Homeward Residential, Inc. v. Sand Canyon Corporation

Filing 227

OPINION & ORDER re: 139 MOTION to Dismiss In Part the Second Amended Complaint. filed by Sand Canyon Corporation, 128 MOTION for Reconsideration re; 124 Order on Motion for Leave to File Document, Defendant's Not ice of Motion for Reconsideration. filed by Sand Canyon Corporation: Before the Court are Defendant Sand Canyon Corporation's ("Defendant") motions (1) for reconsideration of the September 30, 2016 order granting Plaintiff Homewa rd Residential, Inc. ("Plaintiff") leave to file a second amended complaint and (2). to dismiss in part the Second Amended Complaint ("SAC"). For the reasons stated above, Defendant's motion for reconsideration is DENIED and Defendant's motion to dismiss in part the second amended complaint is DENIED in part and GRANTED in part only as to Plaintiff's claims for breach of MLPA § 3.01(a)(24), the "no-fraud" representation. The Clerk of Court is respectfully directed to terminate the motions docketed at ECF Nos. 128 and 139. (Signed by Judge John F. Keenan on 8/22/2017) (jwh)

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

Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 08/22/2017

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------ X
UNITED STATES DISTRICT COURT :
HOMEWARD RESIDENTIAL, INC.,
SOUTHERN DISTRICT as
solely in its capacity OF NEW YORK
:
-----------------------------------------------------------x
Servicer for the Option One
:
In re Loan Trust 2006-3,
:
08 Civ. 7831 (PAC)
Mortgage FANNIE MAE 2008 SECURITIES
:
LITIGATION of the Trustee :
:
09 MD 2013 (PAC)
for the benefit
:
and the holders of Option One
:
:
OPINION & ORDER
Mortgage Loan Trust 2006-3
:
-----------------------------------------------------------x
:
No. 12 Civ. 7319 (JFK)
Certificates,
OPINION & ORDER
Plaintiff,
:
:
-against:
HONORABLE PAUL A. CROTTY, United States District Judge:
:
SAND CANYON CORPORATION, f/k/a :
Option One Mortgage
:
Corporation,
:
BACKGROUND1
Defendant.
:
------------------------------ saw a boom in home financing which was fueled, among
The early years of this decade X
APPEARANCES
other things, by low interest rates and lax credit conditions. New lending instruments, such as
FOR PLAINTIFF HOMEWARD RESIDENTIAL, INC.:
Brian V. Otero (high credit risk loans) and Alt-A mortgages (low-documentation loans)
subprime mortgages
Stephen R. Blacklocks
Michael B. going. Borrowers played a role too; they took on unmanageable risks on the
kept the boom Kruse
HUNTON & WILLIAMS LLP
assumption that the market would continue to rise and that refinancing options would always be
FOR DEFENDANT SAND CANYON CORPORATION:
Michaelin the Calhoon
available L. future. Lending discipline was lacking in the system. Mortgage originators did
Richard P. Sobiecki
Vernon these high-risk mortgage loans. Rather than carry the rising risk on their books, the
not hold Cassin
Douglas Henkin
BAKER BOTTS their loans into the secondary mortgage market, often as securitized packages
originators sold L.L.P.
James Goldfarb
Daniel T. Brown
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
MURPHY & McGONIGLE, P.C.

But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
JOHN F. KEENAN, United States District Judge:
and home prices began to fall. In light of the changing housing market, banks modified their
Before the Court are Defendant Sand Canyon Corporation’s
lending practices and became unwilling to refinance home mortgages without refinancing.
(“Defendant”) motions (1) for reconsideration of the September
30, 2016 order granting Plaintiff Homeward Residential, Inc.
1

Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,

(“Plaintiff”) 2009. For purposes of this Motion, all allegations in the complaint and (2) as true.
dated June 22, leave to file a second amended Amended Complaint are taken
1

1

to dismiss in part the Second Amended Complaint (“SAC”).

For

the reasons that follow, Defendant’s motion for reconsideration
is denied and Defendant’s motion to dismiss is denied in part
and granted in part.
I.
A.

Background

Factual Background

Unless otherwise noted, the following facts and allegations
are drawn from the SAC.

In 2006, Defendant, a mortgage

originator then known as Option One Mortgage Corporation, sold a
pool of over 7,500 mortgage loans with a total principal balance
of approximately $1.5 billion as part of a deal related to the
issuance of mortgage-backed securities. (SAC ¶¶ 1, 16.)

In a

mortgage-backed securitization, a mortgage originator or sponsor
first assembles a pool of mortgage loans. (Id. ¶ 16.)

This pool

of loans is then typically transferred by the originator or
sponsor to an affiliated entity called the “depositor.” (Id.)
The depositor then transfers the loans to a specially-created
mortgage trust. (Id.)

This trust then issues securities—usually

referred to as certificates—entitling holders to a certain
specified share in the income to the trust as borrowers make
their mortgage payments. (Id.)

The money received from the sale

of the certificates flows back to the originator or sponsor as
payment for the loans. (Id.)
Here, Defendant originated or purchased 5,625 mortgages and
2

transferred them to Option One Mortgage Acceptance Corporation
(the “Depositor”) in October 2006. (Id. ¶¶ 1, 17.)

This

transfer was structured as a sale and is documented in a
Mortgage Loan Purchase Agreement (“MLPA”) dated October 19,
2006. (Id. ¶ 17.)

The Depositor conveyed “all right, title, and

interest” in the mortgage loans to a trust called the Option One
Mortgage Loan Trust 2006-3 (the “Trust”) by means of a Pooling
and Service Agreement (“PSA”) dated October 1, 2006. (Id. ¶ 18.)
The Trust issued and sold certificates in various classes, with
each class having a different claim on the income to the Trust.
(Id. ¶ 19.)

In December 2006, Defendant sold an additional

1,958 mortgage loans to the Trust. (Id. ¶ 20.)

In 2008,

Plaintiff took over servicing of the Trust loans. (Id. ¶¶ 1213.)

As servicer, Plaintiff has authority under the PSA to

enforce Defendant’s obligations under the MLPA. (Id. ¶¶ 27-28).
In the MLPA, Defendant made over fifty representations
concerning the mortgage loans sold. (Id. ¶ 21.)

Among other

things, Defendant represented that each loan in the Trust was
“originated substantially in accordance with the Originator’s
underwriting criteria.” (Id.)

These criteria required the

originator to make a “reasonable determination” of an
applicant’s ability to repay the loan. (Id. ¶ 30.)

Defendant

also represented that “[t]here is no material default, breach,
violation or event of acceleration existing under the Mortgage
3

or the related Mortgage Note.” (Id. ¶ 21.)

