Defendant DLJ Mortgage Capital Inc.'s Response to …...1 Defendant DLJ Mortgage Capital, Inc. (“DLJ”) respectfully submits this response to Plaintiff MBIA Insurance Corporation’s

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION

MBIA INSURANCE CORPORATION,

Plaintiff,

-against-

CREDIT SUISSE SECURITIES (USA) LLC, DLJ MORTGAGE CAPITAL, INC. and SELECT PORTFOLIO SERVICING, INC.,

Defendants.

Index No. 603751/09

Hon. Jennifer G. Schecter

DEFENDANT DLJ MORTGAGE CAPITAL, INC.’S RESPONSE TO PLAINTIFF MBIA INSURANCE CORPORATION’S POST-TRIAL BRIEF

Barry Levin Darren S. Teshima (admitted pro hac vice) ORRICK, HERRINGTON

& SUTCLIFFE LLP The Orrick Building 405 Howard Street San Francisco, CA 94105 Tel.: (415) 773-5700 Fax: (415) 773-5759

John Ansbro Richard A. Jacobsen Gregory D. Beaman ORRICK, HERRINGTON

& SUTCLIFFE LLP 51 West 52nd Street New York, NY 10019 Tel.: (212) 506-5000 Fax: (212) 506-5151

Daniel J. Dunne (admitted pro hac vice) Paul F. Rugani ORRICK, HERRINGTON

& SUTCLIFFE LLP 701 Fifth Avenue Seattle, WA 98104 Tel.: (206) 839-4300 Fax: (206) 839-4301

Attorneys for Defendants Credit Suisse Securities (USA) LLC and DLJ Mortgage Capital, Inc.

FILED: NEW YORK COUNTY CLERK 11/21/2019 11:57 PM INDEX NO. 603751/2009

NYSCEF DOC. NO. 2110 RECEIVED NYSCEF: 11/21/2019

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TABLE OF CONTENTS

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I. INTRODUCTION ............................................................................................................. 1

II. MBIA FAILED TO PROVE MAE FOR ANY ALLEGED BREACH ............................ 5

A. MBIA Failed to Prove Any Alleged Breach Had an MAE on Any Loan ............. 6

B. No New York State Court Has Found MAE Based on MBIA’s Arguments ........ 7

C. DLJ’s Putbacks and Repurchases Do Not Demonstrate MAE .............................. 7

D. MBIA Did Not Rebut Dr. Grenadier’s Empirical Analysis Disproving MAE ....................................................................................................................... 8

III. THE NO MONETARY DEFAULT AND MLS REPS DO NOT COVER BORROWER MISREPRESENTATION ........................................................................ 10

A. The No Monetary Default Rep Does Not Cover Borrower Misrepresentation ................................................................................................. 11

B. The MLS Rep Does Not Cover Borrower Misrepresentation ............................. 12

1. The MLS Rep Does Not Cover Borrower Misrepresentation ................. 12

a. The Case Law Does Not Support MBIA’s Interpretation ........... 13

b. The Evidence on Which MBIA Relies Actually Undermines MBIA’s Interpretation ............................................. 14

c. DLJ’s Putbacks Do Not Support MBIA’s Interpretation ............. 16

2. MBIA Did Not Prove DTIs for Stated Income Loans Were Untrue ....... 17

C. MBIA Cannot Convert the No Monetary Default and MLS Reps into the Fraud Rep It Failed to Obtain .............................................................................. 18

IV. MBIA DID NOT PROVE ANY OF ITS BREACH CLAIMS........................................ 20

A. MBIA Did Not Prove its Misrepresentation Claims ............................................ 20

1. MBIA Ignores the Fatal Shortcomings in its Misrepresentation Evidence and Mischaracterizes DLJ’s Evidence in Response ................. 20

2. Butler’s Income and Debt Misrepresentation Claims Fail ....................... 23

B. MBIA’s Underwriting Claims Fail ...................................................................... 25

1. MBIA Did Not Prove its “Missing Documents” Claims ......................... 26

a. Butler Ignored Evidence that the Documents Were Obtained ....................................................................................... 26

b. MBIA Did Not Rebut Gething’s Testimony that Insurance Policies and HUD-1s are Closing Documents, Not Underwriting Documents ............................................................. 28



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TABLE OF CONTENTS(continued)

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c. DLJ’s Repurchase Policy and Repurchase Demands Undermine, Rather than Support, MBIA’s Missing Doc Claims .......................................................................................... 29

d. MBIA’s Other Attempts to Prop Up Butler’s Missing Document Claims Fall Flat .......................................................... 30

2. MBIA Did Not Prove its “Unreasonable Stated Income” Claims ........... 31

a. Gething Did Not Agree With Butler’s Findings .......................... 31

b. Butler’s Use of BLS Data Does Not Establish Unreasonable Incomes ................................................................. 32

3. MBIA Did Not Prove its “Non-Complex Income” Claims ..................... 34

4. MBIA Did Not Prove its “Ability to Pay” Claims ................................... 35

5. MBIA Did Not Prove its “Other Underwriting Defect” Claims .............. 36

V. NEITHER THE LAW NOR THE FACTS SUPPORT MBIA’S ATTEMPT TO AVOID THE LOAN-SPECIFIC WRITTEN NOTICE OR DISCOVERY ELEMENT OF THE REPURCHASE PROTOCOL ....................................................... 37

A. DLJ Received Notice Only On 9,629 Loans ....................................................... 37

B. MBIA’s Attempts to Evade Its Burden to Prove Loan-Specific Discovery Are Precluded by the Repurchase Protocol and New York Law, and MBIA Failed To Prove DLJ Discovered Breaches in any Event .................................... 40

1. MBIA’s “Independent Discovery” Theory Merely Repackages Its “Constructive Notice” and “Pervasive Breach” Theories ........................ 41

2. MBIA Failed Its Burden to Prove DLJ Discovered Material Breaches in Specific Transaction Loans .................................................. 43

C. MBIA’s Willful Blindness Theory Is Misplaced as a Matter of Law and Was Not Proved In Any Event............................................................................. 46

D. MBIA’s Gross Negligence Theory is Inapplicable As Matter Of Law And Would Fail For Lack of Causation In Any Event ................................................ 48

E. MBIA Offers No Basis in Law For Its Attempt to Use Its Transaction Rep Claim Under The Insurance Agreement to Avoid Proving Notice/Discovery Under the PSA’s Repurchase Protocol ................................... 49

VI. THE COURT SHOULD NOT CONSIDER HEARSAY EMAILS ................................ 52

VII. MBIA CANNOT RECOVER FOR ANY LOANS OUTSIDE THE SAMPLE ............. 53

VIII. CONCLUSION ................................................................................................................ 54



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TABLE OF AUTHORITIES

Page(s)

Cases

ACE Sec. Corp. Home Equity Loan Tr., Series 2007-HE3 v. DB Structured Prods, Inc., 5 F. Supp. 3d 543 (S.D.N.Y. 2014) .........................................................................................43

Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2019 WL 4418885 (1st Dep’t Sept. 17, 2019) .........................................................................41

Andersen Consulting LLP v. Am. Mgmt. Sys., Inc., 1995 WL 510042 (S.D.N.Y. Aug. 28, 1995) ...........................................................................12

Anthony v. Highlands Country Club, 54 Misc. 3d 1218(A), (Sup. Ct. Nassau Cty. 2017) .................................................................53

Assured Guar. Mun. Corp v. DB Structured Prods., Inc., 2014 WL 3282310 (Sup. Ct. N.Y. Cty. July 3, 2014) .............................................................43

Assured Guar. Mun. Corp. v. Flagstar Bank, FSB, 920 F. Supp.2d 475 (S.D.N.Y. 2013).............................................................................7, 24, 25

Bank of N.Y. Mellon v. WMC Mortg., LLC, 136 A.D.3d 1 (1st Dep’t 2015) ................................................................................................13

Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, 2012 WL 3201139 (Del. Ch. Aug. 7, 2012) ......................................................................12, 19

City of New York v. 611 W. 152nd St., Inc., 273 A.D.2d 125 (1st Dep’t 2000) ............................................................................................48

Deutsche Bank Nat’l Tr. Co. v. Morgan Stanley Mortg. Capital Holdings, LLC., 289 F. Supp. 3d 484 (S.D.N.Y. 2018)................................................................................42, 43

Fed. Home Fin. Agency v. Nomura Holding Am., Inc., 104 F. Supp.3d 441 (S.D.N.Y. 2015)............................................................................... passim

Harris v. Seward Park Housing Corp., 79 A.D.3d. 425 (1st Dep’t 2010) .......................................................................................49, 50

Home Equity Mortg. Tr. Series 2006-1 v. DLJ Mortg. Capital, Inc. (“HEMT I”), 2019 WL 138634 (Sup. Ct. N.Y. Cty. Jan. 9, 2019) ....................................................21, 39, 40

Home Equity Mortg. Tr. Series 2006-1 v. DLJ Mortg. Capital, Inc. (“HEMT II”), 175 A.D.3d 1175 (1st Dep’t 2019) ..............................................................................38, 39, 40



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Law Debenture Tr. Co. of N.Y. v. WMC Mortg., LLC, 2017 WL 3401254 (D. Conn. Aug. 8, 2017) ...........................................................................43

MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 2013 WL 1845588 (N.Y. Sup. Ct. N.Y. Cnty. Apr. 29, 2013) ................................................13

MBIA Ins. Corp. v. Credit Suisse Secs. (USA) LLC, 165 A.D.3d 108 (1st Dep’t 2018) ..................................................................................3, 11, 13

Morgan Stanley Mtge. Loan Trust 2006-13 ARX v. Morgan Stanley Mtge. Capital Holdings, LLC, 143 A.D.3d 1 (1st Dep’t 2016) ................................................................................................49

Nat’l Credit Union Admin. Bd. v. UBS Sec., LLC, 2017 WL 235013 (D. Kan. Jan. 19, 2017) ...............................................................................25

Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, Nat’l Ass’n v. Nomura Credit & Capital, Inc., 30 N.Y.3d 572 (2017) ..................................................................................................38, 41, 52

Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015), aff’d as modified sub nom. Nomura II .........................39, 40

In re Part 60 Put-Back Litigation, 169 A.D.3d 217 (1st Dep’t 2019) ............................................................................................49

U.S. Bank, N.A. v. UBS Real Estate Sec., Inc., 205 F. Supp.3d 385 (S.D.N.Y. 2016)............................................................................... passim

U.S. Bank Nat’l Assoc. v. DLJ Mortg. Capital, Inc., 2019 WL 5073847 (1st Dep’t Oct. 10, 2019) ....................................................................38, 39

U.S. Bank v. GreenPoint Mortg. Funding, Inc., 147 A.D.3d 79 (1st Dep’t 2016) ..............................................................................................43

Wapnick v. Seven Park Ave. Corp., 240 A.D.2d 245 (1st Dep’t 1997) ............................................................................................48

Other Authorities

N.Y. Evid. Rule 8.00 Note .............................................................................................................53



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Defendant DLJ Mortgage Capital, Inc. (“DLJ”) respectfully submits this response to

Plaintiff MBIA Insurance Corporation’s (“MBIA”) Post-Trial Brief (“MBIABr.”).1

I. INTRODUCTION

DLJ’s opening brief addressed the flaws that infect each of Butler’s loan-level breach

claims, whereas MBIA’s brief largely ignored loan-level analysis and focused on sensationalized

(and false) atmospherics that are legally irrelevant. As this Court has made clear, this case is

about whether these loans in this transaction materially breached the loan-level reps negotiated in

this PSA. That question is decided at the loan level: whether, on a loan-by-loan basis: (i) any of

MBIA’s 747 alleged defects in its 309 sample loans actually constitutes a material breach of a

specific rep; (ii) whether “such breach” had an MAE on MBIA’s interest in that loan; and

(iii) whether DLJ received notice of, or independently discovered, “such breach.”

On these key loan-level issues, MBIA has nothing new to say. On the No Monetary

Default Rep, its argument literally excises the portion of the rep that belies its position and

pretends the language isn’t there. Its argument on the MLS Rep is based largely on the

inadmissible undisclosed unilateral intent of its witnesses, and an expert who testified that the

rep was unremarkable and that he had no recollection of ever negotiating one. As to the loans at

issue, MBIA glosses over the inherently fact-specific and guideline-specific analyses in

perfunctory and conclusory fashion. And as to MAE, MBIA offers nothing more than Butler’s

say so, wholly failing to present the proof the Court has demanded for years. DLJ submits that,

upon examination, MBIA’s loan-level breach claims simply lack proof or merit.

MBIA’s Claims All Fail For Lack Of MAE. The Court appropriately noted that MBIA’s

burden to prove MAE for each of its breach claims was of “extreme importance.” SJO at n.15.

1 Undefined capitalized terms have the same meaning as in DLJ’s opening brief (“DLJBr.”).



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The Court told MBIA it needed to put on proof “of what it means for a breach to non-nominally

increase the risk of loss” (id.) and how “th[ese] particular breaches…statistically increase the

possibility that this loan will ultimately default” (Doc. 1706 at 10:16-18). MBIA did not do that,

and MBIA’s brief makes no claim that it did. It continues to rely solely on Butler’s unfounded

subjective opinion: ‘I know it when I see it.’ This evidence already fell short on summary

judgment. SJO at n.15. Trial showed that Butler had no industry experience during the relevant

period, much less with the kinds of loans at issue. Because Butler made no assessment of the

inherent riskiness of these loans and offered no statistical evidence requested by the Court, he

lacks any basis to opine on a “significant increase in the risk of loss” in any loan.

Absent actual proof of MAE, MBIA argues essentially that this Court was wrong to ask

for evidence and that it should not be put to that burden. Nothing in the three federal trial court

cases MBIA cites calls into question this Court’s denial of summary judgment on unrebutted

loans for lack of MAE, much less this Court’s demand that MBIA substantiate Butler’s MAE

claims. MBIA points to DLJ’s putbacks of loans to originators and its repurchases on some of

MBIA’s repurchase demands and suggests these are tantamount to an admission that Butler’s

alleged breaches resulted in MAE. But DLJ’s putback demands were made under contracts with

originators with different reps and different MAE terms and are simply business discussions

between contracting parties. And DLJ’s repurchases occurred in the context of this dispute,

expressly stated the “rights and obligations of the parties will be determined in the lawsuit,” and

do not and cannot inform Butler’s MAE opinions.

