298 F.R.D. 116
S.D.N.Y.2014Background
- In 2006 Sand Canyon (formerly Option One) sold a pool of mortgage loans to a depositor under a Mortgage Loan Purchase Agreement that included >50 reps and warranties about underwriting, appraisals, and absence of fraud. Homeward Residential is servicer of the trust and sues on behalf of the trust/certificateholders.
- Trustee notified Sand Canyon in March 2012 that 96 loans allegedly breached specific reps and warranties; a Trustee Schedule and supporting loan files were attached to the complaint identifying alleged defects. Sand Canyon refused to cure or repurchase.
- Alleged defects include: understating borrower liabilities or overstating income (flawed stated-income underwriting), missing or inadequate documentation, inflated appraisals producing excessive LTV/CLTV ratios, and other underwriting departures.
- Purchase Agreement requires originator to cure or repurchase loans that materially and adversely affect loan value; §3.01 lists reps, §3.04 provides cure/repurchase remedies, and §5.01(e) contains an indemnity clause.
- Sand Canyon moved to dismiss under Rules 8, 9(b), and 12(b)(6), contesting the form of pleadings, application of Rule 9(b) to fraud-related allegations, whether asserted facts breach the contract, and whether repurchase and indemnity claims are independent causes of action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Pleading form / lengthy attachments | Trustee Schedule + loan files give specific, organized notice linking each loan to contract provisions; Rule 8 satisfied | Attachments are voluminous and force defendant/court to sift; should be dismissed | Denied — exhibits (Trustee Schedule and supporting files) are sufficiently specific and may be considered on 12(b)(6) review |
| Rule 9(b) application to fraud-related allegations | Many allegations sound in fraud (borrower/appraiser fraud) but Plaintiff has particularized facts and reliable confidential witness allegations; Rule 9(b) applied but satisfied | Rule 9(b) should bar non-particularized fraud averments and disallow use of other complaints’ CWs | Court: Rule 9(b) applies to averments of fraud (including at one remove) but Plaintiff met its particularity burden for borrower and appraiser allegations (CW material from another complaint deemed admissible here) |
| Whether alleged facts state breaches (verification, appraisals/LTV, mortgage-note rep) | Alleged failures to verify income/debt, missing docs, and inflated appraisals/LTVs plausibly breach underwriting and Schedule representations; material adverse effect pleaded | Some challenged provisions ambiguous (what “Schedule” means); appraisals are opinion; mortgage/note does not warrant borrower statements; certain defenses are factual | Denied as to verification and appraisal/LTV claims — ambiguities and factual disputes preclude dismissal; granted as to claims based on mortgage-note wording (§3.01(a)(16)) because the note does not warrant borrower statements |
| Repurchase and indemnity claims (separate causes) | Repurchase duty and indemnity are independent contractual obligations giving rise to standalone claims | Repurchase is a remedy for breach of §3.01 (not an independent obligation); §5.01(e) indemnity does not unmistakably cover first-party suits/attorney fees between contracting parties | Repurchase claim dismissed as not an independent cause of action; indemnification claim dismissed as to first-party fees (no unmistakable language covering suits between contracting parties) |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (standards for pleading plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility and pleading more than labels and conclusions)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. standard on accepting complaint facts and inferences)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (Rule 9(b) requirements for alleging fraud)
- Rombach v. Chang, 355 F.3d 164 (Rule 9(b) applies to "all averments of fraud")
- Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (New York requires unmistakable contractual language to award first-party attorney fees by indemnity)