Lawyers representing a subsidiary of a Japanese financial firm which packaged and sold defective mortgage loans to a trustee for securitization urged a Manhattan judge Tuesday to dismiss the “creative” arguments posed by the plaintiff trustee and certificate holders.
On a consolidated motion to dismiss in four related actions, lawyers for Nomura Credit & Capital said breach of contract claims brought by plaintiff trusts are untimely under New York’s six-year statute of limitations and that any damages sought in connection with alleged losses from shoddy residential mortgage-backed securities are barred by the transfer agreements’ sole repurchase remedy provision.
Commercial Division Justice Marcy Friedman reserved ruling following Tuesday’s oral arguments in the cases, Nomura Asset Acceptance, Alternative Loan Trust, Series 2006-S3 v. Nomura Credit & Capital, 652619/2012; Nomura Asset Acceptance, Alternative Loan Trust, Series 2007-S4 v. Nomura Credit & Capital, 653390/2012; Nomura Home Equity Loan Series 2007-3 v. Nomura Credit & Capital, 651124/2013 and Nomura Home Equity Loan Series 2006-FM2 v. Nomura Credit & Capital, 653783/2012.
Arguing on behalf of Nomura Credit & Capital, which is a wholly-owned subsidiary of Nomura Holdings set up to arrange and sponsor these RMBS trusts, was partner Joseph Frank of Orrick, Herrington & Sutcliffe. Arguing on behalf of the plaintiffs was partner Michael Fay of Kasowitz, Benson, Torres & Friedman.
The contractual representations and warranties governing the transfer of these mortgage loan assets from Nomura to the trust were made on July 1, 2006. Lawsuits in these cases were filed July 27, 2012. Thus, Nomura argues, plaintiffs are 27 days too late to bring a breach of contract claim under the six-year statute of limitations.
Just when the statute of limitations kicks in, however, is a key point of dispute, which an upcoming Appellate Division, First Department ruling is expected to resolve.
The First Department will hear oral arguments in exactly two weeks in Ace Securities v. Deutsche Bank Securities Products, 965 N.Y.S.2d 844 (Sup. Ct. N.Y. Cnty. 2013) in which Commercial Division Justice Shirley Kornreich held in a May 13 decision that the statute of limitations begins upon a bank’s refusal to repurchase defective loans and that this recurring obligation renders each refusal a new breach into and onto itself.
Defendant Nomura Credit & Capital, similar to the appellant Deutsche Bank in the above case, asserts that under this interpretation, certificate holders could bring a breach of contract action at any point they felt a representation was problematic, even on a 30-year mortgage note. Frank argued this would flood the courts with litigation.
Thus, Nomura argues that the statute of limitations begins on the actual agreement date, the conclusion Justice O. Peter Sherwood reached in his separate May 10 opinion in Nomura Asset Acceptance v. Nomura Credit & Capital, 653541/2011.
In the wake of an appeal in Nomura, Sherwood also stayed discovery several days later in all pending related cases against defendant Nomura Credit & Capital. These other Nomura actions were transferred over to Friedman’s docket in July, in accordance with a May 23 administrative court order assigning new RMBS cases to one judge to help prevent conflicting rulings in the future.
On Tuesday, before a packed courtroom, Friedman gave no indication how she might rule on the statute of limitations claim but asked Kasowitz’s Fay why a ruling from the First Department overturning Kornreich in Ace (Kasowitz represents the respondent) would not be dispositive of this similar claim pending before her.
Fay responded that it was because the Nomura cases on display Tuesday actually present an additional issue that neither Kornreich nor Sherwood reached in their respective decisions—that is, does the agreement date begin at signing or closing?
Arguing the latter, Fay pointed out that even if the judge agreed with Sherwood that the statute of limitations begins upon the date of agreement, the closing date should dictate the start—or July 28, 2006 in this case, which is within six years of when the lawsuits were brought.
Fay argued that July 1, 2006 was merely the “cut-off date” for determining the “principal balance and price of the loans sold to the Trust.”
“Between July 1 and the closing on July 28, the loans can change,” Fay argued to the court. “There’s no way the trustee had a cause of action prior to getting the mortgage loans file. We don’t even know what kinds of loans will be there until closing.”
Orrick’s Frank, in his statements to the court, meantime, dismissed plaintiff’s arguments as “innovative theories” and “creative arguments.”
“This not an academic exercise, Your Honor,” Frank said. “The contract is clear on its face—the ‘as-of’ [agreement] date [governs the statute of limitations.]”
Orrick seeks a dismissal of claims with prejudice. In his statement, Frank also pointed out to the court that these cases were brought by “made for litigation hedge funds” to capitalize on the abundance of potential RMBS actions nearing expiration, a contention raised in the dismissal brief.
“The Zambezi funds did not invest in the certificates when they were issued in 2006 and did not experience any of the losses that the certificates suffered due to the financial crisis,” Orrick’s brief stated. “Instead, the Zambezi Funds are examples of a growing number of made-for-litigation investment vehicles that have made a cottage industry out of bringing lawsuits like this one.”
Kasowitz denied this was the case to the court.
On Wednesday, the judge will hear arguments in three separate RMBS actions against Nomura Credit & Capital: Ambac Assurance Corp. v. Nomura Credit & Capital, 651359/2013 (plaintiff’s counsel also represented by Kasowitz); HSBC Bank v. Nomura Credit & Capital, 650337/2013 (plaintiff’s counsel is Holwell Shuster & Goldberg); and Nomura Asset Acceptance v. Nomura Credit & Capital, 652614/2012 (plaintiff’s counsel is Patterson Belknap Webb & Tyler).
The issues on argument will slightly overlap with those from Tuesday’s arguments, but also address issues related to standing, sole remedy and sufficiency of allegations.
Orrick represents Nomura in each of these seven actions. Combined, the actions seek more than $1.5 billion.