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THE “SOLE REMEDY REPURCHASE PROTOCOL” IN THIS RESIDENTIAL MORTGAGE-BACKED SECURITIES CASE REQUIRES NOTICE OF EACH INDIVIDUAL DEFECTIVE LOAN BEFORE THE DEFENDANT IS REQUIRED TO REPURCHASE IT; OF THE 783 NONCONFORMING LOANS, 480 WERE NOT SPECIFICALLY IDENTIFIED; THE DEFENDANT WAS NOT OBLIGATED TO REPURCHASE THE UNIDENTIFIED LOANS (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge DiFiore, reversing the Appellate Division, over an extensive partial dissent, determined that the “sole remedy repurchase protocol” contract provision of the residential-mortgage-backed-securities agreements requires notice of each defective loan before the obligation to repurchase is triggered:

Pursuant to the pooling and service agreement (PSA) establishing the trust, [defendant] DLJ made certain representations and warranties, including that each loan was underwritten in accordance with the originators’ underwriting standards and applicable law, that certain provided documentation was true and accurate, and that none of the loans were “high cost” or “predatory.” … [T]he PSA contains a “sole remedy” provision granting U.S. Bank, as trustee, the limited authority to seek a remedy for any breach by DLJ of these representations and warranties through a contractually established “repurchase protocol” requiring DLJ to cure, repurchase, or substitute a nonconforming mortgage loan within 90 days of notice or independent discovery of such breaching loan. * * *

… [T]he trustee’s expert reviewed 1,059 of the loans in the trust—including both previously noticed and unnoticed loans—and identified 783 allegedly nonconforming loans. Only 303 of these loans had been specifically identified by the trustee in its pre-suit letters; the remaining 480 loans were not listed in the schedules of breaching loans provided to DLJ prior to commencement of the action. * * *

A simple reading of the [agreement] demonstrates that the trustee’s assertion that loan-specific notice is not required is inconsistent with the contractual language of the repurchase protocol. The parties structured the repurchase protocol entirely through the lens of individual “mortgage loans”—clearly contemplating a loan-by-loan approach to the agreed-upon sole remedy for breach. U.S. Bank N.A. v DLJ Mtge. Capital, Inc., 2022 NY Slip Op 01866, Ct App 3-17-22

Practice Point: The plain language of a contract will be enforced. Here in this residential mortgage-backed securities case, under the terms of the contract, the defendant was not required to repurchase nonconforming loans about which it was not specifically notified. Of the 783 allegedly nonconforming loans, defendant was specifically notified of only 303.

 

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