Phoenix Light SF Limited et al v. HSBC Bank USA, National Association

Filing 373

OPINION & ORDER re: 361 MOTION to Amend/Correct 62 Answer to Amended Complaint , filed by HSBC Bank USA, National Association. HSBC's motion to amend its Answer is GRANTED in part. It may amend its Answer to add its champe rty defense. The motion to add impossibility, impracticability, and frustration of purpose defenses, however, is DENIED. Respectfully, the Clerk of Court is directed to terminate the motion at ECF No. 361. (Signed by Magistrate Judge Sarah Netburn on 2/16/2021) (ras)

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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Feb. 16, 2021
Feb. 16, 2021

PHOENIX LIGHT SF LIMITED, et al.,
Plaintiffs,
-againstHSBC BANK USA, NATIONAL ASSOCIATION,

14-CV-10101 (LGS) (SN)
OPINION & ORDER

Defendant.
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SARAH NETBURN, United States Magistrate Judge:
HSBC moves to amend its Answer to Plaintiffs’ Amended Complaint with four
additional defenses. ECF No. 361. That motion is GRANTED in part and DENIED in part.
BACKGROUND
Plaintiffs sued HSBC in its role as trustee for 29 trusts composed of residential mortgagebacked securities (“RMBS”). ECF No. 53. The action was coordinated with five similar suits
against HSBC, in which a limited number of trusts were selected to proceed through discovery,
motions, and trial (if necessary), in what was deemed a bellwether process, with actions on the
remaining trusts deferred. See ECF No. 38. On January 2, 2019, this action was referred to my
docket for general pre-trial supervision. See ECF No. 347.
Fact discovery in the four bellwether trusts closed on May 1, 2017, with a limited
exception for certain depositions completed June 16, 2017. See ECF No. 252. Expert discovery
will close on April 7, 2021. See ECF No. 343. The parties’ motions for summary judgment and
Daubert will be completed by September 7, 2021. See id. Trial on the four bellwether trusts is
likely more than a year away.

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On July 31, 2020, HSBC filed its first motion to amend its Answer to the Amended
Complaint. ECF No. 361. It seeks to add four defenses against the Plaintiffs’ allegations. First, it
asserts the defense of champerty under N.Y. Judiciary Law § 489(1). See ECF No. 362, Appx.
A. It also asserts the defenses of impossibility, impracticability, and frustration of purpose of the
governing trust agreements. Id. The Plaintiffs oppose the motion. The Court has not previously
set a deadline to amend pleadings.
DISCUSSION
I.

Standard of Review
Generally, a party may amend its answer once as of right within 21-days of serving the

original pleading. Fed. R. Civ. P. 15(a)(1). Once that period expires, however, a party may
amend only with consent of the opposing parties or with leave of the court. Fed. R. Civ. P.
15(a)(2). Although the Court “should freely give leave” to amend a party’s pleading “when
justice so requires,” Fed. R. Civ. P. 15(a)(2), it may “deny leave for good reason, including
futility, bad faith, undue delay, or undue prejudice to the opposing party.” Holmes v. Grubman,
568 F.3d 329, 334 (2d Cir. 2009) (quoting McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184,
200 (2d Cir. 2007)). The movant bears the burden of explaining its delay, while the opposing
party must show futility, prejudice, or bad faith. See U.S. ex rel Kester v. Novartis Pharma.
Corp., No. 11-cv-08196 (CM), 2015 WL 1650767, at *5 (S.D.N.Y. April 10, 2015) (moving
party’s burden); Contrera v. Langer, 314 F. Supp. 3d 562, 567 (S.D.N.Y. 2018) (opposition’s
burden).
The Court of Appeals has expressed its “strong preference for resolving disputes on the
merits,” weighing in favor of granting amendments. Williams v. Citigroup, Inc., 659 F.3d 208,
212–13 (2d Cir. 2011). “[Rule 15(a)(2)] reflects two of the most important principles behind the
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Federal Rules: pleadings are to serve the limited role of providing the opposing party with notice
of the claim or defense to be litigated . . . and ‘mere technicalities’ should not prevent cases from
being decided on the merits.” Monahan v. N.Y.C. Dep’t of Corrections, 214 F.3d 275, 283
(2d Cir. 2000) (citation omitted). Accordingly, “absent evidence of undue delay, bad faith or
dilatory motive on the part of the movant, undue prejudice to the opposing party, or futility, Rule
15’s mandate must be obeyed.” Id. at 283.
I.

