Homeward Residential, Inc. v. Sand Canyon Corporation

Filing 272

OPINION & ORDER: For the reasons above, Homeward' s motion for permission to prove Sand Canyon's liability via statistical sampling and to admit Dr. Cowan's sampling testimony is DENIED. The Court, having concluded that the Governing Agreements, as relevant here, call for loan-by-loan proof of breaches of representations and warranties, declines to reach the parties' remaining arguments. SO ORDERED. (Signed by Judge John F. Keenan on 11/13/2017) (anc)

Case 1:09-md-02013-PAC Document 57

Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 11/13/2017

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------ X
UNITED STATES DISTRICT COURT :
HOMEWARD RESIDENTIAL, INC.,
SOUTHERN capacity NEW
solely in itsDISTRICT OF as YORK:
-----------------------------------------------------------x
Master Servicer for the Option :
:
08 Civ. 7831 (PAC)
One In re FANNIELoan 2008 SECURITIES :
Mortgage MAE Trust
LITIGATION
:
09 MD 2013 (PAC)
2006-2, for the benefit of the :
:
Trustee and the holders of
:
:
OPINION & ORDER
Option One Mortgage Loan Trust :
-----------------------------------------------------------x
2006-2 Certificates,
:
:
No. 12 Civ. 5067 (JFK)
OPINION & ORDER
Plaintiff,
:
:
HONORABLE PAUL A. CROTTY, United States District Judge:
-against:
:
SAND CANYON CORPORATION,
:
BACKGROUND1
f/k/a Option One Mortgage
:
Corporation,
:
:
The early years of this decade saw a boom in home financing which was fueled, among
Defendant.
:
------------------------------ credit conditions. New lending instruments, such as
other things, by low interest rates and lax X
APPEARANCES
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
FOR PLAINTIFF HOMEWARD RESIDENTIAL, INC.:
Brian V. going.
kept the boom Otero Borrowers played a role too; they took on unmanageable risks on the
Stephen R. Blacklocks
Michael B. Kruse
assumption that the market would continue to rise and that refinancing options would always be
Kristen Madison
HUNTON the future. Lending
available in& WILLIAMS LLPdiscipline was lacking in the system. Mortgage originators did
FOR DEFENDANT SAND CANYON CORPORATION: carry the rising risk on their books, the
not hold these high-risk mortgage loans. Rather than
Douglas W. Henkin
Joyce Y. Young
originators sold their loans into the secondary mortgage market, often as securitized packages
Michael L. Calhoon
Richard P. Sobiecki
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
Vernon A. Cassin
Julia B. Rubenstein
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
Patrick Marecki
BAKER prices began to fall.
and home BOTTS L.L.P. In light of the changing housing market, banks modified their
James Goldfarb
lending practices and became unwilling to refinance home mortgages without refinancing.
Daniel T. Brown
Hannah Berkowitz
MURPHY & McGONIGLE, P.C.
1

Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

1

1

JOHN F. KEENAN, United States District Judge:
Before the Court is plaintiff Homeward Residential, Inc.’s
(“Homeward”) motion under Federal Rule of Civil Procedure 26 and
Federal Rule of Evidence 702 for (1) permission to prove its
breach of contract claims against Sand Canyon Corporation (“Sand
Canyon”) using statistical sampling evidence, and (2) a
determination regarding the admissibility of testimony from its
statistical expert, Dr. Charles D. Cowan, regarding the sampling
exercise and results.

As master servicer for a residential

mortgage-backed securities (“RMBS”) trust, Homeward contends
that Sand Canyon damaged the trust by breaching representations
and warranties set forth in the governing agreements.

According

to Homeward, statistical sampling evidence regarding the
likelihood of breach is appropriate in this case, especially in
light of the large number of loans Homeward contends are
potentially at issue.

Because the Court concludes that the

governing agreements, as relevant here, call for proof of breach
on a loan-by-loan basis, Homeward’s proposed sampling will not
assist the trier of fact and, accordingly, the Court denies
Homeward’s motion.

2

I. Background
A. Factual Background
In 2006, Sand Canyon—then known as Option One Mortgage
Corporation1—conveyed a pool of more than 7,500 mortgage loans
with a total initial principal balance of approximately $1.5
billion to Option One Mortgage Acceptance Corporation via a
Mortgage Loan Purchase Agreement (the “MLPA”) dated June 23,
2006. (See Am. Compl. Ex. F, ECF No. 24-2 (filed July 19, 2013)
[hereinafter MLPA].)

The loans were then transferred to the

Option One Mortgage Loan Trust 2006-2 (the “Trust”) by means of
a Pooling and Servicing Agreement (the “PSA”) dated June 1,
2006. (Am. Compl. Ex. G, ECF No. 24-3 (filed July 19, 2013)
[hereinafter PSA].)

These transactions established an RMBS

trust, the likes of which courts within this Circuit have become
quite familiar in the past decade.

