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-3
Timestamp: 2020-03-30 06:42:52
Document Index: 85172967

Matched Legal Cases: ['§860', '§860', '§ 2', '§2', '§1', '§3']

Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, National Association, solely in its capacity as Trustee, et al., Respondents,v.Nomura Credit & Capital, Inc., Appellant. (And Three Other Actions.) | Brief | Casetext
Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, National Association, solely in its capacity as Trustee, et al., Respondents,v.Nomura Credit & Capital, Inc., Appellant. (And Three Other Actions.)
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N.Y.Mar 22, 2017
To be Argued by: CHRISTOPHER P. JOHNSON Attorney for the Trustee for NHELI 2006-FM2 and NHELI 2007-3 (Time Requested: 5 Minutes) To be Argued by: MICHAEL S. SHUSTER Attorney for the Trustee for NHELI 2007-2 and NAAC 2006-AF2 (Time Requested: 25 Minutes) APL 2016-00024 New York County Clerk’s Index Nos. 653783/12, 651124/13, 652614/12 and 650337/13 Court of Appeals of the 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 (For Continuation of Caption See Inside Cover) JOINT BRIEF FOR PLAINTIFFS-RESPONDENTS IN RESPONSE TO BRIEFS ON BEHALF OF AMICI CURIAE CHRISTOPHER P. JOHNSON ZACHARY W. MAZIN URI A. ITKIN KASOWITZ BENSON TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Tel.: (212) 506-1700 Fax: (212) 506-1800 Attorneys for Plaintiffs-Respondents Nomura Home Equity Loan, Inc., Series 2006-FM2 and Nomura Home Equity Loan, Inc., Series 2007-3, by HSBC Bank USA, N.A., as Trustee MICHAEL S. SCHUSTER DANIEL M. SULLIVAN ADAM T. KIRGIS HOLWELL SHUSTER & GOLDBERG LLP 750 Seventh Avenue, 26th Floor New York, New York 10019 Tel.: (646) 837-5151 Fax: (646) 837-5150 Attorneys for Plaintiffs-Respondents Nomura Home Equity Loan, Inc., Series 2007-2 and Nomura Asset Acceptance Corporation Mortgage Pass-Through Certificates, Series 2006-AF2, by HSBC Bank USA, N.A., as Trustee Date Completed: March 3, 2017 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, – against – NOMURA CREDIT & CAPITAL, INC., Defendant-Appellant. i TABLE OF CONTENTS PRELIMINARY STATEMENT .............................................................................. 1 ARGUMENT ............................................................................................................ 2 I. The Policy Arguments SIFMA Raises Cannot Justify Applying The Sole Remedy Clause Beyond Its Clear Terms ........................................ 2 II. The Trustee Can Enforce The No Untrue Statement Provision, And Sand Canyon’s Contrary Arguments Misread The Agreements.................... 4 CONCLUSION....................................................................................................... 10 ii TABLE OF AUTHORITIES Page(s) Cases FHFA v. Nomura Holding Am., Inc., 68 F. Supp. 3d 439 (S.D.N.Y. 2014) .....................................................................9 Kenford Co., Inc. v. Cnty. of Erie, 73 N.Y.2d 312 (1989) ........................................7 Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42 (1956) .............................................4 People v. Ford, 69 N.Y.2d 775 (1987).......................................................................3 Statutes 26 U.S.C. §860F.........................................................................................................3 1 PRELIMINARY STATEMENT This appeal raises a simple question of contract construction. The securitizations underlying these cases are each governed by a Mortgage Loan Purchase Agreement and a Pooling and Servicing Agreement. Those agreements each contain a Sole Remedy Clause, which states that, should a mortgage loan breach the loan-specific representations and warranties in Section 8 of the MLPA, certain remedies, including repurchase of the loan, “constitute the sole remedies . . . respecting . . . a breach of the representations and warranties contained in Section 8.” E.g., R3158.1 The Sole Remedy Clause does not state that it limits relief for a violation of any other part of the MLPA, such as the separate, transaction-wide representations in Section 7 of that contract. The question on appeal is: Even though the Sole Remedy Clause says nothing about the MLPA’s Section 7 representations, does it nonetheless preclude alternative relief for breach of one of those representations, referred to as the No Untrue Statement Provision? The Appellate Division gave the only answer consistent with the language of the Sole Remedy Clause—no. In its two briefs, Defendant-Appellant Nomura Credit & Capital, Inc., the sponsor of the securitizations, offers no good reason to expand the Sole Remedy Clause beyond its clear terms. 