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Homeward Residential, Inc. v. Sand Canyon Corp.

United States District Court, S.D. New York

January 24, 2018

HOMEWARD RESIDENTIAL, INC., solely in its capacity as Servicer for the Option One Mortgage Loan Trust 2006-3, for the benefit of the Trustee and the holders of Option One Mortgage Loan Trust 2006-3 Certificates, Plaintiff,
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 HUNTON & WILLIAMS LLP.

          FOR DEFENDANT SAND CANYON CORPORATION: Michael L. Calhoon Richard P. Sobiecki Vernon Cassin Douglas Henkin BAKER BOTTS L.L.P. James Goldfarb Daniel T. Brown MURPHY & McGONIGLE, P.C.

          OPINION & ORDER


         Before the Court is Defendant Sand Canyon Corporation's (“Defendant”) motion to certify for interlocutory appeal under 28 U.S.C. § 1292(b) the September 30, 2016 Order (the “September 30 Order”) granting Plaintiff Homeward Residential's (“Plaintiff”) leave to amend. For the reasons that follow, Defendant's motion is denied.

         I. Background

         A. Factual Background

         Knowledge of the basic facts of this case is presumed and is discussed at length in the Court's August 22, 2017 Opinion and Order (ECF No. 227). Briefly stated, the facts of this case are as follows: In 2006, Defendant, a mortgage originator then known as Option One Mortgage Corporation, sold a pool of over 7, 500 mortgage loans with a total principal balance of approximately $1.5 billion as part of a deal related to the issuance of residential mortgage-backed securities (“RMBS”). (Second Amended Complaint ¶¶ 1, 16, ECF No. 126 (filed Oct. 6, 2016) [hereinafter SAC].) Defendant originated or purchased 5, 625 mortgages and transferred them to Option One Mortgage Acceptance Corporation (the “Depositor”) in October 2006. (Id. ¶¶ 1, 17.) This transfer was structured as a sale and is documented in a Mortgage Loan Purchase Agreement (“MLPA”) dated October 19, 2006. (Id. ¶ 17.) The Depositor conveyed “all right, title, and interest” in the mortgage loans to a trust called the Option One Mortgage Loan Trust 2006-3 (the “Trust”) by means of a Pooling and Service Agreement (“PSA”) dated October 1, 2006. (Id. ¶ 18.) In December 2006, Defendant sold an additional 1, 958 mortgage loans to the Trust. (Id. ¶ 20.) In 2008, Plaintiff took over servicing of the Trust loans and assumed the authority to enforce Defendant's obligations under the MLPA. (Id. ¶¶ 12-13, 27-28).

         In the MLPA, Defendant made over fifty representations concerning the mortgage loans sold, including that “[t]here is no material default, breach, violation or event of acceleration existing under the Mortgage or the related Mortgage Note.” (Id. ¶ 21.) Section 3.04 of the MLPA establishes Defendant's obligation to cure or repurchase loans within 120 days of discovery or notice of the breach of any representation, warranty, or covenant that materially and adversely affects the value of a loan or the interests of the Trust and its certificateholders in that loan. (Id. ¶ 24.)

         In a letter dated March 8, 2012, Wells Fargo Bank N.A., as Trustee, gave Defendant notice of breaches of representations and warranties with respect to certain mortgage loans that materially and adversely affected the value of the loans or the Trust's interest in those loans and demanded that Defendant either cure those breaches or repurchase the loans within 120 days. (Id. ¶ 8.) Defendant responded on July 10, 2012, denying any merit to the claims. (Id.) On May 29, 2015, the Law Debenture Trust Company of New York, as Separate Trustee, gave Defendant notice of material breaches of representations and warranties with respect to an additional 649 loans and demanded that Defendant either cure or repurchase those loans within 120 days. (Id. ¶ 9.) The May 29 notice enclosed a letter from Perry, Johnson, Anderson, Miller & Moskowitz LLP, counsel for certain certificateholders, (the “Perry Johnson letter”) and a set of schedules describing the nature of the breaches. (Id.) The Perry Johnson letter alleged “pervasive and widespread breaches” and reserved the right to give notice of additional breaches. (Id. ¶ 9.) To date, Defendant has not cured or repurchased any loans. (Id. ¶¶ 8-9.)

