Ace Securities Corp. Home Equity Loan Trust, Series 2007-HE3 v. DB Structured Products, Inc.

Filing 29

OPINION & ORDER re: (13 in 1:13-cv-02828-AJN) MOTION to Dismiss the Complaint. filed by DB Structured Products, Inc., (16 in 1:13-cv-01869-AJN) MOTION to Dismiss the Complaint. filed by DB Structured Products, Inc., (16 in 1:13-cv-02053 -AJN) MOTION to Dismiss the Complaint. filed by DB Structured Products, Inc., (13 in 1:13-cv-03687-AJN) MOTION to Dismiss the Complaint. filed by DB Structured Products, Inc. For the foregoing reasons, DBSP's motions to dismiss ar e granted in part and denied in part. Plaintiff's declaratory judgment claims, contained in the fourth causes of action in each Complaint, are DISMISSED with prejudice. A scheduling conference in these four actions is hereby set for April 25, 2 014 at 11:30 AM in Courtroom 906 of the Thurgood Marshall U.S. Courthouse, 40 Foley Square, New York, New York. Pursuant to the Court's Individual Rules, the parties must confer and file a joint Proposed Civil Case Management Plan and Scheduling Order no later than seven days prior to the conference. The parties shall use the form available on the Court's website. The parties are also directed to submit, by the same date, a proposed order providing for the consolidation of these four actions going forward. This resolves Docket No. 16 in No. 13 Civ. 1869, Docket No. 16 in No. 13 Civ. 2053, Docket No. 13 in No. 13 Civ. 2828, and Docket No. 13 in No. 13 Civ. 3687. (Signed by Judge Alison J. Nathan on 3/20/2014) (djc) Modified on 3/20/2014 (djc).

--..11

USDC SDNY

.DOC"tJMINT
ELICfaONICALL Y FILED

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

----------------------------------------------------------------------)(
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2007-HE3, by HSBC BANK USA,
NATIONAL ASSOCIATION, as Trustee,

DOC#:

. DATE FILED: ~MAR

Plaintiff,
OPINION & ORDER

DB STRUCTURED PRODUCTS, INC.,
Defendant.

----------------------------------------------------------------------)(
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2007-WM2, by HSBC BANK USA,
NATI ON AL ASSOCIATION, as Trustee,
13 Civ. 2053 (AJN)
Plaintiff,
OPINION & ORDER

-vDB STRUCTURED PRODUCTS, INC.,
Defendant.

----------------------------------------------------------------------)(
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2007-HE4, by HSBC BANK USA,
NATIONAL ASSOCIATION, as Trustee,
13 Civ. 2828 (AJN)
Plaintiff,
OPINION & ORDER

-v-

DB STRUCTURED PRODUCTS, INC.,
Defendant.

----------------------------------------------------------------------)(

1

!
l

2 Q~~£j~

13 Civ. 1869 (AJN)
-v-

I

----------------------------------------------------------------------)(
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2007-HE5, by HSBC BANK USA,
NATI ONAL ASSOCIATION, as Trustee,
13 Civ. 3687 (AJN)
Plaintiff,
OPINION & ORDER

-v-

DB STRUCTURED PRODUCTS, INC.,
Defendant.

----------------------------------------------------------------------)(
ALISON J. NATHAN, District Judge:
Before the Court are four motions to dismiss filed by Defendant DB Structured Products,
Inc. ("DBSP") in four separate breach-of-contract actions brought by HSBC Bank USA,
National Association ("Plaintiff' or the "Trustee") on behalf of four residential mortgage
securitization trusts for which Plaintiff serves as trustee (the "Trusts"). In each action, Plaintiff
alleges that DBSP repudiated its obligations under the Trusts' governing agreements by failing to
repurchase mortgage loans that it sold to the Trusts, even though DBSP knew or was notified
that those loans were in breach of certain representations and warranties that it made at closing.
For the reasons that follow, DBSP's motions are granted in part and denied in part.
I.

BACKGROUND
The Court will briefly outline the procedural history of these four actions and DBSP's

motions to dismiss before turning to Plaintiffs allegations. These actions are materially similar,
in terms of the parties and their claims, to two parallel cases, one before Judge Sweet in this
district and one in New York state court. See Deutsche Alt-A Sec. Mortg. Loan Trust, Series

2

2006-0AJ v. DB Structured Prods., Inc., 9S8 F. Supp. 2d 488 (S.D.N.Y. 2013) (granting in part

and denying in part DSBP's motion to dismiss); ACE Sec. Corp. v. DB Structured Prods., Inc.,
96S N.Y.S.2d 844 (N.Y. Sup. Ct.) (denying DBSP's motion to dismiss on statute-of-limitations
grounds), rev 'd, 977 N.Y.S.2d 229 (1st Dep't 2013).

A. Procedural History
Between March and May of 2013, Plaintiff filed four complaints against DBSP. They
contained similar allegations, but each one concerned a different residential mortgage-backed
securities ("RMBS") transaction involving DBSP. Specifically, No. 13 Civ. 1869, which was
initially assigned to the undersigned, concerned a securitization trust called ACE Securities Corp.
Horne Equity Loan Trust, Series 2007-HE3, or "ACE 2007-HE3" (the "HE3 action"); No. 13
Civ. 20S3, originally assigned to Judge Hellerstein, involved ACE 2007-WM2 (the "WM2
action"); No. 13 Civ. 2828, originally assigned to Judge Marrero, involved ACE 2007-HE4 (the
"HE4 action"); and No. 13 Civ. 3687, originally assigned to Judge Kaplan, involved ACE 2007HES (the "HES action"). On August 29, 2013, the undersigned accepted the WM2, HE4, and
HES actions as related to the HE3 action.
On May 3, 2013, DBSP filed a motion to dismiss in the HE3 action, which was fully
submitted as of July 12, 2013. Subsequently, on July 26, DBSP filed a similar motion to dismiss
in the WM2 action. But once the three related cases were reassigned, the parties stipulated that
DBSP would withdraw its original motion to dismiss in the WM2 action and re-file it
simultaneously with motions to dismiss in the HE4 and HES actions. The Court authorized
consolidated briefing for those three motions. Thus, the three motions to dismiss were filed,
along with a single opening brief from DBSP, on September 27, 2013. Plaintiff filed its
opposition on October 2S, and DBSP's reply followed on November lS.
3

As discussed in greater detail below, Plaintiffs allegations and the arguments advanced
in the parties' briefs are, with certain exceptions, materially identical across the four cases. In
the remainder of this opinion, the Court will note pertinent differences where necessary, but will
generally address the factual and legal issues in a unified fashion.

B. RMBS Securitizations Generally
An RMBS securitization involves the sale to investors of securities, or RMBS, issued by
a trust. (For tax reasons, the trust is typically organized as a Real Estate Mortgage Investment
Conduit, or "REMIC." See 26 U.S.C. §§ 860A-860G.) The trust's assets consist of numerous
residential mortgage loans; the payments made on the loans are "passed through" to the investors
holding the RMBS, who receive distributions on their securities to the extent and in the priority
provided for by the securitization documents. WM2 Compl. iii! 26-30.
A securitization generally involves a "sponsor," which is an affiliate of a bank, which
acquires mortgage loans from their originators. The sponsor then sells the loans to a specialpurpose entity known as the "depositor," which is typically affiliated with the sponsor, and
which immediately transfers (or "deposits") the mortgage loans into the trust. The trust then
issues securities to the depositor, which sells them to investors through an underwriter. In this
way, the proceeds generated by the sale of the securities ultimately finance the purchase of the
mortgage loans. A trustee then holds the loans and administers the trust for the benefit of
investors. And a "servicer" is engaged to collect payments on the underlying loans in a manner
consistent with the securitization documents. WM2 Compl. iii! 26-27.
The sponsor typically conducts "some form ofreview" of the mortgage loan origination
files and therefore is acquainted with the characteristics of the loans that it sells to the trust via
the depositor. These files include borrowers' applications and associated documentation.
4

Because they are not available to investors in the RMBS prior to purchase, and because the
loans' characteristics affect the cash flows that those investors will receive and the credit ratings
of the RMBS, the sponsor makes numerous "representations and warranties" as to the
characteristics of the loans. These representations and warranties are backstopped by specific
remedies provided in the securitization documents, which generally require a sponsor, once it
becomes aware that a representation or warranty is not accurate with respect to a certain loan, to
either "cure" such breach or replace or repurchase the loan from the trust within a specified
period of time. WM2 Compl. i!il 28-37.

