Deutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC

Filing 141

OPINION & ORDER: For the reasons stated above, this Court hereby VACATES the Memorandum Opinion & Order at ECF No. 47 to the extent it dismisses Count III of Deutsche Bank's complaint. Count III, alleging breach of contract based on Morgan Stanley's failure to notify Deutsche Bank of material breaches in the underlying loan pool, is accordingly REINSTATED in this case. SO ORDERED. (Signed by Judge Katherine B. Forrest on 1/10/2018) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------------------------------------DEUTSCHE BANK NATIONAL TRUST CO.,
solely in its capacity as Trustee for the
MORGAN STANLEY STRUCTURED TRUST I
2007-1,

X
:
:
:
:
:
Plaintiff,
:
:
-v:
:
MORGAN STANLEY MORTGAGE CAPITAL :
HOLDINGS LLC, as Successor-by-Merger to
:
MORGAN STANLEY MORTGAGE CAPITAL :
INC.,
:
:
Defendant.
:
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KATHERINE B. FORREST, District Judge:

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: January 10, 2018

14-cv-3020 (KBF)
OPINION & ORDER

Plaintiff Deutsche Bank National Trust Co. (“DB” or “plaintiff”), in its
capacity as Trustee for the Morgan Stanley Structured Trust I 2007-1 (“MSST 20071” or the “Trust”) commenced this action against Morgan Stanley Mortgage Capital
Holdings LLC (“MSMC” or “defendant”) on April 28, 2014. (See Compl., ECF No. 2.)
The complaint included three distinct contract claims arising out of the MSST
2007-1 securitization: (1) MSMC’s breach of certain representations and warranties
(“R&Ws”) contained in the Trust’s governing agreements (the “R&W Claim”) (Id. ¶¶
70-83); (2) MSMC’s failure to cure/repurchase breaching loans (the “Cure Claim”)
(Id. ¶¶ 84-94); and (3) MSMC’s failure to notify DB of such breaches (the “Notice
Claim”) (Id. ¶¶ 96-106).1

The complaint included a fourth claim alleging a breach of the implied covenant of good faith and
fair dealing. (Id. ¶¶ 107-111.) That claim was properly dismissed, and is not at issue here.
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On April 3, 2015, Judge Laura Taylor Swain2 issued a Memorandum Opinion
& Order dismissing, inter alia, the Cure and Notice Claims. (See generally ECF No.
47.) Relying on a series of cases holding that contractual remedy provisions do not
provide a basis for independent breach of contract claims, Judge Swain held that
“the notice/cure/repurchase protocol is remedial and cannot constitute a basis for an
independent breach.” (ECF No. 47 at 13, 15 (internal citations omitted).) The R&W
claim remained, and proceeded to discovery.
On December 19, 2017, this Court issued an Order soliciting the parties’
views as to whether certain legal developments in the years following Judge Swain’s
Memorandum Opinion & Order had rendered her decision to dismiss the Notice
Claim incorrect. (See ECF No. 138.) The parties submitted dueling briefs on that
issue on January 8, 2018. (ECF Nos. 139, 140.)
Having carefully reviewed the parties’ respective briefs and the relevant case
law, this Court is convinced that the Notice Claim should be reinstated.
Accordingly, the Court’s prior Memorandum Opinion & Order at ECF No. 47 is
hereby VACATED to the extent it dismisses Count III of the complaint, and Count
III is REINSTATED.
I.

LEGAL PRINCIPLES
It is well-settled that “New York law . . . does not recognize pre-suit remedial

provisions as constituting separate promises which can serve as the basis for

This case was originally assigned to Judge Laura Taylor Swain. The case was transferred to the
undersigned for all purposes on September 11, 2017.
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independent causes of action.” Lehman XS Trust, Series 2006-4N v. GreenPoint
Mortg. Funding, Inc., 991 F. Supp. 2d 472, 478 (S.D.N.Y. 2014) (internal quotation
marks and citation omitted). In the RMBS context, the New York Court of Appeals
(“Court of Appeals”) has held that a sponsor’s cure/repurchase obligation is
“dependent on, and indeed derivative of [the sponsor’s] representations and
warranties”, and therefore “could not reasonably be viewed as a distinct promise of
future performance.” ACE Sec. Corp. v. DB Structured Prod., Inc., 25 N.Y.3d 581,
596, 36 N.E.3d 623 (2015). Numerous courts applying New York law have relied on
those principles in concluding that breach of an RMBS cure/repurchase obligation
does not give rise to a separate cause of action. See, e.g., ACE Sec. Corp. Home
Equity Loan Tr., Series 2007-HE3 v. DB Structured Prod., Inc., 5 F. Supp. 3d 543,
552 (S.D.N.Y. 2014) (collecting cases).
It is also true that multiple Courts have applied those principles to RMBS
notice provisions, which require a sponsor to notify a Trustee or some other party of
breaches in an underlying loan pool and are often included in conjunction with the
cure/repurchase obligation. See, e.g., FHFA v. WMC Mortgage, LLC, 2015 WL
9450833 (S.D.N.Y. July 10, 2015) (concluding that contractual duty to notify was
“an obligation dependent on and derivative of” the underlying representations and
warranties). Indeed, Judge Swain did so in this very case, concluding that because
the Notice Claim was based on a “pre-suit remedial provision”, it “fail[ed] to state
[a] valid cause[] of action.” (See ECF No. 47 at 14.)

