Securities – Page 4 – New York Appellate Digest

A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (SECOND DEPT).

The First Department, in a full-fledged opinion by Justice Andrias, determined that the requirement that Bear Stearns repay $160,000,000 constituted a penalty (disgorgement) for improper profit-taking, even where the benefits went to others and not Bear Stearns, and therefore was not a “loss” for which Bear Stearns' insurer was liable:

The law of the case is applicable to “legal determinations that were necessarily resolved on the merits in a prior decision” … . On the prior appeal, the Court of Appeals stated that “the Insurers do not earnestly dispute that the claims fall within the policy's definition of Loss” … , but did not rely on the policy language in denying defendants' motions. Instead it focused on the public policy issue. Furthermore, the doctrine does not apply where a motion for summary judgment follows a motion to dismiss that was not converted to a motion for summary judgment pursuant to CPLR 3212(c)… .

Even if the Court of Appeals' prior determination is viewed as addressing the contractual issue, “while the law of the case doctrine is intended to foster orderly convenience' . . ., it is not an absolute mandate which limits an appellate court's power to reconsider issues where there are extraordinary circumstances, such as subsequent evidence affecting the prior determination or a change of law'” … . Here, the United States Supreme Court's decision in [Kokesh v Securities and Exchange Commission (_ US_, 137 S Ct 1635 [2017])], characterizing SEC disgorgement as a penalty, represents such a change of law. * * *… Kokesh has now provided the missing precedent, establishing that disgorgement is a penalty, whether it is linked to the wrongdoer's gains or gains that went to others. In Kokesh, the Supreme Court, emphasizing that when a sanction “can only be explained as . . . serving either retributive or deterrent purposes,” it is a “punishment,” rejected the SEC's argument that disgorgement is remedial because it simply puts the defendant back in the position “he would have occupied had he not broken the law.” J.P. Morgan Sec., Inc. v Vigilant Ins. Co., 2018 NY Slip Op 06146, First Dept 9-19-18

INSURANCE LAW (SECURITIES, A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (FIRST DEPT))/SECURITIES (INSURANCE LAW, A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (FIRST DEPT))/DISGORGEMENT (INSURANCE LAW, SECURITIES, A PENALTY OR DISGORGEMENT STEMMING FROM IMPROPER PROFIT-TAKING BY BEAR STEARNS IS NOT AN INSURABLE LOSS, EVEN IF THE BENEFITS OF THE PROFIT-TAKING WENT TO OTHERS AND NOT TO BEAR STEARNS (FIRST DEPT))

September 19, 2018

Contract Law, Fraud, Insurance Law, Securities

INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT).

The First Department, modifying Supreme Court, in a full-fledged opinion by Justice Manzanet-Daniels, determined plaintiff insurer's (MBAI's) motion for summary judgment should have been denied in its entirety in this action stemming from the insuring of residential mortgage-backed securities. MBAI sought to recover all the payments made after more than 50% of the mortgages underlying the securities went into default:

MBIA seeks “Claims Payment Damages” and “Repurchase Damages.” The “Claims Payment Damages” consist of “all claims payments that MBIA has made . . . [or] will likely incur,” and are designed to put MBIA in the same position it would have been in had the policy never been issued. As such, they constitute rescissory damages and are not recoverable by plaintiff monoline insurer seeking redress under an irrevocable policy. We have made clear that an insurer is “not entitled to damages amounting to all claims payments it made or will make under the policies,” inasmuch as such damages are “rescissory damages to which the insurer is not entitled” … .

“Repurchase Damages” represent the difference between the claims payments MBIA made or is projected to incur, and those MBIA would have made had [defendant] Credit Suisse repurchased nonconforming lines, i.e., those that breached the representations and warranties.

