Law Debenture Trust Company of New York v. WMC Mortgage, LLC et al

Filing 248

MEMORANDUM AND ORDER (see attached) directing the Parties to file additional submissions regarding the impact of Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 2017 WL 6327110 (N.Y. Dec. 12, 2017) on this case, on or before Wednesday, December 27, 2017. Signed by Judge Charles S. Haight, Jr. on December 19, 2017.(Pskowski, R.)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT

TMI TRUST COMPANY, solely in its
capacity as Separate Trustee of the
Securitized Asset Backed Receivables LLC
Trust 2006-WM2,

Civil Action No. 3:12-cv-1538 (CSH)

Plaintiff,
v.

December 19, 2017

WMC MORTGAGE, LLC f/k/a WMC
MORTGAGE CORP.,
Defendant.

MEMORANDUM AND ORDER
HAIGHT, Senior District Judge:
On December 12, 2017 the New York Court of Appeals filed its opinion in Nomura Home
Equity Loan, Inc. v. Nomura Credit & Capital, Inc. The uncorrected decision, subject to revision,
is reported at 2017 WL 6327110.
Counsel for Defendant WMC argue in a letter brief dated December 15, 2017 [Doc. 242] that
the Court of Appeals' decision in Nomura makes all the difference in the case at bar, with particular
reference to Defendant's pending Daubert motion to preclude or limit the proffered expert opinion
of Dr. Joseph R. Mason, a trial witness on damages identified by Plaintiff TMI. WMC perceives this
recent Nomura decision as mandating the granting of that motion.
Counsel for Plaintiff TMI argue in a responsive letter brief dated December 18, 2017 [Doc.
246] that the Court of Appeals' decision in Nomura has nothing to do with the case at bar, WMC's
1

Daubert motion should be denied, and Dr. Mason allowed to testify in the manner appearing in his
previously filed written opinion.
The Court desires further submissions of counsel with respect to the possible effects of the
Nomura decision upon the proper resolution, under governing New York law, of certain issues
presented by this case. This Memorandum, which expresses no present opinion on the Daubert
motion or anything else, is intended by the Court to assist counsel in fashioning the further assistance
their additional submissions will give the Court in this challenging case.
WMC's Daubert motion argues principally that the "Sole Remedy" provision in the pooling
and service agreement (PSA) precludes most of Dr. Mason's damages calculations. This Court's
earlier summary judgment opinion, reported at 2017 WL 3401254, posed the question of "the effect
of the sole remedies provision upon a trust's claim of an originator's failure to notify other PSA
parties of multiple and pervasive breaches of representations and warranties in mortgages the
originator negotiated and issued," a question where "some doubt arises from recent New York
appellate cases." Id. at *15. The principal First Department decisions I identified in the ensuing
discussion were Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage
Capital Holdings LLC, 143 A.D.3d 1 (2016) ("Morgan Stanley"), and Nomura, 133 A.D.3d 96
(2015). No appeal was taken from the First Department's decision in Morgan Stanley. The Court
of Appeals reversed the First Department's relevant holding in Nomura.
In Morgan Stanley, the plaintiff trust claimed that the originator of securitized mortgages
breached what may be called a "Duty to Notify" provision in the underlying contract. In the case
at bar, the comparable Duty to Notify provision is found in Section 2.03(c) of the PSA, which
provides in relevant part that upon discovery by WMC "of a breach of any of the foregoing
2

representations and warranties," WMC "shall give prompt written notice to the others" (including
the Trustee).
In Nomura, the first of these two First Department cases, the plaintiff trustee asserted a claim
under the Duty to Notify provision, and also claimed that the defendant sponsor violated the "No
Untrue Statement" provision, found in Section 7 of the mortgage loan purchase agreement (MLPA),
which stated that "This Agreement does not contain any untrue statement of material fact or omit to
state a material fact necessary to make the statements contained herein not misleading." The No
Untrue Statement provision accompanied "the specific representations and warranties" in the MLPAs
and PSAs "concerning the suitability of each of the mortgage loans contained in the loan pools."1
The First Department's decision in Nomura held that neither the No Untrue Statement claim nor the
Duty to Notify claim were precluded by the Sole Remedy provision. Its order modified the trial
court's order:
to permit plaintiffs to seek damages on the first cause of action for
breach of the No Untrue Statement provision (section 7 of the MLPA)
and for failure to give prompt written notice after discovering
material breaches of the representations and warranties in section 8
of the MLPA.
133 A.D.3d at 110.
In Morgan Stanley, the more recent First Department case, the plaintiff trustee asserted a
Duty to Notify claim. The trial court dismissed the claim on defendant's motion, but the First
Department reversed, relying in part on its prior decision in Nomura. The First Department said:
After the parties briefed this appeal, this Court modified the motion
court's decision in Nomura, holding that under similar RMBS
agreements, a seller's failure to provide the trustee with notice of
1

