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ACE Securities Corp. v. DB Structured Products, Inc.

Supreme Court, New York County

October 12, 2016

ACE Securities Corp., HOME EQUITY LOAN TRUST, SERIES 2006-HE4, by HSBC BANK USA, NATIONAL ASSOCIATION, in its capacity as Trustee, Plaintiff,
v.
DB Structured Products, Inc., Defendant.

          Daniel P. Goldberg, Avi B. Israeli, Michael S. Schuster, Hannah S. Sholl, and Daniel M. Sullivan of Holwell, Shuster & Goldberg LLP, for Plaintiff HSBC Bank USA, National Association

          David J. Woll, William T. Russell, Isaac M. Rethy, and John A. Robinson of Simpson Thacher & Bartlett LLP, for Defendant DB Structured Products, Inc.

          Eileen Bransten, J.

         HSBC Bank USA, National Association ("HSBC"), solely in its capacity as trustee for the ACE 2006-HE4 trust (the "Trust"), brought this action against DB Structured Products, Inc. ("DBSP") for breaches of representations and warranties DBSP made about residential mortgage-backed securities contained in the Trust. In Motion Sequence No. 004, Plaintiff moves to compel production of DBSP's internal repurchase analysis documents, which DBSP argues are protected by the attorney-client privilege and the work-product doctrine. In Motion Sequence No. 006, Defendant moves to compel the production of documents that HSBC claims are privileged and protected by the common interest doctrine. Motion Sequence Numbers 004 and 006 are consolidated for disposition. For the reasons that follow, HSBC's motion is granted in part and denied in part, and DBSP's motion is granted in part and denied in part.

         I. Background

         This action arises from Defendant's sponsorship of a securitization of mortgage-backed loans. (Compl. ¶ 1.) As the sponsor, DBSP initially selected and purchased 3, 826 mortgage loans from third-party originators, then sold the loans to the depositor, ACE Securities Corporation ("ACE"), pursuant to a "Mortgage Loan Purchase Agreement" dated September 28, 2006 (the "MLPA"). (Compl. ¶ 40.) ACE then transferred the loans to the Trust in accordance with a Pooling and Servicing Agreement dated as of September 1, 2006 (the "PSA"). (Compl. ¶¶ 22, 40-42.) In the MLPA, DBSP made a series of representations and warranties ("R & W") about the characteristics, quality, and risk profile of the loans. [1] (Compl. ¶ 43.) If the representations and warranties were breached with respect to underlying loans, and such breach materially affected the value of the loans or the interests of the certificateholders, DBSP promised to cure the breach or repurchase the related loans. (Compl. ¶ 44.) In accordance with the PSA, the Trust held the loans for the benefit of certificate-holding investors. (Compl. ¶ 42.)

         A. Independent Reviews Reveal Breaches of DBSP's R & W

         Before this action was commenced, private certificateholders hired consultants to review 1, 652 loans contained in the Trust. [2] (Compl. ¶ 48.) The consultants found 868 breaches of DBSP's representations and warranties that materially and adversely affected the value of the loans, including misrepresentations about borrower income, occupancy status, debt-to-income ratios, loan-to-value ratios, inclusion of high cost loans, and other inaccuracies. (Compl. ¶¶ 47-49.) A second forensic review scrutinized 288 loans. Of those, 187 were found to be in breach DBSP's representations and warranties. (Compl. ¶ 52.)

         B. The Instant Action

         On September 27, 2012, HSBC filed a summons with notice alleging breaches as to 912 loans-those loans specifically identified by Amherst on behalf of the private certificateholder. (Dkt. No. 1.) On March 4, 2013, after Defendants served a Demand for Complaint, (Dkt. No. 9.), HSBC filed its Complaint asserting causes of action for breach of contract and declaratory judgment, and seeking compensatory and rescissory damages, and specific performance. (Compl. ¶¶ 104-149.) By Order dated April 4, 2014, this Court granted in part and denied in part DBSP's motion to dismiss, allowing Plaintiff's third cause of action for breach of contract to proceed and stating that "Plaintiff's mortgage loan-related recovery is limited to specific performance on loan repurchases or equivalent damages." (April 4, 2014 Order, Dkt. No. 29, at 11.) The parties moved on to discovery, and the present dispute arose after mutual privilege assertions.

         II. Legal Standard Applicable to Both Motions

         Generally, "[t]here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action." CPLR § 3101(a). However, CPLR § 3101(d)(2) also recognizes three categories of protected materials, namely: "privileged matter, absolutely immune from discovery; attorney's work product, also absolutely immune; and trial preparation materials, which are subject to disclosure only on a showing of substantial need and undue hardship in obtaining the substantial equivalent of the materials by other means." Spectrum Systems Intern. Corp. v. Chemical Bank, 78 N.Y.2d 371, 376-77 (1991). Since policy favors full disclosure, "the burden of establishing any right to protection is on the party asserting it; the protection claimed must be narrowly construed; and its application must be consistent with the purposes underling immunity." Id., at 377 (citations omitted).

         III. HSBC's Motion to Compel

         HSBC seeks documents related to DBSP's breach analyses. In opposition to the motion, DBSP argues that the documents constitute attorney work product or are protected by the attorney-client privilege. For the reasons that follow, HSBC's motion is granted in part and denied in part.

