On May 29, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Saco I Trust 2006-5 v. EMC Mortgage LLC, 2014 NY Slip Op. 31432(U), ruling that Plaintiffs’ claim for rescissory and consequential damages was precluded by a “sole remedies” provision in the governing documents for a mortgage-backed securities investment.
In Saco I Trust, the plaintiff investors in mortgage-backed securities brought an action against the sponsor, EMC, for breaches of representations and warranties concerning the mortgages underlying the investment. The governing documents for the securitization trusts contained a “sole remedies” clause, which provided:
It is understood and agreed that the obligation under this Agreement of EMC to cure, repurchase or replace any Mortgage Loan as to which a breach has occurred and is continuing shall constitute the sole remedies against EMC (in its capacity as Sponsor) respecting such breach available to the Certificateholders, the Depositor or the Trustee.
Justice Bransten found that this provision barred any recovery “beyond EMC’s contractual obligation to ‘cure, purchase or replace any Mortgage Loan.'” Thus, plaintiffs’ claims for consequential and rescissory damages were precluded.
Justice Bransten went on to hold that, even in the absence of a sole remedies clause, consequential and rescissory damages would be unavailable under the facts of the case:
Consequential damages are “rarely awarded” and are permitted only where the contract conveys that the parties intended consequential damages to be recoverable in the event of breach. Here, Plaintiff points to no language and makes no argument that such damages were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting. The Court likewise finds no such language. Thus, Plaintiff’s claim for consequential damages merits dismissal.
Plaintiffs’ claim for rescissory damages also fails. As the First Department noted in MBIA Insurance Corp. v. Countrywide Home Loans, Inc., 105 A.D.3d 412, 413 (1st Dep’t 2013), rescission is a “very rarely used equitable tool.” Indeed, the First Department explained that rescissory damages are only applicable where rescission is impracticable and no alternative legal remedies are availing. While Plaintiff maintains that rescission would be impracticable, Plaintiffs claim for rescissory damages lacks merit, since Plaintiff has an alternative remedy – repurchase. Notwithstanding Plaintiffs “pervasive breach” arguments, the sole remedy provision agreed to by the parties limits the Trust’s remedies to repurchase.
This decision illustrates that courts will enforce contractual limitations on damages, and that consequential damages are generally unavailable unless the parties specifically contract for such damages.