HSBC Bank USA, N.A. v Merrill Lynch Mtge. Lending, Inc.
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HSBC Bank USA, N.A. v Merrill Lynch Mtge. Lending, Inc. 2018 NY Slip Op 31110(U) June 6, 2018 Supreme Court, New York County Docket Number: 652793/2016 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. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 1-i:SijC: l$i\~NK. tJS_...\_~ N_l\'fI()f·~L:\I . i~SSl)C:li\'I'I(JN\> 1ts ca1)aci~). . as 'I'ruste(:~ of :~. .fI~:.l:ZRII.. I.. t . '(]\J(~'.J-r /\I_..-rf~I(J\l/i'~rf\/l~ N"(}fl~: i\SSE:.·-r 'I'l~lJSI'~ SI~I~JI~.s 2007 --().1:\J{S~ iJ1 DECISION/ORDER Index No.: 652793/2016 t_. \{N(:J-i .I\. ~f {)l:Z'°I~(}/\(}.E~ I_._E~NT)IN-(1'~! ftv-.J(~:: _ ~ 131\NJ( ()f' ..:\.f\.:tE'..RIC~.1\~ N-.i\.=: and (~()tTN·~rR.'\{\\/]J)I~. 1-ICJJ\,..t[~ l_.()i\. NS~ i NC:.:, \::!I~R~t~JI~t. J)efe_nd.ants. This residential mortgage-backed securities (RMHS) breach of contract action is brought by HSBC Bank USA, National Associatio1i, in its capacity as Trustee of JVlerrill Lynch Alternative Note Asset Trust, Series 2007-0ARS (the Securitization or Trust). Defendant JVkrrill Lynch lVImtgage Lending, Inc. (MeITill or MLML), the Sponsor, selected the mortgage loans to be included in the Trust (CompL, 'f~ 1, 20.) Defendant Countryvvide Home Loans, Inc. (Countrywide or CHL) \Vas the Originator and original Servicer of more than 90!}!) (by principal balance) of the loans. (Id., 4\~i 1, 38.) Defendant Bank of America, N.A. (Bank of America or BANA) \Vas a successor Servicer, until late 2013, of the loans originated by Countrywide. (!_(l,, ni1,2L) The Trustee pleads that Merrill breached numerous representations and wmTanties regarding the quality and characteristics of the loans, and that all of the defendants breached their obligations to notify the Trustee upon their discovery of breaches ofrepresentations and 2 of 28 [* 2] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 warranties. Defendants now jointly move to dismiss the complaint, pursuant to CPLR 3211 (a) (1), (5), and (7). This securitization was effectuated by means of four separate hut interrelated governing agreements. The first was a Master Mortgage Loan Purchase and Servicing Agreement (IV1LPSA), dated as of February 1, 2007, between Merrill as Purchaser and Countrywide as Se!Ier and Servicer. (Corrected Aff. of P. Miller [counsel Jor defendants], Exh. C lNYSCEF No. 92],) 1 The second was an Assignment, Assumption and Reco!:,111ition Agreement (AARA), "made as of October 1, 2007," between and among Merrill as Assignor, non-party Merrill Lynch l'vlortgage Investors, Inc. (MLMI or the Depositor) as Assignee, and non-party Countrywide Home Loans Servicing LP (CHLS) as the Company. Countryvvide as Seller also signed the .A.ARA, although it was not named as a party. (Miller A.ff. In Supp., Exh. D [opening paragraph and signature pages].) The third \Vas a 1vfortgage Loan Purchase Agreement (l'vlLPA), "dated as of October 1, 2007," between Merrill as Seller and MUVU as Purchaser. (Id., Exh. E) The fomih and final agreement was a Pooling and Servicing Agreernent (PSA), "dated as of October 1, 2007," between and among MLIVH as Depositor, the Trustee, and non-party \Vells Fargo Bank, N.A. as Master Servicer and Securities Administrator. (Id., Exh. F.) Merrill agreed to sections 2.02, 2.03, and 2.04 of the PSA, although it was not named as a party. (kL, signaturepages.)2 As discussed more fully below, in the rvILPSA, l'vferrill agreed to purchase certain loans originated by Country-vvide. (.S_~-~ MLPSA, § 2.) Countrywide made certain representations and 1 Defendanis were recently authorized to file a substituted MLPSA, after advising the court that the incorrect MLPSA was attached to their moving papers; that the substitution does not affect their arguments on the motion; and that, although the Trustee could not agree that the substituted MLPSA was the final version of the agreement, the Trnstee did not object to its filing. (See March 29, 20 l 8 Letter [N YSCEF No. 90].) All citations in this decision are to the substituted MLPSA (NYSCEF No, 92). ? These Agreements are collectively referred to as the Governing Agreements. 2 3 of 28 [* 3] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 warranties about the quality and characteristics of the loans. (Id,,§ 7.02.) Countrywide also agreed to give "prompt written notice" to Merrill and its assignees upon Countrywide's discovery ofhreaches of representations and warranties that materially and adversely affected the value of the loans or the interests of Merrili or its assignees. (Jg,,§ 7.03.) The MLPSA also set forth a repurchase protocol, typical of RMBS governing agreements, under which Countrywide was obligated, within 60 days of either discovery or notice of breaches of representations and warranties, to cme such breaches in all material respects or to substitute or repurchase loans affocted by such breaches. (Id.) As is also typical ofRMBS governing agreements, the MLPSA contained a sole rernedy provision. That provision stated that "the obligations of tht: Seller [Countr)7'vide] set fo1th in this Subsection 7.03 to cure, substitute for or repurchase a detective Mortgage Loan a11d to i11demni{y the Purchaser [l\.fon-ill and assignees] as provided in this Subsection 7.03 constitute the sole remedies of the Purchaser respecting a breach of the foregoing representations and warranties." In section 11 of the MLPSA, Countrywide also agreed, "as independent contract servicer," to "service and administer the Mortgage Loans" during a specified preliminary period '•in accordance with the terms and provisions set forth in the Servicing Addendum attached as Exhibit 8 .... " The Servicing Addendum did not expressly require Countrywide to notify l\.forriH and its assignees upon its discovery of breaches of representatiorrn and warranties in its "iudependent" capacity as Servicer. In the AARA, Merrill transforred to the Depositor, with certain exceptions, all of Merrill's right, title and interest in the loans acquired from Countrywide and aH of Merrill's related rights under the MLPSA, This transfer \Vas expressly made subject to the following exception: "Notwithstanding anything to the contrary contained herein, Assignor [Merrill] is retaining the right to enforce the representations and wananties made by the Seller 3 4 of 28 [* 4] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 [Countrywide] prior to the date hereof with respect to the Assigned Loans and the Seller." (AARA, § 1.) The AA.RA also noted, in a Whereas Clause, that •'the SeUer [Countrywide] has assigned its servicing rights related to the Assigned Loans and servicing obligations related thereto under the Purchase and Servicing Agreement [the MLPSA] to the Company [affiliate Country1.vide Horne Loan Servicing LP (CHLS)] and the Company is currently servicing the Assigned Loans for the benefit of the Assignor [Merrill] in accordance with the tem1s and conditions of the [MLPSA]." In the M LPA, which is dated contemporaneously 'Nith the AAHA, Merrill made its own representations and warranties to the Depositor about the quality and characteristics ofthe loans that would make up the Trust corpus. These representations and warranties overlapped, in significant respects, \:Vith the representations and wan-anties made by Countryv. .'ide in the .MLPSA. (~sm::n~~rn e.g. MLPSA, § 7.02 j_iJ, !