposes with obtaining information from the appraisal for purposes of determining REMIC eligibility. In the Federal Action, Tierney, one of Nomura’s bankers, explained this distinction: The banker’s responsibility is to review the appraisal in form. The lawyer’s responsibility is to determine REMIC eligibility. Okay, so reviewing the appraisal is not a responsibility of the law firm. The responsibility of the law firm is to take some numbers off of the appraisal to determine whether it’s REMIC eligible or not. RA1832 (Tierney 212:5-13); see also RA1832 (Tierney 210:8-16). Questions of fact thus exist with regard to the scope of Cadwalader’s engagement and Nomura’s purported direction to not review the appraisals. 80 296791.1 In any event, as a matter of customary third-party closing opinion practice, if Nomura limited the due diligence that Cadwalader could undertake in connection with its REMIC Opinion, Cadwalader was obligated to specifically disclose such limitation in the REMIC Opinion so that third-parties relying on the Opinion would understand that Cadwalader had done no diligence at the direction of its client. As Cadwalader’s own opinion expert, Glazer, explained in his treatise: Customary practice notwithstanding, the parties to a transaction remain free to vary the scope and nature of the factual investigation the opinion preparers otherwise would be required to conduct. To do so, the opinion preparers should discuss the matter with the opinion recipient, describe the factual investigation in the opinion letter and make clear in the opinion letter that the factual investigation described is the only factual investigation they have conducted. Language along the following lines may be used: “We have examined only the following documents and have made no other investigation or inquiry.” RA460 (citations omitted). Notably, Cadwalader’s First Opinion Letter contains no such express disclaimer language. The absence of any such disclaimer provides further evidence that no limitation was placed on Cadwalader’s duty or ability to review appraisals for REMIC-eligibility. Thus, both the scope of Nomura’s direction regarding the review of appraisals and the duty of Cadwalader to ensure that that it was rendering a proper REMIC opinion remain issues of fact for the jury. 81 296791.1 2. Questions of fact exist with regard to whether Nomura understood how to apply the REMIC rules. In an effort to justify its failure to do any due diligence with regard to the DHL, a loan that was secured by a going concern, Cadwalader contends that “Nomura routinely securitized loans secured by going concerns” and, “based on that experience,” Cadwalader “reasonably understood that Nomura was sophisticated in its understanding and application of the REMIC rules.” Def Br. at 33.31 As a preliminary matter, there is no evidence in the Record as to how many loans Nomura securitized that were secured by going concerns, much less that Nomura “routinely” securitized such loans. Even if the Court were to assume that Nomura routinely securitized going concern loans – which it should not – Cadwalader has failed to come forward with any evidence to establish that Nomura was sophisticated in its understanding and application of the REMIC rules to these types of properties. In fact, the evidence is uniformly to the contrary. 31 Tellingly, the citations to which Cadwalader refers the Court do not support Cadwalader’s claim that Nomura routinely securitized loans secured by going concerns or that Cadwalader understood that Nomura was sophisticated in its understanding and application of the REMIC rules. Further, as Biafore explains, an acute care hospital raises unique REMIC issues that hotels and other more typical going concerns do not. See RA1041-46. While Cadwalader asserted in the proceedings below that Nomura securitized a hospital loan other than the DHL, that loan was, in fact, secured by a group of five properties which included an assisted living facility, a skilled nursing facility, a medical office building, and a continuum care facility. See RA897-98. Plainly, such a loan is far different than the DHL, a standalone acute care hospital loan. 82 296791.1 As set forth above, Nomura’s former employees – its CEO, its General Counsel, Marincas, Tokarski, and even Gershon – each testified that it was their understanding that the REMIC Regulations would always be satisfied if Nomura originated loans in accordance with its own underwriting guidelines. See RA1617 (Penner ¶¶ 5-6) (it was Penner’s “understanding that all of the loans that we originated satisfied the requirements of the Internal Revenue Service”); RA1262 (Funt 102:5-19, 103:8-104:15) (given Nomura’s general underwriting practices, Nomura’s General Counsel understood that “[b]asically, every loan that we would do would become REMIC eligible”); RA1542 (Marincas 46:24-47:22) (Marincas, who signed the governing agreements, understood that REMIC was not an issue because “[a]ll of [the] loans were originated to have LTVs lower than 80%. So we were never up against the 125. And the principally secured by real estate, that’s what we made: Loans on real estate.”); RA1839 (Tokarski 218:4-17) (“the industry standard for what that 80 percent is referencing is the loan-to-value”). Gershon had the same understanding, testifying that “100 percent of the loans were 100 percent LTV or less, which in and of itself meant they were all in compliance.” RA1349-50 (Gershon 41:20-42:2). The only contrary evidence offered by Cadwalader is leading testimony elicited by its attorney that conflicts with this witness’ earlier testimony. 83 296791.1 The trial court recognized that issues of fact existed with regard to Nomura’s understanding of Cadwalader’s purported REMIC-related advices and its purported sophistication: “[S]ince the Appraisal did, in fact, value the land and buildings of the hospital using a dark or ‘bricks and mortar’ value (see Adelman I Tr. at 252- 253) [RA976 (Adelman 252:2-253:19)] and came up with a value of only $30,960,000 (Ex. 154, at 2) [RA278], it appears that Nomura was not following Glick’s alleged advice that it needed to inquire further to determine whether the 80% Test was met for the DHL.” RA17. Nomura’s understanding that all of its loans would necessarily satisfy the 80% Test so long as the loans complied with its underwriting guidelines was far from sophisticated. In fact, it was wrong. Accordingly, Cadwalader’s contention that Nomura’s sophistication in its understanding and application of the REMIC rules provided a basis for Cadwalader’s reliance on Nomura’s representations raises issues of fact that cannot be resolved on a motion for summary judgment. 3. Cadwalader has misstated the First Department’s findings. Cadwalader contends that “the Appellate Division has ruled[] Cadwalader provided detailed and sufficient advice to Nomura concerning application of the REMIC rules … and Nomura understood how to apply the REMIC rules to satisfy the 80% Test.” Def. Br. at 34 (emphasis added). While the Appellate Division erroneously resolved the conflicting testimony to find that Cadwalader provided 84 296791.1 Nomura with REMIC advice – which finding is now before this Court – the Appellate Division made no findings with respect to Nomura’s understanding of that advice. Cadwalader has offered no citation for this bald contention. Nor has Cadwalader pointed to any evidence in the Record demonstrating that Nomura knew how to apply Cadwalader’s purported advice. In fact, as noted by the trial court, the evidence establishes that Nomura wrongly understood that it would never have a REMIC issue so long as it made loans that complied with its internal underwriting guidelines. See supra pp. 14-17, 57-60. 4. Questions of fact exist with regard to Cadwalader’s contention that it justifiably relied on Nomura’s Representations because Nomura was responsible for determining the value of the REMIC real property securing the loans. Cadwalader contends that it justifiably relied on Nomura’s REMIC Representations because it had purportedly entered into an agreement with Nomura whereby Nomura would determine the REMIC values and Cadwalader would rely on Nomura’s REMIC-related Representations. See Def. Br. at 34; 41-42. This argument ignores the testimony from Nomura’s CEO, General Counsel, Marincas, and other Nomura employees establishing that Nomura only made the REMIC-related representations based on its understanding that Cadwalader – not Nomura – was determining the REMIC eligibility of each loan. Nomura’s CEO and President, Penner, testified that Nomura made the REMIC Representations 85 296791.1 based on its understanding that “REMIC compliance was the responsibility of our outside securitization counsel, Cadwalader ….” RA1617 (Penner ¶ 6); see also RA1645 (Penner 92:21-93:3); RA1650 (Penner 113:18-21); RA1669 (Penner 19:20-20:19). Nomura’s General Counsel confirmed that it was Cadwalader’s responsibility to determine whether any loan failed to meet the 80% Test because it was the “final arbiter” of REMIC eligibility. RA1265 (Funt 116:20-117:10) (emphasis added). Likewise, Marincas testified: I think – you’re sort of putting two concepts together. The banking team would be responsible for assessing the loan-to-value from a credit underwriting perspective. I don’t know if members of the banking team would have any idea what REMIC eligibility was. They weren’t – you know, they probably knew that loans went into a REMIC, but I’m sure they never read the REMIC statute or anything like that. So to say that they had responsibility for making sure the loans met REMIC standards, no, they didn’t have responsibility for making sure the loans met REMIC standards. They had responsibility for making sure the loans met Nomura’s LTV requirements, which were property specific. You know, certain types of property could have LTVs of 80 percent, other types had to have 75 percent. If they were big loans, they needed to be lower LTVs because we were going to try to get investment-grade treatment for them. So the banking group had responsibility for determining the LTV of the loan and they would report that to us and then we would report that to Cadwalader. Cadwalader would make sure that we were meeting REMIC requirements. RA1543 (Marincas 51:12-52:17) (emphasis added); see also RA1542 (Marincas 46:16-22) (it was Cadwalader’s responsibility to ensure that each loan was REMIC 86 296791.1 qualified); Id. (Marincas 45:11-23) (Cadwalader was responsible for REMIC due diligence); RA1547 (Marincas 73:13-74:5).32 As the foregoing testimony establishes, Nomura made the REMIC Representations based on its understanding that Cadwalader was making sure the loans were REMIC qualified. That Cadwalader argues otherwise creates a triable issue, at the very least. Nomura, thus, understood that REMIC compliance was the responsibility of Cadwalader in general and Adelman in particular and that if Adelman – upon his review of whatever he deemed necessary to review – saw an issue, he would alert Nomura and request to review the appraisal, as he had done in the past. This presents a question of fact for the jury. 5. Questions of fact exist with regard to whether Nomura undertook to determine the value of the REMIC real property securing the DHL. Cadwalader contends that “Nomura itself undertook to determine the value of the real property securing the DHL,” directing the Court’s attention to the Doctors Hospital appraisal, the REMIC Representation from the DHL borrower, and Nomura’s representations and certification. Def. Br. at 34-35. In making the argument, Cadwalader mixes apples and oranges. The value of the “real property” securing the DHL is not the issue. What was in dispute in 32 See, e.g., Garten v. Shearman & Sterling LLP, 52 A.D.3d 207, 207 (1st Dep’t 2008) (defendant lawyer “was obligated not only to prepare the loan documents, but also to protect plaintiff’s expectation … that he would hold a senior security interest [that] was effective”). 