Breach of Contract; Breach of Representations; Breach of Warranty; Motion to Compel Discovery; CPLR § 3101(a), (b), (c); Work-Product-Doctrine; Attorney-Client Privilege
By: Gleny M. Peña | Staff Member
Defendant sponsored the securitization of mortgage-backed loans which were later sold to ACE Securities Corporation (“ACE”). As a sponsor, Defendant selected and purchased mortgage loans from third-party originators and sold them to ACE pursuant to an Agreement ACE then transferred the loans to the Trust, which was held by Plaintiff as Trustee and for the benefit of certificate-holding investors. In the Agreement, Defendant made a series of representations and warranties about the characteristics, quality, and risks associated with the loans. After the certificate holders hired consultants to review the loans, Defendant made representations and warranties that materially and adversely affected the value of the loans.
Subsequently, Plaintiff commenced suit for breach of contract and declaratory judgment arising out of Defendant’s breach of the Agreement and failure to cure and repurchase the defective loans. Specifically, Plaintiff alleged that Defendant included inaccuracies about borrower income, debt-to-income ratios, loan-to-value ratios, and the inclusion of high-cost loans.
Plaintiff filed a motion to compel the production of Defendant’s internal repurchase analysis documents (“Breach Analyses”) compiled in the process of assessing the mortgage loan breaches and repurchase demands made by certificate holders. Plaintiff argued that such documents were not privileged because they were created during the ordinary course of business pursuant to Defendant’s contractual obligations. In opposition, Defendant argued that the Breach Analyses were protected by the work product doctrine and the attorney-client privilege on the basis that the review performed by its Breach Management team was created under the direction of its outside lawyer and completed in anticipation of litigation. In essence, Defendant argued that counsel’s involvement changed the nature of the Breach Analyses, thereby constituting absolute immunity from disclosure.
The Court granted Plaintiff’s motion in part and denied its motion in part. First, the Court found that the Breach Analyses related to specific loans in trusts not at issue in the case were beyond the scope of Plaintiff’s production demand. Under CPLR § 3101(a), courts generally favor full disclosure of all matter material and necessary in the prosecution or defense of an action. When documents are not relevant, they exceed the permissible scope warranting disclosure. Here, the Court agreed with Defendant that the documents pertaining to loans in different trusts did not require disclosure. Second, the Court held that the Breach Analyses remained discoverable despite its later completion time because Defendant was contractually obligated to conduct repurchase reviews and further, such reviews were conducted by nonlawyers. In order to obtain the immunity afforded under CPLR § 3101(c), a party must meet the burden of establishing, with specificity, that the documents were prepared exclusively in anticipation of litigation and thus protected as work product. Here, the Court agreed with Plaintiff that Defendant must produce the Breach Analyses were not exclusively in anticipation of litigation and, was instead, created for a continuous business function of Defendant. Third, the Court held that the involvement of outside counsel in the repurchase review did not significantly change the long-standing practice of Defendant and its consultants in conducting reviews of breaches and requests from investors. Where counsel provides advice on how to respond to a repurchase request, it can be construed as giving advice about how to conduct the ordinary course of business and is therefore not shielded from disclosure. Here, the Court concluded that the documents did not include legal assessments irrespective of the fact that the review was completed within the legal department. Instead, they were routinely prepared as part of a long-standing practice for handling repurchase documents.
Finally, the Court held that any documents attached in email correspondence between Defendant and its lawyers were discoverable in as much as they were documents related to the Breach Analyses and were business judgments prepared by nonlawyers performing a regular business function. Under CPLR 3101(b), an attorney-client privilege asserted under CPLR 4503(a), shields from disclosure any confidential communication between an attorney and a client for the purpose of facilitating legal advice in the course of a professional relationship. Here, the Breach Analyses was prepared by non-lawyers performing a regular business function, the Breach Analyses was predominately related to ordinary business matters, and any communications regarding the Breach Analyses did not explicitly reflect or seek legal advice. Accordingly, the Court held that such documents were subject to disclosure.
ACE Securities Corp. Home Equity Loan Trust, Series 2006-HE4, by HSBC BANK USA, Nation Association, in its capacity as Trustee v. DB Structured Products, Inc., Index No. 653394/2012, 10/12/16 (Bransten, J.)