_xvii], [xxvi], with MLPA, § 7 [a], [h], [k], [sJ.) Section 7 required that the pruty discovering or receiving notice of a material breach of these representations "shall give prompt written notice to the others." The pmiies upon whom section 7 imposed this notification obligation were "the Seiler [Me1Till], the Purchaser [MLM IJ, a Servicer [not defined] or the Trustee." Section 7 also set forth a repurchase protocol which provided that, within 90 days of discovery by or notice to Seller of a material breach of a representation or warranty, Seller vvill cure, repurchase, or, if within hvo years of the Closing Date, substitute breaching loans. Section 7 contained a sole remedy provision stating that this obligation to cure, repurchase, or substitute loans "shall constitute the Purchaser's [MUvH's], the Trustee's and the Certificateholder's sole and exclusive remedy under this Agreement or otherwise respecting a breach of representations or wmTanties hereunder with respect to the l'Vl01igage Loans." 4 5 of 28 [* 5] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 Finally, the PSA provided that the Depositor "hereby assigns to the Trustee, on behalf of the Certificateholders, all of its right, title and interest in the Mortgage Loan Purchase Agreement, including but not limited to Depositor's rights pursuant to the Servicing Agreements (noting that the Seller [Merrill] has retained the right in the event of breach of the representations, \Varranties and covenants, if any, with respect to the related rvfortgage Loans of the related Servicer under the related Servicing Agreement f. defined to include the MLPSA] to enforce the provisions thereof and to seek all or any available remedies)." (Se~ PSA, §§ 2.03 [a], 2.01.) Section 2.03 (b) of the PSA, like section 7 of the MLPA. , provided that Merrill, within 90 days of discovery or notice of a breach of representations and warrantfos, shall cure the breach in al! material respects or substitute or repurchase affected loans. Section L03 (b) fmiher provided that "[e]nforcement of the obligation of the Seller [Merrill] to purchase (or substitute a Substitute Mortgage Loan for) any l\/Iortgage Loan ... (or pay the Purchase Price as set forth in the above proviso) as to which a breach has occurred and is continuing shall constitute the sole remedy respecting such breach avai !able to the Certificateholders or the Trustee on their behalf" The complaint pleads six causes of action. The first and second causes of action are pleaded only against Merrill, and are based on alleged breaches of Merrill's representations and warrant] es in section 7 of the MLPA. The first cause of action seeks recovery for Merrill's alleged failure to cure or repurchase loans identified in pre~action breach notices. (Compl., ~i; 208-217.) The second seeks recovery for Meuill's alleged failure to cure or repurchase loans fiJllowing l\/Ierrilrs alleged independent discovery of breaches, (Id,, 1i! 218-229.) The third and fomth causes of action, also pleaded only against Men-ill, are fur rescission (j_g_,. ~i~f 230-240) and breach of the implied covenant of good faith and fair dealing. (Id., 5 6 of 28 i!~i 241-246.) The fifth and [* 6] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 sixth causes of action plead fal!me to notify claims against Countrywide Bank of America (id., (id.,,-:~ 24 7-253) and ir,-r 254-258), respectively. FAILURE TO NOTIFY CLAIM i\._GAINST BANK OF AMERICA (SIXTH CAUSE OF ACTJON) The Trustee's sixth cause of action pleads that Bank of America had a contractual obligation (the notification obligation), under the Iv1LPA and PSA, to notif'.Y the Trustee upon Bank of America's discovery of breaches of representations and warranties made by Merrill in section 7 of the MLPA. (CompL, ~ 256.) This cause of action further pleads that, in its capacity as Servicer, Bank of America discovered breaches of Merrill Lynch's representations and vvarranties, imd that Bank of America breached its notification obligation. (Id.,,-:, 257-258.) Defendants contend, and the Trustee disputes, that "[t]his claim fails as a matter oflaw because (i) BANA [Bank ofArnerica] had no such contractual obligation, (ii) any such clairn for breach of contract by BANA would be untimely, (iii) the governing agreements' sole remedy provisions bar any failure-to-notify claim, and (iv) the Complaint fails to allege damages from BANA's alleged breach." (Defs.' Memo. In Suppo, at 9; Tee.'s Memo. In Opp., at 21.) Exist.enc1.~ of Contractual Oblfoation ....................... ----¥-------------.·· »•••······-----------~~~~~~~~~~~~~~~~~~~~~ The court first addresses whether any of the governing agreements irnposed a notification obligation upon Bank of America, and whether Bank of America at any point assumed another party's notification obligation. Section 7 of the MLPA (quoted supra at 4) does include "a Servicer" among the parties required to give prompt notice to the other parties upon discovery of a rnaterial breach of a representation or vvarranty of Seller (Merrill) set forth in section 7, The MLPA does not, however, define the term Serv1cer, and Bank of America was not a party to the MLPA. Nor was Bank of America a party to the PSA. Moreover, the complaint does not contain any allegation that Bank of America ever assumed any of the obligations of any of the 6 7 of 28 [* 7] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 parties to either the MLPA or the PSA The complaint accordingly fails to plead a failure to notify claim against Bank of America based on either of those agreements. As defendants acknowledge (De.fa' l'vfomo. In Supp., at 9), however, the complaint else\vhere pleads that ''[t]he MLPSA requires Bank of America to notify Merrill Lynch and the Trustee of any breach of a Countrywide representation and wmranty." (CompL, 4j 194.) Although Bank of America was not a party to the IvlLPSA, Countryvvide was a patiy in its capacity as both Sel !er of the loans to Merrill and as Servicer. It is undisputed that, subsequent to its entry into the MLPSA, Countrywide as Servicer assigned its servicing obligations to Countrywide Home Loans Servicing LP (see AARA, Whereas Clause 2), and that defendant Bank of America later succeeded to the rights and obligations assigned by Countrywide to CHLS. (Defs.' Memo. In Supp., at 3-4; Tee.'s Memo. In Opp., at 6; see also Compl., 4i 2L) As framed by defendat1ts, the issue is whether the servicing obligations transfr~lTed by Countrywide to CHLS, and later assumed by Bank of America, included Country\vide's MLPSA section 7.03 notification obligation, More particularly, defendants argue that under section 7.03, Countrywide had a notification obligation-Le., an obligation to notif): Merrill of Countrywide's discovery of breaches of Countrywide's representations at1d warranties------oniy in its capacity as Seller of the loans to Merrill, not in its capacity as Servicer. According to defendants, Bank of A1nerica's assumption of Countrywide's duties as Servicer therefore did not include a notification obligation. (Defa.' Memo. In Supp., at 9-i O; Deis.' Reply Memo., at 3A.) By its tem1s, _MLPSA section 7.f)3 imposes the notification obligation upon the "Seiler"------Col.mtryv.ride-and the "Purchaser"-Merrill or its assignees. 