Freedom Trust 2011-2 v DB Structured Prods., Inc

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Freedom Trust 2011-2 v DB Structured Prods., Inc 2018 NY Slip Op 30506(U) March 26, 2018 Supreme Court, New York County Docket Number: 652985/2012 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 03/28/2018 03:43 PM 1] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK --- PART 60 • • • • • • • • • • • •••••••••••• • • • • • • ">"-~~~~~~~~~~••••n»•» • • • •••••••••••••••••••••••••••• • • • • • • • • ~~~~~~ ................ ~~~~~~~~••••••"""" • • • •• • • • FREEDOM TRUST 2011-2, on behalf of ACE Securities Corp. Home Equity Loan Trust, Series 2006-Fl\/11, DECISION/ORDER Index No. 652985/2012 Plaintiff, Mot. Seq, 002, 003 - against DB STRUCTURED PRODUCTS, INC, De fondant -andHSBC BANK USA, NATIONAL ASSOCIATION, in its capacity as Trustee of ACE Securities Corp. Home Equity Loan Trust, Series 2006-FMl Nominal Defendant LDIR, LLC, on behalf of ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2007-ASAP1; LDJR, LLC, individually, Index No. 650949/2013 l'vfot Seq. 002, 003 P!aintit1~ - against DB STRUCTURED PRODUCTS, INC., and HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee, Defendants, -andACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2007-ASAPJ, Nominal Defendant. These separate residential mortgage-backed securities (&\.1BS) breach of contract actions are based on alleged breaches of representations and Vv'arranties by defendant DB Structured Products, Inc. (DBSP), the Sponsor, regarding the quality and characteristics of the mortgage loans underlying the securitizations. HSBC Bank USA, National Association is Trustee of ACE 2 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 2] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 Securities Corp. Home Equity Loan Trust, Series 2006-FMl, and ACE Securities Corp. Home Equity Loan Trust, Series 2007-ASAPl, the Trusts to \vhich the loans were conveyed. DBSP moves to dismiss the first amended complaint (FAC) in each case pursuant to CPLR 3211 (a) (1), (3), (5), (7), and (8), on the ground, among others, that the actions are time-barred. The Trustee separately moves in each action for leave to file a proposed second amended complaint (PSAC), which would supplement the pleading of its claims for breach of the implied covenant of good faith and fair dealing with allegations of DBSP's purported bad faith conduct after the closing of the securitizations. The first amended and proposed second amended complaints in the two actions (collectively, the complaints) are substantially similar. 1 Each pleads a first cause of action, for breach of contract, based on DBSP' s alleged breaches of representations and warranties and failures to cure or repurchase defective loans, either upon notice or upon its O\Vn discovery of breaches. (Freedom Trust FAC, ~~ 104-116; Freedom Trust PSAC, ~rir 110-119; LDIR FAC, 1111 l 08-120; LDIR PSAC, ,-;~· l 13-122.) The second cause of action in each complaint, fi.)r breach of the implied covenant of good faith and fair dealing, is based 011 DBSP's alleged deliberate and \villful faUures to cure breaches or to repurchase defective loans, purportedly "as part of a deliberate strategy to deprive the Trustee of its contractual rights" by '•stonewall [ing] in an effort to evade liability." (Freedom Trust FAC, ~fii 118, 117-131; Freedom Trust PSAC, 1111120-149; LDIR FAC, ,-r~· 121-135; LDIR PSAC, ~i~l 123-151.) The implied covenant causes of action in the proposed second amended complaints also plead that DBSP "violated its contractual obligation, express or implied, to notify the other securitization parties, including the Trustee," t lrr this decision, the action captioned Er.~.~Q9!X! ..Irn~t..2.12;1J~)..)l ..P.~.5trJJgtw:~i;LPrn41Jfl!'L. Inc" (No. 652985/20 J 2) will be referred to as "Freedom Trust" or the "Freedom Trust Action," and the action captioned LPIB,.JLG.Y.Rf$. ;>rrn~tm:~<:trrnci1J~tc>,Jf1f" (No. 650949/2013) wiH be referred to as "LDlR" or the "LDIR Action." 2 3 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 3] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 upon its discovery of breaches of representation and warranties. (Freedom Trust PSAC, ,-i 139; LDIR PSAC, if 14L)2 The relevant facts are undisputed: Each of the above-captioned actions was commenced when a certificateholder filed a summons with notice on, or one day prior to, the six-year anniversary of the securitization closing date. The Trustee did not file the initial complaint or attempt to substitute itself as plaintiff in either action until several months after the six-year anniversary of the closing date. 3 The parties' motions raise many issues that have previously been determined by decisions of the appellate courts and of this court. 