C. The Parties' Agreements
Plaintiff was the trustee and DBSP was the sponsor for the four securitizations at issue in
these actions. Each securitization involved two contracts relevant here: a Mortgage Loan
Purchase Agreement ("MLP A") and a Pooling and Servicing Agreement ("PSA") (together, the
"Agreements"). Both Agreements are governed by New York law. PSA § 12.04; MLPA § 17. 1
Pursuant to the MLP A, the depositor, ACE Securities Corp. ("ACE"), purchased the
loans from the sponsor, DBSP. In the MLPA, ACE is named as the "Purchaser," and DBSP is
named as the "Seller." The MLPA sets forth numerous representations and warranties made by
DBSP with respect to the characteristics of the mortgage loans. See MLPA § 6. It also specifies
a repurchase protocol:
Upon discovery by the Seller, the Purchaser or any assignee, transferee or designee of the
Purchaser of ... a breach of any of the representations and warranties contained in
Section 6 that materially and adversely affects the value of any Mortgage Loan or the

1

The Court follows the parties' lead in not distinguishing between the specific Agreements associated with the
various transactions. See Def. Br. at 2 n.6 ("The MLP As and PSAs executed in connection with each Trust are
substantially similar in all material respects"). Quoted portions are taken from the Agreements associated with the
ACE 2007-WM2 securitization. See Woll Deel. Exs. I, 2.

5

interest therein of the Purchaser or the Purchaser's assignee, transferee or designee, the
party discovering such breach shall give prompt written notice to the Seller. Within sixty
(60) days of its discovery or its receipt of notice of ... any such breach of a
representation and warranty, the Seller promptly shall ... cure such ... breach in all
material respects or, in the event the Seller cannot ... cure such ... breach, the Seller
shall, within ninety (90) days of its discovery or receipt of notice of ... any such breach
of a representation and warranty, either (i) repurchase the affected Mortgage Loan at the
Purchase Price (as such term is defined in the [PSA]) or (ii) pursuant to the provisions of
the [PSA], cause the removal of such Mortgage Loan from the Trust Fund and substitute
one or more Qualified Substitute Mortgage Loans.
Id. § 7( a). The MLP A provides that "the obligations of the Seller ... to cure or repurchase a

defective Mortgage Loan ... constitute the sole remedies of the Purchaser against the Seller
respecting a ... breach of the representations and warranties." Id. § 7(c).
Pursuant to the PSA, ACE deposited the loans into the Trusts. The PSA names ACE as
the "Depositor," DBSP as the "Sponsor," and Plaintiff as the "Trustee." The PSA provides that
the "Depositor does hereby transfer, assign, set over and otherwise convey to the Trustee ... , for
the benefit of the Certificateholders, ... the rights of the Depositor under the [MLP A]
(including, without limitation the right to enforce the obligations of the other parties thereto
thereunder)." PSA § 2.01. The PSA also contains a section concerning the repurchase of
defective loans, which references the representations and warranties made by DBSP in the
MLP A as well as its cure, substitution, or repurchase obligations under that agreement:
Upon discovery or receipt of notice ... of a breach by the Sponsor of any representation,
warranty or covenant under the [MLP A] in respect of any Mortgage Loan that materially
and adversely affects the value of such Mortgage Loan or the interest therein of the
Certificateholders, the Trustee shall promptly notify the Sponsor and the Servicer of such
... breach and request that the Sponsor ... cure such ... breach within sixty (60) days
from the date the Sponsor was notified of such ... breach, and if the Sponsor does not ...
cure such ... breach in all material respects during such period, the Trustee shall enforce
the obligations of the Sponsor under the [MLP A] to repurchase such Mortgage Loan ...
at the Purchase Price within ninety (90) days after the date on which the Sponsor was
notified of such ... breach, if and to the extent that the Sponsor is obligated to do so
6

under the [MLP A] .... In lieu of repurchasing any such Mortgage Loan as provided
above, if so provided in the [MLP A], the Sponsor may cause such Mortgage Loan to be
removed from [the Trust] ... and substitute one or more Qualified Substitute Mortgage
Loans ....
Id. § 2.03(a). And like the MLP A, the PSA provides that "the obligation of the Sponsor to cure

or to repurchase (or to substitute for) any Mortgage Loan ... as to which such a breach has
occurred and is continuing shall constitute the sole remedy respecting such ... breach available
to the Trustee and the Certificateholders." Id.

D. Plaintifrs Allegations
Plaintiff alleges that DBSP's representations and warranties were false when made with
respect to numerous loans in the four Trusts, and that DBSP failed to cure those breaches or
replace or repurchase the defective loans in violation of its obligations under the Agreements.
Before Plaintiff brought these actions, an unnamed "Certificateholder" hired an
independent firm to conduct a "forensic review" of the loan files associated with the mortgage
loans held by the Trusts. E.g., WM2 Compl. ii 44. In each case, that review revealed widespread
breaches of the representations and warranties, affecting mortgage loans numbering in the
hundreds or thousands. See HE3 Compl. ii 48 (alleging that 994 of the 1,375 loans reviewed
were in breach of one or more ofDBSP's representations and warranties); WM2 Compl. ii 48
(1,254of2,093 loans reviewed); HE4 Compl. ii 50 (1,117of1,607 loans reviewed); HES Compl.

ii 50 (368 of 603 loans reviewed).

(Each Complaint provides additional details regarding the

discovered breaches.) Plaintiff asserts that the "inaccuracies, misrepresentations, omissions, and
other breaches were so fundamental and numerous as to preclude any notion that they were the
result of mere inadvertence or accident." WM2 Compl. ii 50.

7

Plaintiff alleges upon information and belief that, consistent with the practices of other
RMBS sponsors in the industry, DBSP conducted due diligence on the mortgage loans when it
first acquired them, and during such due diligence "discovered a material number of breaches on
Mortgage Loans subsequently identified by the forensic review." E.g., WM2 Compl. if 11.
Additionally, in the HE4 and HES actions, Plaintiff claims that DBSP discovered the breaches
based on its affiliation with the companies that originated many of the loans that DBSP sold to
the Trusts. HE4 Compl.

if lOS; HES Compl. if lOS.

Under section 7(a) of the MLPA, Plaintiff

asserts, DBSP's discovery of these breaches at the time of the securitizations triggered its
obligation to cure, replace, or repurchase the defective loans. E.g., WM2 Compl. if 12 (stating
that DBSP "had an obligation on day one to cure the breaches, substitute non-breaching loans for
the breaching loans, or repurchase the breaching loans" (emphasis added)).
Plaintiff also argues that DBSP's obligations were triggered independently as a result of
Plaintiff's notifying DBSP of the forensic review's results. (Under section 7(a) of the MLPA
and section 2.03(a) of the PSA, Plaintiff was required to notify DBSP of these breaches after it
received notice of them. WM2 Compl.

ifil 69-70.)

For each securitization, Plaintiff sent

multiple such notices. See HE3 Compl. if 69 (notices sent on November 21, 2011, January 30,
2012, and November 28, 2012); WM2 Compl.

if 70 (July 17, 2012, September S, 2012, and

March 12, 2013); HE4 Compl. if 71 (September 19, 2012, November 19, 2012, and March 12,
2013); HES Compl.

if 71

(September S, 2012 and March 12, 2013). Some of these notices

provided, for each loan as to which a breach had been identified, the loan number, the specific
representations and warranties that had been breached, the specific subsections of the MLP A
setting forth those representations and warranties, and a description of the facts establishing the

8

breaches. E.g., WM2 Compl. if 71. Other notices were somewhat less detailed, but still
identified each breaching loan by number. E.g., id.

if 72.

Notwithstanding DBSP's allegedly discovering and receiving notice of the many
breaches of its representations and warranties, DBSP has, to date, not repurchased any of the
loans identified in Plaintiff's breach notices. HE3 Compl. if 88; WM2 Compl. if 84; HE4 Compl.

if 85; HE4 Compl. if 85.
II.

LEGALSTANDARD
When deciding a motion to dismiss for failure to state a claim pursuant to Federal Rule of

Civil Procedure 12(b)(6), a court must accept as true all well-pleaded facts and draw all
reasonable inferences in the light most favorable to the non-moving party. See Kassner v. 2nd
Ave. Delicatessen, Inc., 496 F.3d 229, 237 (2d Cir. 2007). Although factual allegations are
therefore afforded a presumption of truth, a court is "not bound to accept as true a legal
conclusion couched as a factual allegation." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)) (internal quotation mark omitted).
"To survive a motion to dismiss, the plaintiff's pleading must contain sufficient factual matter,
accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570).
In addition to the allegations in the complaint itself, a court may consider documents
attached as exhibits, incorporated by reference, or relied upon by the plaintiff in bringing suit, as
well as any judicially noticeable matters. See Halebian v. Berv, 644 F .3d 122, 131 n. 7 (2d Cir.
2011); In re Harbinger Capital Partners Funds Investor Litig., No. 12 Civ. 1244 (AJN), 2013
WL 5441754, at *15 n.6 (S.D.N.Y. Sept. 30, 2013). "If a document relied on in the complaint
contradicts allegations in the complaint, the document, not the allegations, control, and the court

9

need not accept the allegations in the complaint as true." TufAmerica, Inc. v. Diamond, -F.
Supp. 2d-, No. 12 Civ. 3529 (AJN), 2013 WL 4830954, at *1 (S.D.N.Y. Sept. 10, 2013)
(quoting Poindexter v. EM! Record Grp. Inc., No. 11 Civ. 559 (LTS), 2012 WL 1027639, at *2
(S.D.N.Y. Mar. 27, 2012)) (internal quotation marks omitted).

