To Be Argued By: DAVID J. WOLL

New York County Clerk's Index No. 650980/2012

~£fu 1Hork ~upr£me Olourt APPELLATE DIVISION-FIRST DEPARTMENT

ACE SECURITIES CORP., HOME EQUITY LOAN TRUST, SERIES 2006-SL2, by HSBC BANK USA, NATIONAL AsSOCIATION, solely in its capacity as Trustee

pursuant to a Pooling and Servicing Agreement, dated as of March 1, 2006,

Plaintiff-Respondent,

--against-

DB STRUCTURED PRODUCTS, INC., Defendant-Appellant.

BRIEF FOR DEFENDANT-APPELLANT

THOMAS C. RICE, ESQ. DAVID J. WOLL, ESQ. SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 tricc@stblaw.com dwoll@stblaw.com

Attorneys for Defendant-Appellant

REPRODUCED ON RECYCLED PAPER

TABLE OF CONTENTS

PRELJMINARY STATEMENT ............................................................................... 1

QUESTIONS PRESENTED ...................................................................................... 6

STATEMENT OF THE CASE .................................................................................. 6

A. The Parties ............................................................................................. 6

B. The Relevant Agree1nents ..................................................................... 7

C. The Repurchase Protocol ...................................................................... 7

D. Procedural History .............................................................................. 11

E. The Order Below ................................................................................. 14

S'f ANDARD OF REVIEW ..................................................................................... 16

ARGUMENT ........................................................................................................... 17

I. THE lAS COURT ERRED IN HOLDING THAT THE PSA'S DEMAND REQUIREMENT DEFERRED ACCRUAL OF PLAINTIFF-RESPONDENT'S CLAIMS .................................................... 17

A. The lAS Court Erred In Concluding That R W Breaches Are Not Breaches Of Contract ................................................................... 17

B. The lAS Court Erred In Concluding That Alleged Noncompliance With The Repurchase Remedy Starts The Limitations Period ............................................................................... 23

II. THE TRUSTEE'S BELATED SUBSTITUTION DOES NOT RENDER THIS ACTION VIABLE ............................................................. 30

A. The Funds Lacked Standing ................................................................ 31

B. The Trustee's Attempted Substitution Does Not Relate Back To The Filing Of The Summons .............................................................. 32

III. DENIAL OF DBSP'S MOTION AS TO LIQUIDATED AND RELEASED LOANS WAS ALSO ERROR ................................................ 34

A. Plaintiff-Respondent May Only Obtain Repurchase Of "Mortgage Loans" Which Are Assets Of The Trust. .......................... 36

1. "Released Loans" Are Not Subject To Repurchase ................. 39

2. Liquidated Loans Are Not Subject To Repurchase ................. .40

B. The lAS Court Erred By Placing The Burden Of Demonstrating Whether A Loan Was Subject To Repurchase On DBSP .................. .43

C. The lAS Court's Construction Of The PSA's Repurchase Provisions Was Erroneous ................................................................. .44

1. The Order Fundamentally Misconstrued The PSA And DBSP's Argument Concerning "Released Loans" ................... 45

2. The lAS Court's Construction Of The PSA's Purchase Price Was Erroneous ................................................................. 47

3. The lAS Court Improperly Rewrote The PSA On The Basis Of Inapplicable Equitable Considerations ..................... .49

CONCLUSION ..................................... , .................................................................. 54

11

TABLE OF AUTHORITIES

Page(s)

Cases

15 E. 11th Apt. Corp. v. Elghanayan, 232 A.D.2d 289 (1st Dep't 1996) ....................................................................... 34

150 Broadway N.Y. Assocs., L.P. v. Bodner, 14A.D.3d 1 (1stDep't2004) ............................................................................. 16

ABE Industrial Sys. v. Prime Tech., Inc., 120 F.3d 351 (2d Cir. 1997) ......................................................................... 18, 23

Airco Alloys Division v. Niagara Mohawk Power Corp., 76 A.D.2d 68 (2d Dep't 1980) ............................................................................ 29

American Home Assurance Co. v. Scanlon, 164 A.D.2d 751 (1st Dep't 1990) ....................................................................... 33

Assured Guaranty Municipal Corp. v. DB Structured Products, Inc., 33 Misc.3d 720 (Sup. Ct. N.Y. Cty. 2011) ......................................................... 26

B&N Props., LLC v. Elmar Assocs., LLC, 51 A.D.3d 831 (2d Dep't 2008) ......................................................................... .45

Bailey v. Fish & Neave, 8 N.Y.3d 523 (2007) ........................................................................................... 20

Beller v. Williams Penn Life Ins. Co. of N.Y., 8 A.D.3d 310 (2d Dep't 2004) ............................................................................ 29

Benjamin v. Keys pan C01p., 104 A.D.3d 891 (2d Dep't 2013) ........................................................................ 17

Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606 (1979) ............................................................................. 17, 18, 19

Buran v. Coupal, 87 N.Y.2d 173 (1995) ......................................................................................... 33

CBS Inc. v. Z~ff-Davis Pub. Co., 75 N.Y.2d 496 ( 1990) ......................................................................................... 21

lll

D&L Holdings, LLC v. RCG Goldman Co., LLC, 287 A.D.2d 65 (1st Dep't 2001) ........................................................................ .41

De Hernandez v. Bank ofNova Scotia, 76 A.D.3d 929 (1st Dep't 2010) ......................................................................... 21

De Vanzo v. Newark Ins. Co., 44 A.D.2d 39 (2d Dep't 1974) ........................................................................... .49

Elie Int'l, Inc. v. Macy's West Inc., 106 A.D.3d 442 (1st Dep't 2013) ................................................................. 27, 28

Ely-Cruikshank Co., Inc. v. Bank of Montreal, 81 N.Y.2d 399 (1993) ................................................................................... 21, 34

Eve rhome Mort g. Co. v. Charter Oak Fire Ins. Co., No. 07 Civ. 98, 2012 WL 868961 (E.D.N.Y. Mar. 14, 2012) ............................ 34

Fairbanks Capital Corp. v. Nagel, 289 A.D.2d 99 (1st Dep't 2001) ......................................................................... 33

First Place Bank v. Skyline Funding, Inc., No. 10 Civ. 2044, 2011 WL 3273071 (N.D. Ill. July 27, 2011) .................. 38, 41

First Place Bank v. Skyline Funding, Inc., No. 10 CV 2044, 2011 WL 824612 (N.D. Ill. Mar. 4, 2011) ............................ .44

Frankart Furniture Staten Island, Inc. v. Forest Mall Assocs., 159 A.D.2d 322 (1st Dep't 1990) ....................................................................... 33

Fulgum v. Town of Cortlandt Manor, 19 A.D.3d 444 (2d Dep't 2005) .......................................................................... 33