The Second Circuit has

offered a helpful summary of the mechanics of an RMBS trust:
To raise funds for new mortgages, a mortgage
lender sells pools of mortgages into trusts
created to receive the stream of interest and
principal payments from the mortgage borrowers.
The right to receive trust income is parceled
into certificates and sold to investors, called
certificateholders. The trustee hires a mortgage
servicer to administer the mortgages by enforcing
the mortgage terms and administering the
payments. The terms of the securitization trusts
1

For the sake of convenience, the Court will refer to the
defendant only as “Sand Canyon” throughout the remainder of this
Opinion.
3

as well as the rights, duties, and obligations of
the trustee, seller, and servicer are set forth
in a Pooling and Servicing Agreement[.]
BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac
Assurance Corp., 673 F.3d 169, 173 (2d Cir. 2012).
Here, the MLPA designated Sand Canyon as “Originator” and
Wells Fargo Bank, N.A. as “Trustee.”

The PSA designated Sand

Canyon as “Master Servicer,” however Homeward subsequently
assumed the role of Master Servicer.

As Master Servicer,

Homeward has authority under the PSA to enforce Sand Canyon’s
obligations under the MLPA. (See PSA § 3.02(b) (“[T]he Master
Servicer, for the benefit of the Trustee and the
Certificateholders, shall enforce the obligations . . . of the
Originator under the [MLPA], including, without limitation, any
obligation . . . to purchase a Mortgage Loan on account of
missing or defective documentation or on account of a breach of
a representation, warranty or covenant, as described in Section
2.03(a).”).)
Given the importance of the rights and obligations set
forth in the MLPA and PSA (collectively, the “Governing
Agreements”)—and the bearing of the Governing Agreements on the
instant motion—it is appropriate to review the relevant
contractual provisions in some detail.

As a starting point,

Sand Canyon made numerous representations and warranties in
connection with conveyance of the loans.

These representations

and warranties are contained in §§ 3.01, 3.02, and 3.03 of the
4

MLPA.

Representations and warranties contained in §§ 3.01 and

3.02 only are at issue in this action.2
As is customary in complex commercial agreements, each
section and subsection of the MLPA contains a title or heading
that relates to the provisions found thereunder.

Section 3.01

bears the heading “Originator Representations and Warranties
Relating to the Mortgage Loans.”

As the heading suggests,

§ 3.01 contains more than fifty representations and warranties
regarding the loans ultimately sold to the Trust. (See, e.g.,
MLPA §§ 3.01(a)(5) (“The Mortgage Loan has been acquired,
serviced, collected and otherwise dealt with by the Originator
and any affiliate of the Originator in compliance with all
applicable federal, state and local laws and regulations and the
terms of the related Mortgage Note and Mortgage[.]”),
3.01(a)(16) (“There is no material default, breach, violation or
event of acceleration existing under the related Mortgage or the
related Mortgage Note[.]”), 3.01(a)(24) (“To the Originator’s
knowledge, there was no fraud involved in the origination of the
Mortgage Loan by the mortgagee or by the Mortgagor, any

2

Section 3.04 of the MLPA provides that “the representations and
warranties set forth in Section 3.01 shall survive delivery of
the respective Mortgage Files to the Trustee on behalf to the
Purchaser.” Ruling on Sand Canyon’s motion to dismiss, Judge
Torres (then presiding) found that the representations and
warranties contained in § 3.02 of the MLPA were also transferred
to the Trust. (See Mem. & Order at 30, ECF No. 51 (filed Mar.
31, 2014).)
5

appraiser or any other party involved in the origination of the
Mortgage Loan[.]”).)
Section 3.02 bears the heading “Originator Representations
And Warranties Relating to The Originator.”

Only one provision

contained in § 3.02, reproduced below, is relevant here.

The

Court will refer to the following provision as the “No Untrue
Statement Rep”:
[T]his 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 written
statements, reports and other documents prepared
and furnished or to be prepared and furnished by
the Originator pursuant to this Agreement or in
connection with the transactions contemplated
hereby taken in the aggregate do not contain any
untrue statement of material fact or omit to
state a material fact necessary to make the
statements contained therein not misleading[.]
(Id. § 3.02(xi).)
Section 3.04 bears the heading “Remedies For Breach of
Representations And Warranties.”

It sets forth the

circumstances that give rise to Sand Canyon’s repurchase
obligation and the process by which Sand Canyon is to effect
repurchase.
Within 120 days of the earlier of either
discovery by or notice to the Originator of any
breach of a representation or warranty made by
the Originator that materially and adversely
affects the value of a Mortgage Loan or the
Mortgage Loans or the interest therein of the
Purchaser, the Originator shall use its best
6

efforts promptly to cure such breach in all
material respects and, if such breach cannot be
cured, the Originator shall, at the Purchaser’s
option, repurchase such Mortgage Loan at the
Purchase Price.3
(Id. § 3.04.)

Alternatively, Sand Canyon has the option to

remove a “deficient” loan from the Trust and substitute a
replacement loan or loans.
The Originator may, at the request of the
Purchaser and assuming the Originator has a
Qualified Substitute Mortgage Loan,4 rather than
repurchase a deficient Mortgage Loan as provided
above, remove such Mortgage Loan and substitute
in its place a Qualified Substitute Mortgage Loan
or Loans. If the Originator does not provide a
Qualified Substitute Mortgage Loan or Loans, it
shall repurchase the deficient Mortgage Loan.
(Id.)

