Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc.

This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 39
Nomura Home Equity Loan, Inc.,
Series 2006-FM2, by HSBC Bank
USA, National Association, solely
in its capacity as Trustee,
et al.,
Respondents,
v.
Nomura Credit & Capital, Inc.,
Appellant.
(And Three Other Actions.)

Joseph J. Frank, for appellant.
Michael S. Shuster, for respondents.
Securities Industry and Financial Markets Association;
Sand Canyon Corporation, amici curiae.

STEIN, J.:
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

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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-
In each of the RMBS transactions at issue, defendant
Nomura Credit & Capital, Inc. selected and sold a pool of
mortgage loans through an affiliated limited-purpose company to a
securitization trust in exchange for money raised from investors.
Defendant, as sponsor of the securitizations, acquired the
mortgage loans from institutions that made the loans to
individual borrowers, and then sold the pool of loans to an
affiliated purchaser, known as a depositor, with the sale of each
loan pool occurring pursuant to its own mortgage loan purchase
agreement (MLPA). In turn, the depositor placed each pool of
loans into a separate trust, with plaintiff HSBC Bank USA,
National Association (HSBC) as the trustee, in accordance with
four pooling and service agreements (PSAs).
A forensic analysis of some of the underlying mortgage
loans conducted by certain investors following the subsequent
collapse of the housing market allegedly revealed that many of

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those loans did not conform to representations and warranties
made by defendant. After providing notice of the breaches and an
opportunity to cure, HSBC, as trustee of the securitization
trusts, commenced this litigation by bringing an action on behalf
of each trust.
HSBC asserted causes of action for breach of the MLPAs
and PSAs, alleging that defendant breached the specific
representations and warranties it made concerning the suitability
of each of the mortgage loans contained in the loan pools. In
addition, HSBC sought specific performance of the remedy that
expressly applies to such breaches under the contracts, i.e.,
that defendant either cure the breaches or repurchase the loans.1
HSBC also asserted claims seeking general contract damages for
alleged breaches of representations made by defendant concerning
the transaction as a whole, specifically the representation that
the contracts and related documents contained no untrue
statements; it is these claims that are before us.
Certain provisions of the MLPAs and PSAs form the core
of the dispute between the parties.2 Section 7 of the MLPAs is
entitled "Representations, Warranties and Covenants of the
Seller." This section includes certain general representations
and warranties made by defendant, including, for example, that:

1
Defendant does not challenge before us the lower court
rulings pertaining to those causes of action.
2
The parties agree that, for purposes of these actions, the
language in the MLPAs and PSAs for each transaction is identical.

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it is a corporation duly organized, validly existing and in good
standing under the laws of Delaware; it has duly authorized the
execution, delivery and performance of the agreement and will be
bound by it; and the consummation of the transactions
contemplated under the agreement are in the ordinary course of
defendant's business. Section 7 also includes the provision
referred to by the parties as the "No Untrue Statement
Provision," which states that:
"This Agreement does not contain any untrue statement
of material fact or omit to state a material fact
necessary to make the statements contained herein not
misleading. The written statements, reports and other
documents prepared and furnished or to be prepared and
furnished by the Seller pursuant to this Agreement or
in connection with the transactions contemplated
hereby taken in the aggregate do not contain any
untrue statement of material fact or omit to state a
material fact necessary to make the statements
contained therein not misleading."
Section 8 of each MLPA is entitled "Representations and
Warranties of the Seller Relating to the Mortgage Loans"
(hereinafter, Mortgage Representations). In section 8, defendant
made specific representations and warranties about each mortgage
loan, including that: information provided to the agencies that
rated the certificates representing interests in the
securitization trusts, including loan level detail, is true and
correct according to the rating agency requirements; no fraud has
taken place on the part of the mortgagor or any other party
involved in the origination or servicing of the mortgage loan;
the mortgage file contains an appraisal of the related mortgaged

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property which was made by a qualified appraiser pursuant to
applicable law and professional standards prior to loan approval;
and each mortgage loan is and will be a mortgage loan arising out
of the originator's practice in accordance with the originator's
underwriting guidelines.
Section 9 of the MLPAs is entitled "Repurchase
Obligation for Defective Documentation and for Breach of
Representation and Warranty." That section provides that, upon a
party's discovery of any materially defective document or "a
breach of any of the representations and warranties contained in
Section 8 that materially and adversely affects the value of any
Mortgage Loan or the interest therein of the Purchaser or the
Purchaser's assignee," that party must give notice to defendant.
Defendant then must cure the breach or, if that is not possible,
repurchase the affected mortgage loan at a purchase price defined
under the PSA. Significantly, section 9 (c) states that "[i]t is
understood and agreed that the obligations of [defendant] set
forth in this [s]ection 9 to cure or repurchase a defective
Mortgage Loan . . . constitute the sole remedies of the Purchaser
against [defendant] respecting a missing document or a breach of
the representations and warranties contained in [s]ection 8"
[emphasis added]. This language is referred to by the parties as
the "Sole Remedy Provision."
The PSAs are separate contracts, which refer to certain
specific provisions of the MLPAs, but do not incorporate the

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MLPAs as a whole. Section 2.01 of the PSAs assigns to HSBC, as
trustee, the depositor's rights under the MLPAs "to the extent of
the Mortgage Loans sold."3 Under section 2.03 of each PSA,
defendant made certain representations and warranties, including
a statement that the Mortgage Representations "are true and
correct." Section 2.03 further provides a remedy for a breach of
the section 8 representations and warranties that tracks the
language of section 9 of the MLPAs -- i.e., that defendant shall
cure such breach in all material respects and, if such breach is
not so cured, shall repurchase or replace the affected mortgage
loans. Section 2.03 also states, in language that parallels
section 9 (c) of the MLPAs, that defendant's obligation to cure,
repurchase or replace any mortgage loan to which a breach has
occurred shall be the "sole remed[y] . . . against [defendant]
respecting such breach" available to the investors, depositor, or
trustee. The PSAs do not include provisions comparable to the No
Untrue Statement Provision in the MLPAs.
The particular causes of action at issue on this appeal
allege that defendant breached the No Untrue Statement Provision
in section 7 of the MLPAs by providing certain documents to the
trusts -- including the mortgage loan files, mortgage loan
schedules, and prospectus supplements -- that contained

3
Although defendant now argues before us that HSBC was
assigned only limited rights and, thus, lacks standing to assert
claims pursuant to the No Untrue Statement Provision in the
MLPAs, that contention was not preserved for our review.

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"widespread, pervasive and material misrepresentations and
omissions with respect to the Mortgage Loans." HSBC further
claims that the results of the investigation of the mortgage
loans, including a review of the loan files, "make clear that
[defendant's] breaches of the Mortgage Representations are
systemic in nature and adversely affect the vast majority of the
[m]ortgage [l]oans in the [t]rust."
Defendant moved to dismiss the complaints pursuant to
CPLR 3211 (a) (1) and (7), arguing that the MLPAs and PSAs both
provide that the sole remedy for breaches of the Mortgage
Representations is cure or repurchase. Supreme Court granted the
motions to dismiss with respect to the causes of action and
claims for general contract damages based on alleged breaches of
the No Untrue Statement Provision of the MLPAs. The Appellate
Division reinstated those claims, reasoning that, if the parties
intended for the Sole Remedy Provision to "apply to both section
8 and section 7 breaches, they certainly could have included such
language in the contracts" (133 AD3d 96, 108 [1st Dept 2015]
[internal quotation marks and citation omitted]). The Appellate
Division granted defendant leave to appeal to this Court,
certifying the question of whether its order was properly made.
-II-
It is fundamental that, "when parties set down their
agreement in a clear, complete document, their writing should as
a rule be enforced according to its terms" (W.W.W. Assoc. v

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Giancontieri, 77 NY2d 157, 162 [1990]; see Reiss v Financial
Performance Corp., 97 NY2d 195, 198 [2001]), and that courts
should read a contract "as a harmonious and integrated whole" to
determine and give effect to its purpose and intent (Matter of
Westmoreland Coal Co. v Entech, Inc., 100 NY2d 352, 358 [2003];
see W.W.W. Assoc., 77 NY2d at 162). Courts may not, through
their interpretation of a contract, add or excise terms or
distort the meaning of any particular words or phrases, thereby
creating a new contract under the guise of interpreting the
parties' own agreements (see ACE Sec. Corp., Home Equity Loan
Trust, Series 2006-SL2 v DB Structured Prods., Inc., 25 NY3d 581,
597 [2015]; Matter of Westmoreland Coal Co., 100 NY2d at 358;
Reiss, 97 NY2d at 199). In that regard, a contract must be
construed in a manner which gives effect to each and every part,
so as not to render any provision "meaningless or without force
or effect" (Ronnen v Ajax Elec. Motor Corp., 88 NY2d 582, 589
[1996]).