I have quoted the Court of Appeals' decision in Nomura, 2017 WL 6327110, at *1.
3

material breaches it discovers in the underlying loans states an
independently breached contractual obligation, allowing a plaintiff to
pursue separate damages. Consistent with our decision in Nomura,
we now modify the motion court's order dismissing the failure to
notify claim made in this case and reinstate it.
143 A.D.3d at 7 (citation omitted).
The next event in this evolution of authority occurred last week, when the Court of Appeals
(after initial argument and then re-argument) decided the appeal in Nomura. The Court confined its
consideration to the plaintiff trust's No Untrue Statement claim. Plaintiff escaped dismissal of that
claim in the First Department. The Court of Appeals reversed and dismissed the claim. The first
paragraph of Judge Stein's opinion, after stating the question on appeal, summarizes the Court's
holding and rationale. I quote that paragraph in full:
In these appeals stemming from four residential mortgage-backed
securities (RMBS) transactions, we are asked to decide whether
claims for general contract damages based on alleged breaches of a
"no untrue statement" provision can withstand a motion to dismiss
based on a contract provision mandating cure or repurchase as the
sole remedy for breaches of mortgage loan-specific representations
and warranties. We hold that, inasmuch as the claims for general
contract damages at issue here are grounded in alleged breaches of the
mortgage loan-specific representations and warranties to which the
limited remedy fashioned by the sophisticated parties applies,
plaintiffs' claims for general contract damages should be dismissed.
2017 WL 6327110, at *1.
A striking feature of this succinct summary is that the reader may detect within its two
sentences the seeds of the present parties' extreme and mutually exclusive interpretations. WMC
looks at this decision and sees an application, a triumph, an exaltation of the Sole Remedy provision,
which in its specific and sophisticated way sweeps away all other claims, forms or calculations of
general contract damages. TMI looks at the decision and sees a No Untrue Statement claim done
4

away with, but a Duty (and Failure) to Notify claim still standing, with undiminished vitality, in full
voice, undisturbed by the Court of Appeals in Nomura, and held by the First Department in Nomura
and again in Morgan Stanley to survive the Sole Remedy provision: a claim which, if proven, entitles
a trust to an independent form of general contract damages.
There are arguments available to the parties at bar which support either of these
interpretations. It is open to WMC to say that while the Court of Appeals' precise holding in Nomura
dismissed a No Untrue Statement claim but said nothing about a Duty to Notify claim as precluded
by the Sole Remedy provision, the Court's reasoning necessarily precludes a Duty to Notify claim
on the same basis. That is so, the argument would proceed, even though the Court accepted the
trust's contention (also pressed by the trust in the instant case) that the breaches of the underlying
mortgages' representations and warranties were pervasive and systemic. The Court of Appeals said:
[W]e accept as true HSBC's allegations of pervasive breaches of the
representations made as to the mortgage loans and misleading
omissions in the transaction documents, including the mortgage loan
files, mortgage loan schedules, and prospectus supplements.
Significantly, however, the complaints themselves affirmatively
pleaded that the claims based on alleged breaches of the No Untrue
Statement Provision were grounded in "misrepresentations and
omissions with respect to the Mortgage Loans," themselves. That is,
HSBC claimed that it was defendant's breaches of the Mortgage
Representations – found in section 8 of the MLPAs, and expressly
incorporated by reference in section 2.03 of each PSA – that were
"systemic in nature."
2017 WL 6327110, at *4 (footnote omitted). That circumstance was crucial to the paramountcy of
the Sole Remedy provision. As the Court then explained:
[T]here are no allegations in the complaints of a breach of the No
Untrue Statement Provision in Section 7 of the MLPAs as to which
the Sole Remedy Provision would not apply because all of the claims
asserted under section 7 are also breaches of the loan-specific
5

Mortgage Representations contained in section 8.
Id. at *6. That reasoning should apply to a Duty to Notify claim, WMC might argue, because the
second cause of action in TMI's complaint, captioned "Breach of Contract/Failure to Notify,"
affirmatively alleges that "the PSA requires WMC to give prompt written notice to the other PSA
parties (including the Trustee) when it discovers that any Loan breaches its representations and
warranties," and "WMC knew or should have known that the Loans breached its representations
and warranties, but failed to notify the PSA parties." Compl. ¶¶ 94, 95 (emphases added).
TMI might argue that a fundamental difference between WMC's obligations under the No
Untrue Statement provision and the Duty to Notify provision results in a Duty to Notify claim falling
outside the Sole Remedy provision, while a No Untrue Statement claim is precluded by it. In the
transaction documents before the Court of Appeals in Nomura, the No Untrue Statement provision
appeared in section 7 of the MLPA, entitled "Representations, Warranties and Covenants of the
Seller." The No Untrue Statement provision was one of several general representations made by the
Nomura defendant in section 7, followed by section 8, where defendant made specific
representations and warranties about each mortgage loan. Read together, the Nomura defendant was
saying in section 7 that the representations it made about loans in section 8 are true. Both
representations, specific and general, are made at the time of contracting, and are true or false at that
time. One can readily understand why, in the Court of Appeals' phrase, the claim for breach of the
No Untrue Statement provision is "grounded in alleged breaches of the mortgage loan-specific
representations and warranties," so that the Sole Remedy provision embraces both claims. 2017 WL
6327110, at *1. In contrast, the defendant's Duty to Notify may arise at a later time, when the
defendant discovers breaches of the mortgage loan warranties or should have done so, a circumstance
6

which places the defendant under an additional and affirmative duty: notifying the other parties.
Quaere whether a claim for breach of that duty would be seen by the Court of Appeals as taking the
case out of the Sole Remedy provision's limitation on damages for breaches of the mortgage loan
representations themselves.
It is with deference that I suggest to attorneys of this quality what arguments they might or
might not make, and nothing I have said during these reflections intimates in any way what rulings
the Court will ultimately make. But the importance of the Court of Appeals' decision in Nomura to
the issues in this case is sufficient to require further submissions by counsel on that subject. The
parties are directed to file those submissions on or before December 27, 2017. I regret the necessity
of intruding upon a calm, peaceful and holy season, but trial is imminent. Sometimes litigation
marches to its own drum.

It is SO ORDERED.
Dated: New Haven, Connecticut
December 19, 2017

/s/Charles S. Haight, Jr.
CHARLES S. HAIGHT, JR.
Senior United States District Judge

7