Fed. Hous. Fin. Agency, Home Loan Mortg. Corp. v. Morgan Stanley Abs Capital I Inc.

• Decision Date: 06 March 2018
• Docket Number: 650291,2013
• Citation: 59 Misc.3d 754,73 N.Y.S.3d 374
• Parties: FEDERAL HOUSING FINANCE AGENCY, as Conservator FOR The FEDERAL HOME LOAN MORTGAGE CORPORATION, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series 2007–NC1 (MSAC 2007–NC1), Plaintiff, v. MORGAN STANLEY ABS CAPITAL I INC., Defendant. Federal Housing Finance Agency, as Conservator for The Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series 2007–NC3 (MSAC 2007–NC3), Plaintiff, v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., Defendant.
• Court: New York Supreme Court

59 Misc.3d 754

73 N.Y.S.3d 374

FEDERAL HOUSING FINANCE AGENCY, as Conservator FOR The FEDERAL HOME LOAN MORTGAGE CORPORATION, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series 2007–NC1 (MSAC 2007–NC1), Plaintiff,

v.MORGAN STANLEY ABS CAPITAL I INC., Defendant.

Federal Housing Finance Agency, as Conservator for The Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series 2007–NC3 (MSAC 2007–NC3), Plaintiff,

v.Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., Defendant.

650291

2013

Supreme Court, New York County, New York.

Decided on March 6, 2018

Counsel for the plaintiff trustee: Molo Lamken LLP, Steven F. Molo, Robert K. Kry, Lauren M. Weinstein

Counsel for defendants: Davis Polk & Wardwell LLP, James P. Rouhandeh, Brian S. Weinstein, Elisabeth Grippando, Alan J. Tabak, Matthew Cormack

Marcy Friedman, J.

These separate residential mortgage-backed securities (RMBS) breach of contract actions are based upon defendant securitizers' alleged breaches of representations and warranties regarding the quality and characteristics of mortgage loans held in two Trusts: Morgan Stanley ABS Capital I Inc. Trust, Series 2007–NC1 (NC1) and Morgan Stanley ABS Capital I Inc. Trust, Series 2007–NC3 (NC3) (collectively, the Securitizations or Trusts).¹ The facts and procedural history of these actions are described at length in this court's prior decisions on the defendants' respective motions to dismiss, Federal Housing Finance Agency v. Morgan Stanley ABS Capital I Inc., 2016 WL 1587345 (Sup Ct, N.Y. County, Apr. 12, 2016, No. 650291/2013) [FHFA (NC1) ] and Federal Housing Finance Agency v. Morgan Stanley Mortgage Capital Holdings LLC , 2016 WL 1587344 [Sup. Ct., N.Y. County, Apr. 12, 2016, No. 651959/2013] [FHFA (NC3) ] [collectively, the Prior Decisions] ). Those decisions were affirmed by the Appellate Division in Federal Housing Finance Agency v. Morgan Stanley ABS Capital I Inc., 146 A.D.3d 566, 45 N.Y.S.3d 418 (1st Dept. 2017)

In FHFA (NC1) , the initial complaint pleaded three separate breach of contract causes of action against defendant Morgan Stanley ABS Capital I Inc. (MSAC): a first cause of action for breach of representations and warranties regarding the securitized loans; a second cause of action for breach of MSAC's obligation to notify Deutsche Bank National Trust Company (the Trustee) upon MSAC's discovery of breaches of representations and warranties; and a third cause of action for breach and anticipatory breach of MSAC's purportedly separate obligation to cure or repurchase defective loans. In an amended complaint filed on February 3, 2014, the Trustee added a fourth cause of action against MSAC for breach of the implied covenant of good faith and fair dealing, based on the same underlying allegations. In FHFA (NC3) , the complaint pleaded two breach of contract causes of action against defendant Morgan Stanley Mortgage Capital Holdings LLC, the alleged successor of Morgan Stanley Mortgage Capital Inc. (collectively MSMC): a first cause of action for both breach of representations and warranties and failure to cure or repurchase defective loans; and a second cause of action for breach of the implied covenant of good faith and fair dealing.

In the Prior Decisions, the court dismissed the Trustee's breach of representations and warranties causes of action, based on the statute of limitations.² The court dismissed the Trustee's causes of action for failure to repurchase defective loans, on the ground that the failure to repurchase did not give rise to a separate cause of action. In addition, the court dismissed the causes of action for breach of the implied covenant of good faith and fair dealing as duplicative of the contract claims.³

This decision concerns the timeliness and viability of the Trustee's claims that defendant MSAC breached its contractual obligations by failing to notify the Trustee of breaches of representations and warranties. These claims are referred to in the coordinated RMBS litigation as "failure to notify" claims.⁴ In the Prior Decisions, and in a number of other substantially similar decisions in the RMBS litigation,⁵ this court deferred decision on whether the trustees had pleaded or could plead timely failure to notify claims. The court requested coordinated briefing on the scope and viability of such claims following a then-recent decision of the Appellate Division, which recognized an independent contractual cause of action based on a securitizer's failure to notify the trustee of its discovery of breaches. ( Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96, 19 N.Y.S.3d 1 [1st Dept. 2015], mod on other grounds 30 N.Y.3d 572, 69 N.Y.S.3d 520, 92 N.E.3d 743 [2017] ; Morgan Stanley Mtge. Loan Trust 2006–13ARX v. Morgan Stanley Mtge. Capital Holdings LLC, 143 A.D.3d 1, 36 N.Y.S.3d 458 [1st Dept. 2016], appeal docketed No. APL–2016–00240 [ Morgan Stanley ] [decided after FHFA (NC1) and FHFA (NC3) ]; Bank of NY Mellon v. WMC Mtge., LLC , 151 A.D.3d 72, 81, 56 N.Y.S.3d 1 [1st Dept. 2017] [ BNYM ]; Second Case Management Order, dated Mar. 24, 2016, § V [Index. Nos. 777000/2015] [NYSCEF No. 96].)