Additionally, § 3.04 cross-references the corresponding

section of the PSA and provides:

“Any repurchase or

substitution required by this Section shall be made in a manner
consistent with Section 2.03 of the [PSA].” (Id.)

3

The “Purchase Price” at which a loan is to be repurchased by
Sand Canyon is defined in the PSA. (See PSA § 1.01 “Purchase
Price.”) Five components make up the “Purchase Price,” which,
for the sake of simplicity, can be described here as the sum of
the remaining stated principal balance on the loan, accrued
interest at the applicable rate, and expenses reasonably
incurred in connection with the repurchase. (Id.)
4

“Qualified Substitute Mortgage Loan” is also defined in the PSA
on the basis of various components. For the sake of simplicity,
and as relevant here, a “Qualified Substitute Mortgage Loan”
must share various characteristics with the “Deleted Mortgage
Loan,” i.e., the loan that it will replace. For example, the
outstanding principal balances, mortgage rates, and terms to
maturity must be similar. (See PSA § 1.01 “Qualified Substitute
Mortgage Loan.”)
7

Under § 3.04, the parties also agreed that a breach of
certain § 3.01 representations and warranties—specifically, §§
3.01(a)(45), (50), (53), and (54)—“will be deemed to materially
and adversely affect the value of the related Mortgage Loan or
the interest of the Purchaser.” (Id.)

Section 3.04 also

contains a provision focused on a breach of a representation or
warranty under § 3.02, which contains the No Untrue Statement
Rep.

The Court will refer to the following provision as the

“All Mortgage Loans Provision”:
In the event that a breach shall involve any
representation or warranty set forth in Section
3.02 and such breach cannot be cured within 120
days of the earlier of either discovery by or
notice to the Originator of such breach, all of
the Mortgage Loans shall, at the Purchaser’s
option, be repurchased by the Originator at the
Purchase Price.
(Id.)
Finally, § 3.04 contains a provision limiting the remedies
available for a breach of the representations and warranties set
forth in the MLPA.

The Court will refer to the following

provision as the “Sole Remedies Provision”:
It is understood and agreed that the obligations
of the Originator set forth in Section 3.04 to
cure, repurchase and substitute for a defective
Mortgage Loan and to indemnify the Purchaser as
provided in Section 5.01 constitute the sole
remedies of the Purchaser respecting a missing or
defective document or a breach of the
representations and warranties contained in
Section 3.01, 3.02 or 3.03.
8

The PSA, for its part, establishes the same prerequisites
for Sand Canyon’s repurchase obligation and the process by which
Sand Canyon is to effect repurchase as those set forth in § 3.04
of the MLPA.

Section 2.03 of the PSA is titled “Repurchase or

Substitution of Mortgage Loans by the Originator” and provides:
Upon discovery or receipt of written notice of
any materially defective document in, or that a
document is missing from, a Mortgage File or of
the breach by the Originator of any
representation, warranty or covenant under the
[MLPA] in respect of any Mortgage Loan which
materially adversely affects the value of such
Mortgage Loan or the interest therein of the
Certificateholders, the Trustee shall promptly
notify the Originator, . . . and if the
Originator does not deliver such missing document
or cure such defect or breach in all material
respects during such period, the Trustee shall
enforce the Originator’s obligation under the
[MLPA] and cause the Originator to repurchase
such Mortgage Loan from the Trust Fund at the
Purchase Price[.]
(PSA § 2.03(a).)

Like the MLPA, the PSA also provides that Sand

Canyon may, in lieu of repurchasing a defective or breaching
loan, “cause such Mortgage Loan to be removed from the Trust
Fund . . . and substitute one or more Qualified Substitute
Mortgage Loans[.]” (Id.)

Additionally, the PSA contains a

provision that resembles the MLPA’s “Sole Remedies Provision”:
It is understood and agreed that the obligation
of the Originator to cure or to repurchase (or to
substitute for) any Mortgage Loan as to which a
document is missing, a material defect in a
constituent document exists or as to which such a
breach has occurred and is continuing shall
9

constitute the sole remedy against the Originator
respecting such omission, defect, or breach
available to the Trustee on behalf of the
Certificateholders.
(Id.)
These terms having been agreed to, the Trust issued and
sold certificates in various classes, with each class having a
different claim on the income to the Trust.

Ultimately, the

loans in the Trust experienced high rates of default and
foreclosure, resulting in losses to the Trust allegedly running
into the hundreds of millions of dollars.

Through various

letters and supporting materials furnished between 2009 and
2012, Sand Canyon received notice of alleged breaches of
representations and warranties with respect to more than 1,000
loans.

According to Homeward, Sand Canyon refused to cure or

repurchase the allegedly breaching loans that were the subject
of repurchase demands.
B. Procedural History
Homeward originally filed this action in the Supreme Court
of the State of New York, New York County on May 31, 2012,
primarily alleging claims for breach of contract. (See Notice of
Removal, ECF No. 1 Ex. A (filed June 28, 2012).)

The action was

subsequently removed to this District and Homeward filed an
amended complaint. (Id.; see also Am. Compl., ECF No. 24 (filed
July 19, 2013).)

On March 30, 2014, Judge Torres—who was

presiding over this case at the time—granted in part and denied
10

in part Sand Canyon’s motion to dismiss the amended complaint.
(See Mem. & Order, ECF No. 51 (filed Mar. 31, 2014).)