         Plaintiff alleges in the SAC that Defendant breached its representations and warranties with respect to “many loans” in the Trust and that Defendant was aware that there were widespread and systemic deviations from its underwriting guidelines when the loans in the Trust were approved. (Id. ¶¶ 29, 33.) Because Defendant was allegedly aware of the widespread disregard of its underwriting guidelines and resulting pervasive breaches, Plaintiff seeks to require Defendant to honor its contractual obligation to repurchase all Trust loans with respect to which it has breached its representations and warranties, or otherwise compensate the Trust. (Id. ¶ 10.) In the alternative, Plaintiff seeks to require Defendant to repurchase the 745 loans that were included in the March 2012 and May 2015 letters demanding repurchase. (Id.)

         B. September 30 Order Granting Leave to File Second Amended Complaint

         Plaintiff first brought suit in this action on September 28, 2012, alleging breaches as to 96 of the 119 loans listed in the March 8, 2012 Trustee letter. (See Compl. ¶ 21, ECF No. 1 (filed Sept. 28, 2012).) After receiving notice of the Perry Johnson Letter, and after the deadline to file a second amended complaint had passed, on November 25, 2015, Plaintiff sought leave to amend its complaint to add (1) breach claims for the 649 additional loans identified by the Perry Johnson Letter, and (2) non-loan-specific allegations that Defendant's breaches were widespread and pervasive, that Defendant knew it was selling loans to the Trust that were in breach, and that Defendant should therefore repurchase all Trust loans that are proven at trial to materially breach those representations and warranties (the “constructive discovery claim”). (See Mem. of L. in Supp. of Mot. for Leave to File SAC, ECF No. 103 (filed Dec. 23, 2015).) On September 30, 2016, Judge Torres granted leave to file the SAC. (See Op. & Order, ECF No. 124 (filed Sept. 30, 2016).)

         In the September 30 Order, Judge Torres held that Plaintiff met both Federal Rule of Civil Procedure 15 amendment standards and Federal Rule of Civil Procedure 16's good cause requirement. Judge Torres held that Plaintiff met Rule 16's good cause requirement because Plaintiff “diligently sought to amend” once it became aware of the basis for its proposed new claims. (Id. at 6.) First, Plaintiff did not become aware of claims with respect to loans beyond the original 96 until May 2015, when it received notice from the Separate Trustee regarding the 649 additional loans. (Id.) Second, documents produced by Defendant during discovery provided evidence to Plaintiff for the first time of Defendant's widespread and systemic disregard of its representations and warranties and showed that Defendant knew of its breaches at the time it sold the loans to the Trust. (Id.) Although Defendant argued that Plaintiff did not act diligently in discovering its new claims because, as servicer, it had access to the 649 loan files for more than seven years, Judge Torres rejected this argument because Defendant provided no support for its contention that Rule 16 diligence imposes a duty to review and analyze “thousands of loans, each with loan files consisting of hundreds of pages” to determine whether Defendant had made additional breaches. (Id. at 7.)

         Judge Torres next held that Plaintiff met Rule 15's “liberal” amendment standards. (Id.) First, Plaintiff did not unduly delay in seeking to amend, even though it had possession of the relevant loan files since 2008, because “Plaintiff would have had to review thousands upon thousands of documents in order to discover evidence of the claims it now seeks to add.” (Id. at 9.) Second, amendment would not be futile, despite the fact that the statute of limitations had run, because the proposed new claims related back to Plaintiff's original claims. (Id. at 9-12.) In finding that the new claims related back, Judge Torres relied on Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 19 N.Y.S.3d 1 (N.Y.App.Div. 2015), which held that new claims regarding additional loans sold to a securitization trust related back to timely claims because the defendant was on notice, before the suit was filed, that certificateholders were investigating breaches in representations and warranties. (Id. at 10.) Judge Torres noted that here, as in Nomura, a pre-suit letter informed Defendant that additional loans ...

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