While such repurchase damages are in theory recoverable, the fraud claim was nonetheless correctly dismissed. It has long been the rule that parties may not assert fraud claims seeking damages that are duplicative of those recoverable on a cause of action for breach of contract (see e.g. Manas v VMS Assoc., LLC, 53 AD3d 451, 454 [1st Dept 2008]). As we noted in Manas, fraud damages are meant to redress a different harm than damages on a cause of action for breach of contract. Contract damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; fraud damages are meant to indemnify losses suffered as a result of the fraudulent inducement … . Where all of the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed … . * * *

… [T]he order of the Supreme Court … [which] granted defendants' motion for summary judgment dismissing the fraudulent inducement claim, denied so much of plaintiff's motion for summary judgment as sought a ruling that an insurer does not have to prove loss causation in connection with a fraudulent inducement claim, granted so much of plaintiff's motion as sought a ruling on the meaning of the “No Monetary Default” representation and the “Mortgage Loan Schedule” representation in the Pooling and Service Agreement for the subject residential mortgage-backed securitization transaction, and denied plaintiff's motion to supplement the record in opposition to defendants' motion, should be modified, on the law, to deny plaintiff's motion as to the meaning of the representations, and otherwise affirmed … . MBIA Ins. Corp. v Credit Suisse Sec. (USA) LLC, 2018 NY Slip Op 06060, First Dept 9-13-18

INSURANCE LAW (SECURITIES, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/CONTRACT LAW (INSURANCE LAW, SECURITIES, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/SECURITIES (INSURANCE LAW, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/FRAUD (INSURANCE LAW, SECURITIES, INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))/RESIDENTIAL MORTGAGE BACKED SECURITIES (INSURER OF RESIDENTIAL MORTGAGE-BACKED SECURITIES NOT ENTITLED TO RECOVER ALL CLAIMS PAID OUT AS A RESULT OF 50% OF THE UNDERLYING MORTGAGES GOING INTO DEFAULT UNDER A FRAUD THEORY, ONLY A BREACH OF CONTRACT THEORY WAS AVAILABLE (FIRST DEPT))

September 13, 2018

Attorneys, Contract Law, Fraud, Insurance Law, Securities

IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Garcia, over a partial dissent, determined certain aspects of defendant Countrywide’s motion for summary judgment against plaintiff insurer, Ambac, stemming from residential mortgage backed securities issued by Countrywide, were properly granted. Ambac’s argument that it need not demonstrate justifiable reliance or loss causation in support of its fraudulent inducement cause of action was rejected, as was Ambac’s argument that it was entitled to relief over and above that specified in the sole remedy clause, as well as attorney’s fees:

Public policy reasons support the justifiable reliance requirement. Where a “sophisticated business person or entity . . . claims to have been taken in,” the justifiable reliance rule “serves to rid the court of cases in which the claim of reliance is likely to be hypocritical” … . Excusing a sophisticated party such as a monoline financial guaranty insurer from demonstrating justifiable reliance would not further the policy underlying this “venerable rule.”

Likewise, there is no merit to Ambac’s argument that it need not show loss causation. Loss causation is a well-established requirement of a common law fraudulent inducement claim for damages. * * *

Ambac’s complaint fails to include breach of contract allegations beyond those that fall under the sole remedy provision … , and accordingly Ambac is limited to the repurchase protocol as the potential remedy for those claims. * * *

In New York, “the prevailing litigant ordinarily cannot collect . . . attorneys’ fees from its unsuccessful opponents. . . . Attorneys’ fees are treated as incidents of litigation, rather than damages. . . . The exception is when an award is authorized by agreement between the parties or by statute or court rule” … . … [T]his Court [has] held that a court “should not infer a party’s intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise … . Ambac Assur. Corp. v Countrywide Home Loans, Inc., 2018 NY Slip Op 04686, CtApp 6-27-18

INSURANCE LAW (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/FRAUD (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/CONTRACT LAW (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/SECURITIES (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/RESIDENTIAL MORTGAGE BACKED SECURITIES (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))/ATTORNEY’S FEES (IN THIS ACTION STEMMING FROM PLAINTIFF’S INSURING OF RESIDENTIAL MORTGAGE BACKED SECURITIES ISSUED BY DEFENDANT, PLAINTIFF WAS REQUIRED TO SHOW JUSTIFIABLE RELIANCE AND LOSS CAUSATION FOR ITS FRAUDULENT INDUCEMENT CAUSE OF ACTION, PLAINTIFF’S RECOVERY WAS LIMITED TO THAT DESCRIBED IN THE SOLE REMEDY PROVISION, AND PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES (CT APP))

