The Bank of New York Mellon v. WMC Mortgage, LLC et al
Filing
271
OPINION AND ORDER....For the following reasons, WMC's March 17 motion for a jury trial is denied..... (Signed by Judge Denise L. Cote on 7/10/2015) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
THE BANK OF NEW YORK MELLON, solely as :
Trustee for GE-WMC Mortgage Securities :
Trust 2006-1,
:
Plaintiff,
:
:
-v:
:
WMC MORTGAGE, LLC, and GE MORTGAGE
:
HOLDING, L.L.C.,
:
Defendants.
:
:
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APPEARANCES
For Plaintiff:
Motty Shulman
Ian M. Dumain
Evelyn N. Fruchter
Marc Ayala
Boies, Schiller & Flexner LLP
333 Main St.
New York, NY 10503
For Defendant WMC Mortgage, LLC:
Stephen L. Ascher
Jenner & Block LLP
919 Third Ave.
New York, NY 10022
Paul M. Smith
Matthew S. Hellman
Jenner & Block LLP
1099 New York Ave., NW
Washington, DC 20001
Barbara S. Steiner
Megan B. Poetzel
Jenner & Block LLP
353 N. Clark St.
Chicago, IL 60654
12cv7096 (DLC)
OPINION
AND ORDER
For GE Mortgage Holding, LLC:
Greg A. Danilow
Stacy Nettleton
Weil, Gotshal & Manges LLP
767 Fifth Ave.
New York, NY 10153
DENISE COTE, District Judge:
Defendant WMC Mortgage, LLC (“WMC”) brings this motion for
a jury trial pursuant to the Seventh Amendment of the U.S.
Constitution, which guarantees the right to a jury trial for
cases arising in law.
The underlying action consists
principally of a breach of contract claim brought by Bank of New
York Mellon as the trustee (“BoNY” or “Trustee”) of a
residential mortgage backed securities (“RMBS”) trust against
the entities that sponsored and arranged for the securitization,
based on breaches of the representations and warranties that
were made to describe the loans (“R&Ws”) backing the
securitization.
The governing contract provides for equitable
remedies only, but BoNY has sought money damages where the
equitable remedies are no longer available.
On May 22, 2015,
this Court issued an Opinion finding that money damages were
available in lieu of the equitable relief described in the
contract.
Bank of New York Mellon v. WMC Mortgage, LLC,
12cv7096 (DLC), 2015 WL 2449313 (S.D.N.Y. May 22, 2015).
For
the following reasons, WMC’s motion for a jury trial is denied.
2
BACKGROUND
The trust, GE-WMC Mortgage Securities Trust 2006-I
(“Trust”), contains 4,654 residential mortgage loans originated
or acquired by WMC.
The Trust received the loans pursuant to a
Pooling and Servicing Agreement (“PSA”).
Upon discovery or
receipt of notice of a breach of the R&WS, the PSA requires the
Trustee to notify WMC, the sponsor of the securitization, who
must then cure the breach, “substitute for” the defective loan,
or repurchase the defective loan from the Trust within 90 days
of receiving the notice.
This remedy constitutes the “sole
remedy . . . available to the Trustee.”
A separate contract, to which the Trustee is not a party
but which it has the right to enforce, requires WMC to cure,
repurchase, or substitute for a defective loan if it discovers
or receives notice of a breach of the R&Ws.
This document, the
Mortgage Loan Purchase Agreement (“MLPA”), requires WMC to
repurchase defective loans at a “price equal to the Purchase
Price.”
Price.
The PSA includes a formula for calculating the Purchase
According to this formula, the Purchase Price of some
loans where the underlying property has been foreclosed upon
will be zero.
Much like the PSA, the MLPA provides that the
obligations of WMC to cure, repurchase, or substitute for a
3
defective loan “constitute the sole remedies of [the Trustee]
against [WMC].”
From the time that the loans were transferred to the Trust,
the servicer of the loans foreclosed on and sold a number of
properties securing the mortgage loans.
The parties have not
provided the percentage of loans at issue in this lawsuit where
the underlying property was foreclosed upon, but it appears that
as many as 1,829 loans may fall into this category.
BoNY commenced this suit on August 21, 2012 in state court.