4 In determining such issues on these motions, the court wiH rely on the reasoning of, and the authorities cited in, the prior decisions. It is now settled that the first cause of action in each of the complaints, for breach of contract, accrued on the closing dates of the respective securitizations, 1;vhen DSBP's representations and warranties were made, and not \Vhen DSBP failed to repurchase breaching 2 The first amended complaint in the LDIR Action pleads that "[u]pon !ts independent discovery of breaches of its representations and warranties, DBSP •,vas required to notif)' the Trustee of the breaches," but does not expressly tie !hat allegation to either of the two causes of action in that pleading. (See LDIR FAC,, 10,) :; More specifically, Freedom Trust 2011-2, a certificateholder in ACE Securities Corp. Home Equity Loan Trust, Series 2006-FMI, commenced the Freedom Trust Action by filing a summons with notice naming DBSP as a defondant on August 24, 2012. The Trnstee filed the initial comp faint on January 28, 2013, more than five months after the six-year anniversary of the securitization closing date of August 25, 2006. LDIR, LLC, a certificateholder in ACE Securities Corp" Home Equity Loan Trust, Series 2007-ASAP I, commenced the LDIR Action by filing a summons with notice on March 15, 2013. The Trustee filed the initial complaint on Augusi 1, 2013, more than four months after the six-year anniversary of the securitization closing date of March 15, 2007. 4 By Order ofthe Administrative Judge, dated May 23, 2013, this court ·was designated to hear "all actions hereafter brought in this court alleging misrepresentation or other wrong in connection with or arising out of the creation or sale of residential mortgage-backed securities." 3 4 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 4] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 AD3d 522 [1st Dept 2013.J [ACE],) As also held under substantially similar circmnstances, "[t]he summons with notice filed by the certificate holders ... , while timely, was ineffective, because the certificate holders lacked standing to assert c.!aims against defendant." (See N2giug~ 520 [1st Dept 2016] [N9rn_qr<lJ) The original, first amended, and proposed second amended complaints, filed by the Trustee after the passage of the six-year statute of limitations frJr breach of representation and warranty claims, are untimely and do not relate back to the defocti ve 433 (1st Dept 2016], Iv granted 29 NY3d 910 [2017]; ACE, 112 AD3d at 523, affd on oth~I \.VL 1587345, at* 4 [Sup Ct, NY County, Apr. 12, 2016, No, 650291/2013] [FHFA (NCI)], affd This court's holding that the certificateholders lacked standing to assert breach of contract claims against DBSP is based on the terms of the "no-action clauses" in the governing Pooling and Servicing Agreements (PSAs). These clauses prohibit any cerfrficateholder from instituting an action with respect to the PSA unless, among other conditions, the certificateholder gives the Trustee "a \;VIitten notice of default and of the continuance thereof' and the Tmstee neglects or refuses to institute such action fur 15 days after its receipt of such notice. (Freedom Tmst PSA, § 12.03; LDIR PSA, § 12.03,) In ACE, the Appel.late Division held that certificateholders lacked standing to commence a breach of contract action on behalf of their trust based on a virtually identical no-action clause. (Se~. 112 AD3d at 523, am.-i on other 4 5 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 5] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 grounds 25 NY3d 581.) 5 In so holding, the Appellate Division expressly rejected an argument by the trustee that the no-action clause "authorize[d] certificate holders to provide notic(~S of 'defa.ult' in cmmection with the sponsor's breaches of the representations." (Id.) The Court reasoned that "the 'defaults' enumerated in the PSA concem[ed] the failures of performance by the servicer and master servicer only." (Id.) This case is indistinguishable from ACE. Here, as in ACE, the default provisions of the PSAs refer to servicer and master servicer defaults. (Freedom Trust PSA, art 8; LDlR PSA, art 8.) Also as in ACE, the no-action clauses permit certificatt..~holders to institute actions upon certain conditions with respect to a "default," an undefined term. On the authority of Aq~, the court holds that the no-action clauses authorize certificatehoider actions only upon \'VTitten notice of a servicer or master servicer defa.u:lt The court accordingly rejects the Trustee's contention that the term "default" authorizes certificateholders to institute actions upon notice of breaches of representations and warranties. 