Section 3.04 of the

MLPA establishes Defendant’s obligation to cure or repurchase
loans within 120 days of discovery or notice of the breach of
any representation, warranty, or covenant that materially and
adversely affects the value of a loan or the interests of the
Trust and its certificateholders in that loan. (Id. ¶ 24.)
In a letter dated March 8, 2012, Wells Fargo Bank N.A., as
Trustee, gave Defendant notice of breaches of representations
and warranties with respect to certain mortgage loans that
materially and adversely affected the value of the loans or the
Trust’s interest in those loans and demanded that Defendant
either cure those breaches or repurchase the loans within 120
days. (Id. ¶ 8.)

Defendant responded two months later, denying

any merit to the claims. (Id. ¶ 8; Def.’s Mem. of L. in Support
of Mot. for Reconsideration at 5, ECF No. 129 (filed Oct. 14,
2016) [hereinafter Def.’s Mot. for Reconsideration].)

On May

29, 2015, the Law Debenture Trust Company of New York, as
Separate Trustee, gave Defendant notice of material breaches of
representations and warranties with respect to an additional 649
loans and demanded that Defendant either cure or repurchase
those loans within 120 days. (SAC ¶ 9.)

The May 29 notice

enclosed a letter from Perry, Johnson, Anderson, Miller &
Moskowitz LLP, counsel for certain certificateholders, (the
“Perry Johnson letter”) and a set of schedules describing the
4

nature of the breaches. (Id.; Def.’s Mot. for Reconsideration at
5.)

The Perry Johnson letter alleged “pervasive and widespread

breaches” and reserved the right to give notice of additional
breaches. (SAC ¶ 9.)

To date, Defendant has not cured or

repurchased any loans. (Id. ¶¶ 8-9.)
Plaintiff alleges that Defendant breached its
representations and warranties with respect to “many loans” in
the Trust and that Defendant was aware that there were
widespread and systemic deviations from its underwriting
guidelines when the loans in the Trust were approved. (Id. ¶¶
29, 33.)

A review of the loan files confirms the widespread

nature of these deviations by revealing numerous instances in
which the originating underwriter failed to make a reasonable
determination of borrowers’ ability to repay the loan. (Id. ¶
34.)

Because Defendant was allegedly aware of the widespread

disregard of its underwriting guidelines and resulting pervasive
breaches, Plaintiff seeks to require Defendant to honor its
contractual obligation to repurchase all Trust loans with
respect to which it has breached its representations and
warranties, or otherwise compensate the Trust. (Id. ¶ 10.)

In

the alternative, Plaintiff seeks to require Defendant to
repurchase the 745 loans that were included in the March 2012
and May 2015 letters demanding repurchase. (Id.)

5

B.

Procedural History

Plaintiff first brought suit in this action on September
28, 2012, alleging breaches as to 96 of the 119 loans listed in
the March 8, 2012 Trustee letter. (See Complaint ¶ 21, ECF No. 1
(filed September 28, 2012).)

On September 25, 2013, Defendant

moved to dismiss the First Amended Complaint. (See Mot. to
Dismiss Am. Compl., ECF No. 38 (filed September 25, 2013).)

On

February 14, 2014, Judge Torres, then presiding over this
action, denied in part and granted in part Defendant’s motion to
dismiss. (See Mem. & Order, ECF No. 58 (filed February 14,
2014).)

On July 22, 2014, Judge Torres entered a scheduling

order which required Plaintiff to file any motions to amend the
complaint by August 22, 2014. (See Civil Case Management Plan &
Scheduling Order, ECF No. 65 (filed July 22, 2014).)
After receiving notice of the Perry Johnson letter, on
November 25, 2015, Plaintiff sought leave to amend its complaint
to add (1) breach claims for the 649 additional loans identified
by the Perry Johnson letter, and (2) non-loan-specific
allegations that Defendant’s breaches were widespread and
pervasive, that Defendant knew it was selling loans to the Trust
that were in breach, and that Defendant should therefore
repurchase all Trust loans that are proven at trial to
materially breach those representations and warranties (the
“constructive discovery claim”). (See Mot. for Leave to File
6

Second Am. Compl., ECF No. 102 (filed Dec. 23, 2015).)

On

September 30, 2016, Judge Torres granted leave to file the SAC.
(See Op. & Order, ECF No. 124 (filed Sept. 30, 2016).)
In her September 30, 2016 opinion and order, Judge Torres
held that Plaintiff met both Federal Rule of Civil Procedure 15
amendment standards and Federal Rule of Civil Procedure 16’s
good cause requirement.

Judge Torres held that Plaintiff met

Rule 16’s good cause requirement because Plaintiff “diligently
sought to amend” once it became aware of the basis for its
proposed new claims. (Id. at 6.)

First, Plaintiff did not

become aware of claims with respect to loans outside of the
original 96 until May 2015, when it received notice from the
Separate Trustee regarding the 649 additional loans. (Id.)
Second, documents produced by Defendant during discovery
provided evidence to Plaintiff for the first time of Defendant’s
widespread and systemic disregard of its representations and
warranties and showed that Defendant knew of its breaches at the
time it sold the loans to the Trust. (Id.)

Although Defendant

argued that Plaintiff did not act diligently in discovering its
new claims because, as servicer, it had access to the 649 loan
files for more than seven years, Judge Torres rejected this
argument because Defendant provided no support for its
contention that Rule 16 diligence imposes a duty to review and
analyze “thousands of loans, each with loan files consisting of
7

hundreds of pages” to determine whether Defendant had made
additional breaches. (Id. at 7.)
Judge Torres next held that Plaintiff met Rule 15’s
“liberal” amendment standards. (Id.)

First, Plaintiff did not

unduly delay in seeking to amend the complaint, even though it
had possession of the loan files at issue since 2008, because
“Plaintiff would have had to review thousands upon thousands of
documents in order to discover evidence of the claims it now
seeks to add.” (Id. at 9.)

Second, amendment would not be

futile, despite the fact that the statute of limitations had
run, because the proposed new claims related back to Plaintiff’s
original claims. (Id. at 9-12.)

In determining that the new

claims related back, Judge Torres relied on Nomura Home Equity
Loan, Inc. v. Nomura Credit & Capital, Inc., 19 N.Y.S.3d 1 (N.Y.
App. Div. 2015), which held that new claims regarding additional
loans sold to a securitization trust related back to timely
claims because the defendant was on notice, before the suit was
filed, that certificateholders were investigating breaches in
representations and warranties. (Id. at 10.)

Judge Torres noted

that in this case, as in Nomura, a pre-suit letter informed
Defendant that additional loans were likely being investigated
for breaches. (Id. at 11.)

Further, Plaintiff here, in both its

original and amended complaints, included allegations suggesting
Defendant’s systemic disregard for its underwriting guidelines
8

and its knowledge of those breaches at the time of
securitization. (Id.)
Judge Torres also rejected Defendant’s argument that
Plaintiff’s claims must be limited to only those loans for which
Defendant has been given notice of an alleged breach because
“[c]ourts have held that a pleading sufficiently alleges that a
defendant discovered its own breaches—triggering its remedial
obligations—when the complaint alleges facts indicating the
seller’s widespread and systemic disregard of its
representations.” (Id. at 12-13.)

