Federal Hous. Fin. Agency v Novation Cos., Inc.

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Federal Hous. Fin. Agency v Novation Cos., Inc. 2017 NY Slip Op 32548(U) November 30, 2017 Supreme Court, New York County Docket Number: 650693/2013 Judge: Marcy Friedman Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 1] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 SUPREME COURT OF THE STATE OF NE\V YORK COlTNTY OF NEV/ YORK --- PART 60 FEDEH.AL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL HOME LOAN MORTGAGE CORPORATION, on behalf of the Trustee of the NOVASTAR MORTGAGE FUNDING TRUST SERIES 2007-1 (NHEL 2007-1), Index No.: 650693/2013 DECISION/ORDER Plaintiff; --- against --NOVATION COMPANIES, INC., t/k/a NOVASTAR FINANCIAL, INC, and NOVASTAR MORTGAGE, INC, Defendants. This residential rn01igage-backed securities (RMBS) breach of contract action, commonly kno"vn as a '"put-back" action, alleges breaches of representations and warranties by defendant NovaStar Mortgage, Inc. (NMI), the Sponsor, regarding the quality and characteristics of the mortgage loans underlying the secmitization. Defendant Novation Companies, Inc., t/k/a Nova.Star Financial, Inc. (Novation), NMI's parent company, is allegedly "a co-obligor with respect to NMI's obligations frn breaches of the R&Ws [representations and warranties]." {Am. Cornpl., ~ 81.) Deutsche Bank National Trnst Company is Trustee ofNovaStar M01igage Funding Trust Series 2007-1, the Trust to \vhich the loans \Vere conveyed, Federal Housing Finance Agency (FHFA), acting as conservator for The Federal Horne Loan Mortgage Corporation (Freddie Mac), a certificateholder in the Trnst, commenced this action by filing a summons with notice, The Trustee subsequently filed the complaint and amended complaint 2 of 11 [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 2] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 Defendants rnove to dismiss the amended complaint pursuant to CPLR 3211 (a) (1), (3), (5) and (7) on the ground, among others, that the claims are not timely. Except as discussed below, this motion raises issues that do not differ in any material respect from those determined by this court and the Appellate Division in a number of recent 1587345 [Sup Ct, NY County, Apr. 12, 2016, No. 650291/2013] [FHFA iNCU] and E~_g_~rfil C?J~i1'3,LJr,w_,, 141AD3d43 i, 432-433 [1st Dept 2016], h: grnpted 29 NY3d 910 [2017]; Federal H.9J!_§,_ _Ein,_/\-g~nr;y__yJi~~-CJ~in~.J~gJJ~:' 2017 WL 1479480 [Sup Ct, NY County, Apr. 25, 2017, 2016 WL 4039321 [Sup Ct, NY County, July 27, 2016, No" 651282/2012] [fl:JJ;:A_fQAlJJ; 2016, No. 650692/2013] [FHFA (BC2)J rcolfectively, the FHFA Opinions].) Fan1i1iarity with these decisions, the RMBS securitization process, and the landmark Court of Appeals and First [2015], fJffg 112 AD3d 522 (1st Dept 2013] [coHectively, A,CJ~]), is presmned. 2 1 Where FHF/\ tNCll and ·············--··----------·- are cited in this decision without reforence to the FHFA {l'vJorwn Stanfevi FHFA iNCJ: .............. ·"·······--.::....•------------------- ...···· attinnance, it should be understood that the Appellate Division affirmance was on other grounds. ,~-------····-""''''""''• 2 By Order of the Administrative Judge, dated May 23, 2013, this court was designated to hear "all actions hereafter brought in this [C]ourt alleging misrepresentation or other wrong in connection with or arising out of the creation or sale ofresidentia! mortgage-backed securities." This court has accordingly issaed numerous decisions in the RMBS litigation. In determining issues on this motion that were previously decided on substantially similar pleadings and governing agreements, the court vv'ill generally rely on tbe prior decisions, without repeating their reasoning. 