Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc.
69 N.Y.S.3d 520, 30 N.Y.3d 572, 92 N.E.3d 743 (2017)
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Rule of Law:
Where sophisticated parties include a 'sole remedy' clause limiting remedies for breaches of specific contractual representations, a plaintiff may not circumvent this limitation by seeking general contract damages for a breach of a more general 'no untrue statement' provision when the alleged untrue statements are grounded in the same facts that constitute breaches of the specific representations.
Facts:
- Nomura Credit & Capital, Inc. (Nomura) selected and acquired pools of mortgage loans from original lenders.
- Nomura sold these loan pools to an affiliated depositor under Mortgage Loan Purchase Agreements (MLPAs).
- Each MLPA contained a general 'No Untrue Statement Provision' in Section 7, warranting that transaction documents, in the aggregate, contained no material untrue statements.
- Each MLPA also contained specific 'Mortgage Representations' in Section 8, making detailed warranties about the quality and characteristics of each individual mortgage loan.
- Section 9 of the MLPAs, the 'Sole Remedy Provision,' stated that the obligation to cure or repurchase a defective loan constituted the 'sole remedies' for any breach of the specific representations in Section 8.
- The depositor placed the loan pools into securitization trusts, with HSBC Bank USA (HSBC) as trustee, pursuant to Pooling and Service Agreements (PSAs) that also contained a sole remedy provision.
- Following the collapse of the housing market, a forensic analysis revealed that many of the underlying mortgage loans did not conform to the specific Mortgage Representations made by Nomura in Section 8, due to issues like inflated appraisals and fraudulent origination.
- HSBC, as trustee, provided notice of the breaches to Nomura and an opportunity to cure.
Procedural Posture:
- HSBC, as trustee, filed suit against Nomura in New York Supreme Court (the trial court) seeking, among other things, general contract damages for breach of the MLPAs.
- Nomura moved to dismiss the claims for general contract damages under CPLR 3211(a)(1) and (7), arguing they were barred by the contracts' 'sole remedy' provision.
- The Supreme Court granted Nomura's motion and dismissed the causes of action for general contract damages.
- HSBC, as appellant, appealed the dismissal to the Appellate Division, First Department (an intermediate appellate court).
- The Appellate Division reversed the trial court's order, thereby reinstating HSBC's claims for general contract damages.
- The Appellate Division then granted Nomura, as appellant, leave to appeal to the Court of Appeals of New York, the state's highest court.
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Issue:
Does a 'sole remedy' provision, which contractually limits remedies for breaches of specific mortgage loan representations and warranties to cure or repurchase, bar a claim for general contract damages based on a separate, more general 'no untrue statement' provision when the alleged untrue statements are grounded in the same underlying facts as the specific breaches?
Opinions:
Majority - Stein, J.
No, the 'sole remedy' provision bars the claim for general contract damages. When sophisticated parties set down their agreement in a clear document, it must be enforced according to its terms. Here, the parties bargained for a specific, limited remedy—cure or repurchase—for any breaches of the detailed, mortgage loan-specific representations in Section 8. HSBC's claim for general damages under the broader 'No Untrue Statement Provision' in Section 7 is based on the exact same underlying facts that constitute the Section 8 breaches. HSBC cannot subvert this exclusive remedies limitation by simply re-characterizing its claims. Reading the contract as a harmonious and integrated whole, the specific Sole Remedy Provision must be given effect and precludes HSBC from seeking general contract damages for these alleged breaches, regardless of how numerous or 'systemic' they are.
Dissenting - Feinman, J.
Yes, in part, the 'sole remedy' provision does not bar all claims under the general provision. While a 'pervasive breach' of Section 8 cannot simply be repackaged as a Section 7 claim, HSBC also alleged breaches of the No Untrue Statement Provision that are not necessarily duplicative of Section 8 breaches. For example, the furnishing of a document with an inflated property appraisal is an untrue statement violating Section 7 on its face, but it does not automatically prove a breach of the more specific Section 8 warranty that the appraiser was biased or non-independent. Because a breach of Section 7 can exist independently of a breach of Section 8, the Sole Remedy Provision, which is explicitly limited to Section 8 breaches, should not bar claims based on those independent Section 7 violations.
Dissenting - Rivera, J.
Yes, the 'sole remedy' provision does not bar the claim for transaction-wide misrepresentations. The MLPA distinguishes between loan-specific defects (covered by Section 8) and transaction-wide misrepresentations (covered by Section 7). The 'sole remedy' of cure or repurchase was intended for a small number of individual loan defects, not for a systemic failure where the entire loan pool was misrepresented. The 'taken in the aggregate' language in Section 7 and the cumulative remedies clause in Section 13 show that the parties contemplated remedies for systemic issues beyond the loan-by-loan repurchase protocol. To hold otherwise renders the No Untrue Statement Provision relatively meaningless and incentivizes the very abusive practices that led to the financial crisis.
Analysis:
This decision reinforces the enforceability of 'sole remedy' provisions in contracts between sophisticated parties, particularly in complex financial agreements. It establishes that a plaintiff cannot evade such a provision by re-characterizing a breach of a specific warranty as a breach of a more general one when the underlying facts are identical. The ruling clarifies that the number or pervasiveness of specific breaches does not automatically transform them into a breach of a different, more general provision to unlock remedies the parties contracted away. This precedent makes it more difficult for plaintiffs in similar RMBS cases to pursue general contract damages, forcing them to rely on the limited remedies they bargained for, and requires them to show that a general warranty claim is truly independent of any specific warranty covered by a limited remedy clause.