Judge

Torres dismissed various causes of action, but held that the
amended complaint stated claims for breach of contract.
Specifically, Judge Torres found that the amended complaint
stated claims based on Sand Canyon’s alleged breaches of
representations and warranties contained in § 3.01 of the MLPA.
(See id. at 22 (refusing to dismiss breach of contract claims
for inaccurate appraisals under § 3.01(a)(4)); see also Order
Amending Mem. & Order Dated March 30, 2014 at 3, ECF No. 64
(filed Sept. 17, 2014) (“Plaintiff has stated a claim for breach
of contract under § 3.01(a)(16).”).)
Judge Torres did not dismiss Homeward’s claim that Sand
Canyon’s alleged breach of the No Untrue Statements Rep in
§ 3.02 triggers Sand Canyon’s obligation to repurchase all the
loans in the pool. (See Mem. & Order at 30-34.)

She noted,

however, that she considered it “unlikely that the parties meant
for the [No Untrue Statement Rep] to apply to loan-level
breaches.” (Id. at 33.)
Finally, Judge Torres denied the motion to dismiss as to
loans that were not identified for repurchase in the demand
letters provided to Sand Canyon before the suit was commenced.
(Id. at 35-37.)

Judge Torres focused on the MLPA’s language

concerning “discovery by” Sand Canyon “of any breach of a
11

representation or warranty . . . that materially and adversely
affects the value” of the loan. (Id. at 35 (quoting MLPA §
3.04).)

Accordingly, Judge Torres reasoned that notice to Sand

Canyon was not necessarily required and that Homeward’s
allegations were sufficient at the pleading stage. (Id. at 3536.)
The case was reassigned to this Court on December 2, 2016.
C. Homeward’s Motion Regarding Statistical Sampling
On July 29, 2015, Homeward moved pursuant to Federal Rule
of Civil Procedure 26 (“Rule 26”) and Federal Rule of Evidence
702 (“Rule 702”) for an order:

(1) permitting Homeward to prove

its claims against Sand Canyon using statistical sampling
evidence, and (2) determining the admissibility of Dr. Cowan’s
proposed sampling methodology and related analysis. (See Notice
of Pl.’s Mot. to Admit Statistical Sampling Testimony, ECF No.
105 (filed July 29, 2015).)

Homeward contends that sampling is

relevant to two of its theories of the case, both of which rely
on breaches of MLPA § 3.01 representations and warranties as to
individual loans. (See Pl.’s Mem. of L. in Supp. of its Mot. to
Admit Statistical Sampling Testimony at 5-6, ECF No. 107 (filed
July 29, 2015) [hereinafter Pl. Mem.]; see also June 19, 2017
Letter from Stephen R. Blacklocks to the Honorable John F.
Keenan at 2, ECF No. 232 (filed June 19, 2017).)

That is,

Homeward apparently concedes that sampling is not relevant to
12

its theory of liability involving the No Untrue Statement Rep
contained in § 3.02. (See June 19, 2017 Letter from Stephen R.
Blacklocks to the Honorable John F. Keenan at 2.)
Briefly and broadly summarized, Homeward proposes a multistep process whereby it would first select a random sample of
representative loans in the Trust. (Pl. Mem at 3.)

Next,

Homeward would re-underwrite the loans in the sample set to
determine whether—and, if so, in what proportion—they breached
the representations and warranties Sand Canyon made. (Id.)
Finally, Homeward would extrapolate the results derived from the
sample loans to the population of loans in the Trust (and any
relevant subpopulations). (Id.)
Specifically, Dr. Cowan proposes a methodology known as
“disproportionate stratified sampling.” (Pl.’s Br. Concerning
the Admissibility of Stratified Sampling in Further Supp. of its
Mot. to Admit Statistical Sampling Testimony at 1, ECF No. 150
(filed Apr. 15, 2016).)

In ordinary stratified sampling, the

researcher “divides the population into relatively homogeneous
groups called ‘strata,’ and draws a random sample separately
from each stratum.” Federal Judicial Center, Reference Manual on
Scientific Evidence 299 (3d ed. 2011).

When the sampling

fraction varies from stratum to stratum, “sampling weights
should be used to extrapolate from the sample to the

13

population.”5 Id.

“Stratified probability sampling can also

disproportionately sample from different strata,” which may
“enable the survey to provide separate estimates for particular
subgroups.” Id. at 382.

“With disproportionate sampling,

sampling weights must be used in the analysis to accurately
describe the characteristics of the population as a whole.” Id.
The sample designed by Dr. Cowan consists of a total of 558
loans drawn from two strata. (Tr. of Hr’g at 21-22, ECF No. 239
(filed July 21, 2017).)

The first stratum consists of the

subset of loans for which Sand Canyon received notice of an
alleged breach, from which Dr. Cowan proposes to draw 293 loans.
(Id.)

The second stratum consists of the remainder of the loans

in the entire Trust-wide population—i.e., excluding loans for
which Sand Canyon received notice of an alleged breach—from
which Dr. Cowan proposes to draw 265 loans. (Id.)