George v. Mt. Sinai Hsp., 47N.Y.2d 170(1979) ......................................................................................... 32

Glaze, Inc. v. Coach Choice Apparel, Inc., 28 Misc.3d 1225(A), 2010 WL 3294300 (Sup. Ct. N.Y. Cty. July l, 2010) ....................................................................... 33

Goldberg v. Camp Mikan-Recro, 42 N.Y.2d 1029 ( 1977) ....................................................................................... 32

IV

Guilbert v. Gardner, 480 F.3d 140 (2d Cir. 2007) ............................................................................... 29

Hahn Automotive Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765 (2012) ......................................................................... 3, 26, 27,28

Hirsch v. New England Navigation Co., 200N.Y. 263 (1910) ........................................................................................... 30

HSBC Guyerzeller Bank A G v. Chascona N. V., 42 A.D.3d 381 (1st Dep't 2007) ......................................................................... 33

JCD Farms, Inc. v. Juul-Nielsen, 300 A.D.2d 446 (2d Dep't 2002) ........................................................................ 33

John Doris, Inc. v. Solomon R. Guggenheim Found., 209 A.D.2d 380 (2d Dep't 1994) ........................................................................ 50

Kahn v. City ofN. Y, 37 A.D.2d 520 (lstDep't 1971) ......................................................................... 16

Kreiss v. McCown DeLeeuw & Co., 131 F. Supp. 2d 428 (S.D.N.Y. 2001) ................................................................ 50

Krich v. Wall Indus., Inc., 118 A.D.2d 627 (2d Dep't 1986) ........................................................................ 30

Lana & Edward's Realty Corp. v. Katz/Weinstein P 'ship, 26 Misc.3d 1238(A), 2010 WL 963564 (Sup. Ct. Kings Cty. Mar. 17, 2010) ................................................................... 18

Lehman Bros. Holdings, Inc. v. Evergreen Moneysource Mortg. Co., 793 F. Supp. 2d 1189 (W.D. Wash. 2011) ..................................................... 5, 28

Lehman Bros. Holdings, Inc. v. Key Fin. Corp., No. 8:09-CV-623-T-17EAJ, 2011 WL 1296731 (M.D. Fla. Mar. 31, 2011) ............................................................................ 29, 38

Lehman Bros. Holdings, Inc. v. Nat'l Bank of Ark., 875 F. Supp. 2d 911 (E.D. Ark. 2012) ............................................................... 29

v

Lehman Bros. Holdings, Inc. v. PMC Bancorp, No. LA CV 10-07207 JAK (PJWx), 2013 WL 1095458 (C.D. Cal. Mar. 8, 2013) ..................................................................................... 29

MASTR Asset Backed Sec. Trust 2006-H£3 v. WMC Mort g. Corp., No. 11 Civ. 2542,2012 WL 4511065 (D. Minn. Oct. 1, 2012) ....... 37, 38, 41,42

Met. L~le Ins. Co. v. Noble Lowndes lnt'l, Inc., 84 N.Y.2d 430 ( 1994) ............................................................................. 24, 34, 37

Metro L~fe Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884 (2d Cir. 1990) ......................................................................... 23, 52

N.Y. Cent. Mut. Fire Ins. Co. v. Glider Oil Co., 90 A.D.3d 1638 (4th Dep't 2011) ....................................................................... 29

Nationwide Advantage Mortg. Co. v. Mortg. Servs. Ill, LLC., No. 13 Civ. 83, 2013 WL 1787551 (N.D. Ill. Apr. 25, 2013) ................ 38, 40,50

Nomura Asset Ace. Corp., etc. v. Nomura Credit & Capital, Inc., 39 Misc. 3d 1226(A), 2013 WL 2072817 (Sup. Ct. N.Y. Cty. May 10, 20 13) .............................................................. passim

Peter R. Friedman, Ltd. v. Tishman Speyer Hudson Ltd., 2013 N.Y. Slip Op. 4708, 2013 WL 3064724 (1st [)ep't June 20, 2013) .................................................................................... 47

Resolution Trust Corp. v. Key Financial Services, Inc., 280 F.3d 12 (1st Cir. 2002) ........................................................................... 29, 37

Rubinstein v. Rubinstein, 23 N.Y.2d 293 (1968) ......................................................................................... 24

S. Wine & Spirits of Am., Inc. v. Impact Envt'l Eng'g, PLLC, 80 A.D.3d 505 (1st Dep't 2011) ......................................................................... 32

Se(lert, Hirshorn & Packman v. Ins. Co. ofN Am., 36 A.D.2d 506 (1st Dep't 1971) ........................................................................ .49

Slayko v. Sec. Mut. Ins. Co., 98 N.Y.2d 289 (2002) ......................................................................................... 51

Vl

Small v. Lori! lard Tobacco Co., Inc., 94 N.Y.2d 43 (1999) ........................................................................................... 30

Stoner v. Walsh, 772 F. Supp. 790 (S.D.N.Y. 1991) .................................................................... .44

Structured Mortg. Trust 1997-2 v. Daiwa Fin. Corp., No. 02 Civ. 3232(SHS), 2003 WL 548868 (S.D.N.Y. Feb. 25, 2003) ................................................................................ 4, 28

Syncora Guar. Inc. v. EMC Mortg., LLC, 39 Misc.3d 1211(A), 2013 WL 1608142 (Sup. Ct. N.Y. Cty. Apr. 15, 2013) ..................................................................... 26

Teichman v. Cmty. Hasp. of W Suffolk, 87 N.Y.2d 514 (1996) ......................................................................................... 22

Trust For Certificate Holders of Merrill Lynch Mortgage Pass­Through Certificates Series 1999-CJ v. Love Funding Corp., No. 04 Civ. 9890(SAS), 2005 WL 2582177 (S.D.N.Y. Oct. 11, 2005) .................................................................................... 41

Truty v. Fed. Bakers Supply Corp., 217 A.D.2d 951 (4th Dep't 1995) ....................................................................... 33

Varga v. Credit-Suisse, 5 A.D.2d 289 (1st Dep't 1958) ........................................................................... 22

Varo, Inc. v. Alvis PLC, 261 A.D.2d 262 (1st Dep't 1999) ....................................................................... 17

W 90th Owners Corp. v. Schlechter, 137 A.D.2d 456 (1st Dep't 1988) ................................................................. 18, 23

Walnut Place LLC v. Countrywide !lome Loans, Inc., 96 A.D.3d 684 (1st Dep't 20 12) ............................................................... 2, 23, 31

Statutes and Rules

22 N.Y.C.R.R. § 600.1 O(b) ........................................................................................ 1

26 U.S.C. § 860F(a) ................................................................................................. 40

Vll

26 U.S.C. § 860G(a)(4)(B)(ii) ................................................................................. 39

26 U.S.C. 860F(a)(2)(A)-(B) .................................................................................. .40

Asset-Backed Sec., 70 Fed. Reg. 1506 (Jan. 7, 2005) ............................................ .40

