Matter of Nomura Asset Acceptance Corp. Alternative Loan Trust, Series 2007-1 v Nomura Credit & Capital, Inc.

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Matter of Nomura Asset Acceptance Corp. Alternative Loan Trust, Series 2007-1 v Nomura Credit & Capital, Inc. 2018 NY Slip Op 30161(U) January 29, 2018 Supreme Court, New York County Docket Number: 777000/2015 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 01/29/2018 03:18 PM 1] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW' YORK--- PART 60 IN RE: PART 60 JL\tfBS PUT-BACK LITIGATION Index No. 777000/2015 NOMURA ASSET ACCEPTANCE CORPORATION ALTERNATIVE LOAN TRUST, SERIES 2007-1, by HSBC BANK USA, NATIONAL ASSOCIATION, in its capacity as Trnstee Index No. 652842/2014 Motion Seq. 003 v NOMURA CREDIT & CAPITAL, INC. Decision/Order HSBC BANK USA, NATIONAL ASSOCIATION, in its capacity as Trustee of MERRILL LYNCH ALTERNATIVE NOTE ASSET TRUST, SERIES 2007-A3 v MERRILL LYNCH MORTGAGE LENDING, INC Index No. 652727/2014 Motion Seq. 003 In Nomura Asset--.. ·--------------------.. Cor<-.ioration Alternative Loan Trust- Series 2007-1 v_ ---------------------------------.. Accentance ..... ________________________ ........ ______________________ ......... _________________________________ ·---------------l:~------ NR.ln!!-rn..(It(git~ ..C.<lPi!@lJ~w, (N_g_ri;mr@), plaintiff Trustee HSBC Bank USA, National Association (HSBC) appeals Special Master Katz's rnling, dated June 27, 2017 (Nomura (M~rriU.I-:'..'iTWh), Trustee HSBC appeals Special ]\faster Katz's ruling, dated Septen1ber 19, 2017 (l'vlerrill Lynch Ruling), These appeals are brought pursuant to the Part 60 RMBS Putback and Monoline Case Management Order, dated December 7, 2015 (Cl\/10). In both Rulings, the Special I\.faster directed the Trustee to produce "all documents that are responsive to the Parties' agreed-upon search terms, but for any document that reasonably '· appears to be a 'clear mi shit', or is subject to a ciaim of privilege." (Merrill Lynch Ruling at 2; see Nomura Ruling at 2.) As discussed further below, both Rulings are based 011 the Special 2 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 2] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 Master's reasoning that, under the circumstances of these cases, the parties' arms-length negotiations of ESI search terms reflect ar1 agreement as to broad relevance, and that further "subjective relevance and responsiveness determinations are genernily inappropriate." (Merrill Lynch Ruling at 2, quoting Nomura Ruling at 2.) The Merrill Lynch Ruling does not involve the production of certificateholder documents, whereas the Nomura Ruling does. The court holds that the Special Master's Rulings should be affim1ed. The parties' ESI search terms \'Vere agreed upon following extensive negotiations that occurred after the Trustee served its responses and objections to Nomura's and Menill Lynch's document requests, respectivelyo The negotiation of the search terms occurred under the general supervision of Special Master Katz, and with the benefit of guidance provided in his numerous rulings in the coordinated Part 60 RMBS Put-Back Litigation. In a prior ruling, dated November 7, 2016, in RMBS putback cases involving SURF and O\\rnit Trusts, in which Merrill Lynch was also a defendant (Merrill Lynch [Malloy] Aff In Opp., Ex, 6), the Special Master explained that "agreed-upon [ESI] search-tem1s inherently represent U.S< Bank's [i.e., the Trustee's] ESI-based document requests. Thus, the results of Merrill Lynch's ESI sear'?hes pursuant to those agreed-upon search-tenns form a corpus of documents that are responsive to UOS. Bank's document requests ipso facto." (Id. at L) The Special 1\ 1aster also r~jected Merrill Lynch's claim that it should be pem1itted to perfonn a 1 further relevance review of docmnents responsive to the ESJ search termso In precluding such further review·, the Special Master reasoned that issues of relevance, as well as the burden of production resulting from proposed ESI search terms, had already been addressed through anns- 3 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 3] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 length negotiation of the search tenns. As the Special Master explained, "with the issues of burden and broad relevance having been addressed through the agreed-upon search terms that resulted from arms-length negotiations, any further winnowing of documents based on one party's or the other's subjective views [of relevance] is generally inappropriate." Gd_,_ at 2.) 