1 In this brief, the Trustee uses the abbreviations defined in its answering brief. 2 Now, two non-parties—the Securities Industry and Financial Markets Association (“SIFMA”) and Sand Canyon Corporation—have submitted briefs as amici curiae in support of Nomura. Yet neither amicus addresses the key language of the Sole Remedy Clause that controls this appeal. Instead, SIFMA advances various policy arguments that ignore the clear terms of the governing agreements. Sand Canyon, for its part, selectively quotes the contracts in offering an alternative basis to decide the case, one not properly before this Court and meritless in any event. This Court can resolve this appeal without addressing these arguments. However, to the extent the Court considers the arguments amici make, Plaintiff- Respondent, the Trustee of the securitizations, submits this response. ARGUMENT I. The Policy Arguments SIFMA Raises Cannot Justify Applying The Sole Remedy Clause Beyond Its Clear Terms SIFMA spills much ink reciting various core principles of New York contract law, such as that limitations on liability should generally be enforced according to their terms. But no one disputes those principles here. The question is the scope of the liability limitation here (the Sole Remedy Clause). And the language of the Sole Remedy Clause answers that question clearly: The Clause limits remedies “respecting . . . the representations and warranties contained in Section 8” of the MLPA, and says nothing about the Section 7 representations, such as the No Untrue Statement Provision. 3 The policy arguments SIFMA advances simply cannot alter the meaning of the Sole Remedy Clause. For example, SIFMA worries about ensuring predictability, honoring settled expectations, and maintaining New York’s place as a reliable expositor of contract law by enforcing contractual limitations on liability. SIFMA Br. at 9–10, 12, 13, 16–18. But there is no better guarantee of New York’s reputation as the preeminent forum for the enforcement of contracts than to enforce the Sole Remedy Clause as far as its terms—and no further. That is what “provides each party with a predictable outcome” and “lowers the transaction costs of entering into the RMBS transaction.” Id. at 12. SIFMA’s final policy argument is that the Sole Remedy Clause should limit the Trustee’s remedies for breaches of the No Untrue Statement Provision in order to “avoid jeopardizing” the status of the Trusts under federal tax law as Real Estate Mortgage Investment Conduits or REMICs. Id. at 13. SIFMA appears to suggest that the damages the Trustee might receive for breaches of the No Untrue Statement Provision, if not limited by the Sole Remedy Clause, might not be the kind of income a REMIC trust is permitted to receive. See id. (citing 26 U.S.C. §860F). This tax-law argument is not properly before this Court because Nomura failed to raise it until its reply brief. People v. Ford, 69 N.Y.2d 775, 777 (1987) (refusing to consider argument “improperly raised for the first time in appellant’s reply brief to this court”). The argument is also premature because this appeal 4 concerns the sufficiency of the Trustee’s pleadings; the parties have not exchanged damages theories. The federal tax consequences of awarding damages to the Trust can await resolution, if appropriate, for when specific damages proposals are made. In any event, SIFMA’s REMIC argument proves too much: If repurchase of breaching loans or equivalent money damages were the Trustee’s only relief, then there would be no remedy for any breach of representations that did not involve a defective loan. For example, the Sponsor could lack proper corporate form and authority to enter the transaction in violation of PSA §§ 2.03(d)(i) and (ii) and, no matter the harm to the Trust, the Trustee could not obtain a remedy on behalf of certificateholders without stripping their investment of REMIC status. New York law does not assume that sophisticated, counseled parties put such toothless terms in their contracts. See Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 (1956) (“[N]o provision of a contract should be left without force and effect.”). Thus, none of SIFMA’s policy arguments