CPLR § 206(a) ................................................................................................... 27, 29

CPLR § 213(2) ..................................................................................................... 7, 25

CPLR § 3211 ............................................................................................................ 14

C P L R § 3 211 (a)( 1 ) .................................................................................................. 1 7

CPLR § 3211(a)(3) .................................................................................................. 17

CPLR § 321l(a)(5) .................................................................................................. 18

CPLR § 3211(a)(7) .................................................................................................. 17

CPLR § 3211(a)(8) .................................................................................................. 17

CPLR § 5501(c) ....................................................................................................... l6

CPLR § 5522(a) ....................................................................................................... 17

Other Authorities

Black's Law Dictionary (9th ed. 2009) .................................................................. .41

CPLR § 206 Practice Commentaries ....................................................................... 26

David D. Siegel, New York Practice § 529 (5th ed) ............................................... 16

Vlll

Defendant-Appellant DB Structured Products, Inc. ("DBSP") submits

this brief in support of its appeal from a Decision and Order dated May 13, 2013

(the "Order"), R. 9-20, 1 issued by the Supreme Court of the State of New York,

New York County (the "lAS Court"), which denied DBSP's motion to dismiss the

Complaint. For the reasons stated below, the Order should be reversed.

PRELIMINARY STATEMENT

The Order appealed from contravenes well-established New York law

that claims for breach of representations and warranties ("R W s") of present facts

accrue on the date the R W s are made, regardless of when their falsity is discovered

or a demand for a remedy is made. This fundamental principle mandated dismissal

of the Complaint on statute of limitations grounds. The lAS Court, however,

found that Plaintiff-Respondent's claims were not time-barred because, in its view,

the RWs could not be breached and the limitations period could not start to run

until a demand was made and rejected. This novel, erroneous theory would allow

plaintiffs to unilaterally extend the limitations period indefinitely. It contradicts

binding precedent from this Court and the Court of Appeals and has not previously

been adopted by any New York court. The Order should be reversed and the

Complaint dismissed.

This dispute concerns a Mortgage Loan Purchase Agreement ("MLP A")

1 References to "R._" indicate citations to the Record submitted by Defendant-Appellant pursuant to§ 600.10(b) ofthc Rules ofthis Court. 22 N.Y.C.R.R. § 600.10(b).

and Pooling and Servicing Agreement ("PSA") entered into among sophisticated

parties in connection with the issuance of residential mortgage-backed securities

("RMBS") by ACE Securities Corp., Home Equity Loan Trust, Series 2006-SL2

(the "Trust"). The Trust was established on March 28, 2006 (the "Closing Date"

as defined in the PSA and MLPA) pursuant to the PSA to hold second-lien

mortgage loans and issue "certificates" backed by those loans. The MLPA, dated

March 28, 2006, contained RWs concerning the loans which were expressly made,

in the MLP A, as of that date.

Almost six years after March 28, 2006, and well after the crash of the

housing market, RMBS Recovery Holdings 4, LLC and VP Structured Products,

LLC, affiliates of two distressed debt investment funds, Fir Tree Partners and

Yarde Partners (collectively, the "Funds") acquired certificates for the purpose of

pursuing "put-back" claims? The Funds tried unsuccessfully to convince the

Trustee to bring suit against DBSP before the limitations period expired.

Consequently, the Funds commenced this action themselves by filing a summons

with notice (the "Summons") on March 28, 2012, six years after the Closing Date.

As this Court confirmed in Walnut Place LLC v. Countrywide Home Loans, Inc.,

96 A.D.3d 684 (lst Dep't 2012), however, certificateholders such as the Funds

2 Media reports indicate that the Funds purchased these securities specifically to profit through repurchase litigation. See, e.g., Asset-Backed Alert, MBS 'Putback' Investors Target Big Issuers (Feb. 24, 2012), available at http://www.abalert.com/headlines.php?hid=l56068.

2

lack standing to sue for R W breaches under the "no action" clauses contained in

RMBS pooling agreements. As a result, the Funds' Summons was a nullity. In a

flawed attempt to cure this fundamental defect, the Funds ultimately persuaded the

Trustee to "substitute" as plaintiff in a complaint filed on September 13, 2012,

more than six months after the expiration of the statute of 1 imitations.

The Trustee's untimely assertion ofRW breach claims was clearly barred

by the six-year statute of limitations for contract claims. New York law could not

be clearer that such claims accrue when the R W s are breached, no matter when the

breach is discovered and regardless of the presence of a demand requirement. See,

e.g., Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765, 771

(2012) (plaintiff "had the legal right to demand payment ... more than six years

before the commencement of this action" and cannot "extend the statute of

limitations indefinitely by simply failing to make a demand") (internal quotation

marks omitted). Moreover, as Plaintiff-Respondent's own allegations make clear,

the Trustee, despite the Funds' entreaties, made a conscious decision not to sue

before the limitations period expired. The Trustee's subsequent Complaint, filed

well outside the six-year limitations period, was time-barred.

This precise situation was addressed by the Honorable 0. Peter

Sherwood in a decision issued three days before the Order from which this appeal

is taken. Justice Sherwood dismissed a substantially similar repurchase case in

3

which the Trustee had belatedly attempted to substitute for another affiliate of Fir

Tree Partners. See Nomura Asset Acceptance Corp., etc. v. Nomura Credit &

Capital, Inc., 39 Misc. 3d 1226(A), 2013 WL 2072817 (Sup. Ct. N.Y. Cty. May

10, 2013). Justice Sherwood held that RW breach claims accrue when the RWs

are made, and rejected the Trustee's argument that its substitution related back to

the date the Funds initially commenced the action.

The same arguments and authorities considered in Nomura were

presented to the IAS Court. Nonetheless, the lAS Court denied the motion to

dismiss the action. While recognizing that the Funds "lacked standing," the lAS

Court held that the statute of limitations did not begin to run until 2012, when

DBSP did not repurchase allegedly breaching loans upon demand. Despite the

undisputed fact that the R W s were made as of March 28, 2006, the lAS Court held

that DBSP could not breach the agreements until it refused a repurchase demand.

ln so doing, the lAS Court noted that two federal court decisions had addressed the

same exact situation and had held that claims for breach of R W s accrue at the time

the RWs are made, but declined to follow those rulings. See Structured Mortg.

Trust 1997-2 v. Daiwa Fin. Corp., No. 02 Civ. 3232(SHS), 2003 WL 548868, at

*2 (S.D.N.Y. Feb. 25, 2003) ("[S]ince the facts warranted in the [relevant] Pooling

Agreement were not true when made, the statute of limitations began to run at that

time, and expired six years later."); Lehman Bros. Holdings, Inc. v. Evergreen

4

Moneysource Mortg. Co., 793 F. Supp. 2d 1189 (W.D. Wash. 2011) (same).