87 296791.1 the underlying Federal Action (and what remains in dispute in this action) is the value of the REMIC real property securing the DHL. To the extent that Cadwalader is contending that Nomura undertook to determine the actual value of the REMIC real property securing the DHL, as set forth above, Cadwalader has failed to identify who from Nomura made such a determination, when that determination was made, how that determination was made, and – most important –what REMIC value was actually determined. See supra pp. 71-72. While Cadwalader directs the Court’s attention to the Doctors Hospital appraisal, Adelman – Cadwalader’s tax expert – conceded that he could not determine the value of the real property for REMIC purposes by reviewing it. See RA948 (Adelman 83:2-19, 84:19-24). He testified that (even with his expertise in reading appraisals for REMIC purposes), the appraisal evidenced REMIC real property of only $30,960,000. See id.33 Nomura’s appraisal experts and Gershon testified to the same effect. See RA1069 (Brooks 280:21-281:7); RA1493 (Howley 242:7-243:8); RA1313 (Gershon 98:13-22). In this action, Biafore reached the same conclusion. RA1027; RA1042-46. The fact that Adelman could not make such a determination is not surprising 33 See also Adelman’s testimony where he conceded that he did not know if the DHL would satisfy the 80% Test prior to his receipt of the Appraisal Supplement. RA975-76 (Adelman 246:18-247:7, 250:7-16); RA985 (Adelman 290:21-291:22); RA1000-01 (Adelman 395:16- 396:3); RA1007 (Adelman 471:8-24.) 88 296791.1 because, as Gershon testified, the appraisal was prepared for credit underwriting, not REMIC purposes. See RA1010 (Biafore ¶ 7) (citing Gershon 32:20-33:19) (with respect to appraisals: “The first priority was making sure your credit was okay. Among the secondary things you were looking at is whether it was REMIC- compliant or not.”)). If there were any evidence of the REMIC real property value of the DHL at the time of securitization, Nomura would not have asked Valuation Counselors in the summer of 2000 to supplement the appraisal to provide additional factual information; nor would Nomura have asked Cadwalader to provide the D5 Trustee with the Second Opinion Letter.34 At best, the documents to which Cadwalader directs the Court’s attention raise questions of fact with respect to whether Nomura ever undertook to determine the value of the REMIC real property securing the DHL. 6. Questions of fact exist with regard to Nomura’s origination procedures and Cadwalader’s purported understanding thereof. Cadwalader contends that it “understood” that Nomura “would only 34 Similarly, neither the representations nor the certification can be deemed to establish that, as a matter of law, Nomura undertook to determine the actual value of the REMIC real property securing the DHL. As set forth above, Nomura’s witnesses testified that Nomura made the REMIC Representations based on its understanding that Cadwalader was determining the REMIC eligibility of the loans. See supra pp. 22-23, 57-60. Similarly unavailing is Cadwalader’s reliance on the certification that was signed by one of Nomura’s managing directors and says no more than the representations are accurate. There is no evidence in the record with regard to the managing director’s position, his knowledge of the representations, or any effort by Cadwalader to determine whether his certification was based on his actual knowledge. 89 296791.1 originate [i.e., make]… a loan if it had determined from the outset that it was secured by real property equal to at least 80% of the loan amount.” Def. Br. at 35. In support of its contention, Cadwalader cites only to certain leading, scripted testimony from Gershon, ignores other testimony from Gershon, ignores the testimony of Adelman, and ignores the fact that the counsel representing Nomura in the loan transaction, Dechert, informed Cadwalader that it was unwilling to make any REMIC determinations with respect to the DHL. See supra p. 26. As a preliminary matter, Gershon worked at Nomura, not Cadwalader. Accordingly, he cannot – and in fact did not – testify to any understanding that Cadwalader had.35 Further, even assuming that Gershon could speak for Cadwalader, when not being asked improper leading questions, Gershon acknowledged that he did not request REMIC eligibility judgments from origination counsel because the loans were not being securitized at that time and “origination counsel did not put the loan in the REMIC.” RA1365-66 (Gershon 160:22-162:4, 164:5-24) (origination counsel did not issue REMIC opinions because they were “not part of the process of putting the loan into [the] REMIC ... [s]o it would not have been a logical request to ask them to write a REMIC opinion”). 35 In the leading, scripted testimony elicited from Gershon, he testified that he expected origination counsel, together with Nomura’s bankers, to make REMIC determinations. See A- 1465 (Gershon 17:17-22). He did not testify, however, to any understanding that Cadwalader might or might not have had. 90 296791.1 Cadwalader’s claim that it understood that Nomura was making REMIC determinations when Nomura originated the loans also is belied by the testimony of Adelman. Adelman testified that, while Nomura originated loans with the expectation that they would be REMIC-eligible, REMIC-eligibility questions were not specifically addressed until the “pool [of loans] was identified.” RA968 (Adelman 179:3-14); see also RA967 (Adelman 174:12-18) (“At the time of origination of the loan, [it was] no one’s responsibility” to confirm REMIC eligibility.); see generally RA966-69 (Adelman 171:8-185:16). Adelman further testified that, when Cadwalader acted as origination counsel, which it often did for Nomura, it did not then address REMIC eligibility questions, stating: “Those determinations are frequently made after the loan is originated” and if the loan is not REMIC qualified, then Nomura will “have to go back to the borrower and amend the loan or … restrict the servicer’s discretionary action under the pooling agreement … the loan origination process is somewhat distinct from … the securitization process.” RA966 (Adelman 171:12-172:25); see also RA968 (Adelman 179:22-180:25) (“I do not know what process … loan origination counsel and Nomura went through. I do not know whether or not [Nomura] satisfied themselves” that the loans were REMIC-eligible at the time the loans were originated). Cadwalader’s contention that it understood that Nomura made REMIC 91 296791.1 determinations at origination also ignores the testimony from Nomura’s former employees. As noted above, Marincas testified that Nomura’s bankers and origination counsel did not determine REMIC eligibility at origination. See supra pp. 22-23. Similarly, when Nomura’s General Counsel was asked who was responsible for determining if Nomura’s loans were REMIC-eligible, he responded “outside counsel.” RA1262 (Funt 105:11-17); see also RA1278 (Funt 79:5-16). When then asked what role origination counsel had in that determination as opposed to Cadwalader, the General Counsel compellingly explained that origination counsel was not issuing the REMIC Opinion, he did not expect that origination counsel would review appraisals, and it was not origination counsel’s responsibility to review loans for REMIC eligibility purposes because it was “actually Cadwalader, not origination counsel” that was the “final arbiter” of such issues. See RA1263 (Funt 106:5-11); RA1264 (Funt 113:7-16); RA1265 (Funt 116:20-117:10). Likewise, Penner testified that “[w]e paid our outside law firm a tremendous amount of money” to ensure that NACC’s loans were REMIC compliant. Therefore, such compliance “would probably fall under the heading of responsibility of” Cadwalader. RA1705-06 (Penner 92:9-93:3); RA1708 (Penner 113:18-21); see also RA1715 (Penner 19:20-20:19). 92 296791.1 Finally, Cadwalader’s contention that it understood that Nomura was making REMIC determinations at origination ignores the fact that Dechert specifically advised Post-Gershon that it was not willing to make any REMIC- related determinations as to the DHL. See RA1743 (Post-Gershon 100:14-101:10) (Cadwalader was aware that Dechert, as origination counsel, was not advising NACC with respect to whether the DHL was REMIC-qualified).36 Joseph Heil, the Dechert partner responsible for closing the DHL, confirmed that Dechert was not asked to provide any REMIC related advice: Dechert did not advise NACC with respect to whether the [DHL] was a qualified loan under [REMIC] regulations. NACC never asked Dechert to provide such advice nor expected Dechert to do so, and Dechert did not voluntarily do so. RA1453 (Heil ¶ 3). To the contrary, Dechert advised Cadwalader that it was not confirming that the DHL met either the 80% or QM Representations. See RA1453-54 (Heil ¶¶ 6-7); RA1456-69. Plainly, therefore, questions of fact exist with regard to Nomura’s origination procedures and Cadwalader’s purported understanding thereof. 36 Post-Gershon received Dechert’s notification that it was not confirming the accuracy of the 80% or QM Representations. While she contends that she so notified Gershon (RA1739 (Post- Gershon 54:2-9)), he denied ever receiving such notification. See RA1368 (Gershon 171:19- 172:5); RA1371 (Gershon 182:7-11). Further, in the Federal Action, Post-Gershon testified that she did not know who was responsible for REMIC compliance – Nomura or Cadwalader, further undermining Cadwalader’s claim that it understood Nomura was making REMIC determinations when it originated the loans. See RA1726-27 (Post-Gershon 139:2-8, 140:8-15, 140:23-142:5). 93 296791.1 7. Questions of fact exist as to whether Cadwalader confirmed the truth of Nomura’s DHL representations. Cadwalader contends that it “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 ….” Def. Br. at 35. As set forth above, however, Cadwalader failed to demonstrate that it met with Nomura’s officers before asking them to sign the PSA and the certification, that it conducted any review of the REMIC Representations with those officers, or that it concluded that Nomura’s officers understood what was actually necessary in order to satisfy the REMIC Representations. Far from obtaining any such confirmations, Adelman conceded that he did not know who at Nomura made the REMIC determination, when they made that determination, or how they made that determination. See supra pp. 71-72. Accordingly, there is no evidence in the record to support Cadwalader’s contention that it confirmed with anyone from Nomura that the DHL was secured by REMIC real property equal to 80 percent of the loan. The evidence, at best, raises issues of fact. In 2003, in the underlying Federal Action, Marincas testified that, in connection with signing the PSA and confirming the accuracy of the representations in general, she did no more than ask Gershon and Tokarski to re-read them and to confirm that they were not aware of any problem. With regard to the REMIC Representations in particular, Marincas 94 296791.1 testified that she did not “know if [she] had any conversation about that particular representation or warranty,” much less any conversation specifically concerning the DHL. RA1552 (Marincas 21:6-11). She then proceeded to testify that Adelman discussed the REMIC Representations with Gershon. See RA1551-52 (Marincas 214:8-218:1). Significantly, neither Gershon nor Adelman testified to having any such conversations. See RA957-63 (Adelman 126:17-151:15); RA132; RA1325-27 (Gershon 179:10-185:6). Whether this, or any other, conversation occurred is clearly a disputed question of fact. 8. Questions of fact exist with regard to Cadwalader’s purported reliance on the DHL borrower’s representation. Cadwalader contends that it was justified in relying on Nomura’s REMIC- related representations because “[t]he borrower of the 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.” Def. Br. at 36-37. There is no evidence in the Record to suggest that anyone at Cadwalader ever reviewed the DHL loan documents, let alone reviewed the particular references to the purported REMIC value of the real property. In fact, Adelman acknowledged that the only documents that he reviewed for purposes of issuing the REMIC Opinion was the Annex to the Prospectus Supplement, which contained no 95 296791.1 information whatsoever with regard to the borrower’s representations or the REMIC property values of the loans for that matter. Plainly, Cadwalader could not rely on a document that it never saw and did not know existed. Even assuming that Cadwalader knew of the borrower’s REMIC Representation, it failed to do the necessary due diligence in order to rely on it. In that regard, there is no evidence that Cadwalader ever had any communications with the borrower, much less made a determination that its representation was reliable. The DHL borrower’s representation, therefore, cannot provide a basis for Cadwalader’s failure to perform any due diligence in connection with issuing its REMIC Opinion.37 9. Cadwalader’s four experts failed to establish as a matter of law that Cadwalader acted reasonably. Cadwalader contends that its “four leading experts” each opined that Cadwalader reasonably relied on Nomura’s representations and was excused from doing independent due diligence. Def. Br. at 41. As set forth above, however, Cadwalader’s four leading experts failed to establish the existence of a standard of care for the issuance of REMIC Opinions pursuant to which counsel may blindly 37 From the perspective of Nomura’s employees, the DHL had $68 million in REMIC real property because they understood that the bottom-line number from an appraisal could be used for REMIC purposes. See supra pp. 20-21. 