Finally, Judge Torres held

that because the fact discovery deadline had recently been
extended to March 2017, Defendant’s assertions regarding
prejudice were too speculative to override Rule 15’s liberal
standard. (Id. at 13.)
Plaintiff filed the SAC on October 6, 2016.

On October 14,

2016, Defendant moved for reconsideration of Judge Torres’
opinion granting Plaintiff leave to amend. (See Mot. for
Reconsideration, ECF No. 128 (filed Oct. 14, 2016).)

On

November 23, 2016, Defendant filed a motion to dismiss in part
the SAC under Rule 12(b)(6) for failure to state a claim. (See
Mot. to Dismiss in Part the Second Am. Compl., ECF No. 139
(filed Nov. 23, 2016).)

Defendant’s motion to dismiss seeks

dismissal of the newly alleged claims in the SAC.

9

II.
A.

Discussion

Motion for Reconsideration
1.

Legal Standard

Reconsideration of a previous order is an “extraordinary
remedy to be employed sparingly in the interests of finality and
conservation of scarce judicial resources.” In re Health Mgmt.
Sys. Inc. Sec. Litig., 113 F. Supp. 2d 613, 614 (S.D.N.Y. 2000)
(internal quotation marks omitted).

“The provision for

reargument is not designed to allow wasteful repetition of
arguments already briefed, considered and decided.” Schonberger
v. Serchuk, 742 F. Supp. 108, 119 (S.D.N.Y. 1990).

“The major

grounds justifying reconsideration are ‘an intervening change of
controlling law, the availability of new evidence, or the need
to correct a clear error or prevent manifest injustice.’” Virgin
Atl. Airways, Ltd. v. Nat’l Mediation Bd., 956 F.2d 1245, 1255
(2d Cir. 1992) (quoting 18 C. Wright, A. Miller & E. Cooper,
Federal Practice & Procedure § 4478 at 790).

Accordingly, a

request for reconsideration under Local Rule 6.3 must
“demonstrate controlling law or factual matters put before the
court in its decision on the underlying matter that the movant
believes the court overlooked and that might reasonably be
expected to alter the conclusion reached by the court.” Fisk v.
Letterman, 501 F. Supp. 2d 505, 530 (S.D.N.Y. 2007).

10

Local Rule 6.3 is intended to “ensure the finality of
decisions and to prevent the practice of a losing party . . .
plugging the gaps of a lost motion with additional matters.”
S.E.C. v. Ashbury Capital Partners, No. 00 Civ. 7898 (RCC), 2001
WL 604044, at *1 (S.D.N.Y. May 31, 2001) (internal quotation
marks omitted).

A court must “narrowly construe and strictly

apply Local Rule 6.3 so as to avoid duplicative rulings on
previously considered issues and to prevent the Rule from being
used to advance different theories not previously argued, or as
a substitute for appealing a final judgment.” Fisk, 501 F. Supp.
2d at 530.
2.

Analysis

Defendant claims that Judge Torres overlooked or
misunderstood Plaintiff’s ability to present its additional
claims on a timely basis.

In support of this contention,

Defendant makes three principal arguments.
First, Defendant argues that Judge Torres’ opinion was
incorrectly based on the contention that Plaintiff had no duties
to the Trust or certificateholders. (Def.’s Mot. for
Reconsideration at 8.) Defendant claims that Plaintiff, as the
servicer of Trust loans, had an obligation under the PSA to
maximize the recovery of principal and interest on a defaulted
loan and, as part of this obligation, Plaintiff was expected to
“pursue all valid repurchase claims where that course would
11

maximize recovery to the Trust.” (Id. at 11.)

Accordingly,

because Plaintiff certified annually that it fulfilled its
obligations as servicer, Plaintiff was “exercising its business
judgment all along with regard to all such loans in the Trust”
and should have asserted its new claims on a timely basis. (Id.
at 11-12; Def.’s Reply Mem. of L. in Support of Mot. for
Reconsideration at 7, ECF No. 137 (filed Nov. 10, 2016).)
Contrary to Defendant’s assertion, Judge Torres did not
find that Plaintiff had no duty to the Trust or
certificateholders.

In fact, Defendant did not raise this

argument in its opposition to Plaintiff’s motion to amend.
Given that a reconsideration motion cannot be used to “advance
different theories not previously argued,” Defendant cannot
claim that Judge Torres overlooked this issue, as it was not
raised on the motion to amend. Fisk, 501 F. Supp. 2d at 530; see
also Ambac Assur. Corp. v. EMC Mortg. Corp., No. 08 CIV. 9464
RMB THK, 2011 WL 308276, at *3 (S.D.N.Y. Jan. 28, 2011)
(“[Defendant] never raised this issue in the original briefing
of the motion to amend, and, therefore, cannot seek
reconsideration on this basis.”).

Further, Judge Torres already

considered and rejected Defendant’s similar argument that
Plaintiff “did not act diligently in discovering the new claims
because it had access for more than seven years to the evidence
purportedly supporting them” as servicer of the loans, because
12

Rule 16 diligence does not impose a duty to review and analyze
“thousands of loans.” (Op. & Order at 6-7.)
Second, Defendant argues that Plaintiff’s new loan-level
claims fail to meet Rule 15 and 16 standards because the
information in the Perry Johnson letter was not new to Plaintiff
in 2015 and thus, discovery of additional breaches did not, as
Judge Torres held, require a review of individual loan files.
(Def.’s Mot. for Reconsideration at 12.)

Defendant contends

that the information in the Perry Johnson letter was in fact
based on data that was supplied to the Trustee by the servicer
on a monthly basis and was also publicly available in SEC
filings by the Trust. (Id. at 12-13.)

Because Plaintiff has had

access to all of this information since 2008, Defendant argues
that it could have easily asserted claims based on this
information when it first brought suit in 2012. (Id. at 13.) 1

1

In a June 30, 2017 letter to the Court, Defendant brought to the
Court’s attention “new facts” regarding Plaintiff’s “recent
admissions” that Defendant claims would further justify
reconsideration of Judge Torres’ opinion. (June 30, 2017 Letter from
Michael Calhoon to the Honorable John F. Keenan at 1, ECF No. 211
(filed June 30, 2017).) Defendant explains that Plaintiff recently
revealed that the study which led to the discovery of breaches in the
additional 649 loans was “limited to publicly-available data about the
loans” and was not based on a review of the loan files itself. (See
id. at 2.) However, this information is not a “new fact.” Indeed, as
discussed above, in its October 14, 2016 motion for reconsideration,
Defendant argues that Plaintiff did not meet Rule 15 standards for
amendment because the information in the Perry Johnson letter “[was]
not derived from the [loan] files” but “was available from public
sources.” (Def.’s Mot. for Reconsideration at 13, 15.)