6 (Cf. t{QmWih 139 AD3d at 520 [holding that the Trustee's argument '"that it alleged compliance with the no-action clause, permitting the certificate holderU to assert clairns on behalf of the trust, is not persuasive, since the pooling and servicing agreement[ s] spedfically refute[] this basis for the certificate holders' allegations of standing"].) For the reasons stated, and on the authorities cited in this court's prior opinions, the court further holds that the no-action clauses were not intended solely for the Trustee's benefit, and ln affirming the Appellate Division's decision i.n M,~~, the Court of Appeals assumed, without deciding, that the certificateholders had standing. (25 NY3d at 589, 599.) 5 6 Even if this court 'Were to accept the Trnstee's argument that a breach ofrepresentation or warranty constitutes a "default," as that term is used in the no-action clauses, the certificateholders do not allege that lhey complied vvith the requtrement w wait 15 days after providing notice of a default to the Trustee befure bringing suit (See Freedom Trnst PSA, § 12.03; LDIR PSA, § 12.03) Each summons with notice was also ineffective for this reason. (See f.~9~IajJ_Ipg_~,__ fig,J~&Q!l9.:LY.V1?.S.. R.5'.~LE~i_m~ S.~9.;l,_,Jrn;_._, 2016 WL 4039321, >I< 3 [Sup Ct, NY County, July 27, 2016, No. 651282/20 J2] [this court's prior decision, finding certificateholder summons with notice ineffective based on failure to comply \vith 60-day waiting requirement in no-action clause].) 5 6 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 6] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 that DBSP has standing to raise the issue of the certificateholders' non-compliance with the 4039321, * 3 [Sup Ct, NY County, July 27, 2016, No. 651282/2012].) The court also rejects, for the reasons stated in its prior decisions, the Trustee's argument that it waived or ratified any standing defect \Vhen it filed the initial complaints. (Id.; federf!JJJgy._~,J:~!JL.t\Z.~n~Y..Y.H~.!?.C fi!h._c.QJil~, 2017 \VL 1479480, * 4 [Sup Ct, NY County, Apr, 25, 2017, No. 651627/2013].) To the extent the Tmstee argues that the no-action clauses do not apply because the certificateholders filed the actions derivatively on behalf of the Trusts, that argument is rejected for the reasons stated by the Appellate Division in 1:HE,~JM9IY.1ML~tfilU~D (146 A.D3d at 567568). The Trustee ark,<ues, in the alternative, that the first causes of action are timely under New York General Obligations La\v (GOL) § ] 7-101, pursuant to which a ;,,vritten acknowledgment of a contractual obligation may restart the six-year limitations period fiJr a breach of contract daim. 7 (See e.g. LDIR Action, Tee. 's Memo. In Opp. To MTD, at 7-10.) ln order to constitute an "acknowledgment" under GO L § 17-10 I, a \vriting "must recognize an existing debt and must contain nothing inconsistent with an intention on the part of the debtor to pay it." (h~J:YJ\1w:-r:i.~ The letters on which the Trustee relies, sent by a representative of DBSP in response to notices by the Trustee of alleged breaches of representations and warranties, do not contain any 7 GOL § 17~101 provides, in pertinent part: "An acknowledgment or promise contained in a \\.'Titing signed by the party to be charged thereby is the only competent evidence of a new or continuing contract whereby to take an action out of the operation ofthe provisions oflimitations of time for commencing actions under the civil practice law and rnle:; other than an action for the recovery of real prope1ty," 6 7 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 7] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 acknowledgment by DBSP of breaches of representations or warranties. Nor do they contain any acknowledgment by DSBP of any obligation on the part ofDBSP to repurchase the loans identified in the Trustee's notices. To the contrary, the letters state that DBSP "'cannot make any determination" as to the accuracy of the alleged breaches without access to the full loan origination :files, servicing records, and all evidence supporting the breach claims made in the Trustee's breach notices. (Letter from Anthony Aulisa, Vice President ofDSBP, dated June 11, 2013 [LDIR Action, Israeli Aff., Exh. A_]; Letter from Anthony Au1isa, Vice President ofDSBP, dated June 19, 2012 [Freedom Trust Action, Israeli Aff., Exh. B].) Although the letters request such materials from the Trnstee, they further explicitly state that "[t]his request is without prejudice and does not waive any rights or defenses that DBSP might have under the [governing agreement(s)] or otherwise might have with respect to the alleged breaches." (Id.) For all of thes(~ reasons, the letters plainly do not qualify as "acknowledgments" under GOL § 17-101. 