96 296791.1 rely on client representations. Rather, the standard of care is an issue for the jury. See supra Point II. Further, Cadwalader’s experts opined that when they issued their own REMIC opinions they understood that they were opining to something different than did Adelman. Lyden, Peaslee, and Weinberger each testified that when they issued their REMIC Opinions they were opining only that the pool of loans qualified for REMIC tax treatment based on the applicability of the REMIC Safe Harbor. See RA1530-33 (Lyden 60:5-71:24); RA1613 (Peaslee 29:6-30:3); RA1884 (Weinberger 63:22-64:24).38 Thus, they opined only that their clients had a good faith belief that the loans were REMIC qualified. Here, in sharp contrast, as set forth above, the Second Circuit already determined that the REMIC Safe Harbor was carved out of the D5 Securitization. A-382-383. As a result, Cadwalader’s REMIC Opinion necessarily meant, as Adelman unequivocally testified, that each loan was REMIC qualified. See RA960 (Adelman 140:16-141:23); RA961 (Adelman 142:8-145:18); RA970 (Adelman 188:13-189:8); RA1919-20 (Adelman 161:20-162:2). And, the fact that Adelman 38 In such circumstances, if a loan failed to meet the 80% Test, the applicable trust would have 90 days to remove the loan or risk losing its status as a REMIC trust and become subject to taxation at the trust level. An opinion that only addressed the applicability of the Safe Harbor, of course, provides far less comfort to investors than does an opinion as to each loan’s REMIC eligibility. 97 296791.1 was doing something entirely different than Cadwalader’s experts demonstrates the lack of any uniform practice for the issuance of REMIC opinions. Even assuming that these four “leading” experts testified to some applicable uniform practice or standard of care, pursuant to which no specific due diligence was required before issuing an opinion, not one of them testified that Cadwalader could ignore a red flag in issuing its opinion. To the contrary, Pealsee conceded that Cadwalader could not “simply rely on a client’s representations if it saw something inconsistent with them.” A-21.a-22.a. Adelman likewise “admitted that reviewing the Appraisal would have been appropriate if any type of ‘red flag’ was raised by the client or if he himself saw something which would cause him to doubt the truth of the client’s 80% Warranty.” RA26. Cadwalader’s opinion- practice expert, Glazer, made the same point in his treatise: “A lawyer … would not be acting in good faith if the lawyer has gone out of his way not to remember or not to have made a connection. When red flags are flying, a finder of fact might reasonably conclude that a lawyer either must have known or that in not knowing did not act in good faith.” RA467-68. Here, both Justice Schweitzer and the Appellate Division determined that the Deal Highlights document potentially constituted such a red flag. See A-22.a-29.a; RA28. On this basis alone triable questions of fact exist as to whether Cadwalader’s reliance on Nomura’s representation was appropriate. 98 296791.1 Questions of fact are also raised by Cadwalader’s own expert, Rodgers, who was in charge of securitization at Merrill Lynch. Rodgers, who is not lawyer, testified that he did not know what counsel for Merrill Lynch reviewed before issuing its REMIC Opinion, but that counsel did not blindly rely on Merrill Lynch’s representations. See RA1808-09 (Rodgers 121:3-122:21); RA1810 (Rodgers 129:2-9); RA1811 (Rodgers 130:20-131:10, 132:9-15); RA1812 (Rodgers 143:9-22); RA1815 (Rodgers 198:24-199:3). Moreover, securitization counsel for Merrill Lynch gave quite different advice than that purportedly provided by Cadwalader. Specifically, Merrill Lynch’s originating bankers were directed to analyze the REMIC eligibility of each loan using the cost approach. See id. In addition, that exercise was repeated a second time at the time of securitization by the bankers reporting to Rodgers. RA1809 (Rodgers 124:22- 125:15). In contrast, Nomura’s employees incorrectly understood that each loan that they issued would necessarily be REMIC qualified so long as they complied with Nomura’s underwriting guidelines (see supra pp. 14-17, 57-60), and, therefore, made no independent effort to determine REMIC eligibility. Accordingly, Cadwalader’s contention that some uniform practice existed pursuant to which it could uncritically rely on Nomura’s representations is belied by its own experts. Even if the testimony of Rodgers is ignored, Cadwalader has offered only 99 296791.1 the testimony of Lyden and the testimony of Peaslee and Weinberger, who both work at the same law firm. Such a limited sample only creates triable issues as to the existence of a “standard” of practice. 10. The First Department determined only that Cadwalader had no obligation to review each of the 156 appraisals. Cadwalader contends that “Nomura offered no competent evidence that Cadwalader departed from the standard of care,” (Def. Br. at 42), claiming that the Appellate Division rejected Field’s opinion that the REMIC Opinion is governed by third-party closing opinion practice. See Def. Br. at 43. The Appellate Division made no such ruling.39 Rather, it rejected only Nomura’s purported theory that Cadwalader was obligated to review the underlying appraisals for each loan in the D5 Securitization and independently determine its REMIC value, finding as follows: “Nomura contends that Cadwalader should have reviewed the underlying appraisals for all of the properties included in the D5 Securitization, and independently confirmed that they were based on real property values that satisfied the REMIC requirements.” A-19.a (emphasis added). “Cadwalader maintains that it was not required to review all of the appraisals, and was instead entitled to rely on Nomura’s representations ….” Id. (emphasis added). 39 As set forth above (see infra Point II), in its opinion this Court should clarify that the applicable standard of care and Cadwalader’s departure from that standard is a question for the jury. 100 296791.1 “[I]n light of Nomura’s sophistication in the securitization field, and its knowledge of the REMIC rules, Cadwalader cannot be faulted for not undertaking a de novo review of all of the appraisals to determine REMIC-eligibility.” A-20.a (emphasis added). “Cadwalader also submitted affidavits from experts in the CMBS and REMIC fields opining that Cadwalader followed the accepted practice … [in] not reviewing all of the appraisals.” Id. (emphasis added). “[W]e conclude that Cadwalader had no generalized duty to review the underlying appraisals for all of the loans in the securitization.” A-21.a (emphasis added). “The opinion rendered by Nomura’s expert, Arthur Norman Field, does not raise an issue of fact as to whether Cadwalader should have reviewed all of the appraisals.” Id. (emphasis added). “Although we reject Nomura’s due diligence claim to the extent it asserts that Cadwalader had a generalized duty to review all of the appraisals, that does not end the inquiry.” Id. (emphasis added). As the foregoing demonstrates, each of the First Department’s findings was limited to Nomura’s claim that Cadwalader needed to review every appraisal and make an independent REMIC determination for each of the loans.40 While the First Department did not specifically address the applicable standard of care, to the extent the decision can be construed as holding that a 40 In actuality, the First Department misinterpreted Nomura’s argument. Nomura did not contend that Cadwalader needed to review every appraisal for every loan in the D5 Securitization. Rather, as demonstrated in Point II above, Cadwalader had a duty to both examine the DHL loan in greater detail and to ensure that Nomura’s statement about the value of the DHL loan was based on knowledge and was made with requisite care. These duties of care were violated even if Cadwalader did not have the obligation to review each of the appraisals for all 156 loans in the D5 Securitization. 101 296791.1 separate customary practice exists for REMIC Opinions, pursuant to which Cadwalader was entitled to simply rely on Nomura’s representation unless a “red flag” was brought to its attention, the First Department erred and its decision should be reversed. As Field explains in his Expert Report, REMIC Opinions are not subject to their own unique customary practice: Any claim that securitization has its own customary practice for legal opinion factual matters is simply wrong. Customary practice would not be able to serve as a reliable communications device between lawyers if those who practiced primarily in a corporate specialty area of the law could make their own customary practice rules. The need for a uniform approach is particularly true as to factual matters. Note that the 1998 TriBar Report has overall application to third-party opinions. It discusses “facts” in Article II without any distinction as to the type of transaction involved. See also ABA Legal Opinion Principles. The same approach is taken in the Thompson, Field & Smith and Glazer & Fitzgibbon treatises cited above. RA1094. Field explained the rationale for a uniform customary practice for third- party legal closing opinion letters, stating as follows: Furthermore, the REMIC Opinion is part of the First Opinion Letter, which itself is a corporate opinion letter that was issued in connection with the closing of a corporate transaction. As such, the First Opinion letter does not distinguish between those portions of the letter that purportedly were prepared by tax counsel and those that were prepared by corporate counsel. In such circumstances, it simply does not make sense to apply different standards to different portions of the First Opinion Letter without warning recipients of the differences in approach. 102 296791.1 RA1233.41 Cadwalader wholly fails to address the fact that the REMIC Opinion was part of the First Opinion Letter, which was being distributed to third-parties including the Trustee and includes no less than eight opinions – in addition to the REMIC Opinion – relating to, among other things, compliance with the Securities Act of 1933, the Trust Indenture Act of 1939, and the Investment Company Act of 1940, as well as opining as to the validity of the Certificates issued. RA271-73. To accept Cadwalader’s argument that different portions of the First Opinion Letter are subject to a different due diligence standard would permit such differing standards to apply to third-party closing opinion letters without disclosing to the recipients of those opinion letters which standards are applicable to which portions of the letter. Such a result would be affirmatively misleading and is not permissible under the widely applied third-party closing opinion practice. RA1233. In short, where a lawyer fails to do any due diligence in connection with the issuance of a third-party closing opinion, be it the result of an agreement or 41 An exception to the uniform rules for third-party closing opinion practice exists for certain tax opinions. In that regard, Glazer stated in his treatise that tax opinions cannot disclaim ‘“responsibility for inquiring as to the accuracy of the facts.’” RA464 at n.33 (citation omitted). Thus, to the extent that the REMIC Opinion is deemed to be a tax opinion as opposed to a third- party closing opinion, it is subject to an even higher due diligence standard with regard to factual statements, not some unidentified lesser standard. 