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To Be Argued By:MARC E. KASOWITZ
New York County Clerk’s Index No. 650980/2012
New York Supreme CourtAPPELLATE DIVISION—FIRST DEPARTMENT
ACE SECURITIES CORP., HOME EQUITY LOAN TRUST, SERIES 2006-SL2, byHSBC BANK USA, NATIONAL ASSOCIATION, solely in its capacity as Trustee
pursuant to a Pooling and Servicing Agreement, dated as of March 1, 2006,
Plaintiff-Respondent,—against—
DB STRUCTURED PRODUCTS, INC.,Defendant-Appellant.
BRIEF FOR PLAINTIFF-RESPONDENT
d
MARC E. KASOWITZ, ESQ.MICHAEL M. FAY, ESQ.KASOWITZ, BENSON, TORRES
& FRIEDMAN LLP1633 BroadwayNew York, New York 10019(212) [email protected]@kasowitz.com
Attorneys for Plaintiff-Respondent
REPRODUCED ON RECYCLED PAPER
i
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ................................................................................... iii
PRELIMINARY STATEMENT ...............................................................................1
COUNTER-STATEMENT OF QUESTIONS PRESENTED ..................................5
COUNTER-STATEMENT OF THE CASE .............................................................6
I. Factual Background.........................................................................................6
II. Proceedings Below ..........................................................................................9
STANDARD OF REVIEW.....................................................................................10
ARGUMENT...........................................................................................................11
I. The Supreme Court Correctly Held That The Trust’s Claims Are NotTime Barred ...................................................................................................11
A. DBSP Breached The Agreements, And The Trust’s Cause OfAction Accrued, When DBSP Refused To Abide By ItsContractual Repurchase Obligation ....................................................12
1. DBSP’s Repurchase Obligation Is A ContinuingObligation That Exists For The Life Of The Trust...................13
2. DBSP Concedes That The Trust’s Cause Of ActionAccrued When DBSP Rejected The Trustee’s DemandFor Cure Or Repurchase ...........................................................19
B. DBSP’s Reliance On Hahn Is Misplaced............................................25
C. DBSP’s Remaining “Accrual” Arguments Are Meritless ..................28
II. In Any Event, This Action Was Filed Within Six Years Of TheClosing Of The Agreements ..........................................................................30
A. The SWN Commenced This Action Within CPLR § 213(2)’sLimitation Period.................................................................................30
ii
B. The Nomura Decision Is Based On A Flawed Analysis Of NewYork Case Law....................................................................................35
III. The Supreme Court Correctly Rejected DBSP’s HypotheticalArguments Regarding Charged Off, Liquidated Or Released MortgageLoans..............................................................................................................38
A. New York Courts Do Not Resolve Disputed Issues Of MaterialFact On CPLR 3211 Motions..............................................................39
B. DBSP Must Repurchase All Defective Loans ....................................41
1. DBSP Must Repurchase Charged Off Or ReleasedMortgage Loans ........................................................................46
2. DBSP Must Repurchase Liquidated Mortgage Loans..............49
C. The Supreme Court Did Not “Rewrite” The Agreements InRejecting DBSP’s Hypothetical Contentions RegardingCharged Off, Released Or Liquidated Mortgage Loans .....................53
CONCLUSION........................................................................................................55
iii
TABLE OF AUTHORITIES
Page(s)CASES
2470 Cadillac Res., Inc. v. DHL Express (USA), Inc.,84 A.D.3d 697 (1st Dep’t 2011) .........................................................................55
Airco Alloys Div. v. Niagara Mohawk Power Corp.,76 A.D.2d 68 (4th Dep’t 1980)...........................................................................13
Am. Home Assur. Co. v. Scanlon,164 A.D.2d 751 (1st Dep’t 1990) ...........................................................33, 34, 38
Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc.,80 A.D.3d 293 (1st Dep’t 2010) .........................................................................41
Assured Guar. Mun. Corp. v. Flagstar Bank, FSB,2013 U.S. Dist. LEXIS 16682 (S.D.N.Y. Feb. 6, 2013) ........................43, 44, 45
Beller v. William Penn Life Ins. Co. of N.Y.,8 A.D.3d 310 (2d Dep’t 2004)............................................................................13
Benn v. Benn,82 A.D.3d 548 (1st Dep’t 2011) .........................................................................11
Bojanovich v. Woitach,2013 N.Y. Misc. LEXIS 2366 (Sup. Ct. N.Y. Cnty. June 3, 2013) ...................31
Bulova Watch Co. v. Celotex Corp.,46 N.Y.2d 606 (1979) .............................................................................13, 14, 15
Bumpus v. N.Y. City Tr. Auth.,66 A.D.3d 26 (2d Dep’t 2009)............................................................................30
Carrick v. Cent. Gen. Hosp.,51 N.Y.2d 242 (1980) .............................................................................36, 37, 38
CIFG Assur. N. Am., Inc. v. Goldman, Sachs & Co.,2012 N.Y. Misc. LEXIS 3986 (Sup. Ct. N.Y. Cnty. May 1, 2012) ...................40
Continental Casualty Co. v. Stronghold Ins. Co.,866 F. Supp. 143 (S.D.N.Y. 1994) ...............................................................21, 22
iv
Continental Casualty Co. v. Stronghold Ins. Co.,77 F.3d 16 (2d Cir. 1996) ............................................................................passim
Craven v. Rigas,71 A.D.3d 1220 (3d Dep’t 2010)..................................................................24, 29
Deutsche Alt-A Sec. Mortg. Trust, Series 2006-OA1 v. DB Structured Prods.,Inc., 2013 U.S. Dist. LEXIS 104417 (S.D.N.Y July 24, 2013)..............29, 40, 45
Elie Int’l, Inc. v. Macy’s W. Inc.,106 A.D.3d 442 (1st Dep’t 2013) .......................................................................27
Empire 33rd LLC v. Forward Ass’n,87 A.D.3d 447 (1st Dep’t 2011) .........................................................................24
Fairbanks Capital Corp. v. Nagel,289 A.D.2d 99 (1st Dep’t 2001) .............................................................33, 35, 38
First Place Bank v. Skyline Funding, Inc.,2011 U.S. Dist. LEXIS 83430 (N.D. Ill. July 27, 2011) ....................................53
Florey v. Meeker,240 P. 2d 1177 (Or. 1952) ..................................................................................47
Franconia Assocs. v. United States,536 U.S. 129 (2002)............................................................................................24
Frankart Furniture Staten Island, Inc. v. Forest Mall Assocs.,159 A.D.2d 322 (1st Dep’t 1990) .......................................................................34
Fulgum v. Town of Cortlandt Manor,19 A.D.3d 444 (2d Dep’t 2005)..........................................................................35
Ganley v. Troy City Nat’l Bank,98 N.Y. 487 (1885) .............................................................................................21
George v. Mt. Sinai Hosp.,47 N.Y.2d 170 (1979) .............................................................................36, 37, 38
Giambrone v. Giambrone,140 A.D.2d 206 (1st Dep’t 1988) .......................................................................32
v
Goldberg v. Camp Mikan-Recro,42 N.Y.2d 1029 (1977) ................................................................................passim
Gordon v. Credno,102 A.D.3d 584 (1st Dep’t 2013) .......................................................................41
Guilbert v. Gardner,480 F.3d 140 (2d Cir. 2007) ...............................................................................13
Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co.,18 N.Y.3d 765 (2012) ..................................................................................passim
HSBC Bank USA v. Nat’l Equity Corp.,279 A.D.2d 251 (1st Dep’t 2001) .......................................................................46
HSBC Guyerzeller Bank AG v. Chascona N.V.,42 A.D.3d 381 (1st Dep’t 2007) .............................................................34, 37, 38
Innophos, Inc. v. Rhodia, S.A.,10 N.Y.3d 25 (2008) ...........................................................................................19
John J. Kassner & Co. v. City of N.Y.,46 N.Y.2d 544 (1979) .........................................................................................22
JP Morgan Chase v. J.H. Elec. of N.Y., Inc.,69 A.D.3d 802 (2d Dep’t 2010)..........................................................................11
Julias A. Nasso & Assocs. Concrete Corp. v. Trataros Constr., Inc.,79 A.D.3d 471 (1st Dep’t 2010) .........................................................................22
Kunstsammlungen zu Weimar v. Elicofon,536 F. Supp. 829 (S.D.N.Y. 1981) ...............................................................22, 23
Kunstsammlungen zu Weimar v. Elicofon,678 F.2d 1150 (2d Cir. 1982) .............................................................................21
LaSalle Bank Nat’l Ass’n v. Lehman Bros. Holdings Inc.,237 F. Supp. 2d 618 (D. Md. 2002)....................................................................45
LaSalle Bank Nat’l Assn. v. CAPCO Am. Securitization Corp.,2005 U.S. Dist. LEXIS 27781 (S.D.N.Y. Nov. 14, 2005)..................................45
vi
Lehman Bros. Holdings, Inc. v. Evergreen Moneysource Mortg. Co.,793 F. Supp. 2d 1189 (W.D. Wa. 2011) .......................................................27, 28
Lehman Bros. Holdings, Inc. v. Nat’l Bank of Ark.,875 F. Supp. 2d 911 (E.D. Ark. 2012)................................................................15
Lehman Bros. Holdings v. Key Fin. Corp.,2011 U.S. Dist. LEXIS 37083 (M.D. Fla. Mar. 31, 2011) .................................53
Leon v. Martinez,84 N.Y.2d 83 (1994) ...........................................................................................10
Lippe v. Genlyte Grp., Inc.,2002 U.S. Dist. LEXIS 6024 (S.D.N.Y. Apr. 8, 2002) ................................17, 25
Lopez v. Highmount Assocs.,101 A.D.2d 618 (3d Dep’t 1984)........................................................................24
Lutzker v. Novo Nordisk Pharms., Inc.,2008 U.S. Dist. LEXIS 26604 (E.D.N.Y. Apr. 2, 2008) ..............................30, 33
MASTR Asset Backed Sec. Trust 2006-HE3 v. WMC Mortg. Corp.,2012 U.S. Dist. LEXIS 142579 (D. Minn. Oct. 1, 2012) ...................................52
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.,34 Misc. 3d 895 (Sup. Ct. N.Y. Cnty. 2012) ......................................................49
Nationwide Advantage Mortg. Co. v. Mortg. Servs. III, LLC,2013 U.S. Dist. LEXIS 59470 (N.D. Ill. Apr. 25, 2013)....................................53
Nolfi Masonry Corp. v. Lasker-Goldman Corp.,160 A.D.2d 186 (1st Dep’t 1990) .......................................................................14
Nomura Asset Acceptance Corp. Alt. Loan Trust,Series 2005-S4 v. Nomura Credit & Capital, Inc.,2013 N.Y. Misc. LEXIS 2001 (Sup. Ct. N.Y. Cnty. May 10, 2013) ..........passim
N.Y. Cent. Mut. Fire Ins. Co. v. Glider Oil Co.,90 A.D.3d 1638 (4th Dep’t 2011).......................................................................13
Olsen v. 432 E. 57th St. Corp.,145 Misc. 2d 970 (Sup. Ct. N.Y. Cnty. 1989) ....................................................33
vii
Pavarini McGovern, LLC v. Tag Ct. Sq., LLC,62 A.D.3d 680 (2d Dep’t 2009)....................................................................52, 53
Rachmani Corp. v. 9 E. 9th St. Apt. Corp.,211 A.D.2d 262 (1st Dep’t 1995) .......................................................................24
Resolution Trust Corp. v. Key Fin. Servs., Inc.,280 F.3d 12 (1st Cir. 2002).................................................................................44
Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P.,60 A.D.3d 61 (1st Dep’t 2008) ...........................................................................16
Rossi v. Oristian,50 A.D.2d 44 (4th Dep’t 1975).....................................................................24, 25
Russack v. Weinstein,291 A.D.2d 439 (2d Dep’t 2002)..................................................................24, 29
S. Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC,104 A.D.3d 613 (1st Dep’t 2013) .......................................................................36
S. Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC,80 A.D.3d 505 (1st Dep’t 2011) .........................................................................36
Schleidt v. Stamler,106 A.D.2d 264 (1st Dep’t 1984) .................................................................34, 38
Snay v. Cohoes Mem’l Hosp.,110 A.D.2d 1021 (3d Dep’t 1985)..........................................................30, 31, 37
Solomon R. Guggenheim Found. v. Lubell,153 A.D.2d 143 (1st Dep’t 1990) .......................................................................22
State Bank of Satanata v. Gaskill,1987 Kan. App. LEXIS 989 (Kan. Ct. App. May 7, 1987)................................47
Structured Mortg. Trust 1997-2 v. Daiwa Fin. Corp.,2003 U.S. Dist. LEXIS 2677 (S.D.N.Y. Feb. 25, 2003) ..............................27, 28
Trust for the Certificate Holders of the Merrill Lynch Mortg. Pass-ThroughCertificates Series 1999-C1 v. Love Funding Corp.,2005 U.S. Dist. LEXIS 23522 (S.D.N.Y. Oct. 11, 2005).......................42, 43, 52
viii