Application
As a preliminary matter, the Plaintiffs do not claim that HSBC acted in bad faith or with a

dilatory motive. Therefore, the Court focuses its analysis on whether the Plaintiffs have shown
that HSBC’s amendments will cause undue prejudice, undue delay, or are futile.
A. Undue Prejudice and Undue Delay
The Court of Appeals has held that undue prejudice is “perhaps [the] most important”
factor under the Rule 15(a)(2) analysis. See State Teachers Ret. Bd. v. Fluor Corp., 654 F.2d
843, 856 (2d Cir. 1981). “The concepts of delay and undue prejudice are interrelated—the longer
the period of unexplained delay, the less will be required of the non-moving party in terms of a
showing of prejudice.” Davidowitz v. Patridge, No. 08-cv-06962 (NRB), 2010 WL 1779279, at
*2 (S.D.N.Y. Apr. 23, 2010) (citing Evans v. Syracuse City Sch. Dist., 704 F.2d 44, 46–47 (2d
Cir. 1983)). Courts determine whether a new defense would be unduly prejudicial by evaluating
whether it would “(i) require the opponent to expend significant additional resources to conduct
discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii)

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prevent the plaintiff from bringing a timely action in another jurisdiction.” Monahan, 214 F.3d at
284 (quotation omitted). 1
Plaintiffs argue that HSBC’s amendment should be denied because HSBC does not
explain why it waited five years to move to amend, especially given that the “circumstances
surrounding the defenses HSBC seeks to add” have been “well known for years.” ECF No. 365
at 3 (quotations omitted). They cite Frenkel v. New York City Off-Track Betting Corp., for the
proposition that HSBC’s failure to amend its answer based on previously known facts is itself
dispositive for denying the motion. See 611 F. Supp. 2d 391, 394–95 (S.D.N.Y. 2009), opinion
adopted, 701 F. Supp. 544 (S.D.N.Y. 2010). Their reliance on Frenkel is misplaced, however, as
that court made clear that “[l]eave to amend . . . will generally be denied when the motion to
amend is filed solely in an attempt to prevent the Court from granting a motion to dismiss or for
summary judgment,” which is not the case here. Id. at 394–95 (emphasis added, quotation
omitted). Indeed, the relevant question to determine undue delay under Rule 15(a)(2) is not how
much time has elapsed since the complaint was filed, but how much remains before the Court
evaluates its merits. See Krumme v. WestPoint Stevens Inc., 143 F.3d 71, 88 (2d Cir. 1998)
(finding that an amendment’s prejudice is determined by “the degree to which it would delay the
final disposition of the action” (citation omitted)).
Although HSBC did not move to amend for several years, it explained the delay,
including: to conform its defenses to the evidence uncovered throughout discovery; and to
present a defense raised in a parallel RMBS case. See Phoenix Light SF Ltd. v. U.S. Bank Nat’l

1

Plaintiffs do not argue the third factor, which generally relates to a statute to limitations, and
there is no reason to believe it is implicated here.