1 This ruling provided, however, that a producing party may appropriately undertake a post-ESI search review· to exclude any document which is "(1) privileged; (2) a 'clear mishit'; or (3) otherwise 'not requesteil"' mt at 1.) In another prior ruling, dated April 11, 2017, made in the MerriH Lynch action at issue here, but which was not the subject of an appeal, the Special MasteI adopted this standard in the context of a dispute over the disclosure of certificateholder materials. In this ruling, the Special Master held that such materials were not "categorically irrelevant under Nevl York law," and that HSBC must "promptly produce any non-privileged Certificateholder Materials that me otherwise responsive to the Parties' negotiated ESI search-tenns------except where HSBC determines in good faith that a responsive document or communication is a clear mishit or was not requested." (Nomura [Kahn] Aff. In Opp., Ex. 1.) The court finds that the circumstances in which the ESI search tenns were negotiated support the Special Master's Merrill Lynch and Nomura Rulings that a further relevance review of documents responsive to the search terms is not appropriate. If the Rulings are viewed as procedural rulings as to the scope of discovery, they are subject to review for abuse of discretion. (See CMO ~ rn [E].) If the Rulings are viewed as based on a conclusion oflmv, they are subject 1 The Special Master further explained that, in the specific context of custodial EST, "an effort [was made] to balance the burden of the proposed search against the broad relevance of the documents being sought ... [TJhat baiancing vrns negotiated at arms-length by the parties-in some cases with the Special Master's assistance----'resulting in the parties' agreement on search terms." (Nov. 7, 2016 ruling at 2.) 3 4 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 4] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 to de novo review. (ldJ Under either standard, tht.~ Rulings should be affirmed. The authorities on i,.-vhich HSBC relies do not support its claim that the Special Master erred in holding that a further relevance review was n(_1t appropriate. In Ghf;'.n::0.~1~I.Y__Qpldm&J, _:~i~-~h§.J'.KJ;_q_._ (2014 \VL 716521 * 1 [SD NY, No. 10 Civ 6950, Feb. 18, 2014] [Francis, Magistrate Judge]), as in the cases at issue on these appeals, the parties had served document demands and responses prior to negotiating ESI search terms. The Court pem1itted a relevance review of search results prior to production, reasoning that the parties had not agreed, and it had not ordered~ that all documents responsive to the terms must be produced. The Court noted that the parties could have agn~ed to another "model," in vvhich they would "simply agree on the search methodology, for example by stipulating to search terms, with the understanding that all documents [except privileged documents] shaH be produced." (Id.) Similarly, in RPX.~A.Pwk [Netburn, Magistrate Judge]), the Court pennitted the producing party to conduct a responsiveness review of search results, based on a finding that the parties had agreed on ESI search terms but not on how to produce documents that contained those terms. The Court specifically noted that the dispute would have been avoided had the parties agreed "on ]?_Qih the ESI Search protocol used and the process for producing the documents captured by that protocol" before beginning discovery. (kt at 3 [emphasis in original],) Here, in contrast, the parties' ESI search terms were not finalized until after the Special Master's November 7, 2016 ruling, in which he elucidated his position that the negotiated search terms capture relevant documents and that a further relevance review is generally not 4 5 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 5] NYSCEF DOC. NO. 213 appropriate. INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 2 Although the November 7, 2016 ruling was issued in a group of actions to which HSBC was not a party, HSBC does not claim that it was unaware ofthat ruling. Nor could it do so. These actions are among the dozens of Part 60 RMBS actions that have been coordinated, \:vith the assistance of liaison counsel, for discovery before the Special Master pursuant to the December 7, 2015 Case l'vfanagement Order. The CMO provides for the appointment of a Special Discovery :tvfaster "[i]n order to facilitate the fair, orderly and expeditious disposition of the Putback and MonoUne Cases." (CMO ~!III [A].) It also expressly requires that even where the Special l'vfaster makes a decision in a case in which a party to another case has not pruiicipated, the pruiy