June 27, 2018

Civil Procedure, Fraud, Securities

THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge DiFiore, over an extensive two-judge concurring opinion and an extensive dissent, determined that some of the claims in this deceptive-practices/fraud action involving residential mortgage backed securities may not be time-barred. The Appellate Division had held both the General Business Law (Martin Act) and Executive Law claims were subject to the three-year statute of limitations for statutory violations and were therefore untimely. The Court of Appeals agreed the Martin Act claims were time-barred but ruled the Executive Law claims may not be time-barred if they are based entirely on the elements of common law fraud subject to a six-year statute of limitations:

… [T]he Martin Act imposes numerous obligations — or “liabilities” — that did not exist at common law, justifying the imposition of a three-year statute of limitations under CPLR 214(2). The broad definition of “fraudulent practices,” as repeatedly amended by the Legislature and interpreted by the courts, encompasses “wrongs” not cognizable under the common law and dispenses, among other things, with any requirement that the Attorney General prove scienter or justifiable reliance on the part of investors. * * *

… [W]hile the lower courts concluded that a six-year statute of limitations applied to defendants’ Executive Law § 63(12) claim — regardless of whether the specific elements of common law fraud had been made out — that holding was not correct. Rather, it is necessary to examine whether the conduct underlying the Executive Law § 63(12) claim amounts to a type of fraud recognized in the common law and, if so, the action will be governed by a six-year statute of limitations … . Although the parties raised various arguments with respect to this question, not all the issues were addressed or resolved by the lower courts. A remittal — which permits consideration of the question in the current procedural posture — is therefore appropriate. If it is determined that the prima facie elements of a common law cause of action were made out in this case, the Attorney General will be obliged to demonstrate each such element at the proof stage or the claim will be subject to dismissal as time-barred. People v Credit Suisse Sec. (USA) LLC, 2018 NY Slip Op 04272, Ct App 6-12-18

CIVIL PROCEDURE (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/STATUTE OF LIMITATIONS (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/SECURITIES (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/RESIDENTIAL MORTGAGE BACKED SECURITIES (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))FRAUD (RESIDENTIAL MORTGAGE BACKED SECURITIES, STATUTE OF LIMITATIONS, THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/CPLR 213 (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/CPLR 214 (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/GENERAL BUSINESS LAW (MARTIN ACT, THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/EXECUTIVE LAW (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))/MARTIN ACT (THE MARTIN ACT CLAIMS IN THIS DECEPTIVE PRACTICES ACTION INVOLVING RESIDENTIAL MORTGAGE BACKED SECURITIES ARE TIME-BARRED UNDER THE THREE-YEAR STATUTE OF LIMITATIONS FOR STATUTORY VIOLATIONS, BUT THE EXECUTIVE LAW CLAIMS MAY NOT BE TIME-BARRED IF THEY ARE BASED SOLELY ON THE ELEMENTS OF COMMON LAW FRAUD SUBJECT TO THE SIX-YEAR STATUTE OF LIMITATIONS (CT APP))

June 12, 2018

Corporation Law, Debtor-Creditor, Securities

INDENTURE TRUSTEE STATED CAUSES OF ACTION FOR FRAUDULENT CONVEYANCES UNDER A VEIL-PIERCING THEORY, COMPLAINT ALLEGED FRAUDULENT REDEMPTIONS SIPHONED OFF ASSETS LEAVING CORPORATE OBLIGORS UNABLE TO PAY NOTEHOLDERS (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Rivera, affirmed the appellate division’s ruling that the complaint by an indenture trustee stated causes of action on behalf of noteholders for fraudulent conveyances under a corporate veil-piercing theory. The court explained the issues before it as follows:

On this appeal we must determine whether an indenture trustee may seek recovery on behalf of noteholders for defendants’ alleged fraudulent redemptions intended to siphon off assets, leaving corporate obligors unable to pay the noteholders. The indenture at issue authorizes the trustee to “pursue any available remedy to collect . . . the payment of principal, premium, if any, and interest on the Notes,” and thus empowers that trustee to proceed at law and in equity to recover losses incurred by all noteholders from the unpaid notes. As such, the trustee may assert causes of action to recover pro-rata losses caused by defendants’ scheme to render the note debtor insolvent. The trustee may also seek to pierce the corporate veil and impose corporate obligations on defendants under an alter ego theory of liability based on properly pleaded factual allegations — here that defendants created, for unlawful purposes, a corporate structure over which they exercised complete control and domination, and which they used to incur corporate debt so they could distribute the loan proceeds to themselves through fraudulent transfers, leaving the corporation unable to pay its creditors. * * *