2 3 of 11 [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 3] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 The first and second causes of actions are untimely to the extent that they plead breaches of contract against defondants for breaches of Nl'vH' s representations and warranties. The breach of representation and warranty claims accrued on Febrnary 28, 2007, the dosing date of the securitization, when the representations and warranties were made. 3 (Mortgage Loan Purchase Agreement [MLPA], §§ 3.01 [b], LOl; Pooling and Servicing Agreement [PSAJ, Appx, A [definition of "Closing Date"]; ACE, 25 NY3d at 589.) Although FHFA filed a timely summons with notice on February 28, 2013, the six-year anniversary of the dosing date, that filing was defective because FHFA lacked standing to commence the action. The Trustee's initial complaint, filed more than six years after the securitization closing date, was untimely and does not relate back to FHFA's defective summons with notice. (See rHE,,_1J)\.1q;n~g1L~i~nh~yJ, 146 Y..N.0X!1W~~,J);~.:lit& ..C.~.m~i1@LJrn;_,. 139 AD3d 519, 520 [1st Dept 2016]; A~:E, 112 AD3d at 523, at10. on oth~r 2,fQ.llJl.4f;, 25 NY3d 581, supra.) The Courts' holdings in the above cases that FHFA and other certificateholders lacked standing to commence RtvlBS actions for breaches of representations and wammties were based on the terms of "no-action clauses" in the goveming PSAs, The court rejects the Trustee's argument, made for the first time at oral argument, that this action is distinguishable from those cases because the no-action clause in the governing PSA here is limited to lawsuits brought by certificatebolders "upon or tmder or \Vith respect to this Agreement [i.e., the PSA]" (PSA, § 12.03), and thus does not apply to suits, like this one, for breaches of representations and 3 In so holding, the court rejects defendants' contention that the breach ofrepresentation and warranties claims accrued on the "as of' date of the ML.PA, (See fU.fl\..tNi;Jj, 2016 WL 1587345, at"' 3 [r~jecting a similar argument].) 4 of 11 [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 4] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 warranties set forth in the MLPA. This court rejected a similar argument in fHEl\.Lt!.E2J (2017 WL 1479480, at* 4-5), to \:vhich the parties are referred. Here, the PSA was entered into contemporaneously with or in dose proxirnity to the MLPA, as part of the securitization of the Ioanso 4 The PSA was the means by which the Trustee was assigned rights, title and interest in the mortgage loans. (See PSA, § 2.01.) The PSA also set forth the certificateholders' rights as beneficiaries of the Trust, including their rights, upon compliance with the no-action clause, to sue on behalf of the Trust (Id.,§ 12.03; see also id.,§ 8.02.) Although no-action clauses are to [2014]), to hold that FHFA' s suit was not a suit "upon or under or with respect to" the PSA would be to ignore the structure of this transaction. (See tllE"'~JJ1E21, 2017 \VL 1479480, at* 4-5.) The court further rejects the Trustee's contention that the MLP A confors standing upon certificateholders independent of the PSA, and thus permits them to bring breach of representation and warranty claims against defendants \Vithout complying '"ith the requirements of the PSA no-action clause. In support of this contention, the Trustee relies on section 3.01 (b) of the MLPA, which provides that "[i]t is understood and agreed that the obligation of the Sponsor [NMI] to cure any breach with respect to or to repurchase or substitute for, any Mortgage Loan as to which such a breach has occurred and is continuing shall, [subject to the indeninification provision, section 6.01] ... constitute the sole remedy respecting such breach 4 The MLPA is dated as of February 1, 2007, and was entered into between and among NMI, as Sponsor; NovaStar Mortgage Funding Corporation, as Depositor; U.S. Bank National Association, as Custodian; and Deutsche Bank National Trust Company, as Trustee. The PSA in this case is also dated as of February 1, 2007, and was entered into between and among NMI, as Servicer and as Sponsor; U.S. Bank National Association, as Custodian; and Deutsche Bank National Trust Company, as Trustee. 