3 In suppmt of their 1 - MLPSA section 7.03 provides, 1n pertinent part: "'. .. Upon discovery by either the Seller [Countrywide] or the Purchaser [Merrill and its assignees] of a breach of any of the foregoing representaiions and \Varranties which ,., I 8 of 28 [* 8] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 contention that Countrywide had a notification obligation only in its capacity as Seller, defendants argue that Countrywide's obligations as Seller and Servicer are set forth in different sections of the agreement; that the notification obligation is specified in section 7,03, which also provides for the repurchase protocol obligating Countrywide, as Seller, to cure or repurchase loans affected by material breaches of its representations and warranties; and that the servicingrelated obligations are specffied in separate provisions of the IvfLPSA-Section 11 and a related Servicing Addendum-which do not specifically require Countryv,;ide as Servicer to give notice of any breaches ofrepresentations or warranties. (Defa' Memo. In Supp., at 9-1 CL) Although defendants' argument is seemingly persuasive, review of the MLPSA as a '\Nhole shows that the MLPSA does not, on its face, dearly distinguish between the obligations imposed upon Countrywide as SeHer and those imposed upon it as Servicer. As the Trustee correctly argues in opposition, while section 7,03 refers to Countrywide as the "Seller," "rtJhe MLPSA defines and refers to Countrywide as the 'Seiler' throughout the :VILPSA," including in the servicing~related provisions-section 11 and the Servicing Addendum. (See Tee.'s Merno. In Opp., at 22.) Contrary to defendants' apparent further contention, the AARA does not demonstrate that Countrywide did not transfer its MLPSA section 7.03 notification obligation to CHLS and thus ultimately to Bank of America. Defendants emphasize that only the ,S.t;IYi£hm rights and materially and adversely affects the value of the Mortgage Loans or the interest of the Purchaser (or which materially and adversely affects the interests ofihe Purchaser in the related Mortgage Loan in the case of a representation and warranty relating to a particular Mortgage Loan), the party discovering such breach shall give prompt written notice to the other." The MLPSA defines the Purchaser as Merrill "or the Person, if any, to which the Initial Purchaser (Merrill] has assigned its rights and obligations hereunder as Purchaser \.Vith respect to a rviortgage Loan pursuant to this Agreement, and each of their respective permitted successors and assigns." (MLPSA, opening paragraph.) The tem1 thus includes the Trustee, but not Bank of America. 9 of 28 [* 9] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 obligations were assigned, citing the second Wl1ereas Clause of the AARA, \Vhich states: "Seller [Countryv,ride] has assigned its servicing rights .. " and servicing obligations related thereto under the Purchase and Servicing Agreement [i.e., the I\riLPSAJ" to CHLS, (Defs.' Memo. In Supp,, at 10.) This clause is plainly insufficient to demonstrate what servicing rights and obligations were trnnsforred. Significantly also, the agreement by \Vhich Countrywide effectuated the assignment of its servicing obligations to CHLS does not appear to have been provided to the court. On this record, the court does not find that defendants have demonstrated as a matter of law that Countrywide's transfor of servicing obligations to CHLS did not include transfer of Countryv,,-ide's MLPSA section 7.03 notification obligation. (See generally L.~.Q!l.Y..M.w:tinY.~, 84 NY2d 83, 88 [1994] [when docurnentary evidence under CPLR 3211 (a) (1) is considered, "a dismissal is \'Varranted only if the documentary evidence submitted conclusively establishes a _y defense to the asserted claims as a matter of law"]; Affl)_t~riJ~rnJfQC')p_l1<:1:lityQrng1LJc1f;._ Mm:~h<1U::AhmJ_\/'!,~Qf<B:.,..I!.w,, 120 AD3d 4 31, 432 [1st Dept 2014].) 9 10 of 28 [* 10] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 Defendants' assertion that the failure to notify clairn is untimely is decided in accordance with this court's recent decision in Federal Housin~r Finance Arenc,., v Moman Stanlev ABS. ········--------------------------------------------------------···......:::.................... ............ ...................................... ~.~ G~niktlJJn~., ~ (2018 WL 1187676 [Sup Ct, NY County, l\tfar, 6, 2018, Nos. 650291i2013, 651959/2013] [the Failure to Notify Decision]), which involved notification provisions substantially similar to MLPSA section 7.03. This decision held that the trustee's failure to notify claims accrued upon the defendant securitizer' s discovery of material breaches of repiesentations and wa.ITanties and failure to provide prompt written notice to the trustee. (Id., at * 8-13.) The same accrual rule applies to the Trustee's failure to notify claims in this case. De:tendants argue that all oft.he: ·failure to notify claims against Bank of America are untimely because the complaint pleads that Bank of America learned of Countrywide' s breaches of representations and warranties when Bank of America performed due diligence on Country-wide in connection \vith an acquisition in 2007-2008, more than six years before the commencement of this action, (Defs.' Memo, In Supp,, at 10-11, 6~7; Cornpt, ~~] 13, 199-202,) 5 The Trnstee does not contend that Bank of America was a party to the tolling agreement that it entered into with l'vlerrill and Countrywide, among others. (See Tee.'s Memo. In Opp., at 24-25.) The failure to notify cause of action, insofar as based on Bank of America's discovery of breaches as a result of this due diligence, is therefor(~ untimely. To the extent that the Trustee "The rernain1ng branches of the motion to dismiss the sixth cause of action against Bank of America assert bases for dismissal that have previously been considered by this court and, in some instances, by the appellate courts, on substantially similar pleadings and provis1ons ofRMBS governing agreements. These arguments will not be discussed at length here. 5 Defendants assert that the due diligence was in fact performed by Bank of Americ:a's parent in connec:tion \Vith an acquisition ofCountrywide's parent. (Defs.' Memo. !n Supp., at lO~l 1.) ln opposition, the Trustee acknowledges that Bank of America's parent company conducted the due diligence, but continues to asseii that Bank of America discovered breaches as a result of this due diligence. {Tee. 's l'vlemo. In Opp., at 24.) JO 11 of 28 [* 11] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 argues that the continuing obligation doctrine renders its failure to notify claim against Bank of America timely even as to discoveries of breaches that occurred in 2007-2008, that argument is rejected for the reasons stated, and on the authorities cited, in the Failure to Notify Decision. (2018 \VL 1187676, at* 13-14.) In arguing that the sixth cause of action is untimely in its entirety, defendants ignore that the complaint also pleads that Bank of America serviced the loans until late 2013, and, in performing specified servicing functions, learned of breaches of representations and '>Varranties by Countrywide and nllerrilI Lynch, but failed to notify the Trustee of such breaches" (CompL, ii~[ 11, 196.) 