U.S. Bank Nat’l Ass’n v. Countrywide Home Loans, Inc.,2013 WL 2356295 (Sup. Ct. N.Y. Cnty. May 29, 2013) ...................................40
Walnut Place LLC v. Countrywide Home Loans, Inc.,96 A.D.3d 684 (1st Dep’t 2012) .........................................................................32
Wells Fargo Bank, N.A. v. Bank of Am., N.A.,2013 U.S. Dist. LEXIS 44955 (S.D.N.Y. Mar. 28, 2013)............................44, 45
Wells Fargo Bank, N.A. v. LaSalle Bank Nat’l Ass’n,2011 U.S. Dist. LEXIS 93927 (W.D. Okla. Aug. 23, 2011) ..............................44
Wiener v. Spahn,60 A.D.3d 586 (1st Dep’t 2009) .........................................................................39
STATUTES
CPLR § 203(f)...................................................................................................passim
CPLR § 205(a) .............................................................................................36, 37, 38
CPLR § 206(a) ...................................................................................................20, 21
CPLR § 213(2) ..................................................................................................passim
CPLR §3011.............................................................................................................33
CPLR 3013...............................................................................................................40
CPLR 3211........................................................................................................passim
CPLR § 5501(c) .......................................................................................................10
OTHER AUTHORITIES
22 N.Y. Jur. 2d, CONTRACTS § 255 (2013) .........................................................14
31 WILLISTON ON CONTRACTS § 79:22 (4th Ed. 2012) ...........................................13
BLACK’S LAW DICTIONARY (5th ed. Abr. 1983) ......................................................47
ix
Press Release, Department of Justice, Office of Public Affairs, ResidentialMortgage-Backed Securities Working Group Members Announce FirstLegal Action (Oct. 2, 2012) (available athttp://www.justice.gov/opa/pr/2012/October/12-opa-1196.html)........................7
Reuters, Private RMBS Take First Steps to U.S. Comeback (Mar. 22, 2013)(available at http://www.reuters.com/article/2013/03/22/abs-rmbs-us-idUSL1N0CE9HS20130322).....................................17
WEINSTEIN, KORN & MILLER, N.Y. Civ. Prac. (2d ed. 1980)..................................21
Plaintiff-Respondent ACE Securities Corp., Home Equity Loan Trust, Series
2006-SL2 (the “Trust”), by HSBC Bank USA, National Association, solely in its
capacity as trustee (the “Trustee”) for the holders of Asset Backed Pass-Through
Certificates, Series 2006-SL2 (the “Certificates”), issued by the Trust pursuant to a
Pooling and Servicing Agreement (“PSA”) and a Mortgage Loan Purchase
Agreement (“MLPA,” and with the PSA, the “Agreements”), both of which closed
on March 28, 2006, respectfully submits this brief in opposition to the appeal of
Defendant-Appellant DB Structured Products, Inc. (“DBSP”) from the Decision
and Order of the New York Supreme Court for the County of New York
(Kornreich, J.) (the “Supreme Court”), dated May 13, 2013 (the “Order”) [R.9-20],
which denied DBSP’s motion to dismiss the Trustee’s Complaint (“Complaint” or
“Cmplt.”) pursuant to CPLR 3211(a)(1), (3), (5), (7) and (8).
PRELIMINARY STATEMENT
This action seeks to hold DBSP accountable for its unambiguous contractual
obligation to repurchase, or otherwise make the Trust whole with respect to
defective residential mortgage loans (the “Defective Loans”) that DBSP sold to the
Trust and that served as collateral for the Certificates issued by the Trust. DBSP’s
pervasive breaches of the Agreements and the poor quality of the Defective Loans
have caused substantial losses to the Trust and its investors (the
“Certificateholders”) – over $338 million to date.
2
Nonetheless, DBSP seeks to evade its most basic, unequivocal promises
regarding the mortgage loans it sold to the Trust (the “Mortgage Loans”). Among
other things, DBSP:
made numerous, specific representations and warranties to theTrust for the benefit of the Certificateholders regarding thecharacteristics and quality of the Mortgage Loans (the“Mortgage Representations”); and
agreed – upon a party’s notice to DBSP of a material breach ofa Mortgage Representation and corresponding demand to curesuch breach or, where cure proved impossible, to repurchase theDefective Loan – to comply with its cure and repurchaseobligations under the Agreements (the “Repurchase Protocol”).
Because the Certificateholders had no practical means or contractual rights to
verify the quality and characteristics of the 8,800-plus Mortgage Loans sold to the
Trust – as only DBSP did – DBSP’s contractual promises regarding the Mortgage
Loans were fundamental to, and, indeed embody the commercial bargain at the
core of, the securitization.
As set forth in the Complaint, investigations of over 1,600 of the Mortgage
Loans have revealed that a stunningly high percentage – 99 percent of the
Mortgage Loans analyzed – violate at least one Mortgage Representation and are
Defective Loans. The Trustee repeatedly demanded that DBSP abide by its
contractual obligation to cure or repurchase the Defective Loans, but DBSP has
steadfastly, and unjustifiably, refused to do so. Accordingly, the Trust – at first,
derivatively through two of its Certificateholders, and now through the Trustee –
3
brought suit to seek redress for the significant losses it suffered and will continue
to suffer.
The Supreme Court correctly denied DBSP’s motion to dismiss pursuant
to CPLR 3211, rejecting the two arguments raised by DBSP in its brief (“DBSP
Br.”) on this appeal.1 First, the Supreme Court rebuffed DBSP’s contention that
this action is time-barred, holding, instead, that DBSP’s obligation to repurchase
Defective Loans continues for the life of the Trust and “the statute of limitations
began to run when DBSP improperly rejected the Trustee’s repurchase demand.”
[R.17] As the Supreme Court properly recognized, and as DBSP conceded below,
under the Agreements, the “Trustee is not entitled to sue” until the Trustee
demands that DBSP repurchase the Defective Loans, by written notice, and DBSP
fails or refuses to so cure or repurchase within the contractually-prescribed time
periods.2 [R.14-17 (emphasis in original).] (See infra at 11-28)
Second, the Supreme Court properly rejected DBSP’s hypothetical
contention that its repurchase obligations are excused for certain ill-defined and
unquantified categories of Mortgage Loans – what it calls “charged off,”
1 DBSP chose not to appeal all of the Supreme Court’s holdings, including theSupreme Court’s ruling that the Trust had sufficiently alleged compliance with theRepurchase Protocol to bring a trust-wide action for all Defective Loans in theTrust. [R.17]2 Moreover, as discussed below, the Trust’s claims are timely for theadditional and independent reason that they were filed within six years of theclosing of the Agreements. (See infra at 30-38)
4
“released,” or “liquidated” Mortgage Loans – because “questions of fact clearly
preclude dismissal on this ground.” [R.18] Indeed, DBSP’s tortured reading of the
Agreements would absolve it of liability for the worst Mortgage Loans, i.e., the
Mortgage Loans that were the first to default. Certificateholders would not have
invested in the Trust if DBSP had not agreed to repurchase all Defective Loans,
including, of course, the worst ones. Nothing in the Agreements suggests that the
parties intended such an absurd result and New York courts have repeatedly
rejected such self-serving arguments. Recognizing this fact, the Supreme Court
found “DBSP’s argument … [to be] unconvincing [because] [i]f DBSP were
correct, it would be perversely incentivized to fill the Trust with junk mortgages
that would expeditiously default so that they could be Released, Charged Off, or
Liquidated before a repurchase claim is made.” [Id.] (See infra at 38-55)
In making these rulings, the Supreme Court affirmed that the commercial
bargain underlying the Agreements is to shift the risk of loss for Defective Loans
to DBSP. If DBSP did not intend for its obligation to be continuing, it could have
contracted for a sunset provision (or time limitation) on its repurchase obligation.
But it did not, and, in fact, there is no sunset provision (or time limitation) on
DBSP repurchase obligation anywhere in the Agreements. Accordingly, the
Supreme Court observed that DBSP’s continuing repurchase obligation
“function[s] as insurance for the Trustee and was likely priced accordingly.”
5
[R.15-17] Only now, after it became clear that DBSP filled the Trust with
thousands of “junk” Mortgage Loans during the height of the housing bubble, ,
does DBSP argue that its repurchase obligation expired six years after the closing
of the Agreements. DBSP’s arguments would impermissibly rewrite and nullify
not only the express provisions of, but also the fundamental commercial purpose
underlying, the Agreements.
As demonstrated in more detail below, DBSP’s appeal is meritless, and the
Order should be affirmed.
COUNTER-STATEMENT OF QUESTIONS PRESENTED
1. Under CPLR § 213(2)’s six-year statute of limitations, does a cause of
action for a party’s failure to abide by its continuing obligation to cure and
repurchase non-conforming mortgage loans accrue each time the party refuses to
comply with that continuing obligation?
The Supreme Court answered this question in the affirmative.
2. Is a CPLR 3211(a)(5) motion meritless where a summons with notice
was filed within six years of the closing of the relevant agreements, the plaintiffs
affirmatively alleged that they had standing to file the summons with notice, and
any potential standing issues were resolved upon the filing and service of the
complaint?
The Supreme Court did not reach this issue.
6
3. Can a defendant’s unsupported factual contentions that certain
categories of mortgage loans are purportedly not available for repurchase be
resolved on a CPLR 3211 motion, where the complaint contains no allegations
about the categories or status of any such mortgage loans, and the record before the
court fails to conclusively support defendant’s contentions?
The Supreme Court answered this question in the negative.
4. Is a seller excused from its contractual obligation to repurchase certain
categories of mortgage loans because such mortgage loans are purportedly not
available for repurchase even though the contracts expressly shift the risk of loss
for all non-conforming mortgage loans to the seller?
The Supreme Court answered this question in the negative.
COUNTER-STATEMENT OF THE CASE
I. Factual Background
This transaction is one of a number of residential mortgage-backed
securitizations (“RMBS”) that the country’s largest banks, including DBSP,
conducted during the run-up to the 2007-2008 financial crisis in ever-increasing
and incredibly high volumes, generating enormous revenue for the banks. Indeed,
what is now apparent, based on the breaches alleged in the Complaint, is that
DBSP – in a race to take advantage of the housing bubble it helped to perpetuate –
sought to generate profits as fast as possible by putting quantity ahead of quality in
7
packaging and selling the Mortgage Loans. [R.33, 40-49 (Cmplt. ¶¶ 3-4, 28-34)]
DBSP’s reckless and improper purchase, pooling, and securitization of the
Mortgage Loans accounts for the poor performance of the Certificates, a
phenomenon illustrated by numerous governmental investigations, including that
of the RMBS working group President Obama established in the Department of
Justice. See Press Release, Department of Justice, Office of Public Affairs,
Residential Mortgage-Backed Securities Working Group Members Announce First
Legal Action (Oct. 2, 2012) (available at
http://www.justice.gov/opa/pr/2012/October/12-opa-1196.html).
Here, DBSP aggregated a pool of 8,815 Mortgage Loans and transferred
those Mortgage Loans to the Trust using its affiliate, ACE Securities Corp. (“ACE
Securities”), as an intermediary. The securitization closed on March 28, 2006, and
the Trust issued the Certificates. Another DBSP affiliate sold the Certificates to
investors, generating over $500 million in proceeds, which were then passed on to
DBSP. [R.33 (Cmplt. ¶¶ 3-4)]
DBSP purchased the Mortgage Loans from third-party originators. During
origination, it was incumbent upon the third-party originators to evaluate the
creditworthiness of borrowers and the value of the homes securing the Mortgage
Loans. In addition, DBSP conducted independent due diligence not only on the
Mortgage Loans, but also on these third-party originators. However, as uncovered
8
by the Financial Crisis Inquiry Commission, DBSP routinely securitized almost
half of the loans that were rejected by its due diligence firm, Clayton Holdings,
Inc. Thus, DBSP must have discovered breaches of the Mortgage Representations
in this securitization before and through the closing of the Agreements. [R.32, 48-
49 (Cmplt. ¶¶ 2, 34-37)] Despite this knowledge, DBSP still chose to guarantee
that the Mortgage Loans were “underwritten in accordance with the related
originator’s underwriting guidelines ….” [R.38, 296 (Cmplt. ¶ 23; MLPA
§6(xxiii))]
In particular, because no Certificateholder was able to conduct loan-by-loan
due diligence on the thousands of Mortgage Loans that DBSP sold to the Trust,
DBSP guaranteed the quality of the Mortgage Loans by, among other things:
(a) making specific Mortgage Representations regarding the characteristics and
quality of each Mortgage Loan, and (b) accepting the risk of Defective Loans in
the Trust by agreeing, upon demand, to cure any breach of the Mortgage
Representations or, if cure proved impossible, to repurchase any Defective Loan.