4 5 of 11 [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 5] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 available to the Depositor, the Trustee, the Ce1tificateholders or the Custodian against the Sponsor." This section does not establish an independent right of certificateholders to institute an action under the MLPA for breaches of representations and warranties" As defondants correctly argue, the sole remedy clause does not create a right of action but, rather, lixni.!Ji the remedies othen:vise available to the parties listed in that clause for breaches of representations and vvarranties. (See Defs.' Sur-Reply Memo,. at 5.) Put another way, section 3.01 (b) merely limits certificateholders' remedies for breaches of representations and warranties to those specified in the sole remedy provision of the MLPA-whether the Trustee acts on their behalf in iitigatfog tbe action, or the certificateholders themselves institute the action, when authorized to do so under the PSA no-action clause. Here, the Trustee fails to allege that the certificateholders were in compliance with the provisions of the no-action clause when they purported to commence this action. Contrary to the Trnstee's contention, FHFA also lacked standing to commence this action under common law principles. Those principles permit the beneficiary of a trust to commence a derivative action on behalf of the trust, provided that a demand upon the trustee to bring suit was rejected or would be futile. "In an action brought by a beneficiary on behalf of the trust, the beneficiary nmst show why he has the right to exercise the power, which the law and the trust agreement iu the first instance confide in the trustees, to bring a suit on behalf of the trust This will normally require either a shm.ving of a demand on the trustees to bring the suit, and of a refusal so unjustifiable as to constitute an abuse of the trustee's discretion, or a showing that suit should be brought and that because of the trustees' conflict of interest, or some other reason, it is futile to make such a demand." (Yl':1~~-y_[~iJ1§1~j_n, 87 AD2d 309, 315 [1st Dept 1982], lv 5 6 of 11 [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 6] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 QJ!Hltl?.~~-4. ,tn n~rt, d~ied in part 57 NY2d 737; see also JY~AD!J0?.A~~-~--LLC.Y..C911ntrx.wi.dt,:..JiQJn.© L.9.<JJJ~,Jn~\, 2012 \VL 1138863, * 3, 5-6 [Sup Ct, NY County, Mar, 28, 2012, No. 650497/2011, Kapnick, J.], gffrj QH Q1her grp_µ_g4§ 96 AD3d 684 [1st Dept 2012].) This line of authority was relied upon by the First Department in its recent affirmance of this court's decisions in EJJFA (NCI) and FHFA {NC3), The Court held that .FHFA did not, in those cases, validly commence derivative actions on behalf of the trnstee or demonstrate that FHF A \Vas excused from the requirernents of the no-action clause, where "FHFA did not allege that the plaintiff (the trnstee) had acted in bad faith or declined to act" and '"failed to 'set fiTrth \Vi th particularity fits] efforts ... to secure the initiation of action by the trustee[], or the reasons for not making such effort"' (FHf:A.{M.QIJL?.11.