If Equitable Relief is Contractual Sole Remedy, Damages Awardable if Equitable Relief Impossible

On October 13, 2015, the First Department issued a decision in Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc., 2015 NY Slip Op. 07458, holding that even where a contract limits remedies to equitable relief, a plaintiff was entitled to damages when equitable relief was unavailable, explaining:

The crux of the dispute between these parties in all these cases concerns the scope and application of the "sole remedy" language set forth above. Defendant contends that, in the remedy limitations contained in sections 9(c) of the MLPAs and 2.03 of the PSAs, that being repurchase or cure of the defective loan, the motion court erred by allowing plaintiffs to seek monetary damages if cure or repurchase of a defective mortgage loan was impossible. Under defendant's interpretation of the "sole remedy" clause, loans that have been foreclosed upon or liquidated cannot be repurchased and, by agreeing to those provisions, plaintiff accepted the risk of loss such an event would entail. However, such an interpretation would leave plaintiffs without a remedy with respect to those loans, as their only recourse would be to commence an action for specific performance, which would be impossible to fulfill. The present state of the law does not support defendant's contention.

New York law has long held that contracting parties are generally free to limit their remedies. A limitation on liability provision in a contract represents the parties' agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor. Therefore, by the terms of the "sole remedy" clause, the agreements limit plaintiffs to seeking an order of specific performance requiring defendant to repurchase the defective loans at the purchase price defined in those agreements, or to cure the defects in those loans.

However, specific performance is an equitable remedy. In the RMBS context, most courts have repeatedly held that while a provision providing for equitable relief as the sole remedy will generally foreclose alternative relief, where the granting of equitable relief appears to be impossible or impracticable, equity may award damages in lieu of the desired equitable remedy. Such a rule makes sense, for to hold otherwise would create a perverse incentive for a sponsor to fill the trust with junk mortgages that would expeditiously default so that they could be released, charged off, or liquidated before a repurchase claim is made.

(Internal quotations and citations omitted).