This Repurchase Protocol is found in Sections 2.03(a) of the PSA and 7(a) of the
MLPA. [R.39-40, 121-122, 300 (Cmplt. ¶¶ 26-27)] Had DBSP not warranted that
the Mortgage Loans met certain quality standards and accepted the risk of loss in
the event they did not, this securitization would not have been consummated as
9
investors were unable to independently evaluate the quality of the collateral.
[R.33-34, 37-39 (Cmplt. ¶¶ 6, 21-25)]
As noted, an ongoing forensic review of over 1,600 of the Trust’s Mortgage
Loans has determined that over 99 percent of the Mortgage Loans analyzed
violated at least one Mortgage Representation. [R.34, 40-48 (Cmplt. ¶¶ 8, 28-30)]
Pursuant to the Repurchase Protocol, the Trustee sent notices to DBSP detailing
and itemizing these breaches, and demanding that DBSP cure the breaches or
repurchase the Defective Loans, beginning on February 8, 2012 (the “Breach
Notices”). [R.50-51, 800-855, 859-904 (Cmplt. ¶¶ 38-39)] To date, DBSP has
refused to cure or repurchase a single Mortgage Loan. [R.50-51 (Cmplt. ¶¶ 38-
39)]
II. Proceedings Below
This action was commenced on March 28, 2012 by means of a summons
with notice (“SWN”) filed by two Certificateholders on behalf of the Trust, which
was then served on DBSP on July 26, 2012. [R.24-27] DBSP demanded the
Complaint on August 24, 2012, and the Complaint – which substituted the Trustee
for the two Certificateholders – was timely filed and served on September 13,
2012. [R.30-53]
On November 30, 2012, DBSP filed a motion to dismiss the Complaint
pursuant to CPLR 3211(a)(1), (3), (5), (7) and (8). [R.349-350] The Trust filed its
10
opposition to the motion on February 8, 2013. After oral argument, held on April
30, 2013, the Supreme Court issued the Order on May 13, 2013, denying DBSP’s
motion to dismiss in its entirety. [R.9-20] In the Order, the Supreme Court held,
among other things, that: (a) the Trust’s claims were timely because DBSP’s
contractual obligation to repurchase Defective Loans was a continuing obligation
under New York law and, thus, CPLR § 213(2)’s six-year statute of limitations ran
from each of DBSP’s refusals to repurchase Defective Loans; and (b) DBSP’s
arguments that, hypothetically, certain Defective Loans were not subject to
repurchase under the provisions of the Repurchase Protocol (i) raised issues of
material fact that could not be resolved on its CPLR 3211 motion, and (ii)
contradicted the express and implied terms of the Agreements. [R.13-19]
STANDARD OF REVIEW
On this appeal, this Court reviews questions of law and fact. CPLR §
5501(c). “On a motion to dismiss pursuant to CPLR 3211, the [complaint] is to be
afforded a liberal construction. [The court] accept[s] the facts as alleged in the
complaint as true, accord[s] plaintiffs the benefit of every possible favorable
inference, and determine[s] only whether the facts as alleged fit within any
cognizable legal theory.” Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994) (citations
omitted). To plead a cause of action for breach of contract, the claimant must state
four elements: (1) the existence of a valid contract; (2) non-performance by the
11
defendant; (3) performance by the plaintiff; and (4) damage to the plaintiff as a
result of defendant’s non-performance. See JP Morgan Chase v. J.H. Elec. of N.Y.,
Inc., 69 A.D.3d 802, 803 (2d Dep’t 2010).
“On a motion to dismiss a cause of action pursuant to CPLR 3211(a)(5) on
the ground that it is barred by the statute of limitations, a defendant bears the initial
burden of establishing, prima facie, that the time in which to sue has expired. In
considering the motion, a court must take the allegations in the complaint as true
and resolve all inferences in favor of the plaintiff. Further, plaintiff’s submissions
in response to the motion must be given their most favorable intendment.” Benn v.
Benn, 82 A.D.3d 548, 548 (1st Dep’t 2011) (quotations and citations omitted).
ARGUMENT
I. The Supreme Court Correctly Held ThatThe Trust’s Claims Are Not Time Barred
As the Supreme Court correctly held, under New York law, the Trust’s
claims for DBSP’s breach of its repurchase obligation accrued each time DBSP
refused the Trustee’s demand to cure or repurchase Defective Loans and not when
DBSP made the Mortgage Representations, i.e., at the closing of the Agreements.
[R.13-17]3 In so holding, the Supreme Court recognized that the Agreements
provide a contractual remedy for material and adverse breaches of the Mortgage
3 The Trust’s claims are timely for the additional and independent reason thatthey were filed within six years of the closing of the Agreements. (See infra at 30-38)
12
Representations, i.e., the Repurchase Protocol, and “the only contractual wrong
that DBSP [] commit[ted] [was its] failure to abide by [the Repurchase Protocol].”
[R.15 (emphasis in original).] Thus, the Trust could only sue for DBSP’s
“contractual wrong” – and its cause of action against DBSP only accrued – when
DBSP refused to perform its repurchase obligations under the Repurchase
Protocol.
A. DBSP Breached The Agreements, And The Trust’sCause Of Action Accrued, When DBSP RefusedTo Abide By Its Contractual Repurchase Obligation
As set forth in the Repurchase Protocol, whenever a party – including
DBSP, as Sponsor; ACE Securities, as Purchaser; or the Trustee, as the Purchaser’s
assignee – discovers and/or receives notice of a breach that “materially and
adversely” affects the value of a Mortgage Loan or the interests of the
Certificateholders therein, the discovering party, if not DBSP, must provide prompt
notice to DBSP. Within 60 days of its own discovery or receipt of notice of such
breach, DBSP must then cure the breach or, if cure proves impossible, within 90
days of its own discovery or receipt of notice, repurchase the Defective Loan.4
[R.15, 121-122, 300 (PSA §2.03(a); MLPA §7(a))] This is the risk-shifting
4 For two years after the closing of the PSA, DBSP could also substitute anew, conforming Mortgage Loan for the Defective Loan within 90 days of notice.[R.121-123 (PSA §2.03(a)-(b))]
13
commercial bargain at the heart of the Agreements that provides a continuing
obligation on DBSP to repurchase Defective Loans for the life of the Trust.
1. DBSP’s Repurchase Obligation Is A ContinuingObligation That Exists For The Life Of The Trust
Accordingly, under New York law, DBSP’s agreement to cure or repurchase
Defective Loans pursuant to the Repurchase Protocol is a continuing obligation.
While the Trust’s breach of contract claims are subject to CPLR § 213(2)’s six-
year statute of limitations, “where a contract provides for continuing performance
over a period of time, each breach may begin the running of the statute anew such
that accrual occurs continuously and plaintiffs may assert claims for damages
occurring up to six years prior to filing of the suit.” Airco Alloys Div. v. Niagara
Mohawk Power Corp., 76 A.D.2d 68, 80 (4th Dep’t 1980) (citing Bulova Watch
Co. v. Celotex Corp. (“Bulova”), 46 N.Y.2d 606 (1979)); N.Y. Cent. Mut. Fire Ins.
Co. v. Glider Oil Co., 90 A.D.3d 1638, 1642 (4th Dep’t 2011) (“Where, as here, a
contract provides for a recurring obligation, a claim for damages accrues each time
the contract is allegedly breached”); see also Beller v. William Penn Life Ins. Co.
of N.Y., 8 A.D.3d 310, 314 (2d Dep’t 2004) (same); Guilbert v. Gardner, 480 F.3d
140, 150 (2d Cir. 2007) (same); 31 WILLISTON ON CONTRACTS § 79:22 (4th Ed.
2012) (“[W]here there is an agreement to repair or to replace goods, that agreement
is not breached until there has been a refusal or failure to repair”).
14
In Bulova, the Court of Appeals considered “the timeliness of a suit brought
to recover damages for a roofing materials supplier’s failure to live up to its
express promise to repair its so-called ‘bonded’ roof for a period of 20 years from
the date of sale.” 46 N.Y.2d at 608. The defendant in Bulova not only made
representations regarding the quality of the roofing materials it sold to plaintiff, but
also promised to undertake any necessary repairs to the roof, as claims arose, for a
period of 20 years. Id. at 608-609.
With respect to plaintiff’s claims for repair, the Bulova court held that “a
cause of action accrues upon each breach of that undertaking which occurs within
the 20-year period and that the Statute of Limitations runs after six years from the
date when the particular breach for which any such suit is brought has taken
place.” Id. at 608. The Bulova court found that defendant’s agreement to repair
the roof was a continuing obligation because defendant did not “merely guarantee
the condition” of the roofing materials, but also agreed to “perform a service,” i.e.,
repair any defects in the roofing materials. Id. at 612.5
5 DBSP strains to distinguish Bulova by claiming that the promise to repair inthat action was in a separate contract from the contract containing the defendant’swarranties regarding its roofing materials. (DBSP Br. at 18-19) This distinction ismeaningless, however, because such issues of form have no relevance where thecontracts at issue, like here, are integrated agreements. See Nolfi Masonry Corp. v.Lasker-Goldman Corp., 160 A.D.2d 186, 187 (1st Dep’t 1990) (“[A] bindingagreement may be assembled from more than one writing, even if all are not signedby the party against whom enforcement is sought”); 22 N.Y. Jur. 2d,CONTRACTS § 255 (2013) (“Where several instruments constitute part of the
15
Here, DBSP undertook the same dual obligation: it not only guaranteed the
condition of the Mortgage Loans through the Mortgage Representations, it also
agreed to perform a service, i.e., to cure or repurchase Defective Loans pursuant to
the Repurchase Protocol. Accordingly, the accrual of the limitations period here
should be afforded the same treatment as that applied by the Court of Appeals in
Bulova. Not surprisingly, the reasoning in Bulova has been applied in the RMBS
context. See Lehman Bros. Holdings, Inc. v. Nat’l Bank of Ark., 875 F. Supp. 2d
911, 916-917 (E.D. Ark. 2012), (because an RMBS plaintiff “could not have sued
on [Defendant’s] independent breach [of its repurchase obligation]” before the
plaintiff demanded repurchase of the loan, the statute of limitations for a claim
alleging a loan seller’s breach of its repurchase obligation begins to run, at the
earliest, from when the plaintiff “demanded repurchase”) (applying New York law;
emphasis added).
same transaction, they must be interpreted together”). Moreover, Sections 2.03(a)of the PSA and 7(a) of the MLPA – which set forth the Repurchase Protocol – arethemselves separate agreements from the Mortgage Representations in Section 6 ofthe MLPA. DBSP also attempts to distinguish Bulova because the Court ofAppeals dismissed the plaintiff’s breach of implied warranty claim as untimely,holding that such claim arose at the time of the sale of the roofing materials.(DBSP Br. at 19) But that point reinforces the Trustee’s central argument on thisappeal: the Trust is not suing for breach of an implied or express warranty;instead, it is suing for DBSP’s breach of its continuing repurchase obligationpursuant to the Repurchase Protocol.
16
The express language of several provisions of the Agreements confirms that
DBSP’s repurchase obligation is meant to continue for the life of the Trust. For
example, Section 4.02 of the PSA states that, “[f]or as long as [the Trust] shall
exist, the Trustee … [may] permit the sale … of the Mortgage Loans … [if] such
sale is as a result of a repurchase of the Mortgage Loans pursuant to this
Agreement.” [R.155 (emphasis added).] Further, the Certificates, attached as
exhibits to the PSA, explicitly provide, without limitation, that “[t]he obligations
created by the Agreement and the Trust Fund ... shall terminate upon payment to
the Certificateholders of all amounts [owed]” – i.e., following the Trust’s
termination. [R.221-267 (PSA, Exs. A-1-A-6)] To contend, as DBSP does, that
DBSP’s repurchase obligation expires within six years of the closing of the
Agreements would impermissibly nullify these express contractual provisions.