engages with, or can justify evasion of, the key contract language: The Sole Remedy Clause’s clear application to breaches of certain terms, but not to the No Untrue Statement Provision. II. The Trustee Can Enforce The No Untrue Statement Provision, And Sand Canyon’s Contrary Arguments Misread The Agreements Sand Canyon does not even attempt to address the Appellate Division’s holding that the Sole Remedy Clause does not apply to breaches of the No Untrue Statement Provision. Instead, Sand Canyon—an originator of mortgage loans 5 involved in similar repurchase litigation of its own (Sand Canyon Br. at 1)—argues that the warranties in Section 7 of the MLPA, including the No Untrue Statement Provision, “were never made or transferred to the Trustee.” Id. at 3. This argument was not raised below and therefore is not properly before this Court. Tr. Br. at 30. In any event, although Nomura hinted at this point in its opening brief, it all but abandoned it on reply (Reply at 8–9 n.4), and for good reason: The argument is meritless. Sand Canyon asserts that the Trustee only received the rights in the MLPA that relate to the mortgage loans, and that the Trustee’s claim that Nomura breached the No Untrue Statement Provision does not fall within the scope of that assignment. Sand Canyon Br. at 10–12. Sand Canyon’s assertion contradicts both the plain language of the governing agreements and the Trustee’s allegations. As a threshold matter, the Trustee’s claims that Nomura breached the No Untrue Statement Provision do relate to the mortgage loans. The No Untrue Statement Provision warrants that the transaction documents “prepared or furnished” by Nomura contain no material misstatements or misleading omissions “taken in the aggregate.” R3148. And, of course, the transaction that the documents describe is a securitization of a pool of mortgage loans. Thus, as one would expect given the scope of the No Untrue Statement Provision and the nature of the transactions, the Trustee’s allegations that Nomura breached the Provision 6 are based on Nomura’s mischaracterization of the loan pools underlying the securitizations in several contract documents—including the Prospectus Supplements, the Mortgage Loan Schedule, and the governing agreements themselves. See Tr. Br. at 18–19 (summarizing allegations). The Trustee’s claims that Nomura breached the No Untrue Statement Provision are therefore within the scope of the rights that even Sand Canyon accepts were transferred to the Trustee. In any event, Sand Canyon misreads the governing agreements. Among other things (see id. at 30–31), the PSA states that the depositor (the Nomura vehicle that acquired the loans from Nomura in the MLPA and sold the loans to the Trustee in the PSA) conveyed to the Trustee “all the right, title and interest of the Depositor in and to the Trust Fund.” E.g., R2976 (PSA §2.01). The “Trust Fund” is defined to include “the assets of REMIC I,” which is defined to include “the rights under the [MLPA].” E.g., R2968 (PSA §1.01 (definition of “Trust Fund”); 2955 (definition of REMIC I, (v)). The meaning of this chain of definitions is confirmed by the MLPA itself, which states in Section 3(c) that, “Pursuant to the Pooling and Servicing Agreement, the Purchaser will assign all of its right, title and interest in and to the Mortgage Loans, together with its rights under this Agreement, to the Trustee for the benefit of the Certificateholders.” R3143 (emphasis added). 7 Sand Canyon’s answer to this clear language is to assert that “the Section 7 representations and warranties are not ‘rights;’ they are representations and warranties.” Sand Canyon Br. at 13. But by transferring to the Trustee “all” the rights under the MLPA, the depositor transferred the right to sue for breach of its terms. Sand Canyon appears to recognize this, and can only muster a plea that the Court construe the term “rights” in the definition of Trust Fund as equivalent to the loans themselves (id. at 15 n.7), which flatly contradicts the contractual definition. Similarly, Sand Canyon’s characterization of the Trustee’s remedy for breach of the No Untrue Statement Provision as “extra-contractual” (id. at 15, 16 n.10) gets it exactly backwards. Suing for ordinary contract-law remedies is not seeking something extra—black-letter contract law allows an appropriate remedy for a breach without need for the contract to specifically provide for one. See Kenford