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Ass’n, No. 14-cv-10116 (VSB), 2020 WL 1285783, at *3 (S.D.N.Y. Mar. 18, 2020). It also
explained that it waited to move to amend until after a settlement conference was held on June
25, 2020. See ECF No. 361 (settlement conference order). HSBC promptly filed its motion
approximately one month after that settlement conference proved unsuccessful.
Furthermore, although Plaintiffs cite several other cases in support of their opposition,
HSBC distinguished each as being in a different posture than this case, including cases where the
amendment sought was either after the permitted period in the civil case scheduling order, within
days of summary judgment or trial, or after summary judgment motions were filed. See, e.g.,
Commerzbank AG v. The Bank of New York Mellon, et al., No. 15-cv-10029 (GBD) (BCM),
ECF No. 152 at *6 (S.D.N.Y. Nov. 6, 2018) (denying the motion “because a deadline to amend
the pleadings was set, was never modified, and has long passed”); Evans v. Syracuse City Sch.
Dist., 704 F.2d 44, 47 (2d Cir. 1983) (upholding the district court’s denial of a motion to amend
made “after two pre-trial conferences, and only six days before . . . trial,” and where no
persuasive reason was given for the delay); Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 72
(2d Cir. 1990) (upholding the district court’s denial of the plaintiff’s motion to amend made one
month after the plaintiff had already filed its opposition to summary judgment). None of those
circumstances is present here, and the Court finds HSBC’s distinctions persuasive. Thus, HSBC
has met its burden in explaining the delay, and Plaintiffs failed to show that the amendment will
significantly delay final disposition of the case.
The only remaining question regarding whether the amendments would unduly prejudice
the Plaintiffs, then, is if adding the proposed defenses would require the Plaintiffs to expend
significant additional resources to conduct discovery and prepare for trial. As noted above, fact
discovery has closed, with expert discovery set to close April 7, 2021. As such, any additional
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discovery implicated by HSBC’s amendments might require the reopening of a deadline that
expired nearly four years ago and extending the expert discovery period. The discovery
implications of HSBC’s newly proposed defenses are evaluated in turn, with champerty first, and
impossibility, impracticability, and frustration of purpose second.
1. The Discovery Implications of HSBC’s Champerty Defense
New York’s champerty law is based upon a common law doctrine “designed to prevent
or curtail the commercialization or trading in litigation.” Phoenix Light SF Ltd. v. U.S. Bank
N.A., No. 14-cv-10116 (VSB), 2020 WL 1285783, at *3 n.5 (S.D.N.Y. Mar. 18, 2020) (citing
N.Y. Judiciary Law § 489(1)) (quotation omitted). HSBC argues that Plaintiffs lack standing to
sue, including because of the champertous nature of assignments they received from the true
claimholder. It further argues that Plaintiffs were put on notice of its intent to contest Plaintiffs’
standing to sue in its Answer, and that the form, scope, and purpose of these assignments have
already been a subject of discovery. 2 Furthermore, it notes that Plaintiffs have recently litigated
the same defense involving the same assignments and exact same facts. 3 See Phoenix Light SF
Ltd., 2020 WL 1285783, at *1 (finding that RMBS assignments implicated both Article III and
prudential standing questions). Finally, it claims that no further discovery is needed, as any
evidence relevant to the assignments is in the Plaintiffs’ possession, and that the defense does not
alter any factual allegations.

2

HSBC has already pleaded the defenses of standing and contractual standing in its Answer. See
ECF No. 62 at 41, 47. It also argues that HSBC explicitly denied the effectiveness of Plaintiffs’
assignments in the portion of Plaintiffs’ Complaint titled “Plaintiffs’ Acquisition of Certificates and
Standing to Sue.” See ECF No. 53 ¶¶ 26–44; ECF No. 62 at *6–9.
3
HSBC has already asserted a collateral estoppel defense in its Answer, which it argues put the
Plaintiffs on notice of its intent to use as a defense any case law deciding identical issues. See ECF No. 62
at *41.