See, e.g., Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 60 A.D.3d 61,
66 (1st Dep’t 2008) (“A court may not, in the guise of interpreting a contract, add
or excise terms or distort the meaning of those used ….”)
In addition, DBSP’s purported six-year sunset provision (or time limitation)
on its repurchase obligation is found neither in the thirteen separate paragraphs that
set forth the steps of, and obligations created by, the Repurchase Protocol nor
anywhere else in the Agreements. [R.121-123, 300 (PSA §2.03, MLPA §7)] As
the Supreme Court aptly recognized, if the parties had desired any such limitation
17
in the Agreements, “which include specific deadlines for the demand and cure
period and involve loans with a 30 year term,” the Agreements “could have stated
that ‘repurchase demands can only be made within six years of the PSA’s
execution’.” [R.16] See also Lippe v. Genlyte Grp., Inc., 2002 U.S. Dist. LEXIS
6024, at *10-11 (S.D.N.Y. Apr. 8, 2002) (where Section 11 of the agreement
required defendant to deliver documents upon plaintiff’s request and there was no
“termination date by which [such] obligations ... would expire,” “the [defendant’s]
continuing failure to comply with § 11 constitutes a separate, continuing breach”).
In fact, most active sponsors of RMBS recognize that repurchase obligations
are designed to run for the lifetime of the trust. See, e.g., Citigroup Inc., Annual
Report for fiscal year ended Dec. 31, 2010 (Form 10-K), at 90, 145 (filed Feb. 25,
2011) (“Citi’s representations and warranties are generally not subject to stated
limits in amount or time of coverage”); Bank of America Corp., Annual Report for
fiscal year ended Dec. 31, 2009 (Form 10-K), at 144 (filed Feb. 26, 2010) (“[Bank
of America’s] representations and warranties are generally not subject to stated
limits and extend over the life of the loan”); Wells Fargo & Co., Quarterly Report
for the period ended Sept. 30, 2010 (Form 10-Q), at 38 (filed Nov. 5, 2010)
(“Investors may demand repurchase at any time …”) (available at sec.gov);
Reuters, Private RMBS Take First Steps to U.S. Comeback (Mar. 22, 2013)
(available at http://www.reuters.com/article/
18
2013/03/22/abs-rmbs-us-idUSL1N0CE9HS20130322) (“While older R&W
provisions and repurchase obligations were for the life of the loan, some recent
RMBS proposals contain ‘sunset provisions’ that free lenders from repurchase
obligations after less than 36 months”).
Also, as the Supreme Court recognized, DBSP’s attempt to place a six-year
time limitation on its repurchase obligation: (a) “is squarely at odds with Section
7(a) of the MLPA,” which “sets forth that the Trustee’s right to enforce DBSP’s
repurchase obligations ‘shall not be impaired’ by the Trustee’s failure to review
loan files or conduct any due diligence on the veracity of the Representations,”
because (b) it would imply a duty on the Trustee “to conduct constant due
diligence on the veracity of the Representations to ensure that lies are ferreted out
before the [purported] time to make a repurchase demand expires.” [R.15-16; see
also R.292 (MLPA §4 (e) (“The fact that the Purchaser or any person has
conducted or has failed to conduct any partial or complete examination of the
Mortgage Files shall not affect the rights of the Purchaser or [the Trust] to demand
repurchase or other relief as provided herein or under the [PSA]”).)]
In sum, the Repurchase Protocol, in conjunction with Sections 4(e) and 7(a)
of the MLPA, shifts the risk of Defective Loans on DBSP for the life of the Trust.
In fact, the Complaint alleges that the price of the Certificates – and indeed, the
securitization itself – depended on DBSP’s continuing obligation to repurchase all
19
Defective Loans. [R.33-34, 39-40 (Cmplt. ¶¶ 5-7, 26-27)] To read the
Agreements as placing a six-year time limitation on DBSP’s repurchase obligation
“utterly belies the parties’ relationship and turns the PSA on its head.” [R.15-16]
See also Innophos, Inc. v. Rhodia, S.A., 10 N.Y.3d 25, 29 (2008) (“The
fundamental, neutral precept of contract interpretation is that agreements are
construed in accord with the parties’ intent” and the “best evidence” of that intent
is “what they say in their writing.”)
2. DBSP Concedes That The Trust’s Cause Of ActionAccrued When DBSP Rejected The Trustee’sDemand For Cure Or Repurchase
Accordingly, as DBSP conceded in its memorandum of law below (“DBSP
Mem.”),6 DBSP only breaches its continuing repurchase obligation – and the
Trust’s cause of action only accrues – when DBSP fails or refuses to repurchase
Defective Loans upon the Trustee’s demand:
The Repurchase Protocol sets forth a specific process by whichDBSP’s repurchase obligation may be enforced. First, the Trusteemust provide DBSP with notice that specific Mortgage Loansmaterially breach specific representations and warranties. Next, theTrustee must provide DBSP with 60 days to cure or 90 days torepurchase the Mortgage Loans at issue. Once this period has expiredwithout the breaches being cured or the loans being repurchased, theTrustee can bring suit to enforce DBSP’s obligation to repurchasesuch loans.
6 Although DBSP’s memorandum of law in support of its motion to dismiss isnot part of the record on this appeal, the Trustee will provide the Court with a copyshould the Court so request.
20
(DBSP Mem. at 12 (emphasis added).) [See also R. 1173 (comments of DBSP
counsel at oral argument: “the whole purpose of the repurchase protocol is for the
trustee to give us notice of 90 days to effect a repurchase, and only at that point is
the trustee authorized to seek to enforce the repurchase protocol”).] Notably,
DBSP made these concessions below as part of its argument that certain of the
Trust’s claims were not ripe. (DBSP Mem. at 12-13) It is apparent that DBSP
dropped this argument on appeal because of the blatant contradiction in its
contentions: claims cannot be both time barred and not ripe.
Consistent with DBSP’s concession, the Supreme Court correctly
held, as part of its discussion of CPLR § 206(a),7 that:
(a) the “three steps” of the Repurchase Protocol “must be followed beforethe Trustee can sue DBSP for breach of its repurchase obligations;”
(b) “[i]t, therefore, follows that DBSP does not breach the PSA, and theclaim for breach does not accrue until” (i) the Trustee demands cureor repurchase (ii) “the cure period lapses,” and (iii) “DBSP fails totimely cure or repurchase a loan;” and thus,
(c) “[t]he statute of limitations began to run when DBSP improperlyrejected the Trustee’s repurchase demand.” [R.15-17]
7 Section 206(a) provides that “where a demand is necessary to entitle aperson to commence an action, the time within which the action must becommenced shall be computed from the time when the right to make the demand iscomplete ....”
21
The Supreme Court’s ruling conforms with well-established New York law,
which holds that where “a [plaintiff’s] demand and [a defendant’s] refusal are
requisite elements of the cause of action,” that “demand requirement is
substantive” and a plaintiff’s cause of action “accrues … only after such demand
and refusal.” Kunstsammlungen zu Weimar v. Elicofon, 678 F.2d 1150, 1161 (2d
Cir. 1982) (citing cases).8 Here, the Repurchase Protocol prevents the Trust from
suing DBSP for breaches of the Mortgage Representations in isolation – a fact that
DBSP affirmatively argued below. (See DBSP Mem. at 12-13) Instead, pursuant
to the Repurchase Protocol, when the Trustee learns of Defective Loans, the
Trustee must provide prompt notice to DBSP, demand that DBSP cure or
repurchase the Defective Loans, and allow DBSP the prescribed periods to so cure
or repurchase. Only if DBSP fails to cure or repurchase within the prescribed
periods, does DBSP breach the Agreements. [See R.15-17] Indeed, if DBSP had
repurchased the Defective Loans upon the Trustee’s demand, there would be no
breach of contract and no injury to the Trust. See Continental Casualty Co. v.
8 “On the other hand, where the demand is merely procedural, that is, wheredemand and refusal are not requisite elements of the cause of action and thedefendant’s actionable conduct was complete prior to demand, § 206(a) of theN.Y.C.P.L.R. ‘governs and the limitation period begins to run when the right tomake the demand is complete.’” Kunstsammlungen, 678 F.2d at 1161 (quotingGanley v. Troy City Nat’l Bank, 98 N.Y. 487, 494 (1885)). “Under theseprinciples, § 206(a) does not apply to substantive demands, and in practice§206(a)’s actual application ‘has been extremely limited.’” Id. (citing WEINSTEIN,KORN & MILLER, N.Y. Civ. Prac. ¶ 206.01 at 2-159 (2d ed. 1980)).
22
Stronghold Ins. Co., 866 F. Supp. 143, 147 (S.D.N.Y. 1994) (“[D]emand and
refusal are essential elements of the cause of action because there would otherwise
be no breach of contract”), aff’d, 77 F.3d 16 (2d Cir. 1996).
As a result, the Trustee’s demand and DBSP’s refusal are essential elements
of the Trust’s cause of action and thus, under New York law, the demand
provisions of the Repurchase Protocol are substantive and the Trust’s cause of
action did not accrue until DBSP’s refused to abide by its repurchase obligation.
See John J. Kassner & Co. v. City of N.Y., 46 N.Y.2d 544, 550 (1979) (“The
breach, if any, occurred … [when] the comptroller … refused to pay the full
amount demanded and allegedly due on the contract,” and plaintiff’s cause of
action only accrued at that point); Julias A. Nasso & Assocs. Concrete Corp. v.
Trataros Constr., Inc., 79 A.D.3d 471, 471 (1st Dep’t 2010) (“The breach of
contract claims therefore did not accrue until … the payment claims were finally
processed and defendants failed to pay the liquidated amounts”).9
9 See also Solomon R. Guggenheim Found. v. Lubell, 153 A.D.2d 143, 147(1st Dep’t 1990) (Until demand is made and refused, possession of the stolenproperty by the good-faith purchaser for value is not considered wrongful and“[t]hus, the requirement that a demand be made upon a good-faith purchaser … is asubstantive element of the cause of action …. In other words, absent a demandthere is no cause of action for replevin against a good-faith purchaser, and absent acause of action the statute cannot begin to run”), aff’d, 77 N.Y.2d 311 (1991);Kunstsammlungen zu Weimar v. Elicofon, 536 F. Supp. 829, 848 (S.D.N.Y. 1981)(“The legal principle underlying the rule that the demand and refusal aresubstantive elements of the cause of action against the bona fide purchaser is thatthe bona fide purchaser’s possession is initially lawful, and only become unlawful
23
Moreover, as the Supreme Court explained:
[T]he instant case bears a resemblance to reinsurance, where theinsurance company is often contractually obligated to make a demandon its reinsurer when it pays out a claim to the underlying insured.The United States Court of Appeals for the Second Circuit, applyingNew York law, has held that a reinsurer does not breach itsobligations to the insurance company until the reinsurer rejects theinsurance company’s demand. See Continental Casualty Co. v.Stronghold Ins. Co. (“Continental”), 77 F.3d 16 (2d Cir. 1996).Though the reinsurer’s contractual liability stems from the insurancecompany’s claim payment to the insured, “the reinsurers were not inbreach[] of their contract to indemnify until they rejected thedemand.” Id. at 21.
[R.16]
In Continental, the Second Circuit found that the “‘demand,’ in the form of
notice to reinsurers of actual losses on the underlying insurance policies,” was
“substantive” under New York law and “an essential element of Continental’s
indemnity claims” because: (a) “Continental’s actual losses were not due and
payable [from defendant reinsurers] until a reasonable period of time elapsed after
it gave notice of them,” and (b) “the reinsurers were not in ‘breach’ of their
contract to indemnify until they rejected the demand (or until a reasonable time for
paying the losses elapsed).” 77 F.3d at 21. Accordingly, “Continental’s causes of
action accrued … when the [defendant] reinsurers refused to pay” or a reasonable
time for payment had passed “and not before.” Id.
once he has refused, upon demand, to return the property to the true owner”), aff’d,678 F.2d 1150 (2d Cir. 1982).
24
Similarly, here, the Trustee’s demand in the form of prompt written notice to
DBSP of Defective Loans was an essential element of the Trust’s breach of
contract claim because the Trust’s “actual losses” for the Defective Loans were not
“due and payable” until the cure and repurchase periods expired,10 and DBSP was
not in breach of its obligation to repurchase until it rejected the Trustee’s demand.