6 For the reasons stated in the Failure to Noti(y Decision, the court bolds that the cause of action is timely to the extent based on discovery of breaches by Bank of America, or failure to provide prompt wTitten notice thereof, within the six-year period prior to the assertion of this failure to notify cause of action. (2018 WL 1187676, at * 16 [holding, on a similar pleading, that the allegations of the complaint supported the inference that the defendant securitizer discovered breaches of representations and warranties not only at or before the securitization closed, but also within the six-year period prior to the assertion of the failure to notify clairns].) Contrary to defendants' apparent contention, the pleading of the complaint is not defective based on its failure to allege discovery on a loan-by-loan basis. This court has repeatedly held that a trustee need not allege discovery of breaches on a loan-by-loan basis in 6 The complaint pleads that "Bank of America's ordinary servicing duties required it to review the documentation supporting each loan and to obtain additional information from the related borrower(s) about their income, assets and other debts, and about the mortgaged properties." {Comp!.,~· 1 J .) The complaint tlirther pleads that "in considering whether to modi(v a Loan, Bank of America would have to re-underwrite the Loan and would thereby identif), violations of the applicable unden\>Titing guidelines. As another example, when dealing with a borrower's bankruptcy, Bank of America would learn about inaccuracies in a bon-ower's loan application, including the borrower's debts, income and assets." (Id., 4f 196.) 1l 12 of 28 [* 12] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 order to plead an RMBS breach of contract claim against a defondant securitizer or servicer, provided that it pleads the existence of pervasive or \videspread defects in the loan pool and that the dcfondant was in a position, by virtue of its perfom1ance of due diligence or servicing duties, to discover breaches ofrepresentations and warranties. (See Failure to Notify Decision, 2018 WL 1187676, at* 12-13 [applying this pleading standard to discovery by a securitizer, and coliectino authorities]:. ·································"""""""""'"""""""""'""'"~"'"""""""""""""""""""""""""""""············································· Nomura Asset Accentance Corr. Alternative Loan Trust Series 2006-S4 v b J:j.Q.m.u.ntCI~4Jt4: . G.a.pi.t;,iL.Jn£,, 2018 WL 2197830 [Sup Ct, NY County, May 14, 2018, No. 653390/2012] [same as to servicer].) The court also rejects defendants' argument that the sole remedy provisions of the governing agreements bar the failure to notify claim against Bank of America. Defendants base this argument on MLPSi\ section 7.03 (a), MLPA section 7, and PSA section 2.03 (b) (quoted ~.1=U?.Hl at 3-5). Each of these sole remedy clauses provides that the applicable repurchase protocol (and, in some cases, the repurchase protocol together with certain indemnification obligations), constitutes a party's sole remedy "respecting" breaches ofrepresentations and warranties. Defendants argue that the "broad" wording of these prnvisions~~and, in particular, the use of the word "respectin.g"-bars the failure to notify claim by bringing that claim within the scope of the sole rernedy clause" {See Defs.' Memo. In Supp., at 11~14,) In support of this argument, defendants attempt to distinguish the sole remedy provisions here frorn that at issue in N°9.illJJrn the Appellate Division recognized a failure to notify claim independent of a claim for breaches ofrepresentations and \Varranties. Defendants argue that in NQXJ:.liJiq, the sole remedy provision was restricted to breaches of specified representations and warranties whereas, here, the sole 12 13 of 28 [* 13] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 remedy provisions more broadly cover all claims "respecting" breaches of representations and warranties. Any confusion that may have existed at the time of the briefing of this motion regarding the effect of such sole remedy prmrisions on the viability of failure to notU)' claims has been Mortgage,J,1,(; (151 AD3d 72 [1st Dept 2017] [BNYM]), There, the A.ppellate Division characterized its prior decisions as holding-and reaffinned-that "claims for failure to notify [a]re not claims 'respecting a vvarranty breach' subject to the 'sole remedy' clause" in the governing agreements. (ht, at 81.) 7 As discussed in the Failure to Notify Decision, the Appellate Division rejected this court's holding that the notification obligation was prut of the remedy for breaches of representations and \Varrantfos and, in a series of decisions, held that ·i In their reply memorandum, defendants argue that PSA section 2.03 (a}-a sole remedy provision not cited in the moving papers------bars the failure to notify claim against Bank of America. (Defs.' Reply Memo., at 6-7.) As this argument was raised for the first time in reply, it is not properly before the cowt. (See g ~rnX!~I!LY:J~jt\ __QfJ~J!}:Y YmhJ?.~rJ,_i;if.P.?r.1':.s.. &:_Rt;,;rn.a,ti_Ql}, 121 AD3d 624, 626 fl st Dept 2014].) The cowi notes parenthetically, however, that the argument is not persuasive. Section L03 (a) provides, in pertinent part: "The Depositor hereby assigns to the Trustee, on behalf of the Certificatcholders, all of its right, title and interest in the Mortgage Loan Purchase Agreement, including but not limited to Depositor's rights pursuant to the Servicing Agreements [defined as including the MLPSAJ (noting that the Seller [Merrill] bas retained the right in the event ofbread1 of the representations, warranties and covenants, if any, with respect to the related Mortgage Loans of the related Servicer under the related Servicing Agreement to enforce the provisions thereof and to seek all or any available remedies.) The obligations ofthe Seller to substitute or repurchase, as applicable, a Mortgage Loan shall be the Trustee's and the Certificateholders' sole remedy for any breach thereof." Defendants contend, without elaboration, that the phrase ''for any breach thereof' in the !ast sentence of the quoted provision means "for mw breach by JillY party of either the MLPSA or the MLPA, including a breach of the duty to notify." (Reply Memo,, at 7 [defendants' emphasis].) The '\,'\/Ord "thereof' does appear to refer to the MLPSA and MLPA. Defendants' interpretation would, however, drastically limit the rights that were actually assigned to the Trustee in the PSA. It is questionable that the parties would agree to limit the Trustee's remedies for 11.P.Y breach of the MLPA and MLPSA to substitution or repurchase, or that the mere use of the word "thereof" signified such intent. Moreover, repurchase protocols are ordinarily remedies for breaches of representations and warranties, not remedies for other covenants and promises made in RMBS governing agreements, like the MLPA and MLPSA, which may include not only notification obligations but also servicing obligations. 13 14 of 28 [* 14] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 breach of a notification obligation gives rise to a cause of action independent of and separate from a cause of action for breaches of representations and warranties. (St,(~ Failure to Notify Decision, 2018 vVL 1187676, at* 7 [discussing HNXM (151 AD3d at 81), l'ylQUJJ!IL~!~nkJ:: (13 3 AD3d ai: 108), the AppeUate Division's prior decisions holding that breach of a notification obligation gives rise to a cause of action independent of a cause of action for breach of representations and wan-antics].) Finally, the court rejects defendants' argument that the sixth cause of action fails to allege that the Trust was damaged by Bank of America's alleged failure to notify. (S~~ Defs.' l\/fomo. In Supp., at 15.) The complaint pleads that Bank of America's "failure to give the required notice of breaches to Men-ill Lvnch and to the Trustee interfered with and delaved both MerrUI >' J Lynch's cure or repurchase of defective Mortgage Loans and the Tmstee's exercise of hs rights, including its right to demand that Men-ill Lynch clue or repurchase defoctive Mortgage Loans." (CompL, ii 204.) The complaint further pleads that, "[a]s a result of Bank of America's breach, the Tmst suffered damages, including, but not limited to, the amount that should have been paid to repurchase the defective Loans." (Id., ii 205.) The complaints at issue in the Failure to Notify Decision advanced a substantially similar damages theory on substantially similar pleadings. For the reasons stated in that Decision, the allegations are sufficient to withstand the motion to dismiss. (See 2018 \VL 1187676, at* 16-19.) At the least, the sixth cause of action is maintainable for nominal darnages. (hL at * 19.) 