Source: https://casetext.com/brief/03058aa1-nomura-home-equity-loan-inc-series-2006-fm2-by-hsbc-bank-usa-national-association-solely-in-its-capacity-as-trustee-et-al-respondentsvnomura-credit-capital-inc-appellant-and-three-other-actions-brief-1
Timestamp: 2020-06-03 18:30:05
Document Index: 214565043

Matched Legal Cases: ['§ 860', '§ 7', '§ 2', '§ 860', '§ 2', '§ 860', '§ 860', '§ 860', '§ 860', '§ 2', '§ 2', '§ 2', '§ 203', '§ 545', '§ 13', '§ 77']

To Be Argued By: JOSEPH J. FRANK Time Requested 30 Minutes APL-2016-00024 New York County Clerk's Index Nos. 653783/12, 651124/13, 652614/12 and 650337/13 @llltrt nf J\pp.eals STATE OF NEW YORK .... NOMURA HOME EQUITY LOAN, INC., SERIES 2006-FM2, by HSBC BANK USA, NATIONAL ASSOCIATION, solely in its capacity as Trustee; NOMURA HOME EQUITY LOAN, INC., SERIES 2007-3, by HSBC BANK USA, NATIONAL ASSOCIATION, solely in its capacity as Trustee; NOMURA ASSET ACCEPTANCE CORPORATION MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2006-AF2, by HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee; NOMURA HOME EQUITY LOAN, INC., HOME EQUITY LOAN TRUST, SERIES 2007-2, by HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee, Plaintiffs-Respondents, May 5, 2016 -against- NOMURA CREDIT & CAPITAL, INC., Defendant-Appellant. REPLY BRIEF FOR DEFENDANT-APPELLANT JOSEPH J. FRANK AGNES DUNOGUE MATTHEW L. CRANER SHEARMAN & STERLING LLP 599 Lexington Avenue New York, New York 10022 Telephone: (212) 848-4000 Facsimile: (212) 848-7179 Attorneys for Defendant-Appellant ii TABLE OF CONTENTS Page TABLE OF AUTHORITIES ................................................................................................. iv PRELIMINARY STATEMENT ............................................................................................ 1 ARGUMENT .............................................................................................................................. 5 I. Plaintiff Has Brought This Breach of Contract Action to Recover for Nomura’s Securitization of Allegedly Defective Loans ...................................... 5 II. The Governing Contracts Establish That the Sole Remedy for Defective Loans, Whether Few or Many, Is Cure or Repurchase of Such Loans ............ 9 A. The Contracts Do Not Provide for Fundamentally Different Remedies If Defective Loans Are Few or Numerous ........................... 9 1. The No Untrue Statement Provision’s Reference to “In The Aggregate” Does Not Nullify the Sole Remedy of Cure or Repurchase for Loan Defects ...................................................... 9 2. The No Untrue Statement Provision Is Not Rendered Superfluous or Meaningless by Enforcing the Sole Remedy . 11 3. The Sole Remedy of Cure or Repurchase for Loan Defects Is Mandated by the Status of the Trusts as Real Estate Mortgage Investment Conduits ................................................. 12 4. The Appellate Division’s Erroneous Holding Is Not Justified by the Specific Contractual Language Here as Compared to That in Ambac ..................................................... 14 B. The Contracts’ Sole Remedy Provision Is Not Nullified by a Separate Provision, Taken Out of Context, Which Refers to Remedies Being Distinct and Cumulative .......................................... 16 iii III. Allowing Plaintiff to Circumvent the Applicable Sole Remedy Limitation by Renaming Its Claims Would Depart From, and Undermine, Fundamental Principles of New York Law .................................... 18 A. Plaintiff’s Contention That It Can Avoid the Sole Remedy Provision Notwithstanding the Essential Nature of Its Claims Is Inconsistent with New York Law ....................................................... 18 B. Plaintiff’s Approach Could Potentially Allow It to Recover Twice for Alleged Loan Defects—A Result Barred by New York Law ....... 22 C. Plaintiff’s Attempt to Turn a Purported Breach of Contract Claim into a Quasi-Federal Securities Law Disclosure Claim Must Be Rejected ............................................................................................... 24 D. Plaintiff Ignores the Role of This Court When Contending That It May Not Hold That, as a Matter of Law, Plaintiff Cannot Pursue General Contract Damages for Its Claims .......................................... 25 CONCLUSION .............................................................................................. 27 iv TABLE OF AUTHORITIES Page Cases Ambac Assurance Corp. v. EMC Mortg. LLC, 121 A.D.3d 514 (1st Dep’t 2014) ................................................................................................... 14-15 Aramony v. United Way of Am., 254 F.3d 403 (2d Cir. 2001) ................................ 17 Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259 (1937) ........................................... 1, 21 Eden Roc, LLLP v. Marriott Int’l, Inc., 116 A.D.3d 486 (1st Dep’t 2014) ............. 24 Erie Ins. Co. of N.Y. v. AE Design, Inc., 104 A.D.3d 1319 (4th Dep’t 2013) ................................................................................................................... 21 Findlay v. Duthuit, 86 A.D.2d 789 (1st Dep’t 1982) ......................................... 21-22 Hartford Acc. & Indem. Co. v. Chartrand, 239 N.Y. 36 (1924) ............................. 23 Indus. Risk Insurers v. Port Auth. of N.Y. and N.J., 387 F. Supp. 2d 299 (S.D.N.Y. 2005) ............................................................................................. 2 Israel v. Chabra, 12 N.Y.3d 158 (2009) .................................................................. 25 J. D’Addario & Co. v. Embassy Indus., Inc., 20 N.Y.3d 113 (2012) .................. 1, 19 Kalisch–Jarcho, Inc. v. City of New York, 58 N.Y.2d 377 (1983) ...................... 1, 18 Kass v. Kass, 91 N.Y.2d 554 (1998) ............................................................ 16, 17, 26 Montoya v. Cousins Chanos Casino, LLC, No. 651353/11, 2012 WL 118475 (Sup. Ct. N.Y. Cnty. Jan. 12, 2012) ....................................................... 21 Morrison v. Nat’l Broad. Co., 19 N.Y.2d 453 (1967) ............................................. 