Trust for Cert. Holders of Merrill v. Love Fund. Corp., Docket No. 07-1050-cv.

• Citation: 591 F.3d 116
• Decision Date: 11 January 2010
• Docket Number: Docket No. 07-1050-cv.
• Parties: TRUST FOR the CERTIFICATE HOLDERS OF the MERRILL LYNCH MORTGAGE INVESTORS, INC., Mortgage Pass-Through Certificates, Series 1999-C1, by and through Orix Capital Markets, LLC, as Master Servicer and Special Servicer, Plaintiff-Appellant, v. LOVE FUNDING CORPORATION, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

591 F.3d 116

TRUST FOR the CERTIFICATE HOLDERS OF the MERRILL LYNCH MORTGAGE INVESTORS, INC., Mortgage Pass-Through Certificates, Series 1999-C1, by and through Orix Capital Markets, LLC, as Master Servicer and Special Servicer, Plaintiff-Appellant, v. LOVE FUNDING CORPORATION, Defendant-Appellee.

Docket No. 07-1050-cv.

United States Court of Appeals, Second Circuit.

Argued: September 26, 2008.

Decided: January 11, 2010.

Ira M. Feinberg, Hogan & Hartson LLP, New York, N.Y. (Andowah Newton, Hogan & Hartson LLP, New York, NY, Lorane F. Hebert, Hogan & Hartson LLP, Washington, D.C., on the brief), for Plaintiff-Appellant.

Alec W. Farr, Bryan Cave LLP, Washington, D.C. (Michael G. Biggers, Anna C. Ursano, Bryan Cave LLP, New York, NY, on the brief), for Defendant-Appellee.

Before: B.D. PARKER,¹ RAGGI, Circuit Judges, and KEENAN, District Judge.²

REENA RAGGI, Circuit Judge:

Plaintiff, the Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc., Mortgage Pass-Through Certificates, Series 1999-C1 (the "Trust") sued defendant Love Funding Corporation ("Love Funding"), the originator of a defaulted mortgage held by the Trust, for breach of various representations and warranties made in a mortgage loan purchase agreement. Love Funding asserted the defense of champerty based on the fact that the Trust was assigned the right to sue Love Funding as part of a settlement of claims against UBS Real Estate Securities, Inc. ("UBS"), the successor in interest to Paine Webber Real Estate Securities Inc. ("Paine Webber"),³ which funded the defaulted mortgage loan. After a bench trial in the United States District Court for the Southern District of New York, Judge Shira A. Scheindlin voided the assignment as champertous and entered judgment in favor of Love Funding. See Trust for Certificate Holders of Merrill Lynch Mortgage Investors, Inc., Mortgage Pass-Through Certificates, Series 1999-C1 v. Love Funding Corp. ("Trust v. Love Funding"⁴), 499 F.Supp.2d 314 (S.D.N.Y. 2007).

On appeal, the Trust argued that the assignment could not be champertous because it had a preexisting interest in the loan giving rise to its claim. Because of ambiguities in the scope of New York's statutory proscription of champerty, see N.Y. Judiciary Law § 489, we certified certain questions to the New York Court of Appeals, see Trust v. Love Funding, 556 F.3d 100, 114 (2d Cir.2009). Having received the Court of Appeals' response, see Trust v. Love Funding, 13 N.Y.3d 190, 890 N.Y.S.2d 377, 918 N.E.2d 889 (2009), we now conclude, as a matter of law, that the trial record does not permit a finding of champerty. Accordingly, we reverse the challenged judgment and remand the case to the district court for entry of judgment in favor of plaintiff and for a determination of damages.

I. Background

A. Securitization of the Arlington Loan

Although we assume familiarity with our prior opinion in this case, see Trust v. Love Funding, 556 F.3d 100, we briefly recite certain facts relevant to the decision reached today. In April 1999, Love Funding entered into a "conduit lending" arrangement with Paine Webber, which was memorialized in an April 23, 1999 mortgage loan purchase agreement (the "Love MLPA"). Under the Love MLPA, Love Funding represented to Paine Webber that no underlying mortgage loan was in default. In the event that Love Funding breached this, or any other, representation, the Love MLPA provided for certain remedies, including the "repurchase [of the] Mortgage Loan at the Repurchase Price," Love MLPA § 5.03(b), and indemnification "from and against all demands, claims or asserted claims, liabilities or asserted liabilities, costs and expenses, including reasonable attorneys' fees, incurred by an Indemnified Party, in any way arising from or related to any breach of any representation, warranty, covenant or agreement ... hereunder," id. § 9.14(a).