will "determine vvhether and how the reasoning underlying the Special Discovery Master's decision on the issue guides [it]" in order to avoid iiti gation of the same issue before the Special Master. (Id . ~ III [B].)3 Indeed, liaison counsel addressed the issues detennined by the November 7, 2016 ruling. (See Oct 25, 2016 Letter to Special Master Katz [HSBC [Schee±] Aff. In Supp. ofMe1TiU Lynch Appeal [Scheef Aff], Ex. 15].) Ivforeover, the Ruling that is the subject of this appeal is consistent with the Special Master's Apri111, 2017 ruling on c:ertificateholder materials in this very case. 2 At oral argument, HSBC stated that "the primary search terms" had been negotiated prior to the November 7, 20 I 6 ruling. (Nov. 30, 2017 Oral Argument Transcript at 24 [Tr.].) HSBC did not dis.pute Merrill Lynch's assertion that the ESI search terms primarily at issue on this motion-the originator search terms------were negotiated in Febrnary and March 20 l 7. (See Tr. at 18- i 9, 44; §_~~ ~lso id. at 50-57 [HSBC Reply].) 3 Paragraph m (B) of the CMO provides: "The Special Discovery Master's decisions shall not be binding on any party in any Putback or Monoline Case unless the party participates in the dispute by submitting a Discovery Brief or Supplemental Brief ... , in which case the decision shall be binding on such party. However, where the Special Discovery Master ln a particular case or cases rules on an issue that has arisen or subsequently arises in other cases, it is expected that the parties in such other case(s) will in good faith determine whether and how the reasoning underlying the Special Discovery Master's decision on the issue guides them \.Vithout the need of litigating substantially the same issue before the Special Discovery Master." 5 6 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 6] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 Even assuming arguemfo that the April 11, 2017 ruling does not control, the instant Ruling should be upheld. B:SBC asserts that it negotiated the ESI tem1s subject to Merrill Lynch's December 2015 requests for production (RFPs) and HSBC's objections as to relevance asserted in its January 19, 2016 "Responses and Objections" (R&Os). (See Sept. 11, 2017 Letter to Special Master Katz [Scheef Aff., Ex, 4]; EISBC's Briefln Supp. of Merrill Lynch Appeal at 2-3,) In support of this assertion, however, HSBC does not point to anything in the record of those negotiations in which it purported to preserve it had set forth in its R&Os. (Se.~ ol~ections to production of documents which id.) In the absence of any explicit reservation of rights rnade at the time the search te1ms were agreed to, and the parties' uegotiat.ion of the terms under the general supervision of the Special Master and \Vith knowledge of his November 7, 2016 ruling ($..~-~ n 4, supra), the court finds that Special Master Katz did not eTI' in holding that a forther relevance review by HSBC was not appropriate. While the Special Master's procedure limiting relevance reviews of documents responsive to ESI search terms may result in production of some documents that are not relevant, this court finds that the proct~dure is not an unreasonable mechanism for avoiding disputes over subjective review· criteria in these numerous coordinated cases, and that the Special Master therefore did not abuse his discretion in adopting the procedure. Nor does the court find that the procedure is contrary to law. ($.~~supra at 4.) Finally, it is noted that Merrill Lynch represented at the oral argw11ent of the motions that it does not know the full universe of documents that HSBC is v.-ithholding. (Tr. at 47.) HSBC outlined certain categories of documents that it objects to producing based on relevance. These documents included transaction documents for other trusts, legal notices relating to properties, and invoices and foe reports. (Id. at 18-22.) While the documents were not described with any 6 7 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 7] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 specificity, HSBC stated that the "bulk" of the objected to documents are transaction documents for other trusts. (l~;t at 18-19.) Significantly, Merrill Lynch agreed that these documents are "mishits" which, by the tenns of the Ruling, need not be produced. (Id. at 47.) It appears that the parties failed to confer in advance of the appeal about whether these documents were mishits. To the extent that there is confusion, as HSBC claims, about whether other types of documents are mishits, the parties must meet and confer in an effort to resolve