Id.; see also Craven v. Rigas, 71 A.D.3d 1220, 1222 (3d Dep’t 2010) (where “the
note permit[ted] plaintiff to declare the balance ‘immediately due and payable’
only” upon the expiration of a ten day period after plaintiff provided notice of
default, plaintiff’s cause of action did not accrue until that time); Russack v.
Weinstein, 291 A.D.2d 439, 441 (2d Dep’t 2002) (since “excess advance” was only
due upon expiration of a 60 day period after plaintiff’s demand, the “statute of
limitations did not begin to run until [those] 60 days” had passed).11
10 That the statute of limitations does not begin to run until the cure andrepurchase periods have lapsed is in line with “well-settled” New York law that “acontract is not breached until the time set for performance has expired.” RachmaniCorp. v. 9 E. 9th St. Apt. Corp., 211 A.D.2d 262, 265 (1st Dep’t 1995); Empire33rd LLC v. Forward Ass’n, 87 A.D.3d 447, 449 (1st Dep’t 2011) (same).11 In addition, where, like here, an agreement provides a party with the right todemand performance at any time during the life of the contract, the statute oflimitations runs from demand and refusal. See Franconia Assocs. v. United States,536 U.S. 129, 147 n.10 (2002) (where contracts granted borrowers the right toprepay the loan at any time, plaintiffs’ claims ran from the Government’s refusal toaccept prepayment); Lopez v. Highmount Assocs., 101 A.D.2d 618, 619 (3d Dep’t1984) (where no time was fixed for an agreement to sell real estate, the six-yearstatute of limitations did not begin to run until one of the parties to the agreementmade a specific demand for performance); Rossi v. Oristian, 50 A.D.2d 44, 46 (4th
25
B. DBSP’s Reliance On Hahn Is Misplaced
Nonetheless, DBSP argues that the Trustee’s demand pursuant to the
Repurchase Protocol is a procedural demand, and thus, has no impact on the
accrual of the Trust’s claim, citing the Court of Appeals’ decision in Hahn Auto.
Warehouse, Inc. v. Am. Zurich Ins. Co. (“Hahn”), 18 N.Y.3d 765 (2012). (DBSP
Br. at 26) DBSP is wrong as Hahn is completely consistent with both the Order
and the Trust’s position on this appeal.
In Hahn, the defendant (“Zurich”) had the right to demand various
reconciliation payments from the plaintiff (“Hahn”) under the terms of several
integrated insurance contracts (the “Insurance Agreements”). 18 N.Y.3d at 767-
768. Accordingly, Zurich asserted counterclaims, alleging that Hahn’s refusal to
pay certain invoices seeking such reconciliation payments breached the Insurance
Agreements. Id. at 769. Hahn moved for summary judgment, arguing that many
of Zurich’s counterclaims were time-barred under CPLR § 213(2). Id. The
Supreme Court granted Hahn’s summary judgment motion and the Appellate
Division, Fourth Department, affirmed. Id. at 769-770.
Dep’t 1975) (in an action based on a stock option agreement, which provided thatthe option could be exercised at any time, the statute of limitations ran from whenplaintiff demanded the stock and defendant refused); Lippe, 2002 U.S. Dist. LEXIS6024, at *10-11 (where agreement permitted plaintiff to demand documents fromdefendant “after closing,” plaintiff’s breach of contract claim accrued uponplaintiff’s demand and defendant’s failure to deliver the documents demanded).
26
Before the Court of Appeals, “Zurich acknowledge[d] that it had the right
under its contracts to bill Hahn years earlier for many of the sums reflected in the
April 2005, March 2, 2006 and March 27, 2006 invoices – in some instances more
than a decade earlier – but failed to do so through inadvertence.” Id. at 771.
Nonetheless, Zurich argued that since the Insurance Agreements purportedly
required Zurich to first demand payment, CPLR § 213(2)’s six-year statute of
limitations did not begin to run until those demands were made. Id. at 770.
The Court of Appeals rejected this argument, holding “that the statute of
limitations on Zurich’s counterclaims began to run when it acquired the right to
demand payment of the various amounts owed under the policies” because the
Insurance Agreements did not condition “its right to payment on its own demand
[and] … the contracts contain specific references to the applicable time periods[,
annually in most instances,] when Zurich was entitled to calculate adjustments and
bill Hahn for the amounts owed.” Id. at 771-772 (citations omitted). In other
words, pursuant to the Insurance Agreements, Hahn owed Zurich any
reconciliation payments upon Zurich’s annual calculations. Id. Thus, Zurich’s
purported written demand, by invoice, was not an element of Zurich’s breach of
27
contract claim because any amounts Hahn owed to Zurich were owed prior to and
independent of Zurich making a demand.12
As noted here, DBSP’s breach only arose upon the Trustee’s demand, in the
Breach Notices, on DBSP to cure or repurchase the Defective Loans and DBSP’s
refusal or failure to cure or repurchase within the prescribed periods. Accordingly,
the Trust’s cause of action for DBSP’s breach of its repurchase obligation accrued
only upon DBSP’s refusal. Notably, the Court of Appeals in Hahn distinguished
Continental on the basis that the notice/demand provision in Continental was
intended to “allow[] the insurance company time to investigate and pay the claim.”
18 N.Y.3d at 772 n.5. Similarly, here, the notice/demand provision in the
Repurchase Protocol provides DBSP with 60 to 90 days to investigate the
Trustee’s demand and cure or repurchase Defective Loans.13 In fact, in a letter
12 DBSP also cites this Court’s decision in Elie Int’l, Inc. v. Macy’s W. Inc.,106 A.D.3d 442 (1st Dep’t 2013), but that case, relying on Hahn and presentingalmost identical facts to those at issue in Hahn, is also inapplicable here. As inHahn, defendant owed payments to plaintiff upon the sale of goods (regardless ofplaintiff’s demand), the agreement only required “an invoice” to demand payment,and plaintiff invoiced defendant for payments eight years after the sale. Id. at 443.Accordingly, following Hahn, this Court held that the “invoice” requirement “didnot affect the accrual date of the breach of contract claim.” Id.13 Although DBSP also relies on Lehman Bros. Holdings, Inc. v. EvergreenMoneysource Mortg. Co. (“Evergreen”), 793 F. Supp. 2d 1189 (W.D. Wa. 2011),and Structured Mortg. Trust 1997-2 v. Daiwa Fin. Corp. (“Daiwa”), 2003 U.S.Dist. LEXIS 2677 (S.D.N.Y. Feb. 25, 2003), these cases are – as the SupremeCourt recognized [R.14] – inconsistent with controlling New York law in that theyimproperly compare a repurchase protocol to a simple, procedural demand for
28
responding to one of the Trustee’s demands, DBSP admitted that the 90-day
repurchase period was intended to provide DBSP time “to assess the alleged
breaches.” [R.857-858]
C. DBSP’s Remaining “Accrual” Arguments Are Meritless
DBSP also contends that the Supreme Court held that a breach of a
Mortgage Representation was not an actual breach. (DBSP Br. at 17-23) The
Order says nothing of the sort. Rather, as noted supra, the Supreme Court simply
recognized that the Agreements provide a remedy through the Repurchase Protocol
if a party, discovering a breach of a Mortgage Representation that materially and
adversely affects the value of a Mortgage Loan, provides notice to DBSP and
demands that DBSP cure or repurchase the Defective Loan. [R.13-17]
Accordingly, the Supreme Court held that “the only contractual wrong that DBSP
[] commit[ted] [was its] failure to abide by [the Repurchase Protocol]” after the
Trustee made a repurchase demand and the prescribed periods expired. [R.15
(emphasis in original).] In other words, DBSP only breached the Agreements –
payment, like that made in Hahn. Further, both cases are inapposite because therepurchase claims in those actions had been abandoned or simply were neverpursued. See Evergreen, 793 F. Supp. 2d at 1193; Daiwa, 2003 U.S. Dist. LEXIS2677, at *2-3. Nomura Asset Acceptance Corp. Alt. Loan Trust, Series 2005-S4 v.Nomura Credit & Capital, Inc. (“Nomura”), 2013 N.Y. Misc. LEXIS 2001 (Sup.Ct. N.Y. Cnty. May 10, 2013), also relied upon by DBSP, makes the same mistake,incorrectly equating the multi-step Repurchase Protocol with the procedural“demand for payment” at issue in Hahn. See id. at *28.
29
and the Trust’s cause of action only accrued – when DBSP refused to abide by its
cure and repurchase obligations under the Repurchase Protocol.
Finally, the Trustee’s demand is not a procedural demand simply because
the Repurchase Protocol provides the Trust with a remedy. (DBSP Br. at 23-29)
In fact, New York courts have consistently found that demands required by
contractual, remedial provisions are substantive demands regardless of the
remedial nature of the demand. See, e.g., Craven, 71 A.D.3d at 1222 (finding
demand required to recover for defaulted loan to be substantive); Russack, 291
A.D.2d at 441 (finding demand required to recover “excess advance” was
substantive); Continental, 77 F.3d at 21 (finding demand required to seek
indemnity to be substantive).14
14 The recent decision in Deutsche Alt-A Sec. Mortg. Trust, Series 2006-OA1 v.DB Structured Prods., Inc. (“DBALT”), 2013 U.S. Dist. LEXIS 104417 (S.D.N.YJuly 24, 2013), does not address statute of limitations issues and is of no help toDBSP on this appeal. Although DBALT discusses whether a defendant’s breach ofits repurchase obligation is an independent breach of contract, it does so solely inthe context of holding that the DBALT agreements limited plaintiff to the “soleremedy” of cure or repurchase. Id. at *24-25. Indeed, DBALT concluded its soleremedy analysis by quoting the Order:
Even in [the Order], where the [Supreme Court] explains that thedefendant commits an independent breach each time it fails itsrepurchase obligation for the purpose of the statute of limitationsaccruing, the court was clear that recovery was “limited to the [soleremedy provision] in the PSA.” …. Defendant’s failure to repurchaseis thus not an independent breach sufficient to invalidate the “soleremedy” provision.
Id. at *31-32 (emphasis added).
30
II. In Any Event, This Action Was Filed WithinSix Years Of The Closing Of The Agreements
A. The SWN Commenced This Action WithinCPLR § 213(2)’s Limitation Period
Although the Supreme Court did not reach this issue, the Trust’s claims are
timely for the separate and independent reason that this action – which was
commenced on March 28, 2012 by the filing of the SWN by two Certificateholders
– was filed within six years of the March 28, 2006 closing of the Agreements.
New York law dictates that the filing of a SWN “fixe[s] the point at which
an action [is] commenced for statute of limitations purpose[s].” Bumpus v. N.Y.
City Tr. Auth., 66 A.D.3d 26, 30-31 (2d Dep’t 2009). See also Snay v. Cohoes
Mem’l Hosp., 110 A.D.2d 1021, 1022 (3d Dep’t 1985) (“We … recogniz[e] that
since the summons [with notice] was properly served upon defendant ... the action
was commenced and cannot be considered a nullity”); Lutzker v. Novo Nordisk
Pharms., Inc., 2008 U.S. Dist. LEXIS 26604, at *8 (E.D.N.Y. Apr. 2, 2008) (“[A]
straightforward reading of New York’s civil practice rules indicates that claims
contained in the complaint are automatically deemed to have been initiated at the
time the summons with notice is filed”). Accordingly, even if the Trust’s claims
accrued on the March 28, 2006 closing of the Agreements, this action was timely
commenced by the filing of the SWN on March 28, 2012. [R.24-27, 78, 290
(MLPA §1; PSA §1.01)]
31
Nevertheless, DBSP contends that the SWN was defective (and therefore
this action was untimely) because the Certificateholders purportedly lacked
standing when they filed the SWN. (DBSP Br. at 30-34) DBSP is mistaken for a
number of reasons.