13

Judge Torres addressed in detail Defendant’s arguments that
Plaintiff unduly delayed in bringing its claims because it has
had access to the underlying data since 2008.

Defendant argued

in its opposition to Plaintiff’s motion to amend that Plaintiff
had access to the underlying information in the Perry Johnson
letter for many years. (Def.’s Mem. of L. in Opp’n to Pl.’s Mot.
for Leave to File Second Am. Compl. at 9, ECF No. 105 (filed
Dec. 27, 2015).)

In her Opinion and Order, Judge Torres

considered and rejected Defendant’s argument that “Plaintiff, as
Servicer of the Trust, has had in its possession the loan files
for every loan in the Trust, as well as detailed records on the
loans’ performance, since it became Servicer in April 2008.”
(Op. & Order at 7, 9) (emphasis added).

Thus, this is not an

issue that was “overlooked,” as Defendant claims, but one that
was already litigated and decided. See Associated Press v. U.S.
Dep’t of Def., 395 F. Supp. 2d 17, 19 (S.D.N.Y. 2005) (a motion
for reconsideration is not “an occasion for repeating old
arguments previously rejected”).
Third, Defendant argues that Plaintiff’s new constructive
discovery claim also fails Rule 15 and 16 standards because
Plaintiff was aware of the facts underlying its constructive
discovery claim at the outset of this action. (Def.’s Mot. for
Reconsideration at 16-17.)

In support of this argument,

Defendant notes that Plaintiff asserted a constructive discovery
14

claim in the original complaint in a related case, Homeward
Residential, Inc. v. Sand Canyon Corp., No. 12 Civ. 5067
(S.D.N.Y. 2012), filed in May 2012, and therefore could and
should have raised it in their original complaint in this
action. (Id. at 17.)

Defendant also claims that Plaintiff

acknowledges in the SAC that it was aware of systemic
abandonment of Defendant’s underwriting guidelines “through the
high losses and delinquency and default rates for loans in the
Trust,” which is evidence that has always been available to
Plaintiff and should have been asserted as part of the original
complaint in 2012. (Id. at 18.)
With respect to Defendant’s argument that Plaintiff
asserted a constructive discovery claim in the related Homeward
Residential, Inc. case and thus, should have alleged that claim
at the outset in this action, Judge Torres was certainly aware
of this fact, as she was the presiding Judge over both actions
on September 30, 2016, and she explicitly noted in her Opinion
and Order allowing amendment that the constructive discovery
claim in the related case had survived a motion to dismiss when
rejecting Defendant’s arguments that such a claim would be
futile in this action. (Op. & Order at 12.)

Thus, Judge Torres

did not overlook this fact.
The remainder of Defendant’s arguments on Plaintiff’s
constructive discovery claim have already been litigated and
15

decided.

As noted above, Judge Torres rejected Defendant’s

argument that Plaintiff unduly delayed in bringing its claims
because the evidence underlying the claims was “readily
available” to Plaintiff since the commencement of this action.
(Id. at 8-9.)

Judge Torres also rejected Defendant’s argument

that Plaintiff admits in the SAC that it has known about
Defendant’s systemic breaches of underwriting guidelines since
2012.

Judge Torres held that “the most that is implied [in the

SAC] about 2012 . . . is that that was the first step in what
has now culminated in an awareness of [Defendant’s] widespread
and systematic breaches.” (Id. at 7 n.7.)

Indeed, Judge Torres

held that, even though Plaintiff had access to the underlying
information in 2012, it did not become aware of claims outside
of the original 96 loans until 2015, and thus, Plaintiff met
Rule 16’s good cause requirement. (Id. at 6-7.)

Further,

because Plaintiff included allegations in both its original and
amended complaints that suggested Defendant’s systemic disregard
for its underwriting guidelines and its knowledge of breaches of
representations—along with the allegation that further discovery
would provide evidence that Defendant violated its underwriting
standards—Judge Torres held that Plaintiff’s constructive
discovery claim related back to its timely claims under Rule 15
because Defendant was on notice that “a claim for widespread and
systemic breaches” would likely be asserted. (Id. at 11-12.)
16

Accordingly, Judge Torres did not overlook this argument and it
could not reasonably be expected to alter the court’s
conclusion.
In sum, Defendant has not provided the Court with
sufficient grounds justifying the “extraordinary remedy” of
reconsideration and Defendant’s motion for reconsideration of
the Opinion and Order allowing amendment is denied.
B.
1.

Motion to Dismiss
Legal Standard

To survive a motion to dismiss under Rule 12(b)(6), a
complaint must contain “enough facts to state a claim to relief
that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007).

A claim is plausible “when the plaintiff

pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged.” Matson v. Bd. of Educ., 631 F.3d 57, 63 (2d
Cir. 2011) (internal quotation marks omitted).

In determining

the adequacy of the complaint, the Court may consider any
document attached to the complaint as an exhibit or incorporated
in the complaint by reference, as well as documents which are
integral to the complaint. Int’l Audiotext Network, Inc. v. AT &
T Co., 62 F.3d 69, 72 (2d Cir. 1995) (per curiam).

On a motion

to dismiss, the Court must accept the factual allegations in the
complaint as true and draw reasonable inferences in the
17

plaintiff’s favor. Tsirelman v. Daines, 794 F.3d 310, 313 (2d
Cir. 2015).

In addition, the Court “should resolve any

contractual ambiguities in favor of the plaintiff.” Subaru
Distributors Corp. v. Subaru of Am., Inc., 425 F.3d 119, 122 (2d
Cir. 2005).
2.
a.

Analysis

Constructive Discovery Claim

In the SAC, Plaintiff adds a constructive discovery claim
alleging that Defendant knew of widespread and pervasive
breaches at the time it sold the loans to the Trust and should
be required to repurchase all loans with respect to which it has
breached its representations and warranties, or otherwise
compensate the Trust for these breaches. (SAC ¶¶ 10, 29.)
Defendant argues that Plaintiff’s constructive discovery claim
should be dismissed because the “clear and unambiguous” language
of the MLPA requires that Plaintiff either put Defendant on
timely notice as to breaches in specific loans or identify
particular loans that Defendant itself allegedly discovered to
be in breach. (Def.’s Mem. of L. in Supp. of Mot. to Dismiss at
7-8, ECF No. 140 (filed Nov. 23, 2016).)

Section 3.04 of the

MLPA requires Defendant to repurchase a loan only upon
“discovery by or notice to [Defendant] of [a material] breach of
a representation or warranty” and further states that the
obligation to repurchase or cure materially-breaching loans is
18

the “sole remed[y] of the Purchaser respecting . . . a breach of
the representations and warranties.” (Mortgage Loan Purchase
Agreement at 21-22, SAC Ex. E, ECF No. 126-96 (filed Oct. 6,
2016) [hereinafter MLPA]).