The [appellate division properly] concluded that the relevant language of the indenture “confers standing on the trustee to pursue . . . the fraudulent conveyance and other . . . claims, which seek recovery solely of the amounts due under the notes, for the benefit of all noteholders on a pro rata basis, as a remedy for an alleged injury suffered ratably by all noteholders by reason of their status as noteholders” … . The court also [properly] found that the complaint sufficiently states a cause of action against these defendants under a veil-piercing theory … . Cortlandt St. Recovery Corp. v Bonderman, 2018 NY Slip Op 01149, CtApp 2-20-18

SECURITIES (INDENTURE TRUSTEE STATED CAUSES OF ACTION FOR FRAUDULENT CONVEYANCES UNDER A VEIL-PIERCING THEORY, COMPLAINT ALLEGED FRAUDULENT REDEMPTIONS SIPHONED OFF ASSETS LEAVING CORPORATE OBLIGORS UNABLE TO PAY NOTEHOLDERS (CT APP))/DEBTOR-CREDITOR (INDENTURE TRUSTEE STATED CAUSES OF ACTION FOR FRAUDULENT CONVEYANCES UNDER A VEIL-PIERCING THEORY, COMPLAINT ALLEGED FRAUDULENT REDEMPTIONS SIPHONED OFF ASSETS LEAVING CORPORATE OBLIGORS UNABLE TO PAY NOTEHOLDERS (CT APP))/CORPORATION LAW (INDENTURE TRUSTEE STATED CAUSES OF ACTION FOR FRAUDULENT CONVEYANCES UNDER A VEIL-PIERCING THEORY, COMPLAINT ALLEGED FRAUDULENT REDEMPTIONS SIPHONED OFF ASSETS LEAVING CORPORATE OBLIGORS UNABLE TO PAY NOTEHOLDERS (CT APP))/INDENTURE TRUSTEE (INDENTURE TRUSTEE STATED CAUSES OF ACTION FOR FRAUDULENT CONVEYANCES UNDER A VEIL-PIERCING THEORY, COMPLAINT ALLEGED FRAUDULENT REDEMPTIONS SIPHONED OFF ASSETS LEAVING CORPORATE OBLIGORS UNABLE TO PAY NOTEHOLDERS (CT APP))/FRAUD (INDENTURE TRUSTEE STATED CAUSES OF ACTION FOR FRAUDULENT CONVEYANCES UNDER A VEIL-PIERCING THEORY, COMPLAINT ALLEGED FRAUDULENT REDEMPTIONS SIPHONED OFF ASSETS LEAVING CORPORATE OBLIGORS UNABLE TO PAY NOTEHOLDERS (CT APP))/PIERCING THE CORPORATE VEIL (INDENTURE TRUSTEE STATED CAUSES OF ACTION FOR FRAUDULENT CONVEYANCES UNDER A VEIL-PIERCING THEORY, COMPLAINT ALLEGED FRAUDULENT REDEMPTIONS SIPHONED OFF ASSETS LEAVING CORPORATE OBLIGORS UNABLE TO PAY NOTEHOLDERS (CT APP))

February 20, 2018

Contract Law, Securities

UNDER THE TERMS OF THE RELEVANT CONTRACTS, WHICH MUST BE INTERPRETED TOGETHER TO GIVE EFFECT TO THEIR TERMS, PLAINTIFF DID NOT HAVE STANDING TO SUE IN ONE ASPECT OF THIS ACTION STEMMING FROM THE SALE OF ALLEGEDLY DEFECTIVE RESIDENTIAL MORTGAGE-BACKED SECURITIES (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Moskowitz, modifying Supreme Court, in actions stemming from the sale of allegedly defective residential mortgage-backed securities, determined that, according to the terms of the relevant contracts, plaintiff did not have standing to sue in one aspect of the action because a critical assignment had not been accomplished in accordance with the contract. The opinion is fact-specific and too complex to fairly summarize here. With respect to Supreme Court’s failure to interpret the two relevant agreements such that both are given effect, the court explained:

In interpreting a contract a court should favor an interpretation that gives effect to all the terms of an agreement rather than ignoring terms or interpreting them unreasonably … . Indeed, “where two seemingly conflicting contract provisions reasonably can be reconciled, a court is required to do so and to give both effect” … . We have also found that “agreements executed at substantially the same time and related to the same subject matter are regarded as contemporaneous writings and must be read together as one” … . Thus, in failing to harmonize the … agreement[s], the motion court essentially read … terms out of existence. U.S. Bank N.A. v GreenPoint Mtge. Funding, Inc., 2017 NY Slip Op 08644, First Dept 12-12-17

SECURITIES (RESIDENTIAL MORTGAGE-BACKED SECURITIES, CONTRACT LAW, UNDER THE TERMS OF THE RELEVANT CONTRACTS, WHICH MUST BE INTERPRETED TOGETHER TO GIVE EFFECT TO THEIR TERMS, PLAINTIFF DID NOT HAVE STANDING TO SUE IN ONE ASPECT OF THIS ACTION STEMMING FROM THE SALE OF ALLEGEDLY DEFECTIVE RESIDENTIAL MORTGAGE-BACKED SECURITIES (FIRST DEPT))/CONTRACT LAW (RESIDENTIAL MORTGAGE-BACKED SECURITIES, CONTRACT LAW, UNDER THE TERMS OF THE RELEVANT CONTRACTS, WHICH MUST BE INTERPRETED TOGETHER TO GIVE EFFECT TO THEIR TERMS, PLAINTIFF DID NOT HAVE STANDING TO SUE IN ONE ASPECT OF THIS ACTION STEMMING FROM THE SALE OF ALLEGEDLY DEFECTIVE RESIDENTIAL MORTGAGE-BACKED SECURITIES (FIRST DEPT))/RESIDENTIAL MORTGAGE-BACKED SECURITIES (CONTRACT LAW, UNDER THE TERMS OF THE RELEVANT CONTRACTS, WHICH MUST BE INTERPRETED TOGETHER TO GIVE EFFECT TO THEIR TERMS, PLAINTIFF DID NOT HAVE STANDING TO SUE IN ONE ASPECT OF THIS ACTION STEMMING FROM THE SALE OF ALLEGEDLY DEFECTIVE RESIDENTIAL MORTGAGE-BACKED SECURITIES (FIRST DEPT))

December 12, 2017

Contract Law, Securities

THE RESIDENTIAL MORTGAGE-BACKED SECURITIES CONTRACTS PROVIDED FOR THE SOLE REMEDY OF CURE AND REPURCHASE, PLAINTIFF TRUSTEE’S CAUSES OF ACTION FOR GENERAL CONTRACT DAMAGES DISMISSED (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Stein, over an extensive two-judge dissent, determined plaintiff trustee (HSBC) was limited to the cure and replurchase remedy described in the contracts for these residential mortgage-backed securities, and could not sue for general contract damages:

In these appeals stemming from four residential mortgage-backed securities (RMBS) transactions, we are asked to decide whether claims for general contract damages based on alleged breaches of a “no untrue statement” provision can withstand a motion to dismiss based on a contract provision mandating cure or repurchase as the sole remedy for breaches of mortgage loan-specific representations and warranties. We hold 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. * * *

.. .[I]t 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. … [T]he sole remedy for breaches of the Mortgage Representations is cure or repurchase. HSBC cannot “subvert this ‘exclusive remedies’ limitation” of liability by simply re-characterizing its claims … . Rather, “[r]eading the [contracts] as a harmonious and integrated whole” … and honoring “the exclusive remedy that the[se] [sophisticated] parties fashioned” … , we conclude that the Sole Remedy Provision applies, precluding HSBC from seeking general contract damages for the particular claims challenged on this appeal. Nomura Home Equity Loan, Inc., Series 2006-FM2 v Nomura Credit & Capital, Inc., 2017 NY Slip Op 08622, CtApp 12-12-17