First, DBSP waived its right to challenge the Certificateholders’ standing by
accepting service of the curative Complaint. See Snay, 110 A.D.2d at 1022
(“[A]lthough the action was defective when commenced by service of the
summons due to plaintiff’s lack of capacity to sue as administratrix, and subject to
dismissal due to that defect, defendant never moved to dismiss the action; nor did
plaintiff discontinue the action. Accordingly, when the complaint was served, the
action was still pending and the defect had been cured”). Similar to the defendants
in Snay, instead of objecting to the sufficiency of the SWN, DBSP demanded the
Complaint and, when the Complaint was served, the Trustee had been substituted
as the party bringing suit on behalf of the Trust. Thus, the Complaint cured any
purported standing defect, and DBSP’s argument is moot.15
Second, the Certificateholders alleged that they had standing by virtue of
their compliance with the “No Action” provision of the PSA. That provision
15 Although DBSP argued below that a party cannot move to dismiss asummons with notice for lack of standing, New York case law is to the contrary.See Bojanovich v. Woitach, 2013 N.Y. Misc. LEXIS 2366, at *7-9 (Sup. Ct. N.Y.Cnty. June 3, 2013).
32
requires, among other things, that the suing Certificateholders hold 25 percent of
the Certificates, provide “a written notice of default and of the continuance
thereof,” to the Trustee, make a “written request upon the Trustee to institute such
action,” and offer the Trustee reasonable indemnification. [R.214-215 (PSA
§12.03 (emphasis added).)] The SWN alleged that the Certificateholders met all of
these requirements. [R.26] Although DBSP relies on this Court’s opinion in
Walnut Place LLC v. Countrywide Home Loans, Inc., 96 A.D.3d 684 (1st Dep’t
2012), that decision is inapposite because the agreements in Walnut Place only
permitted certificateholders to sue for defaults by the servicer or master servicer –
i.e., not sponsors/sellers like DBSP here. Id. at 684-685. The PSA contains no
such limitation, and Certificateholders who comply with the “No Action” clause of
Section 12.03 may maintain actions for any defaults by any party to the
Agreements. [R.214-215] DBSP’s securitization of thousands of Defective Loans
is assuredly a default within the plain meaning of that word.
Third, the relation-back doctrine, which DBSP says precludes the Complaint
from having the benefit of the SWN’s filing date, does not apply to a complaint
filed after a summons with notice. The relation-back doctrine, codified at CPLR §
203(f), applies only to amended pleadings. It does not apply here because: (a) a
summons with notice is not a “pleading” under New York law, Giambrone v.
33
Giambrone, 140 A.D.2d 206, 208 (1st Dep’t 1988);16 and (b) a complaint does not
“amend” a summons with notice. See Olsen v. 432 E. 57th St. Corp., 145 Misc. 2d
970, 972 (Sup. Ct. N.Y. Cnty. 1989) (“Under CPLR 3011, a plaintiff’s initial
pleading in an action is the complaint, not the summons with notice served without
the complaint”) (emphasis in original).
Fourth, even if the relation-back doctrine applied here (which it does not),
this Court has held that an amended pleading substituting a plaintiff with standing
– here, HSBC, as Trustee – is considered, for statute of limitations purposes, as
having been interposed at the commencement of the action (e.g., when the SWN
was filed), even if the original plaintiff lacked standing, so long as there is no
surprise or prejudice to the defendant. See Fairbanks Capital Corp. v. Nagel, 289
A.D.2d 99, 100 (1st Dep’t 2001) (even where original plaintiff lacked standing,
“the substitution of Fairbanks … relates back to the original commencement of the
action … for purposes of the Statute of Limitations, given that the substitution did
not result in any prejudice or surprise to [defendant]”); Am. Home Assur. Co. v.
Scanlon, 164 A.D.2d 751, 751-752 (1st Dep’t 1990) (even though original plaintiff
lacked standing, the court found that the substituted plaintiff’s claims related back
to the filing of the original complaint because “the original pleading gave notice of
16 See also Lutzker, 2008 U.S. Dist. LEXIS 26604, at *11-12 (New York law “doesnot characterize a summons with notice as a pleading” nor “does [it] characterize”the complaint’s claims “as relati[ng] back” to the prior-filed summons with notice).
34
the transactions … or occurrences[] to be proved pursuant to the amended
pleading”) (quotations omitted); Frankart Furniture Staten Island, Inc. v. Forest
Mall Assocs., 159 A.D.2d 322, 323 (1st Dep’t 1990) (where original plaintiff
lacked standing, this Court noted that “[d]efendants cannot complain that they are
prejudiced ... because when a court permits an amendment of the title to an action,
even though the Statute of Limitations has run, there is no prejudice so long as
defendant has not been brought into the action for the first time by the
amendment”) (quotations omitted); see also HSBC Guyerzeller Bank AG v.
Chascona N.V., 42 A.D.3d 381, 383-390 (1st Dep’t 2007) (McGuire, J.,
concurring) (“[A] pre-existing action in which the plaintiff lacks standing is … a
‘valid’ action” precisely of the type “to which an amended pleading could relate
back”); Schleidt v. Stamler, 106 A.D.2d 264, 266 (1st Dep’t 1984) (“This court has
been very liberal in allowing the addition or substitution of new parties, even after
the Statute of Limitations has run, where the cause of action remains unchanged”)
(quotation omitted).17
17 The court in Nomura attempted, but failed, to distinguish this Court’sdecisions in four of these cases. As to Frankart, American Home and HSBCGuyerzeller Bank, the Nomura court held that “(a)ll turn on the fact” that the“substituted plaintiff was a closely related corporate affiliate of the originalplaintiff.” 2013 N.Y. Misc. LEXIS 2001 at *22. However, none of those cases“turn[ed]” on “th[at] fact” and this Court never cited the “closely related” nature ofthe parties in support of these holdings. Moreover, in this action, the substitutedplaintiff, the Trustee, is closely related to the original plaintiffs, twoCertificateholders of the Trust, and in truth, the real plaintiff in this action has
35
Here, the Complaint cures any question as to standing. The Trust has always
been the true plaintiff in this action, as both the two Certificateholders and the
Trustee asserted claims on behalf of the Trust. In addition, the Complaint
substituted the Trustee, and there is no question that the Trustee, on behalf of the
Trust, has standing to prosecute this action. [R.121-123 (PSA §2.03)] Further,
DBSP has not been surprised or suffered prejudice: the Breach Notices and the
SWN provided DBSP with sufficient notice regarding the claims against it [R.24-
27], and gave DBSP both “prior knowledge of the claim[s] and an opportunity to
prepare a proper defense.” Fulgum v. Town of Cortlandt Manor, 19 A.D.3d 444,
446 (2d Dep’t 2005). Indeed, the claims asserted by the Trust in the SWN are
identical to the claims asserted by the Trust in the Complaint. Accordingly, this
action was timely commenced upon the filing of the SWN on March 28, 2012.
B. The Nomura Decision Is Based On AFlawed Analysis Of New York Case Law
DBSP relies heavily on Nomura for the proposition that the Complaint does
not relate back to the SWN for statute of limitations purposes. Nomura – which
dismissed as untimely a different RMBS action where HSBC is also the trustee –
relies principally on Goldberg v. Camp Mikan-Recro, 42 N.Y.2d 1029, 1030
always been the Trust. As for Fairbanks, the Nomura court simply states that it isinconsistent with other New York case law. Id. at *21. However, as demonstratedinfra (at 36-38), Fairbanks represents the better reasoning in the application ofCPLR § 203(f) to substituted plaintiffs.
36
(1977). In Goldberg, the Court of Appeals held that an amended complaint,
asserting a wrongful death claim, filed by a father as the administrator of his son’s
estate did not, for statute of limitations purposes, relate back to the original
complaint, which the father had filed prior to his appointment as administrator.
In relying on Goldberg, Nomura failed to properly consider subsequent
decisions by the Court of Appeals in Carrick v. Cent. Gen. Hosp., 51 N.Y.2d 242
(1980) and George v. Mt. Sinai Hosp., 47 N.Y.2d 170 (1979), as well as
subsequent Appellate Division decisions interpreting Goldberg, George and
Carrick. For example, in George and Carrick – decided with three years of
Goldberg – the Court of Appeals held that actions dismissed for lack of standing
are not a “nullity” for purposes of the revival provisions of CPLR § 205(a).
Accordingly, after George and Carrick, an action dismissed pursuant to Goldberg
for lack of standing can immediately be revived under CPLR § 205(a) once the
standing defect is cured. In fact, one panel of this Court, relying on Goldberg and
CPLR § 203(f), affirmed the dismissal of an action, only to have another panel
recently affirm the revival of that very same action under CPLR § 205(a). See S.
Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC, 80 A.D.3d 505, 505-506
(1st Dep’t 2011); S. Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC, 104
A.D.3d 613, 613 (1st Dep’t 2013).
37
Here – where any purported standing defect was cured before the Complaint
was filed and served and the Supreme Court even held oral argument on DBSP’s
motion to dismiss – dismissing the action only so that it can be immediately
revived pursuant to CPLR § 205(a) is nonsensical and contrary to the principles of
judicial economy. Responding to this reality, Appellate Division panels have
recognized that Carrick either “overruled” or “severely limited” the holding of
Goldberg. Snay, 110 A.D.2d at 1022. See also HSBC Guyerzeller Bank, 42
A.D.3d at 383-390.
A helpful discussion of the interplay between the relation-back doctrine,
codified at CPLR § 203(f), and the revival statute, codified at CPLR § 205(a), is
set forth in Justice McGuire’s concurring opinion in this Court’s decision in HSBC
Guyerzeller Bank:
[Defendant] Chrysler relies on the statement in George … that “anecessary element of any attempt to utilize the relation-back’provisions of [CPLR § 203(f)] is the existence of a valid pre-existingaction to which the amendment can relate back” (see also … Carrick…). Accordingly, Chrysler argues that the relation-back provisions ofCPLR 203(f) cannot apply here because, given Guyerzeller’s lack ofstanding, there is no “valid pre-existing action” to which an amendedpleading could relate back.
Although the Court of Appeals has not clarified what a “valid pre-existing action” entails in this particular context, one need not lookbeyond the Court’s decision in George itself to find reason to thinkthat a pre-existing action in which the plaintiff lacks standing is such a“valid” action. After all, the Court of Appeals stated in George thatalthough dismissal is the “appropriate response” to an action “broughtin the name of the wrong party,” such an action “is no more a nullity
38
than are actions … dismissed for lack of jurisdiction or for nonjoinder,and yet the latter are traditionally deemed to be prior actions forpurposes of CPLR 205 (subd [a])” …. Thus, if Chrysler is correct, acurious conclusion would follow: Guyerzeller brought a foreclosureaction which was not a “nullity” but yet was not a “valid” action. Italso would follow that [this Court’s decisions in] Schleidt (supra),American Home (supra) and Fairbanks Capital (supra) were wronglydecided. In the absence of a persuasive reason to conclude that anaction in which the plaintiff lacks standing is not a “valid pre-existingaction,” we should continue to adhere to this line of [FirstDepartment] cases.
42 A.D.3d at 389-390.
As Justice McGuire recognized, it makes no sense to find that a lack of
standing creates an invalid action, but also one that is not a “nullity;” It is equally
nonsensical to dismiss an action just to have it immediately revived. The better
analysis of CPLR §§ 203(f) and 205(a) – and the decisions in Goldberg, George
and Carrick – is that an amended pleading filed by a party with standing relates
back to the commencement of the action even if the original plaintiff lacked
standing when the earlier pleading was filed, provided the defendant is not
surprised or prejudiced thereby.
III. The Supreme Court Correctly Rejected DBSP’sHypothetical Arguments Regarding Charged Off,Liquidated Or Released Mortgage Loans
The Supreme Court also correctly rejected DBSP’s hypothetical argument
that certain categories of Defective Loans – which happen to include the worst
“junk mortgages” that were the first to default – were not available for repurchase.
39
First, DBSP offered nothing in its CPLR 3211 motion substantiating whether such
Mortgage Loans even exist or in what number. Further, DBSP’s arguments
directly conflict with the express and implied terms of the Agreements, which
require the repurchase of all Defective Loans.
A. New York Courts Do Not Resolve DisputedIssues Of Material Fact On CPLR 3211 Motions
DBSP argued below that an undefined number of Defective Loans it sold to
the Trust have supposedly been charged off, released, or liquidated and therefore,
are purportedly not subject to repurchase. The Complaint nowhere mentions these
supposed categories of Mortgage Loans, no documents in the record substantiate
DBSP’s contentions, and thus, the Supreme Court correctly held that this argument
was premature on a CPLR 3211 motion:
As for DBSP’s contention that the PSA’s damages calculationprohibits recovery by the Trustee, questions of fact clearly precludedismissal on this ground. Even if DBSP were correct that Released,Charged Off, and Liquidated Loans are not subject to repurchase,dismissal would still not be warranted because DBSP needs toestablish that all of the non-conforming loans fell into these definedcategories. Discovery is necessary to make these determinations.