According to

Dr. Cowan, structuring the sample in this manner will enable him
to calculate reliable estimates of the rate of defective loans
in both strata as well as the entire Trust-wide population of
loans. (See Expert Decl. of Charles D. Cowan, Ph.D. Concerning
the Use of Stratified Random Sampling at 12, ECF No. 152 (filed

5

“For example, if 1 unit in 10 is sampled from stratum A while 1
unit in 100 is sampled from Stratum B, then each unit drawn from
A counts as 10, and each unit drawn from B counts as 100.”
Federal Judicial Center, Reference Manual on Scientific Evidence
299 (3d ed. 2011).
14

Apr. 15, 2016).)

That is, with appropriate weighting, Dr. Cowan

states that he can determine the relevant rates of defective
loans at a 95 percent confidence level with a maximum margin of
error of plus/minus 5 percent. (See id.; see also Tr. of Hr’g at
21-22.)
On June 23, 2017, the Court heard testimony from Dr. Cowan
and Dr. Arnold Barnett, Sand Canyon’s expert.

Dr. Cowan

testified regarding the reliability of disproportionate
stratified sampling generally and its suitability in the instant
case. (Tr. of Hr’g at 18-20.)

Dr. Cowan also testified about

the size of the sample set, the confidence level and margin of
error at which he could estimate the “breach rate” for loans in
the strata and the entire Trust-wide population, and the
“representativeness” of the loans that he has selected for the
sample set. (Id. at 20-22, 26-27.)

On direct examination, Dr.

Cowan explained that his methodology would not “uniquely
determine [which specific loans] are breached if they haven’t
been examined,” but that it would enable him to “calculate a
probability that they’re breached.” (Id. at 27.)

Dr. Cowan also

stated that, to his knowledge, no re-underwriting of any loans
had taken place yet. (Id. at 41.)

For his part, Dr. Barnett

testified that, with respect to a loan not included in the
sample set, a sampling exercise like the one Homeward proposes
would not definitively reveal whether that loan breached any
15

representation or warranty, let alone whether the loan breached
a specific representation or warranty. (Id. at 60.)
The Court heard oral argument on the motion on June 26,
2017.
II. Legal Standard
Homeward brings its motion pursuant to Rule 26 and Rule
702.

Under Rule 26, “[p]arties may obtain discovery regarding

any nonprivileged matter that is relevant to any party’s claim
or defense and proportional to the needs of the case[.]” FED. R.
CIV. P. 26(b)(1).

Rule 702 governs expert testimony and provides

that a qualified expert may testify if:
(a) the expert’s scientific, technical, or other
specialized knowledge will help the trier of fact
to understand the evidence or to determine a fact
in issue; (b) the testimony is based on
sufficient facts or data; (c) the testimony is
the product of reliable principles and methods;
and (d) the expert has reliably applied the
principles and methods to the facts of the case.
FED. R. EVID. 702.

“The proponent of the expert testimony bears

the burden of establishing these admissibility requirements, and
the district court acts as a gatekeeper to ensure that the
expert’s testimony both rests on a reliable foundation and is
relevant to the task at hand.” In re Vivendi, S.A. Sec. Litig.,
838 F.3d 223, 253 (2d Cir. 2016) (internal quotation marks
omitted); see also United States v. Williams, 506 F.3d 151, 160
(2d Cir. 2007) (proponent of expert testimony has the burden of

16

establishing by a preponderance of the evidence that the
requirements of Rule 702 are satisfied).
Rule 702 requires that the evidence or testimony “assist
the trier of fact to understand the evidence or to determine a
fact in issue.” Daubert v. Merrell Dow Pharm., Inc., 509 U.S.
579, 591 (1993) (quoting FED. R. EVID. 702).

“This condition goes

primarily to relevance,” and is “aptly described” as one of
“fit.” Id.

“Expert testimony which does not relate to an issue

in the case is not relevant and, ergo, non-helpful.” Id.
(internal quotation marks and citation omitted).
III. Discussion
“Under New York law, a breach of contract claim requires
proof of (1) an agreement, (2) adequate performance by the
plaintiff, (3) breach by the defendant, and (4) damages.”
Fischer & Mandell LLP v. Citibank, N.A., 632 F.3d 793, 799 (2d
Cir. 2011).

In its motion, Homeward proposes to prove that Sand

Canyon breached its representations and warranties by testing a
sample of loans and extrapolating the results of that test to
the relevant populations, thereby generating a probability that
a given loan is in breach.

Because the Court concludes that the

Governing Agreements, as relevant here, call for proof of breach
on a loan-by-loan basis, the Court finds that Homeward’s
proposed sampling will not “assist the trier of fact to
understand the evidence or to determine a fact in issue.”
17

Daubert, 509 U.S. at 591 (quoting FED. R. EVID. 702).

The Court

also rejects Homeward’s alternative argument that it should be
allowed to proceed with proof by sampling notwithstanding
contractual provisions to the contrary.

Accordingly, the Court

denies Homeward’s motion.
A. The Governing Agreements Require Proof of Breach on a Loanby-Loan Basis
The parties vigorously dispute whether the Governing
Agreements authorize statistical sampling as a means of proving
that Sand Canyon breached its representations and warranties.
Homeward argues that the Governing Agreements do not restrict it
to offering proof of breach on a loan-by-loan basis and that
such a requirement would be inconsistent with another
contractual provision, i.e., the All Mortgage Loans Provision.
Sand Canyon contends that the Governing Agreements establish a
repurchase procedure based on specific breaches of individual
loans, and claims that Homeward’s approach would be inconsistent
with the contractual provisions requiring a “material adverse
effect” and “discovery by” or “notice to” Sand Canyon.

