Matter of Part 60 RMBS Put-Back Litig.

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Matter of Part 60 RMBS Put-Back Litig. 2018 NY Slip Op 30627(U) April 10, 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. [* 1] INDEX NO. 777000/2015 NYSCEF DOC. NO. 503 RECEIVED NYSCEF: 04/10/2018 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK-PART 60 ......................................................................... ~~~····· ........... ····--------------------···-·.-.-................................................................................................................................. . i IN RE: PART 601Uv1BS PUT-BACK LITIGATION Index No. 777000/2015 ' ~ :................ ...." ................................................................................................................................. ..] I fN RE: PART 60 MONOLINE INSURER LITIGATION i f.. fi:ffs.noclfi.1ENi'i~r1>Liii·s·:r0·~~Lt: . c~(sEs·······----------------- · ·1 t Index No. 779000/2015 DEC1SlON/ORDER In the coordinated Part 60 R~vms litigation, the put-back and monoline insurer plaintiffs move for leave to reargue and renew an appeal from a May 17, 2017 ruling of Bon. Theodore R Katz (Ret), the Special Discovery Master for these cases. The appeal 'Nas determined by tl1is court's decision and order dated October 13, 2017 (prior decision), \vhich modified Judge Katz's ruling. (2017 NY Slip Op 32161 [U], 2017 vVL 4569727,) The prior decision addressed plaintiffs' request for the court's authorization to contact employers or other third parties, in connection with reundenvriting of securitized mortgage loans at issue in tl1is litigation, to verify borrower information-i.e., information provided by borrowers in their loan applications regarding income and employment. Plaintiffs move for leave to reargue and renew with respect to two restrictions imposed by the prior decision on verification of borrower information: 1) the requirement that the plaintiff make a showing that such verification may be relevant to prove breaches of representations \.Vi.th respect to tl1e particular loans as to which the plaintiff seeks verification discovery, by certifying that the plaintiff has identified n.~d flags that borrower information in the locm files may be incorrect; and 2) the prohibition on reverification where the loan file contains documentation from the employer verifying borrower information at the time of the loan application, or, for self-employed borrowers, '~"here the loan file contains an accountant 2 of 8 [* 2] INDEX NO. 777000/2015 NYSCEF DOC. NO. 503 RECEIVED NYSCEF: 04/10/2018 statement provided at the time of the loan application, if the statement is regular on its face. (,S_~_s:: Pls.' Memo. In Supp. at 5.) Leave to reargue and renew is granted in the interest of ensuring that the parties have a foll and fair opportunity to address the issue of the required shmving of the relevance of the borrower verification discovery sought, in light of its sensitive nature and the widespread impact of the relevance ruling on the coordinated Part 60 RMBS cases. (See fil'.n~rnlli:: QQCJlQifillY Denl}!~, 117 AD3d 601, 601-602 [1st Dept 2014] [whether a motion is treated as one for reargument or for renewal, it is addressed to the sound discretion of the court]; S.filWLf:~.. A~;;_11,_YI?.Ql€:!!1::J~ing, Th©__R0.!1£hQ 36 AD3d 460, 461 [lst Dept 2007] [authorizing renewal~ even if based on facts in existence at the time of the prior motion, '"so as not to defeat substantive 2001)].) Upon reargument, the court adheres to the central holding of the prior decision that a party seeking authorization to verify borrower information must make a two-prong shcnving of relevance: First, the relevance standard requires a shm.ving that verification of borrower information is relevant to prove that the specific representations and \Varranties at issue were breached by defendant securitizers and/or originators. (2017 WL 4569727, at* 7.) Second, the standard requires allegations, as to the specific borrowers selected for verification, that verification of the infurmation provided by those borrowers in their loan applications may lead to relevant evidence, (Id.) As also held in the prior decision, the first prong ofthe standard was met by plaintiffs' shovving that verification of borrower information may be relevant to prove breaches of the "exemplar" representations. (Id. at* 9.) The prior decision held, however, that the second prong was not met, and that a protocol must be developed, after negotiation between the parties and subject to the Special Discovery Master's approval, which sets standards that can 2 3 of 8 [* 3] INDEX NO. 777000/2015 NYSCEF DOC. NO. 503 RECEIVED NYSCEF: 04/10/2018 be applied across the Part 60 coordinated cases for selecting a reasonably limited subset of loans for verification. (Xj,1....