MBIA Misrepresents the No Monetary Default Rep. The critical disputed language in the

No Monetary Default Rep is the portion that provides there is no “material event that, with the

passage of time or with notice and the expiration of any grace or cure period, would constitute a



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default” under the mortgage note. JX-0456.0010 (emphasis added). MBIA argues that a

borrower misrepresentation violates this rep. Yet in making this argument, MBIA’s brief inserts

an ellipsis in place of that key underscored language. Why? Because at trial Butler agreed that

misrepresentation cannot be cured (TT.421:9-10), and the First Department was focused on the

cure language in the rep when it found DLJ had a “compelling argument” that the rep does not

cover borrower misrepresentation. MBIA Ins. Corp. v. Credit Suisse Secs. (USA) LLC (“MBIA

II”), 165 A.D.3d 108, 115 & n.2 (1st Dep’t 2018). MBIA’s airbrush-by-ellipsis of the key

language is a tacit concession that, as written, the rep does not cover borrower misrepresentation.

In consequence, all 169 claims based on this rep fail.

The MLS Rep Does Not Cover Borrower Misrepresentation. There are two main

questions before the Court on the MLS Rep. The first is whether the MLS Rep protected MBIA

against borrower misrepresentation. All three cases cited by MBIA were decided before the First

Department reversed Justice Kornreich and remanded the issue for trial (and MBIA raised two of

those cases in opposition to the appeal). MBIA’s attempt to re-interpret the MLS Rep to provide

coverage for the Fraud Rep it didn’t get was debunked at trial by DLJ’s experts Trickey and

Gething, each with many years of experience negotiating these reps. It is unsurprising that no

witness recalled the MLS Rep as noteworthy: it simply did not mean what MBIA now claims. If

it did, it would have been hotly negotiated, just like the Fraud Rep DLJ three times refused to

give. The second question is: what did DLJ represent was “true” in respect of borrowers’ DTI

ratios listed on the MLS? The undisputed answer comes from the guidelines’ definition of DTI.

As Butler acknowledged, DTI for a stated income loan is the ratio of a borrower’s debt to the

stated income. MBIA’s argument that the MLS Rep is breached if the stated income used to



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calculate the DTI was not “true,” is at odds with the undisputed evidence. DLJ warranted only

that the MLS reflected the DTI calculation was correct.

Butler’s Opinions Are Biased and Entitled to No Weight. MBIA argues that Butler was

“more credible” than Gething, including because Butler worked as a “frontline underwriter,”

whereas Gething has not. MBIABr.4. Gething’s experience, however, is far more relevant.

Gething managed Goldman Sachs’ due diligence group during the years the loans were

originated, and his opinions are grounded in established industry custom and practice and his

firsthand experience working with the types of loans and the reps at issue. TT.1115:16-1117:5,

1110:15:1112:20. Butler, on the other hand, hasn’t worked as an underwriter for nearly 40 years,

never underwrote a reduced documentation or stated income loan, and his “industry” experience

with loans of the type at issue is limited to his work as a paid testifying expert for plaintiffs in

putback litigation.

Butler’s approach to breach claims in this case demonstrates his bias. For example,

Butler asserted “guideline violation” claims for certain loans by applying guidelines to which the

loans were not even originated (TT.466:3-11); he asserted “missing document” claims even

though evidence in the file shows the documents were, in fact, obtained (DLJBr.52-54); he

claimed that loans underwritten in accordance with guidelines were nonetheless imprudently

underwritten, even though at trial he conceded the guidelines reflected prudent underwriting

practice; and he claimed that borrower misrepresentations have an MAE because they show the

borrower’s “willingness to lie” (PX-1219.0061), but at trial vehemently disclaimed any

suggestion that he was opining that borrowers in fact “lied” (TT.379:21-380:16).

By contrast, Gething’s opinions reflected his true independence as an expert. Gething

testified candidly that he didn’t personally like some of the loan programs at issue, but they were



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permitted by the guidelines and were accepted products in the industry at that time.

(TT.1130:24-1332:4). Butler, on the other hand, makes breach claims that are, in large part,

nothing more than his personal disagreements with the type of loan product, even though he

conceded at trial that all the guidelines were prudent. TT.469:19-470:2. Gething did not rebut

Butler’s findings in some instances when the state of the loan file did not allow him to reach a

conclusion; Butler, on the other hand, maintained breach claims even when faced with evidence

that his claims were wrong. See, e.g., DLJBr.50-54. Gething has not made a career out of being

a paid expert in RMBS cases; Butler has, but only for plaintiffs, and has been paid untold sums

for doing so. TT.446:3-447:6.

The Remnants of MBIA’s Dismissed Fraud Claim Have No Legal Relevance. Rather

than focus on issues relevant to the Repurchase Protocol, most of MBIA’s brief rehashes its

long-dismissed fraud narrative. Its goal is to avoid being held to its burden (which it failed to

meet) to prove the notice/discovery element of the Repurchase Protocol and thereby extrapolate

its alleged breach rate to the entire pool of Transaction loans. MBIA posits five overlapping

legal theories in the hope that at least one of them will stick: constructive notice; pervasive

breach (under the guise of “independent discovery”); willful blindness; a Transaction Rep claim;

and gross negligence. But each of MBIA’s legal theories is inapplicable as a matter of law.

Regardless, much of it is cobbled together from inadmissible testimony and documents that do

not prove MBIA’s theories.

As discussed below, a full examination of the trial record compels one conclusion: MBIA

did not meet its burden of proof.

II. MBIA FAILED TO PROVE MAE FOR ANY ALLEGED BREACH

MBIA bore the burden to prove MAE as to each of the 309 allegedly defective loans.

DLJBr.12-21. MBIA chose to rest its proof of MAE at trial on the same Butler opinions the



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Court previously held were insufficient for MBIA to meet its burden of proof. Id.1-3, 12-21.

Butler did not analyze the performance of the loans in relation to the alleged breaches; he cited

no studies correlating the alleged breaches to increased risk of loss; and he presented no data to

back up his opinion that each of his alleged defects “significantly increased the risk of loss.”

Id.14-21. Butler’s “opinion” of MAE is based exclusively on his say so, which he asks the Court

to believe because “I have lots of experience.” TT.604:14-15. But his “experience” is in the

litigation “industry” over the past 11 years, for which he has testified only for plaintiffs and been

paid sums he refused to disclose to the Court. TT.446:3-447:6. He has no experience during the

relevant time period with the types of loans at issue—second lien loans with little to no borrower

equity, to borrowers with blemished credit and whose income was stated but not verified, raising

the known risk of borrower misrepresentation. DLJBr.49-50.

A. MBIA Failed to Prove Any Alleged Breach Had an MAE on Any Loan

MBIA argues it was not required to prove the alleged breaches caused the loans to

default, and that Butler “explain[ed] why every Significant Defect significantly increases a

loan’s risk of loss.” MBIABr.42. The parties agree (subject to DLJ’s right to appeal) that MBIA

must prove the breach “significantly increased the loan’s risk of loss.” DLJBr.12-13. But MBIA

offers only Butler’s conclusory opinions that each type of defect he alleged “significantly

increases a loan’s risk of loss” as a general matter. MBIABr.42 (emphasis added). That is not

enough. DLJBr.12-13. Despite conceding “[e]ach loan is different” (TT:608:3) and “[e]ach loan

is looked at individually” (TT.608:6), Butler looked at only half the equation. He opined on

categories of breaches that, in his opinion, generally increase risk, but failed to evaluate the

actual increase, if any, in the baseline risk profile of these specific loans. DLJBr.14-17. Butler’s

admitted failure to take into account the risk characteristics of each loan and to offer any

explanation how each claimed breach “significantly increased the risk of loss” on that loan—



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either at origination (the wrong time to assess MAE under the law) or at the time of notice or

discovery of alleged breach (the right time to assess it) (DLJBr.21)—is fatal to MBIA’s claims.

B. No New York State Court Has Found MAE Based on MBIA’s Arguments

MBIA argues that the federal trial courts in Flagstar, MARM and FHFA found testimony

similar to Butler’s established MAE. MBIABr.42.2 FHFA was a securities law case concerning

alleged misstatements in offering documents, not a breach of contract case under a PSA

requiring proof of MAE, so that case is irrelevant. 104 F. Supp.3d at 453. And whatever the

federal courts in MARM and Flagstar found sufficient to show MAE in those cases, no New

York state court has found subjective ‘I know it when I see it’ expert testimony sufficient to

prove MAE. While MBIA claims that Flagstar, MARM and FHFA rejected the argument that a

plaintiff needs “quantitative or statistical analysis of increased risk of loss” to meet its burden of

proof (MBIABr.42 n.19), none of those courts even addressed that question. MBIA cited

MARM and Flagstar at summary judgment in support of its MAE arguments, and this Court held

that what MBIA offered did not meet its burden of proof. SJO at n.15. And this Court made

clear before trial that it expected MBIA to show, on a loan-by-loan basis, how each alleged

breach “statistically increase[s] the possibility that this loan will ultimately default.” Doc. 1706

at 10:16-18. MBIA did not do so.

C. DLJ’s Putbacks and Repurchases Do Not Demonstrate MAE

MBIA contends that, because DLJ repurchased certain HEMT 2007-2 loans in response

to MBIA’s repurchase demands and, in the course of its business, made certain putback demands

to originators, DLJ has effectively conceded the requisite MAE. MBIABr.42-43. Far from it.

2 Assured Guar. Mun. Corp. v. Flagstar Bank, FSB (“Flagstar”), 920 F. Supp.2d 475 (S.D.N.Y. 2013); U.S. Bank, N.A. v. UBS Real Estate Sec., Inc. (“MARM”), 205 F. Supp.3d 385 (S.D.N.Y. 2016); Fed. Home Fin. Agency v. Nomura Holding Am., Inc. (“FHFA”), 104 F. Supp.3d 441 (S.D.N.Y. 2015).



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DLJ’s decision to repurchase certain HEMT 2007-2 loans in a good faith effort to narrow the

scope of the parties’ dispute is not an admission. DLJ never admitted that any of MBIA’s

repurchase demands established a breach of a rep, or MAE; DLJ made clear that “the rights and

obligations of the parties will be determined in the lawsuit” (see, e.g., JX-0153.0002); and it has

always maintained that none of MBIA’s alleged breaches had the requisite MAE.

That DLJ may have put back loans to originators is also irrelevant because DLJ’s

putbacks were under different contracts (MLPAs) with different reps—including Fraud Reps that

MBIA did not obtain here (DX-1487.0003)—and with different MAE provisions providing a

different standard for MAE. See, e.g, PX-2017.0039; PX-2019.0040. Moreover, the vast

majority of DLJ’s putbacks to originators were for EPDs (PX-9032), for which MBIA obtained

no protection. JX-0010.0011; JX-0011.0001. And a putback request does not, by itself,

establish that the contractual elements for repurchase are satisfied. At trial, MBIA bore the

burden to prove MAE and the evidence established that it failed to do so.

D. MBIA Did Not Rebut Dr. Grenadier’s Empirical Analysis Disproving MAE

Finally, lacking empirical evidence of its own, MBIA challenges Dr. Grenadier’s

regression, which proved Butler’s claimed breaches did not correlate with an increased risk of

loss. DLJBr.18-20. MBIA’s attacks on Grenadier fail.

First, MBIA argues Grenadier’s regression is flawed because it looked at post-closing

performance rather than risk of loss at origination, as though the two were not related.

MBIABr.65-66. Across a population of loans over several years, a risk of loss must necessarily

correlate to eventual borrower defaults. To suggest otherwise is implausible. As Grenadier

testified, the lack of any statistically significant difference in performance between allegedly

defective and non-defective loans is compelling evidence there was no difference in risk of loss

at origination. TT.1406:18-1407:11. The stressful economic conditions following 2006 are



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precisely the economic environment in which increased risks of loss would be expected to

materialize if they existed (id.), but the data shows the opposite. In the face of skyrocketing

unemployment and plummeting home prices (DX-1451.0009-18), Butler’s classification of a

loan as defective lacked a statistically significant correlation with increased risk of loss. DX-

1451.0024-27; DX-1466.

Second, MBIA argues that Grenadier did not compare allegedly defective loans to a

“clean” set of non-defective loans (MBIABr.66), but Grenadier used as his control set the 91

loans as to which Butler asserts no breach claim (DLJBr.18-19). MBIA’s argument that the 91

Butler non-defective loans “may have had defects” Butler couldn’t recall at trial (TT.589:6-14;

TT.590:2-5), despite Butler’s concerted effort to identify defects in every sample loan, is fatuous.

DLJBr.18. It is also irrelevant. Grenadier was not testing the impact of “defects” in the abstract,

but whether Butler’s classification of a loan as defective or not had any statistical correlation

with loss. The only way to perform that analysis is to compare loans Butler says were defective

against those he did not.

Third, MBIA argues Grenadier did not consider prepayment rates (MBIABr.67), but

prepayment is not one of the three “risks of loss” Butler claimed to identify (DLJBr.14).

MBIA’s reliance on FHFA, in which a federal trial court rejected a regression that did not

consider prepayment rates, is misplaced. MBIABr.67. In FHFA, the plaintiff’s expert used a

prepayment analysis to show the probability of default was statistically significantly higher for

the allegedly defective loans. 104 F. Supp.3d at 542. MBIA offered no such evidence to support

its speculative argument here; to the contrary, Dr. Snow admitted his (untimely) prepayment

analysis does not show a statistically significant correlation between allegedly defective status

and likelihood of default. TT.815:1-5.



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Fourth, MBIA contends Grenadier’s regression did not account for Butler’s claim that his

defect findings were based on two categories of increased risk of loss beyond the risk of default

(MBIABr.67); however, Butler himself never categorized which alleged defects are based on

increased risk of default and which are based on some other category. TT.1409-17:1410-5.

