Mastr Adjustable Rate Mortgages Trust 2006-Oa2, Mastr Adjustable Rate Mortgages Trust 2007-1 & Mastr Adjustable Rate Mortgages Trust 2007-3 v. Ubs Real Estate Sec. Inc.
| Decision Date | 12 April 2016 |
| Docket Number | 12-cv-7322 (PKC) |
| Parties | MASTR ADJUSTABLE RATE MORTGAGES TRUST 2006-OA2, MASTR ADJUSTABLE RATE MORTGAGES TRUST 2007-1 and MASTR ADJUSTABLE RATE MORTGAGES TRUST 2007-3 Plaintiffs, v. UBS REAL ESTATE SECURITIES INC., Defendant. |
| Court | U.S. District Court — Southern District of New York |
Defendant UBS Real Estate Securities Inc. ("UBS") moves in limine to preclude the plaintiffs from introducing evidence that it argues is not permitted under this Court's earlier Memorandum and Order deciding the parties' summary judgment motions. (Docket # 312.) This Memorandum and Order addresses UBS's argument that the plaintiffs may not seek recovery as to noticed breaches that were not specifically identified in the pre-suit breach notices. For the reasons explained, UBS's motion is denied.
The plaintiffs are three trusts (the "Trusts") that purchased pools of residential mortgage-backed securities assembled by UBS. The Trusts bring a single breach of contract claim. They contend that UBS breached representations and warranties that guaranteed compliance with certain quality and underwriting guidelines used to select mortgage loans that it placed into pools of residential mortgage-backed securities. See MASTR Adjustable Rate Mortgs. Trust 2006-OA2 v. UBS Real Estate Secs. Inc., 2015 WL 764665, at *1 (S.D.N.Y. Jan 9, 2015). UBS acquired those mortgage loans from various originators before assembling them into pools and selling them to the Trusts, which, in turn, issued securities (which the parties called "Certificates") to investors (which the parties called "Certificateholders"). Id. The three transactions between UBS and the Trusts were governed by three separate Pooling and Servicing Agreements ("PSAs"), which were identical in all material respects relevant to this litigation. Id. at *2.
Each PSA includes a remedial provision. (See, e.g., Docket # 269, Ex. E at 60-62.) Section 2.03 of each PSA provides that if a party to the PSA discovers "a breach of representation or warranty made by [UBS] pursuant to this Section 2.03 that materially and adversely affects the interests of the Certificateholders or the Certificate Insurer in any Mortgage Loan, the party discovering such breach shall give prompt notice thereof to the other parties and the Trustee." (Id. at 61.) It further provides that UBS "hereby covenants that within ninety (90) days of the earlier of its discovery or its receipt of written notice from any party of a breach of any representation or warranty made pursuant to this Section 2.03 which materially and adversely affects the interest of the Certificateholders or Certificate Insurer in any Mortgage Loan, it shall cure such breach in all material respects . . . ." (Id.) If the breach is not cured, UBS "shall" substitute the defective mortgage loan with an eligible loan or repurchase the defective mortgage loan. (Id. at 61.) Section 2.03 provides that UBS's obligation "to cure, repurchase or replace any Mortgage Loan as to which a breach has occurred and is continuing shall constitute the sole remedies" against UBS in the event of a breach. (Id. at 62.)
From August 2010 through September 2012, Assured Guaranty Municipal Corp., which acted as insurer of the Trusts' securities offerings, sent a series of letters demanding that UBS remedy certain allegedly defective mortgage loans contained in the Trusts' three pools. SeeMASTR Adjustable Rate Mortgs. Trust, 2015 WL 764655, at *3. The Trusts commenced this action in September 2012, alleging that UBS had breached representations and warranties concerning the quality of the pools' mortgage loans, and had failed to remedy the defective mortgage loans in the manner required by the PSAs. (Docket # 1.)
At summary judgment, this Court construed the language of the PSA to mean that the Trusts could seek relief as to all purported breaches that were identified in the breach notices, as well as to any breaches that UBS independently discovered. Id. at *6-10. However, the Court concluded that the Trusts could not, as a matter of law, recover under a theory that the Trusts described as a "pervasive breach." Id. at *10-12. According to the Trusts' "pervasive breach" theory, the breach notices had a cumulative effect of placing UBS on notice that a significant percentage of the loans, beyond those individually identified, were also in breach of the PSAs' representations and warranties. Id. at *10. It urged, in essence, that the contractual language should be construed as an inquiry notice standard by which UBS would be on notice of all breaches that, in the Trusts' view, it should have discovered. The Court disagreed.