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However, since Judge Swain issued her decision, multiple New York
appellate courts have held that notice provisions, unlike cure/repurchase
obligations, do provide a basis for separate breach of contract claims. In Nomura
Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96, 108 (N.Y.
App. Div. 2015) (“Nomura I”), the First Department held that a motions court had
“erred in not allowing plaintiffs to pursue damages for defendant’s failure to give
prompt written notice after it discovered material breaches of the representations
and warranties in section 8 of the MLPA.” At least two courts have explicitly
adopted this reasoning, holding in sum and substance that “a seller’s failure to
provide the trustee with notice of material breaches it discovers in the underlying
loans states an independently breached contractual obligation.” Morgan Stanley
Mortg. Loan Tr. 2006-13ARX v. Morgan Stanley Mortg. Capital Holdings LLC, 143
A.D.3d 1, 7 (N.Y. App. Div. 2016) (“13ARX”); see also Bank of New York Mellon v.
WMC Mortg., LLC, 151 A.D.3d 72, 81 (N.Y. App. Div. 2017) (holding that “the
contractual obligation to notify was independent of the warranty obligations”).
The “law of the case” doctrine “posits that when a court decides upon a rule of
law, that decision should continue to govern the same issues in subsequent stages
in the same case.” Arizona v. California, 460 U.S. 605, 618 (1983). Accordingly,
“courts are understandably reluctant to open a ruling once made, especially when
one judge or court is asked to consider the ruling of a different judge or court”,
Lillbask ex rel. Mauclaire v. Connecticut Department of Education, 397 F.3d 77, 94
(2d Cir. 2005) (internal quotations and citation omitted). That said, “[a]pplication of
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the law of the case doctrine is discretionary and does not limit a court’s power to
reconsider its own decisions prior to final judgment.” Aramony v. United Way of
Am., 254 F.3d 403, 410 (2d Cir. 2001) (internal quotations and citations omitted).
Put simply, “[l]aw of the case directs a court’s discretion, it does not limit the
tribunal’s power.” Arizona, 460 U.S. at 618 (citations omitted).
II.

DISCUSSION
At the time Judge Swain dismissed the Notice Claim, there was substantial

support for the proposition that RMBS notice clauses, which are often written and
designed to work in conjunction with cure/repurchase protocols, could not sustain
an independent breach of contract claim. But as the parties are aware, the law
governing and interpreting RMBS contracts has been developing, and subsequent
developments are at direct odds with Judge Swain’s decision. In at least three
cases, the First Department has clearly and unequivocally held that notice clauses,
unlike cure/repurchase protocols, are independent of the underlying R&Ws and
therefore can be independently breached. See Nomura I, 133 A.D.3d at 108; 13ARX,
143 A.D.3d at 7; Bank of New York Mellon, 151 A.D.3d at 81.
When applying state law, this Court is “bound to apply the law as interpreted
by a state’s intermediate appellate courts unless there is persuasive evidence that
the state’s highest court would reach a different conclusion.” V.S. v. Muhammad,
595 F.3d 426, 432 (2d Cir. 2010). Here, there is no persuasive evidence to suggest
that the Court of Appeals would reverse the aforementioned First Department
holdings. In fact, the Court of Appeals has already had one occasion to reconsider
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the relevant portion of the First Department’s holding in Nomura I, but declined to
do so, instead affirming the First Department’s opinion as modified on separate
grounds. See Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank
USA, Nat'l Ass'n v. Nomura Credit & Capital, Inc., 2017 WL 6327110 (N.Y. 2017)
(“Nomura II”).
MSMC argues that the First Department’s decision in Nomura I (which,
according to MSMC, was “unelaborated and unpersuasive” and subsequently
repeated without justification in 13ARX and Bank of New York Mellon), is at direct
odds with the Court of Appeals’ holding in ACE. (See Def.’s Letter, ECF No. 140 at
5.) But that is simply not true. To start, the ACE decision does not purport to
conclusively establish what types of breach of contract claims can or cannot be
brought in RMBS actions. The key question in that case was the date of accrual for
a breach of contract claim, and although the court did state that the sponsor’s “cure
or repurchase obligation could not reasonably be viewed as a distinct promise of
future performance”, that holding was made in the context of deciding whether the
statute of limitations had expired. See ACE, 25 N.Y.3d at 595. Second, the ACE
decision deals exclusively with a cure/repurchase protocol; there was no notice claim
at issue, and the court did not have occasion to pass upon the propriety of an
independent notice claim.
It is thus clear that the First Department’s decisions in Nomura I, 13ARX,
and Bank of New York Mellon are not directly contradicted by the Court of Appeals’
decision in ACE. And given that the Court of Appeals has subsequently affirmed
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Nomura I without disturbing the relevant ruling, there is in fact persuasive
evidence that those cases were decided correctly. See generally Nomura II, 2017
WL 6327110. The Court need not address at this time any implications this holding
(or any of the First Department’s holdings) may have on the statute of limitations
for RMBS breach of contract claims—those issues have not been fully briefed.
In light of the foregoing, this Court is convinced that subsequent
developments in the law have rendered Judge Swain’s decision to dismiss the
Notice Claim incorrect. And because the parties have agreed that re-insertion of
the Notice Claim would not require any additional discovery or supplemental
briefing on MSMC’s pending motion for summary judgment, the Court concludes
that it would not be unjust to revive the Notice Claim at this stage.
III.

CONCLUSION
For the reasons stated above, this Court hereby VACATES the Memorandum

Opinion & Order at ECF No. 47 to the extent it dismisses Count III of Deutsche
Bank’s complaint. Count III, alleging breach of contract based on Morgan Stanley’s
failure to notify Deutsche Bank of material breaches in the underlying loan pool, is
accordingly REINSTATED in this case.
SO ORDERED.
Dated:

New York, New York
January 10, 2018

____________________________________
KATHERINE B. FORREST
United States District Judge

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