WMC removed the case to federal court on September 20, 2012, and
BoNY amended its complaint on May 29, 2013 (“Complaint”).
In
the Complaint, BoNY requests a judgment against WMC in the form
of “damages in an amount to be determined at trial, but in an
amount that is not less than $378 million.”
On September 6, the parties submitted a joint scheduling
order form to the Honorable Katherine B. Forrest, to whom this
action was then assigned (“Joint Scheduling Order”).
The Joint
Scheduling Order states that “Trial will be before a jury.
the extent permitted by the governing agreements].”
in original.)
[To
(Brackets
Having denied pending motions to dismiss, on
September 13, Judge Forrest issued a scheduling order adopting
the parties’ Joint Scheduling Order.
4
The September 13
scheduling order states that trial will be before a jury to the
extent permitted by the governing agreements.
This case was
reassigned to this Court approximately one year later, on
September 16, 2014.
On December 17, 2014, WMC filed a motion for partial
summary judgment on the ground that BoNY’s remedies were limited
under the PSA and MLPA to repurchase, cure, or substitution, and
that these equitable remedies were not available for loans that
had already been liquidated due to foreclosure on the underlying
property.
This Court held that where equitable relief was
“impossible” or “impracticable,” “money damages may be awarded
in lieu of repurchase even where equitable relief is described
as the ‘sole remedy.’”
2449313, at *2.
Bank of New York Mellon, 2015 WL
As a consequence, the remedies for BoNY’s claim
based on breaches of the R&Ws differ based on the foreclosure
status of the properties securing the loans.
First, for loans
where the underlying properties have not been foreclosed upon,
BoNY’s remedies are limited to the equitable remedies described
in the MLPA, namely repurchase, cure, or substitution. 1
Second,
The only remedy at issue here is the repurchase remedy.
Substitution of a different mortgage loan is only available for
two years following the contract’s closing date, which has long
since expired. Nor has BoNY asked WMC to cure any breaches.
1
5
for loans that have been liquidated, BoNY may receive money
damages “in lieu of repurchase.”
Id.
WMC filed the instant motion for a jury trial on March 17,
2015.
The motion was fully submitted on April 10.
A trial is
scheduled for September 21, 2015.
DISCUSSION
BoNY brought seven claims in the Complaint.
Summary
judgment has been granted in favor of the defendants on four of
these claims. 2
In the principal remaining claim, BoNY seeks to
enforce its contractual rights under the MLPA. 3
The central
question presented by WMC’s motion for a jury trial is whether
this claim arises in law or equity.
WMC argues that a breach of
contract claim where the plaintiff seeks money damages despite
the express prohibition in the governing contract is a “classic”
legal claim and gives WMC a right to a jury trial under the
WMC argued that it is also entitled a jury trial on Count IV of
the Complaint, which is a claim for indemnification, but also
moved to dismiss Count IV. As summary judgment has been entered
in WMC’s favor on the claim, WMC’s entitlement to a jury trial
on the issue presented in Count IV is not considered as part of
this motion.
2
The other two remaining claims include a declaratory judgment
seeking to enforce the contract, and a claim for breach of
contract for failure to notify BoNY of breaches of the R&Ws.
The failure to notify claim may be barred by the recent New York
Court of Appeals decision in ACE Sec. Corp. v. DB Structured
Products, Inc., No. 85, 2015 WL 3616244 (N.Y. June 11, 2015).
3
6
Seventh Amendment.
BoNY contends that a breach of contract
claim, where the contract provides only for equitable relief, is
equitable in nature, and any damages awarded to afford complete
relief under the contract remain equitable in nature.
Equity developed in England after the emergence of the
common law system as a means of resolving disputes where an
unusual set of facts did not conform to the writs used to
initiate a common law action in the courts of law.
1 Dan B.
Dobbs, Law of Remedies § 2.2, at 67 (2d ed. 1993).
Over time,
suits in equity were brought before the King’s Chancellor.
By
the fifteenth century, there was a dual system of common law
courts and chancery courts of equity.
Id. § 2.2, at 72.
The
“[l]aw courts were physically and historically separate from
equity courts, staffed by different judges from different
intellectual traditions.”