In accordance with these principles, courts must honor
contractual provisions that limit liability or damages because
those provisions represent the parties' agreement on the
allocation of the risk of economic loss in certain eventualities
(see Metropolitan Life Ins. Co. v Noble Lowndes Intl., 84 NY2d
430, 436 [1994] [the parties "may later regret their assumption
of the risks of non-performance in this manner, but the courts
let them lie on the bed they made"]; 11-58 Corbin on Contracts, §

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58.16 [2017] ["(w)here a contract provides that damages for
breach shall not be recoverable beyond a specified sum, it is
obvious that the risk of loss beyond that sum is being assumed by
the promisee"]). Contract terms providing for a "sole remedy"
are sufficiently clear to establish that no other remedy was
contemplated by the parties at the time the contract was formed,
for purposes of that portion of the transaction (see J. D'Addario
& Co., Inc. v Embassy Indus., Inc., 20 NY3d 113, 118 [2012]),
"especially when entered into at arm's length by sophisticated
contracting parties" (Kalisch-Jarcho, Inc. v City of New York, 58
NY2d 377, 384 [1983]).

When reviewing a defendant's motion to dismiss a
complaint for failure to state a cause of action, a court must
"give the complaint a liberal construction, accept the
allegations as true and provide plaintiffs with the benefit of
every favorable inference" (Roni LLC v Arfa, 18 NY3d 846, 848
[2011]). Thus, here, we accept as true HSBC's allegations of
pervasive breaches of the representations made as to the mortgage
loans and misleading omissions in the transaction documents,
including the mortgage loan files, mortgage loan schedules, and
prospectus supplements.4 Significantly, however, the complaints

4
The mortgage loan files contain, among other things, the
borrower's loan application, documents verifying the borrower's
income, assets, and employment, the borrower's credit report, an
appraisal of the property secured by the loan, and a statement of
the property's occupant status. The mortgage loan schedules, or
mortgage loan data tapes, provide certain information about each

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themselves affirmatively pleaded that the claims based on alleged
breaches of the No Untrue Statement Provision were grounded in
"misrepresentations and omissions with respect to the Mortgage
Loans," themselves. That is, HSBC claimed that it was
defendant's breaches of the Mortgage Representations -- found in
section 8 of the MLPAs, and expressly incorporated by reference
in section 2.03 of each PSA -- that were "systemic in nature."

Indeed, HSBC alleged that certain appraisals included
in the mortgage loan files were inflated and, thus, there was
"strong reason to believe" that these appraisals did not conform
to federal guidelines and professional standards, which would
constitute a breach of the Mortgage Representation that each
appraisal on file was so prepared prior to approval of the
mortgage loan. Morever, HSBC claimed that misrepresentations in
the mortgage loan files and missing or incomplete loan files
constituted breaches of section 8 Mortgage Representations,
specifically those representations made by defendant that no
fraud was involved in the origination or servicing of the
mortgage loans and that each mortgage loan arose out of the
originator's practice in accordance with its underwriting
guidelines. The alleged deficiencies in the mortgage loan

mortgage loan, including the loan-to-value ratio, occupancy
status, and borrower's credit score. The prospectus supplements
include information for potential investors concerning the offer
of certificates representing interests in the securitization
trusts.

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schedules were also grounded in violations of the Mortgage
Representations -- in particular, HSBC claimed that providing the
purportedly flawed documents to the rating agencies violated
defendant's representation that it had provided such rating
agencies with only true and correct information. Similarly, HSBC
averred that certain statements in the prospectus supplements
constituted breaches of the Mortgage Representations concerning
appraisals and underwriting guidelines.

Contrary to the dissenters' assertion that certain
allegations of HSBC concerning misstatements in the Mortgage Loan
Files (HSBC 2007-3 Compl. ¶ 60 [enumerating certain alleged
misrepresentations]) are not grounded in alleged breaches of the
Mortgage Representations, we need only look to the next paragraph
in the complaint to see that they are (see HSBC 2007-3 Compl. ¶
61 ["Misrepresentations, such as those described above, strongly
suggest fraud by either or both the Mortgagor and the originator
in the underwriting of the loan, in breach of MLPA § 8(ii)"
(emphasis added)]). In addition, to find a breach of the No
Untrue Statement Provision, Judge Feinman creates out of whole
cloth a theory contrary to the allegations penned by HSBC
(Feinman, J. dissenting op at 9-10; Rivera, J. dissenting op at
17 [joining that analysis]). For example, HSBC claimed that
there was reason to believe that certain appraisals contained in
the mortgage loan files were biased, in violation of a Mortgage
Representation, namely MLPA § 8 (29) (see HSBC 2007-3 Compl. ¶

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60). While the dissenters maintain that the mere presence of
inflated property values, if not based on biased appraisals,
could violate the No Untrue Statement Provision and not MLPA § 8
(29), they ignore the fact that, to prevail on the claims
actually alleged, HSBC must show that the appraisals were biased.
The dissenters' contention that HSBC is attempting to prove the
opposite of what was actually alleged, is not a "liberal" reading
of the complaint; nor is that contention relevant to a
determination of "whether the facts as alleged fit within any
cognizable legal claim" (Leon v Martinez, 84 NY2d 83, 87-88
[1994] [emphasis added]). Rather than twisting the complaint in
an attempt to read in theories that it does not support, the
appropriate inquiry is whether "the instant complaint . . .,
although inartfully drafted, adequately alleged for pleading
survival purposes" a violation of the No Untrue Statement
Provision that is not grounded in a violation of the Mortgage
Representations (id. at 88). The approach of the dissenters
strays far from this principle and actually contradicts HSBC's
allegations; that is, to succeed on a claim that section 7, but
not 8, of the MLPA was violated, HSBC would be required to show
both inflated property appraisals and the absence of the very
bias that HSBC is, in fact, seeking to prove. In other words,
the cause of action created by the dissenters cannot stand unless
HSBC's allegations fail.

The additional theories developed by Judge Feinman in

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his dissent and endorsed by Judge Rivera -- concerning alleged
misstatements of loan-to-value ratios and owner-occupancy status
-- suffer from a similar flaw (Feinman, J. dissenting op at 10-
11; Rivera, J. dissenting op at 17). HSBC alleged in the
complaints that these misstatements violated specific Mortgage
Representations. Contrary to the dissenters' assertion, at no
time during the course of this litigation did HSBC itself ever
suggest that its complaints alleged the theories that the
dissenters now fashion. That is because these theories are
untethered to HSBC's claims "as alleged" and do not represent
reasonable "inferences" that can be drawn from the actual
language in the complaints (see Leon, 84 NY2d at 87).

Therefore, 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. However,
under both the MLPAs and the PSAs, the 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 (Matter of
Westmoreland Coal Co., 100 NY2d at 359). Rather, "[r]eading the
[contracts] as a harmonious and integrated whole" (id. at 358)
and honoring "the exclusive remedy that the[se] [sophisticated]
parties fashioned" (J D'Addario, 20 NY3d at 119), we conclude

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that the Sole Remedy Provision applies, precluding HSBC from
seeking general contract damages for the particular claims
challenged on this appeal.

-III-

HSBC argues, and Judge Rivera agrees, that there is a
fundamental distinction between what HSBC describes as the "broad
scope" of the No Untrue Statement Provision, on the one hand, and
the more narrow applicability of the Mortgage Representations set
forth in the MLPAs, on the other. That is, HSBC contends that
the No Untrue Statement Provision encompasses transaction-wide
documents, while the Mortgage Representations involve loan-
specific representations. We reject that argument, inasmuch as
there is no support in the governing agreements for the position
of HSBC that the Sole Remedy Provision applies only to occasional
mortgage loan-specific breaches, whereas pervasive (or
"aggregate") breaches are addressed under the No Untrue Statement
Provision. Likewise, contrary to Judge Rivera's assertion in her
dissent, the agreements do not provide a carve-out from the Sole
Remedy Provision where a certain threshold number of loan
breaches are alleged. Nor do any terms in the No Untrue
Statement Provision -- or anywhere else in the agreements --
nullify the Sole Remedy Provision for breaches of the section 8
Mortgage Representations by allowing a general contract damages
claim where multiple, systemic breaches of those representations
are alleged.