-:. at* 10.) The decision further held that such standards must set forth criteria for determ.ining whether verification may lead to relevant evidence, induding criteria fi.)r identifying red flags that borrower information in the loan file may be incorrect, thus warranting third party verification for particular loans, (Id,) In discussing an example of a possible protocol, the prior decision stated that the protocol might involve a certification by a plaintiffs counsel that it, or a reunden:vriter acting under cmmsel' s supervision and for whose actions counsel agrees to be responsible, has undertaken a full review of the relevant loan file; consulted pi1blidy available information, if any; and identified a red flag or flags justifying further inquiry into the borrower's income or employment (Id.) In discussing the certification, the decision stated that the loans to be verified should be identified in the certification, but that the extent of the other detail to be included in the certification--e.g., detail as to the criteria met in selecting the loans for verification------should be addressed with Judge Katz in the first instance. (Id.) The court now clarifies that it was not the comt's intention to require that the certification include details as to the specific facts underlying the determination that red f1ag(s) had been raised pursuant to the protocol, justifying verification of borrmver information for the selected loans, Nor was it the court's intention to suggest that a certification of the type approved by Judge Katz with respect to resort to public information would not be appropriate for the relevance showing in support of verification of horrovver information. 1 Rather, as held in the prior decision, the criteria for detennining what constitutes a red flag remain for negotiation by ·~~~HHH>HH>>>>>>>>>>>>>>••••••••••••••••••••••••,••• 1 Jn the May 17, 2017 mling which is the subject of this appeal, Judge Katz cited plaintiffs' counsels' proposal that they will affirm, as part of the verification protocol, "that they will oversee and take ultimate responsibility for the actions of their [third-party reunderw:riting firms]." He then rnled lhat "Plaintiffs' counsel shall ce1tii)r that publicly available information was reasonably pursued as part of the verification process." (May 17, 2017 Ruling at 5.) !n the prior decision, this court agreed with that ruling. (2017 WL 4569727, at* 3-4,) 3 4 of 8 [* 4] INDEX NO. 777000/2015 NYSCEF DOC. NO. 503 RECEIVED NYSCEF: 04/10/2018 the parties under Judge Katz's supervision. (Id.) The loans selected for borrower verification discovery should be identified in the c(:rtification. (Id.) However, the extent to vvhich the certification should set forth other detail, if any, as to the criteria met in selecting specific loans for borrower verification, should be addressed \Vith Judge Katz in the first instance. Put another way, the prior decision did not impose a requirement that the certification should set forth the nature of the red flag, or the basis for finding a red flag, with respect to the loans as to which borrower verification is sought Rather, the prior decision left for consideration by Judge Katz in the first instance whether, or to \Vhat extent, such information should b(: included in the certification. Moreover, contrary to plaintiffs' contention (see Pls.' Memo. In Supp. at 14), the prior decision did not contemplate litigation at the discovery stage as to the propriety of a plaintiffs certification that criteria have been met for third party verification discovery with respect to specific loans. 