Trust Entitled to Fees in RMBS Put-Back Action Based on Representation and Warranty Breaches

On May 25, 2020, Justice Friedman of the New York County Commercial Division issued a decision in Part 60 Put-Back Litigation, 2020 NY Slip Op. 31693(U), holding that a trustee can obtain attorneys’ fees from a seller in an RMBS put-back action based on representation and warranty breaches, but not deciding whether fees would be available for a failure to notify claim, explaining:

As is typical in RMBS transactions, the Natixis 2007-HE2 Pooling and Servicing Agreement (PSA) sets forth a repurchase protocol in which, upon discovery by an enumerated party of a specified breach of a representation or warranty by the seller of the loans, the party discovering such breach shall give prompt written notice to the others. The repurchase protocol further provides that within 90 days of the earlier of either discovery by or notice to” the Unaffiliated Seller of any breach of a representation or warranty, the Unaffiliated Seller shall cure such breach (if the cure period is unexpired) or remove the loan from the trust. In the event that the period for cure and removal of a breaching mortgage loan has expired, the Unaffiliated Seller shall repurchase such Mortgage Loan at the Repurchase Price. The repurchase protocol then explicitly states that the obligation under this Agreement of any Person to cure, repurchase, or replace any Mortgage Loan as to which a breach has occurred and is continuing shall constitute the sole remedy against such Persons respecting such breach available to Certificateholders, the Depositor, the Unaffiliated Seller, the Custodian, the Securities Administrator or the Trustee on their behalf.. As relevant here, the PSA definition of Repurchase Price includes:

all expenses reasonably incurred by the Servicer, the Trustee, the Custodian, the Securities Administrator, the Master Servicer or the Unaffiliated Seller, as the case may be, in respect of a breach or defect, including, without limitation, expenses arising out of any such party’s enforcement of the Originator’s repurchase obligation.

Natixis is referred to in the PSA as the Unaffiliated Seller. As discussed further below, pursuant to PSA section 2.03 (d), Natixis has both an independent obligation to repurchase loans and a back-stop obligation in the event the originator fails to repurchase loans when required to do so under other governing agreements for the securitization.

In U.S. Bank N.A. v DLJ Mtge. Capital, Inc. (140 AD3d 518 [1st Dept 2016]) (DLJ), an appeal of two RMBS put-back actions, the Appellate Division held that a materially similar term in the PSAs evidenced the unmistakable intent of the parties to the PSAs that enforcement expenses to be reimbursed include attorney’s fees incurred in bringing these actions. The provision, as quoted more fully in the decision of this court, stated in pertinent part: The Seller shall promptly reimburse the related Servicer and the Trustee for any actual out-of-pocket expenses reasonably incurred by the related Servicer and the Trustee in respect of enforcing’ the repurchase remedy.

The Court further held that language requiring one party to indemnify the other for all expenses incurred in enforcement of the contract must include the expenses incurred in hiring an attorney.

A materially similar repurchase price definition was subsequently addressed by the Appellate Division in Deutsche Bank Natl. Trust Co. v EquiFirst Corp. (154 AD3d 605 [1st Dept 2017]) (EquiFirst). The Court again held that the provisions at issue reflected the unmistakable intent that plaintiff may recover its legal expenses incurred in enforcing the representations and warranties at issue. Most recently, in Matter of Part 60 Put-Back Litigation, the First Department upheld the trustee’s claim for attorney’s fees in a put-back action under a provision which, as described by the Court, authorized the trustee’s recovery of expenses for enforcement of remedies. Indeed, the Court noted that the defendant conceded that the trustee was entitled to attorney’s fees under DLJ.

On the above authority, the court holds that the Repurchase Price definition in the Natixis 2007-HE2 PSA similarly evidences the unmistakable intent of the contracting parties to provide for reimbursement of expenses, including attorney’s fees, incurred in respect of a breach or defect in a Mortgage Loan for which the Repurchase Price remedy is sought.

. . .

In this action, plaintiff Computershare asserts both breach of representation and warranty claims and failure to notify claims. On this motion, plaintiff does not state whether it seeks attorney’s fees and expenses, pursuant to the Repurchase Price definition, for both categories of claims. It is settled that the Repurchase Price remedy is available for timely breach of representation and warranty claims. The Appellate Division has held that failure to notify claims are not claims respecting a warranty breach subject to the sole remedy clause of the governing agreements, and that a seller’s failure to provide notice of material breaches it discovers in the loans states an independently breached contractual obligation, allowing a plaintiff to pursue separate damages. In addressing the sufficiency of the pleading of damages for a failure to notify claim, this court has determined that such damages may be measured by reference to repurchase damages where the notification obligation was breached during the period in which the repurchase remedy was still available. The court thus held that the complaint sufficiently alleged repurchase damages where the trustee sought damages for its alleged inability to exercise its repurchase remedy as a result of the defendant’s breach of its obligation to notify the trustee of its discovery of breaches. This decision did not consider whether such damages could include attorney‘s fees incurred in the litigation of the failure to notify claim. The appellate courts have not yet addressed the measure of damages for failure to notify claims.

This decision should not be read as reaching any determination as to whether the attorney’s fees and expenses included in the Repurchase Price definition may include attorney’s fees and expenses incurred in the litigation of failure to notify claims.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee's prosecution of a put back or repurchase action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.