Butler’s failure to do so casts doubt on his accurate identification of breaches that “significantly

increase risk of loss,” not Grenadier’s opinions.

Finally, MBIA’s argument that Grenadier did not account for differences in defect types

(MBIABr.67) in loss severity is irrelevant because MBIA assumed 100% loss severity in the

event of any default (DLJBr.20). MBIA also criticizes Grenadier for averaging loss severity

values rather than running a separate regression (MBIABr.67), but Grenadier testified the second

regression would be superfluous because: (i) second lien loans with near 100% CLTVs would all

experience near total loss upon default; and (ii) loss severity is conditioned on default occurring,

which he accounted for in his default regression. TT.1408:13-1409:16. And MBIA speculates

that a few repurchased loans could have impacted Grenadier’s loss severity analysis

(MBIABr.67-68), but like MBIA’s entire MAE theory, MBIA presented zero quantitative

evidence to support its speculation.

Because MBIA presented no data or statistical proof that Butler’s defects increased risk

of default (TT.1410:16-21), much less significantly so, the Court should rely on Grenadier’s

statistically-validated opinion disproving any correlation, and find MBIA failed to prove MAE.

III. THE NO MONETARY DEFAULT AND MLS REPS DO NOT COVER BORROWER MISREPRESENTATION

MBIA’s borrower misrepresentation claims are brought under the No Monetary Default

and/or MLS Reps, but neither rep covers borrower misrepresentation. DLJBr.27-36. Borrower

misrepresentation was covered by a Fraud Rep, which MBIA did not obtain. Id.27-29. MBIA



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misinterprets the reps to try to shift the risk of borrower misrepresentation by ignoring an entire

clause of the No Monetary Default Rep, disregarding the plain language of the MLS Rep, and

applying both reps contrary to industry understanding. MBIABr.45-50.

A. The No Monetary Default Rep Does Not Cover Borrower Misrepresentation

DLJ’s opening brief explained why borrower misrepresentation is not a “material event

that, with the passage of time or with notice and the expiration of any grace or cure period,

would constitute a default, breach, violation or event of acceleration under the Mortgage or the

related Mortgage Note.” DLJBr.29-30; JX-0456.0010 (emphasis added). Borrower

misrepresentations do not require passage of time to become a default (DX-1471.0013), nor can

borrower misrepresentations be cured, as Butler unequivocally admitted at trial. TT.421:9-10

(Q: “Can you cure misrepresentation?” A: “No.”). This is precisely the point the First

Department found “compelling” in DLJ’s favor when reversing summary judgment and directing

the Court to reevaluate the meaning of the rep at trial. MBIA II, 165 A.D.3d at 115 & n.2.

MBIA has no answer to this. Instead, MBIA pretends the language that sinks its

argument isn’t there. It cuts out—and replaces with an ellipsis—the rep’s express limitation to

events that only become defaults with the passage of time or with notice and the expiration of

any grace or cure period:

MBIA’s Quotation of the Rep The Full Text of the Rep

“[T]here is no material event that . . . would constitute a default.” MBIABr.48 (alterations in original).

“[T]here is no material monetary default existing under any Mortgage or the related Mortgage Note and there is no material event that, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration under the Mortgage or the related Mortgage Note . . .” JX-0456.0010 (emphasis added).



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The only way MBIA argues the rep covers borrower misrepresentation is by excising the very

language that proves it does not cover misrepresentation. See Andersen Consulting LLP v. Am.

Mgmt. Sys., Inc., 1995 WL 510042, at *3 (S.D.N.Y. Aug. 28, 1995) (rejecting plaintiff’s

interpretation where plaintiff replaced with “ellipses” a “phrase which significantly alters the

meaning of the cited passage”). All 169 claims under this rep should be dismissed.

B. The MLS Rep Does Not Cover Borrower Misrepresentation

Most of MBIA’s MLS Rep claims (97 of 108) are based, in whole or in part, on alleged

borrower misrepresentations, primarily of income, which MBIA claims rendered the DTI ratios

on the MLS not “true.” DLJBr.26.3 There are two independent threshold questions the Court

must answer in ruling on MBIA’s MLS Rep claims: (1) does the rep warrant against borrower

misrepresentation; and (2) for stated income loans, what did DLJ warrant was “true” in respect of

the borrower DTI ratios listed on the MLS?

1. The MLS Rep Does Not Cover Borrower Misrepresentation

MBIA effectively contends the MLS Rep made DLJ a guarantor against borrower

misrepresentation (MBIABr.45-48), even though DLJ refused to bear that risk by rejecting

MBIA’s repeated demands for a Fraud Rep (DLJBr.22-23).4 MBIA relies on inapposite case

law, testimony entitled to no weight under New York law, and DLJ’s supposed practices with

respect to putbacks that do not show what MBIA says.

3 MBIA asserts a handful of claims under the MLS Rep that are not based on borrower misrepresentation. DLJBr.26. Those claims, which MBIA did not address in its brief, fail for the reasons set forth in DLJ’s opening brief. Id.48-49.

4 Former Chief Justice of the Delaware Supreme Court, Leo Strine, called an identical interpretation of an MLS Rep “strained” in Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, 2012 WL 3201139, *10 (Del. Ch. Aug. 7, 2012).



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a. The Case Law Does Not Support MBIA’s Interpretation

MBIA primarily relies on Justice Kornreich’s vacated summary judgment decision

interpreting the MLS Rep (MBIABr.45), which the First Department reversed because the MLS

Rep must be interpreted in context. MBIA II, 165 A.D.3d at 115. The evidence at trial

demonstrated MBIA’s interpretation (1) is contrary to the industry understanding and application

of the MLS Rep; (2) is belied by the parties’ negotiations of the reps, in which the issue of who

would bear the risk of borrower misrepresentation was hotly contested, with DLJ making clear it

would not bear that risk by refusing to give MBIA a Fraud Rep; and (3) makes no commercial or

common sense because it would impose upon DLJ liability for failure to verify income on all

stated income loans, even though their defining characteristic is that income is not verified.

DLJBr.22-29, 33-35.

MBIA cites three cases pre-dating the First Department’s decision in this case, none of

which support MBIA’s argument. MBIABr.45. WMC and Countrywide are inapposite because

whether the MLS Rep warranted the accuracy of underlying data, even if misrepresented by the

borrower, was not at issue in those cases. Bank of N.Y. Mellon v. WMC Mortg., LLC, 136

A.D.3d 1, 6 (1st Dep’t 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 2013 WL

1845588, *27-29 (N.Y. Sup. Ct. N.Y. Cnty. Apr. 29, 2013). And in MARM, the court refused to

consider extrinsic evidence of industry custom and usage of the MLS Rep. 205 F. Supp.3d at

429. MBIA cited MARM and WMC to the First Department unsuccessfully on appeal. Rather

than follow those cases, the First Department held that this Court should interpret the MLS Rep

in context, including by considering extrinsic evidence. MBIA II, 165 A.D.3d at 115-16. The

evidence adduced at trial proves the MLS Rep does not cover borrower misrepresentations.

DLJBr.27-29, 31-35.



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b. The Evidence on Which MBIA Relies Actually Undermines MBIA’s Interpretation

MBIA primarily relies on the testimony of its transaction counsel Smith and its purported

expert Aronoff. MBIABr.45-46. Aronoff’s opinion should be given no weight because he does

not recall ever discussing an MLS Rep in any transaction and has no basis to opine on what

industry participants understood that rep to mean. DLJBr.34. And Smith’s testimony about

what she “understood” the MLS Rep to cover is not admissible under New York law for

purposes of interpreting the meaning of the rep, because (1) she is not an expert in this case, and

(2) she admitted she had no recollection of the negotiations in this Transaction and did not

communicate her understanding to DLJ. Id.28-29. Her understanding is classic inadmissible

undisclosed unilateral intent. Id.29 (citing cases).5

MBIA also cites to the testimony of Stiglitz, Johnson, Brown and Bernier, none of which

bears any weight. MBIABr.46-48. Stiglitz’s testimony regarding the “general purpose” of reps

and warranties, economic efficiency, information asymmetry and allocation of risk is irrelevant

to contract interpretation under New York law, and Stiglitz conceded he has no experience that

would qualify him to opine on the meaning or scope of any of the reps. TT.150:23-152:4, 156:7-

16, 156:25-157:1. Johnson’s testimony should be disregarded for the same reasons as Smith’s—

she had no independent recollection of the negotiations and never communicated her alleged

subjective understanding of the reps to DLJ. DLJBr.28-29. Brown was not involved in

negotiating these reps (TT.28:22-29:2, 45:10-25). Neither was Bernier (Bernier Dep. Tr.251:4-

6), who also admitted it was just his “personal view,” never communicated to DLJ, that the MLS

Rep provided the same coverage as a Fraud Rep (id.274:1-13).

5 MBIA’s speculation about why DLJ did not call its transaction counsel, Robert Olin, to testify (MBIABr.46) is baseless. DLJ did not call him because, like Smith, he did not have anything to say about the parties’ negotiations beyond what the correspondence contains.



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The only admissible evidence MBIA points to are two emails written by Olin and

Timothy Kuo, DLJ’s Transaction Manager for HEMT 2007-2 (MBIABr.46), both of which

support DLJ’s argument that the MLS Rep does not cover borrower misrepresentation.

In the first email (JX-0011.0001), Olin responded to Smith’s markup of draft reps (PX-

0120), in which she proposed additional loan-level reps covering the same information already

listed on the MLS. For example, Smith requested reps regarding (i) the range of mortgage

interest rates on the loans (PX-0120.0010), (ii) the percentage of loans subject to prepayment

penalties (PX-0120.0009), and (iii) the principal balance of the loans (PX-0120.0011), but all

this information was already listed on the MLS. See JX-0003 at Column I (mortgage rates); id.

Column O (prepay penalty); id. Column M (current principal balance). Olin questioned why,

given the MLS Rep, Smith thought it necessary to include separate loan-level reps regarding

information listed on the MLS. JX-0011.0001. Olin was not saying the MLS Rep substitutes as

a Fraud Rep; indeed, Olin expressly stated—in a portion of the email MBIA omits—that DLJ

“does not make a fraud rep.” Id. (emphasis added).

In the second email, Kuo similarly commented that several of the reps proposed by

MBIA’s counsel were already “covered by the loan tape rep.” JX-0010.0005, JX-0010.0007-10.

Kuo was making the same point as Olin—Smith’s proposed reps regarding, for example, the

percentage of loans subject to prepayment penalties (JX-0010.0005) was unnecessary because

that information was already on the MLS and covered by the “loan tape rep.” JX-0010.0005.

However, when it came to the Fraud Rep MBIA requested, Kuo was abundantly clear: “We do

not give a fraud rep in any of our deals.” JX-0010.0010 (emphasis added). Kuo did not say that

MBIA’s proposed Fraud Rep was “covered by the loan tape rep.” He said the exact opposite.

DLJ’s repeated rejection of MBIA’s Fraud Rep proves DLJ’s point: the MLS Rep is not a



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substitute for a Fraud Rep and it does not cover borrower misrepresentation. This is confirmed

by Kuo’s testimony—consistent with Trickey’s and Gething’s testimony regarding the industry

understanding of the rep (DLJBr.33-35)—that the MLS Rep warranted only that the loan data

DLJ received from originators, including DTI, was accurately carried over and reflected on the

MLS (id.34 n.8).6

c. DLJ’s Putbacks Do Not Support MBIA’s Interpretation

MBIA wrongly argues its interpretation of the MLS Rep is confirmed by DLJ’s putbacks.

MBIABr.47. First, MBIA claims that DLJ put back loans for borrower misrepresentation under

“substantively identical MLS warranties.” Id. But that is simply wrong. According to MBIA’s

evidence, Credit Suisse put back hundreds of loans in the HEMT 2007-2 Transaction. PX-9032.

The vast majority were put back because of an EPD (id.)—that is, the borrower missed a

payment in the first 60 or 90 days of the loan (DX-1487.0003). But in every MLPA with

originators, DLJ obtained the right to put back loans with EPDs—a right DLJ did not give to

MBIA. DX-1487.0003.

Those aside, MBIA cites 22 loans in the Transaction that were put back for alleged

borrower fraud or misrepresentation. PX-9037. MBIA claimed those putbacks demonstrate

something as to DLJ’s understanding of the No Monetary Default and MLS Reps. But of those

22 loans, not a single one was put back under the No Monetary Default Rep. And of those same

22 loans, all of them cite, as a basis for the putback, the Fraud Rep in the deal, but only one cites

the MLS Rep. DLJBr.36 & n.9. If MBIA’s argument held water, one would expect to see DLJ

6 MBIA says Trickey admitted he could not say this was the “universal” understanding in the industry (MBIABr.47), but that is misleading. Trickey testified that although there may be people out there who have a different view of the MLS Rep, as evidenced by the parties’ dispute here, he could not think of a single industry participant that interpreted or applied the MLS Rep in the manner MBIA proposes (TT.1072:7-9).



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cite the MLS Rep in all 22 letters. The pattern and practice of DLJ’s putbacks is wholly

consistent with its position in this lawsuit. To claim, based on a single loan, that these putbacks

were made under MLPAs with “substantively identical MLS warranties,” is to ignore the

existence and import of the MLPAs’ Fraud Rep, which MBIA did not get.7

Second, MBIA misleadingly claims that Joseph Quarto, the former head of DLJ’s

putback group, testified “that a borrower misrepresentation breaches a MLS warranty.”

MBIABr.47. Quarto said a misrepresentation of occupancy status hypothetically would be a

breach of an MLS Rep under an entirely different contract where the MLS contained a field for

occupancy. Quarto Dep. Tr.142:5-20; see also PX-1077.0012-13 (listing fields on that MLS

including owner-occupancy). Here, the MLS does not contain any field for “occupancy,” nor

does it include any field for “income” or “debt,” which is what MBIA claims the borrowers

misrepresented to make the data on the MLS incorrect. MBIABr.51.