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In arguing to the contrary, HSBC and Judge Rivera rely
on language in the No Untrue Statement Provision that the
materials prepared and furnished by defendant pursuant to the
agreement, taken in the aggregate, do not contain any untrue
statement of material fact. That reliance is misplaced. The
"taken in the aggregate" language does not relieve HSBC from the
Sole Remedy Provision; nor does it create the type of "loan
pool-level" representations that HSBC claims are distinct from
"loan-level" representations. Rather, the clause is a general
provision stating that the documents, taken together, do not
contain material misstatements and are not materially misleading.
In any event, the Sole Remedy Provision, by its very terms,
applies to all breaches of the section 8 Mortgage
Representations, and HSBC is complaining only of breaches of
those representations. Therefore, HSBC is expressly limited to
the more specific Sole Remedy Provision negotiated by the
parties, however many defective loans there may be (see William
Higgins & Sons v State of New York, 20 NY2d 425, 428 [1967]).

Notably, defendant does not claim that all possible
breaches of the general representations and warranties set forth
in section 7 of the MLPAs, including the No Untrue Statement
Provision, are subject to the sole remedy of curing or
repurchasing the defective loans. Nor does defendant assert that
the Sole Remedy Provision would apply to limit the remedies
available for breach of section 7 representations that are not

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based on the mortgage loans and their characteristics, such as,
for example, a claim that defendant entered into the contract
without proper corporate authority. Rather, defendant concedes
that the Sole Remedy Provision would not apply to such breaches
based upon the language to which the parties agreed (cf. Ambac
Assur. Corp. v EMC Mtge. LLC (121 AD3d 514 [1st Dept 2014]).5
However, as previously noted, there are no allegations in the
complaints of a breach of the No Untrue Statement Provision in
section 7 of the MLPAs to which the Sole Remedy Provision would
not apply because all of the claims asserted under section 7 are
also breaches of the loan-specific Mortgage Representations
contained in section 8.

Finally, contrary to the contentions of HSBC and Judge
Rivera, the additional language in section 13 of the MLPAs --
providing that remedies are cumulative -- does not remove HSBC's
complaints from the ambit of the Sole Remedy Provision. On its
face, section 13 pertains solely to the grant of a security
interest in the mortgage loans; it does not address remedies for
the breach of representations and warranties. HSBC's
interpretation of this language as authorizing an award of
general contract damages for the particular breaches asserted
here would render the Sole Remedy Provision meaningless, even for

5
Thus, contrary to Judge Rivera's assertion, the No Untrue
Statement Provision is not rendered "relatively meaningless"
(Rivera, J. dissenting op at 16).

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disputes that fall squarely under the Mortgage Representations
section of the MLPAs. In any event, the more specific Sole
Remedy Provision that is narrowly related to breaches of the
Mortgage Representations applies here because "[a] specific
provision will not be set aside in favor of a catchall clause"
(William Higgins, 20 NY2d at 428).

Accordingly, the Appellate Division order insofar
as appealed from should be modified, without costs, in accordance
with this opinion and, as so modified, affirmed, and the
certified question answered in the negative.

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Nomura Home Equity v Nomura Credit

No. 39

FEINMAN, J. (dissenting in part):

I concur with the majority insofar as it holds that
breaches of representations and warranties that would otherwise
be subject to the sole remedy provision cannot escape this
provision merely because they are systemic in nature. However,

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the majority missteps by assuming that every claimed breach of
the No Untrue Statement Provision was simply a breach of section
8 which HSBC had "re-characteriz[ed]" as a breach of section 7
(majority op at 13). Rather, in the Series 2006-FM2 and Series
2007-3 complaints, HSBC does not merely allege "pervasive breach"
of the section 8 representations -- which the majority is right
to reject -- but also breaches that by their own terms fell
outside of the scope of section 8 in the first place.1

I.

"On a motion to dismiss under CPLR 3211, the pleading
is to be given a liberal construction, the allegations contained
within it are assumed to be true and the plaintiff is to be
afforded every favorable inference" (Simkin v Blank, 19 NY3d 46,
52 [2012]).

In the Series 2006-FM2 and Series 2007-3 complaints,
HSBC alleges that, "[i]n addition to the pervasive breaches of
the [section 8] Mortgage Representations, the Investigation
revealed that numerous documents assembled and furnished by
Nomura to the Trust -- including the Mortgage Loan Files,
Mortgage Loan Schedule, and Prospectus Supplement -- are rife
with material misrepresentations and omissions" in violation of

1
The non-conclusory allegations in the Series 2006-AF2 and
Series 2007-2 complaints were centered on a theory of "pervasive
breach" of the Section 8 representations themselves, which the
majority properly rejects.

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the No Untrue Statement Provision (2006-FM2/2007-3 Compl. ¶ 64).
Specifically, after an investigation of the loans, HSBC
discovered a series of misstatements that fell within three broad
categories. First, the Mortgage Loan Files contained inflated
property appraisal values (see id. ¶ 45), resulting in the loan-
to-value (LTV) and combined loan-to-value (CLTV) ratios in the
Mortgage Loan Schedule and Prospectus Supplement being
understated (see id. ¶¶ 50, 57). LTV/CLTV ratios "represent the
size of the borrower's obligation as compared to the value of the
property securing the loan. . . . All else being equal, the lower
the CLTV (or LTV), the lower the likelihood of default" (id. ¶¶
47, 48). Second, the Mortgage Loan Files and Mortgage Loan
Schedule falsely represented certain loans as being owner-
occupied (see id. ¶¶ 53, 58). "Owner-occupancy is an important
factor in analyzing the credit risk of a particular loan" (id. ¶
51). HSBC's forensic consultants determined whether a property
was "owner-occupied" based on a series of tests, such as whether
the borrower received the property tax bill for the property at
that address, or whether the property was indicated as the
borrower's permanent residence in lien records (see id. ¶ 52). A
property was deemed not "owner-occupied" if it failed two or more
tests (see id. ¶ 53). Third, the Mortgage Loan Files contained
"many misrepresentations of critical facts about borrowers
including misrepresentations of income and employment,
understatement of existing debt obligations, misstatement of the

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occupancy status of the property, and misstatements of other
basic facts in the Mortgage Loan Files" (id. ¶ 60).

The majority does not contest that these misstatements
breached the clear, unambiguous terms of the No Untrue Statement
Provision. That provision plainly covers untrue statements of
material fact contained in "[t]he written statements, reports and
other documents prepared and furnished or to be prepared and
furnished by [defendant] pursuant to [the MLPA] or in connection
with the transactions contemplated [thereby]" (MLPA § 7 [5]).
Instead, the majority states that these misstatements also
breached section 8 of the MLPA, to which the sole remedy
provision applies. Therefore, according to the majority,
plaintiff cannot seek damages for these claims because allowing
them to do so would render the sole remedy provision a nullity,
contrary to established canons of contractual interpretation.

If this were true, the majority's result would be
entirely correct. However, a straightforward reading of the
relevant contractual language reveals that the sole remedy
provision applies only to specifically-enumerated representations
contained in section 8, and these representations do not
necessarily duplicate all of the false statements that defendant
allegedly furnished HSBC.

II.

The sole remedy provision does not say that the

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repurchase protocol is plaintiff's sole remedy for
misrepresentations "with respect to the Mortgage Loans" (majority
op at 10). Rather, it says that the repurchase protocol is the
sole remedy "respecting . . . a breach of the representations and
warranties contained in Section 8" (MLPA § 9 [c] [emphasis
added]). The sole remedy provision of the PSA similarly says that
the repurchase protocol is the sole remedy "respecting such
breach," that is, "a breach of a representation or warranty set
forth in . . . Section 8 of the Mortgage Loan Purchase Agreement"
(PSA § 2.03 [c] [emphasis added]). Unlike the MLPAs at issue in
some other RMBS cases, the sole remedy provision does not simply
encompass all material misstatements relating to an individual
mortgage loan (cf. Ambac Assur. Corp. v EMC Mortg., LLC, 121 AD3d
514, 518 [1st Dept 2014] [MLPA "provide[d] that the repurchase
protocol is the 'sole and exclusive remedy' 'under this Agreement
or otherwise respecting a breach of representations or warranties
hereunder with respect to the Mortgage Loans'"]; HSBC Bank USA v
Merrill Lynch Mortg. Lending, Inc., 2016 WL 6582406, at *3 [Sup
Ct, New York County, Nov. 3, 2016] [containing a "virtually
identical" sole remedy provision to the one in Ambac]). Rather,
by its express terms, the sole remedy provision is limited to
misrepresentations that breach at least one of the specifically-
listed representations in section 8 of the MLPA.