2 In adhering to its holding that a showing of relevance must be made as to the specific borrowers selected for verification, the court rejects plaintiffs' contention that this requirement will impose an undue burden upon them. (Pls: Memo. In Supp. at 12-14; Pls.' Reply Memo. at 11~]2") Although plaintiffs claim that the requirement "will double the time, effort, and expense associated with reundenvriting" (Pis.' Reply Memo. at 12 [emphasis in original]), they do not submit any evidence to this effuct Rather, although their reundenvriting expert states that verification of borrower information is "one of the first tasks performed" in reundenvriting and typically occurs before the review begins, he does not state, let alone suggest, that the effort .... .............. ----------------------~~~~ ~ ~~~ .............. ~~---------------- 2 Although the court will not, and could not feasibly, assess at the discovery stage whether red t1ag(s) warrnni verification nf borrower information for the specified loans, each plaintiff will, of course, ultimately be required w prove that the evidence supports its claim that breaches of representations and waJTantie5 materially and adversely affected the value of the loans at issue-\vhether or not !he plaintiff has verified bon-nv.rer information for such loans" 4 5 of 8 [* 5] INDEX NO. 777000/2015 NYSCEF DOC. NO. 503 RECEIVED NYSCEF: 04/10/2018 would be doubled merely because the review was conducted in two steps. (Aff. of Robert Hunter, 14.) In any event, as discussed :further below and in the prior decision, the requirement is necessary to strike a proper balance between plaintiffs' need for borrower verification information and avoidance of prejudice to borrowers. (2017 \VL 4569727, at* 1 L) The court also rejects plaintiffs' claim that the required showing of relevance will result in premature disclosure of expert opinion. (Pls.' JV!emo. In Supp. at 13-14.) Defendants represent, and plaintiffs do not dispute, that in many of the Part 60 actions, expert reports have already been disclosed, although they may be supplemented. (Defs.' Memo. In Opp. at 14; Pls.' Reply Memo. at 12, n 7.) Moreover, a certification ofrelevance will not detail an expert's breach analysis. Contrary to plaintiffs' further contention, this court has not applied a "heightened relevance" standard to the verification discovery. (See Pls! Memo. In Supp. at 5-11.) As plaintiff-; correctly argue, under the Comi of Appeals' decision in M.q!i:~X..QfKtW21lJ:'.J~9.~b (23 NY3d 32, 38 [2014]), the "material and necessary" standard is applicable to third party as well as party discovery and is a "liberal" standard that requires that "the requested discovery is relevant to the prosecution or defonse of an action," (Id. at 37~38.) In adopting this standard, the Comi of Appeals rejected a higher standard, which had been followed in some Departments, but not the First, that a party seeking third party discovery must show that the disclosure cannot be obtained from sources other than the nonparty. (Id.) As discussed in the prior decision, the (103 .AD3d 486, 487 [1st Dept 20131) is the sole appellate authority to have considered the standards for authorization of third party verification ofbon-ower information in the ru\t1BS context That decision remains good law after K_qQ_On to the extent that it held that the plaintiff had not shown that the third party borrower information it sought was ••material and necessary to 5 6 of 8 [* 6] INDEX NO. 777000/2015 NYSCEF DOC. NO. 503 RECEIVED NYSCEF: 04/10/2018 its fraud and breach of contract claims" because it had not made "particularized fr-lctual allegations specific to any of the borrowers selected for this disclosure." (Prior Decision, 2017 WL 4569727, at* 7, quoting MBIA, 103 AD3d at 437.) 3 As the MBIA Court also noted, tht~ request fur extensive amounts of "personal and confidential financial information ... constitute[d] an undue burden and expense on the responding mmparties." (lg-J Although the borrower information sought in the coordinated Part 60 cases is far more limited than that sought in MBIA, the information is of a sensitive, persona! nature, and plaintiffs have requested blanket authorization to verify the information for potentially tens of thousands of loans across the Part 60 cases. In applying the "material and necessary" standard to the authorization of this discovery, the court retains its authority to prevent m1duly burdensome discovery. CPLR 3103, which