8 (_~_~e e.g" S1~ITLY__~!~ITh.~1.~Jill:i>,,Jri&~, 22 AD3d 567, 568 [2d Dept 2005] [letter recognizing "possibility" ofliability did not constitute an acknowledgement under GOL § 17-lOl_l; Q{!?;?;ft.Y 1Jg1!~_4_(:_<lL~£mkJntl., 88 AD2d 968, 970 f2d Dept 1982] [execution of mortgage did not constitute an acknowledgment of obligation under guarantee where the parties explicitly reserved '"whatever rights or defenses, as the case may be, under and by virtue of [the] guarantee"' (brackets in original)],) The Trustee argues that, even if its claims for breaches of representations and wan-anties are untimely, it has independent, timely breach of contract claims based on DBSP's alleged 8 Moreover, as DSBP correctly argues, the letters were sent at a time when a conflict existed among the Courts regarding the proper application of the statute oflirnitations to RMBS claims for breach of representations and warranties and for failures w repurchase defective loans. This conflict was first resolved by the Appellate Division in ACE ( 112 AD3d 522, supra). (LDIR Action, Def.' s Reply Memo., at l 0 n 11.) '7 i 8 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 8] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 failure to promptly notify the Trustee of breaches of representations and warranties discovered by DBSP early in the life of the Trusts. (See LDIR Action, Tee.'s Memo. In Opp. To MTD, at 5; Freedom Trust Action, Tee.'s Memo. In Opp, To MTD, at 5.) In a recent decision, to which the parties are referred, this court discussed a number of issues common to RMBS "failure to notify" claims by trustees against secur.itizers, including the accrual of such claims for statute of limitations purposes. c:~foe generally f~g~rglJJ9_µ~_,___rirr~ 2018, Nos, 650291i2013, 651959/2013] [the Failure to Notify decision].) Under the Appellate AD3d 96 [1st Dept 2015], IJ!Q~ on other grounds 30 NY3d 572 [NY, Dec. 12, 2017] [N9!nW_~ ~a12it~UJ914tng~ _ Ll·(: (143 AD3d 1 [1st Df.~pt 2016], appeal gg_~k~t~4 No. APL-2016-00240 Dept 2017]), a securitizer' s alleged breach of its contractual obligation to notii.}1 a trustee upon its discovery of breaches of representations and warranties gives rise to an independent, separate clairn for breach of contract In the Failure to Notii.}1 decision, this court held that such a claim accrues upon the securitizer's discovery of breaches and failure to provide prompt w1itten notice. In these cases, even assuming that failure to notify claims are pkaded, 9 the pleadings do not state legally viable causes of action and are refuted by docmnentary evidence. (See generaUy 9 As noted at tile outset of this decision, neither the first amended complaints nor the proposed second amended complaints plead a breach of contract cause of action based on DBSP's alleged failure to notify. In the LDIR Action, however, the opening summary ofthe first amended complaint pleads that DBSP had a duty to notify the Trustee upon its discovery of breaches of representations and warranties. The proposed second amended complaints in both actions also plead, as part of the implied covenant causes of action, that DBSP violated its "express or implied" obligation to notil)r the Trustee upon its discovery of breaches of representations and wammties. (See supra, ai 2~3,} 8 9 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 9] NYSCEF DOC. NO. 174 NY2d 144, INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 151~152 [2002].) The Trustee fails to identify any provision in the governing agreements that imposes a contractual duty upon DBSP to promptly notify the Trustee of DBSP's discovery of breaches of representations and warranties. Section 7 (a) of the MLPAs, on which the Trustee relies, sets forth a protocol to be followed \Vhen DBSP, the Purchaser, or the Trustee discovers qualifying breaches of representations and warranties. That protocol requires only that notice be provided to DBSP-not to the Trustee, 10 It is well settled that the court "may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the \JVTiting!' (R~i§.§.Y:,.Jjµancial,;pq:fQill1?.PS.~..GQH?:_, 97 NY2d 195, 199 [2001] [internal quotation marks and citation omitted],) These "very sophisticated parties. , . certainly could have included" the Trustee (or "any assignee, transferee or designee of the Purchaser") as a party to be notified upon DBSP's discovery of a breach, (See generally 1::loml.1!1LfEkIZJ, 133 AD3d at 107-108 [internal quotation marks and citations omitted], mod on other gfQ!IDQ.