III.

DISCUSSION
In the Complaints, Plaintiff brings four causes of action for contract damages, rescissory

damages, specific performance, and declaratory judgment. E.g., WM2 Compl. iii! 99-141.
DBSP makes two primary arguments that the Complaints should be dismissed. First, it
argues that under the Agreements' "sole remedy" provisions, the only remedy that the Court may
award is specific performance ofDBSP's repurchase obligation. On the basis of this argument,
DBSP contends that Plaintiff's damages claims are improper and that Plaintiff's specific
performance claims also fail for not alleging that repurchase is actually possible for all breached
loans. Def. Br. at 4, 5-6. 2 Second, DBSP argues that Plaintiff provided inadequate notice of
breached loans and therefore is barred under the Agreements from bringing suit to enforce
DBSP's obligations. Def. Br. at 4-5. The Court will address these arguments in tum.

A. The Sole Remedy Provisions Do Not Require Dismissal
DBSP argues that the Agreements bar Plaintiff's claims for money damages. Plaintiff
contends that this question is premature at this stage, but in fact it is a central component of
DBSP's argument that the Complaints should be dismissed. Specifically, DBSP argues that
Plaintiff's remedies are limited to specific performance of the repurchase remedy. For a court to
grant specific performance, performance by the defendant must be possible. See Wells Fargo

2

Citations to "Def. Br.," "Pl. Opp.," and "Def. Reply" refer to the parties' consolidated memoranda of law
submitted in the WM2, HE4, and HES actions. The arguments raised in the HE3 action are materially similar.

10

Bank, NA. v. Bank ofAm., NA., No. 11 Civ. 4062 (JPO), 2013 WL 372149, at *8 (S.D.N.Y. Jan.

31, 2013). In DBSP's view, the repurchase of many breached loans is not possible, since under
its interpretation of the Agreements, loans that have been foreclosed upon and liquidated cannot
be repurchased. Def. Br. at 23-28. If that is true, and if Plaintiff has not alleged that the
breached loans can actually be repurchased, then Plaintiff would, in DBSP's view, fail to state a
claim for specific performance. Def. Br. at 5-6.
1. Plaintiff Pleads Only Breaches of the Representations and Warranties
Plaintiff initially argues that whether or not the Agreements' sole remedy provisions limit
its remedy for breach of warranty claims to specific performance ofDBSP's repurchase
obligation, that limitation "simply does not apply to a breach of DBSP's obligation to cure or
repurchase." Pl. Opp. at 9. In other words, Plaintiff contends that DBSP's failure to repurchase
loans that it was obligated to repurchase constitutes an independent breach of contract. The
Court disagrees.
"New York law ... does not recognize pre-suit remedial provisions as constituting
separate promises which can serve as the basis for independent causes of action." DEALT 20060AJ, 958 F. Supp. 2d at 499. A breach of contract claim accrues when the plaintiff has a legal

right to demand payment. Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765,
770-71 (2012). When a plaintiff alleges that a representation or warranty was false, the relevant
breach is the false representation or warranty, and the plaintiff has a legal right to demand
payment as of the date it was made. Numerous courts have held that a defendant's failure to
repurchase a breached loan does not affect when the plaintiffs claim accrues, and therefore does
not constitute a separate breach of contract. See, e.g., Homeward Residential, Inc. v. Sand
Canyon Corp., No. 12 Civ. 7319 (AT), 2014 WL 572722, at *15 (S.D.N.Y. Feb. 14, 2014)
11

(dismissing claims that defendant breached "duty to cure or repurchase"); Lehman XS Trust,
Series 2006-4N ex rel. U.S. Bank, Nat'l Ass 'n v. Greenpoint Mortg. Funding, Inc., -

F. Supp.

2d-, No. 13 Civ. 4707 (SAS), 2014 WL 108523, at *3 (S.D.N.Y. Jan. 10, 2014) (defendant's
"alleged failure to comply with its cure or repurchase obligations does not give rise to a separate
breach of contract at the time ofrefusal"); ACE Sec. Corp., 977 N.Y.S.2d at 231 ("the claims
accrued on the closing date of the MLP A, ... when any breach of the representations and
warranties contained therein occurred"); Nomura Asset Acceptance Corp. Alt. Loan Trust, Series
2005-S4 ex rel. HSBC Bank USA, Nat'l Ass'n v. Nomura Credit & Capital, Inc., 971 N.Y.S.2d
73, 2013 WL 2072817, at *9 (N.Y. Sup. Ct. May 10, 2013) ("The repurchase obligation ... is
merely a remedy. It is not a duty independent of the Mortgage Representation breach of contract
claims."). True, courts have often approached this issue in the context of determining when a
statute oflimitations began running, but that question is inextricably intertwined with Plaintiffs
theory that it may bring separate contract claims based on DBSP's failure to repurchase breached
loans. To sanction Plaintiffs theory would effectively allow a plaintiff to extend the statute of
limitations for breach of warranty claims.
Accordingly, the Court rejects Plaintiffs argument that the sole remedy provisions are
inapplicable simply because it has pleaded "independent" failure-to-repurchase claims. Because
such claims are not independently actionable, the question of whether Plaintiffs damages claims
survive depends on whether the Agreements' sole remedy provisions are enforceable and, if they
are, whether they bar damages for Plaintiffs repurchase claims.
Plaintiff cites two cases holding that a defendant's failure to repurchase constitutes an
independent breach, but they do not affect the Court's conclusion. One of them, the New York
Supreme Court's decision in ACE Securities Corp., 965 N.Y.S.2d 844, was recently reversed by
12

New York's Appellate Division. See ACE Sec. Corp., 977 N.Y.S.2d 229. The other, LaSalle
Bank National Association v. Lehman Brothers Holdings, Inc., 237 F. Supp. 2d 618 (D. Md.
2002), relied on a First Circuit case for the proposition that "a loan seller's failure to repurchase
non-conforming loans upon demand as required by a contract is an independent breach of the
contract entitling the plaintiff to pursue general contract remedies." Id. at 638 (citing Resolution
Trust Corp. v. Key Fin. Servs., Inc., 280 F.3d 12 (1st Cir. 2002) (applying New York law)).
However, the LaSalle court misread that case: although the First Circuit affirmed a district court
opinion relying on an independent breach theory, it pointedly declined to decide whether the
district court's view of the law was correct because that question was not dispositive. Resolution
Trust Corp., 280 F .3d at 18 & n.16.
In this case too, the question of whether DBSP's failure to repurchase breached loans
constitutes a separate breach of contract is of limited relevance. Indeed, even the court in
LaSalle, like the First Circuit in Resolution Trust Corp., clarified that the "general contract
damages" it was authorizing were limited to the amount that the defendant would have paid if it
had repurchased the loans when its obligation to do so arose. LaSalle, 237 F. Supp. 2d at 638;
Resolution Trust Corp., 280 F.2d at 18-19 & n.15; see also Bank ofNY. Mellon v. WMC Mortg.,
LLC, 41 Misc.3d 1230(A), 2013 WL 6153207, at *1 (N.Y. Sup. Ct. Nov. 21, 2013) (noting that
"virtually all of the federal and state courts in New York that have recently considered this issue
have held that a Trust's ability to recoup its RMBS losses is limited to the defined repurchase
price for non-conforming loans," regardless of how the breach is characterized) (footnotes
omitted). As explained below, although Plaintiffs independent breach theory is erroneous, the
sole remedy provisions do not bar a similar measure of money damages.