Section 8, in turn, does not purport to include every
conceivable representation concerning the mortgage loans that an

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investor might find important. Indeed, the Mortgage Loan
Schedule, which contained many of the alleged misstatements
concerning LTV/CLTV ratios and owner-occupancy statements, was
provided to investors "to buttress" these representations (2006-
FM2/2007-3 Compl. ¶ 35). To the extent relevant to the Series
2006-FM2 and Series 2007-3 complaints, section 8 reads as
follows:

"The Seller hereby represents and warrants to
the Purchaser that as to each Mortgage Loan
as of the Closing Date:

1. Information provided to the Rating
Agencies, including the loan level detail, is
true and correct according to the Rating
Agency requirements;

2. No fraud has taken place on the
part of the Mortgagor or any other party
involved in the origination or servicing of
the Mortgage Loan;

. . .

8. Any and all requirements of any
federal, state or local law including,
without limitation, usury, truth in lending,
real estate settlement procedures, consumer
credit protection, equal credit opportunity,
fair housing, predatory, fair lending or
disclosure laws applicable to the origination
and servicing of the Mortgage Loans have been
complied with in all material respects, and
the consummation of the transactions
contemplated hereby will not involve the
violation of any such laws;

. . .

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 - 7 - No. 39

14. There is no material default,
breach, violation event or event of
acceleration existing under the Mortgage or
the Mortgage Note and no event which, with
the passage of time or with notice and the
expiration of any grace or cure period, would
constitute a material default, breach,
violation or event of acceleration, and the
Seller has not, nor has its predecessors,
waived any material default, breach,
violation or event of acceleration;

. . .

29. The Mortgage File contains an
appraisal of the related Mortgaged Property
which was made prior to the approval of the
Mortgage Loan by a qualified appraiser, duly
appointed by the related originator and was
made in accordance with the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 and the Uniform
Standards of Professional Appraisal Practice;

. . .

40. No Mortgage Loan was selected from
the mortgage loans in the Seller's portfolio
in a manner so as to affect adversely the
interests of the Purchaser;

. . .

42. Each Mortgage Loan is and will be a
mortgage loan arising out of the originator's
practice in accordance with the originator's
underwriting guidelines;

43. As of the Closing Date, the Seller
has no knowledge of any fact that should lead
it to expect that the Mortgage Loan will not
be paid in full when due;

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 - 8 - No. 39

. . . ."

(MLPA § 8; see 2006-FM2/2007-3 Compl. ¶ 27).2

Just as important as what section 8 says is what it
does not say. Unlike some other MLPAs, section 8 does not contain
a direct representation that the Mortgage Loan Files, Mortgage
Loan Schedule or other loan-specific information sent to the
purchaser is true and accurate (cf. Morgan Stanley Mortgage Loan
Trust 2006-14SL v Morgan Stanley Mortgage Capital Holdings LLC,
2013 WL 4488367, at *2 [Sup Ct, New York County, Aug. 16, 2013];
Homeward Residential, Inc. v Sand Canyon Corp., 2014 WL 2510809,
at *2 [SD NY May 28, 2014]). Nor does section 8 contain a
representation as to the accuracy of the Prospectus Supplement
(cf. Ambac, 121 AD3d at 518; HSBC Bank USA, 2016 WL 6582406, at
*3). Finally, section 8 does not warrant anything about the loan-
level data alleged to have been misrepresented, such as owner-
occupancy status or LTV and CLTV ratios (cf. Blackrock Core Bond
Portfolio v U.S. Bank National Association, 165 F Supp 3d 80, 85
[SD NY 2016] ["Among the representations and warranties of the
seller in the MLPA are the following: . . . the mortgaged
properties are lawfully occupied as the principal residences of

2
This numbering is based on the Series 2006-FM2 MLPA; the
Series 2007-3 MLPA contains identical provisions, though the
numbering is different. "Seller" refers to defendant, as the
Sponsor of the securitizations. The "Purchaser" is the Depositor,
whose interests under the MLPA -- including the benefit of the
representations and warranties therein -- were transferred to
plaintiff, as trustee (see PSA § 2.01).

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 - 9 - No. 39

the borrowers unless specifically identified otherwise; . . .
[and] no loan has a loan to value ratio ('LTV') of more than
100%"]). In short, nothing in section 8 states that all of the
loan-level information provided to plaintiff -- such as the
LTV/CLTV ratios, owner-occupancy and borrower-specific data set
forth, as applicable, in the Mortgage Loan Files, Mortgage Loan
Schedule and Prospectus Supplement -- is true. It is section 7,
and section 7 alone, that furnishes such a warranty.

It is true that, as the majority explains, a breach of
section 8 can be inferred from the presence of such a
misstatement. However, that does not make it the same breach.
HSBC alleged, for instance, that, based on the inflated property
appraisals, there was "strong reason" to believe that the
appraisals were "biased and not independent" and therefore did
not conform either to federal guidelines or to the Uniform
Standards of Professional Appraisal Practice, breaching MLPA § 8
(29) (2006-FM2/2007-3 Compl. ¶ 45). But this is just an
inference; the mere presence of those inflated property values
does not categorically mean that the appraiser was biased or not
independent. Those misstatements can breach section 7 (which
prohibits the furnishing of such misstatements) without breaching
section 8 (which prohibits the inclusion in the Mortgage Loan
Files of nonconforming appraisals), and the first breach is not
duplicative of the second.

The majority does not apparently dispute the

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 - 10 - No. 39

observation "that the mere presence of inflated property values,
if not based on biased appraisals, could violate the No Untrue
Statement Provision and not MLPA § 8 (29)" (majority op at 11-12
[emphasis omitted]). However, the majority suggests that HSBC
pleaded itself out of what would otherwise be a valid claim under
the No Untrue Statement Provision; i.e., that, to prevail on the
claims "actually alleged," HSBC must show that the appraisals
were nonconforming (id. at 12). But the claimed breach of MLPA §
8 (29) is not the furnishing of inaccurate appraisals to HSBC; it
is the bias and non-independence of the appraisers responsible
for them, for which the misstatements in the loan files are but
one piece of evidence. HSBC's failure to prevail on its
additional claim that the appraisals were nonconforming would not
defeat its well-pleaded claim that the inaccuracies in the
appraisals themselves violated the No Untrue Statement Provision.

In a similar vein, HSBC infers that the misstated
CLTV and owner-occupancy figures indicated a deviation from
underwriting standards established in the industry, breaching
MLPA § 8 (42) (see 2006-FM2/2007-3 Compl. ¶¶ 57, 58), and that
other misstatements in the Mortgage Loan Files "strongly suggest
fraud by either or both the Mortgagor and the originator in the
underwriting of the loan," in breach of MLPA § 8 (2) (id. ¶ 61).
But again, the very presence of those misstatements in the
written documents furnished to the trust is a breach of section
7, even if they are the predicate from which a different breach

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 - 11 - No. 39

of section 8 (such as non-conformity with applicable underwriting
guidelines, or the presence of fraud) can be inferred. Indeed,
from the pleadings, it appears that some of the misstated CLTV
ratios did not rise to the level of a breach of appraisal and
underwriting guidelines. In the Series 2006-FM2 loan pool, there
were allegedly 1,751 mortgage loans with "materially understated"
CLTV ratios, even though only 1,463 of them were so inaccurate
that they "warrant[ed] the conclusion that serious errors
occurred in the appraisal process" in violation of MLPA § 8 (42)
(2006-FM2 Compl. ¶¶ 50, 57).

