Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc.

• Decision Date: 12 December 2017
• Docket Number: No. 39,39
• Citation: 69 N.Y.S.3d 520,92 N.E.3d 743,30 N.Y.3d 572
• Parties: NOMURA HOME EQUITY LOAN, INC., SERIES 2006–FM2, BY HSBC BANK USA, NATIONAL ASSOCIATION, solely in its capacity as Trustee, et al., Respondent, v. NOMURA CREDIT & CAPITAL, INC., Appellant. Nomura Home Equity Loan, Inc., Series 2007-3, By HSBC Bank USA, National Association, Solely in its Capacity as Trustee, Respondent, v. Nomura Credit & Capital, Inc., Appellant. Nomura Asset Acceptance CorporationMortgage Pass-Through Certificates, Series 2006-AF2, By HSBC Bank USA, National Association, as Trustee, Respondent, v. Nomura Credit & Capital, Inc., Appellant. Nomura Home Equity Loan, Inc., Home Equity Loan Trust, Series 2007-2, By HSBC Bank USA, National Association, as Trustee, Respondent, v. Nomura Credit & Capital, Inc., Appellant
• Court: New York Court of Appeals Court of Appeals

30 N.Y.3d 572

92 N.E.3d 743

69 N.Y.S.3d 520

NOMURA HOME EQUITY LOAN, INC., SERIES 2006–FM2, BY HSBC BANK USA, NATIONAL ASSOCIATION, solely in its capacity as Trustee, et al., Respondent,

v.NOMURA CREDIT & CAPITAL, INC., Appellant.

Nomura Home Equity Loan, Inc., Series 2007-3, By HSBC Bank USA, National Association, Solely in its Capacity as Trustee, Respondent,

v.Nomura Credit & Capital, Inc., Appellant.

Nomura Asset Acceptance CorporationMortgage Pass-Through Certificates, Series 2006-AF2, By HSBC Bank USA, National Association, as Trustee, Respondent,

v.Nomura Credit & Capital, Inc., Appellant.

Nomura Home Equity Loan, Inc., Home Equity Loan Trust, Series 2007-2, By HSBC Bank USA, National Association, as Trustee, Respondent,

v.Nomura Credit & Capital, Inc., Appellant

No. 39

Court of Appeals of New York.

Decided December 12, 2017

Shearman & Sterling LLP, New York City (Joseph J. Frank, Agnès Dunogué and Matthew L. Craner of counsel), for appellant.

Holwell Shuster & Goldberg LLP, New York City (Michael S. Shuster, Daniel M. Sullivan and Adam T. Kirgis of counsel), and Kasowitz Benson Torres LLP, New York City (Christopher P. Johnson, Zachary W. Mazin and Uri A. Itkin of counsel), for respondents.

Paul Hastings LLP, New York City (Shahzeb Lari of counsel) and Los Angeles, California (Timothy D. Reynolds, of the California bar, admitted pro hac vice, of counsel), for Securities Industry and Financial Markets Association, amicus curiae.

Murphy & McGonigle, P.C., New York City (James K. Goldfarb of counsel) and Washington, D.C. (Daniel T. Brown, of the District of Columbia bar, admitted pro hac vice, of counsel), and Baker Botts L.L.P., Washington, D.C. (Michael L. Calhoon, of the District of Columbia bar, admitted pro hac vice, and Vernon Cassin, of counsel), and New York City (Douglas W. Henkin and John Perry of counsel), for Sand Canyon Corporation, amicus curiae.

OPINION OF THE COURT

STEIN, J.:

In these appeals stemming from four residential mortgage-backed securities (RMBS) transactions, we are asked to decide whether claims for general contract damages based on alleged breaches of a "no untrue statement" provision can withstand a motion to dismiss based on a contract provision mandating cure or repurchase as the sole remedy for breaches of mortgage loan-specific representations and warranties. We hold that, inasmuch as the claims for general contract damages at issue here are grounded in alleged breaches of the mortgage loan-specific representations and warranties to which the limited remedy fashioned by the sophisticated parties applies, plaintiffs' claims for general contract damages should be dismissed.

I.

In each of the RMBS transactions at issue, defendant Nomura Credit & Capital, Inc. selected and sold a pool of mortgage loans through an affiliated limited-purpose company to a securitization trust in exchange for money raised from investors. Defendant, as sponsor of the securitizations, acquired the mortgage loans from institutions that made the loans to individual borrowers, and then sold the pool of loans to an affiliated purchaser, known as a depositor, with the sale of each loan pool occurring pursuant to its own mortgage loan purchase agreement (MLPA). In turn, the depositor placed each pool of loans into a separate trust, with plaintiff HSBC Bank USA, National Association (HSBC) as the trustee, in accordance with four pooling and service agreements (PSAs).

