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Current Developments in the Commercial Divisions of the
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Posted: January 20, 2014

Plaintiff Barred from Recovering Damages Excluded by Contract

On January 15, 2014, Justice Bransten of the New York County Commercial Division issued a decision in U.S. Bank N.A. v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 50029(U), enforcing the provisions of a commercial agreement that significantly limited the damages available under a breach of contract claim.

In U.S. Bank, the plaintiff was the trustee of a trust containing mortgage loans that had been securitized by the defendant. The operating agreement contained a series of representations and warranties about the mortgage loans and provided that the sole remedy for a breach of those representations and warranties was that the defendant would have to repurchase the breaching loans.  The plaintiff sued the defendant, alleging (a) numerous breaches of the representations and warranties, and (b) that the defendant had also breached the sole-remedy clause by refusing to repurchase the loans. Accordingly, the plaintiff alleged, it was no longer restricted to the repurchase remedy and was eligible for the full range of contract remedies, including compensatory, consequential, and rescissory damages. In deciding the defendant’s motion to dismiss, the court held that the plaintiff was still restricted by the sole-remedy clause:

The language of the provision is clear and bars the recovery of the damages sought by Plaintiff . . . . To the extent that [the defendant] breaches its obligation to repurchase breaching loans . . . Plaintiff claims that it is entitled to the full panoply of contract remedies under New York law. However, the sole remedy contractual language agreed upon by the parties is not vitiated because [the defendant] allegedly breached its obligation to perform the remedy therein. Instead, the remedy in that instance is to direct [the defendant’s] performance of its repurchase obligation. Where a loan cannot be repurchased because, for example, it is no longer in the Trust, the remedy is an award of damages equal to the repurchase amount, consistent with the sole remedy provision.

(internal citations and quotations omitted).

The court also noted that even if the sole-remedy clause were unenforceable, the plaintiff still would not have been eligible for consequential damages, because there was no contract language conveying that the parties “intended consequential damages to be recoverable in the event of a breach.” Similarly, the court held that “rescissory damages are only applicable where rescission is impracticable and no alternative legal remedies are availing,” a situation that did not exist because of the availability of a remedy under the sole-remedy clause.

This opinion shows that New York courts will enforce sole-remedy clauses.  Counsel should not assume that they can plead their way around them if a dispute arises.

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