2. MBIA Did Not Prove DTIs for Stated Income Loans Were Untrue

MBIA’s biggest claim under the MLS Rep (74 of 108) is that the borrower’s DTI ratio

was not “complete, true and correct” for stated income loans where borrowers misrepresented

their income. DLJBr.32. Even if the MLS Rep covers borrower misrepresentations, these claims

still fail under the plain language of the rep. Id.32-33. “Income” is not a field on the MLS, and

Butler agreed underwriters properly calculated the DTI ratio for stated income loans by using the

borrowers’ stated income. Id.32. Butler makes no claims DLJ misrepresented the underwriters’

7 MBIA cites one other putback demand for borrower misrepresentation, for a loan not in HEMT 2007-2, which also cited the Fraud Rep and MLS Rep. PX-1904 at CS_M0006148066.xls (Row 14, Column T (citing MLPA § 3.02(l) & PX-1901.0030 (MLPA § 3.02(l) - Fraud Rep)). One other putback demand (for a total of 2 out of hundreds of putbacks) citing the Fraud Rep and MLS Rep does not prove DLJ interpreted the MLS Rep as covering borrower misrepresentation or believed it had any protection against borrower fraud in a contract not containing a Fraud Rep.



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calculations. MBIA’s MLS Rep claims are dependent on substituting what Butler claims is the

borrower’s “true” income for the “stated” income, but it is undisputed that for a stated income

loan the DTI on the MLS is based solely on the borrower’s stated income. Id.48.

C. MBIA Cannot Convert the No Monetary Default and MLS Reps into the Fraud Rep It Failed to Obtain

MBIA’s failure to obtain a Fraud Rep in the PSA is highly relevant to the interpretation

of the No Monetary Default and MLS Reps. MBIA’s argument that the No Monetary Default

and MLS Reps effectively provide the same coverage makes no sense because there would be no

reason for MBIA to have so fervently negotiated for a Fraud Rep if it was already covered

elsewhere. DLJBr.28. Indeed, if (as MBIA claims) the No Monetary Default and MLS Reps

convert mortgage loan sellers and securitization sponsors into guarantors against borrower fraud

and misrepresentation, one would expect there to be at least one industry publication cautioning

industry participants that even if they did not give a Fraud Rep, they would still be liable for any

misrepresentations by borrowers. It is telling that MBIA could offer no industry publication,

articles, speeches or presentations supporting the interpretation it now advances.

MBIA also makes two additional arguments as to why its failure to obtain a Fraud Rep

does not doom its borrower misrepresentation claims, neither of which has any merit.

First, MBIA argues that DLJ’s repurchase policy differentiated between “fraud” and

“misrepresentation” and that Gething admitted they are two distinct concepts. MBIABr.50. That

argument misses the point. MBIA’s claims of borrower misrepresentation are, and always have

been, based on alleged borrower fraud. DLJBr.4, 23-24. MBIA’s attempt to downgrade those

allegations at trial to “misrepresentations,” and not “fraud,” was because Butler admitted he



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could not prove fraud and MBIA had no rep that would cover it. Id.8 Regardless of whether

there is a distinction between “fraud” and “misrepresentation,” MBIA did not obtain a rep

warranting against either. Id.4, 23-24. Gething’s testimony on this matter was not “incoherent”

(MBIABr.50); he testified unequivocally that MBIA did not obtain any rep against borrower

misrepresentation in this PSA, regardless of whether misrepresentation was defined to be “fraud”

or something less than “fraud.” TT.1262:23-1263:2.

Second, MBIA argues that, because DLJ repurchased approximately 24 loans on which

MBIA alleged a borrower misrepresentation, this constitutes an implied concession that borrower

misrepresentations are covered by the No Monetary Default and/or MLS Reps. MBIABr.50. In

a good faith effort to narrow the scope of the parties’ dispute, DLJ repurchased 242 HEMT

2007-2 loans, including the 24 loans MBIA cites, but its decision to do so is not an admission of

anything. DLJ never admitted liability or conceded MBIA established a breach of any reps on

the loans it agreed to repurchase. In fact, DLJ made clear in its responses that it disputed any

alleged breaches and that “the rights and obligations of the parties will be determined in the

lawsuit.” See, e.g., JX-0153.0002; JX-0154.002 (same). DLJ has always taken the position

before and during this lawsuit that (1) because MBIA did not obtain a Fraud Rep, it bore the risk

of borrower misrepresentation, and (2) the No Monetary Default and MLS Reps do not cover

borrower misrepresentation.

8 MBIA is not the first plaintiff to try this bait-and-switch. The Central Mortgage court called out similar “gamesmanship” when, like MBIA, the plaintiff alleged that “[t]he borrowers [had] engaged in fraud at the time of origination by misstating material information such as their income, occupation, and assets,” only to walk back its allegations of fraud once it realized it couldn’t prove its case under the applicable Fraud Rep and “tactically focused its breach of contract theory” on alleged breach of the MLS Rep instead. 2012 WL 3201139 at *10.



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IV. MBIA DID NOT PROVE ANY OF ITS BREACH CLAIMS

A. MBIA Did Not Prove its Misrepresentation Claims

MBIA’s misrepresentation claims fail for the threshold reason that the No Material

Monetary Default and MLS Reps do not warrant against borrower misrepresentations. But

MBIA also did not meet its burden to prove misrepresentations. DLJBr.38-47. To carry its

burden, MBIA was required to show, by a preponderance of the evidence, that the information

the borrower provided on his or her loan application, under penalty of perjury, was in fact false.

DLJ’s opening brief detailed all the ways MBIA’s proof fell short. Id. MBIA’s attempts to prop

up Butler’s deficient misrepresentation findings should be rejected. MBIABr.51-54.

1. MBIA Ignores the Fatal Shortcomings in its Misrepresentation Evidence and Mischaracterizes DLJ’s Evidence in Response

MBIA argues that DLJ “did not challenge the factual bases for Butler’s misrepresentation

defect findings,” but instead only challenged his Post-Closing Sources as “categorically

unreliable.” MBIABr.51-53. MBIA also argues that DLJ did not dispute that Butler’s

misrepresentation claims had an MAE. Id. 51. Neither statement is true.

First, there are significant problems with MBIA’s Post-Closing Sources and the “facts”

they contain. DLJBr.39-47. MBIA’s sole basis for claiming these were not rebutted is that

Gething did not detail the factual shortcomings with MBIA’s evidence on a loan-specific basis.

MBIABr.51. That argument ignores the burden of proof. MBIA, as the proponent of its

misrepresentation evidence, bears the burden of establishing the evidence is reliable and

sufficient to prove misrepresentations. MBIA did not do so. Courts recognize the Post-Closing

Sources MBIA relied on are of questionable accuracy, particularly when used to support a



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borrower misrepresentation claim. DLJBr.36-47 (citing cases).9 MBIA did not offer any

evidence authenticating the Post-Closing Sources or establishing the information was correct. Id.

That shortcoming is especially notable given that the Post-Closing Sources expressly disavow

any warranty as to their accuracy and warn users not to rely upon them as independent proof of

anything. Id. When confronted with significant discrepancies between certain sources at trial,

Butler could not say which one was accurate and which wasn’t. TT.397:4-11, 405:23-407:1.

Moreover, in many instances Butler misinterpreted or drew inappropriate inferences from

the Post-Closing Sources. DLJBr.37-39. DLJ had no obligation to detail these factual

shortcomings in Gething’s report, and instead always retained the right to show the evidentiary

problems with MBIA’s claims at and, through this briefing, after trial. DLJ offered testimony

from both Card and Gill, who discussed why the Post-Closing Sources are not reliable to carry

MBIA’s burden of proof at trial. DLJ highlighted examples during Butler’s cross-examination

(See, e.g., TT.366:1-412:2 ), cited many more in its opening brief, and describes additional loans

below (IV.B.2). These examples demonstrate that Butler’s Post-Closing Sources—the same kind

of “flimsy” evidence the Lehman court found insufficient to prove borrower

misrepresentations—do not and cannot meet MBIA’s burden of proof. DLJBr.37.10 While

9 Home Equity Mortg. Tr. Series 2006-1 v. DLJ Mortg. Capital, Inc. (“HEMT I”), 2019 WL 138634 (Sup. Ct. N.Y. Cty. Jan. 9, 2019), which MBIA cites, did not hold that post-closing sources prove a borrower misrepresentation; rather, Justice Scarpulla simply ruled that certain post-closing information could be introduced at trial, with its probative value subject to assessment based on the “facts and expert testimony.” 2019 WL 138634, at *7. DLJ submits the other cases MBIA cites are against the weight of authority and that Lehman and Bondcorp are more persuasive.

10 MBIA mischaracterizes Gething’s testimony as an admission that Post-Closing Sources are reliable sources of information for repurchase demands. MBIABr.53. Gething testified that post-closing sources may have been used to some extent (TT.1265:11-17), but only as “pointers” and not as proof establishing a borrower misrepresentation (TT.1149:7-25). See also TT.1150:6-22 (post-closing information only “used in the course of reviewing the entire file, facts and



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MBIA argues that DLJ at times used post-closing sources in its repurchase demands

(MBIABr.n.29),11 using those sources to make a repurchase demand in the course of business

negotiations is a far cry from those sources satisfying a legal burden of proof at trial, as the

Lehman court recognized when it held post-closing sources were unreliable to prove PSA rep

breaches, even though the defendant used those same sources in its own business. DLJBr.n.10.

Second, DLJ has always disputed Butler’s ipse dixit that his misrepresentation findings

had an MAE, including because he did not show how a borrower’s non-fraudulent

misrepresentations—which is all he is now claiming—“significantly increases the risk of loss”

on a loan. DLJBr.17. MBIA’s argument that borrower misrepresentations always have an MAE

relies heavily on MARM. MBIABr.n.26. MARM, however, distinguished between “proven

borrower deceit”—i.e., intentional misrepresentations/fraud—and “mistakes by the borrower, the

underwriter or third-parties.” 205 F. Supp.3d at 430, 475. According to MARM, only

intentional misrepresentations—which Butler testified he is not claiming (TT.379:21-381:4,

417:8-23, 420:23-421:7)—give rise to an automatic MAE finding. Non-fraudulent

misrepresentations “require a closer examination to determine whether they materially increased

the risk of loss at the date of discovery or notice of breach.” 205 F. Supp.3d at 430. Butler

performed no such examination.

circumstances after the loan”); 1231:8-18 (post-closing information only “one of the tools you would use to make that assessment”); DLJBr.39.

11 The demands MBIA cites were all made under MLPAs with Fraud Reps, which gave DLJ the protection against borrower misrepresentations that MBIA did not get here. See PX-0213.0016 and PX-2019.0030; PX-0711.0019 and PX-1075.0029; PX-0711.0033 and PX-2015.0032; PX-2021.0002 and PX-1076.0031.



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2. Butler’s Income and Debt Misrepresentation Claims Fail

DLJ’s opening brief showed MBIA’s failure to prove its borrower misrepresentation

claims. DLJBr.37-47. DLJ addressed each of the principal categories of alleged

misrepresentation: income, occupancy and debt. Id. MBIA’s brief discusses only income and

debt, and only one issue related to each category. MBIABr.53-54. MBIA’s arguments fail.

First, MBIA claims that Butler’s use of “near-year income” (for 17 breach claims) should

be credited because he only used “near-year” income when the borrower was employed by the

same employer in the same position. MBIABr.53-54. That is not true. For example, on Loan

410199208 Butler used a Post-Closing Source describing 2007 income to opine the borrower

misrepresented his income in 2006, even though the VOE obtained at origination showed the

borrower in a more senior position in 2006 (Welder Foreman) than the post-closing source

showed for 2007 (Welder). DLJBr.42-43. In any event, DLJ described numerous examples

demonstrating Butler’s findings based on income from later years do not and cannot prove an

income misrepresentation. Id.40-44. And there are more, for example:

Loan 410034795: The borrower stated an income in 2006 of $10,000/month as an

Assistant Professor at a California university, having been in that position since 2002. PX-

3395.00002. Butler found an income misrepresentation because, according to a Post-Closing

Source, the borrower’s monthly income in 2007 was $8,750. Id. Butler assumed, without

foundation, the borrower’s income could not have gone down a mere $1,250/month from 2006—

the year the borrower applied for the loan—to 2007. Butler’s assumption is particularly

misguided because the source shows the borrower’s income each year was a mix of base pay and

other pay, with both amounts changing over different years. PX-3084.0043. Butler has no basis

to opine that the borrower’s combined base and other pay in 2006 did not exceed the mix present

in 2007. Moreover, the borrower’s 2008 income as reported on the source Butler used was



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essentially the same $10,000/month as disclosed on the 2006 loan application. Id. Butler cannot

prove the 2006 mix of income was necessarily the same as, or lower, than 2007 and did not

instead look more like what the borrower reportedly earned in 2008.

Second, MBIA argues that Butler properly claimed a misrepresentation where borrowers

did not disclose they had applied for a loan which, as of the time of the loan application at issue,

had not yet been made. MBIABr.54. MBIA argues this is a misrepresentation because

(1) borrowers have a duty to disclose “significant pending debt,” and (2) DLJ allegedly

acknowledged in one putback demand and a February 2007 presentation that failure to disclose

pending debt was grounds for repurchase. Id. MBIA’s first argument fails because it presented

no evidence of a requirement for borrowers to disclose whether they had applied for, but not

actually taken out, another loan—a fact the Court focused on at trial. TT.667:12-13, 666:13-

667:7. Neither Butler nor MBIA identified any source for the borrower’s supposed duty to

disclose this information. As to the second argument, the one putback demand MBIA cites is not

factually analogous—it alleged the undisclosed debt may have “closed prior to” the loan at issue

and was made under an MLPA with a Fraud Rep (unlike the PSA). PX-0702.0005; PX-

1088.0029. The February 2007 presentation likewise refers to putback issues under DLJ’s

MLPAs with Fraud Reps. Neither document changes the dispositive issue here: borrowers could

not make misrepresentations by not disclosing information they had no obligation to disclose.

Finally, MBIA incorrectly asserts that two federal trial courts have rejected challenges to

the use of “near-year” income and “pending debt” to make a borrower misrepresentation claim.

