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TMI Trust Co. v. WMC Mortgage, LLC

United States District Court, D. Connecticut

December 19, 2017

TMI TRUST COMPANY, solely in its capacity as Separate Trustee of the Securitized Asset Backed Receivables LLC Trust 2006-WM2, Plaintiff,



         On December 12, 2017 the New York Court of Appeals filed its opinion in Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc. The uncorrected decision, subject to revision, is reported at 2017 WL 6327110.

         Counsel for Defendant WMC argue in a letter brief dated December 15, 2017 [Doc. 242] that the Court of Appeals' decision in Nomura makes all the difference in the case at bar, with particular reference to Defendant's pending Daubert motion to preclude or limit the proffered expert opinion of Dr. Joseph R. Mason, a trial witness on damages identified by Plaintiff TMI. WMC perceives this recent Nomura decision as mandating the granting of that motion.

         Counsel for Plaintiff TMI argue in a responsive letter brief dated December 18, 2017 [Doc. 246] that the Court of Appeals' decision in Nomura has nothing to do with the case at bar, WMC's Daubert motion should be denied, and Dr. Mason allowed to testify in the manner appearing in his previously filed written opinion.

         The Court desires further submissions of counsel with respect to the possible effects of the Nomura decision upon the proper resolution, under governing New York law, of certain issues presented by this case. This Memorandum, which expresses no present opinion on the Daubert motion or anything else, is intended by the Court to assist counsel in fashioning the further assistance their additional submissions will give the Court in this challenging case.

         WMC's Daubert motion argues principally that the "Sole Remedy" provision in the pooling and service agreement (PSA) precludes most of Dr. Mason's damages calculations. This Court's earlier summary judgment opinion, reported at 2017 WL 3401254, posed the question of "the effect of the sole remedies provision upon a trust's claim of an originator's failure to notify other PSA parties of multiple and pervasive breaches of representations and warranties in mortgages the originator negotiated and issued, " a question where "some doubt arises from recent New York appellate cases." Id. at *15. The principal First Department decisions I identified in the ensuing discussion were Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, 143 A.D.3d 1 (2016) ("Morgan Stanley"), and Nomura, 133 A.D.3d 96 (2015). No appeal was taken from the First Department's decision in Morgan Stanley. The Court of Appeals reversed the First Department's relevant holding in Nomura.

         In Morgan Stanley, the plaintiff trust claimed that the originator of securitized mortgages breached what may be called a "Duty to Notify" provision in the underlying contract. In the case at bar, the comparable Duty to Notify provision is found in Section 2.03(c) of the PSA, which provides in relevant part that upon discovery by WMC "of a breach of any of the foregoing representations and warranties, " WMC "shall give prompt written notice to the others" (including the Trustee).

         In Nomura, the first of these two First Department cases, the plaintiff trustee asserted a claim under the Duty to Notify provision, and also claimed that the defendant sponsor violated the "No Untrue Statement" provision, found in Section 7 of the mortgage loan purchase agreement (MLPA), which stated that "This Agreement does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements contained herein not misleading." The No Untrue Statement provision accompanied "the specific representations and warranties" in the MLPAs and PSAs "concerning the suitability of each of the mortgage loans contained in the loan pools."[1] The First Department's decision in Nomura held that neither the No Untrue Statement claim nor the Duty to Notify claim were precluded by the Sole Remedy provision. Its order modified the trial court's order:

to permit plaintiffs to seek damages on the first cause of action for breach of the No Untrue Statement provision (section 7 of the MLPA) and for failure to give prompt written notice after discovering material breaches of the representations and warranties in section 8 of the MLPA.

133 A.D.3d at 110.

         In Morgan Stanley, the more recent First Department case, the plaintiff trustee asserted a Duty to Notify claim. The trial court dismissed the claim on defendant's motion, but the First Department reversed, relying in part on its prior decision in Nomura. The First Department said:

After the parties briefed this appeal, this Court modified the motion court's decision in Nomura, holding that under similar RMBS agreements, a seller's failure to provide the trustee with notice of material breaches it discovers in the underlying loans states an independently breached contractual obligation, allowing a plaintiff to pursue separate damages. Consistent with our decision in Nomura, we now modify the motion court's order dismissing the failure to notify claim made in this case and reinstate it.

143 A.D.3d at 7 (citation omitted).

         The next event in this evolution of authority occurred last week, when the Court of Appeals (after initial argument and then re-argument) decided the appeal in Nomura. The Court confined its consideration to the plaintiff trust's No Untrue Statement claim. Plaintiff escaped dismissal of that claim in the First Department. The Court of Appeals reversed and dismissed the claim. The first paragraph of Judge Stein's opinion, ...

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