DBSP alternatively sought dismissal based on Plaintiff-Respondent's

failure to plead that any of the allegedly breaching loans were subject to the

repurchase remedy provided by the PSA an argument this Court need not reach if

it rules, as it should, that the action is time-barred. The PSA provides that

repurchase is the sole remedy for incurable RW breaches and that the Trustee can

only require DBSP to repurchase "Mortgage Loans" held by the Trust at the time

repurchase is sought. As reflected in the PSA, the parties understood that the pool

of Mortgage Loans held by the Trust would decrease over time for various reasons.

The PSA provides that in certain circumstances, Mortgage Loans initially

transferred to the Trust will be "released" from and no longer be assets of the

Trust. Pursuant to the PSA, Mortgage Loans can also be liquidated through

repayment, foreclosure, or other means and thereafter cease to be subject to

repurchase. The PSA further confirms this by providing that the "Purchase Price"

for a liquidated loan would be "zero" ($0).

Despite these clear provisions, Plaintiff-Respondent indiscriminately

brought repurchase claims without regard to whether the claim concerned a

Mortgage Loan subject to repurchase. Instead of requiring the Trustee to plead

viable claims by alleging that they pertained to Mortgage Loans that are subject to

repurchase, the lAS Court ruled that the question involved factual issues that could

5

not be resolved on DBSP's motion. In light of this ruling, the IAS Court should,

respectfully, have stopped there. Nonetheless, the IAS Court compounded its eiTor

by providing an interpretation of the PSA that ignored its plain terms, was based on

flawed assumptions outside the record, and rewrote the PSA to create purportedly

better "incentives."

QUESTIONS PRESENTED

l. Whether claims for breach of RWs should be dismissed as untimely

pursuant to New York's six-year statute of limitations for contract claims (CPLR §

213(2)), where the only party with standing to sue brings suit more than six years

after the R W s were breached?

The trial court answered this question in the negative.

2. Whether a complaint should be dismissed for failure to allege that any

allegedly breaching loans were subject to the sole repurchase remedy, when,

pursuant to the unambiguous terms of the governing contracts, that remedy is only

available for loans that remain in the trust when a demand is made?

The trial court answered this question in the negative.

STATEMENT OF THE CASE

A. The Parties

Defendant-Appellant DBSP is a corporation with its principal place of

business in New York, New York. DBSP purchased the mortgages that were

ultimately securitized.

6

The initial plaintiffs, RMBS Recovery Holdings 4, LLC and VP

Structured Products, LLC, are affiliates of distressed debt investment funds. They

were formed in 2011, long after the collapse of the housing market.

Plaintiff-Respondent HSBC is a national bank with its main office in

Virginia. HSBC serves as Trustee of the Trust. HSBC was originally named as

nominal defendant in the Summons. On September 13, 2012, HSBC filed the

operative complaint, purporting to substitute as plaintiff.

B. The Relevant Agreements

RMBS are securities representing interests in payments received on pools

of mortgage loans. To create the securitization at issue, DBSP, the sponsor,

purchased second-lien loans from non-party originators and sold those loans to

non-party ACE Securities Corp. ("ACE") pursuant to the MLPA. ACE then sold

the loans and its rights under the MLP A to the Trustee, on behalf of the Trust,

pursuant to the PSA. On March 28, 2006, the Trust was established to hold these

loans (defined as "Mortgage Loans") until they were released from the Trust, paid

off, or otherwise liquidated, and to distribute payments to investors

("Certificateholders").

C. The Repurchase Protocol

The MLPA contains RWs regarding characteristics of the Mortgage

Loans. These were expressly made as of March 28, 2006. The PSA, in turn,

7

contains detailed provisions which delineate the sole remedy available for breaches

of the R W s. Specifically, "[ u ]pon discovery or receipt of notice" of a breach that

"materially and adversely" affects the value of a Mortgage Loan, "the Trustee shall

promptly notify" DBSP and request that DBSP cure the breach "within [60] days,"

and if not, "the Trustee shall enforce [DBSP's] obligations ... to repurchase such

Mortgage Loan from REMIC e at the Purchase Price within [90] days." R. 121-22

(PSA § 2.03(a)). The PSA also specifies that "the obligation of [DBSP] to cure or

to repurchase ... any Mortgage Loan as to which ... a breach has occurred and is

continuing shall constitute the sole remedy respecting such ... breach." !d.

(emphasis added).

The PSA also includes a "no action clause" that bars Certificateholders

from bringing suit against DBSP based on alleged R W breaches. See R. 214-15

(PSA § 12.03). This provision only permits Certificateholders to bring actions in

relation to certain defaults by the Servicer or Master Servicer, after providing the

Trustee written notice. Thus, under the PSA, only the Trustee can bring this suit.

The PSA provides that only Mortgage Loans held by the Trust are subject

to repurchase. SeeR. 121-22 (PSA § 2.03(a)); R. 87 (PSA § 1.01) ("Mortgage

Loan"). This is consistent with the fact that the Trust's pool of Mortgage Loans

3 A "RRMIC" is a '"real estate mortgage investment conduit' within the meaning of Section 8600 of the [Internal Revenue l Code." R. 102 (PSA § 1.01 ). "REMIC I" is "the primary trust created []by", and "administered []under" the PSA. ld.

8

decreases over time. Indeed, while 8,815 Mortgage Loans were transferred to the

Trust at closing, according to the Trust's own (publicly-available) records, only

838 remained when DBSP filed its motion to dismiss. SeeR. 912.4

As explained in more detail in Section liLA, infra, Mortgage Loans cease

to be assets of the Trust in several different ways. First, the PSA provides that

Mortgage Loans may be "charge[ d] off' if they are 180 days delinquent and no

meaningful recovery can be obtained. R. 141-42 (PSA § 3.13(a)(iii)). In the event

the Servicer makes such a determination, the PSA expressly provides that after a

further 180-day period, the "charged-off' loan is "released from the Trust Fund,"

no longer gives rise to servicing fees, and is "no longer an asset of [the Trust]." R.

141-43 (PSA § 3.13(a)(iv)).

Pursuant to the PSA, a Mortgage Loan can also cease to be an asset of the

Trust if it is liquidated. This includes when that Mortgage Loan is repaid. See,

e.g, R. 85 (PSA § 1.01) (defining "Liquidation Event" to include when a

"Mortgage Loan is paid in full"). The parties clearly understood that Mortgage

Loans would be repaid at different times. The Prospectus Supplement issued to

investors disclosed that "rates of payment of principal on the Mortgage Loans will

depend on future events and a variety of factors," and that prepayments would

4 November 2012 Master Servicer remittance report listing the "Ending Loan Count."

9

result in average loan terms much shorter than their nominal thirty years. 5

A Mortgage Loan can also be liquidated through foreclosure or other

action by the Servicer. In this event, the now-liquidated loan ceases to be a

Mortgage Loan held by the Trust and subject to repurchase. R. 141, 144-45 (PSA

§§ 3.13(a)(i), 3.14(b )).