13

2. Plaintiffs Remedies May Include Money Damages
Contracting parties are generally free to limit their remedies, and courts applying New
York law routinely enforce such limitations according to their terms. See Baidu, Inc. v.
Register.com, Inc., 760 F. Supp. 2d 312, 317-18 (S.D.N.Y. 2010) (Chin, J). This reflects the fact
that "[a] limitation on liability provision ... represents the parties' Agreement on the allocation
of the risk of economic loss in the event that the contemplated transaction is not fully executed,
which the courts should honor." Metro. Life Ins. Co. v. Noble Lowndes Int'!, Inc., 84 N.Y.2d
430, 436 (1994).
The Agreements state that "the obligation of [DBSP] to cure or to repurchase" breached
loans "shall constitute the sole remedy respecting such ... breach" available to the Trusts, the
Trustee, and the certificateholders. PSA § 2.03(a); see also MLPA § 7(c) (employing materially
identical language). Notwithstanding that language, Plaintiff clearly is entitled to sue DBSP for
failing to comply with its obligations, and DBSP does not argue otherwise. See PSA § 2.03(a)
(contemplating the Trustee's ability to "enforce" DBSP's repurchase obligation); cf Assured
Guar. Mun. Corp. v. Flagstar Bank, FSB, No. 11 Civ. 2375 (JSR), 2011WL5335566, at *4--5
(S.D.N.Y. Oct. 31, 2011) ("the 'sole remedy' provisions of the Transaction Documents do not
preclude AGM from bringing suit against Flagstar in the event that ... Flagstar refuses to
comply with its repurchase obligations"). Nonetheless, as other courts have held, the clear
contractual limitations on Plaintiffs remedies do not dissolve simply because it must bring suit
to enforce those remedies; in other words, the only remedy available to Plaintiff remains the cure
or repurchase of defective loans. See MASTR Adjustable Rate Mortgs. Trust 2006-0A2 v. UBS
Real Estate Sec., Inc., No. 12 Civ. 7322 (HB), 2013 WL 4399210, at *4 (S.D.N.Y. Aug. 15,
2013); DEALT 2006-0AJ, 958 F. Supp. 2d at 497-500; Flagstar, 2011WL5335566, at *5.
14

Thus, by their terms, the Agreements limit Plaintiff to seeking an order of specific perfonnance
compelling DBSP to repurchase loans at the Purchase Price.
However, specific performance is an equitable remedy, and "where the granting of
equitable relief appears to be impossible or impracticable, equity may award damages in lieu of
the desired equitable remedy." Doyle v. Allstate Ins. Co., 1 N.Y.2d 439, 443 (1956). In DBSP's
view, the repurchase of many breached loans is impossible, since under its interpretation of the
Agreements, loans that have been foreclosed upon and liquidated cannot be repurchased. Def
Br. at 23-28. With respect to such loans, DBSP would have the Court award Plaintiff no remedy
at all. But even assuming that DBSP's interpretation of the Agreements is correct, and that some
loans can no longer be repurchased, a number of courts have been willing-in the face of sole
remedy provisions like the ones in the Agreements-to award money damages equivalent to
what the defendant would pay were performance possible. 3 See Resolution Trust Corp., 280
F.3d at 18; MASTR 2006-0A2, 2013 WL 4399210, at *3--4; DEALT 2006-0AJ, 958 F. Supp. 2d
at 500--01; Flagstar, 2011 WL 5335566, at *5-6. DBSP cites only one case that actually holds

3

DBSP suggests that allowing Plaintiff to recover damages where specific performance is impossible is equivalent
to adopting the "failure of essential purpose" doctrine, which DBSP argues is confined to UCC cases. Def. Reply at
10; see, e.g., Cayuga Harvester v. Allis-Chalmers Corp., 95 A.D.2d 5, 6-7 (4th Dep't 1983) (under the UCC, when
"a limited remedy ... fails of its essential purpose, the buyer is relieved of its restrictions and may resort to other
remedies"). No matter how they are characterized, however, the cases cited in the text hold that where specific
performance is no longer possible as a result of a defendant's failure to comply with its repurchase obligations,
courts may award damages to make the plaintiff whole. See S. Fin. Grp., LLC v. McFarland State Bank, No. 12
Civ. 848, 2013 WL 5447994, at *8 (E.D. Wis. Sept. 30, 2013) (discussing this issue). Which is simply to say that
the UCC's "failure of essential purpose" doctrine appears to be consistent with broader principles of equity. See
Orix Real Estate Capital Mlcts., LLC v. Superior Bank, FSB, 127 F. Supp. 2d 981, 983 (N.D. Ill. 2000) ("[T]he
leading English case on failure of essential purpose, Krell v. Henry, 2 K.B. 740 (1903), concerns a short term
apartment lease, the purpose of which was to witness Edward VII's coronation, a ceremony that was later cancelled
due to Edward's illness; this would not have been a UCC contract.").

15

to the contrary,4 MASTR Asset Backed Sec. Trust 2006-HE3 ex rel. US. Bank Nat 'l Ass 'n v.
WMC Mortg. Corp., 843 F. Supp. 2d 996, 1001 (D. Minn. 2012), and the Court will decline to
follow it in light of persuasive in-Circuit precedent pennitting money damages where repurchase
is or may be impossible. DBSP suggests that damages will amount to a windfall for Plaintiff
because the Agreements specifically contemplate its being unable to recover for liquidated loans,
Def. Reply at 10, but that argument is doubly circular: it assumes both DBSP's position that
liquidated loans cannot be repurchased and that the parties expected courts not to grant damages
in lieu of specific performance with respect to liquidated loans.
DBSP does cite some New York cases holding that sole remedy provisions like the ones
at issue here render consequential damages unavailable, but those cases are fully consistent with
the Court's conclusion. See Assured Guar. Mun. Corp. v. DLJ Mortg. Capital, Inc., 964
N.Y.S.2d 57, 2012 WL 5192752, at *8 (N.Y. Sup. Ct. Oct. 11, 2012), rev'd in part on other
grounds, -N.Y.S.2d-, 2014 WL 750485 (1st Dep't Feb. 27, 2014); Home Equity Mortg.
Trust Series 2006-5 v. DLJ Mortg. Capital, Inc., No. 653787/2012, slip op. at 12-13 (N.Y. Sup.
Ct. Sept. 18, 2013), Woll Deel. Ex. 28. The fact that money damages are available under certain
circumstances as an alternative means of enforcing DBSP's repurchase obligation does not affect
whether Plaintiffs remedies are, in fact, limited to enforcement of that obligation. That is, to the
extent that the Agreements' sole remedy clauses are valid and enforceable, they preclude
Plaintiff from recovering types of damages-such as consequential damages-beyond what

4

In two other cases cited by DBSP, the court dismissed damages claims because the plaintiff entirely failed to allege
that it was entitled to specific performance. See First Bank Richmond, N.A. v. Credit Suisse First Boston Corp., No.
07 Civ. 1272, 2008 WL 4410367, at *12 (S.D. Ind. Sept. 24, 2008); Bankers Life Ins. Co. v. Credit Suisse First
Boston Corp., No. 07 Civ. 690, 2008 WL 1817294, at *8 (M.D. Fla. Apr. 22, 2008). These cases are inapposite
because Plaintiff has pied its entitlement to specific performance; the question is whether money damages may be
awarded where that equitable remedy is unavailable. E.g., WM2 Compl. iril 126-133.

16

would be "commensurate with the sole remedy clause." MASTR 2006-0A2, 2013 WL 4399210,
at *4. The Court's role is limited to ensuring that the parties receive the benefit of their bargain,
and does not extend to granting relief that the Agreements explicitly do not contemplate. See

Soggs v. Crocco, 247 A.D.2d 887, 888-89 (4th Dep't 1998).
With that said, Plaintiff argues that the sole remedy provisions are not, in fact,
enforceable in light of DBSP's alleged gross negligence and willful misconduct. Pl. Opp. at 1214. As noted above, courts applying New York law will ordinarily enforce sole remedy
provisions according to their terms. However, that principle sometimes yields to public policy
considerations that prevent contracting parties from insulating themselves from the consequences
of their own egregious misconduct. See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554
(1992) ("a party may not insulate itself from damages caused by grossly negligent conduct");

Kalisch-Jarcho, Inc. v. City ofNew York, 58 N.Y.2d 377, 384-85 (1983) ("an exculpatory
agreement, no matter how flat and unqualified its terms, ... will not apply to exemption of
willful or grossly negligent acts"). On the other hand, while the New York Court of Appeals has
applied this rule "equally to contract clauses purporting to exonerate a party from liability and
clauses limiting damages to a nominal sum," Sommer, 79 N.Y.2d at 554; see also Abacus Fed.

Sav. Bank v. ADT Sec. Servs., Inc., 18 N.Y.3d 675, 682-83 (2012), the sole remedy provisions in
this case do neither of those things.
Nonetheless, numerous courts have held or assumed that less dramatic limitations on
remedies, such as caps on damages or restrictions on the types of damages available, can also be
void where gross negligence or willful misconduct is shown. See, e.g., Morgan Stanley & Co. v.

Peak Ridge Master SPC Ltd., 930 F. Supp. 2d 532, 544-45 (S.D.N.Y. 2013) (Carter, J.)
(assuming that provision barring "consequential, incidental, punitive or special damages" might
17

be void but finding that showing of willful misconduct was insufficient); Tradex Europe SPRL v.