§ 30 2013].) Indeed, it is common for the governing agreements in RMBS transactions to impost~ upon a sponsor an express contractual obligation to notii)" the trnstee upon its discovery of a rn Section§ 7 (a) of the MLPAs provides, in pertinent part: "lfpon discovery by the Seller [DBSP], the Purchaser [non-party ACE Securities Corp.] or any assignee, transferee or designee of the Purchaser [including the Trustee] of ... a breach of any of the representations and warranties contained in Section 6 [of the MLPAJ that materially and adversely affects the value of any Mortgage Loan or the interest therein of the Purchaser or the .Purchaser's assignee, transferee or designee, the party discovering such breach shaH give prompt \YTitten notice to the Seller [DBSPJ." 9 10 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 10] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 breach of a representation or warranty that materially affects the value of a loan. 11 The Trustee here did not secure such a provision. The Trustee argues that, despite the plain language of section 7 (a) of the MLPAs, it would be •'absmd" to interpret the provision as omitting a requirement that DBSP promptly notiiy the Trustee of its discovery of a breach of representation or warranty, because such an interpretation vvould "turn DBSP into the arbiter of its o-\.:vn repurchase obligations." (LDIR Action, Tee.'s Memo, In Opp. To MTD, at 6.) This argument is unpersuasive. Whether or not DBSP has or had a notification obligation, it remained obligated, by the dear terms of section 7 (a), to repurchase loans materially and adversely affected by breaches of representations and warranties. Moreover, "Court[s] 1.vill not imply a tem1 where the circumstances surrounding the formation of the contract indicate that the parties, when the contract was made, must have foreseen the contingency at issue and the agreement can be enforced according to its terms," (Reiss, 97 NY2d at 199.) The possibility that DBSP or other parties would discover breaches of representations or \;varranties was clearly foreseeable to those sophisticated parties, and they specifically agreed to a protocol that would be followed upon such an occurrence. As noted, that protocol does not include any requirement that DBSP promptly i1otify the Trustee of breaches. Section 7 (a) is not without meaning, as it requires the Purchaser and the Trustee to notify DBSP of breaches discovered by those parties, and serves as a condition precedent to DBSP's obligation to repmchase defective loans it does not discover independently. There is no question that the provision can be enforced according to its terms. 12 n For example, section 3.01 of the MLPA at issue in MQrgID:luSt~~}': (143 AD3d 1, supra) provided that, "[u]pon discovery by the Depositor, the Seller, the Servicer, the Purchaser or any assignee, transferee or designee of the Purchaser of a breach of any of the representations and warranties ... the party discovering such breach shall give prompt written notice to the others." CM9I.&~-~!!ml~:i, MLPA [Exh. 1 to the Am. Compl.J, No. 653429/12.) 12 The court also rejects the Trnstee's argument that a duty to notify· should be implied because "DBSP cannot perform its obligation to repurchase loans it discovers to be in breach without notifying the other transaction parties 10 11 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 11] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 As the first causes of action fail to plead viable breach of contract claims, the branches of the motions to dismiss those causes of action will be granted. The remaining issue is whether the Trustee has stated viable claims for breach of the implied covenant of good faith and fair dealing, as pleaded in either the first amended complaints or the proposed second amended complaints. For the reasons stated, and on the authorities cited, in this court's prior RlvlBS decisions, the court holds that the pleaded and proposed implied covenant claims are duplicative of tht~ nonviable breach of contract claims. Similar implied covenant claims have been dismissed as duplicative of breach of representation and warranty and failure to noti:t}I claims in decisions of the Appellate Division and the_U.S. Court of Appeals for the Second Circuit (See l.Y'.HHA.Jn~, implied covemmt daim as duplicative of breach of contract claim where implied covenant claim \.Vas based, among other things, on allegation that defendant "deliberately refused to take corrective action on defaulting loans so that it could collect more fees"]; N9ill1!J'{l..1t.M~j, 133 1&?:m)n(,'.. ,, 810 F3d 861, 869 [2d Cir 2015] [affim1ing dismissal of implied covenant claims as duplicative of untimely breach of contract claims based on Quicken's sale of defective loans and of its intent to do so." (LDIR Action, Tee. 