14 15 of 28 [* 15] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 The Trustee's fitth cause of action pleads that Countrywide breached its obligation under section 7.03 of the MLPSA to notify Merrill and the Trustee upon its discovery of a breach of Countrywide's representations and wan-anties" The complaint pleads that this obligation was assigned to the Trustee under the AARA and PSAO (Compl., ~~ 247-253.) 8 Defendants contend that the Trustee lacks standing to assert this claim against Countrywide, and otherwise raise the same grounds for dismissal of this cause of action as those raised in the branch of their motion to dismiss the failure to notify claim against Bank of America------untimeliness, the purported bar of the sole remedy provision, <md failure to plead damages. (Defa' Memo. In Supp., at 15.) As to standing, defendants argue that Countrywide's duty to notify under section 7.03 of the MLPSA was not assigned to the Trustee. As discussed above (supra at 7, 7 n 3), section 7.03 of the MLPSA by its ter.tns requires Countrywide to notify the "Purchaser" upon CounU)'\Vide's discovery of a breach of a representation or warranty made in the l'vILPSA. The MLPSA, in tum, defines the Purchaser as Men-ill (also denominated the "initial Purchaser"), "the Person, if any, to which the Initial Purchaser has assigned its rights and oh ligations hereunder as Purchaser with respect to a lVlortgage Loan pursuant to this Agreement, and each of their respective permitted successors and assigns." (MLPSA, opening paragraph.) Defendants do not dispute that the Trustee was an ultimate assignee of Merrill pursuant to the AA.RA and the PSA. (See Defao' Memo. In Supp., at 16.) Rather, defendants rely on MeITill's express retention in A.ARA. section 1 of "'the right to enforce the representations and warranties made by the Seller [Countrywide] prior to the date hereof vvith respect to the Assigned Loans and the Seller." Specifically, they 3 The fifth cause of action alleges that the "obligation" of Country'vvide to provide notice of breaches of representations and warranties "was assigned to the Trnstee via the Assignment Agreement fAARAJ and the PSA." (Compl., ~f 251 .) The word obligation would appear to he a scrivener's error. The court construes the complaint, consistent with the Trustee's motion papers, as pleading that the right to enforce Countrywide's MLPSA section 7.03 notification obligation, rather than the obligation itself, was assigned to the Trustee, 15 16 of 28 [* 16] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 contend that Merrill retained the right to enforce Countrywide' s representations and warranties, and that the enforcement right "necessarily include[d_l both the right to receive notice and the right to exercise the contractual remedy because 0 , • it would be difficult (if not impossible) to exercise the repurchase remedy 1,vithout nofa.~e of a breach." (Defa' Memo. In Supp., at 16-17.) The court holds that, under the plain language of the AAR/\ and PSA, which effectuated an assignment to the Trustee of Merrill's rights under the MLPSA., the Trustee is an assignee of Men-ill's right to enforce the MLPSA section 7.03 notification obligation, In section 1 of the AARA, l\/Ierrill assigned its rights under the MLPSA to MLMI, subject to an express retention of the "right to enforce the representations and warranties" made by Countrywide in the I'v1LPSA. In section 2.03 (a) of the PSA, MLMI as Depositor, in turn, assigned to the Trustee its rights under the MLPA and its rights under the Servicing A.greements, which were defined as including the MLPSA. PSA section 2.03 (a) arguably describes the scope of the rights retained by Merrill in the AARA rnore broadly than does A.ARA. section 1 itself.9 It is the AARA, however, that defines the scope of Merrill's assignment to the Depositor. The PSA is a separate agreement which 9 Section l of the AA.RA states that "Assignor [Merrill] hereby grants, transfors and assigns to Assignee [MLMJ] all of the right, title, interest and obligations of Assignor in the Assigned Loans and, as they relate to the Assigned Loans, all of its right, title, interest and obligations in, to and under the Purchase and Servicing Agreement [defined as the MLPSA]. , .. " The section concludes: "Notwithstanding anything to the contrary contained herein, Assignor is retaining the right to enforce the representations and warranties made by the Seller [Countrywide] prior to the daie hereof with respect to the Assigned Loans and the Seller," PSA section 2.03 (a) states that "[t]he Depositor [Ml.Ml] hereby assigns to the Trustee, on behalf of the Certificateholders, all of its right, title and interest in the Mortgage Loan Purchase Agreement, including but not limited to Depositor's rights pursuant to the Servicing Agreements," lt then "not[ es] that the Seller has retained the right in the event of breach of the representations, warranties and covenants, if any, >vvith respect to the related Mortgage Loans of the related Servicer under the related Servicing Agreement to enforce the provisions thereofand to seek all or any available remedies." (Parentheses omitted.) A colorable argument can be made that a promi::;e to notify another party upon discovery of a breach of representations and warranties is a "covenant ... 'Nith respect to the related Mortgage Loans," and that the retention of rights included a retention of the right to enforce the l\/1LPSA section 7.03 notification obligation. 16 17 of 28 [* 17] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 assigns to the Trustee all of the Depositor's rights in the MIYA and the MLPSA, and merely summarizes what rights \Vere retained by Merrill in the /\ARA. In any event, defondants do not rely on the difference between the PSA and ihe A.ARA \Vith respect to the description of Merrill's retention ofrights. Rather, they contend that the right to assert a failure to notify claim against Country'>vfrle \.vas not assi5'11ed to the Trustee because Merrill retained "the right to enforce the representations and warranties" made by Country"vide, and this right purportedly included the right to receive notice of breaches from Countrywide. (Defs.' Memo. In Supp.