103 296791.1 otherwise, the lawyer must disclose that lack of diligence or, as is the case here, the opinion is not in accord with third-party opinion practice. RA1094-95. POINT IV THE DEAL HIGHLIGHTS DOCUMENT RAISED “RED FLAGS” PRECLUDING CADWALADER FROM RELYING ON NOMURA’S REPRESENTATIONS Even if the Court determines that Cadwalader generally had a basis for relying on Nomura’s REMIC-related Representations with respect to the majority of loans, the Court should affirm the due diligence portion of the decision of the Appellate Division because the Deal Highlights document raised “red flags” with respect to the DHL. Both Justice Schweitzer and the First Department determined that when “red flags’ are raised about a client’s representations, further inquiry [is] warranted.” A-22.a; see also RA26 (citing RA956-57 (Adelman 124:7-126:2)) (“Adelman also admitted that reviewing the Appraisal would have been appropriate if any type of ‘red flag’ was raised by the client or if he himself saw something which would cause him to doubt the truth of the client’s 80% Warranty.”); RA30 (citing A-1582 (Peaslee 304:21-105:8)) (Cadwalader may not rely on its client’s representations if it “saw something inconsistent” with the representations); RA467-68 (“A lawyer … would not be acting in good faith if the lawyer has gone out of his way not to remember or not to have made a connection. 104 296791.1 When red flags are flying, a finder of fact might reasonably conclude that a lawyer either must have known or that in not knowing did not act in good faith.”). Both Justice Schweitzer and the First Department also determined that the Deal Highlights document was such a red flag. Justice Schweitzer stated as follows: From a REMIC standpoint, Cadwalader had in its files a document that contained certain information about the [DHL], particularly the $40.6 million cost-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. RA28. Justice Schweitzer also noted that the document disclosed that “the assessed and market value of the hospital in 1996 were $2,132,211 and $1,003,724, respectively, using an equalization factor or 2.1243.” RA27. This too raised a red flag because, as Justice Schweitzer noted, “‘the fact that the appraisal reflects a value that is 25 times greater than the assessed value seems significantly more divergent than would normally be anticipated.’” Id. (emphasis in original, citation omitted). Finally, Justice Schweitzer noted that the Deal Highlights document also disclosed, as a “weakness of the loan,” the “relatively older physical plant and equipment,” again making further inquiry by Cadwalader appropriate. Id. (citation omitted). The First Department recognized that the Deal Highlights document, “on its 105 296791.1 face, contains warning signs that the DHL may not have qualified for REMIC treatment.” A-22.a. In that regard, the court found: • The document made plain that the appraisal was not limited to land and buildings, as Cadwalader had purportedly instructed it should, but rather included the operations of the hospital. A-23.a. • The appraiser had not excluded the “going-concern value,” notwithstanding Cadwalader’s purported advice to the contrary. Id. • The Deal Highlights document “made clear that Nomura’s valuation figure was based on items other than land, buildings and structures,” notwithstanding Cadwalader’s purported REMIC- related advice. Id. • In the Deal Highlights document, the “section titled ‘Appraised Value’ sets forth a $40,600,000 alternate valuation based on the cost approach … which focuses … on the land, buildings and improvements, and equipment … [and] this amount is dangerously close to the $40,000,000 needed for REMIC eligibility, and thus raises questions as to whether the loan should have been included in the securitization.” A-23.a-24.a. • Adelman conceded that “he would typically inquire further if a valuation came to close to REMIC-eligibility, and that his practice was to request the underlying appraisal if he believed further inquiry was required.” A-24.a. Yet, Adelman “made no further inquiry and did not request the appraisal.” Id. • The “Deal Highlights document … contains the $40,600,000 figure, a potential ‘red flag’ apparent from the face of the document itself.” Id. • Cadwalader “points to no evidence that Adelman, or anyone at Cadwalader, even read the [Deal Highlights] document.” A-26.a. • “In light of Cadwalader’s role as securitization counsel, a jury might reasonably conclude that Cadwalader should have read a document separately sent by its client relating to one of the largest loans in the securitization, and then made a follow-up inquiry about the Doctors Hospital Loan.” A-27.a. 106 296791.1 Cadwalader makes various arguments urging this Court to ignore the detailed findings of Justice Schweitzer and the Appellate Division, each of which, as set forth below, raises triable issues of fact. 1. The Deal Highlights document raises a red flag with respect to the value of the REMIC real property securing the DHL. Notwithstanding the decisions by both Justice Schweitzer and the Appellate Division, Cadwalader contends that “[n]othing in the Deal Highlights document indicates that the real property securing the DHL did not have a fair market value of $40 million.” Def. Br. at 31. In making this assertion, Cadwalader has largely ignored Justice Schweitzer’s and the Appellate Division’s determinations, including: (i) the hospital was valued at only $40.6 million using the cost approach (see A-23.a-25.a; A-27.a; RA28); (ii) the assessed and market value of the Doctors Hospital in 1996 was only $2,132,211 and $1,003,724 (see RA27); (iii) the hospital’s physical plant was relatively older (see id.); (iv) the appraiser failed to exclude the operations of the Doctors Hospital, or the going concern value, from his ultimate conclusion as to value of the Doctors Hospital (see A-23.a-25.a; A- 27.a; RA28); and (v) in valuing the Doctors Hospital, the appraiser included “structures” without any evidence that those structures were inherently permanent and qualified as REMIC real property (see RA38). Each of these factors raises a red flag that Cadwalader should not have ignored. At the very least, whether 107 296791.1 Cadwalader could ignore these warning signs and rely on the bottom-line appraised value of $68 million being “far enough above the REMIC threshold to give comfort that the real property component was equal to at least $40 million,” raises issues of fact for a jury. As the First Department has already determined, “there are questions of fact as to … what Cadwalader knew about the Doctors Hospital valuation ….” A-29.a. 2. Cadwalader has failed to explain why the Deal Highlights document was not brought to Adelman’s attention and he failed to submit an affidavit addressing the document. Cadwalader contends that “an appraised value of $68 million did not give [Adelman] reason to question the REMIC classification of the DHL” (Def. Br. at 31) and, if he had seen the Deal Highlights document, “it would not have altered his approach.” Def. Br. at 37, n.12. As the First Department recognized, the absence of an affidavit from Adelman is telling. See A-26.a-27.a. Adelman did not submit an affidavit in support of Cadwalader’s motion for summary judgment; nor did he submit an affidavit in response to the trial court’s request that Cadwalader comment with respect to the Deal Highlights document. There is, therefore, no evidence in the 108 296791.1 record that the Deal Highlights document would not – and should not – have been a red flag for Adelman.42 Cadwalader also fails to address the following questions: (i) why Post- Gershon, or another Cadwalader attorney, did not bring the Deal Highlights document to Adelman’s attention; and (ii) if the Deal Highlights document had been brought to his attention, whether it would have caused him the question the REMIC eligibility of the DHL, particularly in light of the appraiser’s inclusion of the value of the operations of an acute care hospital with which neither he nor Nomura had experience. Determination of whether Cadwalader’s failure to address the information in the Deal Highlights document was negligent is a question for the jury. 3. Nomura had no experience with loans secured by acute care hospitals. Cadwalader contends that it did not matter that the Deal Highlights document disclosed that the DHL was secured by a going concern because “the mere fact that a loan is secured in part by operations is no impediment to REMIC eligibility.” Def. Mem at 31-32. This argument ignores Adelman’s own 42 In a footnote (Def. Br. at 37, n.12), Cadwalader argues that the $40.6 million cost valuation would not have been a red flag for Adelman because “the nature of a cost valuation” is for it to be near the “REMIC threshold.” Cadwalader cites to no evidence in the record to support this argument. It merely cites to the appraisal itself, which makes no mention whatsoever of the REMIC real property values and to the expert report of Lyden, which does not make this argument. 109 296791.1 cautionary advice. In his Chapter in the Mortgage And Asset Backed Securities Litigation Handbook, Adelman warned about the need to ensure that the value of the real property “used to compute the loan’s LTV ratio does not include value attributable to a going concern when an operating business is conducted on the real property, for example, a nursing home or casino.” RA450-51. Adelman could easily have added “acute care hospital” to that list. Adelman then emphasized “[i]n such cases, the appraisal should be scrutinized to determine if the going concern value or business value is broken out separately [from] the real property value, or in some cases, whether a ‘leased fee value’ is provided that does not include the business profit element.” Id. Accordingly, as the Deal Highlights document alerted Cadwalader to the fact that the going concern value had not been “broken out separately from the real property,” that too, by itself, was a red flag for Cadwalader. As also noted above, the legal concepts involved in identifying REMIC real property are difficult ones when dealing with a going concern such as the DHL. See RA1022-27; RA1039-46. Treasury Regulations and rulings specifically address what constitutes “real property” for purposes of REMIC, and one of the more recent rulings specifically addresses that issue with respect a hospital. See, e.g., RA471-76. If what constitutes real property for purposes of REMIC was as 110 296791.1 straight-forward as Cadwalader now contends, there would be no reason for the Treasury Department to issue regulations and the IRS to issue private letter rulings on this very issue. Cadwalader’s tax expert, Peaslee, admitted as much in his report, stating that “at the margins … determining whether the 80% Test has been met may require technical knowledge ....” RA1588 (Peaslee ¶ 153). 