Conair Corp., No. 06 Civ. 1760 (KMW) (FM), 2008 WL 1990464, at *1, *3-5 (S.D.N.Y. May
7, 2008) (similar); Net2Globe Int'!, Inc. v. Time Warner Telecom ofN Y, 273 F. Supp. 2d 436,
449-56 (S.D.N.Y. 2003) (Marrero, J.) (similar); Deutsche Lufthansa AG v. Boeing Co., No. 06
Civ. 7667 (LBS), 2007 WL 403301, at *1, *3-4 (S.D.N.Y. Feb. 2, 2007) (same for indemnity
provision limiting liability to $1 million in the aggregate); SoroofTrading Dev. Co. v. GE

Microgen Inc., No. 10 Civ. 1391(LGS),2013 WL 5827698, at *11-12 (S.D.N.Y. Oct. 30, 2013)
(denying summary judgment on enforceability of provision limiting liability to $1 million in
light of fact questions as to willfulness and gross negligence). And in DEALT 2006-0AJ, a case
very similar to this one, Judge Sweet cited allegations of gross negligence and willful
misconduct as one ground for holding that Plaintiff's damages claims against DBSP could
survive. See 958 F. Supp. 2d at 500-01.
Granted, the above-cited cases extend the Court of Appeals's holdings well beyond
"clauses purporting to exonerate a party from liability and clauses limiting damages to a nominal
sum." As a result, it is unclear whether the Agreements' sole remedy clauses are subject to
attack in the first place. But cf Turkish v. Kasenetz, 27 F.3d 23, 28 (2d Cir. 1994) (rejecting
argument that public policy exception "applies only to clauses that completely exempt a party
from liability, not to those that limit liability"). Moreover, even assuming that they are, it is
doubtful whether the Complaints allege the kind of"reckless indifference to the rights of others"
that is required for a limitation on liability to be void. Abacus, 18 N.Y.3d at 683. Contractual
nonperformance that is merely in a defendant's economic self-interest does not suffice, even if it
is intentional. See Five Star Dev. Resort Cmtys. v. iStar RC Paradise Valley, LLC, No. 09 Civ.
2085 (LTS), 2012 WL 4119561, at *4-5 (S.D.N.Y. Sept. 18, 2012); Metro. Life Ins. Co., 84
18

N.Y.2d at 438-39. Repeated incantations of the word "willful" do not magically transform an
economically motivated breach into the egregious conduct required to negate an unambiguous
contract term negotiated by sophisticated parties. See DynCorp v. GTE Corp., 215 F. Supp. 2d
308, 317-18 (S.D.N.Y. 2002) (Hellerstein, J.); see also Alitalia Linee Aeree Italiane, Sp.A. v.

Airline Tariff Pub. Co., 580 F. Supp. 2d 285, 294 (S.D.N.Y. 2008) (Castel, J.) ("in a contract
between sophisticated parties, ... New York applies a more exacting standard of gross
negligence than it would in other contexts").
At this stage, however, these questions do not require definitive resolution. The fact that
the sole remedy provisions do not bar Plaintiff from seeking damages where repurchase is
impossible dispenses with DBSP's theory that specific performance is the only remedy available
in these actions. As a result, even if the sole remedy provisions are enforceable, Plaintiffs
failure to allege which loans are actually subject to repurchase is not fatal to its claims. The
Court therefore need not decide whether the sole remedy provisions are enforceable. Nor must
the Court address the parties' arguments regarding whether liquidated loans are, in fact, subject
to repurchase. 5
3. Plaintiffs Rescissory Damages Claims Survive
The Court also denies DBSP's motion to dismiss Plaintiffs rescissory damages claims.
DBSP initially argues that Plaintiff waived its right to seek this "very rarely used equitable tool,"

MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412, 413 (1st Dep't 2013), by
5

In the alternative, even assuming both that the sole remedy provisions are enforceable and that---contrary to the
Court's earlier conclusion-Plaintiff is limited to specific performance without resort to money damages, Plaintiffs
failure to plead which loans are subject to repurchase still would not be fatal to its claims because loan-by-loan
allegations are not required at this stage. See DEALT 2006-0AJ, 958 F. Supp. 2d at 504 n.12 ("DBSP does not
allege ... that all the loans at issue were liquidated or paid off, or even specific loans it believes 'no longer exist.' It
is therefore premature to dismiss Plaintiffs specific performance claims merely because certain of the loans may or
may not have been liquidated or foreclosed upon." (citation omitted)).

19

agreeing that its "sole remedy" for breaches of the representations and warranties would be
specific performance of DBSP's repurchase obligation. Def. Br. at 14-16. DBSP is correct that
"explicit language" specifying a "sole remedy" is ordinarily a "complete bar to equitable relief."
Rubinstein v. Rubinstein, 23 N.Y.2d 293, 298 (1968). But as noted above, contractual limitations

on liability can be void under certain circumstances, and the public policy exceptions to the
enforceability of liability waivers affect Plaintiffs right to rescissory damages no less than its
right to consequential damages or other legal remedies not contemplated by the Agreements. Cf
Abele Tractor & Equip. Co. v. Varity Corp., 977 F. Supp. 1252, 1254 (N.D.N.Y. 1997)

(rescission waivers are enforceable "(a]bsent fraud"); Abry Partners V, L.P. v. F&W Acquisition
LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006) (noting the "strong tradition in American law that

holds that contracts may not insulate a party from damages or rescission resulting from the
party's fraudulent conduct" (emphasis added)). 6 The Court has already determined that the
enforceability of the sole remedy clauses need not be addressed at this stage, and given that
courts are generally hesitant in any event to strike remedies before the parties have presented any
facts bearing on the suitability of equitable relief, see Lipsky v. Commonwealth United Corp.,
551F.2d887, 894-98 (2d Cir. 1976); DEALT 2006-0AJ, 958 F. Supp. 2d at 506; Assured Guar.
Mun. Corp. v. UBS Real Estate Sec., Inc., No. 12 Civ. 1579 (HB), 2012 WL 3525613, at *7

(S.D.N.Y. Aug. 15, 2012), the Court also declines to decide whether the sole remedy clauses bar
Plaintiffs rescissory damages claims. 7

6

Although the cases cited in the text concern fraud, and not the gross negligence and willful misconduct alleged by
Plaintiff, they illustrate that public policy exceptions to freedom of contract apply equally to rescission and damages
claims. As noted earlier, the public policy of New York bars enforcement not only of fraud waivers but also of
clauses insulating parties from their gross negligence and willful misconduct.
7

Several cases that DBSP cites as barring rescission because of sole remedy clauses were decided on summary
judgment, see DEALT 2006-0AJ, 958 F. Supp. 2d at 506 n.16 (making this distinction), and none appears to have

20

The Court's conclusion that dismissal is premature is actually reinforced by DBSP's
second argument-that rescissory relief is available only when a plaintiff has no "complete and
adequate remedy at law." Rudman v. Cowles Commc'ns, Inc., 30 N.Y.2d 1, 13 (1972). DBSP
simply asserts that repurchase is an adequate remedy without explaining why, or how the Court
ought to determine a remedy's adequacy at this stage. As Judge Sweet noted in DEALT 2006OAJ, Plaintiff's rescissory damages claims are pled in the alternative to its claims for repurchase,

belying any suggestion that Plaintiff itself believes that repurchase will necessarily be adequate.
958 F. Supp. 2d at 506; see also Fed. R. Civ. P. 8(d)(2) (allowing for alternative statements of a
claim in either the same count or separate ones); The Pantry, Inc. v. Stop-N-Go Foods, Inc., 777
F. Supp. 713, 718 (S.D. Ind. 1991) ("The axiomatic rule that equitable relief may not be granted
when adequate legal relief exists does not affect the viability of either type of claim at the
pleading stage."), modified on other grounds on reconsideration, 796 F. Supp. 1164 (S.D. Ind.
1992); 13-67 Corbin on Contracts§ 67.8[8]. Additionally, the principle that a contracting party
cannot insulate itself from the consequences of its gross negligence or willful misconduct
suggests that an "adequate" remedy is one that places the full measure of those consequences on
that party. Cf Turkish, 27 F.3d at 28. Because it is conceivable that the legal remedies available
to Plaintiff would fall short in this regard, it would be premature for the Court to strike an
equitable remedy at this stage without a decisive reason for doing so.
In a footnote, DBSP also obliquely suggests that because Plaintiff did not actually seek
rescission, rescissory damages-which are designed to act as "the economic equivalent of
involved allegations of gross negligence or willful misconduct. See MBIA Ins. Corp., 105 A.D.3d at 413; MBIA Ins.
Corp. v. Countrywide Home Loans, Inc., 39 Misc.3d 1220(A), 2013 WL 1845588, at *10 (N.Y. Sup. Ct. Apr. 29,
2013); Morgan Stanley Mortg. Loan Trust 2006-14SL v. Morgan Stanley Mortg. Capital Holdings LLC, No.
652763/2912, slip op. at 16-17 (Sup. Ct. N.Y. Aug. 16, 2013); Home Equity Mortg. Trust Series 2006-5 v. DLJ
Mortg. Capital, Inc., No. 653787/2012, slip op. at 12-13 (Sup. Ct. N.Y. Sept. 18, 2013).