MBIABr.54 (citing NCUA and Flagstar). MBIA overstates the decisions. NCUA stated in dicta

in denying a motion to exclude post-closing evidence that a “subsequent-year tax return might

contain evidence of income in a prior year.” Nat’l Credit Union Admin. Bd. v. UBS Sec., LLC,



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2017 WL 235013, *10 (D. Kan. Jan. 19, 2017) (emphasis added). In other words, a borrower’s

2007 tax return is only probative of the borrower’s 2006 income if the 2007 tax return contains

actual evidence of the borrower’s income in 2006. Id. That is far different from how MBIA uses

“near-year” income here. And Flagstar merely described undisclosed debt “that had closed after

the closing of the subject loan” as being among the plaintiff’s expert’s claims; it did not

otherwise discuss or endorse those claims. 920 F. Supp.2d at 510. MBIA neglects to mention

that MARM rejected income misrepresentation claims based on “near-year” income because the

expert there, like Butler here, “provide[d] no detail about the nature of the borrower’s

compensation” in the year he applied for the loan. 205 F. Supp.3d at 492-93.

MBIA’s failure of proof on its misrepresentation claims is not limited to the “near-year”

income and post-closing debt examples. On income in particular, MBIA has never addressed the

ambiguity of the “income” box on the loan application and explained exactly what set of facts

would make that information misrepresented. For example, if a borrower reasonably expected to

work 40 hours/week when applying for a loan in January 2006 but only ended up working 30

hours/week that year, has the borrower misrepresented her income because the 2006 number

ended up being below expectation? If a borrower applying for a loan in December 2006 knows

she will be receiving a raise in 2007 and bases her stated income on that information, has the

borrower misrepresented her income because her 2006 income was lower than what she stated on

the application? Butler never dealt with those questions—he wrongly assumed he can look at

incomplete information years after the fact and know whether the borrower was telling the truth.

B. MBIA’s Underwriting Claims Fail

MBIA focuses its brief on the following categories of alleged underwriting defects:

(1) missing document defects; (2) unreasonable stated incomes; (3) “ability to pay” claims;

(4) “non-complex income” defects; and (5) other assorted alleged defects. MBIABr.55-65.



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DLJ’s opening brief detailed MBIA’s failure or proof on these claims (DLJBr.49-69); we address

the arguments MBIA raised in its brief below.

1. MBIA Did Not Prove its “Missing Documents” Claims

MBIA’s 247 “missing document” claims fail for the reasons set forth in DLJ’s opening

brief: (1) Butler’s assumption—without evidence—that because a document is missing from the

loan file today, it was never obtained at origination is speculation entitled to no weight

(DLJBr.54-57); (2) in many instances (44 claims), Butler ignored evidence in the loan files

indicating the documents he claims were never obtained were, in fact, obtained at origination

(Id.52-54); (3) many of Butler’s missing document claims (63 claims) are based on allegedly

missing closing documents (HUD-1s and title and hazard insurance policies), which are not

subject to the underwriting reps (Id.57); and (4) many of Butler’s claims are based on allegedly

missing first lien HUD-1s and first lien notes (65 claims), but the loans at issue in this case are

the second liens, which have a separate loan file from the first lien (Id.57-58). MBIA’s attempt

to resuscitate these clams in its brief fail.

a. Butler Ignored Evidence that the Documents Were Obtained

MBIA attempts to defend Butler’s speculation that a document missing today was never

there to begin with by citing Butler’s additional speculation that, even where evidence in the loan

file indicated the document had been obtained—such as by the underwriter checking a box or

marking a condition as cleared—underwriters “often” checked boxes and marked conditions as

cleared even when they hadn’t been. MBIABr.58. In other words, Butler effectively says the

Court should assume the people who made these notes are liars. DLJBr.54. Butler, of course,

has no basis to make this claim, and the loan files have been admitted as business records in this

case, meaning the checked boxes and cleared conditions indicating the documents were obtained

have been admitted for their truth.



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In any event, the only alleged example MBIA offers in support of Butler’s speculation

that underwriters “all too often” “check[ed] off a document as present when it wasn’t”

(TT.316:11-14) is a single loan where Gething did not rebut Butler’s findings, which MBIA

nonetheless lost on summary judgment for lack of proof of MAE. MBIABr.58 (citing Loan

410167336). MBIA did not address the myriad loans where Gething rebutted Butler’s findings

because Butler ignored evidence right in the file indicating the document had, in fact, been

obtained at origination. DLJ provided numerous examples of such loans in its opening brief

(DLJBr.52-54), and there are many more like them. For example:

Loan 409277323. Butler alleges this loan file was missing a copy of the preliminary and

final title insurance policy. PX-3327. Butler ignored the HUD-1 settlement statement showing a

title insurance premium of $535 paid from the borrower’s funds to Chicago Title. See e.g.,PX-

5172.0289 (Loan 409933882) (HUD-1 reflected borrower paid for allegedly missing title

policy); PX-5254.0190 (Loan 410050169) (same); PX-5394.0288 (Loan 410198257) (same).

There simply is no evidence that the title company lied when it evidenced a disbursement to the

insurance company. MARM, 205 F. Supp.3d at 496 (rejecting missing title policy claim where

HUD-1 reflected fee paid for allegedly missing title policy).

Loan 410229016. The Closing Fee Sheet for this loan shows a $13.25 payment to Credit

Plus for the credit report Butler opines was not obtained. PX-5513.0268; PX-3477.0001.

Loan 410579261. While Butler alleges this loan did not have a purchase contract, the

Underwriting Conditions worksheet in the loan file reflects that the following condition was

cleared prior to final approval of the loan: “[i] Purchase/purchase agreement—fully executed

both parties.” PX-3486.0002; PX-5550.0415.



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Loan 500919249. Butler alleges this loan file was missing an “automated or manual loan

approval.” However, the Post Closing Sheet in the file had the following condition checked off:

“Loan Approval Form, 1008 Transmittal Summary or Underwriting Summary.” PX-5820.0004

See also Loan 500906749 (allegedly missing loan approval with condition for loan approval

checked off on Credit File Stacking Order). PX-3541.0002; PX-5780.0182.

b. MBIA Did Not Rebut Gething’s Testimony that Insurance Policies and HUD-1s are Closing Documents, Not Underwriting Documents

The other missing document examples MBIA mentions in its brief are two loans

discussed at trial, one of which was missing a hazard policy (PX-3042) and the other a first lien

HUD-1 (PX-3207). MBIABr.55-56. MBIA claims “[t]he primary dispute was over the

importance of having the document in the loan file” (Id.56), but ignores that Gething and Butler

agreed that hazard policies and HUD-1s are trailing documents obtained at closing, not during

underwriting. DLJBr.57. Claims based on these documents allegedly being missing therefore

fail because they are not covered by the Underwriting Guidelines or Prudent Underwriting

Practices Reps. MARM, 205 F. Supp.3d at 463-64 (no breach of rep based on missing title or

hazard policies because they were closing documents).

Unable to refute this fact, MBIA just says Butler explained at trial why having a copy of

the first lien HUD-1 and hazard policy was important. MBIABr.56. But, as DLJ explained in its

opening brief, the first and second lien loans were “piggybacks” underwritten at the same time

by the same underwriter; Butler concedes the underwriter prepared the second lien HUD-1 and

there is no reason to believe the underwriter failed to prepare the first lien HUD-1 or did not have

access to the first lien HUD-1 when underwriting the loan. DLJBr.58; see also, e.g., MARM,

205 F. Supp.3d at 515 (missing second lien note not a breach of underwriting guidelines

warranty as to first lien loan because “the underwriter had access to the second-lien documents



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because the second lien was simultaneously being underwritten by the same lender [i.e.,

piggyback loan]”).12 As for hazard policies, MBIA’s suggestion that there was no way to know

if the property was insured without the policy in the file is not credible. As the Court recognized,

MBIA could have issued subpoenas to find out if such insurance had been obtained (TT.638:20-

641:4), but MBIA deliberately chose not to (DLJBr.56).13

c. DLJ’s Repurchase Policy and Repurchase Demands Undermine, Rather than Support, MBIA’s Missing Doc Claims

MBIA argues that DLJ, in its putback policy, treated the same documents Butler claims

were missing as grounds for repurchase of a loan under its MLPAs. MBIABr.56. However,

MBIA points only to the policy’s definition of “missing documents” (PX-0756.0007), ignoring

that the policy provides that DLJ would only seek repurchase if “the missing documentation

impairs the ability to sell the asset, prevents the asset from being securitized, or prohibits

foreclosure.” PX-0756.0003. As DLJ demonstrated in its opening brief, there is no evidence

any “missing document” satisfied that standard here. DLJBr.59. Otherwise, DLJ only sends out

an advice letter, which is not a repurchase demand. Id. (citing PX-0756.0003).

MBIA also argues DLJ made repurchase demands to originators for the same types of

missing documents Butler claims were missing. MBIABr.55. However, MBIA cites only two

12 For this same reason, MBIA’s reference to DLJ’s Loan Origination Quality Control Policy (MBIABr.56), which contemplated that hazard policies and seller concessions on HUD-1s should be reviewed (PX-1878.0006-07), is irrelevant because there is no evidence the underwriters of the loans at issue did not have access to the first lien HUD-1, and there is ample evidence that the allegedly missing hazard policies were, in fact, obtained.

13 MBIA argues its decision to look the other way, rather than find out if the documents it claims were missing had been obtained at origination, is excusable because DLJ should have investigated that issue since it has an obligation to “cure” a defect under the PSA. MBIABr.56 n.34. DLJ is not the one that has brought a claim for breach of the PSA. MBIA has the burden to prove the documents it claims were missing were, in fact, missing. It is not DLJ’s obligation, under the contract or otherwise, to assist MBIA in its effort to prove a claim.



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examples, the first of which is a loan that Gething did not rebut—a loan as to which MBIA failed

to show MAE at summary judgment or at trial. PX-0704.002. The second loan was not even

securitized in HEMT 2007-2 and, in any event, MBIA misleadingly suggests the putback

demand was based solely “on [a] missing hazard insurance policy” (MBIABr.56) when, in fact,

it was based on borrower misrepresentations of debt and occupancy, property value not

supported by the appraisal, missing all income documents and verification of assets to close and

reserves, missing hazard insurance, missing flood disclosure and insurance, missing VOR and

VVOE, and a missing Truth-in-Lending form (PX-0569.0006-07). Two isolated repurchase

demands do not prove Butler’s missing document claims are legitimate breaches, much less that

they had an MAE.

d. MBIA’s Other Attempts to Prop Up Butler’s Missing Document Claims Fall Flat

MBIA argues Gething contradicted his testimony that missing documents are never

material on cross-examination. MBIABr.57. That is not correct. Gething said the documents

Butler claims were missing were not material (TT.1289:14-24) because they are “peripheral”

documents, not “enforceability documents” that are needed to “enforce your remedies under the

note” or foreclose (TT.1289:23-1291:7)—completely consistent with DLJ’s policy. And there is

no evidence anyone was prevented from foreclosing on any of the mortgages due to any of the

missing documents claimed by Butler. DLJBr.59.

MBIA also argues that Cindy Baird, DLJ’s former Vice President of Credit Policy,

corroborated Butler’s testimony that “prudent underwriting requires documents to be maintained

in the loan file.” MBIABr.57. That, too, is misleading. What Baird actually said is that, in her

view, it is “a prudent practice” to retain documents relied upon by the underwriter, not a required

practice, and other procedures might also constitute prudent underwriting. Baird Dep.



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Tr.243:24-244:8; 347:11-350:4. In any event, MBIA’s argument, in the end, is circular. That a

document is not in the file today does not prove the document was not obtained at origination.

2. MBIA Did Not Prove its “Unreasonable Stated Income” Claims

DLJ demonstrated that MBIA’s 58 claims of “unreasonable stated incomes” fail because

(1) all Butler did is substitute his own subjective judgment as a plaintiffs’ litigation expert for

that of origination underwriters and due diligence professionals; (2) Butler’s claim that

underwriters violated guidelines and/or prudent practices because they did not document their

reasonableness assessments in writing is unsupported by the guidelines and contrary to industry

custom and practice; and (3) there is no basis for Butler to treat every income over the 90th

percentile in BLS data as “unreasonable.” DLJBr.59-66.

a. Gething Did Not Agree With Butler’s Findings

MBIA argues Gething agreed, and DLJ’s own policies and putbacks confirmed, that

underwriters were required to determine whether a borrower’s stated income was reasonable

(MBIABr.59), but DLJ has never contested that (DLJBr.64). The issue is whether underwriters

were required to document their reasonableness assessment in writing, as Butler incorrectly

claims. MBIA did not point to a single underwriting guideline requiring such documentation

and, as Gething explained, it was neither required nor customary in the industry to do so.

DLJBr.64. MBIA also asserts that Gething agreed with 50% of Butler’s unreasonable stated

income findings (MBIABr.59), but that is not true. While Gething did not rebut 29 of Butler’s

58 unreasonable stated income findings, Gething explained his non-rebuttal was not agreement;

rather, it was a statement that the file today does not allow him to reach a conclusion on Butler’s

claim. DLJBr.63.



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b. Butler’s Use of BLS Data Does Not Establish Unreasonable Incomes

Butler conceded he has no idea if the BLS information he consulted in this case was in

any way similar to the third-party salary sources underwriters may have consulted (but were not

required to use) during the relevant period. TT.552:25-553:14. Absent that missing link, he has

no foundation to opine that information in BLS could affect whether an underwriter would have

found a stated income to be “reasonable” at origination. DLJBr.64; see also MARM, 205 F.

Supp.3d at 458 (in evaluating unreasonable stated income claims, “the focus of the inquiry

remains on what the underwriter did or did not do based upon the facts before him or her at the

time of origination”). MBIA suggests Butler’s use of BLS matched what was typical in the

industry and even endorsed by DLJ. MBIABr.60. That is untrue.