21 Richter v. 210 Equities Corp., 216 A.D.2d 106 (1st Dep’t 1995) ........................... 22 Rolnick v. Rolnick, 24 N.Y.2d 805 (1969) .............................................................. 22 People ex rel. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105 (2008) ............ 3, 23 v Tourtellot v. Harza Architects, Engr’s & Constr. Managers, 55 A.D.3d 1096 (3d Dep’t 2008) ............................................................................. 21 Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352 (2003) ....................passim Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir. 1998) .................................... 8 Statutes and Rules 26 U.S.C. §§ 860A-860G ............................................................................. 12, 13, 14 1 PRELIMINARY STATEMENT In assessing whether a claim may proceed as a matter of law, this Court “look[s] for the reality, and the essence of the action and not its mere name.” Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259, 264 (1937). Further, this Court has made clear that “‘[a] written contract will be read as a whole, and every part will be interpreted with reference to the whole,’” such as “‘to give effect to its general purpose.’” Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358 (2003) (quoting Empire Props. Corp. v. Mfrs. Trust Co., 288 N.Y. 242, 248 (1942)) (further internal citations and quotation marks omitted). Otherwise, “‘[t]he meaning of a writing may be distorted where undue force is given to single words or phrases.’” Id. Moreover, contractual provisions that “clearly, directly and absolutely” limit liability for “any act or omission” must be enforced, “especially when entered into at arm’s length by sophisticated contracting parties.” Kalisch– Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384 (1983) (emphasis in the original). Thus, when parties agree to an “exclusive remedy” in connection with a breach of contract, “the exclusive remedy that the parties fashioned . . . should be honored.” J. D’Addario & Co. v. Embassy Indus., Inc., 20 N.Y.3d 113, 118-19 (2012). Contracting parties do and should be able to rely upon the general New York rule that enforces contracts that provide for limitations on liability and 2 remedies. See Indus. Risk Insurers v. Port Auth. of N.Y. and N.J., 387 F. Supp. 2d 299, 307 (S.D.N.Y. 2005). If the essential nature of plaintiff’s claims render them subject to an exclusive remedy provided by a contract read “as a harmonious and integrated whole,” then this Court will reject the plaintiff’s attempt to “subvert th[e] ‘exclusive remedies’” and to “circumvent” that contractual limitation. Westmoreland Coal, 100 N.Y.2d at 358-59. Here, Plaintiff is attempting to do just that and this Court should reject Plaintiff’s attempt to evade the sole remedy by which it is bound. These actions are for breach of contract based on alleged defects in mortgage loans that were securitized into the trusts of which Plaintiff is the Trustee. The Complaints—notwithstanding Plaintiff’s impermissible attempts to rewrite its pleadings in its Opposition Brief on appeal—expressly allege breaches of representations about the characteristics of the loans. The governing agreements indisputably provide that the sole remedy for such breaches is the cure or repurchase of the defective loans. Yet, the Appellate Division allowed Plaintiff to circumvent the sole remedy by pointing to a catch-all representation contained in related agreements that makes various warranties about Nomura’s corporate status and ability to enter into and execute the agreements, and which also states that the transaction documents, taken together, do not contain material misrepresentations 3 and are not materially misleading. This provision, referred to as the “No Untrue Statement Provision” by Plaintiff, says nothing about undoing the sole remedy for breach of representations concerning loan characteristics. Nor does the No Untrue Statement Provision, contrary to Plaintiff’s contention, create a multi-tiered remedy whereby “individual” loan breaches are subject to an exclusive remedy but “numerous” claims for loan breaches are not subject to the exclusive remedy when aggregated. Indeed, the No Untrue Statement Provision does not refer to loans “in the aggregate” at all, but rather to “documents,” furnished by Nomura, “taken in the aggregate.” Interpreting the No Untrue Statement Provision—or another phrase plucked by Plaintiff from another provision, referring to the granting of security interests— in isolation, to nullify the sole remedy provision, is inconsistent with fundamental principles of contract interpretation. Such an interpretation could also be construed to allow Plaintiff effectively to recover twice for the same alleged loan defect— once for an individual breach, and then again when that loan breach is aggregated with others. “‘[C]ourts can and should preclude double recovery’” by a plaintiff, People ex rel. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105, 125 (2008) (quoting EEOC v. Waffle House, Inc., 534 U.S. 279, 297 (2002)), and nothing in the governing agreements suggests that the parties intended such a nonsensical result. Moreover, to the extent that Plaintiff is effectively attempting to transform 4 a breach of contract claim into a disclosure claim under federal securities laws, this Court should disallow it and hold Plaintiff to the terms of the agreements. Contrary to Plaintiff’s contention that this Court cannot decide this issue as a matter of law, this Court can and, respectfully, should hold that Plaintiff is bound by the unambiguous sole remedy provisions of the contracts at issue for any claim based on alleged misrepresentations about loan characteristics—and Plaintiff cannot evade that sole remedy by asserting its claim under the purported cover of the No Untrue Statement Provision. 