After the Court issued its summary judgment decision, the Trusts moved to re-open discovery. In an Order dated March 11, 2015, the Court reopened expert discovery to permit further discovery consistent with the Court's decision on the parties' summary judgment motions. (Docket # 287.) In its Order permitting additional discovery, the Court expressly declined to endorse any proposed methodology, stating that such approval (Docket # 287, at 1-2.)
In a letter of August 17, 2015, UBS requested leave to move to strike the August 7, 2015 expert report of Ira H. Holt, Jr. (the "Holt Report"), arguing that it went beyond the scope of permissible expert discovery. (Docket # 296.) UBS argued that the Holt Report improperly re-underwrote a body of loans that exceeded the 4,460 loans identified in the pre-suit breach notices. (Docket # 296.) The Court issued an Order stating that such a motion was premature, and the matter should be raised as a motion in limine. (Docket # 298.) The Order stated, "Counsel is warned that this Order is not intended to imply any view on the relevance, probative value, efficacy or admissibility of any particular form of evidence or the suitability of any particular methodology, expert or otherwise." (Docket # 298.)
In opposing the motion in limine, the Trusts urge that the Holt Report placed UBS on actual notice of 9,973 loans with breaches that materially and adversely affected the interests of the Certificateholders. The Trusts argue that the PSAs do not require a breach notice to be submitted in a particular format, and that the reasoning of Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep't 2015) (Sweeny, J.), renders the Holt Report a timely and effective notice of breach. More than 90 days have elapsed since the Holt Report was served on UBS.
UBS's motion raises the issue of whether notice of a breach can occur during the pendency of this case, and if the timing of such notices relate back to the filing of the original complaint for statute of limitations purposes.
The Trusts candidly state that they had intended to pursue notice-based claims only for those loans that were listed in the pre-suit breach notices, and that they intended to pursue only discovery-based claims for all other loans. According to the Trusts, however, the October 15, 2015 decision of the Appellate Division, First Department, in Nomura permits them to rely on breaches discovered in the course of the action with a relation back to the date of filing. The Trusts argue that they may pursue notice-based breach claims as to all 9,973 allegedly defective mortgage loans identified in the Holt Report.
The First Department's Nomura decision sheds considerable light on the PSAs' notice requirements and the timeliness of newly asserted breaches. Federal courts sitting in diversity "are bound to follow state law on any matter of substantive law." Rounds v. Rush Trucking Corp., 211 F.3d 185, 188 (2d Cir. 2000) (quotation marks omitted). A federal court is "bound" by a state court's construction of its laws, "even where the only available interpretation is that of an intermediate court, 'unless [the court] find[s] persuasive evidence that the highest state court would reach a different conclusion.'" Grand Light & Supply Co. v. Honeywell, Inc., 771 F.2d 672, 678 (2d Cir. 1985) (quoting Entron, Inc. v. Affiliated FM Ins. Co., 749 F.2d 127, 132 (2d Cir. 1984)). The parties agree that New York law governs this case. (Stipulation of Facts ¶ 13.)
In Nomura, trustees of four RMBS trusts brought breach of contract claims against the sponsor of the transactions, alleging that the pools included loans that breached certain representations and warranties, and that the sponsor failed to remedy the defective loans, as required under the PSAs. 133 A.D.3d at 98-104. Nomura concluded that the plaintiffs could pursue "claims relating to loans that plaintiffs failed to mention in their breach notices" prior to the commencement of the action. Id. at 108. In so holding, the First Department considered twoseparate issues: whether such claims related back to the original complaint for statute of limitations purposes, and whether the pre-suit breach notices adequately placed defendants on notice of potential future breach claims. Id.
As to whether the newly identified breaches were timely under the limitations period, Nomura observed that because the complaints included "some timely claims . . . a complaint amended to add the claims at issue would have related back to the original complaints." Id. As to the pre-suit breach notices, Nomura concluded that they "put defendant on notice that the certificateholders whom plaintiffs (as trustees) represented were investigating the mortgage loans and might uncover additional defective loans for which claims would be made." Id. The First Department concluded that, based on the breach...
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