A forensic analysis of some of the underlying mortgage loans conducted by certain investors following the subsequent collapse of the housing market allegedly revealed that many of those loans did not conform to representations and warranties made by defendant. After providing notice of the breaches and an opportunity to cure, HSBC, as trustee of the securitization trusts, commenced this litigation by bringing an action on behalf of each trust.

HSBC asserted causes of action for breach of the MLPAs and PSAs, alleging that defendant breached the specific representations and warranties it made concerning the suitability of each of the mortgage loans contained in the loan pools. In addition, HSBC sought specific performance of the remedy that expressly applies to such breaches under the contracts, i.e., that defendant either cure the breaches or repurchase the loans.¹ HSBC also asserted claims seeking general contract damages for alleged breaches of representations made by defendant concerning the transaction as a whole, specifically the representation that the contracts and related documents contained no untrue statements; it is these claims that are before us.

Certain provisions of the MLPAs and PSAs form the core of the dispute between the parties.² Section 7 of the MLPAs is entitled "Representations, Warranties and Covenants of the Seller." This section includes certain general representations and warranties made by defendant, including, for example, that: it is a corporation duly organized, validly existing and in good standing under the laws of Delaware; it has duly authorized the execution, delivery and performance of the agreement and will be bound by it; and the consummation of the transactions contemplated under the agreement are in the ordinary course of defendant's business. Section 7 also includes the provision referred to by the parties as the "No Untrue Statement Provision," which states that

"[t]his Agreement does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements contained herein not misleading. The written statements, reports and other documents prepared and furnished or to be prepared and furnished by the Seller pursuant to this Agreement or in connection with the transactions contemplated hereby taken in the aggregate do not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements contained therein not misleading."

Section 8 of each MLPA is entitled "Representations and Warranties of the Seller Relating to the Mortgage Loans" (hereinafter, Mortgage Representations). In section 8, defendant made specific representations and warranties about each mortgage loan, including that: information provided to the agencies that rated the certificates representing interests in the securitization trusts, including loan level detail, is true and correct according to the rating agency requirements; no fraud has taken place on the part of the mortgagor or any other party involved in the origination or servicing of the mortgage loan; the mortgage file contains an appraisal of the related mortgaged property which was made by a qualified appraiser pursuant to applicable law and professional standards prior to loan approval; and each mortgage loan is and will be a mortgage loan arising out of the originator's practice in accordance with the originator's underwriting guidelines.

Section 9 of the MLPAs is entitled "Repurchase Obligation for Defective Documentation and for Breach of Representation and Warranty." That section provides that, upon a party's discovery of any materially defective document or "a breach of any of the representations and warranties contained in Section 8 that materially and adversely affects the value of any Mortgage Loan or the interest therein of the Purchaser or the Purchaser's assignee," that party must give notice to defendant. Defendant then must cure the breach or, if that is not possible, repurchase the affected mortgage loan at a purchase price defined under the PSA. Significantly, section 9(c) states that "[i]t is understood and agreed that the obligations of [defendant] set forth in this [s]ection 9 to cure or repurchase a defective Mortgage Loan ... constitute the sole remedies of the Purchaser against [defendant] respecting a missing documentor a breach of the representations and warranties contained in [s]ection 8" (emphasis added). This language is referred to by the parties as the "Sole Remedy Provision."

The PSAs are separate contracts, which refer to certain specific provisions of the MLPAs, but do not incorporate the MLPAs as a whole. Section 2.01 of the PSAs assigns to HSBC, as trustee, the depositor's rights under the MLPAs "to the extent of the Mortgage Loans sold."³ Under section 2.03 of each PSA, defendant made certain representations and warranties, including a statement that the Mortgage Representations "are true and correct." Section 2.03 further provides a remedy for a breach of the section 8 representations and warranties that tracks the language of section 9 of the MLPAs—i.e., that defendant shall cure such breach in all material respects and, if such breach is not so cured, shall repurchase or replace the affected mortgage loans. Section 2.03 also states, in language that parallels section 9(c) of the MLPAs, that defendant's obligation to cure, repurchase or replace any mortgage loan to which a breach has occurred shall be the "sole remed[y] against [defendant] respecting such breach" available to the investors, depositor, or trustee. The PSAs do not include provisions comparable to the No Untrue Statement Provision in the MLPAs.

The particular causes of action at issue on this appeal allege that defendant breached the No Untrue Statement Provision in section 7 of the MLPAs by providing certain documents to the trusts—including the mortgage loan files, mortgage loan schedules, and prospectus supplements—that contained "widespread, pervasive and material misrepresentations and omissions with respect to the Mortgage Loans." HSBC further claims that the results of the investigation of the mortgage loans, including a review of the loan files, "make clear that [defendant's] breaches of the Mortgage Representations are systemic in nature and adversely affect the vast majority of the [m]ortgage [l]oans in the [t]rust."

Defendant moved to dismiss the complaints pursuant to CPLR 3211(a)(1) and (7), arguing that the MLPAs and PSAs both provide that the sole remedy for breaches of the Mortgage Representations...