In re Part 60 Put-Back Litigation, 122220 NYCOA, 2020-07687

Docket Nº:2020-07687, 84
Opinion Judge:FAHEY, J.
Party Name:In the Matter of Part 60 Put-Back Litigation. Deutsche Bank National Trust Company, & c., Respondent, and Morgan Stanley Mortgage Capital Holdings LLC, & c., et al., Appellants.
Attorney:Brian S. Weinstein, for appellants. Steven F. Molo, for respondent. Securities Industry and Financial Markets Association; Miriam R. Albert, et al.; James M. Peaslee, amici curiae.
Judge Panel:RIVERA, J. (dissenting in part):
Case Date:December 22, 2020
Court:New York Court of Appeals

In the Matter of Part 60 Put-Back Litigation.

Deutsche Bank National Trust Company, & c., Respondent,

and

Morgan Stanley Mortgage Capital Holdings LLC, & c., et al., Appellants.

No. 2020-07687

No. 84

New York Court of Appeals

December 22, 2020

Brian S. Weinstein, for appellants.

Steven F. Molo, for respondent.

Securities Industry and Financial Markets Association; Miriam R. Albert, et al.; James M. Peaslee, amici curiae.

FAHEY, J.

Our recent history of cases dealing with residential mortgage-backed securities (RMBS) has a consistent theme: does the contract mean what it says?

Starting in ACE Sec. Corp., Home Equity Loan Trust, Series 2006-SL2 v DB Structured Prods., Inc. (25 N.Y.3d 581 [2015]), we held that a trustee's cause of action for breach of the representations and warranties made about the mortgage loans accrued on the closing date, and that the sponsor's failure to repurchase the defective loans did not give rise to a separate cause of action. Then, in Nomura Home Equity Loan, Inc., Series 2006-FM2 v Nomura Credit & Capital, Inc. (30 N.Y.3d 572 [2017]), we held that, where the trustee's claims for damages were "grounded in alleged breaches of the mortgage loan-specific representations and warranties to which the limited remedy" set forth in a sole remedy provision applies, the general contract damages claim must be dismissed (id. at 577).

We similarly held in Ambac Assur. Corp. v Countrywide Home Loans, Inc. (31 N.Y.3d 569 [2018]) that allegations of pervasive breach of the representations and warranties were nevertheless subject to the contract's sole remedy provision (see id. at 581-584). We have also considered the application of our procedural statutes to RMBS actions, including CPLR 203 (f) (see U.S. Bank N.A. v DLJ Mtge. Capital, Inc., 33 N.Y.3d 84 [2019]), CPLR 205 (a) (see U.S. Bank N.A. v DLJ Mtge. Capital, Inc., 33 N.Y.3d 72 [2019]), and CPLR 202 (see Deutsche Bank Natl. Trust Co. v Barclays Bank PLC, 34 N.Y.3d 327 [2019]). Only in Deutsche Bank Natl. Trust Co. v Flagstar Capital Mkts. (32 N.Y.3d 139 [2018]) did we hold that, to the extent an accrual clause in the parties' contract sought to delay accrual of the breach of contract cause of action, such a clause was unenforceable because it violated New York's public policy prohibiting pre-accrual extensions of the limitations period.

Here, we again conclude that the parties' contract, as written, means what it says. In this RMBS put-back action, plaintiff seeks to avoid a provision in the contract similar to the provisions at issue in Nomura and Ambac that sets out a sole remedy for a breach by alleging that defendants breached the contract with gross negligence. This sole remedy provision purports to limit, but not eliminate, the remedies available to the plaintiff in the event of a breach. We conclude that, in a breach of contract action, the public policy rule prohibiting parties from insulating themselves from damages caused by grossly negligent conduct applies only to exculpatory clauses or provisions that limit liability to a nominal sum. The rule does not apply to contractual limitations on remedies that do not immunize the breaching party from liability for its conduct. The sole remedy provision is not an exculpatory or nominal damages clause. Plaintiff cannot render it unenforceable through allegations of gross negligence.

I.

Facts and Procedural History

Plaintiff Deutsche Bank National Trust Company is the trustee for the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 (the Trust). Defendant Morgan Stanley Mortgage Capital Holdings LLC is the successor to the sponsor for the RMBS transaction at issue, and defendant Morgan Stanley ABS Capital I, Inc. is the depositor 1. Pursuant to a Representations and Warranties Agreement (RWA) and a Pooling and Servicing Agreement (PSA), 5, 337 residential mortgage loans were placed into a pool for securitization. In the RWA and the PSA, defendants made certain representations and warranties regarding the mortgage loans. Plaintiff now alleges, on behalf of the Trust, that the vast majority of the loans in the pool did not comply with those representations and warranties. The RWA and PSA each contained a "sole remedy provision," which provided that if a loan in the pool materially breached a representation and warranty, plaintiff's sole remedy in the event of such breach would be defendants' obligation to cure the breach or repurchase the loan at the contractually defined Repurchase Price. 2

