On December 12, 2017, the New York Court of Appeals dismissed certain breach of contract claims brought by HSBC Bank USA, N.A. (“HSBC”) against Nomura Credit & Capital, Inc. (“Nomura”), in four separate actions related to Nomura’s role as a sponsor in residential mortgage-backed securities (“RMBS”) transactions. Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, Nat’l Ass’n, solely in its capacity as Trustee, et al. v. Nomura Credit & Capital, Inc. (And Three Other Actions), No. 39 (N.Y. Dec. 12, 2017). The Court of Appeals dismissed HSBC’s claims for general contract damages—based on alleged breaches of a “no untrue statement” provision contained in the Mortgage Loan Purchase Agreement (“MLPA”)—for each transaction, finding that HSBC’s claims relate to the characteristics of the underlying mortgage loans, and are therefore subject to the contract’s provision mandating cure or loan repurchase as the sole remedy for breaches of mortgage loan-specific representations.
The lawsuits at issue arose in the context of RMBS transactions, whose operative contracts are substantively identical. In these transactions, Nomura acted as a sponsor in the RMBS process: it purchased, aggregated, and sold mortgage loans that were then deposited into a trust. HSBC, as the trustee of the relevant trusts, holds the mortgage loans for the benefit of investors in securities issued by the trusts. The transactions were each governed by two types of contracts—the MLPA and a Pooling and Servicing Agreement (“PSA”). Nomura sold the relevant loan pools to a depositor pursuant to the MLPA; then, through the PSA, the depositor conveyed the loan pools to trusts for which HSBC is the trustee, and also assigned to the trustee its rights and interest under the MLPA “to the extent of the Mortgage Loans sold.”
In the MLPA, Nomura made specific representations about characteristics of the mortgage loans in the trusts (the “Mortgage Representations”). Both the MLPA and PSA contain a broad “sole remedy” provision limiting the remedy for any alleged breach relating to the mortgage loans in the trusts to “cure or repurchase” of the loan. The MLPA also contains other representations that are not related to the mortgage loans, such as Nomura having the appropriate corporate authority to enter into the agreement. In addition, the MLPA contains a general representation that it “does not contain any untrue statement of material fact.” HSBC brought breach of contract claims seeking cure or repurchase of defective mortgage loans, but also purported to seek general contract damages on the basis of alleged breaches of the “no untrue statement” provision.
Nomura moved to dismiss the general contract damages claims brought by HSBC, arguing that they were precluded by the sole remedy provisions in the operative contracts. Nomura argued that HSBC’s claims were all based on alleged breaches of loan-level representations, for which the sole remedy is cure or repurchase. In the summer of 2014, Justice Friedman of the Commercial Division of the New York Supreme Court granted Nomura’s motions to dismiss the general contract damages claims. HSBC appealed, and the First Department reversed the New York Supreme Court in October 2015, holding that HSBC’s claims under the “no untrue statement” provision were not duplicative of the breach of Mortgage Representation claims and that that the remedies were cumulative.
The Court of Appeals disagreed, holding that “inasmuch as the claims for general contract damages at issue here are grounded in alleged breaches of the mortgage loan-specific representations and warranties to which the limited remedy fashioned by the sophisticated parties applies, plaintiffs’ claims for general contract damages should be dismissed.” The Court explained that “even accepting HSBC’s allegations as true and giving HSBC the benefit of every favorable inference, it is readily apparent from the face of the complaints that the alleged breaches of the No Untrue Statement Provision are, in fact, based upon alleged breaches of the Mortgage Representations.” The Court further stated that “under both the MLPAs and PSAs, the sole remedy for breaches of the Mortgage Representations is cure or repurchase” and that “HSBC cannot subvert this exclusive remedies limitation of liability by simply re-characterizing its claims.” Centering its analysis on a textual interpretation of the agreements, the Court rejected HSBC’s attempt to apply the “no untrue statement” provision to its allegations, holding that there was no carve-out from the sole remedy provision in the event of a certain threshold number of alleged loan breaches. The Court held that the “sole remedy” provision, “by its very terms,” applied to all breaches of the loan-level Mortgage Representations, and that HSBC’s breach of contract allegations related only to such representations. Accordingly, the Court of Appeals dismissed HSBC’s general contract claims.
This decision is of substantial importance to financial institutions defending similar RMBS breach of contract claims, and is an important affirmation of New York principles of contract law. The Court of Appeals made clear that it would not insert language into the contract that the parties themselves did not intend to include, and demonstrated that it would adhere to the four corners of the contract.
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