Given

that Homeward’s motion turns on the Governing Agreements and
what they say about Sand Canyon’s breaches of its
representations and warranties, (see Tr. of Hr’g at 117), the
Court turns its attention to analyzing the relevant provisions
of those documents.

18

Notably, except for the All Mortgage Loans Provision—
addressed in greater detail below—the applicable provisions of
the Governing Agreements generally refer to a breach event, the
offending loan, and the repurchase price in singular terms.

In

the event of a breach that “materially and adversely affects”
the value of any loan or loans, “if such breach cannot be cured,
the Originator shall, at the Purchaser’s option, repurchase such
Mortgage Loan at the Purchase Price.” (MLPA § 3.04; see also PSA
§ 2.03(a) (“[I]f the Originator does not . . . cure such defect
or breach . . ., the Trustee shall . . . cause the Originator to
repurchase such Mortgage Loan from the Trust Fund at the
Purchase Price[.]”).)

Rather than “repurchase a deficient

Mortgage Loan,” the Originator may “remove such Mortgage Loan
and substitute in its place a Qualified Substitute Mortgage Loan
or Loans.” (MLPA § 3.04; see also PSA § 2.03(a) (“In lieu of
repurchasing any such Mortgage Loan . . ., the Originator may
cause such Mortgage Loan to be removed from the Trust Fund . . .
and substitute one or more Qualified Substitute Mortgage
Loans[.]”.)

In the event that “the Originator does not provide

a Qualified Substitute Mortgage Loan or Loans, it shall
repurchase the deficient Mortgage Loan.” (MLPA § 3.04.)
The structure of these provisions—and the nature of the
defined terms therein—leads to the conclusion that the parties
agreed upon a remedial process that generally calls for proof of
19

breach on a loan-by-loan basis.

Under the Governing Agreements,

a breaching loan may be substituted only for a “Qualified
Substitute Mortgage Loan.” (Id.)

A “Qualified Substitute

Mortgage Loan” is defined as a loan that shares or nearly
approximates many of the characteristics of the specific loan to
be replaced, including the outstanding principal balance,
mortgage rate, remaining term to maturity, and loan-to-value
ratio. (See PSA § 1.01 “Qualified Substitute Mortgage Loan.”)
In the event that a breaching loan is to be repurchased rather
than substituted, “the Originator shall . . . repurchase such
Mortgage Loan at the Purchase Price.” (MLPA § 3.04; see also PSA
§ 2.03(a).)

Like “Qualified Substitute Mortgage Loan,” the

“Purchase Price” is a term defined by reference to the specific
underlying loan, and is calculated by adding together the
entirety of the loan’s stated principal balance and accrued
interest at the applicable mortgage rate. (See PSA § 1.01
“Purchase Price.”)

Precisely defining these terms in connection

with a sophisticated remedial scheme makes little sense if
Homeward may use statistical means to “prove” that a loan is in
breach without actually identifying the specific loan (and
specific breach). (See Tr. of Hr’g at 27 (Dr. Cowan’s testimony
that the proposed sampling methodology will not “uniquely
determine which [specific loans] are breached if they haven’t
been examined”).)
20

Although the posture of the case is different, the analysis
in MASTR Adjustable Rate Mortgages Trust 2006-OA2 v. UBS Real
Estate Sec. Inc. (“MASTR I”) is instructive. No. 12-cv-7322
(PKC), 2015 WL 764665, at *11-12 (S.D.N.Y. Jan. 9, 2015).

On

cross motions for partial summary judgment in a case involving
RMBS pools and alleged breaches of representations and
warranties, the court closely analyzed the relevant language of
the pooling and servicing agreements, which featured singular
nouns and defined terms that referenced the characteristics of
individual loans. Id. (“Here, the PSAs’ cure-or-repurchase
remedy is addressed to ‘such Mortgage Loan’ and the Purchase
Price mechanism is loan specific.”).

Based on these features,

the MASTR I court concluded that “the repurchase mechanism
established by the parties is targeted to a specific loan, and
not to a group or category of loans.” Id.; see also BlackRock
Allocation Target Shares v. Wells Fargo Bank, N.A., 14-CV-09371
(KPF)(SN), 2017 WL 953550, at *5 (S.D.N.Y. Mar. 10, 2017)
(finding that plaintiffs must prove alleged misconduct on “loanby-loan” basis where “all of the components of the ‘Purchase
Price’ are specific to a particular loan”).
Moreover, the sampling evidence that Homeward aims to
introduce would not be probative of other contractual terms that
give rise to Sand Canyon’s repurchase obligation:

namely,

whether Sand Canyon discovered or had notice of a specific
21

breach and whether the breach “materially” and “adversely”
affected the loan’s value. (See MLPA § 3.04; PSA § 2.03(a).)
The product of Homeward’s proposed sampling exercise—a
probability that a loan is in breach, (Tr. of Hr’g at 27)—will
not shed light on these questions. See Blackrock Allocation
Target Shares, 2017 WL 953550, at *5 (“Sampling may fail to
capture whether the nature of the breach had a material and
adverse effect at the time a repurchase obligation, if any, was
triggered[.]”).