Thus, according to Defendant,

Plaintiff cannot allege a constructive discovery claim because
it would be an end-run around the MLPA’s requirement that
Plaintiff’s repurchase demands be made on a loan-by-loan basis.
(Def.’s Mem. of L. in Supp. of Mot. to Dismiss at 8-9.)
Even if the Court were to find that Defendant is correct
that Plaintiff will ultimately have to demonstrate breach on a
loan-by-loan basis, “this is not a pleading requirement.”
Phoenix Light SF Ltd. v. Deutsche Bank Nat’l Tr. Co., 172 F.
Supp. 3d 700, 713 (S.D.N.Y. 2016).

“A plaintiff is not required

to plead the specific actual knowledge of a defendant with
respect to the particular deficiencies of a particular loan.”
Id.

A plaintiff has satisfied their pleading burden where its

allegations “raise a reasonable expectation that discovery will
reveal evidence proving their claim.” Id. (internal quotation
marks omitted).
Several courts have allowed constructive discovery claims
to proceed at the pleading stage in the face of similar remedies
provisions.

In Deutsche Alt-A Securities Mortgage Loan Trust,

Series 2006-OA1 v. DB Structured Products, Inc., 958 F. Supp. 2d
488, 496-97 (S.D.N.Y. 2013), the court considered whether the
19

plaintiff could bring claims related to loans for which it had
not previously given the defendant notice of breaches.

The

contractual remedy provision at issue similarly required that
the defendant “repurchase breaching loans upon either notice or
discovery” and stated that “[t]he obligations of [defendant] set
forth in this Section . . . to cure or repurchase a defective
Mortgage loan

. . . constitute the sole remedies . . . against

[defendant].” Deutsche Alt-A Sec. Mortg. Loan Tr., Series 2006OA1, 958 F. Supp. 2d at 497.

The plaintiff alleged that the

defendant had discovered “numerous breaches . . . including
[those] not specifically listed in the Breach Notices” prior to
the sale of loans to the trust and thus, under the MLPA, the
defendant’s obligation to repurchase would have been triggered
upon its own discovery and would not require notice by the
plaintiff. Id.

The court held that the plaintiff had

sufficiently alleged breaches of contract, even with respect to
loans not the subject of breach notices, because “[w]hether
these loans did, in fact, breach the [representations and
warranties] and whether [defendant] knew, or should have known,
of these breaches at the time of its review, is a question of
fact [and] [i]t would therefore be premature to dismiss
Plaintiff’s claims as to loans which are not the subject of any
Breach Notices at this stage.” Id.; see also Fixed Income
Shares:

£Series M v. Citibank N.A., 130 F. Supp. 3d 842, 854
20

(S.D.N.Y. 2015) (allegations regarding defendant’s general
knowledge about widespread breaches of representations were
sufficient to meet plaintiff’s burden at motion-to-dismiss stage
even though “none of these allegations demonstrates
[defendant’s] knowledge of deficiencies with respect to any
particular loan”); U.S. Bank Nat. Ass’n v. GreenPoint Mortg.
Funding, Inc., 147 A.D.3d 79, 86 (N.Y. App. Div. 2016)
(allegation that defendant breached repurchase protocol because
it knew or should have known of breaches was “sufficient to
withstand motion to dismiss”); ACE Sec. Corp. v. DB Structured
Prods., Inc., 2013 WL 6153206, at *2 (N.Y. Sup. Ct. Nov. 21,
2013) (plaintiff was not precluded from bringing put-back claims
for non-noticed loans where plaintiff alleged that defendant
knew that the majority of the subject loans were nonconforming
and failed to repurchase despite discovery of nonconformance).
Defendant also argues that Plaintiff’s constructive
discovery claims should be dismissed under ACE Secs. Corp. v. DB
Structured Prods., Inc., 25 N.Y.3d 581 (2015), in which,
Defendant purports, the court held that notice is a necessary
precondition to pursuing the repurchase remedy. (Def.’s Mem. of
L. in Supp. of Mot. to Dismiss at 8.)

However, as articulated

in U.S. Bank Nat. Ass’n v. GreenPoint Mortg. Funding, Inc., 147
A.D.3d 79, 85-86 (N.Y. App. Div. 2016), the court in ACE Secs.
Corp. held that a breach notice is a condition precedent to a
21

claim predicated on actual notice of default, as opposed to
claims predicated on nonconforming mortgages that the defendant
itself discovered.

To require Plaintiff to notify Defendant

about the existence of nonconforming mortgages that Defendant
already knew about or would have discovered through its own
diligence would be “wholly illogical.” U.S. Bank Nat. Ass’n, 147
A.D.3d at 85.

For constructive discovery claims, “no

precommencement breach notice [is] necessary,” because under the
MPLA, the cure period is triggered upon discovery by or notice
to Defendant. Id.
Defendant next argues that even if Plaintiff could advance
a constructive discovery theory consistent with the MLPA, it has
failed to allege facts to support a reasonable inference that
Defendant sold many loans to the Trust that it knew at the time
were in breach of representations and warranties. (Def.’s Mem.
of L. in Supp. of Mot. to Dismiss at 10.)
Defendant is incorrect.

“[P]laintiffs can survive a motion

to dismiss by alleging massive breaches of representations and
warranties and by referring to the mortgage industry’s practices
of ignoring underwriting guidelines and engaging in predatory
lending.” Phoenix Light SF Ltd., 172 F. Supp. 3d at 713.
Plaintiff has provided evidence sufficient to support a
plausible allegation that Defendant was aware of systemic
disregard for its underwriting guidelines at the time it sold
22

the loans to the Trust.

Plaintiff’s evidence showing that

Defendant “was aware that there were widespread and systemic
deviations from [its] underwriting guidelines” includes (1) a
2004 investigation by the U.S. Attorney’s Office of the Eastern
District of Pennsylvania into Defendant’s origination practices
that found “significant fraud,” including “inflated appraisals,
fictitious charitable grants for borrowers to apply toward down
payments, [and] misrepresentations concerning cash brought to
closing,” (2) a 2006 H&R Block Internal Audit Report which
concluded that Defendant’s underwriting guidelines were
“frequently not complied with at the branch level,” (3)
allegations in other lawsuits regarding Defendant’s violations
of its underwriting guidelines from 2004-2007, and (4) internal
emails from 2006 and 2007 in which Defendant’s employees
describe pervasive disregard of underwriting guidelines
including “red flags that are missed or ignored on loans and
appraisals,” “forged lease agreements,” and “ungodly stated
income.” (SAC ¶¶ 3-4, 33, 42-44, 46.)