5 ARGUMENT I. Plaintiff Has Brought This Breach of Contract Action to Recover for Nomura’s Securitization of Allegedly Defective Loans It is undisputed that the gravamen of Plaintiff’s actions—including its claim as to the No Untrue Statement Provision—is that a large number of loans transferred into the trusts at issue, of which Plaintiff is the Trustee, were allegedly defective. See, e.g., Opp. at 10, 11, 18, 19, 33. To the extent Plaintiff contends that any “transaction documents” contained false statements and breached the No Untrue Statement Provision, it is on the alleged basis that those documents misrepresented the characteristics of the loans. See, e.g., Opp. at 18, 19. Plaintiff’s Complaints could not be clearer in basing Plaintiff’s No Untrue Statement Provision claim on alleged breaches of representations about the characteristics of the loans. In 2006-FM2 and 2007-3, 1 Plaintiff alleges 2 : 1 All references to “R__” are to the Record on Appeal. Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, National Association, solely in its capacity as Trustee v. Nomura Credit & Capital, Inc., No. 653783/12 is referred to as “2006-FM2.” Nomura Home Equity Loan, Inc., Series 2007-3, by HSBC Bank USA, National Association, solely in its capacity as Trustee v. Nomura Credit & Capital, Inc., No. 651124/13 is referred to as “2007-3.” Nomura Home Equity Loan, Inc., Home Equity Loan Trust Series 2007-2, by HSBC Bank USA, National Association, as Trustee v. Nomura Credit & Capital, Inc., No. 650337/13 is referred to as “2007-2.” Nomura Asset Acceptance Corporation Mortgage Pass- Through Certificates, Series 2006-AF2, by HSBC Bank USA, National Association, as Trustee v. Nomura Credit & Capital, Inc., No. 652614/12 is referred to as “2006-AF2.” Each of these actions is brought by HSBC Bank USA, National Association, as trustee for the relevant trust (“Plaintiff” or “Trustee”). References 6  “[T]he No Untrue Statement Covenant applied to: (a) the mortgage loan files . . . and (b) the mortgage loan data tape (the “Mortgage Loan Schedule”), which provided detailed information about the characteristics of each Mortgage Loan . . .” 2006-FM2 Compl. ¶ 5 [R 69]; see also id. ¶ 35 [R 79].  “[T]he presence of material and widespread misrepresentations and misstatements in the Mortgage Loan Files and the Mortgage Loan Schedule . . . is a breach of the No Untrue Statement Covenant.” 2006-FM2 Compl. ¶ 9 [R 70-71].  The entire section, in two of the Complaints, entitled “Nomura Breached the Mortgage Representations and the No Untrue Statement Covenant,” sets forth alleged breaches of specific mortgage representations one after the other and, in the sub- section entitled “Breaches of the No Untrue Statement Covenant,” alleges that as a result numerous documents, including the Mortgage Loan Files, Mortgage Loan Schedule, and Prospectus Supplement, contained alleged misrepresentations and omissions. 2006-FM2 Compl. ¶¶ 37-68 [R 80-93].  “The Mortgage Loan Files, Mortgage Loan Schedule, and the Prospectus Supplement, among other documents provided to the Trust by Nomura, contained widespread, pervasive and material misrepresentations and omissions with respect to the Mortgage Loans. These misrepresentations and omissions breached the No Untrue Statement Covenant.” 2006-FM2 Compl. ¶ 90 [R 97]. As for Plaintiff’s actions in 2006-AF2 and 2007-2, Plaintiff does not purport to assert a separate claim based on the No Untrue Statement Provision. Rather, as to “Nom. Br.” are to Nomura’s opening brief, and references to “Opp.” are to the Joint Brief for Plaintiffs-Respondents. 2 Plaintiff’s Complaints in 2006-FM2 and 2007-3 are substantively identical to each other; so too are Plaintiff’s Complaints in 2006-AF2 and 2007-2. 7 set forth in Nomura’s Opening Brief, Plaintiff’s Complaints in those actions are based on alleged misrepresentations as to the characteristics of the mortgage loans, and Plaintiff invokes the No Untrue Statement Provision only when seeking to circumvent the sole remedy of cure or repurchase for such allegedly defective loans. Nom. Br. at 28, 30; 2006-AF2 Compl. ¶ 94 [R 2038-39]. Indeed, as Plaintiff expressly admits: Plaintiff’s “allegations of misrepresentations underlying the complaints . . . revolve around the mortgage loans.” Opp. at 31. Plaintiff is thus bound by the sole remedy provision—which plainly applies to breaches as to the mortgage loans. To the extent Plaintiff inconsistently and halfheartedly also attempts to suggest—in opposing this appeal—other potential bases for a claim based on the No Untrue Statement Provision, Plaintiff has not actually pled any. Plaintiff egregiously mischaracterizes its own Complaints in suggesting that, in 2006-FM2 and 2007-3, it asserted breaches of the No Untrue Statement Provision by “alleg[ing] that the Prospectus Supplement contained false statements about the business operations of Nomura and its originators, such as mortgage loan originator ResMAE Corporation, their general approach to underwriting loans, and their ‘quality control’ procedures.” Opp. at 18-19. The allegations to which Plaintiff points clearly pertain to the alleged breaches of representations as to the 8 loans. 3 In no way does Plaintiff, in any of its Complaints in these actions, even purport to assert some type of entity-level misrepresentation—distinct from allegations as to defective loans—as a basis for an alleged breach of the No Untrue Statement Provision. Plaintiff cannot change its pleadings in its opposition brief on appeal. See, e.g., Wright v. Ernst & Young LLP, 152 F.3d 169, 178 (2d Cir. 1998) (noting well-established principle that a party may not amend its complaint through its briefs). 4 3 The 2006-FM2 and 2007-3 Complaint paragraphs which Plaintiff cites contain the following allegations, in their entirety:  “The results of the Investigation—including the AVM Analysis, the Owner-Occupancy Analysis, and the Loan File Review—make clear that Nomura’s breaches of the Mortgage Representations are systemic in nature and adversely affect the vast majority of the Mortgage Loans in the Trust.” 2007-3 Compl. ¶ 62 [R 1146]; 2006-FM2 Compl. ¶ 62 [R 90].  “Moreover, ResMAE, which originated over 77 percent of the Mortgage Loans between 2005 and 2007, has faced scrutiny over its poor lending practices and the high rate of foreclosures in its 2005- 2007 originations. As such, given the number of Defective Loans identified in the Investigation and Nomura’s practice of ‘waiving in’ non-conforming mortgage loans—including, potentially, loans that breached Nomura’s contractual representations and warranties—it is likely that the breaches of the Mortgage Representations and the No Untrue Statement Covenant pervade a significant number of the Mortgage Loans in the Trust.” 2007-3 Compl. ¶ 67 [R 1148-1149]; 2006-FM2 Compl. ¶ 67 [R 92-93] (substantively identical but referring to Fremont and its originations). 4 Furthermore, Plaintiff could not plead claims under the No Untrue Statement Provision that are not tied to the mortgage loans (even assuming 9 II. The Governing Contracts Establish That the Sole Remedy for Defective Loans, Whether Few or Many, Is Cure or Repurchase of Such Loans A. The Contracts Do Not Provide for Fundamentally Different Remedies If Defective Loans Are Few or Numerous 1. The No Untrue Statement Provision’s Reference to “In The Aggregate” Does Not Nullify the Sole Remedy of Cure or Repurchase for Loan Defects Contrary to Plaintiff’s central contention, the No Untrue Statement Provision does not refer to loans “in the aggregate.” Rather, it refers to “documents,” prepared and furnished by Nomura, “taken in the aggregate.” MLPA § 7(v) [R 450, 1401, 2059, 3148]. The plain and unambiguous words of the provision do not create the type of “loan pool-level” representation that Plaintiff claims is distinct from “loan-level” representations. Rather, the clause is a catch-all provision that provides that the documents, taken together, do not contain material misstatements and are not materially misleading. It is intended to address any material arguendo that it can plead any claims under that provision at all—an issue as to which Nomura reserves all rights). Plaintiff baselessly contends that Nomura has somehow waived the point that the No Untrue Statement Provision is only in the MLPAs and Plaintiff is a party only to the PSAs. In fact, Nomura highlighted below that Plaintiff is a party only to the PSAs. It is an undisputed fact. See, e.g., 2007-3 Compl. ¶ 76 [R 1151]. The point is that, as a party to the PSAs, the Plaintiff is the beneficiary of a limited assignment of the Depositor’s rights under each of the MLPAs. The Trustee received “all of [Depositor’s] rights and interest under the Mortgage Loan Purchase Agreement, to the extent of the Mortgage Loans sold under the Mortgage Loan Purchase Agreement.” PSA § 2.01 (emphasis added) [R 175, 1198, 2175, 2976]. Any attempt to plead some entity- level claim pursuant to the No Untrue Statement Provision would, therefore, fail. But, in any event, Plaintiff expressly admits—as it must—that its claims are tied to the mortgage loans. 10 misstatements or omissions not covered in the agreement’s more specific provisions. Even if, contrary to its plain terms, the No Untrue Statement Provision did refer to loan pools or loans “in the aggregate,” it would not nullify the governing agreements’ limitation on the remedy allowed for loan breaches. The contracts do not provide a carve-out from the sole remedy provision if a certain threshold number of loan breaches are alleged. Nor do any words in the No Untrue Statement Provision—or anywhere else in the four corners of the agreements— nullify the sole remedy for loan misrepresentations and allow a general damage claim if many loan misrepresentations are alleged. As set forth in Nomura’s Opening Brief, the agreements must be read as a whole, giving words their plain and practical meaning, and in a way that does not render meaningless any of their terms, including the sole remedy provisions—crucial limitations negotiated by sophisticated parties. Nom. Br. at 35-36. In short, Plaintiff’s claims are based on allegations of many loan breaches. Each alleged loan breach is subject to the exclusive remedy of cure or repurchase of the loan. That adds up, for all the alleged breaches, to the cure or repurchase of all the allegedly defective loans. It does not add up to the entirely different remedy of general contract damages. 11 2. The No Untrue Statement Provision Is Not Rendered Superfluous or Meaningless by Enforcing the Sole Remedy Contrary to Plaintiff’s erroneous assertion, Nomura has explained how the various relevant provisions of the governing agreements interact, including the No Untrue Statement Provision and the sole remedy provisions. Nom. Br. at 44-48. Furthermore, Nomura does not claim that all possible breaches of the No Untrue Statement Provision are subject to the sole remedy of curing or repurchasing defective loans. Nomura does not assert, for example, that the sole remedy of cure or repurchase could have any application to a claim based on allegations that Nomura entered the contract without proper corporate authority. The No Untrue Statement Provision covers issues that are not related to the loans themselves and their characteristics, including entity-level representations, as well as providing a catch-all for material misrepresentations or omissions that are not addressed by specific representations and warranties. Id. The sole remedy of cure or repurchase does not apply to alleged breaches that are unrelated to the mortgage loans. But that is irrelevant here because Plaintiff is suing about allegedly defective loans. 