Trust for Certificate Holders v. Love Funding
| Decision Date | 27 February 2007 |
| Docket Number | No. 04 Civ. 9890(SAS).,04 Civ. 9890(SAS). |
| Citation | 499 F.Supp.2d 314 |
| Parties | TRUST FOR THE CERTIFICATE HOLDERS OF THE MERRILL LYNCH MORTGAGE INVESTORS, INC. Mortgage Pass-Through Certificates Series 1999-C1, by and through ORIX Capital Markets, LLC, as Master Servicer and Special Servicer, Plaintiff, v. LOVE FUNDING CORPORATION, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Kenneth S. Yudell, Aronauer, Goldfarb, Re & Yudell, LLP, New York, NY, Amy Howell, ORIX Capital Market, LLC, Dallas, TX, for Plaintiff.
Alec W. Farr, Bryan Cave LLP, Washington, DC, Robert D. Piliero, Piliero Goldstein Kogan & Miller, LLP, New York, NY, for Defendant.
The Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates, Series 1999 C-1 ("Trust") brings this action against Love Funding Corporation ("Love Funding") for breach of contract. The Trust's claim arises from Love Funding's breach of representations and warranties set forth in a Mortgage Loan and Purchase Agreement ("Love MLPA") between Love Funding and Paine Webber Real Estate Securities, Inc. ("PWRES"), whose successor, UBS Paine Webber ("UBS"),1 subsequently assigned its rights under the Love MLPA to the Trust.2 Because this Court has already determined, as a matter of law, that Love Funding breached one of its warranties under the Love MLPA,3 the issues remaining for trial included Love Funding's affirmative defense of champerty and the amount of damages, if any, the Trust may recover from Love Funding. A bench trial was held from January 17, 2007 to January 23, 2007. The following constitutes the Court's findings of fact and conclusions of law.
New York statutory law provides that:
no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.4
Interpreting the champerty statute's "intent and purpose" requirement, the New York Court of Appeals has held that:
[I]n order to constitute champertous conduct in the acquisition of rights ... the foundational intent to sue on that claim must at least have been the primary purpose, if not the sole motivation behind, entering into the transaction.... The bottom line is that Judiciary Law § 489 requires that the acquisition be made with the intent and for the purpose (as contrasted to a purpose) of bringing an action or proceeding.5
Importantly, "the question of the intent and purpose of the purchaser or assignee of a claim is usually a factual one to be decided by the trier of facts.'"6
The policy behind the champerty doctrine is to "prevent the resulting strife, discord and harassment which could result from permitting attorneys and corporations to purchase claims for the purpose of bringing actions thereon...."7 Champerty "does not embrace a case where some other purpose induced the purchase [or assignment]," and the intent to sue "was merely incidental and contingent."8
The Trust is a New York trust created pursuant to an agreement dated November 1, 1999, between Merrill Lynch Mortgage Investors, Inc. ("MLMI"), as Depositor, Orix Capital Markets, LLC ("Orix"), as Master and Special Servicer, and Norwest Bank Minnesota, N.A., as Trustee. Love Funding is a Virginia corporation with its principal place of business in Washington, D.C. It is "a full-service, commercial mortgage-banking firm" that "offers loan placement services for borrowers, and origination, consulting and servicing of loans for investors."10
On or about July 6, 1999, Love Funding made a $6.4 million mortgage loan ("Arlington Loan") to Cyrus II Partnership ("Cyrus"). The loan is evidenced by a Promissory Note ("Note") in the original principal amount. The Note was secured by, among other things, a Mortgage Security Agreement and Assignment of Leases and Rents ("Mortgage"), which was a lien on Cyrus's property known as the Arlington Apartments located in Harvey, Louisiana. The Note was further secured by a Guaranty of Borrower's Recourse Obligations, executed by Mondona Rafizadeh, a principal of the Borrower. Before entering into the Arlington Loan, Love Funding conducted certain due diligence, which included collecting information, performing limited lease audits, and making site visits to the Arlington property.