SECURITIES (THE RESIDENTIAL MORTGAGE-BACKED SECURITIES CONTRACTS PROVIDED FOR THE SOLE REMEDY OF CURE AND REPURCHASE, PLAINTIFF TRUSTEE’S CAUSES OF ACTION FOR GENERAL CONTRACT DAMAGES DISMISSED (CT APP))/CONTRACT LAW (THE RESIDENTIAL MORTGAGE-BACKED SECURITIES CONTRACTS PROVIDED FOR THE SOLE REMEDY OF CURE AND REPURCHASE, PLAINTIFF TRUSTEE’S CAUSES OF ACTION FOR GENERAL CONTRACT DAMAGES DISMISSED (CT APP))/RESIDENTIAL MORTGAGE-BACKED SECURITIES (THE RESIDENTIAL MORTGAGE-BACKED SECURITIES CONTRACTS PROVIDED FOR THE SOLE REMEDY OF CURE AND REPURCHASE, PLAINTIFF TRUSTEE’S CAUSES OF ACTION FOR GENERAL CONTRACT DAMAGES DISMISSED (CT APP))/SOLE REMEDY PROVISIONS (THE RESIDENTIAL MORTGAGE-BACKED SECURITIES CONTRACTS PROVIDED FOR THE SOLE REMEDY OF CURE AND REPURCHASE, PLAINTIFF TRUSTEE’S CAUSES OF ACTION FOR GENERAL CONTRACT DAMAGES DISMISSED (CT APP))

December 12, 2017

Civil Procedure, Contract Law, Securities, Trusts and Estates

BREACH OF CONTRACT ACTION BY CALIFORNIA TRUSTEE OF MORTGAGE-BACKED-SECURITIES TRUSTS IS CONTROLLED BY NEW YORK’S BORROWING STATUTE AND MUST BE TIMELY UNDER BOTH CALIFORNIA AND NEW YORK LAW, SUIT WAS UNTIMELY UNDER CALIFORNIA LAW (FIRST DEPT).

The First Department determined this breach of contract action stemming from a mortgage-backed-securities trust, brought by a California plaintiff (trustee) ,and concerning California lenders must be timely under both California and New York law. The action, although timely in New York, was not timely under California law, which has a four-year statute of limitations. The New York choice-of-law provisions in the agreements did not expressing incorporate the NY statute of limitations:

CPLR 202 requires that an action brought by a nonresident plaintiff, “based upon a cause of action accruing without the state,” be timely under the respective statutes of limitations of both New York and “the place without the state where the cause of action accrued.” In Global Fin. Corp. v Triarc Corp. (93 NY2d 525, 529-530 [1999]), the Court of Appeals set forth the general rule that, in cases where (as here) the alleged injury is purely economic, a cause of action is deemed, for purposes of CPLR 202, to have accrued in the jurisdiction of the plaintiff’s residence. …

it is undisputed that the domiciles of the trust beneficiaries, which are in various jurisdictions, do not provide a workable basis for determining the place of accrual. As to the New York choice-of-law clauses of the relevant agreements, because these provisions do not expressly incorporate the New York statute of limitations, they “cannot be read to encompass that limitation period” … . By contrast, the subject trust in each action comprises a pool of mortgage loans, originated by California lenders and encumbering California properties, either exclusively … or predominantly ,,,, and … administered in California by plaintiff, a California-based trustee …. Further, it is undisputed that the relevant pooling and servicing agreement (PSA) for each trust contemplates the payment of state taxes, if any, in California … . To the extent the physical location of the notes memorializing the securitized mortgage loans has relevance to the analysis, each trust’s PSA contemplates that the notes may be maintained in California, but neither contemplates maintaining the notes in New York … . Deutsche Bank Natl. Trust Co. v Barclays Bank PLC, 2017 NY Slip Op 08459, First Dept 12-5-17