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Although Plaintiffs argue that they should not be deprived of an opportunity to pursue
fact discovery concerning the champerty defense, they fail to articulate what discovery would be
implicated by the defense. A generalized complaint that there was no discovery on a particular
defense is not the same as showing that opposing the defense will require the Plaintiffs to expend
significant resources to reopen discovery. See Lamont v. Frank Soup Bowl, No. 99-cv-12482
(JSM) (HBP), 2000 WL 1877043, at *2 (S.D.N.Y. Dec. 27, 2000) (allowing amended defenses
where the plaintiff “fail[ed] to offer any explanation of . . . what other discovery he would have
taken had this amendment been included in defendant’s original answer”). Accordingly, the
Court finds that Plaintiffs do not show that adding the champerty defense will be unduly
prejudicial.
2. The Discovery Implications of HSBC’s Impossibility, Impracticability, and
Frustration of Purpose Defenses
HSBC’s remaining proposed defenses relate to its ability to perform its duties as an
RMBS trustee. It contests the Plaintiffs’ allegations that it was obliged to unilaterally undertake
factual investigations and initiate litigation against trust sponsors to repurchase a massive
number of purportedly breaching loans. It notes, however, that if such a duty did exist, the 2008
Financial Crisis made it impossible or impracticable to meet its obligations and frustrated the
purpose of such obligations. Specifically, it puts at issue whether HSBC could investigate and
initiate massive litigation efforts, and whether the sponsors of the loans could possibly
repurchase in the volumes asserted by the Plaintiffs.
Plaintiffs make a stronger showing that these defenses were not subject to particularized
discovery, and that allowing the amendments without further discovery would be unduly

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prejudicial. 4 First, they note that HSBC successfully limited the scope of discovery throughout
the case by arguing that it could withhold “corporate trust administration documents involving
non-Bellwether trusts” including documents related to “‘common’ servicers, originators and
sponsors [because] doing so would undo the Bellwether process.” ECF No. 111 at 1. They
contend that—had HSBC pleaded these affirmative defenses initially—Plaintiffs would have an
undisputed right to discovery relating to non-bellwether trusts, as it would bear on whether
HSBC could and did take actions in other trusts that it now contends was impossible for the
trusts at issue. Plaintiffs add that they should be permitted to assess whether there were any
factual differences that made HSBC’s performance possible in one context, but impossible with
respect to the at-issue trusts.
Second, Plaintiffs argue that these defenses are available to the asserting party only if its
conduct did not contribute to the impossibility, impracticability, or frustration. See, e.g.,
Lowenschuss v. Kane, 520 F.2d 255, 265 (2d Cir. 1975); accord In re Stock Exchange Options
Trading Antitrust Litig., No. 99-cv-00962 (RCC), 2005 WL 1635158, at *11 (S.D.N.Y. July 8,
2005) (noting that a party asserting frustration of purpose must be “without . . . fault”). As the
Second Circuit has recognized, the RMBS industry (of which HSBC was a part) “was a textbook
example of a small set of market participants racing to the bottom to set the lowest possible

4

This is bolstered by an entire section of Plaintiffs’ brief that requests that—if HSBC’s motion is
granted—the Court should reopen discovery as to the impossibility, impracticability, and frustration of
purpose defenses, but not to champerty. They lists six areas in which it would seek discovery: (i)
repurchase demands HSBC made and the result of such demands; (ii) HSBC’s involvement in repurchase
litigation; (iii) steps taken to address breaches by servicers in RMBS trusts and similar securitization
structures; (iv) HSBC’s failure to take action despite knowing of breaches by parties who originated or
serviced loans in this actions and the reasons for such inaction; (v) funds or other relief HSBC has
received to compensate an RMBS trust or its certificate holders for losses or to prevent future losses; and
(vi) HSBC’s general ability to seek recoveries or servicing improvements during the relevant period. ECF
No. 365 at *12.

