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Bank of New York Mellon v. WMC Mortgage, LLC

United States District Court, S.D. New York

July 30, 2015

THE BANK OF NEW YORK MELLON, solely as Trustee for GE-WMC Mortgage Securities Trust 2006-1, Plaintiff,

Motty Shulman, Ian M. Dumain, Evelyn N. Fruchter, Marc Ayala, Boies, Schiller & Flexner LLP, New York, NY, for Plaintiff.

Greg A. Danilow, Stacy Nettleton, Weil, Gotshal & Manges LLP, New York, NY, for Defendant GE Mortgage Holding, LLC.


DENISE COTE, District Judge.

This action involves a breach of contract claim brought by Bank of New York Mellon ("BoNY") as the trustee ("Trustee") of a residential mortgage backed securities ("RMBS") trust. Defendant WMC Mortgage, LLC ("WMC"), [1] the sponsor of the securitization, originated or acquired the mortgage loans that are the subject of this lawsuit and sold the loans to codefendant GE Mortgage Holdings, LLC ("GEMH"). GEMH then sold the loans to the depositor, GE-WMC Mortgage Securities, L.L.C. ("the Depositor"), which placed the loans into the trust. As part of the transfer of loans to the trust, WMC made a number of contractual representations regarding the underlying mortgage loans. In this lawsuit, the Trustee asserts that both defendants are liable for the breaches of the contractual representations.

GEMH moved for summary judgment on the ground that the Trustee's sole remedy for breaches of the contractual representations at issue here is its claim against WMC. The primary legal issue raised by GEMH's motion - whether the Trustee may seek the remedy of repurchase against GEMH - has already been addressed in an Opinion by the Honorable Katherine B. Forrest, to whom this action was then assigned. Bank of New York Mellon v. WMC Mortgage, LLC, No. 12cv7096 (KBF) (S.D.N.Y. Jan. 1, 2014) ("January 2014 Opinion"). For the following reasons, GEMH's motion for summary judgment is denied.


The following facts are undisputed or taken in the light most favorable to the non-moving party. The RMBS industry was a major economic force in 2006 when the securitization at issue in this action occurred. RMBS certificates are financial instruments backed by hundreds or thousands of individual residential mortgages. The usual process for creating a securitization may be summarized as follows: First, originators issue the mortgage loans, typically in accordance with the originator's underwriting guidelines. Next, loans are sold to a sponsor. Sponsors purchase loans from originators or loan aggregators, a transaction that is generally governed by a Mortgage Loan Purchase Agreement which contains representations and warranties. The sponsor holds title to the loans before they are transferred to the RMBS depositor. Sponsors select loans from among those on its books, place the selected loans into groups for securitization, and sell them to depositors, typically a sponsor's affiliate.

Depositors are essentially shell corporations that exist for one purpose: to purchase the loans from the sponsor and deposit them in a trust. The depositor establishes a trust and deposits the loans into the trust in exchange for certificates. The depositor also issues Registration Statements, Prospectus Supplements, and other offering documents for the securitization. The RMBS trusts created by depositors are typically established pursuant to a Pooling and Servicing Agreement. The trustee for each trust is generally responsible for maintaining custody of operative documents related to the mortgage loans, receiving the cash flows each month from the entities servicing the loans, and allocating the cash flows to the certificate-holders and others pursuant to the rules laid out in the Pooling and Servicing Agreement.

Two aspects of the securitization here deserve particular mention. First, WMC, the sponsor of the securitization, also originated many of the mortgage loans.[2] Second, instead of transferring the loans directly to the Depositor, WMC transferred the loans to its affiliate GEMH. GEMH is described in the transaction documents as the "mortgage loan seller." The securitization accordingly involves two Mortgage Loan Purchase Agreements, the first between WMC and GEMH, which is referred to as the "Originator MLPA, " and the second between GEMH and the Depositor, which is referred to as the "Seller MLPA."

The trust, GE-WMC Mortgage Securities Trust 2006-I ("Trust"), created by the securitization in this case, contains 4, 654 residential mortgage loans originated or acquired by WMC. The securitization of the loans placed into the Trust was accomplished through the execution of three documents in August 2006. First, WMC, the sponsor of the securitization, sold these loans to GEMH on August 10, pursuant to the Originator MLPA. GEMH simultaneously transferred the mortgage loans to the Depositor pursuant to the Seller MLPA, also dated August 10. The Depositor conveyed the mortgage loans to the Trust, with BoNY as the Trustee, pursuant to the Pooling and Servicing Agreement, dated as of August 1 ("PSA"). The closing date for the PSA was August 21, 2006. The Trustee is not a party to either MLPA, but is a party to the PSA.

WMC and GEMH are the parties to the Originator MLPA. In Sections Five and Six of the Originator MLPA, WMC made over eighty representations and warranties ("R&Ws") to GEMH concerning the quality of the loans. WMC also assumed an obligation to repurchase loans that do not conform to those R&Ws. Originator MLPA § 7(a) requires WMC, upon "its discovery or receipt of notice" of a breach of the R&Ws, to "cure, " "repurchase, " or "substitute for" the defective loan and states that any repurchase will be made in a "manner consistent with Section 2.03 of the [PSA]."

The Seller MLPA is a contract between GEMH and the Depositor. In Section Five of the Seller MLPA, GEMH made fourteen additional R&Ws regarding GEMH's ability to transfer the mortgage loans and perform its obligations under the Seller MLPA. For example, GEMH represented and warranted that it "has the full power and authority to hold each Mortgage Loan, to sell each Mortgage Loan, and to execute, deliver, and perform, and to enter into and consummate, all transactions contemplated by" the Seller MLPA. Although GEMH did not make additional R&Ws regarding the quality of the mortgage loans in Section Six of the Seller MLPA, GEMH "assign[ed] all of its rights under the [Originator MLPA] including the representations and warranties with respect to the Mortgage Loans and the repurchase obligations of WMC contained therein."

In Section Seven of the Seller MLPA, GEMH undertook a repurchase obligation based on both the R&Ws made by GEMH in the Seller MLPA as well as the R&Ws made by WMC in the Originator MLPA. This commitment is central to the Trustee's claims here. Seller MLPA § 7(a) states that:

Upon discovery by [GEMH], [the Depositor], or any assignee, transferee or designee of [the Depositor]... of a breach of any of the [R&Ws] contained in Section Five of Six or the [Originator MLPA]... the party discovering the breach shall give prompt written notice to the other. Within ninety (90) days of its discovery or its receipt of notice of... any such breach of a [R&W]... [GEMH] shall... cure such defect or breach[, ]... repurchase the affected Mortgage Loan... or... substitute [for] [the affected loan].

(Emphasis added.)[3]

Seller MLPA § 7(b) clarifies the limitations of GEMH's liability for breaches of the R&Ws contained in both MLPAs. It lists the "sole" remedies available to the Depositor or its assignee. Seller MLPA § 7(b) provides:

It is understood and agreed that the obligations of [GEMH]... to cure, ... repurchase or substitute for a defective Mortgage Loan constitute the sole remedies of [the Depositor] against [GEMH] respecting... a breach of the [R&Ws] contained in [the ...

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