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Homeward Residential, Inc. v. Sand Canyon Corp.

United States District Court, S.D. New York

November 13, 2017

HOMEWARD RESIDENTIAL, INC., solely in its capacity as Master Servicer for the Option One Mortgage Loan Trust 2006-2, for the benefit of the Trustee and the holders of Option One Mortgage Loan Trust 2006-2 Certificates, Plaintiff,
v.
SAND CANYON CORPORATION, f/k/a Option One Mortgage Corporation, Defendant.

          FOR PLAINTIFF HOMEWARD RESIDENTIAL, INC.: Brian V. Otero Stephen R. Blacklocks Michael B. Kruse Kristen Madison HUNTON & WILLIAMS LLP

          FOR DEFENDANT SAND CANYON CORPORATION: Douglas W. Henkin Joyce Y. Young Michael L. Calhoon Richard P. Sobiecki Vernon A. Cassin Julia B. Rubenstein Patrick Marecki BAKER BOTTS L.L.P.

          James Goldfarb Daniel T. Brown Hannah Berkowitz MURPHY & McGONIGLE, P.C.

          OPINION & ORDER

          JOHN F. KEENAN, United States District Judge

         Before the Court is plaintiff Homeward Residential, Inc.'s (“Homeward”) motion under Federal Rule of Civil Procedure 26 and Federal Rule of Evidence 702 for (1) permission to prove its breach of contract claims against Sand Canyon Corporation (“Sand Canyon”) using statistical sampling evidence, and (2) a determination regarding the admissibility of testimony from its statistical expert, Dr. Charles D. Cowan, regarding the sampling exercise and results. As master servicer for a residential mortgage-backed securities (“RMBS”) trust, Homeward contends that Sand Canyon damaged the trust by breaching representations and warranties set forth in the governing agreements. According to Homeward, statistical sampling evidence regarding the likelihood of breach is appropriate in this case, especially in light of the large number of loans Homeward contends are potentially at issue. Because the Court concludes that the governing agreements, as relevant here, call for proof of breach on a loan-by-loan basis, Homeward's proposed sampling will not assist the trier of fact and, accordingly, the Court denies Homeward's motion.

         I. Background

         A. Factual Background

         In 2006, Sand Canyon-then known as Option One Mortgage Corporation[1]-conveyed a pool of more than 7, 500 mortgage loans with a total initial principal balance of approximately $1.5 billion to Option One Mortgage Acceptance Corporation via a Mortgage Loan Purchase Agreement (the “MLPA”) dated June 23, 2006. (See Am. Compl. Ex. F, ECF No. 24-2 (filed July 19, 2013) [hereinafter MLPA].) The loans were then transferred to the Option One Mortgage Loan Trust 2006-2 (the “Trust”) by means of a Pooling and Servicing Agreement (the “PSA”) dated June 1, 2006. (Am. Compl. Ex. G, ECF No. 24-3 (filed July 19, 2013) [hereinafter PSA].) These transactions established an RMBS trust, the likes of which courts within this Circuit have become quite familiar in the past decade. The Second Circuit has offered a helpful summary of the mechanics of an RMBS trust:

To raise funds for new mortgages, a mortgage lender sells pools of mortgages into trusts created to receive the stream of interest and principal payments from the mortgage borrowers. The right to receive trust income is parceled into certificates and sold to investors, called certificateholders. The trustee hires a mortgage servicer to administer the mortgages by enforcing the mortgage terms and administering the payments. The terms of the securitization trusts as well as the rights, duties, and obligations of the trustee, seller, and servicer are set forth in a Pooling and Servicing Agreement[.]

BlackRock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assurance Corp., 673 F.3d 169, 173 (2d Cir. 2012).

         Here, the MLPA designated Sand Canyon as “Originator” and Wells Fargo Bank, N.A. as “Trustee.” The PSA designated Sand Canyon as “Master Servicer, ” however Homeward subsequently assumed the role of Master Servicer. As Master Servicer, Homeward has authority under the PSA to enforce Sand Canyon's obligations under the MLPA. (See PSA § 3.02(b) (“[T]he Master Servicer, for the benefit of the Trustee and the Certificateholders, shall enforce the obligations . . . of the Originator under the [MLPA], including, without limitation, any obligation . . . to purchase a Mortgage Loan on account of missing or defective documentation or on account of a breach of a representation, warranty or covenant, as described in Section 2.03(a).”).)