4. The cost approach to valuation includes value that is not REMIC real property. Cadwalader also contends that the cost approach “does not call into doubt the accuracy of Nomura’s representation” because it “excludes value attributable to property that clearly qualifies as ‘real property’ for REMIC purposes.” Def. Br. at 32-33.43 Notably, Cadwalader fails to cite to any such property in with respect to the Doctors Hospital. Cadwalader also pointedly ignores the fact that the cost approach includes value that clearly does not qualify as REMIC real property. See RA1012 (Biafore ¶ 10). In that regard, the appraiser’s cost valuation included his estimated value of the equipment. Yet, as Biafore explained in his expert report, in most instances, equipment does not qualify as REMIC real property because it is not an “inherently 43 Cadwalader seems to contend that “value attributable to having a fully functioning business capable of being operated” is not included in a cost valuation but nevertheless constitutes REMIC real property. See Def. Br. at 33 n.11. As set forth above, and as Adelman himself made plain, it does not. The value attributable to the business, or the going concern value, must be “broken out separately [from] the real property value ….” RA451; see also RA1011-12 (Biafore ¶ 9). 111 296791.1 permanent structure.” RA1023-25. Indeed, when asked about the Doctors Hospital equipment at his deposition, Adelman conceded that he could not tell if any portion of the equipment, all of which was included in the appraiser’s cost valuation, constituted REMIC real property. RA952 (Adelman 99:10-101:2). Cadwalader also fails to recognize that the cost approach does not account for the fact that a building may be worth less than it would cost to replace. As Biafore explained: A cost approach that bases value on the estimated replacement cost of the property should not be used for purposes of the 80% Test without at least some caution, as the replacement cost of a building may well exceed the building’s value, in particular the value of the REMIC “real property.” RA1012 (Biafore ¶ 10). Accordingly, as both lower courts recognized, the Deal Highlights document was very much a red flag that Cadwalader could only ignore at its peril. 5. Nomura provided Cadwalader with the Deal Highlights document three weeks before the D5 Securitization closed as a stand-alone document. As a preliminary matter, why or for whom Nomura first prepared the Deal Highlights document is irrelevant. What is relevant, as the First Department aptly recognized, is that more than three weeks before the D5 Securitization closed, Nomura faxed the document to Post-Gershon, one of the three primary Cadwalader attorneys working on the transaction. See A-22.a. The DHL was the eighth largest 112 296791.1 loan in the pool and the Deal Highlights document was “sent alone”; it was not “part of some larger document production.” Id. Thus, Cadwalader was then aware (if it did not already know) that the D5 Securitization included a going concern loan secured by a free standing acute care hospital where the cost valuation was perilously close to the limit necessary for REMIC compliance, the tax values were nonsensical, and the hospital was old. Accordingly, that the Deal Highlights document may originally have been prepared for the rating agencies is immaterial. Cadwalader’s contention that it satisfied the applicable standard of care even if the Deal Highlights document constitutes a red flag is baseless. Equally baseless is Cadwalader’s contention that its list of “undisputed facts” (Def. Br. 47-49) are, in fact, undisputed. The record amply demonstrates genuine issues of material fact as follows: (1) While Nomura successfully securitized hundreds of loans, there is no proof in the record that it “successfully applied the 80% Test hundreds of times” (Def. Br. at 47), much less that it successfully applied the 80% Test with respect to loans secured by going concerns. (2) Testimony of Nomura’s former employees reveals that they did not have an understanding of how to apply the 80% Test, particularly when dealing with a going concern. See supra pp. 14-21, 57-60. 113 296791.1 (3) Nomura made the REMIC Representations in reliance on its understanding that Adelman was reviewing the loans for REMIC purposes and would notify Nomura if any of them presented an issue. See supra pp. 22-23. (4) Nomura retained Cadwalader to advise it with respect to REMIC in connection with the DHL; Nomura did not retain any of the other advisors for purposes of REMIC. See supra pp. 12-13, 26. (5) None of the other advisors retained by Nomura provided any REMIC related services. Dechert specifically advised Cadwalader that it was not willing to provide any REMIC-related Representations or advice with regard to the DHL. See supra p. 26. Neither Valuations Counselors, which performed the appraisal, nor Coopers & Lybrand, which reviewed the financial statements and related financial materials of the Doctors Hospital, made any effort to determine the value of the REMIC real property securing the DHL. See supra pp. 23-24; see also RA881-96. The only entity that Nomura retained to address REMIC was Cadwalader. See supra pp. 12-13, 22-23. (6) Nomura did not make REMIC determinations at the time it originated the loans that were to be included in the D5 Securitization. See supra pp. 14-23. And Dechert, the counsel that represented Nomura with regard to the origination of the Doctors Hospital Loan, specifically advised Cadwalader that Dechert was not providing any REMIC-related Representations or advice. See supra p. 26. 114 296791.1 (7) At the time of the D5 Securitization, Adelman had no knowledge of the representation made by the DHL borrower. See supra pp. 94-95. Even assuming that he was aware of the borrower’s representation, there is no proof that he or anyone else from Cadwalader communicated with the borrower to ascertain whether the representation could be relied upon. See id. (8) Nomura provided Cadwalader with the REMIC Representations based on Nomura’s understanding that (i) by complying with its underwriting guidelines it was necessarily also satisfying the 80% Test; and (ii) Adelman was reviewing the loans for purposes of the 80% Test and would notify Nomura if he saw any problem See supra pp. 14-17, 22-23, 57-60. (9) In issuing the REMIC Opinion, Adelman did not rely on Nomura’s representations but reviewed Annex A to the Prospectus Supplement; Adelman was aware that Annex A provided only an overall LTV for the loans, not a REMIC LTV and thus was deficient for REMIC purposes. See supra pp. 22-23. (10) Nomura provided Cadwalader with the officer certificates based on Nomura’s understanding that (i) by complying with its underwriting guidelines it was necessarily also satisfying the 80% Test; and (ii) Adelman was reviewing the 115 296791.1 loans for purposes of the 80% Test and would notify Nomura if he saw any problems. See supra pp. 14-17, 22-23, 57-60.44 Therefore, as Justice Schweitzer and the First Department determined, a trial is necessary to resolve these disputed issues of fact. POINT VII THE RECORD CONTAINS SUBSTANTIAL EVIDENCE THAT CADWALADER’S NEGLIGENCE PROXIMATELY CAUSED NOMURA’S DAMAGES Cadwalader claims that its “malpractice could not have caused [Nomura’s] injury” (Def. Br. at 52) because (i) the REMIC Opinion was correct; (ii) Nomura would have needed to repurchase the DHL regardless of Cadwalader’s negligence; and (iii) Nomura would have owned the DHL if it had not been securitized. Id. at 52-59.45 Each of these claims is without merit. A. Proximate Cause Is A Question For The Jury As a preliminary matter, Cadwalader’s proximate causation argument ignores this Court’s ruling that, “[a]s a general rule, the question of proximate cause is to be decided by the finder of fact ….” Derdiarian v. Felix Contracting 44 Further, as set forth above, Cadwalader failed to demonstrate that it met with Nomura’s officers before asking them to sign the certification, that it conducted any review of the REMIC Representations with those officers, or that it concluded that Nomura’s officers understood what was actually necessary in order to satisfy the REMIC Representations. See supra Point II. 45 Proximate cause is not one of the grounds upon which Cadwalader sought leave to appeal to this Court. 116 296791.1 Corp., 51 N.Y.2d 308, 312 (1980); see also Sweeney v. Bruckner Plaza Assocs., 57 A.D.3d 347, 348 (1st Dep't 2008); Freese, 203 A.D.2d at 514. Accordingly, “[w]hen faced with a motion for summary judgment on proximate cause grounds ... a plaintiff need only raise a triable issue of fact regarding whether defendant's conduct proximately caused plaintiff's injuries.” Burgos v. Aqueduct Realty Corp., 92 N.Y.2d 544, 550 (1998); see also Smartix Int’l Corp. v. Garrubbo, Romankow & Capese, P.C., No. 06 Civ. 1501, 2009 WL 857467, at *8 (S.D.N.Y. Mar. 31, 2009) (summary judgment denied when an issue of fact existed with respect to causation and damages resulting from defendant’s failure to give appropriate advice). In order to establish proximate causation, a plaintiff need not prove that a defendant’s negligence was the “sole” cause of plaintiff’s damages, but only that it was a “substantial factor.” Barnett v. Schwartz, 47 A.D.3d 197, 203-05 (2d Dep't 2007);46 accord Acker v. Wilger, No. 12 Civ. 3620, 2014 WL 100013, at *5 (S.D.N.Y. Jan. 10, 2014) (citing Barnett, supra, for the proposition that “‘a plaintiff client in a legal malpractice action need prove only that the defendant- 46 In Barnett, the court explained that “but for” causation is not “synonymous with sole proximate cause”; nor is there a “heightened standard for causation” applicable to legal malpractice cases. 47 A.D.3d at 204. The court further noted that “a conclusion that the ‘but for’ formulation of causation requires proof that the negligence of the defendant-attorney was the sole proximate cause of damages is contrary to the holding of the Court of Appeals that the contributory negligence of the plaintiff-client may be pleaded as an affirmative defense.” Id. at 205 (citing Arnav Indus. Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder & Steiner, 96 N.Y.2d 300 (2001); Boudreau v. Ivanov, 154 A.D.2d 638 (1989)). 117 296791.1 attorney’s negligence was a proximate cause of damages’”); Kirk v. Heppt, No. 05 Civ. 9977, 2009 WL 2870167, at *10 (S.D.N.Y. Sept. 3, 2009) (plaintiff “need not show that [defendant’s] negligence was the sole cause of [plaintiff’s] lost severance benefits”); Utica Cutlery Co. v. Hiscock & Barclay, LLP, 109 A.D.3d 1161, 1162 (4th Dep’t 2013) (“[A] plaintiff in a legal malpractice action must establish that the defendant law firm was a proximate cause of damages, but need not establish that it was the proximate cause.”) (emphasis in original); Equitable Life Assurance Soc’y of the United States v. Nico Constr. Co., Inc., 245 A.D.2d 194, 196 (1st Dep’t 1997) (“Based on the trial evidence, there was a rational basis for the verdict on causation, which need not be based on absolute certitude or exclude every other possible cause of injury.”); Harding v. Noble Taxi Corp., 182 A.D.2d 365, 370 (1st Dep’t 1992) (defendant’s negligence must be “a substantial cause,” not “the only cause ... nor need [plaintiff] eliminate every other possible cause”); Mortensen v. Mem’l Hosp., 105 A.D.2d 151, 158 (1st Dep't 1984) (if defendant’s negligence “is a substantial factor in producing the injury, it is a proximate cause of the injury.”). Here, Cadwalader has failed to establish, as a matter of law, that its failure to give critical REMIC-related advice and its lack of due diligence in connection with the REMIC Opinion did not proximately cause Nomura damages. In fact, Nomura was sued in connection with the very issue upon which Cadwalader opined, which 118 296791.1 by itself raises a question of material fact with respect to proximate causation. See Smartix Int’l Corp., 2009 WL 857467, at *7.47 While Cadwalader baldly contends that “there is no evidence that the [REMIC] Opinion was anything but correct” (Def. Br. at 53), it ignores the detailed evidence that Nomura submitted establishing that the DHL was not REMIC qualified.48 As the First Department ruled: Cadwalader argues that Nomura cannot establish proximate cause because the Doctors Hospital Loan was in fact REMIC-qualified. Cadwalader contends that the loan was secured by the requisite 80% REMIC real property, and that Nomura made formal judicial admissions of that alleged fact in the federal action. These contentions lack merit. In the appraisal obtained before the securitization closed, the only readily apparent REMIC real property amounts to only $30,960,000, which is plainly less than the required $40,000,000. Although a subsequent appraisal obtained after the deal closed indicates that the loan was REMIC-qualified, that merely presents a question of fact for a jury. A-29.a-30.a. Likewise, the trial court found Cadwalader’s argument that “Nomura 47 The cases Cadwalader cites in support of its theory that Nomura cannot establish proximate causation (Def. Br. at 52-53) are inapposite. In Rosner v. Paley, 65 N.Y.2d 736, 738 (1985), the court determined that there was no negligence because the attorney’s underlying advice was correct and, therefore, it did not reach issues of proximate causation. Here, as demonstrated above, questions of fact exist with regard to the sufficiency of Cadwalader’s REMIC advice and its due diligence in connection with the REMIC Opinion. In Tinter v. Rapaport, 253 A.D.2d 588, 590 (1998), to the extent any negligent advice was given at all, the court determined that the applicable law limited the plaintiff’s recovery and, as a result, the advice was not the proximate cause of plaintiff’s damages. No similar circumstances exist here. 48 If an issuer cannot prove that a mortgage loan meets the 80% Test, the mortgage loan is not a qualified mortgage under the REMIC Regulations. See RA1042 (Biafore 8 (“the loan must actually meet the 80% Test”) (emphasis in original)); RA1579 (Peaslee ¶ 124 (“the 80% Test must be met in fact”)). Neither the 1997 Appraisal, nor the Appraisal Supplement established that the $50 million DHL was secured by the requisite $40 million in REMIC real property. 