[R.18] See also Wiener v. Spahn, 60 A.D.3d 586, 586 (1st Dep’t 2009)
(“Defendants are not entitled to dismissal of the complaint pursuant to CPLR
3211(a)(1), since they have not demonstrated that the documentary evidence
definitively resolves all material issues of fact, thereby resulting in the failure of
40
plaintiff’s claims as a matter of law”) (citations omitted); see also DBALT, 2013
U.S. Dist. LEXIS 104417, at *45-46 (citing the Order).18
As this Court has affirmed, where, as here, the plaintiff “alleges breach of
the [] Agreement due to breaches of representations and warranties pertaining … to
… the Loans … [and] that [plaintiff] served notice of the breaches and [defendant]
failed to cure the breaches or repurchase the breaching loans,” the breach of
contract claims “may not be dismissed” because “the complaint gives sufficient
notice of the claim.” CIFG Assur. N. Am., Inc. v. Goldman, Sachs & Co., 2012
N.Y. Misc. LEXIS 3986, at *37-39 (Sup. Ct. N.Y. Cnty. May 1, 2012), aff’d, 2013
N.Y. App. Div. LEXIS 3184 (1st Dep’t May 7, 2013); see also U.S. Bank Nat’l
Ass’n v. Countrywide Home Loans, Inc., 2013 WL 2356295, at *5 (Sup. Ct. N.Y.
Cnty. May 29, 2013) (plaintiff’s allegations that defendants breached sections of
the agreement and “that as a result, it suffered damages” were “‘sufficiently
particular to give the court and parties notice’” of the claim) (quoting CPLR 3013).
The allegations of the Complaint exceed this standard. [R.37-51 (Cmplt. ¶¶ 21-
40)]
Although DBSP contends for the first time on this appeal that the Trust
somehow had an affirmative duty to plead whether Mortgage Loans were charged
18 Indeed, DBSP actually admitted below that “the Court need not decide”these issues, regarding the purported status of the Mortgage Loans, “for purposesof this motion.” (Def. Mem. at 22 n.15)
41
off, liquidated, or released (DBSP Br. at 43-44), New York law is to the contrary.
Regardless of whether DBSP can assert defenses based on the purported categories
of certain Defective Loans, as this Court has recently held, “there [i]s no need for
the complaint to address every possible defense to the claim.” Gordon v. Credno,
102 A.D.3d 584, 585 (1st Dep’t 2013); see also Assured Guar. (UK) Ltd. v. J.P.
Morgan Inv. Mgmt. Inc., 80 A.D.3d 293, 305 (1st Dep’t 2010) (“There is no
requirement that a complaint anticipate and overcome every defense that might be
raised in opposition to a cause of action”).
B. DBSP Must Repurchase All Defective Loans
In any event, DBSP is wrong.19 Its tortured reading of the Agreements
would excuse it from liability for the very worst of the Mortgage Loans, i.e., the
Mortgage Loans that most egregiously breached the Mortgage Representations and
performed so poorly that they were the first to default. No Certificateholders
would have invested in the Trust if they had any idea that Defective Loans of any
type (and particularly, the very worst Defective Loans) would not be repurchased
or otherwise remedied by DBSP, and the Agreements were drafted to reflect that
fact. Indeed, as the Supreme Court noted, if DBSP were right, DBSP would be
incentivized to fill the Trust with “junk” Mortgage Loans, all in the hope that they
19 Although DBSP recognizes that the Supreme Court’s further discussion ofcharged off, released or liquidated Mortgage Loans may be dicta and not subject toappeal, it still advances arguments on this issue in its appeal. (DBSP Br. at 45)
42
would default quickly and be “released” out of the Trust, at no cost to DBSP,
before the Trustee could make a repurchase demand. [R.18] Nothing in the
Agreements suggests that the parties intended such an absurd result and New York
courts have repeatedly rejected such self-serving arguments.
For example, in Trust for the Certificate Holders of the Merrill Lynch
Mortg. Pass-Through Certificates Series 1999-C1 v. Love Funding Corp. (“Love
Funding”), 2005 U.S. Dist. LEXIS 23522 (S.D.N.Y. Oct. 11, 2005), rev’d on other
grounds, 591 F.3d 116 (2d Cir. 2010), the agreements at issue – similar to the
Agreements here – contemplated the repurchase of foreclosed-upon loans by
including “Liquidation Proceeds” in the definition of Mortgage Loan. Like DBSP,
the defendant argued that it could not repurchase a Mortgage Loan after
foreclosure, but the court disagreed:
This contention is based on a faulty premise. The MLPA’s definitionof Mortgage Loan states that such a loan “includes without limitation… Liquidation Proceeds, Condemnation Proceeds, InsuranceProceeds, and all other rights, benefits, proceeds, and obligationsarising from or in connection with such Mortgage Loan.” Eventhough the mortgage has been foreclosed, several components of theArlington Loan continue to exist, which can be repurchased by LoveFunding, including the Louisiana court’s judgment against Cyrus infavor of the Trust and the proceeds, which are held by a receiver, fromthe court-ordered sale of the Property. Therefore, Love Funding’sperformance is not impossible.
43
Id. at *34-35. As discussed infra (at 49-53), the PSA’s definition of “Purchase
Price” – by deducting “Liquidation Proceeds” – accomplishes the same result here,
and DBSP’s arguments should be rejected accordingly.
Further, two recent New York RMBS decisions confirm that the Trust is
entitled to relief regardless of the purported status of the Mortgage Loans. In
Assured Guar. Mun. Corp. v. Flagstar Bank, FSB (“Flagstar”), 2013 U.S. Dist.
LEXIS 16682 (S.D.N.Y. Feb. 6, 2013), plaintiff Assured Guaranty Municipal
Corp. (“Assured”) insured two RMBS trusts that securitized approximately 15,000
mortgage loans originated by defendant Flagstar Bank, FSB (“Flagstar”). Like
DBSP here, Flagstar made certain representations and warranties regarding the
characteristics and quality of the mortgage loans in the trusts and agreed to
repurchase any loans that breached those representations and warranties. Id. at *7-
10. After discovering that a significant number of mortgage loans were defective,
Assured demanded, through two written notices, that Flagstar repurchase the
defective loans. Id. at *28-29. When Flagstar refused, Assured filed suit to
recover the insurance proceeds that it had paid to the bondholders of those trusts.
After a bench trial, the court awarded Assured over $90 million in damages by
extrapolating the breach rate found in a 400-loan sample from each of the two
trusts. Id. at *29, 119-120. In so doing, the Flagstar court specifically found that
an award of damages did not conflict with the repurchase provision in the
44
agreements because Flagstar “would … receive nothing back on defaulted loans,
even if specific loans in the sample were identified and re-transferred.” Id. at
*115.
Next, in Wells Fargo Bank, N.A. v. Bank of Am., N.A., 2013 U.S. Dist.
LEXIS 44955 (S.D.N.Y. Mar. 28, 2013), plaintiff Wells Fargo Bank, N.A., as
trustee on behalf of certificateholders in an RMBS trust, brought an action against
defendant Bank of America, N.A. (“BOA”) for breach of BOA’s contractual
obligation to cure or repurchase a securitized mortgage loan that materially and
adversely breached certain loan-level representations and warranties made by
BOA. The parties cross-moved for summary judgment, with BOA contending
that, among other things, repurchase of the loan was impossible “because the
mortgage securing the [l]oan ha[d] been foreclosed and almost all of the [p]roperty
ha[d] been sold ….” Id. at *35. The Court disagreed, holding:
“[A] ‘repurchase provision is designed to shift the risk to the sellingparty in the event that a dispute arises,’ and that such a provision isthe appropriate method of making Plaintiff whole once a breach ofwarranty is established.” Wells Fargo (Okla.), … 2011 U.S. Dist.LEXIS 93927 at [*7] (applying New York Law) ….
The parties bargained for the purchase price calculation as defined inthe PSA, and BOA’s contention that this calculation applies onlywhere repurchase is possible is unavailing in light of the case law.See … Resolution Trust, 280 F.3d at 18 (“[Defendant] claims thatrepurchase is [Plaintiff’s] sole remedy under the contract, andtherefore, awarding general contract damages provides [Plaintiff] witha windfall. [Defendant’s] argument is misplaced. Whether or not[Plaintiff] committed an independent breach by failing to repurchase
45
on demand, the district court was free to make [Defendant] whole, andit did so in terms of the obligation imposed by the contract.” (internalfootnote omitted)); Lehman Bros., 237 F. Supp. 2d at 638 (concludingthat the purchase price as defined in the PSA was an appropriatedamages calculation where it was not possible for Defendant torepurchase the applicable loan); Capco, ... 2005 U.S. Dist. LEXIS27781, … at [*18] (“The parties agreed to a method of calculating therepurchase price. PSA §1.01. By awarding damages in the amountthat Capco agreed to pay in the event of breach, the court will makeLaSalle whole.”). Here, repurchase is impossible, given theforeclosure and subsequent sale of the Property; however, the PSAspecifically provides that, in the event of a material breach of theMLPSA, the purchase price, offset by any proceeds generated byPlaintiff’s liquidation of the Properties that are not provided asreimbursement to the Trust for reasonable servicing advances,represents the appropriate damages calculation.
Id. at *38-41 (emphasis and alterations in original); see also DBALT, 2013 U.S.
Dist. LEXIS 104417, at*44-46 (“DBSP’s argument that loans in these categories
are not subject to repurchase because they are no longer assets of the Trust (or that
their defined Purchase Price is now $0) is … unconvincing”) (citing the Order and
Flagstar). It is now well-established by New York courts that RMBS agreements,
similar to the Agreements here, place the risk of Defective Loans on the sponsor-
seller, (i.e., DBSP), and sponsor-sellers cannot escape liability for Defective Loans
because, through their own wrongdoing, certain Defective Loans were the first to
default.
46
1. DBSP Must Repurchase Charged Off Or ReleasedMortgage Loans
Further, the Agreements expressly require DBSP to repurchase all Defective
Loans. The MLPA states that DBSP is obligated to “repurchase the affected
Mortgage Loan” (i.e., a Mortgage Loan that materially and adversely breaches a
Mortgage Representation) with “Mortgage Loan” being defined as all the “second
lien, residential mortgage loans … having an aggregate principal balance as of
[March 1, 2006] of approximately $537,844,669” and sold by DBSP to the Trust
on March 28, 2006. [R.290, 300 (MLPA §§1, 7(a))] This broad definition does
not exempt any charged off or released Mortgage Loans. Instead, DBSP ignores
the MLPA altogether and instead asserts that it is solely Section 2.03 of the PSA
(specifically, a single phrase from this section, “from REMIC I”) that governs
DBSP’s repurchase obligation. (DBSP Br. at 34-35) However, DBSP took the
exact opposite position below – asserting that the “Sponsor’s repurchase obligation
arises under the MLPA, not the PSA.” (DBSP Mem. at 14 n.12) In short, because
the MLPA places no limitations on the Defective Loans that DBSP must
repurchase, absent some express negation thereof in the PSA (which does not
exist), DBSP’s repurchase obligation applies to all Defective Loans. See HSBC
Bank USA v. Nat’l Equity Corp., 279 A.D.2d 251, 253 (1st Dep’t 2001) (“[W]here
two seemingly conflicting contract provisions reasonably can be reconciled, a court
is required to do so and to give both effect”) (quotations omitted).
47
In any event, the PSA is entirely consistent with the MLPA regarding the
scope of DBSP’s repurchase obligation. The PSA defines “Mortgage Loan” as
“[e]ach mortgage loan transferred and assigned to the Trustee … pursuant to
Section 2.01 of this Agreement … as held from time to time as a part of the Trust
Fund, the Mortgage Loans so held being identified in the Mortgage Loan
Schedule.” [R.87 (PSA §1.01)] The definition’s inclusion of the phrase “held
from time to time” – which can be restated as “at any time”20 – indicates that the
status of a Defective Loan has no bearing on DBSP’s obligation to repurchase
Defective Loans. In other words, regardless of whether a Mortgage Loan is now in
the Trust, so long as it was in the Trust at all (i.e., as long as it had been “held from
time to time” and was identified in the Mortgage Loan Schedule21), it comes within
the definition of “Mortgage Loan” and is subject to the Repurchase Protocol.