3 Dobbs, supra, § 12.8(2), at 201.
In the United States, the Judiciary Act of 1789 conferred
on federal courts jurisdiction over “all suits of a civil nature
at common law or in equity” where there is subject matter
jurisdiction.
1 Stat. 78 (1789).
The jurisdiction conferred
therefore included the “authority to administer in equity suits
the principles of the system of judicial remedies which had been
devised and was being administered by the English Court of
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Chancery at the time of the separation of the two countries.”
Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc.,
527 U.S. 308, 318 (1999) (citation omitted).
In the nineteenth century, both the United States and
England adopted procedural reforms that created one form of
action, the civil action.
1 Dobbs, supra, § 2.6(1), at 148.
These reforms are referred to as the merger of law and equity.
Id.
Before the merger, federal courts exercised powers in both
equity and law but operated by “distinctly separating equity
cases and [using] separate equity rules.”
n.2.
Id. § 2.6(1) at 148
Only with the adoption of the Federal Rules of Civil
Procedure in 1938 did this separation end in federal courts.
Id.
Under the Federal Rules, a party may join legal and
equitable claims in a single action.
Dairy Queen, Inc. v. Wood,
369 U.S. 469, 471 (1962).
The Seventh Amendment guarantees the right to a trial by
jury “in Suits at common law.”
U.S. Const. amend. VII.
“Although the thrust of the Amendment was to preserve the right
to jury trial as it existed in 1791, it has long been settled
that the right extends beyond the common-law forms of action
recognized at that time.”
(1974).
Curtis v. Loether, 415 U.S. 189, 193
“The phrase ‘Suits at common law’ refers to suits in
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which legal rights were to be ascertained and determined, in
contradistinction to those where equitable rights alone were
recognized, and equitable remedies were administered.”
Eberhard
v. Marcu, 530 F.3d 122, 135 (2d Cir. 2008) (citation omitted).
In Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989),
the Supreme Court set forth a two-part test to determine whether
a private action is a “suit at common law.”
at 135.
Eberhard, 530 F.3d
The first step is to determine whether the action was a
legal or equitable action in eighteenth-century England.
Granfinanciera, 492 U.S. at 42.
The second, which is weighed
more heavily than the first, analyzes whether the remedy being
sought is “legal or equitable in nature.”
Id.
When an action presents both legal and equitable claims,
the plaintiff is entitled to a jury trial on the legal claims.
Dairy Queen, 369 U.S. at 472-73.
This right cannot be denied by
characterizing legal claims as merely “incidental to” equitable
issues.
470.
Curtis, 415 U.S. at 196 n.11; Dairy Queen, 369 U.S. at
Moreover, “the constitutional right to trial by jury
cannot be made to depend upon the choice of words used in the
pleadings.”
Dairy Queen, 369 U.S. at 477-78.
If a “legal claim
is joined with an equitable claim, the right to a jury trial on
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the legal claim, including all issues common to both claims,
remains intact.”
Curtis, 415 U.S. at 196 n.11.
Turning to the first Granfinanciera prong, the Court finds
that this action would have been brought before a court of
equity in 1791. 4
In eighteenth-century England, the writ of
assumpsit was used to redress contract claims seeking money
damages.
1 Dobbs, supra, §§ 4.2(1), 4.2(3) (describing the
development of the writ of assumpsit as a vehicle for enforcing
ordinary contracts).
Assumpsit was an action at law.
See id. §
4.2(1), at 571 (describing assumpsit as a writ at “common law”);
see also Great-W. Life & Annuity Ins. Co. v. Knudson, 534 U.S.
204, 213 (2002); Atlas Roofing Co. v. Occupational Safety &
Health Review Comm’n, 430 U.S. 442, 459 (1977); 8 Moore’s
Federal Practice § 38.10(2)(c) (Matthew Bender 3d ed.).
By
contrast, an action for specific performance would have been
brought before a court of equity.
See Atlas Roofing, 430 U.S.
at 459 (“[S]pecific performance was a remedy unavailable in a
court of law . . . .”); see also 8 Moore’s Federal Practice,
supra, § 38.10(3); 3 Dobbs, supra, § 12.8, at 191.
In some
circumstances, where an action was brought for specific
The parties did not address in their briefing the
Granfinanciera test or eighteenth-century jurisprudence.