119 296791.1 [could not] adduce any evidence that the DHL was secured by anything less than $40 million of real property” to be “unpersuasive for several reasons.” RA36. As a result, both courts – as well as the Second Circuit before them – concluded that issues of fact existed with respect to whether the DHL was actually REMIC- qualified. See A-29.a-31.a; RA38. The facts that contradict Cadwalader’s argument include: (i) The only real property that was expressly valued in the Appraisal was the land ($3,000,000) together with the building and the site improvements ($27,960,000), which is plainly less than the required $40 million. See RA36-37; RA1027; RA278. (ii) Adelman testified that the Appraisal evidenced REMIC real property of only $30,960,000. See RA36; RA948 (Adelman 83:2-19, 84:19- 24). Nomura’s Federal Court Action appraisal experts and Gershon testified to the same effect, as did Biafore. See RA1069 (Brooks 280:21-281:7); RA1493 (Howley 242:7-243:8); RA1313 (Gershon 98:14-23); RA1027; RA1042-46. (iii) In the Appraisal Supplement, the appraiser allocated $4.8 million of the $27.4 million in intangible value to the Certificate of Need49 even 49 As Biafore explains, a Certificate of Need is “akin to a business license” for a hospital. RA1044. 120 296791.1 though there was no proof the certificate existed, could be transferred, or was anything other than a license. See RA37; RA1044-45. Similarly, the appraiser allocated $5.3 million of the $27.4 million to stabilized real estate contribution (RA187), even though “it is not possible to conclude that the ‘stabilized’ component of value is attributable to real property rather than to business value.” RA1044. (iv) The Appraisal Supplement opined that $4 million of the purported $9 million in equipment constituted REMIC structural components, even though the appraiser never inventoried the equipment and merely assumed that that some portion of it constituted fixtures, assumed the equipment was owned even though he knew it was leased, and assumed the costs. See RA278; RA1072 (Dost 89:13-23); RA1079 (Dost 124:2-125:16); RA1082-83 (Dost 177:14-179:3); RA1084-85 (Dost 368:18-370:9). Based on the foregoing, no less than three courts have now concluded that whether the DHL was secured by $40 million in REMIC real property raises questions of fact. Thus, at the very least, questions of fact exist as to whether (i) Nomura would have originated the DHL in the manner that it did but for Cadwalader’s negligent advice; and (ii) Nomura would have securitized the DHL in the D5 Securitization but for Cadwalader’s insufficient due diligence. 121 296791.1 B. Cadwalader Has Failed To Demonstrate That Its REMIC Opinion Was Correct Cadwalader summarily contends that its REMIC Opinion “was undisputedly correct” and that Nomura’s claim should thus be dismissed. Def. Br. at 52-54. In support of this contention, Cadwalader argues that (i) it “opined simply that the D5 was REMIC qualified;” (ii) Biafore purportedly conceded that the D5 was REMIC qualified and the IRS has always treated the D5 as a REMIC trust; (iii) Nomura purportedly told “investors, the IRS, and two federal courts that the D5 is REMIC qualified;” and (iv) Cadwalader’s REMIC Opinion is “expressly based upon and subject to the accuracy of the representations made by Nomura in the MLPSA.” See Def. Br. at 53-54. Each of these arguments is unavailing. 1. Adelman testified that, in issuing the REMIC Opinion, he was opining that each of the loans in the D5 Trust was REMIC-eligible. In both courts below, Cadwalader argued that the DHL was REMIC qualified. See A-30.a; RA36-39. It is unclear if Cadwalader has abandoned that argument because it now contends that it “opined simply that the D5 was REMIC qualified.” See Def. Br. at 53. But, as Biafore explains, if it was determined that the DHL was not REMIC qualified, the D5 Trust would have 90 days to get the DHL out of the Trust or it too would lose its REMIC status. See RA1020 (a trust “cannot be a REMIC if it owns more than a ‘de minimis’ amount of assets other than “qualified mortgages’”); RA1022 (if the Trust discovers that a loan fails the 122 296791.1 80% Test, the loan “is a defective obligation and loses its status as a Qualified Mortgage 90 days after the date of discovery”). To the extent that Cadwalader is arguing that it was not in its REMIC Opinion expressing a view as to each individual loan’s REMIC qualifications, the argument should not be heard. See Bingham v. New York City Trans. Auth., 99 N.Y.2d 355, 359 (2003) (“As we have many times repeated, this Court with rare exception does not review questions raised for the first time on appeal.”) Misicki v. Caradonna, 12 N.Y.3d 511, 519 (2009) (“We are not in the business of blindsiding litigants, who expect us to decide their appeals on rationales advanced by the parties, not arguments their adversaries never made.”) The testimony of Adelman forecloses any argument that Cadwalader was not opining as to the REMIC value of each individual loan. Adelman testified that the REMIC Opinion meant “that each of the loans [satisfied] the 80 percent value to loan test.” See RA970 (Adelman 188:13-189:8) (emphasis added) (see also RA960-61 (Adelman 140:16-141:23; 142:8-145:19). Adelman also testified that he was not relying on the REMIC Safe Harbor when he issued the REMIC Opinion. See RA1919-20 (Adelman 161:20-162:2) (“I do not have any recollection of placing any reliance on the Safe Harbor, or advising a client that, [y]ou have this leeway, you don’t have to worry about whether or not a loan is really secured as long as you believe it is. I did not – it was not my intention to 123 296791.1 rely upon a backstop to the deal qualifying.”); see also RA116; RA124 (based on Adelman’s testimony, both courts concluded that the REMIC Opinion meant that each of the loans in the D5 Securitization was REMIC-qualified).50 Accordingly, Cadwalader should not be heard to contend that its REMIC Opinion did not mean that the DHL was REMIC qualified. 2. Biafore testified that the DHL is not REMIC- qualified and the REMIC Opinion is not accurate. In support of its contention that, as a matter of law, no causation exists, Cadwalader cites to Biafore’s deposition, where he testified that, to the best of his knowledge, in its IRS filings, the D5 Trustee treated the D5 Trust as REMIC- qualified and the IRS had never challenged those filings. See Def. Br. at 53; A- 1273. 50 The industry understood, just as Adelman did, that Cadwalader was opining on the loans’ REMIC qualifications, not merely the existence of the REMIC Safe Harbor. See RA1039 (“The purchasers of Certificates … would have had no way of knowing that Cadwalader was relying on the [REMIC] Safe Harbor rather than reviewing every mortgage loan to determine that it met the 80% Test.”). Field similarly explains that, to the extent the REMIC Opinion was stating only that the REMIC Safe Harbor was applicable, the REMIC Opinion would not be “fair and objective” and would not be in accord with customary third-party closing opinion practice. See RA1234. An opinion that stated no more than the REMIC Safe Harbor was available would have left Nomura exposed to substantial damages without ever being aware of the risk. The REMIC Safe Harbor offers protection only until it is “discovered” that a loan is not qualified; after discovery, the loan must be removed from the trust within 90 days to prevent an adverse tax consequence. See supra p. 13. Cadwalader never advised Nomura that it was opining only as to Nomura’s “reasonable belief” and that Nomura could be liable for repurchasing loans at a later date because Cadwalader was offering no opinion on substantive compliance with REMIC for each loan. 124 296791.1 A cursory review of Mr. Biafore’s expert reports reveals that it is his unqualified view that the DHL is not secured by $40 million of REMIC real property and that the REMIC Opinion is thus inaccurate. See RA1042.51 His expert opinion is not related to whether or not the IRS audited the D5 Trust. Equally unpersuasive is Cadwalader’s contention that the D5 Trustee’s IRS filings establish the validity of the REMIC Opinion. In making this contention, Cadwalader ignores the stipulation that the D5 Trustee and Nomura entered into in which they agreed that there could be no “discovery” (within the meaning of the Treasury Regulations) of a REMIC issue (that would trigger the need to remove the DHL from the D5 Trust so as to preserve its REMIC eligibility) until the Federal Action was resolved. See RA488. That stipulation required the D5 Trustee to treat the D5 Trust as REMIC- eligible. Cadwalader’s contentions with respect to the D5 Trustee’s filings with the IRS also ignores the fact that (at the same time the D5 Trustee filed the tax returns 51 In support of its contention that the D5 Trust was REMIC-qualified, Cadwalader also ignores the fact that its REMIC experts, Lyden, Peaslee and Weinberger, each refused to opine on the REMIC eligibility of the DHL. See RA1528 (Lyden 28:20-24) (not opining as to the REMIC real property value of the Doctors Hospital property); RA1614 (Peaslee 81:11-18) (not expressing an opinion as to the REMIC real property value of the Doctors Hospital property); RA1881 (Weinberger 11:19-12:8) (not opining as to the REMIC real property value of the Doctors Hospital property). Rodgers, who is a banker, was the sole Cadwalader witness who was prepared to address the issue, and he could not identify the value of the REMIC real property, claiming only that it was greater than $40 million. At the same, time Rodgers claimed that it was inconceivable that the loan could have been sold for anywhere near $45 million. Not surprisingly, he never explained this inconsistency. See RA1821-22 (Rodgers 225:7-226:10). 125 296791.1 to which Cadwalader cites) the D5 Trustee sued Nomura claiming that the DHL was not REMIC qualified and needed to be removed from the D5 Trust in order for it to continue to be REMIC-eligible. Cadwalader’s contention that the “[t]he IRS has treated the D5 as a qualified REMIC since its inception” is likewise unconvincing. Def. Br. at 53.52 As both the trial court and the Second Circuit Court of Appeal recognized: [T]he fact that the D5 Securitization trust never was disqualified by the IRS is not dispositive, because there is no evidence that IRS ever audited the trust and there is no indication that it would have any reason to question the trust’s status RA39 (citing RA139). 