Plaintiff also provides

specific examples of breaches in underwriting guidelines from
individual loan files including the originating underwriter’s
failure to make a reasonable determination of borrowers’ stated
debts and/or employment. (Id. ¶¶ 33-41.)
As Judge Torres held in her opinion granting Plaintiff’s
motion to amend, “a pleading sufficiently alleges that a
23

defendant discovered its own breaches—triggering its remedial
obligations—when the complaint alleges facts indicating the
seller’s widespread and systemic disregard of its
representations.” (Op. & Order at 13); see also Phoenix Light SF
Ltd., 172 F. Supp. 3d at 713 (denying motion to dismiss
constructive discovery claims where complaint included “specific
examples of alleged problems with origination policies” and
plaintiff alleged that originators of the loans had been
investigated for deficient underwriting practices); BlackRock
Allocation Target Shares: Series S. Portfolio v. Wells Fargo
Bank, Nat’l Ass’n, No. 14CIV10067KPFSN, 2017 WL 1194683, at *8
(S.D.N.Y. Mar. 30, 2017) (plaintiffs adequately alleged
defendant’s knowledge of breaches in representations and
warranties on the basis of defendant’s internal documents
reflecting improper loan underwriting); Royal Park Investments
SA/NV v. Deutsche Bank Nat’l Tr. Co., No. 14-CV-4394 (AJN), 2016
WL 439020, at *6 (S.D.N.Y. Feb. 3, 2016) (“Plaintiff’s detailed
allegations of high default rates, staggering economic losses,
and widespread investigation into RMBS securitization are
sufficient to ‘allow[ ] the court to draw the reasonable
inference’ that R&Ws were breached on a loan-by-loan basis.”
(quoting Iqbal, 556 U.S. at 678)).

Accordingly, Plaintiff has

alleged facts sufficient to support a reasonable inference that
Defendant was aware of systemic disregard for its underwriting
24

guidelines and widespread breaches at the time it sold the loans
to the Trust.
Finally, Defendant argues that Plaintiff’s constructive
discovery claim fails to satisfy the heightened pleading
standard of Federal Rule of Civil Procedure 9(b). (Def.’s Mem.
of L. in Supp. of Mot. to Dismiss at 14.)

Where a complaint

alleges fraud or mistake, “a party must state with particularity
the circumstances constituting fraud or mistake.” FED. R. CIV. P.
9(b).

However, “investor put-back actions are not fraud cases”

because “[t]he contracting parties specifically negotiated
representations and warranties and the remedy for breach of
these contractual provisions—the Repurchase Protocol.” ACE Sec.
Corp., 2013 WL 6153206, at *2.

The gravamen of Plaintiff’s

claim—that Defendant discovered breaches of representations and
warranties in loans it sold to the Trust but failed to cure or
repurchase those loans in violation of its contractual
obligations under the MLPA—is breach of contract, not fraud. See
Citigroup Mortg. Loan Tr. 2007-AMC3 v. Citigroup Glob. Mkts.
Realty Corp., No. 13 CIV. 2843 GBD, 2014 WL 1329165, at *4
(S.D.N.Y. Mar. 31, 2014) (“Because Plaintiff seeks a cognizable
remedy on a traditional breach of contract claim that does not
sound in fraud, Rule 9(b) does not apply.”).

Further, as

discussed below, Plaintiff’s claims related to the “no-fraud”
representation are dismissed, after Plaintiff’s withdrawal;
25

thus, no fraud claims remain that would require Plaintiff to
meet Rule 9(b)’s heightened pleading standard.
b.

New Loan-Specific Claims

i.Claims for Breach of Representations Related to Title, Priority
Liens, and Insurance
The SAC adds claims for specific loans under the theory
that high loss severities 2 for these loans indicate that
Defendant breached its representations that (1) it had valid
title to the loans (MLPA § 3.01(a)(1)), (2) the mortgage note
and mortgages were valid and enforceable and gave Defendant a
priority over other liens (MLPA § 3.01(a)(6)-(8)), (3) there was
title insurance for each loan (MLPA § 3.01(a)(15)), and (4)
everything on the mortgage schedule was true, including that
some of the loans had private mortgage insurance (MLPA §
3.01(a)(4)). (SAC ¶¶ 55-56.)
Defendant argues that Plaintiff has not pleaded any facts
to support these allegations but instead asks the Court to infer
that these breaches must have occurred solely because the Trust
lost money on these loans. (Def.’s Mem. of L. in Support of Mot.
to Dismiss at 16.)

This inference is “unsound” according to

Defendant because a high loss severity may happen for any number

2 Loss severity is a measure of the loss made when there is a default
on a loan and the property securing the loan is sold. (Pl.’s Mem. of
L. in Opp’n to Def.’s Mot. to Dismiss at 16, ECF No. 146 (filed Dec.
14, 2016).) The loss severity for any loan is that loss stated as a
percentage of the original principal balance of the loan. (Id.)

26

of reasons unrelated to breaches of the specific warranties
enumerated in the SAC, including circumstances surrounding the
2008 housing crisis. (Id.)

Plaintiff argues in response that

facts giving rise to a reasonable inference of liability are
sufficient to defeat a motion to dismiss and the fact that the
Trust suffered such high losses on these loans leads to the
plausible inference that Defendant’s representations regarding
title, security, and insurance were false because, had these
safeguards been in place, the loans would have been protected
against such high loss severities. (Pl.’s Mem. of L. in Opp’n to
Def.’s Mot. to Dismiss at 17.)
When a plaintiff alleges facts from which the Court must
infer liability, the pleading standard is “particularly
critical.” Phoenix Light SF Ltd. v. Bank of New York Mellon, No.
14-CV-10104 VEC, 2015 WL 5710645, at *3 (S.D.N.Y. Sept. 29,
2015).

“[F]actual content that is ‘merely consistent with,’

rather than suggestive of, a finding of liability will not
support a reasonable inference.” N.J. Carpenters Health Fund v.
Royal Bank of Scot. Grp., PLC, 709 F.3d 109, 121 (2d Cir. 2013)
(quoting Twombly, 550 U.S. at 556).

But a “reasonable

inference” in the context of a complaint pled under Federal Rule
of Civil Procedure 8 “need not be ‘as compelling as any opposing
inference’ one might draw from the same factual allegations.”
Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
27

U.S. 308, 324 (2007)).

“[T]he existence of other, competing

inferences does not prevent the plaintiff’s desired inference
from qualifying as reasonable unless at least one of those
competing inferences rises to the level of an ‘obvious
alternative explanation.’” Id.
At this stage, Plaintiff’s allegations regarding high loss
severities of specific loans are sufficient to support a
reasonable inference that Defendant breached representations and
warranties related to good title, priority liens, and insurance—
safeguards designed to protect the Trust against huge losses.
Taken together with Plaintiff’s allegations regarding high rates
of delinquency and foreclosure in loans sold to the Trust and
Defendant’s widespread disregard for its underwriting guidelines
(SAC ¶¶ 5-6), Plaintiff’s claims create a plausible inference
that Defendant is liable for the alleged breaches. See Blackrock
Core Bond Portfolio v. U.S. Bank Nat’l Ass’n, 165 F. Supp. 3d
80, 99 (S.D.N.Y. 2016) (Federal Rule of Civil Procedure 8 and
Twombly do not “require certainty as ultimate victory” but
rather require that “plaintiffs’ allegations, construed as a
whole, put forward sufficient facts to allege a plausible
violation of the law”).

