Bank of N.Y. Mellon v. WMC Mortg., LLC

• Decision Date: 07 September 2016
• Citation: 53 Misc.3d 967,39 N.Y.S.3d 892,2016 N.Y. Slip Op. 26282
• Parties: The BANK OF NEW YORK MELLON, solely in its capacity as Securities Administrator for J.P. Morgan Mortgage Acquisition Trust, Series 2006–WMC3, Plaintiff, v. WMC MORTGAGE, LLC, as successor-by-merger- to WMC Mortgage Acquisiton CORP., J.P. Morgan Mortgage Acquisiton Corporation, and J.P. Morgan Chase Bank, N.A., Defendants.
• Court: New York Supreme Court

53 Misc.3d 967

39 N.Y.S.3d 892

2016 N.Y. Slip Op. 26282

The BANK OF NEW YORK MELLON, solely in its capacity as Securities Administrator for J.P. Morgan Mortgage Acquisition Trust, Series 2006–WMC3, Plaintiff,

v.WMC MORTGAGE, LLC, as successor-by-merger- to WMC Mortgage Acquisiton CORP., J.P. Morgan Mortgage Acquisiton Corporation, and J.P. Morgan Chase Bank, N.A., Defendants.

Supreme Court, New York County, New York.

Sept. 7, 2016.

McKool Smith, P.C., for plaintiff.

Jenner & Block LLP, for WMC.

Sullivan & Cromwell LLP, for JPMorgan.

SHIRLEY WERNER KORNREICH

, J.

Motion sequence numbers 001 and 002 are consolidated for disposition.

Defendants WMC Mortgage, LLC (WMC), J.P. Morgan Mortgage Acquisition Corporation (JPMMAC), and J.P. Morgan Chase Bank, N.A. (Chase, and together with JPMMAC, JPMorgan) move, pursuant to CPLR 3211

, to dismiss the complaint. Defendants' motions are granted in part and denied in part for the reasons that follow.

Procedural History & Factual Background

As this is a motion to dismiss, the facts recited are taken from the complaint and the documentary evidence submitted by the parties.

This is the third residential mortgage backed securities (RMBS) put-back action before this court in which The Bank of New York Mellon (BONY), as Securities Administrator, seeks to compel JPMMAC (the sponsor), Chase (the servicer), and WMC (the originator) to put-back nonconforming loans in an RMBS trust. The trust at issue in this case is the J.P. Morgan Mortgage Acquisition Trust, Series 2006–WMC3 (the Trust). The court assumes familiarity with the two related actions and RMBS cases in general. See Bank of N.Y. Mellon v. WMC Mort., LLC, 50 Misc.3d 229, 17 N.Y.S.3d 613 (Sup.Ct., N.Y. County 2015)

(WMC2 ) (holding, inter alia, that the accrual clause does not extend the statute of limitations); Bank of N.Y. Mellon v. WMC Mortg., LLC, 41 Misc.3d 1230(A), 2013 WL 6153207 (Sup.Ct., N.Y. County 2013) (WMC4 ) (addressing, inter alia, the meaning of section 2.06(a)(iii) of the PSA), rearg. denied 2014 WL 3738083 (Sup.Ct., N.Y. County 2014), aff'd 136 A.D.3d 1, 22 N.Y.S.3d 3 (1st Dept.2015).¹

BONY commenced this action on October 10, 2014 by filing a summons with notice. Its complaint, filed on September 28, 2015, asserts four causes of action: (1) breach of contract, asserted against the originator, WMC; (2) breach of contract, asserted against the sponsor, JPMMAC; (3) breach of contract, asserted against the servicer, Chase; and (4) breach of contract, asserted against WMC. See Dkt. 13.² The first two causes of action are to put back non-conforming loans, the third cause of action is for failure to notify, and the fourth cause of action is for reimbursement of costs. The two operative contracts are the Mortgage Loan Sale and Interim Servicing Agreement dated July 1, 2005 (the MLSA) (Dkt. 28) and the Pooling and Servicing Agreement dated August 1, 2006 (the PSA) (Dkt. 30).³ The PSA's closing date was September 14, 2006, more than six years before this action was commenced.

On December 4, 2015, defendants filed the instant motions to dismiss. WMC contends that, under ACE Secs. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc., 25 N.Y.3d 581, 15 N.Y.S.3d 716, 36 N.E.3d 623 (2015)

, the claims asserted against it are time-barred. BONY opposes and takes the position that the MLSA's accrual clause renders its claims against WMC timely. The court rejected BONY's accrual clause argument in WMC2 and the court adheres to that decision. Indeed, after WMC2 was decided, both the First Department and the Second Circuit issued decisions on the accrual clause issue in accord with WMC2. See

Deutsche Bank Nat'l Trust Co. v. Flagstar Capital Markets Corp., 143 A.D.3d 15, 36 N.Y.S.3d 135, 137 (1st Dept.2016) (Flagstar II ) (“[t]he accrual provision in the agreement is unenforceable, despite the principle of freedom of contract upon which plaintiff relies.”), accord John J. Kassner & Co. v. City of New York, 46 N.Y.2d 544, 550, 415 N.Y.S.2d 785, 389 N.E.2d 99 (1979) ; see also

Deutsche Bank Nat'l Trust Co. v. Quicken Loans Inc., 810 F.3d 861, 866–67 (2d Cir.2015) (Quicken ); Lehman XS Trust, Series 2006–4N v. Greenpoint Mort. Funding, Inc., 643 Fed.Appx. 14, 16 (2d Cir.2016). In Flagstar II, the First Department approvingly cited the Second Circuit's decision in Quicken. See

Flagstar

II,

36 N.Y.S.3d at 137 (“[a]ssuming arguendo that the accrual provision is not unenforceable as a matter of public policy, we are persuaded by the Second Circuit's reasoning.”). BONY, therefore, is left to rely on its alternative argument, namely, that principles of equitable estoppel bar WMC from maintaining a statute of limitations defense. The court rejects this argument.

