Court Upholds RMBS Failure to Notify Claims

On May 1, 2024, Justice Reed of the New York County Commercial Division issued a decision in Deutsche Bank Natl. Trust Co. v. HSBC Fin. Corp., 2024 NY Slip Op. 50512(U), upholding failure to notify claims, explaining:

In this court’s view, the second amended complaint sufficiently states a claim for the HASC defendants’ alleged failure to notify plaintiff of breaches of the R&Ws, per this court’s March 7, 2018 Bellwether decision. The second amended complaint contains numerous allegations supporting the inference that the HASC defendants discovered R&W breaches in the years after closing of the securitization—namely, between late 2009 and early-2012. . . .

Defendants further argue that plaintiffs’ FTN claims are barred by the sole remedies clause from the PSA. Under the sole remedies clause, and according to defendants’ interpretation of the PSA, HSBC Bank can have FTN liability only with respect to the so-called “gap” R&Ws, and plaintiff, according to defendants, did not allege that HSBC Bank has discovered breaches of any gap R&Ws.

In Section 4 of the MLPA, HSBC Bank made a series of loan-level representations. That section also requires HSBC Bank to give notice upon its “discovery” of a breach of one of its representations, but only if that breach “does not also constitute a breach of a representation or warranty of the applicable” originator. In other words, in defendants’ reading, HSBC Bank has notification obligations under the MLPA only for “gap” representations for which it has liability, not for representations also made by loan originators. Moreover, in section 2.03 of the PSA, HSBC Bank agrees to provide notice “upon discovery” of the breach of any of its representations (gap or non-gap), but the “sole remedies” provided are cure or repurchase on gap representations for which HSBC Bank is responsible. According to defendants, the typical “sole remedies” clause confines a trustee to cure or repurchase only for R&W claims. By contrast, the sole remedies clause in the PSA for HASC 2007-HE2 allegedly has no such scope limitation and must be enforced to bar FTN claims except on gap R&Ws.

This court disagrees with defendants’ reading of the PSA. The HASC PSA does not purport to limit FTN claims to the sole remedy for gap R&W breaches, nor could it by its plain language, since HSBC Bank’s notification obligation expressly extends to all R&Ws, not just gap R&Ws. While HSBC Bank’s repurchase obligation extends only to its “gap” R&Ws, and the sole remedies available against HSBC Bank for a breach of any of those “gap” R&Ws are cure, repurchase, or substitution of a breaching loan, HSBC Bank’s notification obligation, by its express language, is not so limited. Indeed, HSBC Bank’s notice obligation under the HASC PSA explicitly extends to the breach of “any” R&W by HSBC Bank, as follows: “Upon the discovery by [HSBC Bank] of a breach of any of the Sponsor’s representations and warranties set forth in Section 4 of the [HASC MLPA], [HSBC Bank] shall give prompt written notice to [the HASC Trustee ]” (HASC PSA § 2.03[d]). The HASC PSA does not, by its express terms, include FTN breaches within the sole remedy provision. It simply limits HSBC Bank’s liability for breaches of R&Ws not “also made by” Decision One (ie., “gap” R&Ws) to “cure, repurchase or substitut[ion]” of the breaching loan.

The reading suggested by the HASC defendants is contrary the parties’ express contractual language. Accordingly, HSBC Bank’s argument fails.

(Internal citations omitted).

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