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standards for themselves.” See Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc., 873 F.3d
85, 134 (2d Cir. 2017). Plaintiffs argue that HSBC successfully curtailed discovery into its own
wrongdoing and contribution to the conditions of the 2008 Financial Crisis by withholding
numerous relevant transcripts of depositions taken of HSBC employees that were involved in
loan origination misconduct and drastically limited the amount of discovery that Plaintiffs could
obtain from HSBC’s corporate trust department. See ECF No. 153 at 6–7.
Plaintiffs’ arguments are compelling. Although HSBC claims that Plaintiffs had ample
opportunity to conduct discovery on these issues and to request information regarding trusts
outside of the bellwether process, this does not comport with its previous arguments that such
discovery be limited. And just because Plaintiffs were able to ask questions during depositions
related to non-bellwether trusts does not mean that any question or admission was directed
toward rebutting these defenses. Furthermore, whereas Plaintiffs control the documents
necessary to counter HSBC’s champerty defense, HSBC is largely in control of the documents
and information the Plaintiffs would need to rebut its claims of impossibility, impracticability,
and frustration of purpose. Finally, the Court would be loath to reopen discovery in this case
nearly four years after its close, which was a hard-fought process in the first instance. Doing so
would delay the final disposition of this case because the impending expert discovery, summary
judgment, and Daubert deadlines would likely be pushed back to accommodate any new facts
uncovered during the process.
Accordingly, the Court finds that HSBC’s proposed amendments as to impossibility,
impracticability, and frustration of purpose would likely necessitate the reopening of discovery
and require the Plaintiffs to expend significant resources. Amending these defenses would result
in undue prejudice to the Plaintiff, and therefore will not be allowed by the Court.
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B. Futility
“A proposed amendment to a pleading would be futile if it could not withstand a motion
to dismiss.” Ballard v. Parkstone Energy, LLC, No. 06-cv-13099 (RWS), 2008 WL 4298572, at
*3 (S.D.N.Y. Sep. 19, 2008) (quotation omitted). Thus, “[l]eave to amend may be denied on
grounds of futility if the proposed amendment fails to state a legally cognizable claim or fails to
raise triable issues of fact.” AEP Energy Servs. Gas Holding Co. v. Bank of America, N.A., 626
F.3d 699, 726 (2d Cir. 2010) (citation omitted).
Plaintiffs failed to argue that HSBC’s proposed champerty defense would be futile, but
for a minor argument that champerty is an affirmative defense that was already waived, citing
Phoenix Light SF Ltd v. Bank of New York Mellon, No. 14-cv-10104 (VEC), 2020 WL
2950799, slip op. at *1–2 (S.D.N.Y. Jun. 3, 2020). In that case, however, Judge Caproni found
that the defendant had waived its champerty defense when it was raised for the first time in its
second summary judgment motion—not in a motion to amend before summary judgment was
filed. See id. at ECF No. 341. Indeed, Plaintiffs recognize that Judge Caproni recently allowed
the defendants in another case in a very similar posture to add a champerty defense, where “no
scheduling deadline for amending the pleadings had been entered [and the] action had not yet
reached summary judgment.” Phoenix Light SF DAC, et al. v. The Bank of New York Mellon,
No. 18-cv-01194 (VEC), slip op., ECF. No. 160 at *1 (S.D.N.Y. Aug. 14, 2020). Accordingly,
the Court finds that Plaintiffs have not met their burden of showing that HSBC’s champerty
defense would be futile.
Because HSBC’s impossibility, impracticability, and frustration of purpose defenses
would result in undue prejudice—and are denied on those grounds—the Court does not discuss
whether or not they would be futile.
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CONCLUSION
HSBC’s motion to amend its Answer is GRANTED in part. It may amend its Answer to
add its champerty defense. The motion to add impossibility, impracticability, and frustration of
purpose defenses, however, is DENIED. Respectfully, the Clerk of Court is directed to terminate
the motion at ECF No. 361.
SO ORDERED.

Dated: February 16, 2021
New York, New York

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