applies to both party and nonparty discovery, provides: '"The court may at any time on its own initiative, or on the motion of any party or of any person from whom or about whom discovery is sought, make a protective order denying, limiting, conditioning or regulating the use of any disclosure device. Such order shall be designed to prevent m1reasonahle annoyance, expense, embarrassment, disadvantage, or other prejudice to 3 The court is unpersuaded by plaintif:fa' reading of.MBJ.::\ as applying a heightened standard only to the l\.IBIA plaintiffs request for borro>vver tax returns (ii~~ Pfa.' Memo. fa Supp. at 5-9), and not to the extensive other third party disclosure that the MBIA plaintiff also sought------Le., financial disclosure and testimony from the employers of the borrowers; borrower depositions; and borrower personal investment and bank account statements. (MBIA, l 03 AD3d at 486-487.) Although the Court dted Ewo tax cases i Wil_H_~lJP,L\.:'J'i~W.Xs-!!:h:J;::_HXBfX!!!Lt1,!!1h<-' 22 AD3d 315 [1st Dept 2005] and Qgn!!2fLYJ}!Q~~rA~!+, 183 AD2d 669 [lS! Dept 1992]) in support of its holding that the plaintiff was required to make a strong showing of necessity and to demonstrate that the infom1ation was unavailable from other sources, the Comt expressly applied this requirement to all of the requested disclosure, "including" personal investment and bank: account statements and tax rettJms. (MBIA, 103 AD3d at 487.) As indicated in the prior decision (2017 \VL 4569727, at *6}, this MBIA holding is no longer controlling in light ofKa_gon (23 NY3d at 38), which has eliminated the requirement that a party seeking third party discovery "demonstrate that it cannot obtain the requested disclosure from any other source." (It is noted that this requirement, although not relevant here, continues to exisi for disclosure, even from a party, of tax returns. [See~, P.im~.~~l?._S.rnm:_~__ M?.!li~__& t:m~rJ:-~~rm:!~!1LJJ,G__y__ Qr?.~m?., 154 AD3d 601, 601 fl st Dept 2017]; Lee v Lu, 132 AD3d 515, 516 [1st Dept 2015], lv 9-l~mj,'j:_g~g 27 NY3d 975 [2016].) Kapon does not, however, affect the MWA Court's al!emative holding, which expressly found that the plaintiff had not satisfied the material and necessary relevance standard for the requested borrower verificmion discovery because the plaintiff had not made particularized factual allegations specific to the borrowers as to which 1hird party discovery was sought ~holding quoted in the texE above; Prior Decision, 20 i 7 WL 4569727, at* 7.) 6 7 of 8 [* 7] INDEX NO. 777000/2015 NYSCEF DOC. NO. 503 RECEIVED NYSCEF: 04/10/2018 any person or the courts," The mandate of CPLR 3101 that "'[t]here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action" is thus subject to the court's smmd exercise of discretion in order to balance the need for discovery against "unnecessarily onerous application of the discovery statutes." (See generally Kf.WJl.JA~gh __y __Qgg~~~ 662 [2018].) The court adheres to its holding that this discretion should be exercised here. Finally, on renewal, the court modifies the prior decision to the extent of rescinding its prior directive that the c1iteria for reverification should not permit 1) employer reverification where the loan file contains documentation from the employer verifying borrower information at the time of the loan application, or 2) verification of borrower income from accmmtants, \vhere the loan file includes an accmmtant statement provided at the time of the loan application, if the statement is regular on its face. Plaintiff has submitted at least some evidence of instances in which such prior verifications have been false. (See Huntf.~r Aff., i1'i! 6-7.) Such reverifications must, however, be subject to the criteria and ce.t1ification discussed above for verifications generally, It is accordingly hereby ORDERED that plaintiffs' motion for leave to reargue and renew is granted and, upon reargument and renewal, the court adheres to its prior decision except to the extent of rescinding its prior directive regarding reverification of borrower information that, at the time of the loan application, was verified by an employer or was the subject of an accountant statement Dated: New York, New York April 10, 2018 7 8 of 8

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