First, Gething did not admit, as MBIA argues, that BLS was used by underwriters in 2006

and 2007 (MBIABr.60)—Gething said when he was at Goldman he was aware BLS was “out

there” and available (TT.1145:24-1146:5), but that underwriters did not use BLS, including

because “it was not intended for re-verification of any income” (TT.1145:3-5). See also

TT.1144:23-1145:1 (underwriters did not consult BLS in industry practice at the time and were

not required to). Similarly, MBIA claims Sacco admitted Citibank used BLS data to check

income, but what Sacco actually said was that he did not know what BLS was and was simply

reading, at counsel’s request, an email from Citibank’s due diligence group referring to BLS.

TT.1020:23-1021:12. Likewise, MBIA claims Baird admitted DLJ used BLS to check stated

incomes (MBIABr.60), but MBIA ignores Baird’s testimony that DLJ primarily used

cbsalary.com and salary.com (Baird Dep. Tr.290:21-291:8), neither of which is a proxy for BLS.

Second, MBIA claims DLJ endorsed Butler’s methodology because a January 2007

presentation says to “[u]se websites like Salary.com or Monster.com” to check stated income.



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(PX-0399.0006). Neither MBIA nor Butler has any basis to say “BLS data is obtained from a

website ‘like’ Salary.com.” MBIABr.60. As Gething and Card testified, BLS and salary.com

are completely different and often produce markedly different results—salary.com considers

bonuses and overtime (whereas BLS does not) and provides much more granular data matching

job title and geographic location than BLS, which is why the Lehman court rejected income-

related defects that relied on BLS data. DLJBr.65-66. Moreover, Butler admitted he has no idea

if BLS reported similar information to salary.com. Id.65. Butler had no evidentiary basis to use

BLS data as a proxy for anything, and MBIA’s assertion that BLS is “like” salary.com has no

evidentiary support.

The loan examples discussed in DLJ’s opening brief demonstrate the flaws in Butler’s

methodology for finding incomes unreasonable. DLJBr.61-63. Additional examples include:

Loan 410198003: The borrower stated employment as a Teacher for the New York City

Department of Education for 16 years, with income in 2006 of $9,000/month. PX-3129.0003.

Butler decided this income was unreasonable because, according to BLS, a teacher working in

the “New York-Northern New Jersey-Long Island, New York, New Jersey, Pennsylvania area

earning in the 90th percentile would earn … $5,181.67 per month.” Id. BLS does not account

for tenure in the job, nor did Butler, and he offered no explanation for why it would have been

unreasonable for a teacher, working in New York City with the same employer for nearly twenty

years, to be earning more than 90% of teachers in a broad geographic region including Long

Island, New Jersey and Pennsylvania.

Loan 410051174: The borrower stated employment as a “Driver” for a medical

transportation company in Naples, Florida, for the past two years and eleven months, with a

stated income of $4,750/month. PX-3407.0006-7. Butler contends that this income is



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unreasonable because, according to BLS data, a “Driver/Sales Worker” in the Naples-Marco

Island, Florida area earning in the 90th percentile would have earned $3,754.17/month, but the

borrower was a driver for a medical transport provider, not a “Sales Worker.” Id. The BLS data

also does not factor the size of the borrower’s employer or tenure on the job, which Gething

considered, along with the borrower’s savings and housing payment history, in determining that

the stated income was reasonable.

Loan 410199913: The borrower stated employment as an Account Executive with

Siemens, a large multinational company, with income of $10,000/month. PX-3461.0003-4.

Butler claims this income was unreasonable because the borrower had only been at Siemens for

four months, had been employed by three other companies in the prior year and, in Butler’s

opinion, didn’t have enough cash reserves or a high enough credit limit. Id. However, the

borrower’s income at his previous employer was $8,000/month and it is entirely plausible the

borrower left his prior employer for a large multinational conglomerate for more money.

Critically, Butler does not opine it is unreasonable for an account executive at Siemens to earn

$10,000.

3. MBIA Did Not Prove its “Non-Complex Income” Claims

DLJ’s guidelines, on their face, permitted stated income loans to W-2 wage earners,

which Sacco confirmed at trial. DLJBr.51; see also TT.949:11-17, 1059:24-1060:1. MBIA

offered no evidence to rebut Sacco’s testimony. Instead, MBIA argues Sacco admitted a W-2

wage earner could theoretically still have complex income and DLJ’s guidelines did not contain

an exhaustive list of all types of borrowers who could not receive a stated income loan.

MBIABr.63. This argument makes no sense. DLJ’s guidelines permitted stated income loans to

W-2 wage earners, regardless of whether such wage earners could or could not have

supplemental complex income.



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MBIA also argues that Sacco did not explain how making a stated income loan to a W-2

wage earner, even if permitted by the guidelines, was nonetheless prudent (MBIABr.62-63), but

as Sacco testified, “[i]t was a standard industry program to allow those” loans to be made at the

time (TT.1054:16-17). Moreover, Butler admitted at trial (1) it is not imprudent to make a stated

income loan to a W-2 wage earner if permitted by applicable guidelines (TT.511:2-6); and (2) his

claims on these 57 loans are based solely on DLJ’s underwriting guidelines, which he admits

were prudent (TT.469:19-470:2). Thus, if DLJ’s guidelines permitted stated income loans to W-

2 wage earners (they did), there could not possibly have been a breach of the Underwriting

Guidelines or Prudent Underwriting Practices Reps.

4. MBIA Did Not Prove its “Ability to Pay” Claims

MBIA claims twelve “no ratio” loans breached the Prudent Underwriting Practices Rep

because the loans were made to borrowers whom Butler, in his subjective judgment, deemed

unlikely to be able to repay. MBIABr.61. The guidelines for a “no ratio” loan expressly provide

that the loan will be originated without any income information or calculation of DTI. DX-

0102.0021. Ignoring what the guidelines say, for these claims Butler calculated an assumed

income necessary to support a 50% DTI, even though the guidelines did not permit assessing

reasonableness of a “hypothetical” income number that would support a “hypothetical” 50%

DTI. Instead, no ratio loans were underwritten based exclusively on the borrower’s credit score,

verified deposits and the property value. DX-0102.0021.

Butler testified he was not opining that any guidelines were imprudent. TT.470:1-2 (“I’m

not claiming that the guidelines were wrong or imprudent in any way.”). In other words, as

applied to these loans, it was not imprudent for originators to do precisely what the guidelines

state—assess the loan based solely on the credit score, verified deposits and property value,

without consideration of income. Far from ignoring the allegations, Gething followed the



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standard Butler claimed to apply—he looked to whether the loans were originated consistent

with the guidelines (they were), none of which were alleged to be imprudent. Thus, because

these twelve “no ratio” loans were approved in accordance with the applicable guidelines—a fact

MBIA does not dispute—by Butler’s own admission, these loans could not breach the Prudent

Underwriting Practices Rep.

5. MBIA Did Not Prove its “Other Underwriting Defect” Claims

MBIA argues that 74 loans have underwriting defects that do not fall into the categories

discussed above, and that because DLJ did not cross-examine Butler on these “other” types of

alleged underwriting defects, the Court should automatically credit Butler’s findings.

MBIABr.64-65. This is effectively asking the Court to waive MBIA’s obligation to meet its

burden of proof on these claims. Of course, had DLJ gone loan-by-loan at trial, the trial likely

still would be going on. Gething’s loan-level appendices, which are in evidence (DX-0108),

responds to each loan. DLJ showed examples in its opening brief of why these claims fail.

Moreover, DLJ demonstrated that Butler’s flawed process and lack of experience with the loans

at issue equally infects his other underwriting defect claims outside of the main categories

discussed above, and requires a loan-by-loan review of the individualized issues Butler raises.

DLJBr.69-70. The example in MBIA’s brief illustrates Butler’s problems:

Loan 410228845: Butler claimed a “guideline violation” and “imprudent underwriting”

violation because it was a non-arms-length transaction and the underwriter allegedly failed to

send the loan “to the attention of the settlement site’s underwriting manager,” which Butler

claims DLJ’s guidelines required. MBIA Br.65; see also PX-3476.0006. As an initial matter,

Butler used the wrong guidelines. This loan was originated to Taylor Bean & Whitaker’s

guidelines, not DLJ’s, and Gething rebutted Butler’s finding of a “guideline violation” because

Butler applied the wrong guidelines. PX-3476.0006. This is not a mere “quibble,” as MBIA



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contends. MBIABr.64. This Court already barred MBIA from using DLJ’s guidelines to prove a

guideline breach when the loan was not originated to DLJ’s guidelines. Doc. 1706 at 27:14-17.

In any event, Butler concedes non-arms-length transactions are not prohibited by the

guidelines and are not categorically imprudent. DLJBr.70. Whether and how such transactions

are permitted is dictated by the applicable guidelines. Butler complains he didn’t see written

evidence “in the loan file that the loan was sent to the settlement site’s underwriting manager”

(PX-3476.0006), but he cannot point to any guideline or industry standard of “prudence” that

requires an underwriter to document he or she sent the file to the underwriting manager.14

V. NEITHER THE LAW NOR THE FACTS SUPPORT MBIA’S ATTEMPT TO AVOID THE LOAN-SPECIFIC WRITTEN NOTICE OR DISCOVERY ELEMENT OF THE REPURCHASE PROTOCOL

MBIA’s attempts to avoid its burden under the Repurchase Protocol to prove either that it

gave DLJ loan-specific written notice of defects or that DLJ itself, on a loan-specific basis,

discovered such breaches, are baseless.

A. DLJ Received Notice Only On 9,629 Loans

There is no legitimate dispute that (i) Section 2.03 requires MBIA to provide “written

notice” to DLJ of each allegedly breaching loan and (ii) MBIA gave written notice of alleged

breaches with respect to 9,629 loans. JX-0001.0087; JX-0456.0024. Now, relying on

misrepresented case law and misleading characterizations of its complaint and Butler’s expert

14 MBIA also argues Butler found an “Employment Discrepancy defect” on this loan because he did not see a written explanation in the loan file addressing a discrepancy regarding the borrower’s length of employment. MBIABr.64-65. As Gething explained, however, the fact that the document Butler wanted to see for purposes of his litigation assignment was missing from the file nearly a decade after the loan was originated does not mean it was never there, nor does it mean the underwriter did not orally obtain information resolving the discrepancy to his or her satisfaction (PX-3476.0009).



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reports, MBIA asks this Court to deem that MBIA provided written notice for every breaching

loan in HEMT 2007-2. MBIABr.68, 70-71. The arguments are baseless.

MBIA purports to ground its notice argument in recent First Department decisions

addressing the relation-back doctrine, but ignores what those decisions actually hold. Each of

those cases applied relation-back to permit the plaintiff to proceed on specifically identified

loans in untimely breach notices. Home Equity Mortg. Tr. Series 2006-1 v. DLJ Mortg. Capital,

Inc. (“HEMT II”), 175 A.D.3d 1175, 1176 (1st Dep’t 2019) (“timely complaints that identified

certain breaching loans may be amended to add the claims at issue”); U.S. Bank Nat’l Assoc. v.

DLJ Mortg. Capital, Inc. (“HEAT”), 2019 WL 5073847, *1 (1st Dep’t Oct. 10, 2019)

(“subsequently identified loans…related back to the time of the initial notice”). Here, MBIA is

seeking far more: it wants a ruling that timely repurchase demands should be treated as providing

sufficient notice for every loan in the trust. But that is precisely the sort of “pervasive breach”

allegation the Court of Appeals has treated as insufficient to afford a “carve-out” from a loan-

specific sole remedy provision. Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC

Bank USA, Nat’l Ass’n v. Nomura Credit & Capital, Inc. (“Nomura II”), 30 N.Y.3d 572, 581-83,

585 (2017).

As Justice Scarpulla recently held, “[i]n Nomura, the First Department did not dispense

with the requirement of loan by loan notice….The [Nomura] court found that where a party

provided timely loan by loan pre-suit notice of the nonconforming loans, together with notice

that further investigation was being conducted into additional potentially defective loans, that

party could later, after commencement of the action, provide loan by loan notice of additional

breaches revealed, because they would relate back” to the original notice for purposes of the

statute of limitations. HEMT I, 2019 WL 138634 at *4, aff’d, HEMT II. There are no



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specifically noticed loans in this case beyond those in MBIA’s demands and Butler’s expert

reports. Those are the only loans eligible for relation back under First Department law.

MBIA claims it may proceed as to all breaching loans because its amended complaint

demanded repurchase of all breaching loans and because Butler alleged a 77.3% breach rate. But

neither satisfies the requirement to specifically identify an allegedly breaching loan. The

complaint makes no attempt to provide the loan-specific notice required by the Repurchase

Protocol. Doc. 391 at 86-87. Similarly, Butler’s reports identified only 309 specifically

breaching loans, and cannot provide “loan by loan notice of additional breaches” for loans Butler

never reviewed. See HEMT I, 2019 WL 138634, at *4 (“plaintiffs may proceed to trial on any

loan breach that was . . . identified in the expert reports….”) (emphasis added).

MBIA’s suggestion that the “sheer volume” of its repurchase demands and Butler’s high

breach rate indicated to DLJ that there “were likely” many other breaching loans is a tacit

admission that DLJ did not receive additional notice. MBIABr.70. The HEAT, HEMT, and

Nomura decisions defeat this argument. Not only do the cases not say initial notices or high

alleged breach rates dispense with the loan-specific written notice requirement, they hold to the

contrary: any subsequent notice for relation back purposes must “provide loan by loan notice of

additional breaches revealed.” HEMT I, 2019 WL 138634, at *4, aff’d HEMT II, 175 A.D.3d at

1176; HEAT 2019 WL 5073847 at *1 (“subsequently identified loans” relate back to the initial

notice) (emphasis added); Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit

& Capital, Inc., 133 A.D.3d 96, 108 (1st Dep’t 2015) (“Nomura I”), aff’d as modified sub nom.

Nomura II (same). HEMT II, in particular, did not say that “repurchase demands reflecting

‘massive scale’ of defective loans and breach rates between 65% and 72%” excused the plaintiff

from providing additional notice, as MBIA contends. MBIABr.70-71. Instead, the HEMT II



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court merely held those demands provided sufficient notice to allow subsequent untimely notices

“that identified certain breaching loans” to relate back. HEMT II, 175 A.D.3d at 1176 (emphasis

added).