Other courts in this District analyzing similar

contract language have reached similar conclusions. See id.;
MASTR I, 2015 WL 764665, at *10 (“[T]he proposed statistical
sampling does not adequately distinguish between breaches that
are material and adverse as to a particular loan and those that
are not.”); see also MASTR Adjustable Rate Mortgages Trust 2006OA2 v. UBS Real Estate Sec. Inc., No 12-cv-7322 (PKC), 2015 WL
797972, at *3 (S.D.N.Y. Feb. 25, 2015) (“Summary judgment was
denied because plaintiffs’ theories and expert sampling data did
not align with the materiality requirement of the parties’
agreements.”).
Homeward’s arguments to the contrary are not persuasive.
Its principal argument is that interpreting the Governing
Agreements to require proof of breach at the level of individual
loans would violate a cardinal principle of contract
interpretation by introducing an internal contradiction. (See
22

Pl.’s Reply Mem. in Further Supp. of its Mot. to Admit
Statistical Sampling Testimony at 6, ECF No. 132 (filed Dec. 23,
2015) [hereinafter Pl.’s Reply].)

Specifically, Homeward argues

that such an interpretation would “wipe out” the All Mortgage
Loans Provision, which states:
In the event that a breach shall involve any
representation or warranty set forth in Section
3.02 and such breach cannot be cured within 120
days of the earlier of either discovery by or
notice to the Originator of such breach, all of
the Mortgage Loans shall, at the Purchaser’s
option, be repurchased by the Originator at the
Purchase Price.
(MLPA § 3.04.)

According to Homeward, the All Mortgage Loans

Provision cannot be squared with Sand Canyon’s interpretation of
the MLPA generally—or the Sole Remedies Provision specifically—
as mandating proof of breach at the level of individual loans.
It is not impossible, however, to reconcile the All
Mortgage Loans Provision, the Sole Remedies Provision, and a
repurchase procedure that generally requires proof of breach on
a loan-by-loan basis.

True, the MLPA appears to contemplate

different procedures for the repurchase of “all of the Mortgage
Loans” for a breach of a § 3.02 representation or warranty and
the repurchase of a “deficient Mortgage Loan” for other breaches
under § 3.04. (Compare MLPA § 3.04 (“In the event that a breach
shall involve any representation or warranty set forth in
Section 3.02 . . . , all of the Mortgage Loans shall, at the

23

Purchaser’s option, be repurchased by the Originator at the
Purchase Price.”), with id. (“Within 120 days of the earlier of
either discovery by or notice to the Originator of any breach of
a representation or warranty made by the Originator that
materially and adversely affects the value of a Mortgage Loan
. . . the Originator shall, at the Purchaser’s option,
repurchase such Mortgage Loan at the Purchase Price.”).)
Elsewhere in § 3.04, the parties agreed that breach of certain
§ 3.01 representations and warranties—not identified in
Homeward’s amended complaint—would necessarily have a material
and adverse effect on the related loan or loans. (See id. (“It
is understood by the parties hereto that a breach of the
representations and warranties made in Section 3.01(a)(45),
(50), (53), and (54) will be deemed to materially and adversely
affect the value of the related Mortgage Loan or the interest of
the Purchaser.”).)

That the Governing Agreements establish

different procedures for breaches of different representations
and warranties, however, does not mean that there is any
internal incoherence.
It is a “cardinal principle of contract construction[] that
a document should be read to give effect to all its provisions
and to render them consistent with each other.” Perreca v.
Gluck, 295 F.3d 215, 224 (2d Cir. 2002) (quoting Mastrobuono v.
Shearson Lehman Hutton, Inc., 514 U.S. 52, 63 (1995)).
24

In all

the aforementioned instances under the Governing Agreements, the
nature of the remedy is the same:

repurchase by Sand Canyon.

What may vary is the threshold to trigger Sand Canyon’s
obligation to repurchase.

Given the parties’ current

disagreement, it is likely that the All Mortgage Loans Provision
and the Sole Remedies Provision could have been drafted more
artfully, but they need not be read as in fundamental conflict
with each other.

Nor are they incompatible with loan-by-loan

proof of breach for representations and warranties under MLPA §
3.01.
Likewise, Homeward’s citation to Assured Guaranty Municipal
Corp. v. Flagstar Bank, FSB, 920 F. Supp. 2d 475 (S.D.N.Y. 2013)
is unavailing.

There, a financial guaranty insurance company

(i.e., Assured) contracted with a federally chartered savings
bank that originated residential mortgage loans to provide
insurance on two securitizations of home equity lines of credit.
Id. at 478.

After many of the loans underlying the

securitizations defaulted, Assured paid approximately $90
million in claims. Id. at 486.

Assured submitted formal

repurchase demands in connection with both securitizations, then
sued, alleging that Flagstar breached representations and
warranties in the agreements between the parties and was
obligated to reimburse Assured. Id.

After a twelve-day bench

trial, Judge Rakoff granted judgment in favor of Assured.
25

Id.

at 478, 517.