3. Nomura’s arguments in the Federal Action raise issues of fact that cannot be resolved on a motion for summary judgment. In further support of its contention that “there is no evidence that the [REMIC] Opinion was anything but correct” (Def. Br. at 53), Cadwalader states that Nomura “repeatedly told investors, the IRS, and two federal courts that the D5 is REMIC qualified.” Id.53 The contention fares no better here than it did in the lower courts. 52 In support of its contention, Cadwalader cites only to the oral argument presentation of its counsel. Plainly, that presentation is not “evidence” and, thus, should not be considered. 53 Cadwalader cites only to the MLPSA and a memorandum of law Nomura submitted to the District Court in the Federal Action. See Def. Br. at 53. The record thus does not support Cadwalader’s exaggeration. 126 296791.1 In connection with its motion for summary judgment, Cadwalader argued that Nomura told the Federal courts that the DHL was REMIC-qualified and that those statements barred Nomura from now taking a different position. The trial court rejected Cadwalader’s argument because Nomura had not succeeded in the Federal Action, stating as follows: Nomura’s representations to both the District Court and the Second Circuit that the DHL met the 80% Test constitute informal judicial admissions …. [S]uch statements are not conclusive, but are “merely evidence of the fact or facts admitted, the circumstances of which may be explained at trial.”… Since Nomura was proceeding on an advice of counsel defense, this may serve as an adequate explanation. RA38-39 (citations omitted). The First Department came to the same conclusion, holding as follows: There is no merit to Cadwalader’s contention that Nomura made formal judicial admissions that the loan qualified for REMIC treatment. Cadwalader points to only two alleged admissions made in the federal action. First, during an oral argument, Nomura’s counsel stated that the appraisal evidences that the loan was secured by sufficient REMIC real property. Second, a point heading in one of Nomura’s memoranda of law states that the fair market value of the interest in real property with respect to the Doctors Hospital Loan was at least 80% of the amount of the loan. These statements constitute, at most, informal judicial admissions that provide some evidence of the facts admitted, but that are not conclusively binding on Nomura (see Baje Realty Corp. v. Cutler, 32 AD3d 307, 310 [1st Dept 2006]). They lack the formality required to constitute formal judicial admissions (see GJF Constr., Inc. v. Sirius Am. Ins. Co., 89 AD3d 622, 626 [1st Dept 2011, Richter, J., concurring]). A-30a.-31.a. See also One Beacon Ins. Co. v. Espinoza, 2007 N.Y. Slip Op. 127 296791.1 01304, 2007 WL 466042, at *1 (2d Dep’t Feb. 13, 2007) (declining to apply the doctrine of judicial estoppel where the appellant never obtained a favorable judgment as a result of his inconsistent positions in the prior personal injury action); Chock Full O’Nuts Corp. v. NRP LLC I, 47 A.D.3d 189, 192 (1st Dep’t 2007) (“Because plaintiffs failed to secure any formal grant of relief … the doctrine of inconsistent positions is not implicated. At most, the statements relying on the report constitute an informal judicial admission that is not conclusive but is ‘merely evidence of the fact or facts admitted,’ the ‘circumstances of which may be explained at trial.’”) (citations omitted). Baje Realty Corp., 32 A.D.3d at 310 (“The doctrine of judicial estoppel or the doctrine of inconsistent positions precludes a party who assumed a certain position in a prior legal proceeding and who secured a judgment in his or her favor from assuming a contrary position in another action simply because his or her interests have changed.”) (internal quotations omitted and emphasis in original).54 54 The doctrine of informal judicial admissions only “prevents a party from advancing contradictory factual positions in separate legal proceedings.” TLC Beatrice Int’l Holdings, Inc. v. CIGNA Ins. Co., No. 97-Civ. 8589, 1999 WL 33454, at *7 (S.D.N.Y. Jan. 27, 1999) (emphasis added). Therefore, where a statement sought to be used as the basis for an informal judicial admission is a legal argument, the doctrine does not apply. See TM Patents, L.P. v. Int’l Bus. Machs. Corp., 72 F. Supp. 2d 370, 379-80 (S.D.N.Y. 1999) (judicial estoppel only applies to inconsistent factual positions, not to issues of law), supplemented by, 77 F. Supp. 2d 480 (S.D.N.Y. 1999); Rahman v. Smith, 40 A.D.3d 613, 614-15 (2d Dep’t 2007) (“[i]n order to constitute a judicial admission, the statement must be one of fact”); Wheeler v. Citizens Telecomms. Co. of New York, Inc., 18 A.D.3d 1002, 1004-05 (3d Dep’t 2005); Matter of Excelsior 57th Corp. (Kern), 218 A.D.2d 528, 529-30 (1st Dep’t 1995). Here, Cadwalader has 128 296791.1 Cadwalader makes no effort to address the rulings by the First Department and Justice Schweitzer or the foregoing cases. 4. Nomura’s Representations do not release Cadwalader from its independent due diligence obligations. Citing to language in the First Opinion Letter, Cadwalader contends that its REMIC Opinion was “undisputedly correct” because the First Opinion Letter is “expressly based upon and subject to the accuracy of the representations made by Nomura in the MLPSA ….” Def. Br. at 53. Cadwalader specifically asserts that the MLPSA’s “express language forecloses any argument that the Opinion backstopped or guaranteed Nomura’s representation” (id. at 54); and “[l]awyers are not insurers” (id.). This argument amounts to nothing more than a bald statement that a lawyer’s opinion is not better informed than a client’s opinion, it involves no legal work, and third-parties should take no comfort in receiving an opinion from a reputable firm.55 made no effort to address the nature of the arguments advanced in the Federal Action, and both Field and Biafore have opined that such statements were legal. See supra pp. 65-68. Even if, however, the arguments were factual, as both the trial court and First Department held, Nomura is entitled to explain at trial the circumstances for its statements, as well as the evidence to the contrary. 55 The cases cited by Cadwalader to support its contention that “[l]awyers are not insurers” have no application here. Def. Br. at 54. In Darby & Darby v. VSI Int’l, Inc., 95 N.Y.2d 308, 313 (2000), this Court concluded that the law firm had no duty to advise its client that the client’s general liability insurance policy might cover Florida patent and trademark infringement litigation when, at the time of the representation, neither Florida, nor New York, recognized such a coverage obligation by an insurer. Here, there was nothing new or novel about the REMIC Regulations, and in particular, the 80% Test. See id. (if at the time of the representation “laws 129 296791.1 The First Department rejected Cadwalader’s contention that the language in the First Opinion Letter to which Cadwalader cites absolves it of its negligence: Cadwalader’s reliance on the Opinion Letter to escape all liability is unavailing. The letter states that Cadwalader was relying on Nomura’s representations as to “facts material to [the opinion that] were not known to [Cadwalader].” It further makes clear that Cadwalader’s “knowledge” means “actual awareness … of … information by any lawyer in our firm actively involved in the [D5 Securitization].” Since there are questions of fact as to the circumstances under which Cadwalader received the “Deal Highlights” document, and what Cadwalader knew about the Doctors Hospital valuation, it cannot be said as a matter of law that the disclaimers in the Opinion Letter insulate Cadwalader from the malpractice alleged. A-29.a. The “disclaimers” in the First Opinion Letter do not state – as Cadwalader contends – that, in issuing the REMIC Opinion, Cadwalader solely relied on Nomura’s representations.56 Rather, the First Opinion Letter states that, in addition and rules are clearly defined, an attorney’s disregard of them is seldom excusable”). In Town of N. Hempstead v. Winston & Strawn, LLP, 28 A.D.3d 746, 748 (2006), the client made the decision not to pursue a particular defense after that defense was presented as an option to the client. In contrast, Cadwalader never raised an issue with respect to the REMIC qualification of the DHL because it never did the requisite due diligence to determine that there was an issue. Nomura was never in the position, as was the case of the client in Town of N. Hempstead, to make any informed decision with respect to the REMIC status of that loan. 56 Although the REMIC experts proffered by Cadwalader purportedly relied on client representations when issuing their REMIC opinions, those REMIC opinions were limited to an opinion that the pool of loans at issue qualified for REMIC tax treatment because of the “Safe Harbor” provisions of the REMIC Regulations. See supra p. 96. As set forth above, Adelman testified that he was not relying on the Safe Harbor, but rather was opining as to the REMIC eligibility of each loan in the pool. See id.; see also RA24. 130 296791.1 to relying on the documents specifically enumerated, Cadwalader also “examined and relied upon … other documents … as we have deemed necessary as a basis for such opinions hereinafter expressed.” RA270 (emphasis added). Consistent with that statement, Adelman testified that he reviewed other documents, including Annex A to the Prospectus Supplement and appraisals when he deemed appropriate. See supra pp. 22-23.57 In any event, as set forth above, blind reliance on a client’s representations is inconsistent with applicable third-party closing opinion practice, particularly when (as here) Cadwalader lacked a basis for such reliance, the representations were legal in nature, and red flags were flying. See supra Point II. Furthermore, as also noted above, the loan to an acute care hospital in itself raised a red flag that precluded Cadwalader from relying on Nomura’s statement of value alone. Id. Proximate causation exists without regard to whether the DHL was a REMIC-qualified mortgage (which it was not) or the purported “correctness” of Cadwalader’s REMIC Opinion. As a result of Cadwalader’s failure to properly advise Nomura as well as its failure to comply with third-party closing opinion practice, Nomura made the DHL, included it in the D5 Trust, was sued, and 57 In addition, while the First Opinion Letter uses the language “to our knowledge” to circumscribe the imputation of knowledge to Cadwalader, that phrase is used only in connection with the first enumerated opinion therein. RA271. It is not used in the REMIC Opinion, the fifth enumerated opinion. RA272. Plainly, if Cadwalader wished to limit its due diligence obligations, it had easy means to do so. 131 296791.1 suffered a loss. If, as Nomura contends, Cadwalader failed to comply with customary third-party opinion practice, the fact that the opinion might be correct should not bar Nomura from pursuing its claim that Cadwalader ignored facts and law and knowingly gave an opinion without basis, thereby inflicting injury upon Nomura. See RTC v. Latham & Watkins, 909 F. Supp. 923, 928-29 (S.D.N.Y. 1995) (mere fact that opinion was correct is irrelevant). If Cadwalader had properly advised Nomura, it would not have made the DHL without evidence of compliance with the REMIC Regulations. Similarly, if Cadwalader had complied with third-party closing opinion practice, Nomura would not have included the DHL in the D5 Trust without an appraisal that clearly established that it was REMIC-qualified. C. Cadwalader’s Efforts To Assert A Claim For Breach Of Representation 24 Were Properly Rejected By The District Court Cadwalader hypothesizes that Nomura’s purported breach of Representation 24 would have caused it to repurchase the DHL regardless of Cadwalader’s negligence.58 See Def. Br. 54-58. To support this hypothesis Cadwalader must demonstrate that Nomura would have been compelled to repurchase the DHL 58 Representation 24 provides that “[t]here is no default, breach, violation or event of acceleration existing under the related Mortgage or the related Note ….” RA70 (§ 2(b)(xxiv)). In the DHL “Loan Agreement,” the borrower represented that the “Tax Fair Market Value” (“TFMV”) of the property was $50 million (RA247, RA249), but Representation 24 references only the defined terms “Mortgage” and “Note,” not the “Loan Agreement,” itself a defined term that does not include the “Mortgage” or “Note.” See RA62; RA70 (§ 2(b)(xxiv)); RA90. 