B. MBIA’s Attempts to Evade Its Burden to Prove Loan-Specific Discovery Are Precluded by the Repurchase Protocol and New York Law, and MBIA Failed To Prove DLJ Discovered Breaches in any Event

There can be no legitimate dispute that under the Repurchase Protocol, in order for

MBIA to recover on any allegedly breaching loans beyond those for which it gave written notice,

MBIA needed to prove DLJ itself discovered “such breach” and that the breach had an MAE on

MBIA’s interests in that loan. In HEMT I, Justice Scarpulla noted the First Department in

Nomura denied a pleading-stage motion based on allegations that “defendant already knew,

based on its own due diligence, that certain loans…breached its representations and warranties.”

HEMT I, 2019 WL 138634 at *4 (quoting Nomura I). At summary judgment, Justice Scarpulla

found an issue of fact as to whether “DLJ discovered a breach pursuant to Section 2.03(g) of the

PSAs,” and ruled that the “[p]laintiffs [will] have the opportunity at trial to establish that, based

upon DLJ’s own due diligence or quality control, it discovered the loan breaches.” Id. (emphasis

added).15 The cases place the burden on MBIA to prove DLJ discovered specific breaches in

specific loans.16

15 Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2019 WL 4418885 (1st Dep’t Sept. 17, 2019) does not lead to a different conclusion. The court stated in dictum that a repurchase protocol was “triggered with respect to any loans for which…[the seller] knew or should have known of the breaches.” Id. at * 2 (emphasis added). But the standard for discovery was not at issue in that appeal. Regardless, given the loan-specific discovery required in the repurchase protocol, the decision’s reference to “the breaches” can only mean to reiterate that loan-specific discovery of specific “breaches” is required.

16 DLJBr.71-74 (citing additional cases requiring proof of loan-specific discovery).



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MBIA argues DLJ “independently discovered” breaching loans when it reviewed its

vendors’ pre-acquisition due diligence reports and conducted quality control (“QC”) reviews, but

did not identify any Transaction loan outside of the noticed loan population as to which DLJ

actually discovered a breach.

1. MBIA’s “Independent Discovery” Theory Merely Repackages Its “Constructive Notice” and “Pervasive Breach” Theories

At the pre-trial conference, MBIA told the Court that it would present theories of

“constructive notice” and “pervasive breach” at trial, but in its pre-trial brief MBIA replaced

those terms with “willful blindness.” Now MBIA rebrands the theories as “independent

discovery.” MBIABr. 71-74. Relying on inadmissible or irrelevant evidence, MBIA argues DLJ

discovered breaches in loans that were not included in HEMT 2007-2. At bottom, MBIA is

merely repackaging the theories of “constructive notice” and “pervasive breach” New York

courts have held cannot be used to avoid a PSA’s repurchase protocol.

The Court of Appeals in Nomura II held evidence of “pervasive” or “systemic” breach

cannot be used to avoid the elements of proof in a repurchase protocol. Nomura II, 30 N.Y.3d at

585. In finding that an RMBS trustee’s “constructive knowledge argument is little more than a

reformulation of their ‘pervasive breach’ theory,” the court in MARM explained these theories

are inconsistent with the PSA’s sole remedy. MARM, 205 F. Supp. 3d at 424-25. The trustee

plaintiffs in MARM , like MBIA, contended the defendant “knew or should have known about

widespread breaches in the pools” at issue based on samples drawn from the loans and due

diligence reports. Id. at 424. The plaintiffs argued the defendant could have conducted broader

reviews to identify specific breaches requiring repurchase, which the court recognized is an

argument that “turns on what the plaintiffs believe UBS would have learned if it had adopted a

different diligence protocol.” Id. The problem, as the court held, was that “the PSAs provide for



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‘sole remedies’ that apply to breaches on an individualized loan-by-loan basis. … The Trusts’

‘constructive knowledge’ theory would create a broader obligation for UBS than the one

negotiated by the parties.” Id. (citation omitted). Under the guise of alleged “independent

discovery,” MBIA is attempting to obtain that same improper result—avoiding the sole remedy

in the PSA.

MBIA cites several cases for the proposition that, because DLJ had access to due

diligence results and loan files it “could use” to perform additional loan reviews, it should be

deemed to have knowledge of all allegedly breaching Transaction loans. MBIABr.71-72. But

that is not what the cases hold. MBIA repeatedly mischaracterizes the courts’ descriptions of

what the plaintiffs allege or argue as a holding of what evidence will actually prove discovery.

For example, MBIA recites the following (incomplete) quote from Deutsche Bank Nat’l Tr. Co.

v. Morgan Stanley Mortg. Capital Holdings, LLC. (“DBNTC”), 289 F. Supp. 3d 484, 507

(S.D.N.Y. 2018): “[B]y virtue of [defendant’s] due diligence, it had knowledge of each and

every [Trust] loan that contained a material breach.” MBIABr.71. The quote excerpted by

MBIA was from the Court’s recitation of the plaintiff’s argument, not its holding. See DBNTC,

289 F. Supp. 3d at 507 (“The import of [plaintiff’s] allegation is that, by virtue of [defendant’s]

due diligence….”) (emphasis added).17 The other cases MBIA cites do not speak to whether

17 Other cases MBIA cites are pleading cases that have nothing to do with MBIA’s burden at trial. ACE Sec. Corp. Home Equity Loan Tr., Series 2007-HE3 v. DB Structured Prods, Inc., for example, merely held that “[b]y alleging that DBSP conducted due diligence on loan pools that suffered from obvious and widespread breaches, Plaintiff has adequately alleged that DBSP discovered those breaches.” 5 F. Supp. 3d 543, 559 (S.D.N.Y. 2014) (emphasis added). The Court further held that plaintiff’s general discovery theory “does not relieve Plaintiff of its burden of proving loan-by-loan breaches at later stages of litigation.” Id. at 560 (emphasis added). See also U.S. Bank v. GreenPoint Mortg. Funding, Inc., 147 A.D.3d 79, 85-86 (1st Dep’t 2016) (addressing discovery allegations on a motion to dismiss).



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MBIA could avoid its burden to prove loan-specific discovery, much less whether it actually did

so (it didn’t).18

2. MBIA Failed Its Burden to Prove DLJ Discovered Material Breaches in Specific Transaction Loans

Given (i) MBIA’s burden under the Repurchase Protocol to prove DLJ itself discovered,

in specific non-noticed transaction loans, material breaches that had an MAE on MBIA’s

interests in those loans and (ii) the proclamation in MBIA’s brief that it did in fact prove that

DLJ “independently discovered” numerous such breaches, one would think MBIA would have

identified those loans individually and cited to evidence of DLJ’s discovery of the alleged

breaches in each one. But MBIA has no such list because it proved no such thing.

MBIA highlights that DLJ put back loans to originators pursuant to its MLPAs, claiming

the MLPA reps were “nearly identical” to the reps in the PSA here. MBIABr.73. As the

evidence showed, however, the two sets of agreements were anything but identical. First and

foremost, DLJ’s MLPAs with originators contained Fraud Reps. DLJ thus had an express

contractual right to put loans back to originators in situations where DLJ felt it was warranted

due to borrower misrepresentation, but those instances were not breaches of the PSA reps. JX-

0001; DX-1487.0003; JX-0010. Another material difference between these contracts is that loan

sellers provided DLJ with protection against EPDs in the MLPAs, whereas DLJ did not extend

18 MBIA relies on narrow holdings applicable only to defendants that were the sole originator of all loans at issue. See Law Debenture Tr. Co. of N.Y. v. WMC Mortg., LLC, 2017 WL 3401254, at *12-14 (D. Conn. Aug. 8, 2017) (distinguishing allegations that sole-originator defendant “knew all about” breaching loans it originated from allegations against a sponsor defendant, like DLJ, in MARM that “did not participate in creating…and had no direct knowledge of” breaches); Assured Guar. Mun. Corp v. DB Structured Prods., Inc., 2014 WL 3282310, at *6 (Sup. Ct. N.Y. Cty. July 3, 2014) (finding plaintiff’s discovery allegations “especially warranted…because there was only one originator”). DLJ was not the sole originator of HEMT 2007-2 and MBIA has put forth no evidence of a “material uniformity” of the loans therein.



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that protection to MBIA in the PSA. The overwhelming majority of HEMT 2007-2 loans DLJ

put back to originators were for EPD violations. PX-9032. DLJ’s right to put back a loan under

an MLPA for EPD has no bearing on whether that same loan breached different representations

in the PSA, and therefore is not relevant to discovery of such breaches.

DLJ’s QC results do not prove DLJ independently discovered material breaches in non-

noticed Transaction loans. Typical of the industry, DLJ’s QC was not designed to identify and

remedy loan defects but to provide information to be used to enhance DLJ’s loan-acquisition

processes in the future. TT.954:3-13. Moreover, MBIA did not demonstrate that DLJ

considered a loan marked as “critical” in QC to breach applicable guidelines. In this vein and

demonstrating the limited QC function, DLJ used its own guidelines as a benchmark to evaluate

operations, even when the loan was underwritten to seller guidelines, so a “critical” finding did

not mean the loan did not meet the origination guidelines. PX-0590.0009. Moreover, a

“critical” QC finding from a vendor did not mean DLJ agreed with the finding. Hill Dep.

Tr.80:22-81:2. DLJ frequently sent QC findings back to the fulfillment centers for further

review, and often the issue was resolved or rebutted. DX-0854.0001.19

The inclusion of loans in HEMT 2007-2 that other banks (Citi and Chase) declined to

purchase in proposed unrelated whole-loan trades is irrelevant to whether those loans complied

with PSA Reps. MBIABr.20-21, 73. There is no evidence anyone re-underwrote each of those

loans to see if they breached the PSA reps. DX-1482.0107, .0109-110. And, MBIA does not

19 Beyond these flaws, MBIA’s urging that DLJ should have extrapolated QC findings for 1,656 loans to the entire HEMT 2007-2 pool (MBIABr.72) is precisely the pervasive breach theory that cannot be used to prove discovery. See MARM, 205 F. Supp. 3d at 424-25 (plaintiff’s allegation that UBS “knew or should have known about widespread breaches in the pools based on … higher-than-average levels of risk identified in samples drawn from the loans” could not be used as evidence to prove knowledge of breached warranties).



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identify the guidelines Citi and Chase used in making their purchase decisions, whether any trade

stipulations applied, or any other specifics surrounding the proposed trades. Id. Notably, all

loans declined in the February 2007 Chase trade and many declined in the April 2007 Citi trade

were based on post-origination drops in borrower FICO scores. Id.0109-110. MBIA had no

protection against that occurrence in the PSA, and as Grice explained, post-origination FICO

declines are typical after borrowers apply for credit and not reflective of rep breaches. Id. There

is also no evidence whether Citi or Chase intended to securitize the loans on a shelf with tighter

FICO, CLTV, documentation or other standards than HEMT. Absent any context, Citi and

Chase declining to purchase these loans does not prove DLJ discovered the loans met all

elements necessary for repurchase under the PSA. See id.

MBIA also claims DLJ was aware of “high critical defect rates” for certain sellers, but

tellingly does not define what a “high” defect rate is. MBIABr.74. As Grice explained, there is

no industry standard ‘unacceptably high defect rate’ that, if triggered, calls into question a

seller’s underwriting practices or requires suspension or termination of a seller. See DX-

1482.0046-47. Furthermore, as noted, QC was intended to provide high-level information

regarding sellers, in order for DLJ to identify post-purchase collateral trends. Id.0047. It was

not, as MBIA suggests, designed to provide in-depth analysis on the adherence of seller

underwriting practices to applicable guidelines.

Similarly, MBIA looks to entries in DLJ’s PBS database labeling certain loans as

“ineligible” or “does not meet guidelines,” as evidence DLJ “discovered … approximately thirty

percent of loans in HEMT 2007-2 were breaching.” MBIABr.72. But MBIA provides no

admissible evidence of the meaning of these terms, or establishing that either of these entries

represents a breach of HEMT 2007-2 PSA reps. To the contrary, “does not meet guidelines”



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indicated the loan did not appear to comply with the guidelines used for the QC review (PX-

0020.0051), which, as noted, were not necessarily the origination guidelines. MBIA did not

prove these notations reflect a material breach of a PSA rep, much less one that has an MAE.

Finally, much of the evidence that MBIA refers to relates to loans that were not in HEMT

2007-2. Purported evidence of alleged issues with other loans securitized in other DLJ RMBS

(or not securitized at all) cannot eliminate the PSA’s requirement that DLJ “discover” a specific

breach in a particular loan in this Transaction for MBIA to be entitled to relief. JX-0001.0087.

C. MBIA’s Willful Blindness Theory Is Misplaced as a Matter of Law and Was Not Proved In Any Event

MBIA argues DLJ was “willfully blind” to breaches of the PSA reps. MBIABr.74-75.

But again, even if MBIA had proved willful blindness (it didn’t), it bore the burden at trial to

identify which non-noticed Transaction loans it claims fall within the scope of its “willful

blindness” theory. See MARM, 205 F. Supp. 3d at 425 (“The parties could have, but did not,

bargain for additional remedies or a notice provision that did not turn on loan-specific

knowledge.”). Indeed, in setting out the statement of law on willful blindness, MBIA

acknowledges its burden was to prove that DLJ intentionally sought to avoid confirming

“additional breaches and thus was willfully blind to those breaches.” MBIABr.74-75 (emphasis

added). But at trial, MBIA did not identify any of “those breaches.” The lack of any proof of

“the breaches” ends the inquiry.

Regardless, rather than support a theory of “willful blindness,” the two circumstances

MBIA points to illustrate why the theory fails. MBIA first claims three email threads

demonstrate DLJ changed its QC procedures to avoid discovering breaching loans. MBIABr.75.