In addition, plaintiff alleges that, inasmuch as the
understated LTV/CLTV ratios and inaccurate owner-occupancy
statements were provided to the rating agencies through their
inclusion in the Mortgage Loan Schedule and (as to the LTV/CLTV
ratios) the Prospectus Supplement, defendant violated MLPA § 8
(1) (see 2006-FM2/2007-3 Compl. ¶¶ 50, 53). But the delivery of
such false statements to the rating agencies prior to closing is
an entirely separate act from its delivery to the trust, and the
mechanism by which the trust is harmed in each case is different.
While the Mortgage Loan Schedule is provided to investors to
support the section 8 representations, it is provided to the
rating agencies as a basis for the rating assigned to the RMBS,
which ultimately influences the price at which they are sold (see

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 - 12 - No. 39
id. ¶ 35).3

3
The majority's concern that this reading of HSBC's
pleadings is "untethered" from the parties' contentions during
the course of this litigation is unfounded. The complaints
explicitly pleaded that defendant made false statements, not only
in MLPA § 8, but in the documents furnished to the trust
themselves:

"D. Breaches of the No Untrue Statement
Covenant

64. In Section 7(5) of the MLPA, Nomura
represented that '[t]he written statements,
reports and other documents prepared and
furnished or to be prepared and furnished
pursuant to this Agreement or in connection
with the transactions contemplated hereby
taken in the aggregate do not contain any
untrue statement of material fact or omit to
state a material fact necessary to make the
statements contained therein not misleading.'
In addition to the pervasive breaches of the
[section 8] Mortgage Representations, the
Investigation revealed that numerous
documents assembled and furnished by Nomura
to the Trust -- including the Mortgage Loan
Files, Mortgage Loan Schedule, and Prospectus
Supplement -- are rife with material
misrepresentations, misstatements and
omissions"

(2006-FM2 Compl. ¶ 64 [emphasis added]; accord 2007-3 Compl. ¶
64). This "[i]n addition to" language alerts us that HSBC is not
merely grounding its No Untrue Statement Provision claims on a
theory of "pervasive breach" of section 8, but also on the
misstatements furnished to it in the accompanying documentation,
which misstatements are described elsewhere in the pleadings (see
2006-FM2/2007-3 ¶¶ 45, 50, 53, 57, 58, 60 [describing loan-level
inaccuracies]; see also id. ¶¶ 5, 47, 50, 60 [explaining that the
data alleged to have been misrepresented are contained in the
Mortgage Loan Files, Mortgage Loan Schedule and Prospectus
Supplement]; ¶ 35 ["The No Untrue Statement Covenant applies to,
among many other things, the Mortgage Loan Files and the Mortgage
Loan Schedule, both of which were critical components of the

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 - 13 - No. 39

Securitization"]).

This argument was considered by Supreme Court insofar as its
dismissal orders incorporated its earlier decision in Nomura
Asset Acceptance Corp. Alternative Loan Trust, Series 2006-S4 v
Nomura Credit & Capital, Inc. (2014 WL 2890341 [Sup Ct, New York
County, Jun. 26, 2014]; see Nomura Home Equity Loan, Inc., Series
2006-FM2 v Nomura Credit & Capital, Inc., 2014 WL 12698722 [Sup
Ct, New York County, Jul. 17, 2014] [dismissing the third cause
of action "(o)n the authority and reasoning relied on" in Nomura
Asset Acceptance Corp. Alternative Loan Trust, Series 2006-S4];
Nomura Home Equity Loan, Inc., Series 2007-3 v Nomura Credit &
Capital, Inc., 2014 WL 12698720 [Sup Ct, New York County, Jul.
17, 2014] [same]).

"The complaint does not allege any breach of
the No Untrue Statement provision that was
not also a breach of the Mortgage
Representations to which the sole remedy
provisions apply. Rather, the complaint
pleads that pervasive breaches of the
Mortgage Representations breached the No
Untrue Statement Provision. The only other
alleged breach of the No Untrue Statement
provision is that 'the Mortgage Loan Schedule
did not contain true and accurate loan-level
information regarding the Mortgage Loans.' As
described in the complaint, however, the
Mortgage Loan Schedule 'identifies and
provides detailed information about the
characteristics of each Mortgage Loan,
including the loan-to-value ratio, occupancy
status, and borrower's credit score.' The
statements in the Mortgage Loan Schedule
about the characteristics of the mortgage
loans thus duplicate the Mortgage
Representations about the characteristics of
the loans"

(Nomura Asset Acceptance Corp. Alternative Loan Trust, Series
2006-S4, 2014 WL 2890341, at *12 [emphasis added] [citations
omitted]). As explained above, however, this reasoning was based
on a flawed reading of the MLPAs at issue here, as statements
concerning LTV ratios, occupancy status and credit score do not

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 - 14 - No. 39

"Historically, we have been 'extremely reluctant to
interpret an agreement as impliedly stating something which the
parties have neglected to specifically include'" (ACE Sec. Corp.,
Home Equity Loan Trust, Series 2006-SL2 v DB Structured Prods.,
Inc., 25 NY3d 581, 597 [2015], quoting Vermont Teddy Bear Co. v
538 Madison Realty Co., 1 NY3d 470, 475 [2004]). A contractual
provision limiting certain enumerated remedies should not be
expanded to preclude other remedies not enumerated (see Biotronik
A.G. v Conor Medsystems Ireland, Ltd., 22 NY3d 799, 805 [2014]).
Under the well-settled canon of expressio unius est exclusio
alterius (see Quadrant Structured Products Co., Ltd. v Vertin, 23
NY3d 549, 560 [2014]; Two Guys from Harrison-N.Y., Inc. v S.F.R.
Realty Associates, 63 NY2d 396, 403-404 [1984]; Woodmere Academy
v Steinberg, 41 NY2d 746, 751 [1977]), and in the absence of any
broader language like that in Ambac (121 AD3d at 518), the sole
remedy clause applies to every claim arising under a specific
subsection of section 8, but not to those that merely fall within
that section's penumbras.

The majority's holding puts similarly-situated

necessarily "duplicate" section 8.

HSBC raised this point in its brief before this Court (see
Resp. Br. at 18-19) and at oral argument, citing specifically to
paragraph 64 of the 2006-FM2/2007-3 complaints (reproduced above)
when asked where HSBC alleged a breach of section 7 that was not
also a breach of section 8.

- 14 -
 - 15 - No. 39
plaintiffs in an unenviable dilemma. If they plead too little,
they may not be able to make out a breach of section 8 or avail
themselves of the repurchase protocol, as "bare legal
conclusions" are not entitled to consideration (Connaughton v
Chipotle Mexican Grill, Inc., 29 NY3d 137, 141 [2017]). If they
plead too much, they will have boxed themselves out of an
otherwise valid claim under the No Untrue Statement Provision,
though the claim could be supported by a reasonable view of the
facts. Even though HSBC may have been furnished with
misstatements that breached section 7 but not section 8, and even
though HSBC affirmatively pleaded that these misstatements
violated section 7, the majority's holding today leaves it
without a remedy for those misstatements. As a matter of
doctrine, this position is untenable.

Accordingly, HSBC adequately pleaded breaches of the No
Untrue Statement Provision that do not duplicate breaches of
section 8, and which should therefore survive defendant's motion
to dismiss (see Campaign for Fiscal Equity, Inc. v State, 86 NY2d
307, 318 [1995] ["If we determine that the plaintiffs are
entitled to relief on any reasonable view of the facts stated,
our inquiry is complete and we must declare the complaint legally
sufficient"]; accord Aristy-Farer v State, 29 NY3d 501, 509
[2017]).

III.

I would therefore modify so much of the order of the

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 - 16 - No. 39
Appellate Division as denied defendant's motions to dismiss the
third cause of action under the Series 2006-FM2 and Series 2007-3
complaints, to permit those claims to proceed solely to the
extent that they are not based on statements contained in
specific subsections of section 8. I am otherwise in agreement
with the majority opinion.

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Nomura Home Equity v Nomura Credit

No. 39

RIVERA, J.(dissenting):

Plaintiff, HSBC Bank USA, National Association, as
trustee of four residential mortgage loan securitization trusts,
sued defendant, Nomura Credit & Capital, Inc., for
misrepresentations regarding business practices and certain
securitization transactions. Liberally reading those claims, as
we must (AG Capital Funding Partners, L.P. v State St. Bank &
Trust Co., 5 NY3d 582, 591 [2005]), plaintiff sufficiently sets
forth allegations that defendant mischaracterized the
securitization process in violation of a clause in section 7 of
the governing mortgage loan purchase agreements (MLPA), which the
parties call the "No Untrue Statement Provision." These
allegations are independent and distinct from claims based on
specific characteristics and idiosyncracies of any particular
individual mortgage loan, which would be subject to the "Sole
Remedy Provision" contained in section 8 of the MLPA and

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 - 2 - No. 39
foreclose plaintiff's claims for general damages under the No
Untrue Statement Provision. Contrary to the majority, I conclude
that plaintiff's complaints sufficiently plead cognizable claims
for damages based on breaches of section 7.

I.