In so doing, Judge Rakoff allowed statistical

sampling evidence offered by Assured on the questions of the
defendants’ liability and damages. Id. at 512, 514.
Several features of Flagstar are distinguishable from the
instant case.

Most significantly, although Judge Rakoff

carefully considered the relevant contract language, he
evidently did not conclude—as this Court does here—that the
parties’ agreements established a procedure calling for loan-byloan proof of breach.

Rather, Judge Rakoff permitted sampling

on the question of liability because “sampling is a widely
accepted method of proof in cases brought under New York law”
and on the question of damages because Assured’s damages model
was based “only on defective, defaulted loans.” Id.
Furthermore, Flagstar preceded the Second Circuit’s decision in
Retirement Board of the Policemen’s Annuity and Benefit Fund of
the City of Chicago v. Bank of New York Mellon, 775 F.3d 154 (2d
Cir. 2014).

Although the Second Circuit in Retirement Board did

not definitively rule on the propriety of sampling evidence as
proof of liability in RMBS actions, see 775 F.3d at 162 n.6,
courts in this District have cited to Retirement Board for the
proposition that, past the pleading stage, “[p]laintiffs must
prove that they have evidence to support their claims loan-byloan and trust-by-trust.” Phoenix Light SF Ltd. v. Bank of N.Y.
Mellon, 14-CV-10104 (VEC), 2017 WL 3973951, at *9 (S.D.N.Y.
26

Sept. 7, 2017) (internal quotation marks omitted); see also
Royal Park Invs. SA/NV v. HSBC Bank USA Nat’l Ass’n, 14-CV-08175
(LGS)(SN), 2017 WL 945099, at *4 (S.D.N.Y. Mar. 10, 2017)
(“Because this action has progressed beyond the pleading stage
and is well on its way to summary judgment and trial, plaintiffs
must be ready to prove HSBC’s alleged misconduct loan-by-loan
and trust-by-trust.” (internal quotation marks omitted)).
Accordingly, the Court does not believe that Flagstar compels
resolution of the instant motion in Homeward’s favor.
B. No Alternative Equitable Remedy Is Available
In the alternative, Homeward asserts for the first time in
its reply brief that equitable principles dictate that the Court
should allow Homeward to proceed with proof by sampling
notwithstanding the language of the Governing Agreements. (See
Pl.’s Reply at 7.)

Homeward also urged this theory at oral

argument. (See Tr. of Hr’g at 96.)

In support of its position,

Homeward relies on the decision in Nomura Home Equity Loan, Inc.
v. Nomura Credit & Capital, Inc., 19 N.Y.S.3d 1 (N.Y. App. Div.
2015).

Sand Canyon argues that Nomura is inapplicable and does

not support Homeward’s position.

The Court agrees with Sand

Canyon that Nomura stands on different footing from the instant
matter and does not call for disregarding the Governing
Agreements.

27

The Nomura court considered whether the trial court erred
by permitting the plaintiffs “to seek monetary damages if cure
or repurchase of a defective mortgage loan was impossible.” 19
N.Y.S.3d at 5.

The relevant agreements limited the plaintiffs

to “seeking an order of specific performance requiring defendant
to repurchase the defective loans . . . or to cure the defects
in those loans.” Id.

Given this limitation, the defendant

argued that the plaintiffs had no remedy for loans that had been
foreclosed upon or liquidated because such loans could not be
repurchased. Id.

Rejecting that argument, the Nomura court

reasoned that an award of damages may be an appropriate
substitute remedy where the granting of equitable relief (i.e.,
specific performance of the repurchase obligation) appears to be
impossible or impracticable. Id. at 5-6.

Accordingly, the

Nomura court held that the trial court did not err in refusing
to dismiss the plaintiffs’ cause of action for monetary damages.
Id. at 6.
The Nomura court’s holding that equity may allow for an
award of damages in lieu of specific performance is readily
distinguishable from Homeward’s request here.

The Nomura court

had no reason to consider the admissibility of sampling
evidence, let alone whether equity permits for the fashioning of
“an alternative remedy” such as sampling proof where “a contract
. . . mandate[s] a loan-by-loan repurchase.” (Tr. of Hr’g at
28

92.)

This Court does not believe that Nomura extends quite so

far.

Moreover, the Nomura court emphasized the impossible or

impracticable nature of the equitable remedy at issue.
Hom~ward

Here,

concedes that re-underwriting all the loans in the

Trust is not "literally impossible." (Pl.'s Reply at 15.)
Rather, Homeward argues that loan-by-loan proof is "not
practicable" because of the expenses entailed.

(Id. at 13.)

Under such circumstances, the Court finds that Nomura is
inapplicable and does not compel allowing Homeward to proceed
with proof by sampling.
Conclusion

For the reasons above, Homeward's motion for permission to
prove Sand Canyon's liability via statistical sampling and to
The Court,

admit Dr. Cowan's sampling testimony is DENIED.

having concluded that the Governing Agreements, as relevant
here, call for loan-by-loan proof of breaches of representations
and warranties, declines to reach the parties' remaining
arguments.

SO ORDERED.

Dated:

New York, New York
November / 3 , 201 7

V

29

F.

John
Keenan
United States District Judge