12 3. The Sole Remedy of Cure or Repurchase for Loan Defects Is Mandated by the Status of the Trusts as Real Estate Mortgage Investment Conduits Plaintiff makes the baseless suggestion that, due to the purported “market reality” of RMBS securitizations, the governing agreements involve a distinction between representations and remedies as to “individual” loans, on the one hand, versus “aggregate” loans, on the other. Opp. at 7-10. Plaintiff can point to nothing in the contracts or otherwise to support this contention—which, in fact, contravenes the market and legal reality of the RMBS securitization structure. The sole remedy of substitution, cure or repurchase for any breaching loans is not only a negotiated limitation on an RMBS securitization sponsor’s liability for defective loans. It is an essential element of the overall structure of RMBS and is mandated by the tax code: the loan-by-loan sole remedy of substitution, cure or repurchase mandated by the governing agreements here is necessitated by Real Estate Mortgage Investment Conduit (“REMIC”) statutory requirements and reflects the parties’ clear intention to preserve the trusts’ tax-exempt REMIC status. Pursuant to the underlying PSAs, each trust is treated as a REMIC for federal income tax purposes. See PSA Prelim. Stmt. [R 109-18, 1160-68, 2084-94, 2908-15]. As a REMIC, each trust operates as a pass-through vehicle and is exempt from corporate tax. See 26 U.S.C. §§ 860A-860G. But, as explained below, contributions and income that are not permitted by federal income tax law 13 are subject to a 100 percent tax and may imperil REMIC status. The acquisition and maintenance of REMIC status is thus a critical aspect of the securitization and is of great value ex ante to certificateholders. Indeed, the very first statement in the PSA following the conveyance of the trust fund reflects the requirement to “make an election” to treat the trust fund as a REMIC. See PSA Prelim. Stmt. [R 109, 1160, 2084, 2908]. Likewise, the PSA contains several provisions designed to ensure and protect REMIC treatment. See, e.g., 2007-3 PSA §§ 2.05, 3.09, 4.04 [R 1203, 1207-08, 1217] (prohibiting various acts and transactions that would be inconsistent with REMIC status). The all-important sole remedy at issue here is one such provision. In order to qualify as a REMIC, the trust must be passively managed, and “substantially all” of the trust’s assets must consist of “qualified mortgages”— including obligations which are principally secured by an interest in real property—as well as income received on such mortgages, and properties acquired due to mortgage foreclosures. See 26 U.S.C. §§ 860D, 860F, 860G. Other income received by the trust—including income not derived from specific loans or related assets—is prohibited and is subject to a 100 percent tax. See id. § 860F(a). Further, if a prohibited transaction alters the balance of a REMIC’s assets such that “substantially all” of those assets no longer consist only of qualified mortgages and 14 permitted investments, the trust’s REMIC status can be revoked. See id. §§ 860D(a)(4), (b)(2). The statute provides an exception, however, which applies when qualified mortgages are later found to be defective. Specifically, it permits the substitution of a defective loan with a qualified replacement mortgage or the repurchase in lieu of substitution of a defective loan. See id. § 860F(a)(2)(A)(i). Thus, the loan-by- loan sole remedy of cure or repurchase is required by the relevant REMIC statutory provisions, and the agreements reflect the parties’ intention to maintain the trusts’ REMIC status. See, e.g., 2007-3 PSA § 2.05(a) [R 1203] (“[N]o repurchase or substitution pursuant to Sections 2.02 or 2.03 shall be made unless the Sponsor delivers to the Trustee an Opinion of Counsel, addressed to the Trustee, to the effect that such repurchase or substitution would not (i) result in the imposition of the tax on ‘prohibited transactions’ . . . or contributions after the Closing Date, as defined in sections 860F(a)(2) and 860G(d) of the Code, respectively or (ii) cause any [trust] to fail to qualify as a REMIC at any time that any Certificates are outstanding.”). 4. The Appellate Division’s Erroneous Holding Is Not Justified by the Specific Contractual Language Here as Compared to That in Ambac As set forth in detail in Nomura’s Opening Brief, the relevant contractual provisions here do not substantively differ from those in Ambac Assurance Corp. 15 v. EMC Mortg. LLC, 121 A.D.3d 514 (1st Dep’t 2014) (“Ambac”). Nom. Br. at 42-46. Although Plaintiff plucks out isolated words and professes a lack of clarity regarding the structure and scope of the relevant Ambac provisions (see Opp. at 25- 27), the Ambac PSAs provide that: “The obligations of the Sponsor to substitute or repurchase, as applicable, a Mortgage Loan shall be the Trustee’s and the Certificateholders’ sole remedy for any breach thereof.” 5 The Ambac PSAs also state that: “Enforcement of the obligation of the Sponsor to purchase (or substitute a Substitute Mortgage Loan for) any Mortgage Loan or any property acquired with respect thereto (or pay the Repurchase Price as set forth in the above proviso) as to which a breach has occurred and is continuing shall constitute the sole remedy respecting such breach available to the Certificateholders or the Trustee on their behalf.” 6 Furthermore, the Ambac MLPAs expressly incorporate the sole remedy into the loan representations and warranties provision and state that cure and repurchase constitute the sole remedy for breaches of loan representations and 5 See Affirmation of Darrell S. Cafasso in Support of Defendants’ Motion to Dismiss the First Amended Complaint (“Cafasso Aff.”) Ex. C-1 (excerpt of the Bear Stearns Mortgage Funding Trust 2006-AR2 Pooling and Servicing Agreement, dated September 1, 2006) at § 2.03(a), Ambac Assurance Corp. v. EMC Mortg. LLC, 39 Misc. 3d 1240(A), 2013 N.Y. Slip. Op. 50954(U) (Sup. Ct. N.Y. Cnty. June 13, 2013); see also Nom. Br. at 45-47. 6 See Cafasso Aff. Ex. C-1 (excerpt of the Bear Stearns Mortgage Funding Trust 2006-AR2 Pooling and Servicing Agreement, dated September 1, 2006) at § 2.03(b), Ambac Assurance Corp. v. EMC Mortg. LLC, 39 Misc. 3d 1240(A); see also Nom. Br. at 45-47. 