any dispute and may seek further guidance, if necessary, from the Special MasteL HSBC also objected to producing legal department reports, which it claimed are privileged. (Id. at 22.) As Merrill Lynch correctly argues, the Special ]\!laster's Ruling explicitly provides for withholding of privileged documents, and a privilege log for such documents must be prepared. Applying the reasoning of his prior rulings discussed above, the Special Master ruled in £-kmrnrn that HSBC rnust "produce documents and cmmnunications related to certificateholders for the trusts at issue in this case that are otherwise responsive to the parties' negotiated ESI search terms." (Nomura Ruling at 3.) Signlficantly, HSBC itself appears to acknowledge the relevance ot~ and represents that it has produced, certificateholder documents relating to breaches of representations and warranties. (See HSBC's Briefin Supp. of Nomura Appeal at 8; Tr. at 9, 54.) HSBC disputes the relevance of other categories of certificatehoJder documents, identi:(ying documents concerning certificateholders' directions to and indemnification of the Trustee in connection vvii.h litigation against defendant-securitizer; documents concerning certificateholders' financial status and holdings; and documents concerning non-disclosure agreements between the Trustee and ., I 8 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 8] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 certificatebolders in connection with the Trustee's provision of nonpublic infommtion to certificateholders. (HSBC's Briefin Supp. of Nomura Appeal at 8-9.) The court does not find that these otht..~r categories of certificateholder documents lack relevance in light of the Appellate Division's holding that a trustee rnay assert breach of contract claims based not only on allegations as to a defendarrt-securitizer's breaches ofrepresentations and warranties but also on a!legations as to the defendant's failure to notify the trustee of the defendant's discovery of such breaches. (See Nmxrnrn.Jkirxw ~QJJity_J.,Qf:J:E,Jm~,__ yJ'.''.l-9m1lTi:tJ):~_9cH ~--C~m.i!~lJm;,, 133 AD3d 96, 108 [1st Dept Oct 13, 2015] llim:nm:11J], mQ~t ~mother grQJ,U14,$, ----NY3d-, 2017 WL 6327110 [Ct App 2017]; MQrg~r~_.SJ<'lmr;s..NHg~.J,9w;iJ)JJf?t~Q_Q\2::1dAJ1X Y..M~xrg£i11..S1m;1I~y_Mtgf,\__CJmiX11LH9lding~__L_L_C, 143 AD3d 1, 3-4 [1st Dept 2016]; ~flg__Q[J:{,Y, M~Jh1.n_Y_lYMbJY1ig~,_, __L_L~, 151 AD3d 72, 81 [lst Dept 2017].) At the oral argument of these appeals, this court inquired extensively as to the relevance of the objected to certificateholder documents. Jn response to Nomura's arguments, HSBC generally objected to the above categories of documents and broadly asserted that it had "produced all documents that we have, other than privileged documents . , , relating to breaches of representations [and] warranties." (Tr. at 9.) HSBC did not make any showing that the v.ithheld documents, which relate to HSBC's o-vvn potential obligation to commence litigation against Nomura based on Nomura's alleged breaches ofrepresentations and warranties, do not contain any discussion of such breaches or any infom1ation relevant to the timing of HSBC's acquisition of notice of such breaches. Further, HSBC generally asserted that its own breach of its obligations to certificateholders is not relevant to its claims against Nomura. (See Tr. at 55.) However, it is not apparent that the existence of an obligation on HSBC's part to commence litigation against Nornura and the timing of this obligation, if one arose, would not have an 8 9 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 9] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 impact on the damages HSBC can recover on its independent failure to notify claim against Norrmra. 4 The court further holds that the authority on which HSBC relies is not to the contrary. Although HSBC cites several cases which held that certificateholder documents were not relevant, those cases were decided prior to the Appellate Division's recognition in N:mrnuJd of the failure to notify claim or, if decided post-Ng_m_µr?.:J, considered the relevance of ~J!:_p1;~JJY.ltg£.,__C~t:iJ.