CIVIL PROCEDURE (BORROWING STATUTE, CONTRACT LAW, BREACH OF CONTRACT ACTION BY CALIFORNIA TRUSTEE OF MORTGAGE-BACKED-SECURITIES TRUSTS IS CONTROLLED BY NEW YORK’S BORROWING STATUTE AND MUST BE TIMELY UNDER BOTH CALIFORNIA AND NEW YORK LAW, SUIT WAS UNTIMELY UNDER CALIFORNIA LAW (FIRST DEPT))/BORROWING STATUTE (CIVIL PROCEDURE, BREACH OF CONTRACT ACTION BY CALIFORNIA TRUSTEE OF MORTGAGE-BACKED-SECURITIES TRUSTS IS CONTROLLED BY NEW YORK’S BORROWING STATUTE AND MUST BE TIMELY UNDER BOTH CALIFORNIA AND NEW YORK LAW, SUIT WAS UNTIMELY UNDER CALIFORNIA LAW (FIRST DEPT))/CONTRACT LAW (CIVIL PROCEDURE, BORROWING STATUTE, STATUTE OF LIMITATIONS, BREACH OF CONTRACT ACTION BY CALIFORNIA TRUSTEE OF MORTGAGE-BACKED-SECURITIES TRUSTS IS CONTROLLED BY NEW YORK’S BORROWING STATUTE AND MUST BE TIMELY UNDER BOTH CALIFORNIA AND NEW YORK LAW, SUIT WAS UNTIMELY UNDER CALIFORNIA LAW (FIRST DEPT))/SECURITIES (MORTGAGE-BACKED SECURITIES, CONTRACT LAW, CIVIL PROCEDURE, BORROWING STATUTE, BREACH OF CONTRACT ACTION BY CALIFORNIA TRUSTEE OF MORTGAGE-BACKED-SECURITIES TRUSTS IS CONTROLLED BY NEW YORK’S BORROWING STATUTE AND MUST BE TIMELY UNDER BOTH CALIFORNIA AND NEW YORK LAW, SUIT WAS UNTIMELY UNDER CALIFORNIA LAW (FIRST DEPT))/TRUSTS AND ESTATES (MORTGAGE-BACKED SECURITIES TRUST, BREACH OF CONTRACT, CIVIL PROCEDURE, BORROWING STATUTE, BREACH OF CONTRACT ACTION BY CALIFORNIA TRUSTEE OF MORTGAGE-BACKED-SECURITIES TRUSTS IS CONTROLLED BY NEW YORK’S BORROWING STATUTE AND MUST BE TIMELY UNDER BOTH CALIFORNIA AND NEW YORK LAW, SUIT WAS UNTIMELY UNDER CALIFORNIA LAW (FIRST DEPT))

December 5, 2017

Civil Procedure, Cooperatives, Securities

DECLARATORY JUDGMENT ACTION SEEKING A DETERMINATION OF THE OWNERSHIP OF A STOCK CERTIFICATE REPRESENTING SHARES IN A COOPERATIVE APARTMENT IS GOVERNED BY A THREE-YEAR STATUTE OF LIMITATIONS, THE STOCK CERTIFICATE IS PERSONAL NOT REAL PROPERTY (SECOND DEPT).

The Second Department noted that the declaratory judgment action which sought a determination of the ownership of a stock certificate representing shares in a cooperative apartment was governed by the three-year statute of limitation. The stock certificate was personal property, not real estate:

The defendants established that the action was barred by the three-year statute of limitations for recovery of a chattel (see CPLR 214[3]). “In order to determine the Statute of Limitations applicable to a particular declaratory judgment action, the court must examine the substance of that action to identify the relationship out of which the claim arises and the relief sought'”

… . “If the court determines that the underlying dispute can be or could have been resolved through a form of action or proceeding for which a specific limitation period is statutorily provided, that limitation period governs the declaratory judgment action” … . Here, the plaintiff seeks to recover a stock certificate representing shares in a cooperative apartment corporation. An action to recover a stock certificate is governed by the three-year statute of limitations for recovery of a chattel … . “Shares of stock issued in connection with cooperative apartments are personal property, not real property” … . Loscalzo v 507-509 President St. Tenants Assn. Hous. Dev. Fund Corp., 2017 NY Slip Op 06070, Second Dept 8-9-17

