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Wells Fargo Bank, NA v. Bank of America, N.A.

United States District Court, S.D. New York

February 6, 2014

WELLS FARGO BANK, N.A., as Trustee for the Registered Holders of Banc of America Commercial Mortgage Pass-Through Certificates, Series 2007-5, acting by and through its Special Servicer C-III ASSET MANAGEMENT, INC., Plaintiff,
v.
BANK OF AMERICA, N.A., Defendant.

OPINION AND ORDER

J. PAUL OETKEN, District Judge.

This case involves violation of certain representations in a mortgage loan sale agreement. The Court has previously granted summary judgment for Wells Fargo Bank on liability. The Court has yet to rule on three disputes between the parties with respect to the calculation of damages. The Court holds that Wells Fargo has not waived its right to statutory prejudgment interest under N.Y. C.P.L.R. § 5001(a). The Court reserves judgment on two further issues until Bank of America has had the opportunity for additional discovery.

I. Background

On March 28, 2013, the Court granted the Wells Fargo's motion for summary judgment as to Defendant Bank of America's liability. (Dkt. No. 98.) Familiarity with that decision is assumed here. The Court held that Wells Fargo is entitled to the purchase price, as defined in the Pooling Services Agreement, offset by any proceeds from the liquidation of the properties that were not applied to reimburse the Trust for reasonable servicing advances. ( Id. at 23.) Wells Fargo moved for a money judgment for the amount of the purchase price offset by $1, 883, 872.45 in unapplied proceeds from liquidation of the properties. (Dkt. No. 104, Ex. A at 2, 3.)

Bank of America sought discovery on three points: first, the calculation of net cash flow from the properties; second, the results of Wells Fargo's audit of the accounting records for net cash flow from properties; and third, the reasons why Wells Fargo granted $2.2 million in tax and due diligence waiver credits toward the sale price of the properties. (Dkt. Nos. 107, 112.) The Court heard the parties on these issues at a telephone conference and ruled that Bank of America would not be entitled to reopen discovery in general; however, the Court reserved judgment as to reopening discovery regarding the $2.2 million in sale price credits and requested further documentation on that point from Wells Fargo. (Dkt. No. 116 at 21:11-21.)

At the close of the conference, Wells Fargo's counsel asked the Court: "Do you do the prejudgment interest calculation or do you need us to do that as well?" ( Id. at 25:03-04.) The letter briefs the parties exchanged before the conference had not discussed prejudgment interest. (Dkt. Nos. 104-05, 107-110, 112.)

The parties exchanged letter briefs regarding the $2.2 million in sale price credits, and a dispute developed as to whether Wells Fargo is entitled to statutory prejudgment interest. (Dkt. Nos. 118-121.) The Court held a telephone conference to discuss the prejudgment interest issue and reserved judgment. (Dkt. No. 126.) The parties then exchanged three further letters regarding the balance of the loan as of August 2009. (Dkt. Nos. 123-25.)

The facts relevant to the prejudgment interest issue are as follows. The Mortgage Loan Purchase and Sale Agreement (MLPSA), which conveyed mortgage loans to Wells Fargo, and the Pooling Services Agreement (PSA), which governs the servicing of those loans, both provide for specific remedies for breach of the MLPSA. First, if Bank of America breaches a warranty representation about a mortgage loan it conveyed to Wells Fargo, Bank of America must repurchase or cure the defective mortgage loan upon notice of the breach. MLPSA § 4(c) (Dkt. No. 124-3). If Bank of America cures or repurchases a defective mortgage loan, the cure or repurchase is Wells Fargo's sole remedy for breach of a warranty representation. PSA § 2.03(h) (Dkt. No. 124-1).

Second, if a court orders Bank of America to make a cash payment in lieu of repurchasing a defective mortgage loan, the amount of that payment may be determined by "mutual agreement... or... judicial decision." PSA § 2.03(i). Such a payment is defined as a "loss of value payment." Id. If Bank of America makes a loss of value payment, the payment is Wells Fargo's sole remedy for Bank of America's breach. Id.

New York law governs interpretation of these agreements. MLPSA § 14; PSA § 12.04.

II. Discussion

A. Prejudgment Interest

New York law requires courts to award prejudgment interest on damages resulting from a breach of contract. N.Y. C.P.L.R. § 5001(a); U.S. Naval. Inst. v. Charter Commc'ns, Inc., 936 F.2d 692, 698 (2d Cir. 1991) ("[A] plaintiff who prevails on a claim for breach of contract is entitled to prejudgment interest as a matter of right."). Prejudgment interest is intended to compensate the nonbreaching party for lost use of money owed by the breacher. J. D'Addario & Co., Inc. v. Embassy Inds., Inc., 20 N.Y.3d 113, 117 (2012). For this reason, a plaintiff is entitled to prejudgment interest even if the underlying contract itself provides for interest on overdue payments-in other words, a plaintiff can recover prejudgment interest on unpaid principal and unpaid interest. Spodek v. Park Prop. Dev. Assocs., 96 N.Y.2d 577, 581 (2001). Whether the amount owed represents principal or accrued interest, the plaintiff was entitled to the money just the same, and prejudgment interest compensates the plaintiff for lost use of her money. Id. at 581-82; see also NML Capital v. Republic of Argentina, 17 N.Y.3d 250, 266-67 (2011) ("The application of statutory interest on unpaid interest payments compensates [the plaintiff] for a distinct injury-[] failure to timely make interest payments.").

But parties can waive the right to statutory prejudgment interest. J. D'Addario, 20 N.Y.3d 113. In J. D'Addario, parties to a commercial real estate transaction agreed on a specific remedy for any potential default by the buyer. 20 N.Y.3d at 121 n.*. The parties designated funds in escrow as liquidated damages, provided for interest on the escrowed funds, and referred to the funds as the "sole remedy" for default. 20 N.Y.3d at 118. The buyer ultimately breached the contract. Id. at 117. The New York Court of Appeals held that the seller was not entitled to prejudgment interest because, as "establish[ed]" by the foregoing contract terms, the seller waived its right to prejudgment interest. Id. at 118 ("The use of the terms sole remedy, ' sole obligation, ' and no further rights' by the parties, together with the provision for interest on the escrowed sum, was sufficiently clear to establish for purposes of this transaction that interest paid at the statutory rate was not contemplated by the parties at the time the contract was formed."). This ...


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