In connection with this briefing, the court granted leave to defendant MSAC in FHFA (NC1) to renew its motion to dismiss the Trustee's failure to notify claim. The court also granted leave to the Trustee in FHFA (NC3) to move to amend its complaint to add a failure to notify claim. The parties to the coordinated litigation subsequently decided to argue these motions as "bellwether cases" with respect to the scope and viability of failure to notify claims. This decision is the first in which this court has addressed failure to notify claims following the Appellate Division decisions in Nomura , Morgan Stanley , and BNYM , which are discussed in detail below.

BACKGROUND

Although these cases involve separate RMBS Trusts, the complaints and governing agreements in each action are materially similar. The defendant in FHFA (NC3) , MSMC, was the Sponsor of both Securitizations. (NC3 Proposed Am. Compl., ¶¶ 11, 17 [Weinstein Aff. In Supp., Exh. 5]; NC1 Am. Compl., ¶ 14.) The defendant in FHFA (NC1) , MSAC, served as the Depositor for both Securitizations. (NC1 Am. Compl., ¶¶ 1–2, 14–15; NC3 Proposed Am. Compl., ¶ 17.) Federal Housing Finance Agency (FHFA), acting as conservator for The Federal Home Loan Mortgage Corporation (Freddie Mac), a certificateholder in both Trusts, commenced the actions by filing a summons with notice in FHFA (NC1) on January 25, 2013, and in FHFA (NC3) on May 31, 2013. The Trustee subsequently filed complaints and sought to substitute itself as plaintiff in both actions.

The NC1 and NC3 Securitizations closed, respectively, on January 26, 2007 and May 31, 2007. (NC1 Am. Compl. ¶ 12; NC3 Proposed Am. Compl. ¶ 17.) MSAC in FHFA (NC1) , and MSMC in FHFA (NC3) , made numerous representations and warranties about the quality and characteristics of the underlying mortgage loans or "backed" representations and warranties made by another party. These representations and warranties were stated to be true as of the closing dates. (See NC1 Am. Compl., ¶¶ 20–21; NC1 Pooling and Servicing Agreement [PSA], §§ 2.03 (b), (f) & Sched. III [Weinstein Aff. In Supp., Exh. 3]; NC3 Proposed Am. Compl., ¶ 25; NC3 Representations and Warranties Agreement [RWA], §§ 2, 4 (a) & Exh. 1, Parts A–B [Weinstein Aff. In Supp., Exh. 7]; NC3 PSA, § 2.01 [a] [Weinstein Aff. In Supp., Exh. 6]; see also Tee.'s Opening Memo., at 4 [describing the relevant agreements and provisions].⁶ )

As is typical in RMBS transactions, the agreements governing each of the Securitizations set forth a "repurchase protocol" in which, upon either notice to or discovery by MSAC in FHFA (NC1) or MSMC in FHFA (NC3) of any breach of a representation or warranty that materially and adversely affected the value of any mortgage loan or the interest of the Trustee or certificateholders, the respective defendant was required to cure, substitute, or repurchase such loan(s). (NC1 PSA, § 2.03 [f]; NC3 RWA, § 4 [a].) The repurchase protocol (and, in FHFA [NC1] , related indemnification obligations) was the sole remedy available to the Trustee for such breaches. (NC1 PSA, § 2.03 [m]; NC3 RWA, § 4 [c].)⁷ The PSA governing each Securitization also required MSAC to notify the Trustee of any breaches of representations and warranties it discovered. (NC1 PSA § 2.03 [d]; NC3 PSA § 2.07.) It does not appear that MSMC had a similar notification obligation.⁸

The Trustee pleaded in both actions, among other things, that numerous loans were affected by material breaches of representations and warranties, and that defendants failed and/or refused to repurchase such loans. (See NC1 Am. Compl., ¶¶ 79–92, 103–116 [pleading such claims against MSAC only]; NC3 Compl., ¶¶ 60, 64 [pleading such claims against MSMC only].) The Trustee in FHFA (NC1) also pleaded that defendant MSAC breached its duty to notify the Trustee upon its discovery of breaches of representations and warranties. (NC1 Am. Compl., ¶¶ 93–102.) As stated above, the complaint in FHFA (NC3) did not plead a failure to notify claim against MSMC, the sole defendant in that case.

Although the parties' briefing refers to "defendants" collectively, as "Morgan Stanley," a close review of the record reveals that the Trustee does not in fact seek to plead a failure to notify claim against MSMC in either action—not even in FHFA (NC3) , in which MSMC currently is the sole defendant. Rather, the Trustee opposes dismissal of its failure to notify claim against MSAC in FHFA (NC1) , and seeks to amend the complaint in FHFA (NC3) to plead a failure to notify claim against MSAC in that action. MSMC's interest in these motions thus is not immediately apparent. The court will nonetheless follow the parties' convention in referring to "defendants"' arguments...