16 warranties. Nom. Br. at 43-45. Thus, like the relevant provisions here, the Ambac provisions provided a sole remedy of cure or repurchase of breaching loans, and there is no basis for treating the contractual provisions at issue here differently from the substantively equivalent provisions in Ambac. B. The Contracts’ Sole Remedy Provision Is Not Nullified by a Separate Provision, Taken Out of Context, Which Refers to Remedies Being Distinct and Cumulative Plaintiff’s contention that Section 13 of the MLPA nullifies the sole remedy for breaching loans is likewise contrary to the words of that contract and well- established principles of contract interpretation. First, this Section unambiguously pertains to the “Mandatory Delivery” of, and “Grant of Security Interest” in, the loans. Nom. Br. at 48-50; [R 459, 1406, 2068-69, 3160]. The effort by Plaintiff (and the First Department) to pluck the sentence regarding cumulative and distinct remedies at the end of that Section—and suggest that it eviscerates the specific sole remedy provision as to breaches regarding characteristics of the mortgage loans— does violence to the parties’ agreement and departs from well-established rules of contract interpretation. In examining an agreement, “‘[p]articular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties as manifested thereby. Form should not prevail over substance and a sensible meaning of words should be sought.’” Kass v. Kass, 91 N.Y.2d 554, 566 (1998) (quoting Atwater & Co. v Panama R.R. Co., 17 246 N.Y. 519, 524 (S.D.N.Y. 1927)). Thus, “[w]here the document makes clear the parties’ over-all intention, courts examining isolated provisions ‘should then choose that construction which will carry out the plain purpose and object of the [agreement].’” Id. at 567 (quoting Williams Press v. State of New York, 37 N.Y.2d 434, 440 (1975)) (further internal quotation marks omitted; second alteration in Kass). Further, “it is a fundamental rule of contract construction that ‘specific terms and exact terms are given greater weight than general language.’” Aramony v. United Way of Am., 254 F.3d 403, 413 (2d Cir. 2001) (quoting Restatement (Second) of Contracts § 203(c) (1981) and further citing Arthur Linton Corbin, Corbin on Contracts §§ 545–54, at 521 (1952) (“[W]ords of general description should generally yield to words that are more specific.”)). Under Plaintiff’s interpretation, the isolated statement in Section 13 7 would mean that, even as to claims that Plaintiff does not dispute fall squarely under Section 8, Plaintiff could pursue other remedies it may have at law or equity in connection with such breaches. Indeed, although Plaintiff avoids expressly stating this, it is the logical conclusion of Plaintiff’s argument. Such an interpretation— 7 The first paragraph of Section 13 concludes with the provision that “[a]ll rights and remedies of the Purchaser under this Agreement are distinct from, and cumulative with, any other rights or remedies under this Agreement or afforded by law or equity and all such rights and remedies may be exercised concurrently, independently or successively.” MLPA § 13 [R 459, 1406, 2069, 3160]; see also Nom. Br. at 48-50. Section 13 of the MLPA is not incorporated into the PSA. 18 which renders the sole remedy provisions of both the MLPA and PSA utterly meaningless—clearly does not comport with the agreements as a whole, which unambiguously provide that the sole remedy for any misrepresentations and defects as to the loans is the cure or repurchase of such defective loans. III. Allowing Plaintiff to Circumvent the Applicable Sole Remedy Limitation by Renaming Its Claims Would Depart From, and Undermine, Fundamental Principles of New York Law Plaintiff erroneously contends that allowing it to pursue general damages for alleged breaches of the No Untrue Statement Provision will not cause uncertainty and inconsistency regarding important principles of contractual interpretation and enforcement. To the contrary: the Appellate Division’s holding in this regard contravenes numerous precepts established by this Court. A. Plaintiff’s Contention That It Can Avoid the Sole Remedy Provision Notwithstanding the Essential Nature of Its Claims Is Inconsistent with New York Law As this Court has made clear, contractual provisions that “clearly, directly and absolutely” limit liability for “any act or omission” (other than intentional wrongdoing or gross negligence) must be enforced, “especially when entered into at arm’s length by sophisticated contracting parties.” Kalisch–Jarcho, 58 N.Y.2d at 384 (emphasis in the original). Thus, “‘when parties set down their agreement in a clear, complete document,’” and decide on an “exclusive remedy” in 19 connection with a breach of contract, then “the exclusive remedy that the parties fashioned . . . should be honored.” J. D’Addario, 20 N.Y.3d at 118-19. Specifically, when a contractual party seeks to evade the contractual limitation to which it agreed—through attempts to tie its claims to other provisions, even though the allegations fundamentally relate to the issues as to which the sole remedy applies—the Court will enforce the exclusive remedy. This Court’s decision in Westmoreland Coal Co. v. Entech, Inc. provides an instructive illustration. In Westmoreland Coal, the governing agreement, relating to a stock purchase, provided an exclusive remedy for breaches of representation or warranty—i.e., litigation in a court of competent jurisdiction, with a cap on any indemnification by the seller to the buyer, for such breaches, of $1.75 million. 100 N.Y.2d at 356-57. Other provisions in the contract specified different procedures if one of the parties sought a purchase price adjustment—i.e., review by an independent accountant whose decision would be binding and was not subject to any monetary cap. Id. at 355-56. The plaintiff buyer claimed an adjustment in its favor of about $74 million, which represented more than half the purchase price, on the basis that many of the asset values in the closing certificate allegedly did not comply with GAAP—and then sought to compel the seller to submit the dispute to an independent accountant, pursuant to the purchase price adjustment provisions in the stock purchase agreement. Id. at 355, 357. 