's Memo. ln Opp. To MTD, at 6.) First, the Trustee does not address whether there are circumstances under which DBSP might be able to "cure [the] defect or breach in all material respects" without involving the Trustee, in which case repurchase would be mmecessary. (See MLPA § 7 [a].} Furthermore, although it may be true that, as a matter of"logistics" (LDIR Action, Tee.'s Memo. Io Opp. To MTD, at 6), DBSP cannot repurchase without the involvement of the Trustee, the Court of Appeals has foreclosed the possibility of an independent breach of contract claim based on a sponsor's failure to comply with its repurchase obligations. (!:\QE, 25 NY3d at 599.) Here, the Trustee did not bargain for a notification right in the governing agreements. Accordingly, even accepting the Trustee's assertion that notice is one of several procedural sieps eventually necessary for DBSP to comply with its repurchase obligations, the failure to provide such notice is noi an independent breach of these contracts. 11 12 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 12] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 "purported failure to notify the Trustee promptly of material defects"]; R~Jll~~h~J~_~gk_N~1l: Im§t(g,_y__ f.']~g§_t.;ir__C~mi_tgL~ikt~,..CQIJI,, 2015 \VL 1646683, * 4 [Sup Ct, NY County Apr. 13, 2015, No. 653048/13] [this court's prior decision dismissing an implied covenant cause of action as duplicative of a breach of contract cause of action where both claims \Vere based on allegations as to the defendant's "pervasive breaches of the representations and warranties, its awareness of the breaches, and its failure to notify the Trnstee or repurchase the defective loans"], affd on other grm,m4~ 143 AD3d 15 [1st Dept 2016] tfl.~,K~1fil]; L.~w Deb~ntqre Trust C9.c.9.0~_,X. v DLnyf_tq_~,--~~~WA1~LJri~,, 2015 WL 1573381, * 11 [Sup Ct, NY County, Apr. 8, 2015, No. 651958/13] [sarne]; §.~-~ g~xi:~r.<!lly Ptw~11i~ __c;_~piJ~_Jn.Y~~1m~.nt~..LL.C...Y..FJ.Erw!&m. l\{Kb Qr_g_lff<,_.LJ,~,.C~,, 51 AD3d 549, 550 [1st Dept 2008] [dismissing implied covenant claim as •'an invalid substitute for its nonviable breach of contract claim"].) 1v1ore particularly, the breach of contract claims in both the LDIR action and the Freedom Tmst action are based on the allegations that "DBSP discovered or at least should have discovered breaches of the representations and warranties on its own" and was provided with breach notices by the Trustee, thereby "triggering D.BSP's cure or repurchase obligations." DBSP, however, "failed and refused to cure or repurd1ase any defective Morgan Loans!' (LDIR FAC, ~i! 111, 113; Freedom Trust FAC, il~i 106, 108.) The breach of contract claims also allege that DBSP's failure to identif)' and cure breaches of representations and warranties was "grossly negligent or willful[]." (LDIR FAC, 1116; Freedom Trust FAC, ~· 11 L) The implied covenant claims in both actions are based on allegations that DBSP discovered breaches of representations and warranties and thereafter engaged in a course a conduct, designed to delay or frustrate repurchase efforts until the limitations period expired, by failing to notify the Trustee of defects and responding to breach notices in bad faith" (LDIR FAC, ~~ 121-135; Freedom Tmst FAC, 41"1 12 13 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 13] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 116-130.) The implied covenant claims thus allege that "DBSP in bad faith has adopted .. , a practice of deliberately and willfully breaching its obligations not only to cure breaches or repurchase breaching loans once it has been put on notice of breaches by the Tmstee, but also of deliberately and willfully failing to cure or repurchase based on its obligation arising from its mvn discovery of breaches.'' (LDIR FAC, if 122; Freedom Trust FAC, 1117.) The proposed second arnended complaints add details as to this alleged pract.ice. 13 The allegations in the implied covenant claims as to DBSP's discovery of breaches and failure to comply with the repurchase protocol are clearly duplicative of those in the breach of contract claims. The allegations as to DBSP's failure to notify the Trustee of defective loans, similarly, are duplicative oi~ and fail to save, the Trnstee's nonviable failure to notify claims, Further, it is weU settled that, although the implied covena11t encompasses "promises which a reasonable person in the position of the promisee would he justified ln understanding were included" in a