Although Defendant offers a competing

inference—that the 2008 housing crisis could have been the cause
of high losses on the loans—this does not render Plaintiff’s
inference unreasonable, nor is Defendant’s competing inference
28

an obvious alternative explanation given Defendant’s alleged
widespread disregard for its underwriting guidelines. See, e.g.,
In re Aluminum Warehousing Antitrust Litig., 95 F. Supp. 3d 419,
437 (S.D.N.Y. 2015) (“[W]hile there may be a myriad of
explanations for the conduct described . . . if the inference
plaintiffs ask the Court to draw is not unreasonable, then that
is the inference the Court must draw at this stage.”).
ii.Claims for Breach of “No-Fraud” Representation
Plaintiff newly alleges in the SAC that specific loans
breached MLPA § 3.01(a)(24), the “no-fraud” representation,
which represents that, to the originator’s knowledge, there was
no fraud in the origination of the loan. (SAC ¶ 40.)

Plaintiff

has since withdrawn its claims for breach of the no-fraud
representation as to the new 649 loans, recognizing that it
cannot meet Rule 9(b)’s heightened pleading standard, but
contends that it has not waived the right to re-notice breach of
this warranty at a later date “if discovery or expert study
provide grounds for asserting breach with particularity.”
(October 27, 2016 Letter from Brian V. Otero to the Honorable
Analisa Torres at 2, ECF No. 132 (filed October 27, 2016).)
Defendant argues that Plaintiff cannot reserve the right to
bring these claims indefinitely and asks that the Court dismiss
these claims with prejudice. (Def.’s Mem. of L. in Supp. of Mot.
to Dismiss at 18.)
29

Federal Rule of Civil Procedure 15 instructs a court to
“freely give leave” to amend “when justice so requires.” FED. R.
CIV. P. 15(a)(2).

However, amendment “is not warranted absent

some indication as to what [a plaintiff] might add to [its]
complaint in order to make it viable.” Shemian v. Research In
Motion Ltd., 570 F. App’x 32, 37 (2d Cir. 2014) (quoting
Horoshko v. Citibank, N.A., 373 F.3d 248, 249 (2d Cir. 2004)).
The Court recognizes that Plaintiff commenced this action in
2012 and moved to amend its claims over a year and a half prior
to the date of this Order.

Despite numerous opportunities,

Plaintiff has failed to adequately plead a viable claim for
breach of the no-fraud representation.

Accordingly, Plaintiff’s

claims related to breaches of the no-fraud representation are
dismissed with prejudice.
iii.Claims for Breach of Representations Concerning Payment
Defaults
The SAC contains new allegations as to hundreds of loans
based on alleged breaches of the representations in MLPA §§
3.01(a)(4), (16), and (29), all of which relate to borrower
payment delinquencies.

Plaintiff’s claims for breaches of each

provision are discussed in turn below.
1.

Breaches of § 3.01(a)(4)

Plaintiff alleges that Defendant breached 3.01(a)(4)—which
warrants that “the information set forth on each Schedule is

30

true and correct in all material respects as of the Cut-off
Date”—by stating in the mortgage loan schedule of specific loans
that it had received payments from certain borrowers when in
fact the borrowers had missed the relevant payments, according
to later Trustee reports. (SAC ¶ 56.)

Defendant argues that the

fact that a later report provided updated information regarding
borrower payments does not indicate that the mortgage loan
schedule was not true and correct as of the closing date.
(Def.’s Mem. of L. in Supp. of Mot. to Dismiss at 23.)
Accepting the factual allegations in the complaint as true,
Plaintiff has adequately pleaded claims for breach of §
3.01(a)(4).

Whether the borrowers actually missed those

payments, making the mortgage loan schedules false as of the
closing date, is an issue of fact not appropriately decided on a
motion to dismiss.
2.

Breaches of § 3.01(a)(16)

Plaintiff claims that 137 loans violated § 3.01(a)(16),
which provides that “there is no material default, breach,
violation or event of acceleration existing under the related
Mortgage . . . other than a payment delinquency that is for a
payment due after the date specified in (i) above”—the “nodefaults” provision—because the loans were delinquent as of
October 1, 2006 and Defendant’s no-defaults representation was
given as of the closing date of October 27, 2006. (SAC ¶ 57.)
31

Defendant argues that Plaintiff’s interpretation of §
3.01(a)(16) is incorrect because the exception for “a payment
delinquency that is for a payment due date after the date
specified in (i) above” can only refer to § 3.01(a)(9), which
states that “[a]s of the last calendar date of September 2006,
none of the Mortgage Loans are Delinquent.” (Def.’s Mem. of L.
in Supp. of Motion to Dismiss at 19-20.)

Thus, according to

Defendant, there is an exception in § 3.01(a)(16) for
delinquencies after September 30, 2006 and these 137 loans were
not in default as of the closing date. (Id.)

However, as both

Plaintiff and Defendant admit, there is no “(i) above” to which
this provision can refer—it was clearly a drafting error. (Id.
at 20; Pl.’s Mem. of L. in Opp’n to Def.’s Mot. to Dismiss at
20.)

Plaintiff argues that § 3.01(a)(16) is ambiguous and the

obvious error shows that the parties had no fixed intent about
any “as-of date” for payment defaults other than the closing
date, October 27, 2006, which governs all of Defendant’s
representations under MLPA § 3.01(a). (Pl.’s Mem. of L. in Opp’n
to Def.’s Mot. to Dismiss at 21.)

Both Plaintiff and Defendant

ask the Court to look to other agreements between the parties,
including previous MLPAs, and the parties’ subsequent course of
dealing to determine their intent concerning any exception in
the no-defaults provision. (Id. at 21; Def.’s Mem. of L. in
Supp. of Mot. to Dismiss at 20.)
32

Plaintiff also alleges that an additional 68 loans that
were sold to the Trust in December 2006 (the “subsequent loans”)
are in breach of the no-defaults representation because the
borrower had missed their November 1 or December 1 payments. 3
(SAC ¶ 57.)

The parties disagree on whether there is a cut-off

date for delinquencies in the no-defaults representation for
subsequent loans—Defendant claims that the September 30, 2006
exception in MLPA § 3.01(a)(9) also applies to these subsequent
loans, thus these loans could not have been in default, and
Plaintiff argues that under the language of PSA § 2.08(c), the
September 30, 2006 date doesn’t apply to subsequent loans.
(Pl.’s Mem. of L. in Opp. to Def.’s Mot. to Dismiss at 23;
Def.’s Mem. of L. in Supp. of Mot. to Dismiss at 22 n.9.)
First, “when considering a motion to dismiss, courts should
resolve any contractual ambiguities in favor of the plaintiff
without resorting to parol evidence.” D.C. USA Operating Co. v.