20 See BLACK’S LAW DICTIONARY, p. 341 (5th ed. Abr. 1983) (defining “fromtime to time” as “now and then”); Florey v. Meeker, 240 P.2d 1177, 1190 (Or.1952) (defining “from time to time” to mean “[a]s occasion may arise; atintervals;” or “occasionally,” and holding “that the phrase ‘from time to time’ isnot restrictive as to any particular period”) (quotations omitted); State Bank ofSatanata v. Gaskill, 1987 Kan. App. LEXIS 989, at *2 (Kan. Ct. App. May 7,1987) (finding that the phrase “from time to time” means “once in a while;occasionally” and is “not susceptible to different meanings, and especially cannotbe interpreted as meaning ‘for one year’”) (quotations omitted).21 The term “Mortgage Loan Schedule,” as defined in the PSA and used in thedefinition of “Mortgage Loan,” refers to the data tape attached to the PSA asSchedule 1. [R.87 (PSA §1.01)] Therefore, the “Mortgage Loans” susceptible torepurchase are those Mortgage Loans identified in the “Mortgage Loan Schedule”
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Further, the PSA’s definition of “REMIC I” – the primary trust that holds
the Mortgage Loans – is equally broad and includes:
(a) “[t]he segregated pool of assets …, constituting the primary trust …consisting of … such Mortgage Loans and Prepayment Charges asfrom time to time are subject to this Agreement …,” and
(b) the “rights under the Mortgage Loan Purchase Agreement” assignedto the Trust, including the right to demand that DBSP repurchase allDefective Loans.
[R.102 (PSA §1.01 (emphasis added).)] As with its definition of “Mortgage
Loan,” the PSA expressly includes in REMIC I those Mortgage Loans that are
“from time to time” subject to the PSA. The PSA also incorporates all of the
Trust’s rights under the MLPA in its definition of REMIC I, which includes the
Trustee’s right to demand that DBSP repurchase any Defective Loan.
Accordingly, the inclusion of “from REMIC I” in the PSA’s repurchase provision
does not limit DBSP’s obligation to repurchase Defective Loans in any way.
These provisions of the Agreements are consistent with the logical,
commercial bargain agreed to by the parties. It is nonsensical that the PSA would
assign to the Trust the right to demand repurchase of Defective Loans, as provided
by the MLPA, and then provide a much narrower definition of “Mortgage Loan” to
at the closing of the Agreements, or in other words, all of the Mortgage Loans thatDBSP sold to the Trust.
49
restrict those very same rights.22 Such an interpretation of the Agreements is a far
cry from the “plain meaning of [their] terms.” MBIA Ins. Corp. v. Countrywide
Home Loans, Inc., 34 Misc. 3d 895, 912 (Sup. Ct. N.Y. Cnty. 2012).
2. DBSP Must Repurchase Liquidated Mortgage Loans
Similarly, that a Defective Loan may have been liquidated – i.e., where the
underlying mortgage property may have been foreclosed upon – in no way
absolves DBSP of its repurchase obligation. Indeed, the parties specifically
contemplated the repurchase of liquidated Defective Loans because the PSA
expressly reduces a Defective Loan’s repurchase price by any foreclosure
proceeds:
Section 2.03 of the PSA requires DBSP to repurchase Mortgage Loans attheir “Purchase Price;”
Purchase Price is defined to include a Mortgage Loan’s “Stated PrincipalBalance;”
Stated Principal Balance has an offset for all “Liquidation Proceeds;” and
Liquidation Proceeds includes amounts received from “the liquidation ofa defaulted Mortgage Loan through a trustee’s sale, foreclosure sale orotherwise.”
22 Notably, nowhere in the Prospectus or the Prospectus Supplement for thissecuritization – publicly filed with the U.S. Securities and Exchange Commissionand required by federal securities laws to disclose the material risks of aninvestment in the Certificates – does DBSP warn investors that its repurchaseobligation is subject to any of the limitations it now claims on this appeal.
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[R.85, 99-100, 114 (PSA §1.01)] DBSP cannot possibly contend that it has no
obligation to repurchase a foreclosed-upon Defective Loan when the Repurchase
Protocol expressly contemplates repurchase after foreclosure.
DBSP nonetheless argues that the Purchase Price for a liquidated Mortgage
Loan is contractually defined as zero. DBSP is mistaken. As set forth above, the
definition of Purchase Price is the Stated Principal Balance of the Mortgage Loan
minus, among other things, any Liquidation Proceeds. Purchase Price is defined as
zero only where: (a) the Mortgage Loan has been paid in full; (b) the Mortgage
Loan has previously been repurchased; or (c) the servicer has issued a written
certificate (a “Final Recovery Certificate”) stating that, in its good faith judgment,
all proceeds recoverable on a particular Mortgage Loan have been recovered.
[R.83, 99-100, 114 (PSA §1.01)]
The Trust is not seeking the repurchase of Mortgage Loans paid in full or
previously repurchased, and the record on this appeal, and before the Supreme
Court, does not contain a single Final Recovery Certificate. In fact, since the Trust
is seeking repurchase of all Defective Loans, it is nonsensical that anyone would
make a written determination that no repurchase recovery was available. Further,
it is clear from the Agreements that Defective Loans are only priced at zero for
Trust management and accounting purposes.
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Significantly, the Agreements contemplate repurchase of all types of
Defective Loans, including Mortgage Loans that are not secured by a mortgage on
an underlying property – i.e., the very type of Defective Loans that DBSP argues it
cannot now repurchase. For example, in the Mortgage Representations, DBSP
represented that every Mortgage Loan sold to the Trust was secured by “a valid,
existing and enforceable second lien on the Mortgaged Property.” [R.295 (MLPA
§6(x))] Thus, a Mortgage Loan in breach of Section 6(x) is, by definition, a
mortgage loan that is not secured by a mortgage or deed of trust on real property,
and yet, also by definition, it is a Mortgage Loan that DBSP must repurchase.
How is it that DBSP must repurchase a Mortgage Loan that never had a lien, but
need not repurchase a Mortgage Loan that no longer has a lien?
That DBSP must repurchase all Defective Loans makes sense. As
previously noted, nothing in the Agreements places an obligation on the Trustee to
investigate the Mortgage Loans for breaches of the Mortgage Representations prior
to foreclosure, and, in fact, DBSP expressly agreed that the Trustee had no such
obligation. [R.292, 300 (MLPA §§4(e) and 7(a))] It would also be unreasonable
to impose an obligation on the Trustee to uncover each and every Defective Loan
prior to instituting foreclosure because, among other reasons, foreclosure is the
Trust’s primary mechanism for mitigating losses. In fact, DBSP benefits from
foreclosure proceedings because the repurchase price it owes to the Trust is
52
significantly reduced by Liquidation Proceeds, and it is relieved of the time and
expense of pursuing foreclosure on its own.
Unable to contest the express language of the Agreements, DBSP relies on
an earlier, non-binding decision from the United States District Court for the
District of Minnesota, MASTR Asset Backed Sec. Trust 2006-HE3 v. WMC Mortg.
Corp., 2012 U.S. Dist. LEXIS 142579 (D. Minn. Oct. 1, 2012), which: (a) was
decided on a motion for summary judgment, not a motion to dismiss; (b) addressed
the very same Mortgage Loan language at issue in Love Funding; and (c) openly
ignored New York principles of contract interpretation in reaching its holding.
Similar to the Agreements here and in Love Funding, the agreements in MASTR
expressly included foreclosure proceeds in the definition of Mortgage Loan, but
the court simply ignored that language. Id. at *14.23 Nothing about the MASTR
decision is consistent with New York law. See, e.g., Pavarini McGovern, LLC v.
Tag Ct. Sq., LLC, 62 A.D.3d 680, 680 (2d Dep’t 2009) (when interpreting a
“commercial contract negotiated by and entered into at arm’s length between
23 In addition, although the MASTR court criticized plaintiff’s calculation ofPurchase Price because that calculation was not tied to the date of repurchase,since defendant was refusing to repurchase, the repurchase date was still unknown,and thus, any calculation of the Purchase Price could not be tied to that date. 2012U.S. Dist. LEXIS 142579, at *19-20 n.9.
53
sophisticated business people … a court must enforce the agreement according to
its terms”).24
C. The Supreme Court Did Not “Rewrite” The AgreementsIn Rejecting DBSP’s Hypothetical Contentions RegardingCharged Off, Released Or Liquidated Mortgage Loans
Lastly, DBSP claims that the Supreme Court used “inapplicable equitable
considerations” to: (a) “rewrite” the Agreements’ provisions regarding charged off,
released or liquidated Mortgage Loans, and (b) suggest that DBSP’s conduct could
give rise to a breach of the implied covenant of good faith and fair dealing. (DBSP
Br. at 49-53) The Supreme Court did nothing of the sort. As discussed supra (at
41-53), the Agreements require DBSP to repurchase, or otherwise provide a
remedy for, all Defective Loans. Accordingly, the Supreme Court simply observed
24 DBSP’s other cases are factually inapposite. In Nationwide AdvantageMortg. Co. v. Mortg. Servs. III, LLC, 2013 U.S. Dist. LEXIS 59470 (N.D. Ill. Apr.25, 2013); First Place Bank v. Skyline Funding, Inc., 2011 U.S. Dist. LEXIS 83430(N.D. Ill. July 27, 2011); and Lehman Bros. Holdings v. Key Fin. Corp., 2011 U.S.Dist. LEXIS 37083, at *29 (M.D. Fla. Mar. 31, 2011) (cited in DBSP Br. at 38-41),the courts construed repurchase provisions that did not incorporate foreclosureproceeds into the definitions of Mortgage Loan or Purchase Price. Further, in FirstPlace, the court ultimately denied defendant’s motion to dismiss plaintiff’s claimfor defendant’s breach of its repurchase obligation, holding that there is “no legalsupport for [defendant’s] argument that if a contract provides for a remedy in theevent of breach, and the breaching party further breaches the contract by failing tocomply with the contractual remedy, the nonbreaching party cannot bring a breachof contract claim arising from such failures.” 2011 U.S. Dist. LEXIS 83430, at*16. Similarly, in Key Fin., the court denied defendant’s motion to dismiss andheld that “a loan seller’s failure to repurchase non-conforming loans upon demandas required by a contract is an independent breach of contract entitling the plaintiffto pursue general contract remedies for breach of contract.” 2011 U.S. Dist.LEXIS 37083, at *29.
54
that if DBSP’s erroneous interpretation of the Agreements was correct, DBSP
could fill the Trust with “junk” Mortgage Loans thereby depriving the Trust and
the Certificateholders of the fundamental benefit of their bargain:
DBSP’s argument that loans in these categories are not subject torepurchase because they are no longer assets of the Trust (or that theirdefined Purchase Price is now $0) is unconvincing. If DBSP werecorrect, it would be perversely incentivized to fill the Trust with junkmortgages that would expeditiously default so that they could beReleased, Charged Off, or Liquidated before a repurchase claim ismade. Indeed, if DBSP learned that loans were non-conforming andplayed a crafty game of accounting by moving them off the Trust’sbooks to their own to evade their repurchase obligations, such actionswould be a breach of the duty of good faith and fair dealing.Consequently, it is to no avail to contend that the non-conformingloans are long gone and the Trustee’s repurchase rights have beenextinguished by DBSP’s actions.
[R.18]
In other words, the Supreme Court reasoned that if the allegations of the
Complaint are assumed to be true – and DBSP intentionally dumped Defective
Loans into the Trust – DBSP would breach the implied covenant of good faith and
fair dealing by now asserting that the Trust has no remedy for these very Defective
Loans. Further, although DBSP contends that the Trust has not asserted a claim
for breach of the implied covenant, DBSP is wrong. Where, as here, a claim for
breach of the implied covenant of good faith and fair dealing is based on the same
allegations supporting a claim for breach of contract, the implied covenant claim is
duplicative of the breach of contract claim and need not (and, actually, cannot) be
55
asserted as a separate cause of action. See, e.g., 2470 Cadillac Res., Inc. v. DHL
Express (USA), Inc., 84 A.D.3d 697, 698 (1st Dep’t 2011).
CONCLUSION
DBSP’s arguments on this appeal should be rejected, and the Order of the
Supreme Court should be affirmed.
Dated: New York, New YorkAugust 7, 2013
Respectfully submitted,
KASOWITZ, BENSON, TORRES& FRIEDMAN LLP
By: /s/ Michael M. FayMarc E. Kasowitz ([email protected])Michael M. Fay ([email protected])
1633 BroadwayNew York, New York 10019(212) 506-1700
Attorneys for Plaintiff-Respondent
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Printing Specifications Statement
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authorities, proof of service, certificate of compliance, or any authorized addendum
is under 14,000 words.