contract, "[t]he duty of good faith and fair dealing ... is not without limits." citation omitted],) "[N]o obligation can be implied that 'would be inconsistent with other terms 58 NY2d 293, 304 [1983].) The implied covenant accordingly "cannot be used to create terms n The proposed second amended complaints allege, among oilier things, !hat DBSP recognized after the dosing dates that "the mortgage loans it had purchased over the years were rife with defects" (LDJR PSAC, ~ 129; Freedom Trnst PSAC, ii 126) a:nd that it "engaged in a massive, systematic, post-closing reunderwriting of mortgage loans" in order to "seek reimbursement from originators for breaching loans." (LDlR PSAC, ~ 126 [emphasis omitted]; Freedom Trust PSAC if, 123,) The purpose of this "breach out program" allegedly was to mitigate losses by identifying defoctive loans and recovering payments from originators with respect to those loans. (LDlR PSAC, ii 128 [internal quotation marks omitted]; Freedom Trust PSAC, 1 125.) Yet despite its numerous repurchase request:; to originators, DBSP failed to repurchase any defective loans from the Trusts. (See LDIR PSAC, 1 135; Freedom Trust PSAC, 1132.) Moreover, DBSP "stonewalled" upon receiving breach notices from the Tmstees, declaring ihat it lacked information that, in fact, it had already acquired as a result of its "breach oui" efforts. (LDlR PSAC, 1 138; Freedom Tmst PSAC, '1T 135") 13 14 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 14] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 that do not exist in the v.iriting." (Yanlex St_pres, Inc. v BFP 300 M~4!,~Qv,JJJ,,J,,(.~, 66 AD3d 580, Dept 2001], J_y _g_~gj~~ 97 NY2d 611 [2002] ["The covenant of good faith and fair dealing cannot be used to add a new term to a contract, especially to a commercial contract betvveen nvo sophisticated commercial parties represented by counsel"].) Put another way, the implied covenant cannot be used to "effectively create an independent contractual right that was not CQJJ2!_, 25 AD3d 309, 310 [1st Dept 2006], h: gJ~xnb_~~g 7 NY3d 886 [same].) \Vhere a contract contains an express covenant governing a subject, Courts will not imply a covenant with respect [Sup Ct, NY County, Mar. 12, 2013, No. 653284/11] [this court's prior decision, collecting authorities].) As discussed above, the MLPAs explicitly cover the subject of notice and do not require DBSP to promptly notify the Trustee upon its discovery of a qualifying breach. This court may not imply a notification obligation inconsistent with the notification requirements expressly provided for in the MLPAs. Moreover, the Trustee could not reasonably have expected to receive written notice from DBSP upon DBSP' s discovery of a breach of representations and warranties under these circumstances in which the MLPAs do not require such notice. 14 As DBSP correctly argues, absent a contractual provision to the contrary, a party is under no obligation to reveal to its counterparty that it has breached a contract. If the Trustee wanted 14 The Trustee, although not a party to the MLPAs, must be charged with knowledge of the contents of those agreements, and in particular the rights it stood to acquire from the Purchaser- (E.g. LDIR Action, FAC, ,-ri[ 100~106 [detaili.ng tl:ie contractual provisions assigning the Purchaser's rights under the MLPA to the Trustee}.) 14 15 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 15] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 to impose such an obligation on DBSP, it should have made certain the contract was clear and unambiguous. Gi~S'. 2.Wilf'<'mQ__ y __ QJ~i!JJ1,, 6 NY3d 666, 675 [2006] ["A ·wrongdoer is not legally obligated to make a public confession, or to alert people who may have claims against it, to get the benefit of a statute of limitations"]; __QfN,_¥,__ ,M~-1AQnY_WM(:__M11w,J,J,C, 53 Misc 3d t~§nk 967, 971-973 [Sup Ct, NY County, Sept 7, 2016, No. 653099/14, Kornreich, J.J [same].) Having failed to negotiate for such a notification right, the Trustee cannot now supplement or "nullify" the protocols to which it agreed on the ground that '"defendant acted unfairly" or in bad faith in failing to notify it of breaches. (See generall_-y .!~hQS'.P.~0..C~pjJ~Ul}.Y~-~tm~xn.~ ..l,I,(.'., 51 AD3d at 550.) Although the consequences of the Trustee's bargain may be quite severe under the particular circumstances of these cases, the fact that a party suffers harm under a contract does not mean that an t.~xpn.~ss or implied contractual duty \Vas violated, Finally, implying a requirement that DBSP promptly notify the Trustee upon its discovery of breaches of representations imd warranties woukl create an independently enforceable obligation. (SS'.