But while possible changes to QC were the subject of those emails, they give no indication, and

there was no evidence at trial, that any such changes were ever actually implemented. The



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evidence was to the contrary. Sacco testified the person who raised the discussion, Sack, had no

authority over DLJ’s QC. TT.1065:10-12. Finally, the emails make no reference to any specific

securitization, much less HEMT 2007-2, and no reference to any specific loans, much less to any

allegedly breaching non-noticed Transaction loans. The emails thus fail to support MBIA’s

claim that DLJ was “willfully blind” to breaches of the PSA reps.

MBIA also argues that when DLJ put loans back to originators due to EPDs, because

EPDs were understood to be a “red flag for potential borrower fraud, or defective underwriting,”

DLJ should have investigated these EPD loans to see what, if any, breaches of reps might exist.

MBIABr.75. But even if the theory were accepted, it was MBIA’s burden to offer admissible

evidence of the specific loans that were put back for EPDs, and to link the “red flags” in these

loans to Butler’s breach allegations. This loan-specific evidence is essential to show discovery

because EPDs are frequently caused by other issues or events different from the rep breaches

alleged here, such as loss of employment, or transfers from one loan servicer to another servicer,

resulting in borrowers sending payments to the wrong place or not knowing where to send it at

all. DX-1482.0121-0122; Salomon Dep. Tr.171:16-172:21, 172:24-173:21. Absent evidence of

specific EPD put-backs for specific loans, MBIA has not proved “willful blindness.”

MBIA’s focus on EPDs as a red flag for fraud rings especially hollow because Butler

testified at trial that none of his breach claims are based on borrower fraud. TT.379:21-381:5;

420:23-421:7. Any argument that DLJ was “willfully blind” to potential fraud is irrelevant

because MBIA is not pressing fraud as a breach claim and DLJ did not make a Fraud Rep to

MBIA.



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D. MBIA’s Gross Negligence Theory is Inapplicable As Matter Of Law And Would Fail For Lack of Causation In Any Event

MBIA argues it proved facts sufficient to meet the elements of the tort of gross

negligence, and the remedy it seeks is to “void the sole remedy provision” of the Repurchase

Protocol in the PSA. MBIABr.75-77. The argument is fundamentally flawed.

MBIA has two remaining causes of action, one alleging breach of the PSA and one

alleging breach of the Insurance Agreement. Its newfound negligence theory fails because

“claims based on negligent or grossly negligent performance of a contract are not cognizable.”

City of New York v. 611 W. 152nd St., Inc., 273 A.D.2d 125, 126 (1st Dep’t 2000) (emphasis

added). “[A]bsent the allegation of a duty owed by defendant independent of the contract…a

valid cause of action for negligence is not stated….Moreover…there is no cause of action for

‘negligent performance of [a] contract.’” Wapnick v. Seven Park Ave. Corp., 240 A.D.2d 245,

247 (1st Dep’t 1997) (internal citations omitted). MBIA makes no claim here that DLJ owed it a

duty independent of the contracts because there is none, and the negligence theory fails for that

reason alone.

While it is correct that courts in some RMBS cases have permitted allegations of gross

negligence to survive dismissal motions, the reason was that those plaintiffs claimed the sole

remedy provisions in those contracts insulated the defendants from liability and limited damages

to nominal sums.20 But MBIA here does not make that allegation or argument, nor could it. It is

the law of this case under the PSA’s sole remedy, MBIA would have been entitled to repurchase

20 See Morgan Stanley Mtge. Loan Trust 2006-13 ARX v. Morgan Stanley Mtge. Capital Holdings, LLC, 143 A.D.3d 1, 9 (1st Dep’t 2016) (“[t]he issue of whether the sole remedies clauses in these contracts will make the [plaintiff] whole [could not] be ascertained at [the pleading] stage of the litigation”); In re Part 60 Put-Back Litigation, 169 A.D.3d 217, 225 (1st Dep’t 2019) (“at this stage of the case, the actual effect of the sole remedy clause in making the investors whole cannot be ascertained”).



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damages if it had proved all three elements of the Repurchase Protocol for each allegedly

breaching loan. SJO at 3. There also is no dispute that MBIA’s alleged harm here flows solely

from the alleged existence in the Transaction of non-conforming loans. Because the sole remedy

in the PSA—if MBIA had proved its alleged breaches of loan-level reps under the PSA—could

have made MBIA whole, the cases recognizing a “gross negligence” exception are inapplicable.

Regardless, the critical legal question MBIA ignores is this: assuming arguendo that its

gross negligence allegations could void the sole remedy of the Repurchase Protocol, where

would that leave MBIA? The answer is MBIA would be left asserting a common law claim for

breach of the PSA, including causation and damages. Harris v. Seward Park Housing Corp., 79

A.D.3d. 425, 426 (1st Dep’t 2010) (“The elements of [a breach of contract] claim include the

existence of a contract, the plaintiff’s performance thereunder, the defendant’s breach thereof,

and resulting damages.”) (emphasis added). From the outset of this action MBIA has steadfastly

held it “need not show that breaches caused defaults” (MBIABr.41), and at trial MBIA relied

entirely on Butler’s subjective opinion to prove that loan defects “significantly increased its risk

of loss.” That “significant increased risk of loss standard” derives from the very Repurchase

Protocol MBIA argues no longer applies. It is not available to supply the element of causation of

injury under a tort theory. MBIA disclaimed any obligation at trial to prove Butler’s alleged

breaches caused the loan defaults and resulting injury for a tort, and made no effort to do so. Id.

42. As a result, if MBIA were somehow able to void the Repurchase Protocol (it can’t), its entire

claim would fail for lack of causation and damages.

E. MBIA Offers No Basis in Law For Its Attempt to Use Its Transaction Rep Claim Under The Insurance Agreement to Avoid Proving Notice/Discovery Under the PSA’s Repurchase Protocol

MBIA’s brief confirms that its Transaction Rep claim is offered so “the Court need not

consider whether the condition precedent to the repurchase protocol (i.e., notice or discovery) is



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satisfied.” MBIABr.86 (emphasis added). As explained in DLJ’s opening brief, however, even

if MBIA had proved a breach of the Transaction Rep (it didn’t), nothing in the contracts or New

York law would excuse MBIA from proving the notice/discovery element of the Repurchase

Protocol. DLJBr.76-81. MBIA cites no legal authorities to support its argument because there

are none. The law of this case is that MBIA’s only path to recovery was through the sole remedy

of the Repurchase Protocol. SJO at 3. And again, that is precisely how MBIA attempted to

proceed at trial, including by having Butler purport to show that his alleged defects “significantly

increased the risk of loss,” i.e., the MAE standard unique to the repurchase protocol. MBIA’s

legal argument that the remedy for its Transaction Rep claim is that MBIA may opt out of the

notice/discovery element that it finds inconvenient simply has no basis in law or logic.

If, as MBIA contends, its remedy for breach of the Transaction Rep under the Insurance

Agreement is not the sole remedy of the Repurchase Protocol (of which notice/discovery are but

one of three elements), then as with gross negligence, the Transaction Rep claim is governed by

New York common law, which requires MBIA to prove (among other things) causation and

damages. DLJBr.78-79; Harris, 79 A.D.3d. at 426. The Transaction Rep itself expressly

required MBIA to prove DLJ’s alleged statements were untrue or misleading in a “material

adverse respect when made.” JX-0456.0012-13. But MBIA made no such showing. MBIA

offered the testimony of Brown and Johnson as to what they considered “important” or “critical,”

but the Court ruled this subjective intent testimony is not relevant in the context of excluding

testimony from DLJ’s monoline insurance expert, Stern, designed to rebut Brown and Johnson

by showing MBIA did not care about or consider the Pitchbook statements that underlie this

claim. TT.1355:10-1361:17. Even if it were relevant, these witnesses’ testimony demonstrated

their complete lack of recollection of any communications or events related to MBIA’s decision



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to approve HEMT 2007-2, and their testimony would be entitled to no weight. DLJBr.80. In

consequence, MBIA has failed to meet its burden to prove materiality, causation, and injury.

MBIA also did not prove any material misstatement by DLJ in breach of the Transaction

Rep. DLJBr.79-81. First, DLJ’s sales/trading group did not have underwriting authority, as DLJ

stated in the Pitchbook. PX-0773.0016. While MBIA asserts that Fallacara—the head of the

conduit—“could make final credit decisions” (MBIABr.84 (emphasis added)), Sacco testified

that neither Fallacara nor anyone else ever pressured him to approve loans over his objection

(TT.937:12-938:4) and Shev admitted he saw no evidence of anyone in sales ever overruling

credit personnel’s decisions (TT.759:1-10).

Second, MBIA concedes DLJ had a seller approval process, with tools such as “Customer

Scorecards,” a “Watch list” and “Seller Reviews” (MBIABr.84), which is all DLJ said in the

Pitchbook (PX-0773.0009). DLJ made no statements as to the efficacy of those tools, and

MBIA’s argument that these tools were imperfect does not make the statements that the tools

existed false. MBIABr.84-85. Moreover, MBIA’s brief ties DLJ’s bare statements of the

existence of these tools from one page of the Pitchbook to aspirational statements on a different

page describing DLJ’s ‘business philosophy,’ which is puffery, not a cognizable statement of

material fact. MBIABr.84.

Third, DLJ’s high-level, generic statement that it had a “rigorous due diligence process”

is puffery, not a statement of material fact, as this Court held at the pleading stage. Doc. 129 at

17. And Grice testified that DLJ’s due diligence processes “met or exceeded” industry

standards. See generally, DX-1482.0056-0102.

Finally, MBIA points to other alleged misstatements by DLJ (MBIABr.85), but many of

them are subject to the loan-level PSA reps (e.g., alleged misrepresentations regarding



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borrowers’ stated incomes and underwriting conditions having been cleared) and, as such, are

subject to the sole remedy of the Repurchase Protocol. Nomura II, 30 N.Y.3d at 584-85. The

allegation of false Transaction-wide DTI information on the loan tape fails because, as discussed

above, the DTIs on that tape and the MLS were correct. And as for DLJ’s alleged provision of

incorrect guideline information regarding certain loans, the evidence proved MBIA never even

asked to see third-party originators’ guidelines (TT.90:3-18), and MBIA offered no evidence that

it would have made any different decision about insuring the Transaction had it known other

originators’ guidelines, rather than DLJ’s, were used to originate those loans.

Because no MBIA witness recalled any statement of material fact DLJ allegedly made, its

brief again relies on Shev to act as MBIA’s mouthpiece to “opine” about what DLJ actually said

at a meeting he did not attend (and no MBIA witness recalls) and what would have been

important to an industry participant. For the reasons detailed in DLJ’s opening brief (DLJBr.75-

76, 81), the Court should give Shev no weight.

VI. THE COURT SHOULD NOT CONSIDER HEARSAY EMAILS

MBIA primarily relies on hearsay emails written by Vibert and Daniel (MBIABr.77-79),

two former traders who had no knowledge, involvement or experience in loan underwriting.

Vibert Dep. Tr. 65:25-66:5, 66:7-17, 87:17-88:10; compare PX-0732.0001 (Daniel as co-head of

Non-Agency Trading) with PX-0733.0001 (Sacco responsible for underwriting). The Court held

at the June 17, 2019 pretrial conference that Vibert’s and Daniel’s emails expressing personal

views about DLJ’s underwriting are not party admissions and are not admissible for the truth. In

a tacit acknowledgment of this ruling, MBIA argues it is offering the emails for a non-hearsay

purpose of showing DLJ’s “knowledge and awareness of the information they describe.”

MBIABr.77. Under MBIA’s gross negligence/willful blindness theory, however, the only

potential relevance to Vibert’s and Daniel’s expressions of belief is if they truthfully represented



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flaws in DLJ’s underwriting. Id.78-79. The emails may not be used for that purpose under the

Court’s ruling and the Rules of Evidence. NY Guide to Evid. Rule 8.00 Note (“[W]here the

statement is offered for its truth, or has no relevant purpose other than a truth purpose, the

statement is deemed hearsay.”).

MBIA also argues hearsay emails written by Sack regarding QC and due diligence are

party admissions (MBIABr.79), but QC was Sacco’s responsibility, not Sack’s (TT.953:22-

954:2), Sack testified he had no responsibility for due diligence (Sack FHLBS Dep. Tr. at 21:23-

25, 22:3-10), and even if Sack had been responsible for QC and due diligence, there is no

evidence DLJ authorized Sack to speak on behalf of the company regarding those matters. 58

N.Y. Jur. 2d Evidence and Witnesses § 314 (“[E]ven if the statement is reliable and concerns a

matter directly within the scope of the employee’s duties, the statement is nevertheless

inadmissible unless[,] which is rarely the case[,]…the employer specifically authorized the

employee to make a statement.”); Anthony v. Highlands Country Club, 54 Misc. 3d 1218(A), at

*4 (Sup. Ct. Nassau Cty. 2017) (“statements, even those of managerial staff, inadmissible absent

evidence of the declarant’s authority to speak for his employer”). Finally, MBIA argues that

hearsay emails written by Bertram Hill, Cynthia Baird and Jason Nordyk regarding underwriting,

QC and due diligence are party admissions, but there is no evidence any of them had authority to

speak on behalf of DLJ as to those matters.

VII. MBIA CANNOT RECOVER FOR ANY LOANS OUTSIDE THE SAMPLE

MBIA argues that, based on the sample selected by Cowan, the Court can extrapolate

Butler’s defect rate to the entire pool of 15,615 loans. MBIABr.80-81. But Cowan’s sample is

flawed because he drew it from a population that included loans for which there is no proof of

notice or discovery. DLJBr.82; see also MARM, 205 F. Supp.3d at 476 (rejecting extrapolation



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because “the Court cannot determine whether the Trusts have proved that UBS received notice or

otherwise discovered that a loan was in breach unless the loan is identified”).

VIII. CONCLUSION

The Court should return a verdict for DLJ and reject MBIA’s claims in their entirety.



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CERTIFICATE OF COMPLIANCE WITH WORD COUNT

Pursuant to the parties’ Stipulation and Order Regarding Post-Trial Briefing (Doc. 1852),

the total number of words in the foregoing brief, exclusive of the cover page, table of contents,

table of authorities, signature block, and this certificate is 17,129.

Dated: November 21, 2019

/s/ John Ansbro John Ansbro



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