~Jg!.1A~YL 146 AD3d at 567-568 [parentheses, brackets, .and ellipses in original], quoting Velez, 87 AD2d at 316.) Here, similarly, FHFA's failure to allege a demand or futility bars the breach of representation and warranty claims, The Trustee's remaining arguments in supp01i of the timeliness of its claims for breaches of representations and warranties have been repeatedly rejected by this comi in the FHFA Opinions, The defect in FHFA's standing was not cured by the Trnstee's belated attempt to substitute itself as plaintiff in this action. (fifr'.6 .. ffU~~j, 2017 WL 1479480, at * 4-5; FHFA [OA1], 2016 \VL 4039321, at* 2-3.) For the reasons stated and on the authorities cited in FHFA (NC 1), the claims are not timely under the federal Housing and Economic Recovery Act of 2008. _y_.Qµi.gJc.t,:JLLQ~WL1!1f,, 810 F3d (2016 WL 1587345, at* 5, citingp~gt§~J1t;J;t?:nkJ~{?:1LIA¥~t(.Q_, _ 861, 868 (2d Cir 2015].) The court also rejects the Tmstee's argument that defendants are equitably estopped from invoking the statute oflimitations based on their failure to notii:Y the Trustee of breaches of representations and warranties, (tJ]]'.:"'~jJJE;?J, 201 7 \VL 14 79480, at 3.) 6 7 of 11 * [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 7] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 For the above reasons, the court wil1 dismiss the first and second causes of action to the extent that they are based on alleged breaches ofrepresentations and warranties. In view of this holding, the court need not and does not reach defondants' additional contentions that the amended complaint fails to state a cause of action for breaches of representations and warranties as to any loan not specifically identified in the complaint, and that any claim for monetary damages should be dismissed in light ofthe sole remedy provision of the PSA. 5 The court vvill also dismiss the first and second causes of action to the extent that they are based on purported breaches of defendants' repurchase obligations. Under the Court of Appeals decision in ACE, there is no independent cause of action for a sponsor's failure to repurchase loans that breach representations and warranties. ffHEAJN_f,Jj, 2016 WL 1587345, at* 10.) The second cause of action is also based on aUegations that defendants breached their contractual obligation to notify the Tmstee of their discovery of breaches of representations and wrurnnties. (Am. CompL, ~fif 94, 98.) The branch of defendants' motion to dismiss this "failure to notify" claim 'Nill be denied without prejudice" Defendants may seek dismissal of the claim in connection vvith the coordinated briefing requested by this court folkn.ving the Appellate AD3d 96 [1st Dept 2015], rearg ordered 29 NY3d 992 [2017]) and Mwgrm__ S_tm:il~XMQIH;_<,W5,': 2016]). The parties to this action have consented to this procedure. (Transcript of Oral Arg., at 2-3, 17.) It is noted that belhvether briefing on failure to notify issues has been submitted in This court has addressed similar arguments in prior decisions. (See u ,~.GB..S.c_q~,..G9n!.'.. \l__p_:!-,i __:S.~n!~1WfQ Vrn.<lµqt.s_,Jn_c_,, 2014 WL 4785503, * 2-6 [Sup Ct, NY County, Aug. 28, 2014, No. 651936/20U] [identification of loans]; !)_._S_,_l?JmkN~tl.A:;:;n.":y:J?J~LMt?.2,J;;;n:J!~L.I!!S'.,, 2016 WL 1.365966, *[Sup Ct, NY County, Apr. 5, 2016, No. 653140/2015], affd on other grounds 146 AD3d 603 [1st Dept 2017] [damages].) 5 8 of 11 [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 8] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 The Tmstee's third and fifth causes of action will be dismissed for the reasons stated, and on the authorities cited, in this court's prior decisions addressing RMBS trustees' claims for anticipatory breach of contract and breach of the irnplied covenant of good faith and fair dealing, respectively, (FHFA [NCI], 2016 WL 1587345, at* 10-11 [implied covenant, citing additional authorities J; 1iiwJ2,~l:?~n1m~Lirn.~LG9.d?.f.N,Y,__YPI~.LJYHg~,.J:~nh~J,Jpg,, 2015 \VL 15 73 381 [Sup Ct, NY County, Apr, 8, 2015, No. 651958/2013] [anticipatory breach and irnplied covenant]; Jdfltt~Ql1~J~linkJ~9:!!!Lirn.