The fact that Mortgage Loans that have been liquidated whether

through repayment, foreclosure or otherwise were not intended to be subject to

the repurchase remedy is underscored by the PSA' s definition of the "Purchase

Price" at which repurchases are to be made. That definition is, in turn, based on

"1 00% of the Stated Principal Balance" as of the date of repurchase. R. 99-100

(PSA § 1.01 ).6 The Stated Principal Balance of a loan is "zero" once the proceeds

of a "Liquidation Event" with respect to that loan have been distributed. R. 114

(PSA § 1.01 ). Thus, even if such loans were subject to repurchase, the price would

be $0.

Notably, the PSA treats Mortgage Loans that are liquidated by repayment

and Mmigage Loans that are liquidated through other means identically. Plaintiff-

Respondent acknowledged that it had no claims with respect to repaid loans. See

5 See ACE 2006-SL2, Prospectus Supplement at S-38, S-40-52 (Form 424(b )(5)) (Mar. 24, 2006) ("ACE 2006-SL2 PS"), available at http://www.sec.gov/ Archives/edgar/data/1356242/000093041306002368/c41660 424b5.txt.

6 The Purchase Price also includes interest on the ($0) Stated Principal Balance, as well as unreimbursed servicing fees and advances. R. 99-100 (PSA § 1.01 ).

10

R. 1199 (Hr'g Tr. at 56:5-7) ("No damages for paid off loans, your honor. We're

not looking for something that we're not entitled to here."). There is, however, no

basis in the language of the PSA to treat repaid loans and loans that are liquidated

by foreclosure or otherwise differently insofar as the repurchase remedy is

concerned. Both categories of loans, once liquidated, are no longer Mortgage

Loans subject to repurchase.

The sole remedy for RW breaches i.e., the repurchase protocol can

therefore be summarized as follows: DBSP made RWs in respect of the Mortgage

Loans, in the MLPA, as ofMarch 28,2006. If any RW was breached when made,

the Trustee (not certificateholders) may enforce the sole remedy by notifying

DBSP of any such breaches and affording DBSP 60 days to cure the breach or 90

days to repurchase the Mortgage Loan. R. 121-22 (PSA § 2.03(a)). If DBSP does

not cure or repurchase, the Trustee (not certificateholders) may take further action

to "enforce" the sole remedy, including by lawsuit. !d.; R. 214-15 (PSA § 12.03).

The repurchase remedy is limited to Mortgage Loans in the Trust and requires

payment of the "Purchase Price" in exchange for return of the Mortgage Loan. R.

87,99-100, 121-22 141-42 (PSA §§ 1.01, 2.03(a), 3.13(a)(iv)).

D. Procedural History

The Funds acquired their certificates m December 2011 and January

2012, nearly six years after they were issued. SeeR. 355 n.2, 361-62. On January

11

12, 2012, the Funds wrote to the Trustee, asking it to "act expeditiously to request

[a tolling] agreement" "in light of the potentially expiring statute of limitations

deadlines." R. 355-59, at 359. In this letter, the Funds alleged that 322 loans

breached R W s on the grounds that a retroactive automated valuation model

("A VM") yielded lower property values than the original appraisals. !d. at 356.

Several weeks later, on February 8, 2012, the Trustee notified DBSP of these

allegations. R. 801-02. The Trustee's letter did not provide supporting data or

explain why a post-hoc A VM was more reliable than the original appraisal.

Instead, the Trustee stated that it had "not conducted any independent review of the

facts asserted in the [letter] and makes no representations as to the accuracy or

information contained therein." !d.

Thereafter, on March 8, 2012 prior to the expiration of the 60- and 90-

day pre-suit cure and repurchase periods the Funds directed the Trustee to bring

suit. R. 24-27, at 26. This was, at best, premature. Even if the Trustee's February

8 letter to DBSP constituted a valid repurchase demand, the pre-suit cure and

repurchase periods had not lapsed. On March 23, 2012, the Trustee forwarded

DBSP another letter concerning a further 624 alleged breaches. R. 813. Again, the

Trustee made clear that it was forwarding these allegations without any view as to

their accuracy. !d. On March 28, 2012, six years after the RWs were made and

therefore the last day for the Trustee to bring a timely claim, the Funds filed their

12

Summons, naming DBSP as defendant and the Trustee as nominal defendant. R.

24-27. The Summons alleged that the Trustee had refused to sue DBSP. !d.

After their Summons was filed, the Funds continued to send the Trustee

breach allegations, which the Trustee continued to forward to DBSP while

disclaiming their accuracy. See, e.g., R. 850-55. After service of the Summons,

the Trustee and DBSP each entered their appearances in the action. R. 29, 31. On

September 13, 2012, almost six months after the limitations period expired, the

Trustee, now represented by the Funds' counsel, Kasowitz Benson Torres &

Friedman, filed the Complaint, substituting itself for the Funds, and purpmiing to

assert a claim for breach of contract based on DBSP' s alleged breach of the R W s.

R. 32-53.

On November 30, 2012, DBSP moved to dismiss the Complaint pursuant

to CPLR § 3211. DBSP argued, inter alia, that the Funds lacked standing to bring

suit, that the Trustee's claims were time-barred, and that released and liquidated

loans were not subject to repurchase. The lAS Court heard argument on DBSP's

motion on April30, 2013.

Ten days later, on May 10, 2013, Justice Sherwood issued his ruling in

Nomura, dismissing a virtually identical repurchase case on the same grounds that

DBSP asserts here. There, affiliates of the Funds initiated a repurchase action one

day before the six-year anniversary of the "closing date" (which, in that case, was

13

later than the date of the PSA and MLPA). 2013 WL 2072817, at *4. Months

later, the Trustee substituted as plaintiff. !d. Relying on settled New York law,

Justice Sherwood found that because "the plaintiff with standing to sue

appeared . . . more than six years after Plaintiff's claims for breach of contract

accrued, the complaint must be dismissed." !d. at *9. Justice Sherwood

specifically affirmed what New York law already says the "statute of limitations

runs from the time of breach of the Mortgage Representations, not from the time

plaintiff elected to make demands for repurchase." !d. at *8. The lAS Court's

Order, which reached a contradictory result, was issued on May 13, 2013.

E. The Order Below

The lAS Court observed that it is "undisputed that [the Funds] lacked

standing to maintain this action under the PSA's no-action clause," but found the

issue to be moot because the statute of limitations started to run not when the RWs

were made, but when DBSP "rejected the Trustee's repurchase demand."7 R. 11,

17. The Order concluded that RW breaches were not breaches of contract and that

the "only contractual wrong" DBSP could commit was to fail to repurchase a

breaching loan. R. 15. The lAS Court reasoned that a repurchase claim would not

accrue until the cure period expired, because Plaintiff-Respondent did not have the

right to make a "repurchase demand" until DBSP failed to cure the breach. !d.