4
10
performance, the English Court of Chancery would award money
damages as a substitute for equitable relief.
See Fleming
James, Jr., Right to A Jury Trial in Civil Actions, 72 Yale L.J.
655, 659 n.27, 672-73, 677 (1963).
There is no dispute that the remedies described in the MLPA
and PSA as BoNY’s “sole remedies” for breaches of the R&Ws are
equitable in nature, and the Complaint brings a breach of
contract claim seeking to enforce these remedies.
A claim
relating to the breach of R&Ws is thus a claim for specific
performance, and would have been enforced in a court of equity
in the eighteenth century.
Atlas Roofing, 430 U.S. at 459.
The
conclusion that such an action arises in equity is not altered
by the fact that BoNY framed its claim as one for damages; the
right to a jury trial does not turn on the form of the
complaint.
Dairy Queen, 369 U.S. at 477-78.
Because the Seventh Amendment “preserve[s] the right to a
jury trial as it existed in 1791,” Curtis, 415 U.S. at 193, it
may be unnecessary to discuss the second prong of the
Granfinanciera analysis in those instances in which the claim
existed in 1791 and the historical record makes it clear that
the action would have been brought in law or equity in
eighteenth-century England.
After all, the Granfinanciera test
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was developed in the context of a statutory claim.
492 U.S. at
23.
As a breach of contract claim seeking specific performance
existed in 1791 and could only have been brought in a court of
equity, the first Granfinanciera prong could be viewed as
dispositive.
But, as at least one commentator has noted,
American equitable courts expanded the concept of substituted
relief (when specific performance was unavailable) beyond what
was permitted in eighteenth-century England.
James, supra, at
677; see also Edward Yorio, Contract Enforcement: Specific
Performance and Injunctions §§ 19.1-19.3.
For this additional
reason, it is appropriate to complete the Granfinanciera
analysis.
The second Granfinanciera factor asks whether the remedy
sought is legal or equitable.
equitable.
The remedy sought by BoNY is
As the Court of Appeals for the Sixth Circuit
observed in Golden v. Kelsey-Hayes Co., 73 F.3d 648, 661 (6th
Cir. 1996), a monetary award can be an equitable remedy even
though it is generally a form of legal relief.
Restatement §§ 346–56.
See generally
The Supreme Court itself has recognized
that not every “award of monetary relief must necessarily be
‘legal’ relief.”
Chauffeurs, Teamsters & Helpers, Local No. 391
12
v. Terry, 494 U.S. 558, 570 (1990) (citation omitted).
It is
well established that “equitable relief includes monetary
damages where required to afford complete relief.”
Restatement
§ 358(3); see also Tull v. United States, 481 U.S. 412, 424
(1987).
Accordingly, while every legal issue affords a party the
right to a jury trial on that issue even if the legal issue is
incidental to equitable claims, “a monetary award incidental to
or intertwined with injunctive relief may be equitable.”
494 U.S. at 571 (citation omitted).
Terry,
“A court does not err in
denying a jury trial where the monetary award sought is
incidental to, or intertwined with, equitable relief.
It does
err when it denies a jury trial because of its determination
that legal issues in the case are merely incidental to equitable
ones.”
Golden, 73 F.3d at 661; see also Entergy Arkansas, Inc.
v. Nebraska, 358 F.3d 528, 546 (8th Cir. 2004).
The Court of Appeals for the Second Circuit recognized the
distinction between legal issues incidental to equitable ones
and monetary relief incidental to equitable relief in Crane Co.
v. Am. Standard, Inc., 490 F.2d 332 (2d Cir. 1973).
Holding
that a defendant’s Seventh Amendment right was not violated when
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a judge awarded damages following a bench trial rather than an
injunction, the Second Circuit distinguished cases
where the question of the proper order for trying
jury and non-jury issues arises before any trial has
occurred, as in . . . Dairy Queen . . . [from] those
where the action has been properly tried to a judge
and damages enter the case only because defendant’s
acts subsequent to the judgment require
retrospective relief, possibly including damages,
rather than the prospective relief initially sought.
Id. at 341-42.
