By Evan Jaffe | Staff Writer
Contract; breach; standing.
Plaintiff brought suit seeking to recover losses for breaches of multiple sections of interconnected contracts involving residential mortgage-backed-securities (“RMBS”). Plaintiff alleged Defendant’s fraud and misrepresentations caused Plaintiff to pay over $300 million to certificateholders under insurance policies. Plaintiff appealed from a trial court order granting Defendant’s motion to dismiss for alleged breach of contract.
Plaintiff insured seven RMBS originated between March and November 2006. Defendant, as sponsor, purchased underlying loans from third-party originators and sold and assigned interest in loans to an affiliated special purpose entity (“Depositor”). Depositor then sold mortgage loans into securitization trusts under loan purchase agreements. Each transaction had an independent trustee (“Trustee”) who, under a pooling and servicing agreement (“PSA”), was responsible for acting on certificateholders’ behalf. Transactions included mortgage loan purchase agreements (the “MLPAs”) and PSAs.
In section 7 of the MLPAs, Defendant made a series of representations and warranties concerning individual mortgage loans. In section 8, Defendant represented the prospectus did not include untrue statements of material fact. The PSAs governed sales of mortgage loans from Depositor to the securitization trusts. Together, the MLPAs and PSAs created a repurchase protocol under which certain parties to agreements could compel Defendant to repurchase loans in breach of the MLPAs’ representations and warranties provisions.
Section 7 of the MLPAs stated the repurchase protocol was Depositors’, Trustees’, and certificate holders’ sole remedy for breach of representations or warranties. The PSAs expressly named Trustee as party with authority to enforce the repurchase protocol. In addition, Depositor, for the benefit of certificateholders and Plaintiff, assigned to Trustee all rights under the MLPAs. Plaintiff was not a direct party to the MLPAs or PSAs and contractual rights arose from status as third-party beneficiary.
Plaintiff argued that since it was not a party to the MLPAs, the “sole remedy” language of section 7 did not apply and its remedies were not limited by the repurchase protocol. Plaintiff also argued the language of section 7 applied to that section alone and did not cover section 8 warranties.
The First Department upheld trial court’s dismissal of two counts for breach of contract. The First Department held Section 7 of the MLPAs did not limit the remedy to just that section and also covered section 8. However, the court accepted plaintiff’s reasoning that pursuant to Assured Guaranty Municipal Corp. v DLJ Mortgage Capital, Inc., 117 A.D.3d 450 (1st Dep’t 2014), Plaintiff was not bound by the sole remedy provision as it was not a party to the agreements. But the agreements transferred the right to pursue breaches of representations and warranties from the Depositor into the trust, and the trust conferred rights to Trustee, who, in turn, pursues remedies on behalf of Plaintiff. Therefore, Plaintiff lacked standing to sue for breach of contract.
Ambac Assurance Corporation v. EMC Mortgage LLC, Index No. 12665 651013/12 (Kapnick, J.).