21

rescission in a circumstance in which rescission is warranted, but not practicable," Gotham
Partners, L.P. v. Hallwood Realty Partners, L.P., 855 A.2d 1059, 1072 (Del. Ch. 2003)-should

not be available. Def. Br. at 14 n.18. This argument finds some support in New York case law.
See MBIA Ins. Corp., 105 A.D.3d at 413; Home Equity Mortg. Trust Series 2006-5 v. DLJ
Mortg. Capital, Inc., No. 653787/2012, slip op. at 13 & n.3 (Sup. Ct. N.Y. Sept. 18, 2013). But

the Court need not address this argument, which-likely because it is raised only in a footnotehas not been presented squarely or briefed in any detail. See In re Global Crossing, Ltd. Sec.
Litig., 471 F. Supp. 2d 338, 351 n.13 (S.D.N.Y. 2006) (Lynch, J.) (declining to address argument

raised in footnote "though it might have merit"). Without adequate briefing, the Court cannot
conclude that Plaintiff's choice not to seek rescission was not simply a pragmatic decision driven
by the obvious difficulty of unwinding the Agreements. For all of these reasons, the Court
declines to dismiss Plaintiff's rescissory damages claims.
B. Plaintiff States a Claim Based on DBSP's Discovery of Breaches
As noted above, the Agreements' sole remedy provisions do not preclude Plaintiff from
bringing suit to enforce DBSP's repurchase obligations when DBSP fails to comply with those
obligations. Plaintiff points to two ways in which DBSP failed to comply with its obligations.
First, it alleges that DBSP discovered numerous breaches of representations and warranties in the
loan pools at the time of securitization but failed to either cure those breaches within 60 days or
repurchase or substitute for the defective loans within 90 days, as required by the MLP A. E.g.,
WM2 Compl. iJ 3. Second, Plaintiff alleges that it provided notice of thousands of specific
breaches to DBSP, independently triggering DBSP's cure-or-repurchase obligation. E.g., id.

iii! 4, 13.

For the following reasons, Plaintiff's claims survive based on the former theory,

meaning that Plaintiff is entitled to discovery to determine the extent to which DBSP became
22

aware of breaches in the Trusts. In light of that conclusion, the Court need not address Plaintiffs
alternative "notice" theory.
1. The Complaints Adequately Plead Discovery
DBSP agrees with Plaintiff that under section 7(a) of the MLPA, its cure or repurchase
obligation arises "upon either notice or its own discovery." Def. Br. at 18. However, it argues
that Plaintiffs allegations that DBSP discovered breaches are inadequate to survive a motion to
dismiss. The Court disagrees.
The Complaints allege that DBSP was familiar with the characteristics of the loans that it
sold to the Trusts as a result of its dealings with the loans' originators and the due diligence that
it performed on the loans before selecting them for inclusion in the Trusts. E.g., WM2 Compl.

iii! 3, 8-9, 11-12, 31, 41.

The Complaints also allege that Plaintiffs subsequent forensic review

of the loans revealed breaches that would have been apparent to DBSP based on its familiarity
with the loans. Many of the forensic review's findings concerned the loans' characteristics when
they were initially sold to the Trusts, for instance, whether the borrowers were current on their
payment obligations at that time. E.g., WM2 Compl. ii 49. By alleging that DBSP conducted
due diligence on loan pools that suffered from obvious and widespread breaches, Plaintiff has
adequately alleged that DBSP discovered those breaches, and therefore that its cure-orrepurchase obligations were triggered independent of any notices. Accord DEALT 2006-0AJ,
958 F. Supp. 2d at 494 (holding that Plaintiffs claims were not restricted to loans for which it
provided notice of alleged breaches because "Plaintiff contends that 'it is not commercially
plausible' to infer that DBSP, during even a passing due diligence review, would not uncover ...
obvious and severe breaches" throughout the loan pools).

23

DBSP makes two arguments to the contrary, neither of which is persuasive. First, it
argues that in alleging widespread breaches among the mortgage loans underlying the Trusts,
Plaintiff advances mere legal conclusions, which are not entitled to a presumption of truth. Def.
Br. at 19; see Iqbal, 556 U.S. at 678 (a court is "not bound to accept as true a legal conclusion
couched as a factual allegation" (quoting Twombly, 550 U.S. at 555)). However, the Complaints
do not simply assert, without more, that a certain number ofloans were in breach of the
representations and warranties. Instead, they say which representations and warranties were
breached, and how. For example, in the WM2 action, the Complaint alleges that "208 Mortgage
loans were past due ... on the Closing Date." WM2 Compl. ii 59. It also alleges that in the
MLP A, DBSP represented that no loans were in breach of their payment obligations as of the
closing date. Id.

ii 53; see MLP A § 6(xiv).

These are factual allegations, not legal conclusions.

Second, DBSP argues that Plaintiff's allegations that DBSP discovered breaches "simply
because it performed the routine diligence typical of RMBS sponsors in the industry" are overly
speculative. Def. Br. at 18. Yet the "plausibility" standard articulated in the Supreme Court's

Twombly and Iqbal decisions does not require a plaintiff to demonstrate that its allegations are
true before a presumption of truth attaches to those allegations; that would put the cart before the
horse. Instead, a court must ask whether the plaintiff's factual allegations, taken as true, make
the claim of wrongdoing by the defendant "plausible." See Twombly, 550 U.S. at 556; see also

Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (noting that the plausibility
standard "does not prevent" a plaintiff from pleading facts upon information and belief"where
the facts are peculiarly within the possession and control of the defendant"). Taken as true,
Plaintiff's allegations that DBSP performed due diligence on loan pools rife with defects makes

24

its claims that DBSP discovered breaches of the representations and warranties more than
plausible. 8
It is true that, unlike Plaintiff's theory that DBSP's repurchase obligation was triggered

upon notice, its "discovery" theory does not furnish a basis for determining which specific
breaches DBSP actually discovered, and therefore which loans it was obligated to repurchase.
See Def. Br. at 19 (noting that Plaintiff's theory does not raise "more than a sheer possibility"
that "discovery actually occurred with respect to any loan"). However, as DBSP concedes,
several courts "have found that, as a matter of pleading sufficiency, a complaint for repurchase
need not contain specific allegations regarding each loan at issue." Def. Reply at 12; see, e.g.,
MASTR 2006-0A2, 2013 WL 4399210, at *5; DEALT 2006-0AJ, 958 F. Supp. 2d at 497 & n.4;
First Bank Richmond, NA. v. Credit Suisse First Boston Corp., No. 07 Civ. 1262, 2008 WL
4410367, at *12 (S.D. Ind. Sept. 24, 2008); ACE 2006-SL2, 965 N.Y.S.2d at 849. Those cases
lend support to the Court's conclusion, which notably does not relieve Plaintiff of its burden of
proving loan-by-loan breaches at later stages oflitigation. 9
DBSP cites only one RMBS case to the contrary, Central Mortgage Co. v. Morgan
Stanley Mortgage Capital Holdings, No. 5140-CS, 2012 WL 3201139 (Del. Ch. June 22, 2012),
but its reliance on that case is misplaced. Although Central Mortgage Co. primarily involved the
"relation back" doctrine with respect to a statute oflimitations, it does contain language stating

8

In the HE4 and HES actions, Plaintiff alleges another basis for its discovery allegations: DBSP's affiliation with
two entities that originated loans underlying the Trusts. HE4 Compl. iii! 52, 59, 62; HES Compl. iii! 52, 59, 62.
DBSP argues that this affiliation does not lend support to Plaintiffs discovery allegations. Def. Br. at 19. Because
the Court concludes that those allegations are sufficient without considering DBSP's affiliates, it need not address
the parties' arguments concerning this issue.
9

As Plaintiff notes, many courts have accepted statistical "sampling" as a means of demonstrating liability in RMBS
cases. Pl. Opp. at 18-19. The Court need not decide now whether that method of proof is appropriate in this case.