~ at 16-17; Defs,' Reply Memo., at 8-9.) The court rejects this contention. As discussed above ($upra at 12-14), the Appellate Division has repeatedly held that an RMBS defendant's breach of a notification obligation gives rise to a cause of action independent of and separate from a cause of action based on the defondant's breach of representations and wananties. Applying the Appellate Division's holding to the instant dispute, this court holds that Merrill's retention of the "right to enforce the representations and warranties" by Countrywide in the MLPSA did not encompass the right to enforce Countrywide's separate notification obligation. The court may not, under the guise of contract interpretation, add a reservation of a right that Merrill, a sophisticated entity, "neglected 581, 597 [internal quotation marks and citation omitted]; NQJlHf(~, 133 AD3d at 107-108, HJQ_~i. Finally, in holding that the Trustee was assigned the right to enforce the MLPSA section 7"03 notification obligation, the court rejects defendants' argument that "[i]t would be nonsensical to require that a breach notice be given to a party that has no right to exercise the remedy for that breach." (Defs.' Memo. In Supp., at 17.) The Tmstee persuasively argues in response that Countrywide's representations and warranties, which Merrill retained the right to 17 18 of 28 [* 18] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 enforce, overlap substantially \Vith the representations and \Varranties 1nade by Merrill in the MLP A, which the Trustee does have the right to enforce. (Tee.' s Memo. In Opp., at 17-18; CompL, ~~· 132-134.) The assigmnent of the notification obligation thus facilitates the Trustee's ability to enforce Merrill's overlapping representations and wammties. Merrill, in tum, retained its own remedy against Countrywide with respect to loans that it was or may be required to repurchase from the Trustee. In chalienging the timeliness of the failure to notity claim against Countrywide, defendants contend that the complaint pleads that Countrywide discovered breaches of representations and warranties only in the course of its origination of the loans, and that the last loan was sold to Merrill on October l, 2007, more than six years before the effective date of a ToHing Agreement between the Trustee and Merrill, MLM1, Countrywide, and a certain holder of Trust ce1tificates. (See Defs.' Memo. In Supp,, at 17, 7; Defa.' Reply Memo., at 9-10.) In opposition, the Trustee argues, among other things, that Com1hy•,;v1de's notification obligation required it to give "prornpt"-not immediate-notice, and also that the cmnplaint pleads that Countrywide discovered defective loans '\luring its post-closing (i.e., post October 31, 2007) surveillance, quality control reviews and audit activities relating to the Mortgage Loans ..· ,, (Tee. 's Memo. Jn Opp., at 19-2(L) On this record, defendants fail to meet their burden of making a prima facie shmving that the cause of action against Countrywide is time barred. (.S.g_~ gt;nt;Hllli: J:,~q~q~·~cyJ}l.<!Y.'!tnU~,, 144 AD3d 24, 28 [1st Dept 2016] .) In particular, defendants do not submit documentary evidence sufficient to show that Countr)''\Vide did not discover breaches of representations and warranties between October 1, 2017 and the closing date of the securitization, October 31, 2017. The Trustee's failure to notify clairn, to the extent based on such breachl'.~s, may benefit fiom the 18 19 of 28 [* 19] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 Tolling Agreement, which defendants adrn.it was in effect between October 16, 2013 and May 18, 2016. (See Defa' l'viemo. In Supp., at 7.) A1Tording the complaint the benefit of an reasonable inferences (LeDJ\, 84 N Y2d at 87- 88), the court holds that the complaint also pleads that Countryi,vide discovered breaches of representations and warranties through post-closing internal quality control and review processes. (See CompI., ,-r,-r 182-190.) Contrary to defendants' contention (Defs.' Reply Merno. at 10), the failure to notify claim is maintainable based on these allegations as to post-closing discovery. As held in connection with the Trustee's failure to notify claim against Bank of America, tbe complaint pleads a timely cause of action against Countrywide to the extent that it is based on Countrywide's discovery of breaches, and Jailure to provide prompt w-ritten notice thereof, within the six-year limitations period preceding the assertion of the failure to notify cause of action, accounting for the toHing period. Sole Remeds Provisions and Dama~tes Pieadim~_ ..........................................................., .•......................... . .;.,. »•••••······-----------------...---.-.~~~~~~~~~· Defendants' remaining arguments for dismissal------namely, that the MLPSA 's sole remedy provision bars a failure to notify claim against Countrywide, and that the Trust was not damaged by Country,vide's alleged breach of its notification obligation------are rejected for the reasons stated in this courf s discussion of the sixth cause of action against Bank of America, above. BREACH OF REPRESENTATIONS AND \VARRANTIES CLAif\:f AGAINST MERRILL BASED ON NOTICE (FIRST CAUSE OF ACTION) The first cause of action pieads that MeITill conveyed nurnerous loans to the Trust that breached its representations and waITanties in section 7 of the MLPA, and that Merrill was obligated under PSA section 2.03 (b) to repurchase loans within 90 days of notice of a material breach, (CompL, ~~ 210-21 L) As further alleged in the complaint, the Trustee notified Merrill of breaches on five separate occasions: October 16, 2013, April 8, 2015, February 29, 2016, 19 20 of 28 [* 20] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 March 25, 2016, and May 19, 2016 (collectively, the Breach Notices). (Id., ii~ 212, 119-120.) "The cure periods for the breaches identified in the Breach Notices expired on November 14, 2013, July 7, 2015, May 29, 2016, June 23, 2016 and August 17, 2016, respectively. In each case, Meuill Lynch refused to repurchase the relevant Mortgage Loans.'' (Jg~,~· 212.) This action was commenced on May 24, 2016, after all five of the Breach Notices had be.en sent, but before the expiration of the 90-day cure period applicable to any but the October 16, 2013 and April 8, 2015 Breach Notices (the Initial Breach Notices). Defendants argue that t.his cause of action must.be dismissed because the complaint fails to allege compliance \\ti.th the contractual condition precedent to suit with respect to all but t\vo loans-the loans identified in the Initial Breach Notices. (Defs.' Memo. In Supp., at 19.) The Trustee counters that because the 90-day period expired as to some loans before the Trustee commenced the action, the Trustee may proceed as to the loans in all of the Breach Notices. (Tee. 's Memo. In Opp., at 11.) Contrary to the Trustee's contention, },f(,lm!Jrn (133 AD3d 96, supra) does not stand for the blanket proposition that "where there are •some timely claims,' a court should not 'dismiss claims relating to loans that plaintiffs failed to mention in their breach notices or that were mentioned in breach notices sent less than 90 days before plaintifts commenced their actions."' (Tee.'s Memo. In Opp,, at 11, quoting NPDlWJl, 133 AD3d at 108.) Jn Nmnw;<J., the Court upheld this court's denial of a motion to dismiss claims ''relating to loans that plaintiffs failed to mention in their breach notices or that \Vere mentioned in breach notices sent less than 90 days before plaintiffs commenced their actions." (Id. at 108.) The Court reasoned that there were "some timely claims" in the cases; that the breach notices "put defondant on notice that the certificateholders whom plaintiffs (as trustees) represented were investigating the mortgage loans and might uncover additional defective loans for which claims would be made" (id.); and that "in 20 21 of 28 [* 21] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 addition to sending defendant notices of breach, plaintiffs allegefdJ that defondant already knew, based on its ovvn due diligence, that certain loans in