132 296791.1 regardless of Cadwalader’s malpractice. See Nat’l Enters. Corp., 246 A.D.2d at 482 (“While the class plaintiffs in the securities fraud action had alleged other fraudulent nondisclosures, the law firm failed to carry its burden of showing that such action would have been brought even without the accounting nondisclosures.”). Cadwalader has failed to make such a showing. Cadwalader’s “causation expert,” Michael Weinberger, conceded that Nomura’s obligation to repurchase a mortgage loan arises only upon receipt of a demand to do so. RA1890 (Weinberger 161:11-20); RA1854 (Weinberger ¶ 45); RA35 (“Notice of a breach of this particular representation was required by Section 3(a) of the MLPSA.”). And here, the D5 Trustee never demanded that Nomura’s repurchase the DHL due to an alleged breach of Representation 24. See RA35; RA80 (§ 3(b)); RA97-98 (§§ 2.03(d) and (e)); RA217-18. Notwithstanding, Cadwalader contends that the D5 Trustee’s November 13, 2003 request to amend its Complaint to assert a claim for breach of Representation 24 constituted an effective repurchase demand. See Br. Def. 56-57. Both the First Department and the trial court rightly rejected this argument. See A-29.a-31.a (finding Cadwalader’s remaining arguments on causation, including that with respect to Representation 24, were “unavailing”); RA35-36. As the trial court explained: The problem with Cadwalader’s argument is that LaSalle never gave 133 296791.1 [Nomura] notice of a breach of Representation 24, nor did it demand that [Nomura] repurchase the DHL for this reason pursuant to the notice and repurchase provisions of the PSA and MLPSA. See Ex. 3, §§ 2.03(d) and (e); Ex. 2, §§ 3(a), (b); see also Exs. 52, 55 and 58. Notice of a breach of this particular representation was required by Section 3(a) of the MLPSA. Ex. 2, § 3(a) …. While LaSalle sought leave in October of 2003 to further amend its complaint to assert a cause of action for breach of Representation 24, the District Court denied the request by reason of LaSalle’s “undue delay and the undue prejudice that would flow to defendants if this Court were to permit the proposed amendments.” Ex. 985: Docket Entries 43 and 56. Cadwalader’s argument that LaSalle’s request for leave of court to further amend the complaint was sufficient notice and triggered Nomura’s repurchase obligations ignores the District Court’s adverse ruling and ignores the purpose of a contract requirement for notice of a breach. RA35-36 (citations omitted); see also RA505 (docket entries 43 and 46); RA504 (docket entry 56). Cadwalader also fails to establish as a matter of law that, even if the D5 Trustee had been granted leave to amend, its claim would have been successful. It would have been barred by the applicable six-year statute of limitations and the District Court stated that it was inclined to grant a motion to dismiss on the merits. See RA588.2 (33:4-11). As the trial court determined, Cadwalader has failed to demonstrate as a matter of law that, by reason of Representation 24, Nomura would have been required to repurchase the DHL. 134 296791.1 D. Nomura Would Have Disposed Of The DHL By No Later Than March 1998 Cadwalader also argues that proximate cause is lacking because its alleged negligence occurred after the DHL was funded. Thus, if Nomura had not securitized the DHL, it “would have remained on its books and [Nomura] would have suffered the losses that resulted from the default.” Def. Br. 58. Any evidence that Nomura would have disposed of the DHL before it defaulted, Cadwalader asserts, is “speculative.” Def. Br. 59. Cadwalader ignores Nomura’s allegations that Cadwalader committed malpractice both before and after Nomura originated the DHL. See RA53 (¶¶ 31- 35). Had Cadwalader properly advised Nomura regarding the REMIC Regulations, Nomura would have refrained from originating the DHL or would have originated it in compliance with REMIC. Further, the undisputed evidence establishes that Nomura would have disposed of the DHL well before it defaulted in June 2000 because, as the trial court recognized, “Nomura was not a ‘balance sheet lender,’ but was in the business of originating loans for securitization and its business model was to get loans off Nomura’s balance sheet.” RA40 (emphasis in original); see also RA1617 (Penner ¶ 7); see also id. (Penner ¶ 4); RA1674 (Penner 37:4-39:24) (other than mezzanine loans that were converted into preferred equity investments or short- 135 296791.1 term construction loans, Nomura’s objective was to securitize the loans that it originated); RA1252-53 (Findlay ¶¶ 5-6); RA1328 (Gershon 216:22-25) (“Nomura was not in the business of making loans to hold ... and warehouse on the balance sheet indefinitely. The purpose of making a loan … was to sell it.”); RA1384 (Gershon 267:2-5) (“[I]t was Nomura’s practice not to originate loans to stay on its balance sheet. So it was not the intent when we wrote loans for them to stay on the balance sheet.”)); RA1399-1400 (Glick 229:9-230:17); RA40. This practice is entirely consistent with that of the industry. As Nomura’s expert, Bruce K. Hounsell, explained: By definition, if a loan is not sold via securitization, it remains on the originator’s (in this case Nomura’s) balance sheet. However, the loan is only held on the balance sheet until it can be otherwise disposed, either via a whole loan sale or in another securitization. RA1485. That is because “investment bank securitization groups were strongly discouraged from holding loans long term.” Id.59 If Cadwalader had advised Nomura that the DHL had REMIC eligibility issues, Nomura had no less than three available exit strategies that it could have used. First, Nomura would have ordered a new appraisal. See RA1618 (Penner ¶ 59 Cadwalader relies on deposition testimony taken out of context to support its claim that the DHL would have remained on Nomura’s books regardless of Cadwalader’s malpractice. See Def. Br. at 58. Obviously, once Nomura originated a loan, for some period of time it would remain on its balance sheet until it was securitized or, if it could not be, was otherwise removed. The operative question is, however, for how long that would have been. As the evidence cited above establishes, Nomura would have disposed of the DHL well before the DHL defaulted. 136 296791.1 8); RA1384 (Gershon 268:14-169:8); RA1252 (Findlay ¶ 4). Assuming it resolved any concerns with respect to the 80% Test, Nomura would have included the DHL in the D5 Securitization, or in Nomura’s next securitization, the “D6.” See RA1618 (Penner ¶ 9); RA1384-85 (Gershon 269:9-270:7). That securitization closed on March 27, 1998 and was an approximately $3.3 billion securitization consisting of 325 mortgage loans on 436 commercial and multifamily residential properties, including anchored and unanchored retail properties, office buildings, multifamily residential housing, full and limited service hotels, industrial properties, mobile home parks and healthcare facilities. See RA522. At nearly twice the size of the D5 Trust, there was no reason why the DHL – that had already been vetted by the rating agencies – could not have been included therein. Second, as Cadwalader’s experts concede, Nomura could have restructured the DHL, splitting it into a securitized senior loan and a junior mezzanine loan to be converted to preferred equity prior to securitization.60 See RA1618 (Penner ¶ 8); RA1894 (Weinberger 175:22-176:5); RA1820-21 (Rodgers 218:8-223:12). 60 For example, if there was only $30 million of REMIC real property, as opposed to $40 million, Nomura could have restructured the DHL into a $37.5 million senior loan to be securitized that would have met the 80% Test. The remaining $12.5 million loan amount would be structured as a mezzanine loan, convertible to preferred equity prior to securitization. Gershon testified that on at least one occasion – if not more – Nomura had sought to restructure a loan to ensure its REMIC-qualification. See RA1341 (Gershon 583:11-584:21); see also RA1892-93 (Weinberger 169:14-170:4) (testifying that he was involved in situations when loans were modified or amended to be made REMIC compliant). 137 296791.1 Finally, if the DHL could not have been securitized, “it would typically be sold in the secondary market within a relatively short period of time ....” RA1485; see also RA1475; RA1618 (Penner ¶ 8); RA1253 (Findlay ¶ 7). It could have been sold at a price between 90 percent and 97 percent of the outstanding principal balance of the loan. See RA1471-75; see also RA1485-90. In no event, however, would Nomura have kept the DHL on its books indefinitely because “Nomura’s internal cost for maintaining commercial mortgage loans on its balance sheet was expensive and did not permit holding real estate loans for any extended period.” RA1253 (Findlay ¶ 6). The DHL would have been disposed of if Nomura knew it was not REMIC qualified by the fall of 1998, when Nomura exited the business of originating and securitizing commercial mortgage loans and then undertook “to dispose of all of those loans [which had not yet been securitized] and did not retain any on its balance sheet indefinitely.” Id. (Findlay ¶ 7). Accordingly, and as determined by the First Department and the trial court, issues of fact exist as to whether “Nomura would have owned the DHL and suffered the losses from its default in May 2000 such that the issue of proximate cause must be decided by a jury.” RA42; see also Smartix Int’l Corp., 2009 WL 857467, at *7.61 61 The cases Cadwalader cites are not to the contrary. In AmBase Corp., 8 N.Y.3d at 436, the court found, based on the client’s past behavior, that the alleged additional advice that defendant 138 296791.1 CONCLUSION For the foregoing reasons, Nomura respectfully requests that the First Department’s decision granting Cadwalader’s motion for summary judgment with respect to Nomura’s Advice Claim be reversed and that the First Department’s decision denying Cadwalader’s motion for summary judgment with respect to Nomura’s Due Diligence Claim be affirmed. Nomura also respectfully requests that the Court clarify in its opinion that issues of fact exist concerning the applicable standard of care and whether Cadwalader deviated from the standard of care in issuing its REMIC opinion by (i) failing to perform the requisite due diligence on the Doctor’s Hospital Loan despite knowing that it was an acute care hospital, and (ii) failing to perform the requisite diligence due to determine if the representations made by its client about the value of the DHL were prepared with failed to give would not have altered that behavior. Here, in sharp contrast, Nomura’s behavior was based on the erroneous advice of Cadwalader and not on any independent determination by Nomura. The other case cited by Cadwalader, Williams v. New York, 18 N.Y.3d 981 (2012), involves the escape of a patient from a State run mental health facility and his subsequent assault on a pedestrian nearly two years later. See Def. Br. at 59. There, this Court reversed an Appellate Division decision finding that the State’s careless supervision of the patient proximately caused the pedestrian’s injuries because the casual connection between the staff’s negligence in 1993 and the attack – two years later – in 1995 was “simply too attenuated and speculative to support liability.” 18 N.Y.3d at 983-84. While the factual similarities between Williams and the legal malpractice action presently before the Court are themselves a bit “attenuated and speculative,” but for Cadwalader’s negligence, Nomura could have disposed of the DHL by no later than March 1998, just seven months after Nomura originated the DHL and five months after the D5 Trust closed.