25

that loan-by-loan breach allegations are required at the motion-to-dismiss stage. See id. at * 1819. However, the court also made clear that it was applying a Delaware pleading standard that
requires "specific facts that make out a cause of action." Id. at * 13. That standard is higher than
the one applied in federal court. See, e.g., Erickson v. Pardus, 551 U.S. 89, 93 (2007) (stating
that under Rule 8(a)(2), "[s]pecific facts are not necessary," and that a complaint need only "give
the defendant fair notice of what the ... claim is and the grounds upon which it rests." (quoting

Twombly, 550 U.S. at 555) (internal quotation marks omitted)). Accordingly, Central Mortgage
Co. does not provide a persuasive basis for DBSP's argument that Plaintiff's allegations do not
meet federal pleading standards.
2. Adequacy of Notice Is Irrelevant at this Stage
DBSP argues that Plaintiff's claims should be dismissed because providing adequate
notice of breaches is a prerequisite to bringing suit, and the notices that Plaintiff provided to
DBSP were inadequate. However, the Court need not resolve these issues because at this stage,
based on Plaintiff's discovery allegations, the adequacy of its breach notices is moot.
As an initial matter, the formal legal significance of Plaintiff's notice obligation is
unclear from the parties' briefing. A plaintiff's entitlement to sue for breach of contract depends
on whether it has performed its own obligations, see Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d
Cir. 1999), and a plaintiff also must have "substantially performed" its own contractual duties in
order for a court to grant specific performance, Wells Fargo, 2013 WL 372149, at *8. Consistent
with these principles, DBSP appears to be attacking the adequacy of Plaintiff's performance. See
Def. Br. at 4 ("Plaintiff's own failure to abide by the terms of the Agreements bars its specific
performance claims."); cf MASTR 2006-0A2, 2013 WL 4399210, at *5 ("UBS argues that
'adequate performance by the plaintiff' has not been alleged because the Complaint does not
26

allege that there was prompt notice or notice by the Trustee .... "). However, several courts
considering contractual notice provisions in similar contexts have asked whether providing
adequate notice is an express condition on a defendant's obligation to repurchase defective loans.
See Trust for Certificate Holders ofMerrill Lynch Mortg. Passthrough Certificates Series 1999Cl v. Love Funding Corp., No. 04 Civ. 9890 (SAS), 2005 WL 2582177, at *7 (S.D.N.Y. Oct. 11,
2005); LaSalle Bank Nat'! Ass 'n v. Citicorp. Real Estate, Inc., No. 02 Civ. 7868 (HB), 2003 WL
21671812, at *3 (S.D.N.Y. July 16, 2003); Morgan Guar. Trust Co. ofNY. v. Bay View
Franchise Mortg. Acceptance Co., No. 00 Civ. 8613 (SAS), 2002 WL 818082, at *5 (S.D.N.Y.
Apr. 30, 2002). 10 Although not addressed by the parties, this distinction is important because an
express condition must be literally performed in order for the relevant obligation to arise, while a
plaintiff's performance of other contractual promises must be merely "substantial" before it can
recover for a defendant's breach. See Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.,
86 N.Y.2d 685, 690 (1995) ("constructive conditions, which ordinarily arise from language of
promise, are subject to the precept that substantial compliance is sufficient"). DBSP's insistence
that a lack of adequate notice represents a per se bar to Plaintiff's claims implies the belief that
Plaintiff's notice obligation must be literally performed.
To resolve these issues, the Court must examine the terms of the parties' contracts.
DBSP's representations and warranties are contained in the MLPA, not the PSA, and its
repurchase obligations are governed by the MLP A, not the PSA. The PSA speaks of
representations and warranties made by DBSP "under the [MLPA]," makes clear that DBSP's

10

Other courts have characterized inadequate notice arguments as going to a claim's ripeness, see Flagstar, 2011
WL at *7; MASTR 2006-HE3, 843 F. Supp. 2d at 1000, but to say that a contract claim is ripe for adjudication is
basically equivalent to saying that all conditions precedent have occurred, see, e.g., Sirob Imps., Inc. v. Peerless Ins.
Co., 958 F. Supp. 2d 384, 388-90 (E.D.N.Y. 2013).

27

repurchase obligations arise "under the [MLPA]," and requires the Trustee to enforce DBSP's
duty to repurchase a defective loan only "if and to the extent that [DBSP] is obligated to do so
under the [MLPA]." PSA § 2.03(a); see also, e.g., WM2Compl.ii10 n.4, ii 41. As DBSP
concedes, the MLPA clearly states that DBSP's repurchase obligation arises upon discovery, and
it does not provide that the Purchaser must notify DBSP of breached loans before enforcing
DBSP's duty to repurchase those loans. 11 See MLP A § 7(a).
Plaintiff also has the right to enforce the obligations that the MLP A imposes on DBSP.
The MLP A states that upon the closing of the Trusts, ACE "will assign ... its rights under this
Agreement, to the Trustee for the benefit of the Certificateholders." MLP A § 3(c). In tum, the
PSA states that ACE "does hereby transfer, assign, set over and otherwise convey to the
Trustee ... , for the benefit of the Certificateholders, ... the rights of the Depositor under the
[MLP A] (including, without limitation the right to enforce the obligations of the other parties
thereto thereunder)." PSA § 2.01.
DBSP's argument that pre-suit notice is required centers on section 2.03(a) of the PSA.
That section provides that if the Trustee discovers or receives notice of a breach, it must
promptly notify DBSP and ask it to cure the breach or repurchase the loan within 60 days. 12 If
DBSP does not do so, the Trustee must "enforce" DBSP's obligation within 90 days of providing
notice. PSA § 2.03. To DBSP, this provision suggests that Plaintiff may not enforce DBSP's
repurchase obligation unless it first provides notice and waits the required amount of time.
11

DBSP implies that the PSA's failure to also provide that DBSP's repurchase obligation arises upon discovery is
somehow relevant, Def. Br. at 18, but that is hardly surprising: the PSA does not impose any repurchase obligation
on DBSP because that obligation arises under the MLP A.
12

Plaintiff also has an obligation to notify DBSP upon discovering a breach under section 7(a) of the MLPA, as an
assignee of ACE's rights under that Agreement. Unlike the PSA, the MLPA does not require Plaintiff to ask DBSP
to take any action upon receiving such notice. Compare PSA § 2.03(a), with MLP A§ 7(a).

28

Indeed, suing to make DBSP repurchase breached loans-even those that DBSP itself has
discovered and is therefore already obligated to repurchase under MLPA section 7(a)necessarily requires first becoming aware of the alleged breaches. Under a literal reading of PSA
section 2.03(a), that awareness triggers a duty to notify DBSP of the breaches, then wait, and
only then "enforce" DBSP's repurchase obligation.
However, under the Agreements' terms, notice does not operate as an express condition
precedent. Under New York law, "[i]n determining whether a particular agreement makes an
event a condition courts will interpret doubtful language as embodying a promise or constructive
condition rather than an express condition." Love Funding, 2005 WL 2582177, at *7 (alteration
in original) (quoting Oppenheimer & Co., 86 N.Y.2d at 691) (internal quotation marks omitted).
Nothing in the Agreements either specifically provides that the Trustee may not sue to enforce
DBSP's repurchase obligation unless it has provided notice or expressly conditions DBSP's
repurchase obligation on receiving notice from the Trustee. Cf Flagstar, 2011 WL 5335566, at
*7 ("notably absent ... is any indication that the parties intended this 'notice and opportunity to
cure' process to be the exclusive means by which AGM may enforce its rights under the
Transaction Documents"). Of course, if DBSP had not initially discovered the breaches, its
repurchase obligation would not be triggered in the first place without the Trustee's notice. But
with respect to breaches that DBSP did discover, in the absence of explicit contractual language
to the contrary, the Trustee's duty to provide notice of breaches is simply a promise, not an
express condition that must be literally performed.
Therefore, Plaintiff's nonperformance would have to be "material" to bar its claims.
"Under New York law, for a breach of a contract to be material, it must 'go to the root of the
agreement between the parties."' Frank Felix Assocs., Ltd. v. Austin Drugs, Inc., 111 F .3d 284,
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289 (2d Cir. 1997) (quoting Septembertide Publ'g, B. V v. Stein & Day, Inc., 884 F.2d 675, 678
(2d Cir. 1989)). One factor in determining materiality is "the extent to which the injured party
will be deprived of the benefit which he reasonably expected." Restatement (Second) of
Contracts§ 241(a); see Encompass Ins. Co. ofAm. v. English, No. 11 Civ. 2606 (KMW), 2013
WL 796309, at *5 (S.D.N.Y. Mar. 5, 2013); Bear, Stearns Funding, Inc. v. Interface Grp.-Nev.,
Inc., 361 F. Supp. 2d 283, 296 (S.D.N.Y. 2005). DBSP's argument amounts to the claim that the
notice obligation imposed by section 2.03(a) of the PSA is an integral part of the repurchase
protocol, which DBSP bargained for and is entitled to rely upon.
However, the Trustee's obligation to notify DBSP of breaches might also be understood
as a kind of promise to take specific action for the benefit of certificateholders. Without such
language, the Trustee, whose compensation is not conditioned on the performance of the trust
assets, see PSA § 9.05 ("The fees of the Trustee ... shall be paid in accordance with a side letter
agreement with the Master Servicer and at the sole expense of the Master Servicer."), might have
little incentive to enforce DBSP's repurchase obligations. On this reading, Plaintiff's duty to
notify DBSP of any breaches it discovers would not have been part of any "bargain" between the
Trustee and DBSP. Indeed, DBSP is not even a party to the PSA, which it signed only for the
purpose of acknowledging and agreeing to section 9.05, which does not involve repurchase.
Woll Deel. Ex. 1 at 127. This further implies that the contours ofDBSP's bargain with respect
to the repurchase protocol were set entirely by the terms of the MLP A.
Additionally, DBSP's argument amounts to the position that the Trustee can sue to force
DBSP to repurchase breached loans only if someone other than DBSP discovers the breaches,
since logically the Trustee cannot provide notice-a prerequisite to suit, in DBSP's viewunless it first discovers or is told about a breach. This would make questionable sense. DBSP's
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reading allows it to sit on its hands after discovering a breach merely because the Trustee has not
also discovered and noticed the same breach, effectively nullifying the "discovery" language in
section 7(a) of the MLPA. See GulfIns. Co. v. Transtl. Reins. Co., 69 A.D.3d 71, 81 (1st Dep't
2009) (contracts should be interpreted so as to harmonize their provisions). It seems particularly
unlikely that the parties intended DBSP's obligation to be so limited given that the MLP A
disclaims a duty on Plaintiffs part to examine loan files. MLPA §§ 4(e), 7(a). DBSP bought the
loans, performed due diligence on them, selected them for inclusion in the Trusts, and made
representations and warranties about them, and was therefore uniquely positioned to be aware of
breaches. DBSP's reading would also imply, counterintuitively, that section 2.03(a) of the PSA
obligates the Trustee to "notify" DBSP of breaches that DBSP has already discovered before it
may enforce DBSP's repurchase obligation with respect to those breaches.
In any event, "[t]he issue of whether a party has substantially performed is usually a
question of fact and should be decided as a matter oflaw only where the inferences are certain."

Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 186 (2d Cir. 2007); see also
Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. ofN.Y., 375 F.3d 168, 178 (2d Cir.
2004) ("Unless for some reason an ambiguity must be construed against the plaintiff, a claim
predicated on a materially ambiguous contract term is not dismissible on the pleadings."). In
light of the foregoing discussion, it would be premature for the Court to conclude that Plaintiffs
notice obligation was sufficiently material that any nonperformance of that obligation forecloses
its ability to sue to enforce DBSP's repurchase obligation with respect to the breached loans that
DBSP independently discovered.

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***
To summarize, because Plaintiff adequately alleges that DBSP discovered breaches and
failed to repurchase the defective loans, and because its entitlement to sue to enforce DBSP's
repurchase obligation with respect to those loans does not require prior notice, the Court need not
address the parties' arguments concerning the timing and adequacy of the notices that Plaintiff
provided. Discovery may reveal that DBSP was, in fact, unaware of certain breaches, meaning
that its obligation to cure them or repurchase the defective loans would be triggered only upon
notice. If so, the adequacy and timing of Plaintiffs notices would remain relevant.
A final note on this subject: The basic thrust of DBSP's argument is that Plaintiffs
"discovery" theory cannot be correct because it is too easy to plead. Def. Br. at 5, 18. It is true
that the repurchase protocol is a specific pre-suit remedy that the parties bargained for and which
Plaintiff should not be able to avoid easily. It is also true that, under the foregoing interpretation
of the Agreements, Plaintiffs allegations that DBSP discovered breaches and failed to
repurchase the defective loans would effectively allow it to sue DBSP without first asking it, out
of court, to abide by its contractual obligations. (Of course, in this case, Plaintiff actually did
notify DBSP of alleged breaches.) But ifthe parties intended to impose such a demand
requirement, they could have done so clearly. See Lehman XS Trust, Series 2006-4N, 2014 WL
108523, at *2 (describing explicit "accrual provision" in purchase agreement). And the ease
with which Plaintiff has surmounted contractual obstacles to litigation is directly related to the
pervasiveness of the breaches discovered during the forensic review. If that review had
uncovered only a few breached loans, for instance, Plaintiffs allegations that DBSP conducted
industry-standard due diligence on the loan pools might not "nudge[] [its] claims across the line

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from conceivable to plausible." Twombly, 550 U.S. at 570. But the Court is required to accept
Plaintiff's allegations of widespread breaches as true.

C. Plaintiff's Declaratory Judgment Claims Are Dismissed
Plaintiff seeks a declaratory judgment that DBSP must reimburse it for expenses incurred
in enforcing its remedies under the Agreements, including the costs of suit, attorney's fees, and
other expenses. E.g., WM2 Compl. if 141. Under the Declaratory Judgment Act, a federal court
"may declare the rights and other legal relations of any interested party seeking such declaration,
whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). "It is within the broad
discretion of the trial court whether to exercise declaratory jurisdiction." DEALT 2006-0AI, 958
F. Supp. 2d at 507 (quoting Camofi Master LDC v. Coll. P'ship, Inc., 452 F. Supp. 2d 462, 480
(S.D.N.Y. 2006)) (internal quotation marks omitted); see Duane Reade Inc. v. St. Paul Fire &

Marine Ins. Co., 411 F.3d 384, 388 (2d Cir. 2005); Muller v. Olin Mathieson Chem. Corp., 404
F.2d 501, 505 (2d Cir. 1968).
Plaintiff's declaratory judgment claims allege entitlement to expenses under the
Agreements themselves. E.g., WM2 Compl. if 89 (asserting that DBSP "agreed to reimburse the
Trustee for the expenses of enforcing DBSP's obligations"). Plaintiff therefore has the right to
seek the reimbursement it requests as part of the coercive remedy it is pursuing under its breach
of contract claims. See DEALT 2006-0AI, 958 F. Supp. 2d at 507 ("Plaintiff has acknowledged
its rights under the relevant Agreements to pursue this remedy."). Accordingly, declaratory
relief is unnecessary, and Plaintiff's request for such relief is dismissed. 13 See Am. Auto. Ins. Co.

13

Plaintiffs contention that its declaratory judgment claim states a valid Article III "case or controversy" may have
merit, Pl. Opp. at 30, but that jurisdictional argument is irrelevant to whether declaratory relief is necessary or
appropriate in light of Plaintiffs existing claims for coercive relief. See Muller, 404 F.2d at 505 ("[E]ven when
justiciability is present the court is not required to proceed with the declaratory judgment action .... ")

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v. Advest, Inc., No. 08 Civ. 6488 (LAK), 2009 WL 3490060, at *1 n.1 (S.D.N.Y. Oct. 28, 2009)
("Where ... the dispute may be resolved in a direct action for coercive relief, courts may dismiss
the declaratory judgment complaint."); see also Johnson v. McCuskey, 72 F. App'x 475, 478 (7th
Cir. 2003) ("Declaratory judgments are not meant simply to proclaim that one party is liable to
another."); lOB Charles Alan Wright et al., Federal Practice and Procedure§ 2751 (3d ed.
2013) (a declaratory judgment is "a means by which rights and obligations may be adjudicated in
cases involving an actual controversy that has not reached the stage at which either party may
seek a coercive remedy and in cases in which a party who could sue for coercive relief has not
yet done so").

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IV.

CONCLUSION
For the foregoing reasons, DBSP's motions to dismiss are granted in part and denied in

part. Plaintiff's declaratory judgment claims, contained in the fourth causes of action in each
Complaint, are DISMISSED with prejudice.
A scheduling conference in these four actions is hereby set for April 25, 2014 at 11 :30
AM in Courtroom 906 of the Thurgood Marshall U.S. Courthouse, 40 Foley Square, New York,
New York. Pursuant to the Court's Individual Rules, the parties must confer and file a joint
Proposed Civil Case Management Plan and Scheduling Order no later than seven days prior to
the conference. The parties shall use the form available on the Court's website. 14 The parties are
also directed to submit, by the same date, a proposed order providing for the consolidation of
these four actions going forward.
This resolves Docket No. 16 in No. 13 Civ. 1869, Docket No. 16 in No. 13 Civ. 2053,
Docket No. 13 in No. 13 Civ. 2828, and Docket No. 13 in No. 13 Civ. 3687.
SO ORDERED.

Dated: March 20, 2014
New York, New York

United States District Judge

14

http://nysd.uscourts.gov/judge/Nathan.

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