the trusts at issue breached hs representations and warranties." (Id.) (147 AD3d 79 [20161), the Appellate Division, over a vigorous dissent, dismissed notice-based claims for breaches of representations and warranties, where the notices that identified the af:focted loans and sought cure or repurchase were sent only after the commencement of the action, Considering a substantiaHy similar repurchase protocol to that at issue here, the Court held that, for breach of representation and warranty claims based on notice to the defendant, "[t]he breach notices [a]re a contracted~for condition precedent to bringing this action," 10 and "[t]he doctrine of relation back cannot render these otherwise untimely breach notices timely," (Id. at 86.) In holding that the Trustee's post-suit breach notices did not relate back to the timety filed summous \vith notice, the Court reasoned that "the inherent nature of a condition precedent to bringing suit is that it actually precedes the action." (Id. at 87.) The Court distinguished Nm::mu:~, stating that the "critical distinction" between the two cases, with respect to the application of the relation-back doctrine, was that the trustees in N9.t!J1l!§ "complied with the condition precedent of providing that defendant with notice of its default .. , , Furthermore, although the precommencement breach notices in N_Q_m_lfUt did not specifically identify every aJleged nonconforming mortgage, the trustees' presuit demands put the defondant on notice that the certificate holders whom the plaintiffs (as trustees) represented \Vere investigating the mortgage loans and might uncover additional defective loans for 'Nhich clairns \Vould be made." (Id. at 88-89.) The Qi:~~neQ!n! decision upheld the breach of contract claim io the exient based on the defendant's own discovery of breaches of representations and warrn.nt1es regarding the rnorigage loans, (147 AD3d at 86.) 10 21 22 of 28 [* 22] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 Here, although there \Vere two pre-suit breach notices (the Initial Breach Notices) sent more than 90 days before the action was commenced, these notices, unlike those in N0nmn!-, \Vere insufficient to have put defendant on notice of breaches regarding loans mentioned ln later breach notices that were sent less than 90 days before commencement of this action. Each of these two Breach Notices mentioned only one loan. The vast majority ofloru1s allegedly affected by material breaches were first identified in the May 19, 2016 notice, which specified 973 loans but was not sent until five days before the commencement of the action. (CompL, ,-r 212.) I'vforeover, neither of the Initial Breach Notices informed defendant that an investigation of the loans was in process and that further breaches might be discovered. (See Compl., Breach Notices, Exhs. 4-8.) 11 Given the insufficiency of the Initial Breach Notices to support the notice-based breach of contract cause of action for loans other than those mentioned in those Notices, this cause of action will be dismissed to the extent based on the February 29, March 25, and May 19, 2016 Breach Notices. The Trustee has requested that any dismissal be granted without prejudice to refiling of an action under CPLR 205 (a). (Tee.'s Memo. In Opp., at 12, n 6<) As this action vvas timely commenced, failure to meet the condition precedent to enforcement of defondant's cure or repurchase obligation is not a bar to such refiling. (See U. S~J~_\ln.:k.NmJ.__ A~_$.H, __y PLJ Mtgg,__Q~mHi:lLJrn~,, 141 AD3d 431, 432 [1st Dept 2016] [DLJJ [Iv gn~n_t~Q 29 NY3d 910 (2017)], affg 2015 \VL 1331268 (Sup Ct, NY County Mar. 24, 2015, No. 654147/2012]; !)_._S_.__ Jt<ink_Nml. 654147/2012] [this court's decision of a motion to reargue the motion to dismiss decided by the 11 The breach notices merely directed Merrill's attention to attached letters from Wells Fargo, in which Wells Fargo notified the Trustee that it "has received, or otherwise has obtained actual kncnv!edge of, certain facts and/or information that may arise to potential breaches ofrepresentations and warranties made by the Seller [Merrill]. , , ." (See Letter from Nancy Luong [for HSBC] to Merrill, dated Oct 16, 2013; Letter from Andres Do Cordero [for HSBC] to Merrill, dated Apr. 8, 2015.) 23 of 28 [* 23] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 l'vlar, 24, 2015 decision, adhering to the _prior holding that the action was timely commenced by the Trustee's filing of the summons and complaint befr1re the statute of limitations expired, and that the action was not rendered untimely commenced by the Trustee's fa.ilure to satisfy the repurchase demand condition precedent prior to the commencement of the action or the Misc 3d 343 [Sup Ct, NY County Mar. 29, 2016_] [this court's decision extensively discussing CPLR 205 [a] authorities, and holding that a dismissal for failure to comply with a repurchase demand condition precedent is not a dismissal frff untimelinessj,)1 2 BREACH OF REPRESENT/\ T!ONS AND WAH RANTlES CLAllVl AGAINST MERRILL-BASED ON MERRIL.L.'S 0\VN DISCOVERY (SECOND CAUSE OF ACTION) Like the first cause of action, the second cause of action pleads that MerrUI conveyed mu11erous loans to the Trust that breached its representations and warranties in section 7 of the MLPA, and that Iv1erri11 vvas obligated under PSA section 2.03 (b) to repurchase loans within 90 days of notice of a material breach. (Compl., ~41210-21 1 L) The second cause of action further ~ in BNYM (J 51 AD3d 72, _$~\!J!J_~), decided atl:er the parties briefod this motion, the Appellate Division stated that "f_t]o assert a timely claim" for breaches of representations and warranties against the defondant originator (WMC), the plaintiff (BNY) was required io file suit within six years of the date on which the representations and warranties \Vere made "and also had to satis(y the procedural condition precedent"-Le., a breach notice providing the contractually required cure or repurchase period. (Id., at 79.) This language is dicta. The summons with notice in BNYM was not filed until several months after the expiration of the statute oflimitations for suit against \VMC. Thus, the plaintiff's daims against the originator in BNYM would have been untimely even if the action had been comrnenc:ed only after the cure or repurchase period had elapsed on the breach notice sent to \VMC. (lg,, at 75~ 76, 79-80.) Moreover, the Court permitted the plaintiff to proceed on a "backstop" claim against the defendant-sponsor, based on a breach notice sent to WMC when WMC was still obligated to repurchase, notwithstanding that the statute of limitations on a suit against WMC had expired before WMC's cure or repurchase period expired. To the extent that the above-quoted language from _t~NY_M is not Q.icta, it appears to be inconsistent with DU ( 141 AD3d 43 l, supra}, (G_qi:m:@:~ ~NYM, 151 AD3d at 79 [holding that "'even if BNY had filed a summons on or before June 28, 20 l 2 [!he last day of the statute of {imitations period J, it would not have been able to file a timely suit against WMC based on the June 7 notice because the 60- and 90-day periods for cure and repurchase would not have elapsed before the expiration of the limitations period"], with DLJ, !4 l AD3d at 432 [holding that "[a]lthough the trustee commenced this [put-back] action within the applicable statute of limitations, it did not meet the rnndition precedent to enforcement of defendant [sponsor's] secondary 'backstop' repurchase obligation, which required that the trustee first provide notice of the alleged breaches to defendant [originator], and allow a 90-day cure period to expire. Under these circumstances, the [t_]rustee's timely claims were properly dismissed without prejudice to refiling pursuant to CPLR 205 [a].") 