~l_,Jn~,~ J.J 2014 \.VL 3853657 [Sup Ct, NY County July 28, 2014] [Schweitzer, iHEMI2.QQ6::~J [pre-.Ni,m:mrnJ case, which held that documents relating to the certificateholder' s holdings and its directions to and indemnification ofthe trustee were not relevant, as there was no issue as to tbe standing of the trustee to sue]5; ~~-~m,k __qfNfYL.YP.r:k ~:k.lhm_yjY:M~~--M_tg~,,..LI~C, SD NY, No. 12 Civ 7096, Sept 16 2014 [Cote, J.] [pre-N~nrrnrnJ case "vhich, without discussion, declined a letter application for an order compelling discovery ;r;J}1.C.. Mtg£.,JJ,_C Sup Ct, NY County, Index No. 651820/2012, Decision on the Record dated l\/Iarch 1, 2016 at 6-13 [Branste.n, .L] [post-Nmn:lJl'.!:lJ case, which did not address the relevance of certificateholder documents to a failure to notify claim, and fr)llowing HBMT2QQ2::,~, quashed as irrelevant a subpoena to a certificateholder for documents which apparently included, among 4 Given the relatively recent recognition by the Appellate Division of the failure to notify claim, the parties to the Rl'vIBS litigation have yet to articulate with any specificity their theories as to the damages recoverable on proof of such claim. On the instant appeal, Nomura asserts, but without discussion, that HSBC's failure to perform its contractual obligations would preclude contractual claims for specific perfonnance. (Nomura's Briefin Opp. at 8.) HSBC asserts in conclusory fashion that the obligations are not relevant, but fails to discuss the bearing of an obligation to commence litigation on the damages recoverable on the failure to noti:(y claim. (HSBC's BriefJn Supp. of Nomura Appeal at 9- l O; Tr. at 55.) 5 This decision also held that the certificateholder's internal analyses of the loans were either irrelevant or privileged. Such analyses are not at issue in the instant appeal, as Nomura seeks certificateholder documents within the trustee's possession, and not documents in the certificaiebolder's possession, as in Rf:MJ?QQ§~~· 9 10 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 10] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 others, documents regarding the certificateholder's directions to the trustee and its other RMBS lmvsuits and loan analysis] [HSBC [Scheef] Aff. in Supp. of Nomura Appeal, unpublished orders annexed as Ex. 4].) In contrast, even P!f:.:NQmJJntJ, at least one case, which HSBC cites as persuasive authority, recognized the relevance of certificateholder documents to the issue of vvhether the trustee gave prompt notice of breaches ofrepresentations and warra.nties. (See Tr. at 54; ,~_(]~ No. 13 Civ 01869, Decision on the Record dated JVfay 22, 2015 at 32 [Gorenstein, Magistrate Judge] [case decided on a letter application by the defondant-securitizer to enforce a subpoena against the certificateholder, which held that "communications between the trustee and [certificateholder] that go to the issue of whether the trustee gave prompt notice to the defendant should be produced," but that the certificateholder's loan analyses were not relevant].) On this record, the court does not find that the Special ]\faster erred i.n ruling that the ce1iificateholder documents are not "categorical!y irrelevant" For the reasons stated above, the court further holds, on a de novo review of the Nomura Ruling, that the particular categories of certificateholder documents to which HSBC objects are .not iITelevant as a matter of law to the failure to notify issue. 6 The court also notes that HSBC acknowledges that the production required by the Ruling consists of between 300 and 600 certificateholder documents and is therefore "not extensive." (Tr. at 14-16,) Finally, the co mt is satisfied that the broad confidentiality order in place in the 6 Nomura also argues that HSBC is bound by the Special Master's unappealed April I I, 2017 ruling, made in M~irilLLJ0$P in which HSBC is also the trustee, requiring HSBC to disclose certificateholder materials. HSBC argues that it is not bound by that ruling as it is the trustee for a different trust in that action. In vie-.v of the above holding, the court need not and does not reach this issue. The couri notes that neither party has cited the extensive legal authority discussing the preclusion doctrine, or has addressed the impact ofCMO '1f m (B) on the application of that doctrine. 10 11 of 12 [*FILED: NEW YORK COUNTY CLERK 01/29/2018 03:18 PM 11] NYSCEF DOC. NO. 213 INDEX NO. 652727/2014 RECEIVED NYSCEF: 01/29/2018 Part 60 RlviBS actions will provide ample protection against misuse of sensitive infom1ation regarding certificateholders' holdings or other financial infom1ation. It is accordingly hereby ORDERED that the motion of plaintiff Trustee HSBC Bank Ruling of the Special IVfaster is denied; and it is further ORDERED that the motion of plaintiff Trustee HSBC Bank USA, National Association 652727/2014) for reversal of the Ruling of the Special Master is denied. Dated; New York, New York January 29, 2018 11 12 of 12

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