Co., Inc. v. Cnty. of Erie, 73 N.Y.2d 312, 319 (1989). Contracts can, of course, limit common-law remedies, and the Sole Remedy Clause is such a limitation. It, however, does not apply to the No Untrue Statement Provision. In an effort to rescue its argument, Sand Canyon advances a new and elaborate theory about the purposes of the transaction-wide representations in Section 7 of the MLPA and the No Untrue Statement Provision in particular. See Sand Canyon Br. at 17–26. Such speculations from an amicus should be rejected. Sand Canyon cannot speak to the purposes of the parties who negotiated these 8 specific agreements (tellingly, Nomura does not make Sand Canyon’s claims), nor is it proper for Sand Canyon to offer what amounts to an ersatz expert opinion, but without qualifications or basis in the record, on RMBS contracts in general. Even taken on its terms, Sand Canyon’s theory goes nowhere. Sand Canyon asserts that the representations in Section 7 of the MLPA are meant to establish that the “immediate purchaser” of the loans is “a holder-in-due-course.” Id. at 19– 22. The Trustee, Sand Canyon continues, “does not need” the MLPA’s Section 7 representations “to protect the interest of the investors in the Trust’s securities.” Id. at 22. But it is not up to Sand Canyon to decide what rights the Trustee “need[s].” The Trustee may exercise the rights the governing agreements grant it, whether they serve Sand Canyon’s purposes or not. Further, Sand Canyon does not connect the No Untrue Statement Provision to its holder-in-due-course theory. Sand Canyon argues instead that the No Untrue Statement Provision “helps lay the groundwork for” the underwriters of the securities offered to investors to assert the due-diligence defense available under the federal securities laws for liability arising from misstatements in the offering documents. Id. at 25. Nothing in the contracts supports this theory; indeed, the underwriters are not even parties to the PSA or the MLPA. R2902, R3142. The case law, furthermore, suggests that the No Untrue Statement Provision does not shield underwriters from liability. In the securities-law action involving some of 9 the trusts at issue here, which Sand Canyon refers to, the S.D.N.Y. dismissed the due-diligence defense of RBS, an underwriter, where it had merely relied on Nomura’s representations about the loans, rather than investigating itself. See FHFA v. Nomura Holding Am., Inc., 68 F. Supp. 3d 439, 481–84 (S.D.N.Y. 2014). Lastly, consider the absurd conclusion to which Sand Canyon’s theory leads. According to Sand Canyon, Nomura-as-seller made transaction-wide representations to Nomura-as-depositor that only Nomura-as-depositor can enforce against Nomura-as-seller. Sand Canyon does not, and cannot, explain how it is commercially reasonable to expect Nomura to sue itself, or how such an arrangement “benefit[s] the Certificateholders.” R3143 (MLPA §3(c)). * * * At the end of the day, this Court need not wade into these weeds. This appeal comes on a motion to dismiss and, at most, the amici raise ambiguities concerning the agreements or the damages to which the Trustee is entitled for breach. Such issues can be addressed, after discovery, at an appropriate time. Nomura’s motion was premised on the contention that the Sole Remedy Clause barred the Trustee from seeking alternative relief under the No Untrue Statement Provision. The Appellate Division held that the Sole Remedy Clause by its terms does not apply to the No Untrue Statement Provision. That holding was correct and should be affirmed. 10 CONCLUSION For the reasons stated herein and in the Trustee’s answering brief, this Court should affirm the Appellate Division’s Order. Dated: New York, New York March 3, 2017 :~Lc~r~ tH~~(~~:L:Br~G~LLP I \ Michael S. Shuster .. j Daniel M. Sullivan Adam T. Kirgis 750 Seventh Avenue, 26th Floor New York, New York I 0019 Telephone: (646) 837-5151 Attorneys for Plaintiffs-Respondents HSBC Bank USA, N.A., as Trustee for Nomura Home Equity Loan, Inc., Series 2007-2 and Nomura Asset Acceptance Corporation Mortgage Pass- Through Certificates, Series 2006-AF2 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Bye//~.-;~ Christopher P. Johnson Zachary W. Mazin Uri A. Itkin 1633 Broadway New York, NY 10019 (212) 506-1700 Attorneys for Plaintiffs-Respondents HSBC Bank USA, N.A., as Trustee for Nomura Home Equity Loan, Inc., Series 2006-FM2 and Nomura Home Equity Loan, Inc., Series 2007-3 11