         Given the importance of the rights and obligations set forth in the MLPA and PSA (collectively, the “Governing Agreements”)-and the bearing of the Governing Agreements on the instant motion-it is appropriate to review the relevant contractual provisions in some detail. As a starting point, Sand Canyon made numerous representations and warranties in connection with conveyance of the loans. These representations and warranties are contained in §§ 3.01, 3.02, and 3.03 of the MLPA. Representations and warranties contained in §§ 3.01 and 3.02 only are at issue in this action.[2]

         As is customary in complex commercial agreements, each section and subsection of the MLPA contains a title or heading that relates to the provisions found thereunder. Section 3.01 bears the heading “Originator Representations and Warranties Relating to the Mortgage Loans.” As the heading suggests, § 3.01 contains more than fifty representations and warranties regarding the loans ultimately sold to the Trust. (See, e.g., MLPA §§ 3.01(a)(5) (“The Mortgage Loan has been acquired, serviced, collected and otherwise dealt with by the Originator and any affiliate of the Originator in compliance with all applicable federal, state and local laws and regulations and the terms of the related Mortgage Note and Mortgage[.]”), 3.01(a)(16) (“There is no material default, breach, violation or event of acceleration existing under the related Mortgage or the related Mortgage Note[.]”), 3.01(a)(24) (“To the Originator's knowledge, there was no fraud involved in the origination of the Mortgage Loan by the mortgagee or by the Mortgagor, any appraiser or any other party involved in the origination of the Mortgage Loan[.]”).)

         Section 3.02 bears the heading “Originator Representations And Warranties Relating to The Originator.” Only one provision contained in § 3.02, reproduced below, is relevant here. The Court will refer to the following provision as the “No Untrue Statement Rep”:

[T]his Agreement does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements contained herein not misleading. The written statements, reports and other documents prepared and furnished or to be prepared and furnished by the Originator pursuant to this Agreement or in connection with the transactions contemplated hereby taken in the aggregate do not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements contained therein not misleading[.]

(Id. § 3.02(xi).)

         Section 3.04 bears the heading “Remedies For Breach of Representations And Warranties.” It sets forth the circumstances that give rise to Sand Canyon's repurchase obligation and the process by which Sand Canyon is to effect repurchase.

Within 120 days of the earlier of either discovery by or notice to the Originator of any breach of a representation or warranty made by the Originator that materially and adversely affects the value of a Mortgage Loan or the Mortgage Loans or the interest therein of the Purchaser, the Originator shall use its best efforts promptly to cure such breach in all material respects and, if such breach cannot be cured, the Originator shall, at the Purchaser's option, repurchase such Mortgage Loan at the Purchase Price.[3]

(Id. § 3.04.) Alternatively, Sand Canyon has the option to remove a “deficient” loan from the Trust and substitute a replacement loan or loans.

The Originator may, at the request of the Purchaser and assuming the Originator has a Qualified Substitute Mortgage Loan, [4] rather than repurchase a deficient Mortgage Loan as provided above, remove such Mortgage Loan and substitute in its place a Qualified Substitute Mortgage Loan or Loans. If the Originator does not provide a Qualified Substitute Mortgage Loan or Loans, it shall repurchase the deficient Mortgage Loan.

(Id.) Additionally, § 3.04 cross-references the corresponding section of the PSA and provides: “Any repurchase or substitution required by this Section shall be made in a manner consistent with Section 2.03 of the [PSA].” (Id.)

         Under § 3.04, the parties also agreed that a breach of certain § 3.01 representations and warranties-specifically, §§ 3.01(a)(45), (50), (53), and (54)-“will be deemed to materially and adversely affect the value of the related Mortgage Loan or the interest of the Purchaser.” (Id.) Section 3.04 also contains a provision focused on a breach of a representation or warranty under § 3.02, which contains the No Untrue Statement Rep. The Court will refer to the following provision as the “All Mortgage Loans Provision”:

In the event that a breach shall involve any representation or warranty set forth in Section 3.02 and such breach cannot be cured within 120 days of the earlier of either discovery by or notice to the Originator of such breach, all of the Mortgage Loans shall, at the ...

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