7 The Order characterizes DBSP's actions as "improper" with no explanation how its actions were so.

14

Ultimately, the lAS Court concluded that Plaintiff-Respondent's claims

were timely because they accrued when DBSP did not repurchase allegedly

breaching loans on demand, regardless of when the R W s were made. R. 17. As to

the concern that this would allow plaintiffs to extend the statute of limitations

unilaterally, the lAS Court noted that "[h]ad the Trustee ... waited a number of

years to file suit, the inquiry might be different." !d. This loose standard for

determining the timeliness of contract claims is without any support in New York

law and leaves the door open for parties to assert breach claims indefinitely. The

lAS Court acknowledged it was contradicting previous cases dealing "with this

exact situation," which it believed "misappli[ ed] New York law." R. 14.

Despite the plain language of the PSA, the Order also rejected DBSP' s

arguments regarding released and liquidated loans, finding that issues of fact

would preclude dismissal. Instead of simply denying the motion on this basis, the

lAS Court provided an interpretation of the contracts that was not predicated on

any of the terms of the agreements or any of the facts in the record, but was based

instead on the lAS Court's view of the parties' proper "incentives."

Following entry of the Order, DBSP moved for a stay of all proceedings

pending appeal, which the lAS Court granted at a telephonic conference held on

June 7, 2013. The stay permits limited discovery of third-party loan servicers in

order to ensure preservation of loan origination and servicing files during the

15

pendency of this appeal. The terms of the stay are memorialized in a June 27,

2013 order issued by the lAS Court.

STANDARD OF REVIEW

This Court reviews all questions of law and fact from an order denying a

motion to dismiss. CPLR § 550l(c). "This pervasive review power allows the

appellate court at the first tier of appeal to stand in the place of the nisi prius judge

and do whatever the judge should have done." David D. Siegel, New York

Practice § 529 (5th ed). This Court is therefore not bound by the order below and

may reverse or modify, wholly or in part, that order to the extent supported by the

record. CPLR § 5522(a); Kahn v. City of N.Y., 37 A.D.2d 520, 521 (1st Dep't

1971 ).

A complaint that fails to state a claim is subject to dismissal under CPLR

§ 32l1(a)(7), and an action commenced by a defective summons with notice is

subject to dismissal under CPLR § 32ll(a)(8). An action brought by a party

without standing or capacity to sue is subject to dismissal under CPLR §

3211 (a)(3). Where documents properly before the court "unambiguously

contradict[ ] the allegations supporting a litigant's cause of action," dismissal is

also warranted under CPLR § 3211 (a)(l) "regardless of any extrinsic evidence or

self-serving allegations offered by the proponent of the claim." 150 Broadway

NY. Assocs., L.P. v. Bodner, 14 A.D.3d 1, 5 (1st Dep't 2004). Finally, a claim that

16

is facially time-barred is subject to dismissal under CPLR § 321l(a)(5) unless the

nonmoving party can "raise an issue of fact as to the applicability of an exception

to the statute of limitations." Benjamin v. Keyspan Corp., 104 A.D.3d 891, 892

(2d Dep't 2013).

ARGUMENT

I. THE lAS COURT ERRED IN HOLDING THAT THE PSA'S DEMAND REQUIREMENT DEFERRED ACCRUAL OF PLAINTIFF-RESPONDENT'S CLAIMS

The lAS Court held that Plaintiff-Respondent's contract claim did not

accrue on the date the challenged RWs were made, but only after the pre-suit cure

and repurchase periods had lapsed. This ruling is contrary to well-settled New

York law concerning the accrual of contract claims and rests on a misinterpretation

of the agreements. If allowed to stand, the Order will effectively vitiate the

limitations period for breach claims under all commercial contracts containing sole

remedy provisions.

A. The lAS Court Erred In Concluding That RW Breaches Are Not Breaches Of Contract

It is black-letter law that contracts containing RWs are breached if the

R W s are false, and that the resulting claims accrue on the date of the breach. See

Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606, 610 (1979) (breach of

warranty claim concerning condition of roof accrued on date of contract); Varo,

Inc. v. Alvis PLC, 261 A.D.2d 262, 265, 268 (1st Dep't 1999) (RW breach claim

17

accrued on the date of the agreement; courts "may not invent tolling provisions

simply because to do so might seem necessary in order to avoid results thought to

be unfortunate in particular cases") (internal quotation marks omitted)).

Where, as here, RW s are made "as of" the date of an agreement and

concern existing or historical facts, they are false (if at all), and the plaintiff's

breach claim accrues on the day the agreement is entered into, not the date of the

plaintiff's subsequent discovery or injury. See, e.g., W. 90th Owners Corp. v.

Schlechter, 137 A.D.2d 456, 458 (1st Dep't 1988) ("The representation ... was

false when made. Thus, the breach occurred at the time of the execution of the

contract."); Nomura, 2013 WL 2072817, at *8 ("[T]he Mortgage Representations

are alleged to have been false when made. Those representations did not arise or

change over time .... The statute of limitations [therefore] runs from the time of

breach of the Mortgage Representations, not from the time plaintiff elected to

make demands for repurchase."); Lana & Edward's Realty Corp. v. Katz/Weinstein

P 'ship, 26 Misc.3d 1238(A), 2010 WL 963564, at *4 (Sup. Ct. Kings Cty. Mar. 17,

2010) (same); ABB Indus. Sys. v. Prime Tech., Inc., 120 F.3d 351, 360 (2d Cir.

1997) (same).

The Order cites the Court of Appeals' decision in Bulova, 46 N.Y.2d 606,

but misapplies its holding. That case involved three separate contracts, one to

supply roofing materials and two "20-Year Guaranty Bonds" under which

18

defendants promised to repair the roof any time it sprang a leak over a 20-year

period. The Court of Appeals held that the plaintiff's implied warranty claim

under the first contract arose "at the time of the sale," not when the roof sprang a

leak and repairs were requested, and was therefore time-barred. !d. at 610. Under

this precedent, the lAS Court should have held that Plaintiff-Respondent's RW

breach claims accrued when the R W s were made and were time-barred.

The Bulova Court went on to explain that the "20-Year Guaranty Bonds"

were "separate ... agreements contemplating [future] services" which "did not

merely guarantee the condition or performance of the goods, but agreed to perform

a service." !d. at 611-12. Thus, the Bulova Court concluded that the breach of the

bonds occurred when the duty to perform the service arose, i.e., when the roof was

in need of repair. Jd. Instead of applying Bulova's breach of warranty holding to

the R W breach claims at issue here, the lAS Court incorrectly analogized the R W s

to the Guaranty Bonds. As in Bulova, however, the RWs were breached, if at all,

at the time they were made.