Plaintiff's complaint alleged three causes of action, all sounding in breach of contract. Plaintiff also alleged that defendants were "grossly negligent" in failing to comply with their obligations under the contracts. Specifically, plaintiff alleged that defendants were grossly negligent in failing to notify plaintiff of the nonconforming loans and in failing to cure or repurchase those defective loans. Plaintiff sought specific performance, "compensatory, consequential, and punitive damages," and attorneys' fees. Defendants moved to dismiss the complaint pursuant to CPLR 3211 (a) (1) and (7). Defendants argued that the sole remedy provision was enforceable despite plaintiff's allegations of gross negligence because gross negligence could render unenforceable only exculpatory or nominal damages clauses, and the sole remedy provision was neither. Defendants also sought dismissal of plaintiff's claims for punitive damages and attorneys' fees. Plaintiff argued that gross negligence should render unenforceable any contractual provision that restricted the types of remedies or amount of damages available to the non-breaching party.

With respect to plaintiff's first cause of action alleging a breach of the representations and warranties, Supreme Court held that the sole remedy provision was enforceable. The court granted defendants' motion to the extent of dismissing plaintiff's claims for damages on the first cause of action as well as plaintiff's claims for punitive damages and attorneys' fees. Plaintiff appealed from Supreme Court's order, challenging the dismissal of its first cause of action for breach of the representations and warranties to the extent plaintiff sought compensatory damages inconsistent with the sole remedy provision. Plaintiff also challenged the dismissal of its claims for punitive damages and attorneys' fees. [3]

The Appellate Division reversed, denying defendants' motion to dismiss plaintiff's cause of action for breach of the representations and warranties to the extent plaintiff sought compensatory damages beyond those contemplated by the sole remedy provision and to dismiss plaintiff's claims for punitive damages and attorneys' fees (169 A.D.3d 217 [1st Dept 2019]). The Court concluded that the complaint's allegations of gross negligence were sufficient to render the sole remedy provision unenforceable (see id. at 219, 224-225, citing Morgan Stanley Mtge. Loan Trust 2006-13ARX v Morgan Stanley Mtge. Capital Holdings LLC, 143 A.D.3d 1 [1st Dept 2016] [hereinafter 2006-13ARX ]). The Court reasoned that it could not determine, at this stage of the litigation, whether the sole remedy provision would actually make the investors whole (see id. at 225).

The Appellate Division further reinstated the claim for punitive damages, holding that the complaint adequately pleaded the elements of such a claim pursuant to this Court's decision in New York Univ. v Continental Ins. Co. (87 N.Y.2d 308 [1995]) (see 169 A.D.3d at 225-226). Finally, the Court held that plaintiff's claim for attorneys' fees was improperly dismissed (see id. at 226).

The Appellate Division granted defendants leave to appeal to this Court. We now reverse.

II.

Sole Remedy Provision

Plaintiff's first cause of action, to the extent it sought compensatory damages for defendants' breach of the representations and warranties, should be dismissed. In a pure breach of contract case, where a defendant's conduct does not give rise to separate liability in tort, the public policy rule prohibiting parties from immunizing themselves from liability for grossly negligent conduct applies only to exculpatory or nominal damages clauses, and the sole remedy provision is neither.

A.

In New York, contractual exculpatory clauses intended to insulate a party from liability for its own negligence are enforceable, albeit disfavored and closely scrutinized, so long as the contract language is clear and unequivocal and the clause does not violate statutory law or a separate rule of public policy (see Lago v Krollage, 78 N.Y.2d 95, 99-100 [1991]; Ciofalo v Vic Tanney Gyms, 10 N.Y.2d 294, 296-297 [1961]). Furthermore," '[c]ontract terms providing for a sole remedy are sufficiently clear to establish that no other remedy was contemplated by the parties at the time the contract was formed, for purposes of that portion of the transaction... especially when entered into at arm's length by sophisticated contracting parties'" (Ambac, 31 N.Y.3d at 581-582, quoting Nomura, 30 N.Y.3d at 582). "It is well settled that 'courts must honor contractual provisions that limit liability or damages because those provisions represent the parties' agreement on the allocation of the risk of economic loss in certain eventualities'" (id. at 581, quoting Nomura, 30 N.Y.3d at 581).

On the other hand, it is equally well settled that public policy "forbids a party's attempt to escape liability, through a contractual clause, for damages occasioned by 'grossly negligent conduct'" (Colnaghi, U.S.A. v Jewelers Protection Servs., 81 N.Y.2d 821, 823 [1993], quoting Sommer v Federal Signal Corp., 79 N.Y.2d 540, 554 [1992]; see Kalisch-Jarcho, Inc. v City of New York, 58 N.Y.2d 377, 384-385 [1983]; Gross v Sweet, 49 N.Y.2d 102, 106 [1979])....

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