These appeals from four orders involving separate
securitizations are yet another installment in a series of
lawsuits spawned by the financial crisis that began in 2007.1
Like many of the lawsuits prior, this involves claims of
widespread misrepresentations and bad business practices in the
residential mortgage-backed securities (RMBS) industry, behavior
that resulted in huge financial losses (see e.g. Oddo Asset Mgmt.
v Barclays Bank PLC, 19 NY3d 584 [2012]; Bank of New York Mellon
v WMC Mortg., LLC, 151 AD3d 72 [1st Dept 2017]; Loreley Fin.
(Jersey) No. 3, Ltd. v Morgan Stanley & Co. Inc., 146 AD3d 683
[1st Dept 2017]; Deutsche Bank Nat. Tr. Co. v Flagstar Capital
Markets Corp., 143 AD3d 15 [1st Dept 2016]; U.S. Bank Nat. Ass'n
v GreenPoint Mortg. Funding, Inc., 147 AD3d 79 [1st Dept 2016];

1
This consolidated appeal involves four separate actions
commenced by HSBC on behalf of four separate mortgage loan trusts
trusts known as Series 2006 FM-2, Series 2007-3, Series 2006-AF
2, and Series 2007-2. The trusts were managed by plaintiff-
respondents HSBC on behalf of Nomura Home Equity and Nomura Asset
Acceptance Corporation. Trusts Series 2006 FM-2, Series 2007-3,
and Series 2007-2 belong to Nomura Home Equity, and trust Series
2006 AF-2 belongs to Nomura Asset Acceptance Corporation.

- 2 -
 - 3 - No. 39
Morgan Stanley Mortg. Loan Tr. 2006-13ARX v Morgan Stanley Mortg.
Capital Holdings LLC, 143 AD3d 1 [1st Dept 2016]; IKB Int'l S.A.
v Morgan Stanley, 142 AD3d 447 [1st Dept 2016]; ACE Sec. Corp. v
DB Structured Prod., Inc., 25 NY3d 581 [2015]; Bank of N.Y.
Mellon v WMC Mtge., LLC, 136 AD3d 1 [1st Dept 2015], affd 28 NY3d
1039 [2016]; Ambac Assurance Corp. v EMC Mortg. LLC, 121 AD3d 514
[1st Dept 2014]; CIFG Assur. N. Am., Inc. v Goldman, Sachs & Co.,
106 AD3d 437 [1st Dept 2013]; MBIA Ins. Corp. v Credit Suisse
Sec. (USA) LLC, 103 AD3d 486 [1st Dept 2013]; MBIA Ins. Corp. v
Countrywide Home Loans, Inc., 87 AD3d 287 [1st Dept 2011]). As
in numerous RMBS cases, plaintiff alleges misconduct across
various, sophisticated investment and banking entities, both
domestic and international (see e.g. Morgan Stanley Mortg. Loan
Tr. 2006-13ARX v Morgan Stanley Mortg. Capital Holdings LLC, 143
AD3d 1, 8–9 [1st Dept 2016] ["(W)e have recognized that
allegations of serious and pervasive misrepresentations regarding
the level of risk in an investment with widespread, massive
failures will support a claim for contractual gross negligence.
In other contexts, we have recognized that this type of alleged
conduct in substantially similar investments would support a
claim of fraud" (citations omitted)]).

The instant appeals involve the securitization of RMBS
by defendant. Securitization is a method by which several
mortgage loans are transferred into a trust that issues debt
securities to investors. As underlying mortgages are paid off by

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 - 4 - No. 39
their respective borrowers, the proceeds are used to make
payments on the debt securities issued to investors in accordance
with a priority scheme provided for in the securitization
documents. The process begins with banks lending to individual
borrowers. Next, a "Sponsor" reviews the loan origination files
(including borrowers' applications), selects and acquires loans,
and sells those loans to an entity known as the "Depositor." The
sale agreement between the Sponsor and the Depositor is known as
a Mortgage Loan Purchase Agreement (MLPA). The Depositor
transfers (or "deposits") the loans into a trust -- which is
controlled by a "Trustee" for the benefit of its security holders
-- in exchange for debt securities in the trust. The agreement
governing the Depositor's transfer of the loans to the trust in
exchange for debt securities is the "Pooling and Service
Agreement" or "PSA," which is entered into between, among other
parties, the Sponsor, Depositor and Trustee. Ultimately, the
Depositor sells the debt securities (known as certificates) to
investors (the certificate holders) (Nomura Home Equity Loan,
Inc. v Nomura Credit & Capital, Inc., 133 AD3d 96, 99 [1st Dept
2015]; Ace Securities Corp. Home Equity Loan Trust, Series 2007-
HE3 ex rel. HSBC Bank USA, Nat. Ass'n v DB Structured Products,
Inc., 5 F Supp 3d 543, 547-48 [SD NY 2014]).

Investors, as certificate holders, thereby receive
distributions of principal and interest income collected on the
mortgage loans held by the trust. Securitization thus enables

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 - 5 - No. 39
financial diversification and transfer of risk from mortgage
lenders to investors. By pooling loans, securitization can make
for an attractive investment. However, investors rely on the
sponsor's warranties and representations -- as the entity
responsible for assessing and selecting the loans to be included
in the trust -- to ensure that the loan pools are as they purport
to be.2 Indeed, the purpose of securitization is to convert
loans with their attendant individualized risks, into tradeable
securities. Plaintiff's complaints must be considered in the
context of this market reality.

II.

Defendant is the sponsor of four mortgage loan trusts
in these appeals. Plaintiff is the trustee of each of those
trusts and, under each applicable PSA, the assignee of the
depositor's rights under the MLPA "to the extent of the Mortgage
Loans sold" in connection with the applicable trust. Plaintiff
sued defendant for breaches of the MLPA and PSA associated with
each trust, including causes of action for damages for breach of

2
"Secondary market purchasers also demand contractual
protections to mitigate the [high-risk loans] problem . . .
[I]nstitutional investors usually have to make snap judgments
whether to invest without time for any substantive due diligence;
most simply rely on lenders, underwriters, and rating agencies"
(Kathleen C. Engel & Patricia A. McCoy, Turning A Blind Eye: Wall
Street Finance of Predatory Lending, 75 Fordham L. Rev. 2039,
2061, 2068 [2007] [citation omitted]).

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 - 6 - No. 39
section 7 of the MLPAs. Defendant moved to dismiss the
complaints pursuant to CPLR 3211 (a)(1) and (7). Supreme Court
granted defendant's motions to dismiss with respect to the causes
of action for damages under section 7 of the MLPA (see Nomura
Home Equity Loan Inc., Series 2007-3 v Nomura Credit & Capital,
Inc., 2014 WL 12698720 [Sup Ct, New York County, July 17, 2014];
Nomura Home Equity Loan Inc., Series 2006-FM2 v Nomura Credit &
Capital, Inc., 2014 WL 12698722 [Sup Ct, New York County, July
17, 2014]; Nomura Asset Acceptance Corp., Mortgage Pass-Through
Certificates, Series 2006-AF2 v Nomura Credit & Capital, Inc.,
2014 NY Slip Op 33609[U] [Trial Order], 2014 WL 10646128 [Sup Ct,
New York County, July 18, 2014]; Nomura Home Equity Loan, Inc.,
Home Equity Loan Trust, Series 2007-2 v Nomura Credit & Capital,
Inc., 2014 NY Slip Op 32604[U] [Trial Order], 2014 WL 5243512
[Sup Ct, New York County, July 18, 2014]). In a consolidated
appeal, the Appellate Division modified and affirmed as modified,
holding that the motion court erred in disallowing the section 7
claims (see Nomura Home Equity Loan, Inc. v Nomura Credit &
Capital, Inc., 133 AD3d 96 [1st Dept 2015]). I disagree with the
majority that those claims should be dismissed.

These appeals involve the interplay of the following
sections of the securitization agreements. Section 7 (5) of the
MLPA, the Untrue Statement Provision, assures investors that:

"This Agreement does not contain any untrue
statement of material fact or omit to state a
material fact necessary to make the

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 - 7 - No. 39
statements contained herein not misleading.
The written statements, reports and other
documents prepared and furnished or to be
prepared and furnished by [Nomura] pursuant
to this Agreement or in connection with the
transactions contemplated hereby taken in the
aggregate do not contain any untrue statement
of material fact or omit to state a material
fact necessary to make the statements
contained therein not misleading."

Section 8 of the MLPA contains 62 representations and
warranties, each of which is made "as to each Mortgage Loan."
These include the requirement that Nomura provide rating agencies
with correct information (MLPA § 8 [1]), a warranty against a
default on an underlying mortgage (MLPA § 8 [14]), and a
representation that each mortgage loan was subject to an
independent appraisal before it was approved (MLPA § 8 [29]).