The lAS Court adopted the novel theory, which neither party advanced,

that falsity of a RW was not a breach because DBSP had no duty to ensure the

8 In the complaint, its briefs and at oral argument, Plaintiff-Respondent repeatedly argued RW breaches were breaches of the contracts. R. 1174 (Hr'g Tr. 31 :25-26) ("There are really two kinds of breaches here. One are [sic] the breaches of the reps and warranties"); R. 1196 (Hr' g

19

Though DBSP characterizes a Representation as being 'breached' if it is false, in this contract action, the mere fact that a Representation is false does not mean that DBSP 'breached' the PSA. Under the PSA, DBSP has no duty to ensure that the Representations are true. Thus, upon discovery or notice of falsity, DBSP's obligation is to follow the [cure-and-repurchase remedy].

R. 15. This theory cannot be reconciled with the above-cited precedents or the

terms of the operative agreements.

The MLP A provides that the R W s "shall be true and correct in all

material respects as of the date as of which they are made." R. 300-01 (MLPA §

8(a)). The PSA, in turn, provides for DBSP to repurchase a Mortgage Loan that is

in "breach" ofRWs upon notice of"breach." R. 121-22 (PSA § 2.03(a)); R. 299-

300 (MLPA § 7(a)). As this makes clear, the falsity of any RW is a "breach" of

the agreements and such a "breach" must occur for the repurchase remedy to

apply. The Order, however, inappropriately reads these provisions out of the

contracts. See Bailey v. Fish & Neave, 8 N.Y.3d 523, 528 (2007) ("courts may not

by construction add or excise terms") (internal quotation marks omitted)). If the

lAS Court were cmTect that falsity of a RW is not a breach, Plaintiff-Respondent

would never be entitled to the repurchase remedy, because there would never be

any underlying "breach" in the first instance.

The lAS Court reasoned that the claims could not have accrued when the

Tr. 53: 16-18) ("If you breach that rep and warranty, ... then the sole remedy for that is going to be repurchase").

20

challenged RW s were made because this would impose a duty on Plaintiff­

Respondent to "perform constant due diligence" to uncover breaches, which the

lAS Court found to be "at odds with Section 7(a) of the MLPA" and not

"commercially reasonable." R. 15-16. MLPA § 7(a), however, has no relevance

to accrual. That section, which provides that the R W s "shall not be impaired by

any review and examination of loan files ... or any failure on the part of [DBSP]

or [ACE] to review or examine such documents," R. 299-300, exists simply to

make clear that as assignee of ACE's rights under the MLP A, the Trustee is not

charged with its predecessors' knowledge as to the R W s, which could have

conceivably rendered the R W s unenforceable. See CBS Inc. v. Ziff-Davis Pub.

Co., 75 N.Y.2d 496, 503-04 (1990). Nothing in that section defers accrual of

contract claims.

Moreover, the holding that it would not be "commercially reasonable"

for Plaintiff-Respondent's claim to accrue when the challenged RWs were made

because Plaintiff-Respondent would then have to discover breaches within the

limitations period, R. 16, is contrary to New York law that contract claims accrue

regardless of discovery. See Ely-Cruikshank, 81 N.Y.2d at 402; De Hernandez v.

Bank of Nova Scotia, 76 A.D.3d 929, 930 (1st Dep't 2010). Indeed, New York

courts have consistently held that the possibility that breaches will not be

discovered during the limitations period does not justifY importing a discovery rule

21

into contract law. See, e.g., Varga v. Credit-Suisse, 5 A.D.2d 289, 292 (1st Dep't

1958), ajf'd, 5 N.Y.2d 865 (1958) ("Knowledge ofthe occurrence ofthe wrong on

the part of the plaintiff is not necessary to start the Statute of Limitations running

in [ ] contract [claims]."). That the lAS Court thought this was not "commercially

reasonable" does not, of course, justify a different result. Teichman v. Cmty. Hasp.

of W. Suffolk, 87 N.Y.2d 514, 520 (1996) ("Courts may not make or vary the

contract ... to accomplish [their] notions of abstract justice .... "). Moreover, this

is not a situation in which the plaintiff lacks the ability to ascertain breaches.

Plaintiff-Respondent, as Trustee, has full authority to manage the Trust for the

benefit of investors and receives regular reports from the Servicer as to the

performance of the Trust and the underlying loans. The fact that Plaintiff­

Respondent did not bring claims (either independently or prompted by

certificateholders) for more than six years after the RWs were made does not

render the standard limitations period "commercially unreasonable" even if

"commercial reasonableness" were relevant to the application of statutes of

limitation.

The Order also states that it was "highly peculiar" that the parties did not

expressly state that claims would be subject to a six-year statute of limitations. R.

16. Contracting parties, however, do not have to recite the statute of limitations in

their agreements for it to apply. The limitations period is six years, regardless of

22

whether the parties set it forth in the contract. CPLR § 213(2). Moreover, courts

routinely dismiss untimely contract claims even though the subject of the contract

persists past the limitations period. See, e.g., W 90th Owners Corp., 137 A.D.2d

at 458; ABB Indus. Sys., 120 F.3d at 360. While the parties could have included

accrual-upon-demand language, the lAS Court ened in rewriting the agreements to

contain such language under the guise of "commercial reasonableness." Metro

Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889 (2d Cir. 1990) (Contracts

should not be altered by "judicial views as to what terms might be preferable.").

B. The lAS Court Erred In Concluding That Alleged Noncompliance With The Repurchase Remedy Starts The Limitations Period

Contrary to the lAS Court's holding, a "sole remedy" provision m a

contract is not a separate agreement for ongoing performance of services. Nomura,

2013 WL 2072817, at *8 (under Bulova, repurchase provision is not a "continuing

obligation"). The lAS Court erred in concluding that failure to remedy a breach is

the trigger for statute of limitations purposes. R. 15-16. Under the lAS Court's

holding, the six-year statute of limitations for contract claims would be displaced

in any contract containing a "sole remedy" provision or pre-suit demand

requirement. R. 16. This is not the law.

As this Court explained in Walnut Place, a repurchase provisiOn Is

"merely ... a remedy in the event of a breach," not the basis for a separate cause of

action. 96 A.D.3d at 684. The lAS Court appeared to agree at oral argument. R.

23

1190 (Hr' g Tr. at 4 7: 19-20) (repurchase remedy is "a remedy for a breach. It's not

a separate contract."), but ultimately held that failure to repurchase was the

relevant action.