In July 1999, pursuant to the Love MLPA, Love Funding arranged a $6.4 million mortgage loan (the "Arlington Loan") to Cyrus II Partnership ("Cyrus"), which was secured by a mortgage on Louisiana property known as the Arlington Apartments. On November 1, 1999, Paine Webber sold and assigned 36 loans, including the Arlington Loan, to Merrill Lynch Mortgage Investors, Inc. ("Merrill Lynch"), pursuant to the Merrill Lynch mortgage loan purchase agreement (the "Merrill Lynch MLPA"). In the Merrill Lynch MLPA, Paine Webber represented, as Love Funding had in the Love MLPA that none of the mortgage loans was in default.

The loans were then securitized through a process that involved the creation of the plaintiff Trust. On November 1, 1999, Merrill Lynch assigned to the Trust all of its "right[s], title and interest ... in, to and under (i) the Mortgage Loans [including the loans sold by Paine Webber], (ii) each Mortgage Loan Purchase Agreement and (iii) all other assets included or to be included" in the Trust. Pooling and Servicing Agreement § 2.01(a). Commercial mortgage-backed securities, entitling their holders to interest payments generated on the underlying mortgages including the Arlington Loan, were then issued and sold to investors.

B. Arlington Loan Default and Resulting Litigation

On March 8, 2002, the Trust declared the Arlington Loan to be in default and accelerated payment on the full amount of the loan. The Trust then commenced a mortgage foreclosure action in Louisiana state court, securing a ruling that Cyrus had committed fraud to obtain the Arlington Loan and that such fraud constituted an event of default. As a consequence, the Arlington Apartments were sold for approximately $6.5 million in net proceeds, of which the Trust received $5.9 million. The Trust also obtained a judgment of more than $10 million against Cyrus and its principals.

In September and October 2002, the Trust brought several actions against UBS related to the sale of loans by Paine Webber to the Trust. With respect to the Arlington Loan, the Trust's theory was that, because Cyrus's fraud put the Arlington Loan in default from the outset, Paine Webber (and, therefore, its successor UBS) necessarily breached its representation in the Merrill Lynch MLPA that "there is no material default." Merrill Lynch MLPA, Schedule I ¶ 7. On September 13, 2004, after two years of vigorous litigation, the Trust and UBS reached a settlement releasing the Trust's claims as to 33 loans. While UBS paid the Trust $19.375 million in consideration for releases on 32 loans, the sole consideration for the Trust's release on the Arlington Loan was UBS's assignment of its rights under the Love MLPA.

C. District Court Proceedings

In November 2004, the Trust commenced this action against Love Funding for breach of the Love MLPA. On October 11, 2005, the district court granted summary judgment in favor of the Trust on its claim that Love Funding had breached its representation that the Arlington Loan was not in default; nevertheless, it allowed Love Funding to amend its answer to assert the affirmative defense of champerty.

On February 27, 2007, after a bench trial, the district court ruled that Love Funding had proved champerty because "the Trust's primary purpose in accepting the Assignment was to buy a lawsuit against Love Funding." Trust v. Love Funding, 499 F.Supp.2d at 322. The district court relied on the fact that the Trust "carve[d] out ... a single loan from a group of loans that were settled," id. at 324, and thereby "negotiated for itself `a whole new lawsuit,' with the intent to `basically ... continu[e] a microcosm of the litigation that ha[d] already been going on for the last three years with UBS,'" id. at 322-23 (alterations in original). In reaching this conclusion, the district court further found that the Trust was motivated by a perception that it could recover more on the Arlington Loan by suing Love Funding than by pursuing a cash settlement because it would be able to recoup "millions of dollars in simple and default interest that have been accruing on the loan for years" and because it "could also potentially recover indemnification damages." Id. at 323.

D. Certification of Questions to the New York Court of Appeals

On appeal, the Trust argued that New York's champerty law did not apply to this lawsuit because the relevant statute "was never intended to prohibit assignments in complex commercial transactions where the assignee has a substantial interest at stake." Appellant's Br. at 26. Recognizing ambiguities in New York law, we certified the following questions to the New York Court of Appeals:

1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the "primary" intent proscribed by New York Judiciary Law § 489(1), or must there be a finding of "sole" intent?

2. As a matter of law, does a party commit champerty when it "buys a lawsuit" that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?

3. (a) As a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor?

(b) Is the answer to question 3(a) affected by the fact that the challenged assignment enabled the assignee to exercise the assignor's indemnification rights for reasonable costs and attorneys' fees?

Trust v. Love Funding, 556 F.3d at 114.

E. New York Court of Appeals' Response

The New York Court of Appeals accepted our certification and answered the second question and both parts of the third question in the negative, rendering it unnecessary to answer our first inquiry. Trust v. Love Funding, 13 N.Y.3d at 198, 890 N.Y.S.2d at 380-81, 918 N.E.2d 889.

In responding to our second question, the Court of Appeals emphasized that New York's prohibition of...