20 This Court—after (i) “[r]eading the [a]greement as a harmonious and integrated whole,” and (ii) examining the underlying nature of the plaintiff’s claims—concluded that the plaintiff’s claims were, fundamentally, for a breach of a representation or warranty and therefore were subject to the exclusive remedy to which the plaintiff had agreed for such breaches. Id. at 358-59. The Court rejected plaintiff’s contention that the defendant was “seek[ing] to rewrite” the provisions under which the plaintiff proposed to bring its claims “to insert specific words limiting these provisions to changes in value occurring between the acquisition and closing dates.” Id. at 360. It found instead that, “the words of these provisions, when read in the context of the entire [a]greement rather than in isolation, are plain enough.” Id. In reaching its holding in Westmoreland Coal, this Court stressed that [plaintiff’s] interpretation of the purchase price adjustment provisions to provide a remedy for breach of a representation or warranty—which is exactly what [plaintiff] asserts when it objects to an asset value on the closing date certificate for failure to comply with GAAP, consistently applied—would subvert th[e] ‘exclusive remedies’ limitation and waiver, and would allow [plaintiff] to circumvent the $1.75 million threshold. Id. at 359. This Court declined to allow plaintiff to evade the exclusive remedy it had agreed to for the breaches of representations and warranties that constituted the gravamen of its claims. See id. Here, this Court should similarly decline to allow 21 Plaintiff to subvert and circumvent the sole remedy to which it agreed for breaches of representations and warranties as to the loans securitized into the trusts at issue. 8 More broadly, this Court “look[s] for the reality, and the essence of the action and not its mere name” in assessing whether a claim may proceed. Brick, 276 N.Y. at 264 (rejecting plaintiff’s attempt to cast its claim in such a way as to avoid the applicable statute of limitations); accord, e.g., Morrison v. Nat’l Broad. Co., 19 N.Y.2d 453, 458-59 (1967) (examining the “reality” and “essence” of the claim, rather than its name, and concluding that “[t]he harm assertedly sustained by the plaintiff—injury to his reputation—is precisely the same as that caused by defamation,” and therefore, notwithstanding plaintiff’s attempt to plead a cause of action for a separate “intentional wrong,” the statute of limitations for defamation should apply and the action must be dismissed); see also, e.g., Findlay v. Duthuit, 86 A.D.2d 789, 790 (1st Dep’t 1982) (“looking for the reality and the essence of 8 Disallowing Plaintiff, here, to circumvent the sole remedy provision by which it is bound is also consistent with New York courts’ enforcement of other contractual limitations, such as forum selection clauses. See, e.g., Tourtellot v. Harza Architects, Engr’s & Constr. Managers, 55 A.D.3d 1096, 1098 (3d Dep’t 2008) (holding that a party “cannot circumvent application of the forum selection clause by pleading parallel and/or additional related noncontractual claims”); accord Erie Ins. Co. of N.Y. v. AE Design, Inc., 104 A.D.3d 1319, 1320 (4th Dep’t 2013); Montoya v. Cousins Chanos Casino, LLC, No. 651353/11, 2012 WL 118475, at *5 (Sup. Ct. N.Y. Cnty. Jan. 12, 2012) (holding that a party may not defeat a forum selection clause “by artful pleading of claims not based on the contract containing the clause if those claims grow out of the contractual relationship or . . . a breach of that relationship” (internal quotation marks omitted)). 22 the action and not its mere name,” concluding that the complaint did not provide a basis for long-arm jurisdiction, and affirming the dismissal of plaintiff’s claims). Where the plaintiff has a legal remedy to redress the breach which it alleges, the plaintiff may not seek to evade a limitation on that remedy—such as attempting to extend the applicable statute of limitations—by attaching a different “label” to its claim. See, e.g., Rolnick v. Rolnick, 24 N.Y.2d 805, 805 (1969). So too, here, Plaintiff should not be permitted to evade the sole remedy limitation by attaching the “No Untrue Statement Provision” label to its claims for alleged loan defects. This Court should decline to allow Plaintiff to circumvent the sole remedy to which it agreed, and adhere to the oft-repeated principle—across various legal contexts—that “[a] party will not be permitted to use artful pleading to salvage, by rewording, a cause of action that is fatally deficient.” Richter v. 210 Equities Corp., 216 A.D.2d 106, 106 (1st Dep’t 1995). B. Plaintiff’s Approach Could Potentially Allow It to Recover Twice for Alleged Loan Defects—A Result Barred by New York Law Under Plaintiff’s logic, as set out in its Opposition Brief, it could potentially recover twice for the same alleged harm resulting from a defective loan: once for an individual loan breach, and another time when that loan breach is aggregated with other such loan breaches. New York law does not allow that. To the extent the Appellate Division’s decision could be construed to permit Plaintiff to pursue 23 such a double recovery for any and all alleged loan defects, the Appellate Division erred. 9 By setting up a false structure that purports to provide cumulative remedies for “individual” loan breaches, on the one hand, and “aggregate” loan breaches on the other, Plaintiff is essentially saying it is free to double-count each alleged breach and get two separate remedies for it. But, as this Court has repeatedly made clear, “‘the courts can and should preclude double recovery’” by a plaintiff. Spitzer, 11 N.Y.3d at 125 (quoting EEOC v. Waffle House, Inc., 534 U.S. 279, 297 (2002)); see also, e.g., Hartford Acc. & Indem. Co. v. Chartrand, 239 N.Y. 36, 41 (1924) (“The law does not favor a double recovery . . . .”). Nothing in the governing agreements supports the conclusion that the parties intended to allow Plaintiff to obtain such double recovery. 10 The impermissible implication of Plaintiff’s approach further underscores that its proposed contractual interpretation is baseless. 