Commercial Division Blog

Posted: July 5, 2018 / Categories Commercial, Contracts, Impleader

Court Examines Rules Relating to Impleader in Complex Cases

On May 14, 2018, Justice Marcy Friedman of the New York County Commercial Division issued a Decision & Order in Nomura Asset Acceptance Corp. v. Nomura Credit & Capital, Inc., 2018 NY Slip Op. 30928(U), which addressed a number of issues relating to impleader in complex commercial cases.

The underlying action was brought by HSBC Bank as Trustee of an RMBS (residential mortgage-backed securities) trust against Nomura Credit & Capital, which had sold the securitized loans to the trust, alleging that Nomura had made false representations concerning the quality of the loans and had failed to comply with its contractual obligation to repurchase defective loans. Nomura then impleaded Wells Fargo and Ocwen Loan Servicing LLC (“the Servicers”) alleging that they had breached their contractual obligations to review the loan files and identify deficient loans, thereby depriving Nomura of the opportunity to replace or repurchase them.

The Servicers moved to dismiss the third-party complaint on a variety of grounds, several of which are discussed here.

First, Ocwen moved to dismiss under CPLR § 1007, arguing that Nomura’s claims against it did not arise from Nomura’s potential liability to the plaintiff trustee, and more specifically that the trustee’s claims against Nomura concerned false representations made at the time the trust was created, whereas Nomura’s claims against it involved breaches that took place after the trust had been created, and after Nomura’s own false statements had been made.

The court rejected Ocwen’s argument, first noting as a general matter that “[a]s is common in the RMBS litigation, this case [ ] requires application to the complex financial instruments and contracts at issue of general legal precepts that were developed in materially different contexts,” and then analyzing the facts as follows:

This case involves a hybrid in which the theories of liability in the main and third-party actions differ, but the damages sought by defendant/third-party plaintiff in the third-party action relate directly to the damages sought against defendant in the main action. More particularly, the alleged breaches of contract by Ocwen and Nomura in the third-party and main actions, respectively, are not causally connected. It is not claimed, for example, that Ocwen's alleged breaches of its servicing and/or notification obligations caused Nomura' s alleged breaches of representations and warranties or prevented Nomura from notifying the Trustee upon its own separate discovery of breaches. However, Ocwen was a party to the PSA, under which the Trustee's sole remedy for breaches of representations and warranties is the repurchase protocol. As pleaded by Nomura, each of the parties, including Ocwen, had the ability to either facilitate or frustrate that remedy. For its part, Nomura was required to cure, substitute, or repurchase defective loans at the Purchase Price, which is calculated pursuant to a contractual formula. Nomura claims that this contractual formula has been or will be affected by Ocwen's separate breaches of contract, resulting in an increase in the amounts for which Nomura may be liable to the Trustee for breaches of representations and warranties. There is thus a claimed causal relationship between Ocwen's alleged breaches of contract and the specific damages for which Nomura may be liable to the Trustee.

. . .

The court rejects Ocwen's contention that allowing impleader in this case would create a standard under which any party whose conduct indirectly increases a plaintiff’s damages may be impleaded. Although the alleged breaches of contract by Ocwen and Nomura are separate, this is not a case in which the acts of the third-party defendant are related only in an attenuated fashion to the plaintiff's damages and the conduct alleged in the main action. Ocwen had a prescribed role in the repurchase protocol, which constitutes the Trustee's sole remedy for breaches of representations and warranties and which it allegedly breached: Jt purportedly failed to notify the other parties upon its discovery of breaches of representations and warranties, assertedly depriving Nomura and the Trustee of the options of substitution, cure, or repurchase early in the life of the loans. Affording Nomura the benefit of all favorable inferences, as the court must do on a motion to dismiss it was also reasonably foreseeable that breaches by Ocwen of its servicing and/or notification obligations would "exacerbate" the damages for which Nomura may be held liable.

(Emphases added.)

Second, the court rejected the Servicers’ argument that Nomura’s claims are premised upon its own breaches of the PSA, and that as a breaching party Nomura is barred from bringing actions against others for breach of the PSA, on the grounds that a prior material breach only bars a claim if the promises in question were dependent rather than independent. And in this case:

Nomura' s breach of contract claim in the third-party action is based, in part, on the Servicers' alleged failure to notify Nomura of breaches of representations and warranties. The PSA unambiguously required each Servicer to provide prompt notice to Nomura upon that Servicer’s discovery of a qualifying breach of representation or warranty. In arguing that Nomura's own alleged breaches of representations and warranties deprive Nomura of the right to enforce the Servicers' notification obligations, the Servicers fail to recognize that the parties' covenants are independent Indeed, a breach of a representation or warranty was a condition that, once discovered by the Servicers, triggered their duty to notify Nomura (among others) of the defect The Servicers' position in effect would preclude Nomura from ever enforcing the Servicers' notification obligation. There is no support in the language of the PSA for such a result. The Servicers' notification obligation was plainly integral to Nomura's own obligation, under the repurchase protocol, to cure, substitute, or repurchase defective loans. . . . .

The court reaches the same conclusion with respect to the Servicers' argument that Nomura's breaches of representations and warranties bar Nomura from suing to enforce the servicing obligations. These obligations exist independently of and must be performed regardless of, the truth or falsity of Nomura's representations and warranties. If the parties had intended to bar Nomura from suing to enforce the servicing obligations, they could have expressly so provided.

(Emphases by the court.)

Third, the court rejected Ocwen’s argument that Nomura’s measure of damages—the increase in the purchase price of the defective loans between the time Ocwen discovered the defects and the time Nomura’s liability to the trustee is calculated—was an impermissibly speculative claim for consequential damages:

As this court has previously held, it is apparent from the plain terms of the PSA that the notification obligations serve primarily to facilitate the repurchase remedy for breaches of representations and warranties. Ocwen does not dispute that the Purchase Price of defective loans may increase as a result of delays in repurchase. At this preliminary stage, and on this cursorily briefed record, the court is not persuaded that the damages sought by Nomura are not general damages, which flow directly from the breach, as opposed to consequential damages, to which a heightened pleading standard would apply.

Moreover, assuming arguendo that the damages sought by Nomura are consequential in nature, the record does not support a finding, as a matter of law, that they are speculative or incapable of proof with reasonable certainty. Ocwen contends that Nomura's damages theory depends on speculation that the Purchase Price at the time of Ocwen's discovery was lower than the Purchase Price Nomura may ultimately pay the Trustee, and that Nomura would have acted swiftly to remedy defective loans had it received prompt notice of breaches from Ocwen. Ocwen merely identifies potential factual issues, which cannot be decided at the pleading stage.

This decision illustrates the complex and unusual nature of the issues presented in RMBS litigation, and also provides good analyses of impleader, prior material breach, and damages law.
Contact Schlam Stone & Dolan partner John Lundin at or Schlam Stone & Dolan of counsel Niall Ó Murchadha at if you or a client have questions regarding RMBS litigation.