JPMorgan, however, is not similarly situated to WMC in this action because it executed tolling agreements.⁴ Nonetheless, JPMMAC argues that, under the PSA, its “backstop” liability was extinguished once the claims against WMC became time-barred. The court does not agree. Moreover, Chase contends it is not a proper defendant since the failure to notify claim asserted against it is not viable. The court considered and rejected a virtually identical failure to notify claim in WMC2 (despite sustaining such a claim in WMC4 ) on the ground that ACE foreclosed failure to notify claims where the PSA makes clear that the trustee's sole remedy with respect to non-conforming loans is a put-back claim against the sponsor or originator. The court reexamines this issue in light of Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96, 19 N.Y.S.3d 1 (1st Dept.2015)

, which was issued less than a month after WMC2 was decided, and Morgan Stanley Mort. Loan Trust 2006–13ARX v. Morgan Stanley Mort. Capital Holdings LLC, 143 A.D.3d 1, 36 N.Y.S.3d 458 (1st Dept.2016), which was issued after oral argument on the instant motions. See Dkt. 97 (7/12/16 Tr.)

WMC's Motion (Seq. 001)

BONY contends that WMC, the originator, should be equitably estopped from asserting a statute of limitations defense due to WMC's failure to notify BONY of the pervasive fraud permeating the loans in the Trust. Similar arguments made by other RMBS trustees have been rejected. See Deutsche Bank Nat'l Trust Co. v. Flagstar Capital Markets Corp., 2015 WL 1646683, at *3–4 (Sup.Ct., N.Y. County 2015)

(Friedman, J.) (Flagstar I ), aff'd on other grounds,

Flagstar II, 36 N.Y.S.3d 135, citing In re Residential Capital, LLC, 524 B.R. 563, 588–89 (Bankr.S.D.N.Y.2015) (Glenn, J.); Wells Fargo Bank, N.A. v. JPMorgan Chase Bank, N.A., 2014 WL 1259630, at *5 (S.D.N.Y.2014)

(Cedarbaum, J.), aff'd 643 Fed.Appx. 44 (2d Cir. 2016). This court also rejects the argument.

“The doctrine of equitable estoppel is an ‘extraordinary remedy.’ ” Pahlad v. Brustman, 33 A.D.3d 518, 519, 823 N.Y.S.2d 61 (1st Dept.2006)

, aff'd 8 N.Y.3d 901, 834 N.Y.S.2d 74, 865 N.E.2d 1240 (2007), quoting E. Midtown Plaza Hous. Co. v. City of New York, 218 A.D.2d 628, 628, 631 N.Y.S.2d 38 (1st Dept.1995) (“that extraordinary remedy is only applicable in circumstances where there is evidence that plaintiff was lulled into inaction by defendant in order to allow the statute of limitations to lapse”). “For the doctrine to apply, a plaintiff may not rely on the same act that forms the basis for the claim —the later fraudulent misrepresentation must be for the purpose of concealing the former tort.” Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 491, 836 N.Y.S.2d 509, 868 N.E.2d 189 (2007) (emphasis added), citing Zumpano v. Quinn, 6 N.Y.3d 666, 674, 816 N.Y.S.2d 703, 849 N.E.2d 926 (2006). “[W]here the alleged concealment consisted of nothing but defendants' failure to disclose the wrongs they had committed [,] ... defendants [are] not estopped from pleading a statute of limitations defense.” Corsello v. Verizon N.Y., Inc., 18 N.Y.3d 777, 789, 944 N.Y.S.2d 732, 967 N.E.2d 1177 (2012) (emphasis added), citing Ross, 8 N.Y.3d at 491–92, 836 N.Y.S.2d 509, 868 N.E.2d 189. In other words, “[e]quitable tolling is unavailable” where the plaintiff does not allege “an act of deception [ ] separate from the ones for which they sue.” See id.⁵

In this case, BONY has not alleged any affirmative act on the part of WMC that prevented BONY from commencing suit.⁶ On the contrary, BONY's tolling argument is based on WMC's failure to notify BONY of its knowledge of the presence of non-conforming loans in the Trust. Regardless of whether an originator's failure to notify can form the basis of an independent cause of action, WMC's failure to notify BONY of the very warranty breaches WMC sues on cannot be used as a predicate for equitably tolling the statute of limitations. While BONY's brief states in conclusory terms that “WMC actively concealed facts from [BONY]” [see Dkt. 58 at 16], the use of the word “conceal” to parrot the standard for equitable tolling cannot change the nature of what WMC is alleged to have done wrong. WMC is not alleged to have hidden anything or prevented BONY from discovering breaches. WMC is merely accused of failing to notify BONY that it “learned of rampant breaches.” See id. This type of failure to notify, which contravenes WMC's obligations under section 2.03 of the PSA, is nothing more than the “failure to disclose the wrongs [ ] committed” that Corsello holds is insufficient to warrant equitable tolling.

To be sure, as BONY reminds the court, the conduct of those in the RMBS industry was appalling.⁷ Nonetheless, the ACE court has also reminded us that RMBS cases, and all causes of action, no matter how despicable, cannot be brought if barred by the statute of limitations. See Zumpano, 6 N.Y.3d at 675, 816 N.Y.S.2d 703, 849 N.E.2d 926

(“Conduct like this might be morally questionable but it is not fraudulent concealment as a matter of law. A wrongdoer is not legally obliged to make a public confession, or to alert people who may have claims against it, to get the benefit of a statute of limitations. Plaintiffs do not allege any ...