23 24 of 28 [* 24] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 pleads that l\/Ierrill was required to cure or repurchase a mortgage loan affected by a material breach vvithin 90 days of discov~~ry of a breach, and that rvfeITill discovered breaches during both pre-closing and post-closing due diligence on the loans and on CmmtrY'wide, but failed to repmchase the loans or to notify the Trustee. (Id.,~~ 220, 223-226.) Defendants argue that the second cause of action fails to state a claim because "[t]he Complaint does not adequately allege that MLML [Merrill] actually discovered a specific representation and warranty breach vvith respect to any Mmtgage Loan, much less how or when it discovered any breaches!' (Defa.' Memo. In Supp., at 20.) The Trustee contends in opposition that its allegations of discovery are supported by allegations that Merrill conducted due diligence on the loans it securitized, and by allegations that there were pervasive breaches of representations and \varranties. (Tee. 's l\ilemo. In Opp., at 9-10.) The court holds that the Trustee's allegations as to discovery are at least as specific: as the allegations which this court, and the weight of authorities, have found sufficient to support claims for breaches ofrepresentations and warranties based on a defendant securitizer's discovery of such breaches. As this court has previously held, "many put-back actions have been pennitted to proceed in this and other courts despite the trustees' inability to a!Iege discovery on a loan-by-loan basis, based on the alleged existence of pervasive defects in the loan pools and the securitizer's due diligence." (See Failure to Notify Decision, 2018 WL 1187676, at* 12 [Sup Ct, NY County, Aug. 28, 2014, No. 651936/2013] [this court's prior decision, also collecting authorities].) VinaHy, defendants claim that the sole remedy provision of the MLPA. bars the second cause of action to the extent that it pleads a claim that Merrill breached its duty to notify under the MLPA. (See CompL, ,~ 221, 226; Defs.' l\ifomo, In Supp., at 22.) This claim is rejected for 24 25 of 28 [* 25] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 the reasons stated in the court's discussion of the failure to notify claims against Bank of America and Countrywide. "FUNDAMENTAL BREACH/RESCISS!ON/RESCISSORY DAIV1AGES" CLAIM AGAlNST MERRILL (THIRD CAUSE OF ACTION) The Trustee's third cause of action, which is "pleaded as an alternative to the preceding [second] cause of action" (CompL, ~ 231 ), a!Ieges that "the parties contemplated the possibility that the Trust could inadveiiently receive a fe\v defective Mortgage Loans,'' but that the alleged pervasiveness of defects in the loan pool "is so far afield from the bargain the parties struck that it defeats the bargain entirely." (Id., ~14) 236, 238.) This cause of action also alleges that IvkrriH's breaches were '\.villful and grossly negligent" (hi,, 41 240.) The Trustee seeks rescission or, if rescission is not practical, rescissory damages. (Id.) Defendants contend that the sole remedy clause bars any claim for rescissory relief, and that "[t]his is true regardless of the Complaint's allegations of gross negligence"" (Defs.' Memoo In Supp., at 22,) They further contend that rescissory damages in this case "would effectively be equivalent to repurchase damages," \-Vhich it contends "are a sufficient remedy." (Id~, at 22-230) The Trustee "acknowledges that this Court has previously held that rescission or rescissory damages are not available in cases similar to this action," and "simply notes for purposes of appeal, with respect to rescission, that the severity and extent of the breaches alleged in the Complaint warrant an award of rescissory damages for the same reasons they warrant a finding of gross negligence.'• (Tee.'s Memo. In Opp", at 15,) Assuming @rgu~mlQ that proof of the Trustee's gross negligence claim would render the sole remedy provision ineffective, the court does not allege facts sl:fficient to suppmi a reasonable inference that damages are inadequate. (See NPQJ!Jff!, 133 AD3d at 108 [upholding dismissal of a rescission claim at the pleading stage, the Court reasoning that "[e]ven if section 25 26 of 28 [* 26] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 9(c) ofthe MIYA and section 2.0J(e) of the PSA [the governing agreements' sole remedy provisions] did not waive plaintiffs' right to seek such relief, rescission would be unwarranted because damages are available"]; Rwhwm..Y...GQ':Y.!~§__(;.o.nHTIY.Hl!<§Jfa!Js. 11;_1£~, 30 NY2d 1, 13-14 [1972].) The court accordingly holds that the third cause of action fails to state a claim" Moreover, to the extent that the third cause of action is for gross negligence, it is duplicative of the first and second causes of action, each of which pleads that Merrill was "reckless or grossly negligent" in securitizing the loans, and that the Trustee therefore "is not limited to its contractual repurchase remedy." (CompL, ir~ 217, 229.) BREACH OF THE lMPLlED OWENANT OF GOOD FAITH AND FAIR DEALING CLAIM AGAINST iv1ERRILL (FOURTH CAUSE OF ACTION) The fourth cause of action, for breach of the implled covenant of good faith and fair dealing, is based on Merrill's alleged knowing breaches of representations and warranties and conceahnent of defects in the loans, (CompL, ~- 243-244.) This claim is dismissed in accordance with extensive authority dismissing implied covenant claims based on substantially similar Nos, 652985/2012, 650949/2013] [this court's recent decision, collecting additional authorities].) His accordingly hereby ORDERED that defendants' motion to dismiss the cornplaint is granted solely to the following extent, and is otherwise denied: It is ORDERED that the Trustee's first cause of action, which is pleaded against defendant Jv1erri!1 Lynch Mortgage Lending, Inc. (Me1Till) for breaches of representations and 26 27 of 28 [* 27] INDEX NO. 652793/2016 NYSCEF DOC. NO. 93 RECEIVED NYSCEF: 06/06/2018 warranties, is dismissed except to the extent that it is based on loans identified in the Trustee's October 16, 2013 and ,i\_pri! 8, 2015 Breach Notices; and it is further ORDERED that the Trustee's third cause of action, which is pleaded against Merrill for '•Fundamental Breach/Rescission/Rescissory Damages," is dismissed in its entirety; and it is further ORDERED that the Trustee's fourth cause of action, which is pleaded against fv1erriU for breach of the implied covenant of good faith and fair dealing, is disrnissed in its entirety; and it is further ORDERED that the Trustee's sixth cause of action, which is based on the alleged failure of defendant Bank of America, Nj\, (Bank of America) to notif)'- the Trustee upon its discovery of breaches of representations and warranties, is dismissed to the extent that it is based on Bank of America's alleged discovery of breaches of representations and warranties and failure to provide prompt notice more than six years before the commencement of this action; and it is fi1rther ORDERED that the remaining daims are severed <md shall continue. This constitutes the decision and order of the court Dated: New York, New York June 6, 2018 27 28 of 28
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