~ Mrn:Iwn._St;:J,!1J~y_, 143 AD3d at 4.) Recognition of this obligation could give rise to a contract claim accruing later than that for breaches of representations and warranties, and thereby enable the Trnstee to recover damages in fact caused by such breaches. In its recent Failure to Notify decision, this court addressed accrual and other issues arising as a result of the Appellate Division's recognition of a breach of contract claim based on the defendant's failure to noti£:y the trustee of its discovery of breaches ofrt.:presentations and warranties, vvhere the governing agreements expressly required such notification. The decision discussed the substantial implications for the Rl\1BS litigation and significant public policy concerns raised by the recognition of an ind.ependently enforceable notification obligation, (See Failure to Notify decision, 2018 WL 1187676, at* 8-13, 16-19.) No justification exists for this 15 16 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 16] NYSCEF DOC. NO. 174 INDEX NO. 652985/2012 RECEIVED NYSCEF: 03/28/2018 court to irnply a notification obligation vvith such serious ramifications where, as here, the extremely sophisticated commercial parties did not see fit to expressly provid.e for such an obligation. In sum, both the first amended complaints and the proposed second amendt~d complaints fail to plead viable causes of action for breach of the implied covenant of good faith and fair dealing. As the proposed complaints are "palpably insufficient or dearly devoid of merit," leave to amend to supplement the implied covenant causes of action will accordingly be denied. (See MJHA Ins:J;;.QU\.Y_Qr_~y,<:;tg_p,~--~--~Q-"jnc._, 74 AD3d 499, 500 [1st Dept 2010].) l'vforeover, the implied covenant claims in the first amended complaints will be dismissed. Equitable Estoppel Finally, the Trustee argues that DBSP should bt~ equitably estopped from asserting the statute of limitations as it allegedly kept silent about breaching loans and failed to comply in good faith with its repurchase obligations prior to the expiration of the limitations period for breach of contract claims. (See LDIR Action, Tee. 's Memo. Jn Opp. To MTD, at 23-24.) This court and others have rejected virtually identical equitable estoppel arguments in RMBS cases, based on the trustees' failure to plead facts sufficient to support their claim that the defendant securitizers' bad faith conduct led the trustees to believe that there vvere no defective Joans or "'prevented" them from bringing suit within the limitations period. (See ~ fi?JL~iJ!.r, 2015 WL 1646683, * 3-4 [this court's decision, citing additional authorities], affd on other gr_QJfilQ~ 143 AD3d 15; ~!l!lli:..QD~:L.Y:,J!1~m;m.:v. ..W:Mc; _ M_tg~,_J,J:,_~, 53 Misc 3d 967, 971-973 (Sup Ct, NY County Sept. 7, 2016, No. 653099/14, Kornreich, J,] [rejecting equitable estoppel argument \Vhere the defendant was "not alleged to have hidden anything or prevented [the trustee] from discovering breaches"]; see also .\V,~U~.f~r.gQ_H_<lllk, __ Ncol\,:_.\l..JP~1QIKill1.~h©:.~~~fillk~J'.':{:l'.\:,, 2014 16 17 of 18 [*FILED: NEW YORK COUNTY CLERK 03/28/2018 03:43 PM 17] INDEX NO. 652985/2012 NYSCEF DOC. NO. 174 \VL 1259630, grn.llld~ RECEIVED NYSCEF: 03/28/2018 * 5 [SD NY Mar. 27, 2014, No. 12 Civ 6168, Cedarbaum, J.], affd on other 643 Fed .A.ppx 44 [2d Cir, Mar. 16, 2016].) The Trustee's invocation of equitable estoppel ht~n.~ is unavailing for the same reasons, 15 The court has considered the Trnstee's remaining contentions and finds them to be It is accordingly hereby ORDERED that the motions of defendant DB Structured Products, Inc. to dismiss the first amended complaints in the above-captioned actions are granted, and each action is dismissed in its entirety; <md it is further ORDERED that the motion of HSBC Bank USA, National Association in each action for leave to file a proposed amended complaint is denied. This constitutes the decision and order of the court Dated: New· York, New York March 26, 2018 ..--··) .~··";:.~···-.'·.. ;:.O~>;: .~ _.,..-"' / . .."" /:~~:'.j;~~~:'.~:;'.~~~;~;1;-i<<~,-/~~:::~~-:~::~'.::~::~:~~=~"'""""" .... .1\.1..ARCY 15 s,~vh,::i.t;,i:·:f:f\/JAN, ·..-:.:·· J.S,C. In its Failure to Notify decision, the court contrasted the standard for prevention under the equitable estoppel doctrine with !he standard for pleading that a securitizer' s failure to notify a trustee of breaches of representations and warranties was a proximate cause of the trustee's failure to commence a put-back action within the statute of limitations. (2018 \VL ll 87676, at* 18 n 18.) 17 18 of 18

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