CIVIL PROCEDURE (DECLARATORY JUDGMENT ACTION SEEKING A DETERMINATION OF THE OWNERSHIP OF A STOCK CERTIFICATE REPRESENTING SHARES IN A COOPERATIVE APARTMENT IS GOVERNED BY A THREE-YEAR STATUTE OF LIMITATIONS, THE STOCK CERTIFICATE IS PERSONAL NOT REAL PROPERTY (SECOND DEPT))/DECLARATORY JUDGMENT (STATUTE OF LIMITATIONS, DECLARATORY JUDGMENT ACTION SEEKING A DETERMINATION OF THE OWNERSHIP OF A STOCK CERTIFICATE REPRESENTING SHARES IN A COOPERATIVE APARTMENT IS GOVERNED BY A THREE-YEAR STATUTE OF LIMITATIONS, THE STOCK CERTIFICATE IS PERSONAL NOT REAL PROPERTY (SECOND DEPT))/SECURITIES (SHARES IN COOPERATIVE APARTMENT, DECLARATORY JUDGMENT ACTION SEEKING A DETERMINATION OF THE OWNERSHIP OF A STOCK CERTIFICATE REPRESENTING SHARES IN A COOPERATIVE APARTMENT IS GOVERNED BY A THREE-YEAR STATUTE OF LIMITATIONS, THE STOCK CERTIFICATE IS PERSONAL NOT REAL PROPERTY (SECOND DEPT))/COOPERATIVES (DECLARATORY JUDGMENT ACTION SEEKING A DETERMINATION OF THE OWNERSHIP OF A STOCK CERTIFICATE REPRESENTING SHARES IN A COOPERATIVE APARTMENT IS GOVERNED BY A THREE-YEAR STATUTE OF LIMITATIONS, THE STOCK CERTIFICATE IS PERSONAL NOT REAL PROPERTY (SECOND DEPT))

August 9, 2017

Contract Law, Fiduciary Duty, Securities, Trusts and Estates

ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, reversing (modifying) Supreme Court, in a full-fledged opinion by Justice Gische, determined that defendant’-trustee’s motion to dismiss the breach of contract cause of action should not have been granted. Although the defendant indenture trustee did not owe the plaintiffs a fiduciary duty with regard to the sale of securities, the trustee still owed plaintiffs a duty of care as described in the trust agreement, including a duty to avoid conflicts of interest. Here the plaintiffs alleged the trustee sold the securities below market price and then sold them for a profit, thereby depriving plaintiffs of the equity in the securities:

This appeal concerns the rights and obligations of the parties with respect to the termination of certain REMIC (real estate mortgage investment conduit) trusts. The assets held by the trusts were mortgage loans. The trusts originally sold securities to outside investors, representing two classes of holders, i.e., regular security holders and residual security holders. Plaintiffs … are holders of the residual security interests in those trusts. While the holders of regular securities were entitled to receive regular payments on distribution dates, the residual security holders had no such right. Instead, they were entitled to receive the proceeds of the disposition of any asset remaining in the trust REMICs upon their termination, but only after each class of regular security holder had been paid. Plaintiffs’ interest is referred to as the trust “equity.” The residual holder interest was the riskiest tranche of ownership and any right to payment was subordinate to payment in full of amounts due to the regular interest holders.

… The trustee argues that under the trust documents, it had the right to purchase trust assets at below market, even though it could resell them within days of acquiring them, allowing the trustee to realize millions of dollars in personal profit. The trustee is alleged to have kept for itself the profit it realized on the forward sale, which was in excess of $3,000,000.

… Even if the sale of assets to the trustee had been conclusively established by documentary evidence, there is still a valid claim that the trustee’s actions create a conflict of interest prohibited under the operative trust agreements and in violation of the trustee’s contractual obligations. The trust documents do not give the trustee the express right to purchase the trust assets for its own financial benefit at less than market value and to thereby diminish, let alone extinguish, plaintiffs’ interest as residual security holders. NMC Residual Ownership L.L.C. v U.S. Bank N.A., 2017 NY Slip Op 05923, First Dept 8-1-17

SECURITIES (ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))/TRUSTS AND ESTATES (REAL ESTATE MORTGAGE INVESTMENT CONDUIT TRUSTS, ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))/REAL ESTATE MORTGAGE INVESTMENT CONDUIT TRUSTS (ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))/CONTRACT LAW (REAL ESTATE MORTGAGE INVESTMENT CONDUIT TRUSTS, ALTHOUGH THE DEFENDANT INDENTURE TRUSTEE DID NOT OWE PLAINTIFFS A FIDUCIARY DUTY, THE TRUSTEE DID OWE PLAINTIFFS A DUTY OF CARE AS DESCRIBED IN THE TRUST AGREEMENT, THE BREACH OF CONTRACT CAUSE OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT))

August 1, 2017