The Second Circuit further noted that the
unavailability of equitable relief as a result of the occurrence
of the event sought to be enjoined would not “transform what had
been a suit in equity into one at least partially at law simply
because the chancellor might determine monetary relief to be a
more appropriate remedy than a retrospective injunction.”
Id.
at 342.
Applying these principles to the breach of contract claim
here, it seeks an equitable remedy notwithstanding BoNY’s
request for damages.
There is no dispute that the remedies
described in the MLPA and PSA as BoNY’s “sole remedies” are
equitable.
The breach of contract claim is based on breaches of
the R&Ws in the MLPA.
The fact that equity permits damages to
be awarded where the specific equitable relief described by the
contract is not available -- where the loans have been
liquidated -- does not convert the otherwise equitable action to
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an action at law.
See id.
Damages in such circumstances are
“exactly the type of monetary relief that courts . . . envision
as equitable relief; they are incidental to the grant of
equitable relief, yet are necessary to afford complete relief.”
Entergy Arkansas, 358 F.3d at 546 (citation omitted).
WMC presents three main arguments in support of its motion
for a jury trial on this claim.
Each is unavailing.
First, WMC
argues that BoNY seeks money damages and any claim for such
damages is by nature legal.
It is true that BoNY framed its
claim as one for damages rather than specific performance, and
that contract actions for damages are historically (and in
modern practice) legal in nature.
As discussed above, however,
the right to a jury trial does not depend on the form of the
complaint.
Dairy Queen, 369 U.S. at 477-78.
A plaintiff cannot
secure for itself the right to a jury trial by framing a claim
to enforce equitable remedies as one for damages; nor could a
plaintiff eliminate a defendant’s right a jury trial by framing
a legal claim as one for specific performance.
A nominal claim
for specific performance will not preclude a defendant’s right
to a jury trial if the claim seeks legal damages.
But, here,
the Complaint seeks enforcement of a contract providing for only
an equitable remedy and only seeks damages on that cause of
15
action.
An award of such damages is properly regarded as
equitable in nature. 5
Golden, 73 F.3d at 661.
Second, WMC contends that case law establishing that a
court of equity may award monetary relief is inapplicable
because that case law predated the merger of law and equity in
federal courts and is premised on the existence of the arguably
defunct “clean up” doctrine.
The clean-up rule allowed courts
in equity to assume “incidental” jurisdiction to “decide all
issues in a case, including legal issues, once they had taken
jurisdiction to decide the equitable issues.”
supra, § 2.6(4), at 169.
It is unclear whether the clean-up
rule survived the merger of law and equity.
490 F.2d at 341-42.
See 1 Dobbs,
See, e.g., Crane,
But, the cases describing monetary
compensation as “equitable” where such compensation is
incidental to equitable relief do not turn on the existence of
the clean-up rule -- and, in any event, they post-date the
merger of law and equity.
See Entergy Arkansas, 358 F.3d at
546; Golden, 73 F.3d at 661; Crane, 490 F.2d at 341-42.
It is worth observing that WMC and its affiliates drafted the
MLPA. There can be no unfairness, therefore, in relying on that
contract’s terms to define the nature of the remedy available to
the parties seeking to enforce its terms, and by extension, to
answer the inquiry posed by Granfinanciera.
5
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Finally, WMC argues that the claim for money damages cannot
be incidental because the number of loans where equitable relief
is no longer available is substantial in comparison to the
number of loans where equitable relief is still available.
Whether a single property was foreclosed upon, or many were,
should not affect the determination of the nature of the remedy
and the right to a jury trial.
Rather, it is the presence of
any legal issue, no matter how incidental, that would afford WMC
the right to a jury trial.
BoNY presents a claim for specific
performance of WMC’s repurchase obligation and requests a
monetary award where such relief is unavailable.
The need for a
substituted remedy does not convert what would otherwise be an
equitable claim into a legal one.
The plaintiff’s claim, therefore, would have been brought
in an equity court in eighteenth-century England and seeks an
equitable remedy.
Accordingly, WMC is not entitled to a jury
trial based on BoNY’s claim for breaches of the R&Ws.
CONCLUSION
WMC’s March 17 motion for a jury trial is denied.
Dated:
New York, New York
July 10, 2015
__________________________________
DENISE COTE
United States District Judge
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