Section 9 of the MLPA prescribes remedies in the event
of "a breach of any of the representations and warranties
contained in Section 8 that materially and adversely affects the
value of any Mortgage Loan or the interest therein of the
Purchaser or the Purchaser's assignee, transferee or designee"
(MLPA § 9 [a]). Under this section, unless defendant can cure
the defect within a contractually prescribed period of time,
defendant must either repurchase the affected mortgage loan or
remove and substitute that mortgage loan from the trust (see
id.). Further, "the obligations of [defendant] set forth in this
Section 9 to cure or repurchase a defective Mortgage Loan . . .
constitute the sole remedies . . . against [defendant] respecting

- 7 -
 - 8 - No. 39
a missing document or a breach of the representations and
warranties contained in Section 8" (id. § 9 [c]). However, MLPA
section 13 states that "[a]ll rights and remedies . . . under
this Agreement are distinct from, and cumulative with, any other
rights or remedies under this Agreement or afforded by law or
equity and all such rights and remedies may be exercised
concurrently, independently or successively" (MLPA § 13).

Section 2.03 (b) of the PSA contains customary
transaction-wide representations similar to those contained in
section 7 of the MLPA (none of which are implicated in this
case). Unlike section 7, however, PSA § 2.03 (b) does not
contain a No Untrue Statement Provision. Instead, section 2.03
(b) of the PSA provides that in the event that a party discovers
a breach of the loan-specific representations and warranties set
forth in section 8 of the MLPA, or of certain transaction-wide
representations in PSA § 2.03 (b), and the breach "materially and
adversely affects the interests of the Certificate holders in any
Mortgage Loan," defendant must either repurchase or substitute
the affected mortgage loan. As in section 9 of the MLPA, this
repurchase-or-substitution covenant "shall constitute the sole
remedies . . . respecting such breach."

Unlike section 8 of the MLPA and section 2.03 (b) of
the PSA, which specifically limit remedies for claims arising
from violations of the warranties within those provision, section
7 has no such limitations on its remedy or scope. It clearly

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 - 9 - No. 39
covers any and all misrepresentations related to the entire
agreement, meaning the entire transaction. Thus, as is
undisputed by the parties, where there is a breach of the
representations and warranties of section 8 concerning an
individual mortgage loan, plaintiff is limited to the sole remedy
of cure or repurchase. Yet that remedy is not exclusive of other
available remedies for different breaches of the securitization
agreement.

III.

A. Applicable Legal Standards on Defendant's Motion to Dismiss

In assessing the adequacy of a "motion to dismiss
pursuant to CPLR 3211, the pleading is to be afforded a liberal
construction. We accept the facts as alleged in the complaint as
true, accord plaintiffs the benefit of every possible favorable
inference, and determine only whether the facts as alleged fit
within any cognizable legal theory" (Leon v Martinez, 84 NY2d 83,
87–88 [1994] [citation omitted]); see also AG Capital, 5 NY3d at
591 [internal quotation marks and citations omitted]; Al-Rushaid
v Pictet & Cie, 28 NY3d 316, 327 [2016]). "Unlike on a motion
for summary judgment, where the court 'searches the record and
assesses the sufficiency of the parties' evidence,' on a motion
to dismiss the court 'merely examines the adequacy of the
pleadings'" (Davis v Boeheim, 24 NY3d 262, 268 [2014], quoting

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 - 10 - No. 39
State of New York v Barclays Bank of N.Y., 151 AD2d 19, 21 [3d
Dept 1989], aff'd 76 NY2d 533 [1990]). Whether the plaintiff
"can ultimately establish its allegations is not part of the
calculus in determining a motion to dismiss" (EBC I, Inc. v
Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]), and therefore a
plaintiff opposing a motion to dismiss need not prove entitlement
to recovery.

The moving party carries a heavy burden in a CPLR 3211
(a) (1) claim, as it cannot prevail unless "the documentary
evidence conclusively refutes plaintiff's . . . allegations" (AG
Capital, 5 NY3d at 591 [reversing grant of motion to dismiss];
see also J.P. Morgan Sec. Inc. v Vigilant Ins. Co., 21 NY3d 324,
334–335 [2013]), "conclusively establish[ing] a defense to the
asserted claims as a matter of law" (Carlson v American Int'l
Grp., Inc., No. 47, 2017 WL 5557948 [2017] [holding defendants
failed to show plaintiff had not "manifest(ed) any cause of
action cognizable at law" or submitted "documentary evidence (to)
conclusively establish a defense to the asserted claims as a
matter of law" to satisfy 3211 (a) (1) (citations omitted)]).
Further, in assessing motions pursuant to CPLR 3211 (a) (7), "any
deficiencies in the complaint may be amplified by supplemental
pleadings and other evidence" (AG Capital, 5 NY3d at 591
[citation omitted]), as "the criterion is whether the proponent
of the pleading has a cause of action, not whether he has stated
one" (Carlson, No. 47, 2017 WL 5557948, quoting Leon, 84 NY2d at

- 10 -
 - 11 - No. 39
88). Courts should deny motions to dismiss in breach-of-contract
claims as premature when factual development may impact their
resolution (see e.g. J.P. Morgan Sec. Inc. v Vigilant Ins. Co.,
21 NY3d 324 [2013] [reversing dismissal of a breach-of-contract
claim because application of defense depended on the facts]).

Here, plaintiff alleges various breaches of the
securitization agreements. Under our well-established rules of
contract interpretation, courts look to the plain language of
contracts when interpreting their meaning (see Metropolitan Life
Ins. Co. v Noble Lowndes Int'l, Inc., 84 NY2d 430 [1994]; W.W.W.
Assoc. v Giancontieri, 77 NY2d 157, 162 [1990]). A contract
should be read as a fully integrated whole, with no provision
rendered meaningless (see Bombay Realty Corp. v Magna Carta,
Inc., 100 NY2d 124, 127 [2003] ["All parts of a contract must be
read in harmony to determine its meaning."]; Ronnen v Ajax Elec.
Motor Corp., 88 NY2d 582, 589 [1996] ["We have long and
consistently ruled against any construction which would render a
contractual provision meaningless or without force or effect."]).
"Where two seemingly conflicting contract provisions reasonably
can be reconciled, a court is required to do so and to give both
effect" (Meehan v County of Suffolk, 144 AD3d 642, 644 [2d Dept
2016]; accord National Conversion Corp. v Cedar Bldg. Corp., 23
NY3d 621, 626 [1969] ["All parts of an agreement are to be
reconciled, if possible, in order to avoid inconsistency."]).

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B. Plaintiff's MLPA § 7 Transaction-Wide Misrepresentation
Claims

Plaintiff asserts that it sufficiently alleges a
violation of the No Untrue Statements Provision of section 7 in
connection with all four securitizations. It further claims that
due to the violations, it may seek damages sounding in breach of
contract. The majority rejects this view of the complaints and
instead adopts defendant's argument that plaintiff's claims
amount to violations of section 8, rather than section 7. As
such, plaintiff would be limited to the sole remedies of
repurchase or cure (majority op at 11). I disagree. Plaintiff's
allegations of transaction-wide misrepresentations concerning the
respective loan pools are not mere duplicative recitations of
breaches of section 8 warranties and representations. Instead,
plaintiff's section 7 claims concern defendant's
characterizations, through its statements and documentation, of
the securitizations as suitable investment opportunities, the
reliability of defendant's business practices, and the nature and
quality overall of the loan pools. The misrepresentations
alleged by plaintiff as violations of the No Untrue Statement
Provision go to the core of the securitizations.

For example, plaintiff alleges transaction-wide
misrepresentations and misleading omissions in certain documents
furnished by defendant as part of the securitization. These
included false statements about defendant's business operations,

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loan underwriting, and quality control procedures contained in
the Prospectus Supplement, as well as misrepresentations of the
loan pool's overall characteristics, owner-occupancy status, and
borrower credit scores in the Mortgage Loan Schedule. Section 7,
which assures the investor that the furnished documents contain
no untrue statements and that the transactions in the aggregate
are not misleading, applies to these documents and the statements
contained therein.