3

Defendant argues that the claims related to 68 subsequent loans are
not made clear in the SAC. However, as Defendant states in its motion
to dismiss, the Perry Johnson letter claims that 68 loans were in
breach due to missed payments in November and December 2006. (Def.’s
Mem. of L. in Supp. of Mot. to Dismiss at 22 n.9.) When assessing the
legal sufficiency of a claim, the Court may consider “the facts
alleged in the complaint, and any documents attached as an exhibit to
the complaint or incorporated by reference.” Miotto v. Yonkers Public
Sch., 534 F. Supp. 2d 422, 425 (S.D.N.Y. 2008) (citations omitted);
see also FED. R. CIV. P. 10(c) (“A copy of a written instrument that is
an exhibit to a pleading is part of the pleading for all purposes.”)
The Perry Johnson letter is an attachment to the SAC, accordingly, the
claims for breach of the no-defaults provision as to 68 subsequent
loans are included in the SAC.

33

Indian Harbor Ins. Co., 07 Civ. 0116, 2007 WL 945016, at *8
(S.D.N.Y. Mar. 27, 2007).

Thus, at this stage of the

proceeding, the Court declines to consider any extrinsic
evidence presented by the parties as to their intent regarding
the drafting of § 3.01(a)(16).

“[W]hen the language of a

contract is ambiguous, its construction presents a question of
fact, which of course precludes summary dismissal on a Rule
12(b)(6) motion.” Maniolos v. United States, 741 F. Supp. 2d
555, 567 (S.D.N.Y. 2010), aff’d, 469 F. App’x 56 (2d Cir. 2012)
(internal quotation marks and citations omitted).

Whether or

not § 3.01(a)(16) contains an exemption for any loans that were
delinquent after September 30, 2006 is not clear based on the
language in that provision.

Thus, this contractual ambiguity is

resolved in Plaintiff’s favor and the Court assumes, for the
purposes of this motion, that there is no exception in §
3.01(a)(16) for payment delinquencies after September 30, 2006.
Accordingly, Plaintiff has adequately alleged claims for breach
of § 3.01(a)(16) as to the 137 loans sold to the Trust on
October 27, 2006.
As to the additional 68 loans sold to the Trust in December
2006, it is not clear based on the language of either the MLPA
or the PSA as to the parties’ intent regarding which date—
September 30, 2006, or the “Subsequent Cut-Off Date” in PSA §
2.08(c), or some other date—applies to determining whether
34

subsequent loans are in breach of the no-defaults provision.
Accordingly, this issue cannot be resolved at the pleading stage
and Defendant’s motion to dismiss Plaintiff’s claims for breach
of the no-defaults provision as to the 68 subsequent loans is
denied. Psenicska v. Twentieth Century Fox Film Corp., 07 Civ.
10972, 08 Civ. 1571, 08 Civ. 1828, 2008 WL 4185752, at *4
(S.D.N.Y. Sept. 3, 2008) (“Where there are alternative,
reasonable interpretations of a contract term rendering it
ambiguous, the issue should be submitted to the trier of fact
and is not suitable for disposition on a motion to dismiss.”)
3.

Breaches of § 3.01(a)(29)

Plaintiff alleges a breach as to one loan of § 3.01(a)(29)
which states that “[p]rincipal payments on the Mortgage Loan
commenced no more than two months after the proceeds of the
Mortgage Loan were disbursed.” (SAC ¶ 59; MLPA § 3.01(a)(29).)
According to Plaintiff, this breach was material because “[t]he
purpose of the requirement that repayment of principal begin
within two months of the loan being made is to protect the Trust
from underreporting of delinquent loans, which are likely to
result in losses to the Trust.” (SAC ¶ 59.)

Defendant argues

that the first payment for this loan was due 66 days after the
proceeds were distributed, rather than 60 days as required under
§ 3.01(a)(29), and Plaintiff has not explained how setting the
borrower’s first-payment due date less than a week late could
35

have materially and adversely affected the value of the loan as
of the date that notice of breach was provided. (Def.’s Mem. of
L. in Supp. of Mot. to Dismiss at 22.)
Under MLPA § 3.04, a breach by Defendant must materially
and adversely affect the value of a loan or the interests of the
Trust and its certificate holders in the loan.

Plaintiff has

alleged that this particular loan breached Defendant’s
representation in § 3.01(a)(29) and that that breach was
material because, according to the Perry Johnson Letter, “[t]he
Trust suffered a total loss on this loan.” (SAC ¶ 59; Def.’s
Mem. of L. in Supp. of Mot. to Dismiss at 23 (citing SAC Ex. C,
ECF No. 126-94 at 22-23 (filed Oct. 6, 2016)).)

Resolving all

inferences in favor of Plaintiff, this claim for breach of §
3.01(a)(29) is adequately alleged.

Whether or not setting the

first-payment date six days late did in fact materially and
adversely affect the value of the loan is an issue of fact not
appropriately decided on a motion to dismiss.
Accordingly, Defendant’s motion to dismiss Plaintiff’s
claims for breaches of MLPA §§ 3.01(a)(4), 3.01(a)(16), and
3.01(a)(29) is denied.
iv.Claims for Breach of Representation That Loans Were Originated
Substantially in Accordance With Underwriting Guidelines
Plaintiff alleges that 320 loans breached § 3.01(a)(28)
which represents that “[e]ach Mortgage Loan was originated

36

substantially in accordance with the Originator’s underwriting
criteria” because the borrowers had either debt-to-income
(“DTI”) ratios in excess of the applicable underwriting
guidelines or FICO scores below the applicable underwriting
guidelines. (SAC ¶ 58; MLPA § 3.01(a)(28).) Defendant claims
that because variances from DTI and FICO thresholds are
permissible under the guidelines, the mere fact that a borrower
did not meet one of those thresholds, without additional factual
allegations, does not demonstrate a breach of the underwriting
guidelines. (Def.’s Mem. of L. in Supp. of Mot. to Dismiss at
24.)

As Defendant admits, Judge Torres already held in her

opinion on Defendant’s motion to dismiss the First Amended
Complaint that whether these deviations from the underwriting
guidelines were a permissible variance or a breach of §
3.01(a)(28) is “an issue of fact that cannot be decided on a
motion to dismiss.” (Id.)

The Court agrees.

Accordingly,

Plaintiff has adequately pleaded claims for breach of §
3.01(a)(28).
CONCLUSION
For the reasons stated above, Defendant’s motion for
reconsideration is DENIED and Defendant’s motion to dismiss in
part the second amended complaint is DENIED in part and GRANTED
in part only as to Plaintiff’s claims for breach of MLPA §
3.01(a)(24), the “no-fraud” representation.
37

The Clerk of Court

is respectfully directed to terminate the motions docketed at
ECF Nos . 128 and 139 .
SO ORDERED.

Dated :

New York , New York
August .z. L , 2017
John F . Keenan
United States District Judge

38