Love Funding made the Arlington Loan pursuant to a conduit lending arrangement it had entered into with UBS in early 1999. Under this arrangement, Love Funding would find prospective loans for UBS to underwrite. Love Funding was the lender in these transactions, but UBS actually funded the loans, which were assigned to UBS. Love Funding and UBS memorialized the terms of this relationship in the Love MLPA, which is dated April 23, 1999, and was drafted by UBS. In the Love MLPA, Love Funding made certain representations and warranties concerning the individual mortgage loans. Section 5.02 of the Love MLPA reads, in pertinent part:
... [A]s to each Mortgage Loan, the Seller hereby makes the following representations and warranties to the Purchaser as of each related Closing Date:
[paragraphs omitted]
(cc) There is no default, breach, violation or event of acceleration existing under the related Mortgage or the related Mortgage Note.12
Section 5.03 of the Love MLPA defines the Purchaser's (UBS's) remedies in the event of a breach of the Seller's (Love Funding's) representations and warranties. It states, in pertinent part:
(a) ... [U]pon discovery by either the Seller or the Purchaser of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of any or all of the Mortgage Loans ... the party discovering such Breach shall give prompt written notice to the other.
(b) Within sixty (60) days of the earlier of either discovery by or notice to the Seller of any Breach of a representation or warranty, the Seller shall cure such Breach in all material respects and, if such breach cannot be cured, the Seller shall, at the Purchaser's option, repurchase such Mortgage Loan at the Repurchase Price....13
The Love MLPA also includes an indemnification clause providing that in addition to curing or repurchasing a defaulted loan, Love Funding shall indemnify the Purchaser "from and against all demands claims or asserted claims ... costs and expenses, including reasonable attorneys' fees incurred ... in any way arising from or related to any breach of any representation [or] warranty ... of the Seller hereunder."14
The Arlington Loan was assigned to UBS pursuant to the Love MLPA on July 6, 1999. As consideration for originating the Arlington Loan, Love Funding received a fee of $64,000. UBS then sold the Arlington Loan to MLMI who, in turn, transferred the Arlington Loan to the Trust in November 1999 as part of a larger commercial mortgage-backed securities transaction involving numerous loans. As part of this transaction, MLMI and UBS entered into an MLPA ("MLMI MLPA") dated November 1, 1999.15 Under the MLMI MLPA, UBS made several representations and warranties concerning these loans, including ones substantively similar to those made by Love Funding in section 5.02(cc) of the Love MLPA. The MLMI MLPA also contained a provision similar to section 5.03 of the Love MLPA, requiring UBS to either cure any breach of a representation or warranty or, if such breach could not be cured, to repurchase the problem loan.
It is undisputed that Cyrus committed fraud in obtaining the Arlington Loan.16 It is also undisputed that Love Funding was unaware of this fraud at the time it assigned the loan to UBS pursuant to the Love MLPA.17 The Trust and Love Funding stipulate that by March 2002 and sometime in the fall of 2002, respectively, they each had knowledge of Cyrus's underlying fraud.18 Under the terms of the Mortgage, this fraud constituted an event of default resulting in an acceleration of the loan.19 The parties' knowledge of the fraud also triggered section 5.03(a) of the Love MLPA, which obligates each of the Seller and Purchaser to promptly notify the other upon discovering any breach of a representation or warranty that materially and adversely effects the value of a mortgage loan. Despite this mutual obligation, neither party, upon learning that the Arlington Loan had been induced by lies and forged documents, notified the other. In Trust I, this Court found that UBS's failure to promptly notify Love Funding of Cyrus's fraud constituted a breach of the Love MLPA.20
Between April and August 2002, the Trust demanded that UBS repurchase the Arlington Loan pursuant to the MLMI MLPA.21 UBS rejected this demand, and in September and October 2002, the Trust instituted various lawsuits against UBS (collectively known as the "MLMI Litigation") related to, inter alia, the sale of over thirty loans by UBS to the Trust, including the Arlington Loan.22 For the next two years, the Trust and UBS engaged in what is referred to colloquially as scorched earth litigation; it proceeded in one federal court, two Texas state courts and New York state court, involved approximately seventy attorneys at ten separate law firms, and spent tens of millions of dollars in legal fees.23
UBS fiercely defended the claims brought by the Trust. Although the Arlington Loan was not the only loan at issue, the Trust acknowledged that it was one of the "poster child" loans that sparked and drove the MLMI Litigation24 Surprisingly, however, neither the Trust nor UBS saw fit to involve Love Funding in their dispute over the Arlington Loan....
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