9 Nomura believes that, even if this Court does not reverse the Appellate Division’s erroneous decisions, Plaintiff should not be permitted to seek double recovery for alleged loan breaches. Nomura anticipates, however, that Plaintiff may take the position that the Appellate Division’s decision allows it to do so. 10 To the extent Plaintiff may suggest it would be willing to forego its claims as to what it refers to as “individual” alleged loan breaches, in favor of seeking general damages as to those alleged breaches when “aggregated,” this does not resolve the issue, of course, as it would achieve the circumvention of contractual limitations that this Court, as set forth above, does not allow. 24 C. Plaintiff’s Attempt to Turn a Purported Breach of Contract Claim into a Quasi-Federal Securities Law Disclosure Claim Must Be Rejected Plaintiff’s implicit attempt to litigate this action as if it were brought under federal securities laws regarding disclosures to investors must be rejected. See, e.g., Opp. at 10, 11, 17. This is an action for breach of contract. The claims and remedies are therefore limited by the four corners of the governing agreements. Fundamentally, a claim for breach of contract as to representations and warranties must be tied to specific representations. The express contractual representations and warranties at issue are those that relate to the characteristics of those loans. Insofar as Plaintiff is seeking to import federal securities law concepts here, and create a quasi-securities claim for a vague “broader message” allegedly gleaned from the transaction documents, based on those same alleged defects, this claim should be rejected. See, e.g., Eden Roc, LLLP v. Marriott Int’l, Inc., 116 A.D.3d 486, 487 (1st Dep’t 2014) (dismissing a claim “founded on the same allegations that form the basis of the claims for breach of contract”). Relatedly, Plaintiff’s implied suggestion that the No Untrue Statement Provision must be interpreted the same way as federal securities laws also has no basis. See, e.g., Opp. at 17. This Court has made clear that parties may “craft specific contract terms governing their rights” and that—unless a statute expressly and intentionally abrogates a common-law rule related to the interpretation of 25 contracts—the agreement’s words and common-law principles of contractual interpretation govern. 11 Israel v. Chabra, 12 N.Y.3d 158, 167-68 (2009). Thus, the federal securities statutory provisions invoked by Plaintiff “play[] no role” in interpreting the governing agreements, including the No Untrue Statement Provision. See id. at 168. D. Plaintiff Ignores the Role of This Court When Contending That It May Not Hold That, as a Matter of Law, Plaintiff Cannot Pursue General Contract Damages for Its Claims Plaintiff mistakenly contends that it would be inappropriate for this Court to decide that Plaintiff cannot pursue general contract damages for its claims, based on allegedly defective loans, under the No Untrue Statement Provision. Plaintiff invokes the notice pleading standards, and argues that possible “factual development” precludes the dismissal of its claims at this stage. See, e.g., Opp. at 15. Plaintiff contends that this Court should allow its claims to proceed because discovery is needed to resolve any ambiguity as to the relevant provisions. See, e.g., Opp. at 17 & n.4. This Court, of course, is fully able to reverse the Appellate Division’s order as to this issue. “Whether an agreement is ambiguous is a question of law for the 11 Furthermore, the contractual language on which Plaintiff focuses—“taken in the aggregate”—is nowhere to be found in the federal statutory provision to which Plaintiff points. See Opp. at 17 (quoting 15 U.S.C. § 77k). 26 courts.” Kass, 91 N.Y.2d at 566. Thus, this Court can and must decide for itself whether the relevant contractual provisions are ambiguous. The question here is whether—based on the contracts and the law—Plaintiff can evade the sole remedy provisions applicable to alleged breaches of representations concerning loan characteristics under the MLPA and/or PSA, by styling its claim as one for general contract damages under the No Untrue Statement Provision. 12 For the reasons set forth above and in its Opening Brief, Nomura respectfully submits that the governing provisions are not ambiguous, and that Plaintiff’s claims for general contract damages should be dismissed. 12 Contrary to Plaintiff’s assertion, Nomura has not conceded that Plaintiff has adequately pled a claim under the No Untrue Statement Provision; rather, the question at issue here is whether Plaintiff can seek the remedy of general contract damages for the claim it purports to bring—regardless of how Plaintiff styles that claim. As set forth above and in its Opening Brief, Nomura respectfully submits the answer is no. 27 CONCLUSION For the foregoing reasons, and the reasons set forth in Nomura’s Opening Brief, Defendant-Appellant respectfully submits that this Court should reverse the holdings of the Appellate Division’s October 13, 2015 Decision and Order, which (i) modified the IAS Court’s orders to deny Defendant’s motion to dismiss the third causes of action in each of Nomura Home Equity Loan, Inc., Series 2006- FM2, by HSBC Bank USA, National Association, solely in its capacity as Trustee v. Nomura Credit & Capital, Inc., No. 653783/12 , and Nomura Home Equity Loan, Inc., Series 2007-3, by HSBC Bank USA, National Association, solely in its capacity as Trustee v. Nomura Credit & Capital, Inc., No. 651124/13, and (ii) modified the IAS Court’s orders to deny Defendant’s motion to dismiss claims for damages (on the first cause of action) for breach of the No Untrue Statement Provision (Section 7 of the Mortgage Loan Purchase Agreement) in each of Nomura Home Equity Loan, Inc., Home Equity Loan Trust Series 2007-2, by HSBC Bank USA, National Association, as Trustee v. Nomura Credit & Capital, Inc., No. 650337/13, and Nomura Asset Acceptance Corporation Mortgage Pass- Through Certificates, Series 2006-AF2, by HSBC Bank USA, National Association, as Trustee v. Nomura Credit & Capital, Inc., No. 652614/12. Dated: New York, New York May 5, 2016 SHEARMAN & STERLING LLP By:~--<-/~ osePb J :Tank 28 Agnes Dunogue Matthew L. Craner 599 Lexington Avenue New York, New York 10022 (212) 848-4000 (tel.) (212) 848-7179 (fax) Attorneys for Defendant-Appellant Nomura Credit & Capital, Inc.