Further in support of its claims, plaintiff alleged
that the defects in the mortgage loans were so pervasive in
nature, numbering in the thousands and constituting between 45
percent and 83 percent of the samples reviewed, that these
defects impaired plaintiff's interests in the loan pool as an
entirety, in breach of the No Untrue Statement Provision. For
example, plaintiff alleges that "revelations regarding
[defendant's] mortgage loan securitization practices indicate,"
"given the thousands of breaches identified to date and the
losses suffered by the Trust," that these "breaches pervade the
entire Trust." One complaint alleges:

"The massive number of defective loans that
Nomura sold to the Trust far exceeds anything
contemplated by the agreements. A handful of
breaches (and a handful of cures,
substitutions, and/or repurchases) in a pool
of 2,717 mortgage loans is perhaps to be
expected. Some 1,600 separate breaches, many
of which Nomura discovered prior to closing,
are not."

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In contrast, section 8 representations and warranties do not
assure the absence of systemic problems with the securitization.
Nor do some small number of individual defective loans
destabilize the loan pools or exponentially enhance the
investors' risks, as plaintiff alleges occurred with these
securitizations.

Moreover, sections 8 and 9 of the MLPA are both written
in the singular and refer exclusively to breaches of the
representations and warranties contained in section 8. Section 8
states that the representations and warranties therein apply "as
to each Mortgage Loan," while section 9 limits the sole remedies
of cure and repurchase of "a defective Mortgage Loan . . .
respecting a missing document or breach of the representations
and warranties contained in section 8." Section 2.03 of the PSA
also provides that the sole remedy is limited to section 8
violations and not to breaches of any other provision: section
2.03(c) refers back to the breach of any representation or
warranty in section 8 "that materially and adversely affects the
interest of the Certificate holders in any Mortgage Loan."
Additionally, section 13 of the MLPA states that "[a]ll rights
and remedies of the [Depositor] under this Agreement are distinct
from, and cumulative with, any other rights or remedies under
this Agreement or afforded by law or equity" (MLPA § 13). This
provides for aggregation, and the parties must have anticipated
potential claims based on combined misrepresentations and loan

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defects. If the parties meant the sole remedy clause to apply to
transaction-wide misrepresentations they would have said so.
They did not, and, as a consequence, these sophisticated parties
are bound to the language of the contract and their bargained for
allocation of risk (Metropolitan Life Ins., 84 NY2d at 436).

Contrary to the majority's assertion, this
interpretation of the interplay among the PSA and sections 7 and
8 of the MLPA does not render the sole remedy clause meaningless
or superfluous. The limited remedy contained in that clause is
available on an ad hoc, loan-specific basis. The flaw in the
majority's analysis is laid bare by the fact that plaintiff
cannot claim a systemic problem with the securitization loan pool
by pointing to any particular loan's failure, which of course is
necessary to constitute a breach of the warranties and
representations in section 8. Inversely, the fact that
widespread loan defects may serve as evidence of plaintiff's
transaction-based claims is of no consequence at the pleading
stage, where the inquiry is solely whether plaintiff has alleged
facts supporting any cognizable theory for relief. Notably,
although the majority's approach would permit claims under
section 8, it would render the No Untrue Statement Provision
relatively meaningless and perversely incentivize the very
abusive business practices that led to the financial crash.

Ultimately, if the risk of the loans in the pool had
been correctly calculated, then it would make sense for defendant

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to repurchase or replace loans that violate the warranties, as
this would be a small number. Yet, this scheme does not address
large scale breaches where defendant intentionally manipulated
the risk assessment by waiving in non-conforming loans.
Interpreting section 7 to encompass transaction-wide claims
furthers the purpose of the securitization because investors
would not buy in if they could not rely on defendant's business
practices to adequately document and assess risk.

As plaintiff asserts:

"Given its unique vantage point as the
securitization sponsor with control over
which of the loans were selected and with
access to the underwriting information
pertaining to each such loan, Nomura was the
only transaction party that was in a position
to accept the risks associated with defects
in the Mortgage Loans, including defects in
the underwriting process itself. Moreover,
it was market practice for responsible
parties -- such as the securitization sponsor
-- to accept those risks, and Nomura did so."

Without assurances as to the characteristics and quality of the
individual loans, the overall market strength of the loan pools,
and the nature of the practices governing the securitization
process, investors would not purchase the debt securities:
because "investors were unable to conduct loan-by-loan due
diligence before purchasing the Certificates," if Nomura had not
warrantied the pools, "the Securitization would not have been
consummated as investors had no other means to independently
verify the quality of the Mortgage Loan collateral."

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C. Plaintiff's Other MLPA § 7 Claims

I join section II of Judge Feinman's dissent and agree
with his comprehensive analysis of the section 7 claims that are
not subject to the Sole Remedy Provision. Even under the
majority's interpretation of the MLPA and PSA, several of the
loan-level claims alleged by plaintiff fall outside the scope of
the Sole Remedy Provision. Specifically, plaintiff alleges that,
"[i]n addition to the pervasive breaches of the [section 8]
Mortgage Representations, the Investigation revealed that
numerous documents assembled and furnished by [defendant] to the
Trust -- including the Mortgage Loan Files, Mortgage Loan
Schedule, and Prospectus Supplement -- are rife with material
misrepresentations and omissions" in violation of the No Untrue
Statement Provision. Additionally, plaintiff asserts that the
Mortgage Loan Files contained "many misrepresentations of
critical facts about borrowers including misrepresentations of
income and employment, understatement of existing debt
obligations, misstatement of the occupancy status of the
property, and misstatements of other basic facts in the Mortgage
Loan Files" (id. ¶ 60).

Contrary to the majority's narrow interpretation of the
complaint (majority op at 9-11), such claims may be read as
asserting breaches of section 7 that do not necessarily breach
the representations and warranties contained in section 8.
Neither law nor logic support the majority's contention that the

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assertion of this category of section 7 claims would render it
impossible for plaintiff to establish a claim based on a section
8 breach (majority op at 11). As Judge Feinman explains in
detail, plaintiff alleges statements that are untrue but that may
not breach a section 8 representation as well (Feinman, J.
dissenting op at 4-15).3 These are sophisticated parties, who
would not have included section 7 if it merely repeated the
representations of section 8, nor, by the majority's reading,
foreclosed a claim based on an untrue statement in order to
preserve a claim under section 8. The majority's antagonistic
interpretation is contrary to our pleading rules and ignores that
the parties could not have set forth every potential untrue
statement in section 8's warranties.

It is impossible at the pleading stage to determine
whether plaintiff will prove these section 7 claims.
Nevertheless, on a motion to dismiss the question is not whether
plaintiff will ultimately prevail but whether plaintiff has
alleged a cognizable claim (Carlson, No. 47, 2017 WL 5557948).
"If the court finds that the plaintiff is entitled to recover
upon any reasonable view of the stated facts, its inquiry is

3
For example, as Judge Feinman discusses (Feinman, J.
dissenting op at 9), the plaintiff claims there was "strong
reason" to believe that the property appraisals were "biased and
not independent" because the appraisals were inflated. While the
mere inclusion of inflated property values would breach section
7, only if the appraiser were actually biased or not independent
would section 8 (which prohibits the inclusion of biased
appraisals in the Mortgage Loan Files) be breached.

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complete and it must declare the complaint to be legally
sufficient" (219 Broadway Corp. v Alexander's, Inc., 46 NY2d 506,
509 [1979]; see also Davis v Boeheim, 24 NY3d 262, 268 [2014]).
Therefore, affording the pleading a liberal construction,
accepting the facts alleged as true, and according plaintiff the
benefit of every possible favorable inference, plaintiff has
sufficiently asserted a claim for relief based on alleged untrue
statements contained in various documents submitted to the Trust.
Since defendant failed to "conclusively establish[] a defense to
the asserted claims as a matter of law" (Carlson, No. 47, 2017 WL
5557948 [citation omitted]), it was error to dismiss plaintiff's
causes of action for damages based on alleged breaches of section
7 that are distinct from breaches of section 8.

IV.
For the reasons I have discussed, plaintiff's claims
for relief from violations of the No Untrue Statement Provision
are properly pleaded. The Appellate Division order should be
affirmed, and the certified question answered in the affirmative.
* * * * * * * * * * * * * * * * *
Order, insofar as appealed from, modified, without costs, in
accordance with the opinion herein and, as so modified, affirmed
and certified question answered in the negative. Opinion by
Judge Stein. Judges Fahey, Wilson, Centra and Balkin concur.
Judge Feinman dissents in part in an opinion, in which Judge
Rivera concurs in part in a separate dissenting opinion. Chief
Judge DiFiore and Judge Garcia took no part.

Decided December 12, 2017

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