~t~:9.~..Y.J1.?r91?.-.:~-.~J~w1\\Yr~.C 2015 WL 7625829, * 3 [Sup Ct, NY County, Nov. 25, 2015, Nos. 651338/2013, 652001/2013] [anticipatory breach].) The fourth cause of action seeks a declaratory judgment that "NMI is required to reimburse the Tmstee for all losses resulting from R& \V [representation and warranty] breaches, as well as the expenses in enforcing its remedies , ... " (Am. Compl.,, 127,) The branch of defondants' motion to dismiss this cause of action will be denied without pn.judice, The motion was briefed before the First Department's decision in tL~L.H.<l11k.N,A,_ _yJ}j)Jy19_rt_gr~gs;__ C_<lf?it<JL ( In~, 140 AD3d 518, 519 [ l st Dept 20 I 6]) and its more recent decisions in \Yilmi.n.HJ9X1.Trm~t(;_g_, y__M~;_rgJJ,lI..S_!ilnl~1JYA9rltrnm,~..C.filTI!?l Holding§.J,:1Q O52 AD3d 421, 4 22 [1 st Dept 2017]) and P~nt§~h~__ U_<lnk_N<'lJLTrm1t_(~g~_ _yJ~-~mi.fi.rnLC.m}:: (154 AD3d 605 [1st Dept 2017]). The applicability of those decisions should not be decided on this record, without affording the parties the opportunity to address the issue in com1ection with the coordinated briefing on the viability of indemnification claims foHowing the First Department decisions, {See EHfAJH~-~J, 2017 WL 1479480, at* 6.) His accordingly hereby ORDERED that the motion of defendants Novation Companies, Inc., f!l</a NovaStar Financial, Inc., and NovaStar Mortgage, lnc. to dismiss the amended complaint is granted to the following extent: 9 of 11 [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 9] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 It is ORDERED that the first cause of action (Breach of Contract: Specific Perfom1ance), the third cause of action (Anticipatory Breach of Contract), and the fifth cause of action (Breach of the Implied Covenant of Good Faith and Fair Dealing), are dismissed in their entirety; and it is further ORDERED that the second cause of action (Breach of Contract: Eq4itable and Legal Remedies) is dismissed solely to the extent that it is based on breaches of representations and \Varranties or breaches of defendants' alleged duties to repurchase defective loans; and it is further ORDERED that the branch of the motion to dismiss the second cause of action to the extent that this cause of action is based on defendants' alleged failures to notify th.e Trustee of defective loans is denied without prejudice to a new motion brought in confonnity \Vith procedures to be established in the coordinated put-back actions in Part 60 regarding additional motions with respect to failure to notify claims. Nothing herein shall be construed as detem1ining the scope or import of the AppeHate Division decision in N9gm,r_[!JJ9_m_~--E~rnitY LP.illL1m;_,_yNrn:mu:!!J;'.redit 4;:J~:gt~irnLJnf:_ (133 AD3d 96 [1st Dept 2015], re<J:r_g gr4~rnfJ 29 NY3d 992 [2017]) or M_oxg&LSJ@l~Y2~:11h1~J;"gmi,Irn§Ji\B,,~__y)0;Qrfo~!U~!i!?:nk.;:__ ~~ttg~_~J;m;'.!JgJ IJQAQfng~_JJJ,~ (143 AD3d 1, 3-4 [lst Dept 2016]) with respect to such claims; and it is further ORDERED that the branch of the motion to dismiss the fourth cause of action (Declaratory Judgment: Indemnification) is denied ·without prejudice to coordinated briefing on the viability of such claims following the Appellate Division's decisions in 1I,_$,__~.tmkJi~!L r:\.~§!LYPLLMtg~_, __~)?:PiJ~tJr.w, (141 A.D3d 431, 432-433 [1st Dept 2016]), 1YHmiDKLQI1.Int?J C£LY~i\'!QL@..~D__ gt!?:nl.~.Y.MJ?J:t.tL~S.~..G?.Ci1fJLU91.\'JiJ1g§J,,J,_C (152 AD3d 9 10 of 11 421, 422 [1st Dept 2017]), [*FILED: NEW YORK COUNTY CLERK 12/05/2017 09:41 AM 10] NYSCEF DOC. NO. 172 INDEX NO. 650693/2013 RECEIVED NYSCEF: 12/05/2017 This constitutes the decision and order of the court Dated: New York, Ne\v York Novernber 30, 2017 10 11 of 11

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