Counsel to a defendant depositor argued to a Manhattan judge Wednesday that the bank trust that purchased a bundle of securitized residential mortgage loans to later sell to investors is not entitled to damages for the alleged breach of those mortgage loan representations.
On the second day of arguments relating to a rash of litigation against Nomura Credit & Capital over its participation in the residential mortgage-backed securities market leading up to the financial crisis, defense counsel argued that plaintiff HSBC Bank USA, in its capacity as trustee, is entitled only to the repurchase of those loans per a sole remedy provision outlined in the parties’ agreement.
Citing a string of holdings on this issue to Commercial Division Justice Marcy Friedman, Orrick, Herrington & Sutcliffe partner Joseph Frank said that under New York law, the response to plaintiffs seeking a remedy beyond repurchase in similar cases thus far “has been, uniformly, no.”
“This court should not be the first [to invalidate the sole remedy provision],” Frank said.
The plaintiff trust, represented by Holwell Shuster & Goldberg, is seeking rescissory or compensatory damages in connection with the trust’s purchase of 2,652 loans for which an alleged 14,000 breaches of the representations and warranties were later uncovered.
The case is HSBC Bank USA, National Association, in its capacity as trustee of Nomura Home Equity Loan, Series 2007-2 v. Nomura Credit & Capital, 650337/2013.
HSG partner Michael Shuster argued to the court that the loan representation breaches were so numerous and egregious that they violated the fundamental nature of the contract between Nomura and the plaintiff trust.
“What Nomura had was a plain, old-fashioned obligation that it breached,” he stated.
According to the complaint, “such numerous breaches make recourse to the repurchase remedy impractical because it was never designed to resolve disputes over more than a handful of loans.”
“Because the very nature of the investors’ bargain irrevocably has been altered, the Trustee is entitled to rescissory damages,” the complaint further states.
Nomura made 62 representations and warranties relating to the mortgage loans.
Yet Nomura, in its motion to dismiss brief, is adamant that these sophisticated parties expressly bargained for “specific and exclusive remedies for breach of the mortgage representations” and that “Plaintiff may not obtain relief above and beyond those remedies in this lawsuit, nor may it assert claims that would render the contracts’ sole remedies provisions meaningless.”
Friedman did not make a ruling immediately after hearing the motion. During the course of argument, she asked Frank, of Orrick, when Nomura advised the trustee that it would not repurchase these mortgage loans.
“In the days preceding these cases,” Frank responded. “That’s the kind of notice they [the plaintiff] provided.”
Amidst this litigation has been pointed discussion over the nature of entities pursuing RMBS actions, first laid bare in court a day earlier, when Friedman heard arguments on the statute of limitations’ issue that has factored so prominently in these cases.
New York’s statute of limitations was not at issue in Wednesday’s arguments, but it will affect whether other trustee plaintiffs can bring suit against Nomura in related cases.
Also Wednesday, Friedman heard arguments on the motion to dismiss the complaint in Ambac Assurance Corp. v Nomura Credit & Capital, 651359/2013, in which the plaintiff, a monoline insurer that guaranteed RMBS, is pursuing a breach of contract cause of action.
Nomura contends that Ambac Assurance has no standing to bring a breach of contract claim over these mortgage representations since the insurer has “no controlled right to sue pursuant to the repurchase protocol.”
Ambac, which is represented by Patterson Belknap Webb & Tyler, argues that as a third-party beneficiary to the pooling and servicing agreement between the parties to this transaction, it has the right to enforce the repurchase protocol.
“We were in this from the beginning, we were not a hedge fund that came late to the game,” partner Peter Tomlinson pointed out to the court, in a reference to Nomura’s assertions that these actions have been brought at the behest of “made-for-litigaton” hedge funds.
Tomlinson asserted that there is nothing in the pooling and servicing agreement that “prohibits [Ambac] from enforcing the agreement.”
Frank, of Orrick, argued that Ambac “could have bargained for representations and warranties to be in their insurance contract” but did not.