         A. Documents Related Only to Other RMBS Cases

         As a preliminary matter, HSBC requests that DBSP produce documents related to this case, as well as documents related to five other residential mortgage-backed securities ("RMBS") cases between the same parties: In re ACE Securities Corp. RMBS Litigation, No. 13-1869-AJN-GWG (S.D.NY), a set of four consolidated RMBS put-back actions, and ACE Securities Corp. Home Equity Loan Trust 2007-HE1 v. DB Structured Prods., Inc., 650327/2013, filed in this court and assigned to Justice Kornreich.

         This case, involving solely the ACE 2006-HE4 Trust, proceeded on a parallel schedule with those matters. According to Plaintiff, the parties agreed that documents produced in any case could be used in all cases in order to promote efficiency across all six actions. Defendant argues that the parties agreed to coordinate the matters for deposition purposes only, but that the other cases are now stayed pending settlement discussions. Defendant also notes that Plaintiff fails to explain how documents related solely to trusts in other actions are relevant here. [3]

         Defendant concedes there may be documents about "general loan origination standards and practices" that many courts have deemed relevant in RMBS put-back actions, and this Court agrees that they are relevant. See, e.g., Woll Aff., Ex. H (July 9, 2014 Order of Judge Alison Nathan in In re Ace Sec. Corp. RMBS Litig., No. 13 Civ. 1869, Dkt. No. 138.) Beyond those general documents, however, the Court agrees with Defendant that repurchase analysis documents related to specific loans in trusts that are not at issue in this case do not need to be produced. Accordingly, that branch of Plaintiff's motion that seeks documents concerning trusts not at issue in this case is denied. To the extent Plaintiff's motion is granted below, it is only with regards to documents related to the 2006-HE4 Trust.

         B. The Breach Analyses and Bulk Demands

          1. DBSP's Asset Management Unit

         Within its Asset Management unit, DBSP had a "Breach Management" team to handle and address repurchase demands made by certificateholders. See Affirmation of Hannah Sholl in Support of Plaintiff's Motion dated February 1, 2016 ("Sholl Affirm."), Ex. 5. In 2008, the team consisted of twelve analysts-non-lawyers-who operated pursuant to Deutsche Bank's manuals on mortgage loan breaches. See Sholl Affirm. Exs. 6-8. The analysts created separate folders for each individual loan and a master spreadsheet of all reported breaches; both were stored on DBSP's shared computer hard drive. See Sholl Affirm. Ex. 7, at 1783235-47. Based on their analysis of each breach claim, the analysts drafted responses that were also stored in the shared drive. Id.

         The Breach Management team was also tasked with uncovering breaching loans before trustees, investors, or anyone else provided a breach notice. With respect to loans that DBSP purchased from originators and placed into securitization pools, DBSP primarily outsourced its loan-level review to external re-underwriters. See Sholl Affirm., Ex. 8. The outsourced breach analyses were uploaded to DBSP's shared drive. See Sholl Affirm., Ex. 8. Then, DBSP's own analysts "validated" the findings, and sent a detailed letter explaining the breach to the originators, a copy of which was also placed in the shared drive. See Sholl Affirm., Ex. 8.

         DBSP maintained a Breach Management database called the Collateral Performance System ("CPS"). See Sholl Affirm. Ex. 6. The CPS created an "audit trail" and "allow[ed] an asset's repurchase timeline to be tracked and also allow[ed] other analysts to easily become up to date and knowledgeable regarding an asset." See Sholl Affirm. Ex. 8, at 187980-81. The CPS also included a "Breach Analysis Detail" section that included analysts' evaluation of the breach claims. See Sholl Affirm. Ex. 8. The CPS could generate several reports, including a "Breach In Analysis Review" with internal comments and correspondence between DBSP and the entity that sent the breach notice. Sholl Affirm., Ex. 12. All documents generated by DBSP's internal and external reunderwriters are collectively referred to herein as "Breach Analyses."

         2. The Bulk Repurchase Demands

         DBSP received the first bulk repurchase demand from Amherst on November 21, 2011 (the "Bulk Demands"). (Aulisa Opp'n Aff., ¶ 20.) This demand was different from previous Breach In demands because it came from a distressed debt investor and involved hundreds of loans, far more than a typical Breach In demand. Id. The investor was also represented by litigation counsel. Id.

         DBSP asked Latham & Watkins LLP ("Latham"), who was already representing it in connection with unrelated litigation, to advise it in connection with the Amherst Bulk Demands. Id., ¶ 21. In December 2011 and January 2012, Latham retained consultants to review the Bulk Demands, and Defendant contends that Latham and the consultants "had calls and meetings so that counsel could provide advice and direction on how to assess the alleged R & W breaches." Id., ¶ 22. The re-underwriting consultants worked closely with Latham and DBSP personnel to "assess which loans were and were not eligible for repurchase, based on various legal arguments and defenses." Id., ¶ 24. Thus, DBSP argues that the Breach In process was significantly different after the receipt of the first Amherst Bulk Demand. Id., ¶¶ 30-31. DBSP contends that its litigation counsel's involvement demonstrates that its documents were prepared in anticipation of litigation.

         3. Documents ...


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