On September 27, 2023, Justice Crane of the New York County Commercial Division issued a decision in HSBC Bank USA, N.A. v. Nomura Credit & Capital, Inc., 2023 NY Slip Op. 33361(U), dismissing an RMBS loan servicer’s claim for lost profits damages arising from the seller’s failure to give notice of document defects, explaining:
[T]he court need not determine whether or not Ocwen can pursue an independent cause of action against Nomura for failure to notify because, even if Ocwen could, Nomura has shown that it is entitled to dismissal for lack of damages. As an initial matter, the court rejects Ocwen’s contention at oral argument that it is not seeking damages for lost profits. Ocwen contended at oral argument that it is not seeking lost profit damages but rather is seeking damages in the form of servicing income that flows directly from Nomura’s obligation to notify and substitute loans, non-breaching loans. However, Ocwen’s argument is semantic because Ocwen acknowledges in its opposition to Nomura’s summary judgment motion that it is seeking consequential damages and then refers to the same factors that the proponent of lost profit damages must establish.
In any event, the alleged damages relating to additional servicing income that Ocwen would have attained with non-breaching loans clearly appear to be consequential lost profit damages as they represent income that Ocwen allegedly would have received as a result of transactions involving unrelated parties (i.e., Nomura’s purchase of non-breaching mortgage loans to replace the breaching mortgage loans).
In order to establish entitlement to lost profits, a plaintiff must show that such damages were actually caused by the breach, that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made and that the alleged loss is capable of proof with reasonable certainty.
Here, Nomura has established entitlement to dismissal of the claim for lost profits by showing that the parties to the PSA did not contemplate lost profits. Rather, the PSA limits remedies against Nomura for any breach to the sole remedies of cure, repurchase, or replace. Thus, the PSA unambiguously does not contemplate lost profits as a remedy. Even if PSA § 2.03(e)’s silence as to whether servicers in particular can recover lost profits created an ambiguity, Ocwen still would have failed to meet its burden. If a contract is silent on the issue of lost profits, the court must consider extrinsic evidence and employ a commonsense approach to determine what the parties intended. Ocwen has presented no extrinsic evidence to indicate that the parties ever contemplated lost profits as a component of damages in the event of a breach.
Rather, Ocwen merely argues that the PSA contemplated lost profit damages based on how the Servicers’ compensation as vendors is a very small fractional percentage of the principal balance of the mortgage loans and, therefore, the Servicers earn more on compliant loans than breaching loans. However, whether or not Ocwen would have earned more servicing compliant loans is irrelevant to the question of whether the PSA contemplated that Ocwen could recover lost profits in a lawsuit seeking the difference between non-compliant and compliant loans. The PSA unambiguously specifies cure, repurchase, and replace as the sole remedies, and Ocwen has presented nothing to refute that text.
In addition, the court dismisses the lost profits claim because it is wholly speculative. A lost profits claim should be dismissed where it is predicated not upon the requisite reasonably certain assessment but upon nothing more than assumptions, speculation and conjecture. Here, Ocwen’s lost profits damages theory is that if Nomura had followed proper procedures under the PSA, it would have replaced the breaching loans with non-breaching loans and Ocwen would have received greater servicing fees as a result. In support of this argument, Ocwen cites the report of their counterclaim damages expert, Samuel Warren. However, in assessing damages, Mr. Warren relies on industry average servicing costs and his determination that mortgage loans that comply with representations and warranties stay in the Trusts longer on average, and therefore generate more compensation. Fundamentally, this analysis based on averages is not a reasonably certain assessment” of damages. It is, instead, a speculative modeling of what damages potentially could be based on theoretical replacement loans that Nomura undisputedly never purchased. This is not sufficient to establish damages based on lost profits.
(Internal quotations and citations omitted).