The Order is also fundamentally inconsistent with long-standing New

York law that " [a] limitation on liability provision in a contract represents the

parties' [a]greement on the allocation of the risk of economic loss ... which the

comis should honor." Met. Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d

430, 436 (1994); see also Rubinstein v. Rubinstein, 23 N.Y.2d 293, 298 (1968)

("explicit language in the contract that [a remedy is] to be the sole remedy" is

enforceable). The lAS Court's holding does not allow parties to agree to allocate

the risk of economic loss. Under its holding, parties cannot limit their liability by

agreeing to a sole remedy because such a remedy provision would be construed,

according to the lAS Court, as creating a recurring obligation to remedy breaches,

and deferring accrual of the statute of limitations. This is contrary to settled

expectations in any number of contracts. Cf Nomura, 2013 WL 2072817, at *8

("The repurchase obligation ... is merely a remedy. It is not a duty independent of

the Mortgage Representation breach of contract claims.").

Tellingly, if the parties had not agreed to a sole remedy, the statute of

limitations would undisputedly have commenced upon the R W breach. The Order

fails to explain why the outcome is different when a sole remedy provision is

24

present. It defies logic to conclude that the parties, by seeking to limit the

remedies available by adopting a "sole" remedy provision making no mention of

the accrual of any party's claim, actually extended the limitations period

indefinitely.

The lAS Court further erred in concluding that Plaintiff-Respondent's

claim did not accrue until after Plaintiff-Respondent made and DBSP rejected a

"repurchase demand." Under CPLR § 206(a), "where a demand is necessary to

entitle a person to commence an action, the time within which the action must be

commenced shall be computed from the time when the right to make the demand is

complete." In applying that provision, the lAS Court held that the Trustee "is not

entitled to sue or make a repurchase demand until discovery or notice by [DBSP]

occurs and the cure period lapses. It, therefore, follows that DBSP does not breach

the PSA and the claim for the breach does not accrue until DBSP fails to timely

cure or repurchase a loan." R. 15 (emphasis in original). That is incorrect.

The agreements create a simple remedial mechanism whereby DBSP

must repurchase any Mortgage Loan it cannot cure after notice of a R W breach. R.

294-99 (MLPA § 6); R. 121-22 (PSA § 2.03(a)). Contrary to the lAS Court's

holding, Plaintiff-Respondent is not required to make a separate "repurchase

demand" after the 60-day cure period expires; DBSP is automatically obligated to

repurchase a breaching loan if it fails to cure the breach. Indeed, as the breach

25

notices submitted to the IAS Court make clear, Plaintiff-Respondent never sent

DBSP separate "repurchase demands" after the cure period lapsed. Therefore, if

sending such demands were in fact a prerequisite to accrual, this case would be

subject to dismissal for that very reason.9

Moreover, both the Court of Appeals and this Court recently confirmed

that under CPLR § 206(a) a pre-suit demand requirement does not delay accrual

until after the demand is rejected, even though a suit cannot be maintained until

such time. 10 See Hahn, 18 N.Y.3d at 770-71 (claim accrued when plaintiff had

right to ask for payment, not when defendant failed to pay upon demand); Elie

9 The lAS Court appears to have relied on unidentified but purportedly "similar" agreements which ostensibly provide that a R W breach claim does not accrue until a demand is made. The lAS Court may have been referencing a loan purchase agreement between DBSP and originator GreenPoint Mortgage Funding, Inc. ("GreenPoint") at issue in Assured Guaranty Municipal Corp. v. DB Structured Products, Inc., 33 Misc.3d 720 (Sup. Ct. N.Y. Cty. 2011). Far from being "similar" to the PSA and MLP A, this agreement provided that claims "shall not accrue" until DBSP discovers a breach and notifies GreenPoint; GreenPoint fails to cure the breach; and DBSP demands that GreenPoint repurchase that loan. Assured, 33 Misc.3d at 743-44. That agreement only demonstrates that parties knew how to draft "accrual-upon-demand" language when agreed to. The agreements here contain no such language. See Syncora Guar. Inc. v. EMC Mortg., LLC, 39 Misc.3d 1211(A), 2013 WL 1608142, at *4 (Sup. Ct. N.Y. Cty. Apr. 15, 2013) (refusing to "import" a provision into a contract that "did not include [such] language" where "similarly situated parties did include such [provisions] in other transactions").

10 The Order appears to have confused cases where the demand is a necessary element of the plaintiff's claim such as in bailment, replevin and insurance cases with cases, such as the present one, where the demand requirement is merely a procedural prerequisite to suit "in which a right to relief already exists." CPLR § 206 Practice Commentaries. This action is completely unlike bailment, replevin or insurance cases where there is no wrong until a demand for return of chattel or for coverage is refused.

26

Int'l, Inc. v. Macy's W. Inc., 106 A.D.3d 442,442 (1st Dep't 2013) (same). 11

flahn concerned very similar contractual provisions whereby plaintiff

was required to make written demand for payment and defendant was then

required to pay within a specified timeframe. 18 N.Y.3d 765. Much like Plaintiff-

Respondent here, the plaintiff in Hahn failed to commence an action within six

years. Id. To avoid the statute of limitations, the plaintiff advanced the same

argument adopted by the IAS Court, that its claims did not accrue until it

"demanded payment and [defendant] refused to pay." I d. at 770. ln rejecting that

argument, the Hahn Court held that a contract claim accrues at the time of the

breach, not when the plaintiff discovers the breach or is injured. !d. The Court

went on to explain that while the contracts may have conditioned the plaintiffs

right to payment upon a demand, plaintiff could have made the demand as soon as

payment became due. "To hold otherwise," the Court stated, "would allow

[plaintiff! to extend the statute of limitations indefinitely by simply failing to make

a demand." Id. at 771 (internal quotation marks omitted).

This Court recently reached a similar result in Elie. In that case, this

Court rejected the argument that because a contract made "receipt of an invoice a

condition for requiring payment," plaintiffs claim did not accrue until it sent the

II These authorities also confirm that a party's refusal to remedy a breach is not itself a breach of contract that gives rise to an independent claim.

27

invoice and defendant refused payment. 106 A.D.3d at 443. 12

The lAS Court noted that its ruling was inconsistent with two pnor

decisions that addressed "the exact [same] situation." Those decisions held that a

claim accrues not when the defendant fails to repurchase upon demand, but at the

time the R W s are breached. See Evergreen, 793 F. S upp. 2d at 1 192, 1194 (statute

of limitations is "triggered by a breach of any [RW]," not by failure to demand

repurchase); Daiwa, 2003 WL 548868 at *2 (RWs "were not true when made," so

the "statute of limitations began to run at that time, and expired six years later";

demand requirement did not defer accrual because the "right to make that demand"

was "complete" as of the breach). Although the Order concluded that Daiwa and

Evergreen were wrongly decided, both decisions are completely consistent with

binding precedents cited above. In contrast, the other cases cited in the Order in

support of the lAS Court's statute of limitations ruling did not address either RWs

12 The Order incorrectly analogized the contracts at issue to (rc )insurance contracts. R. 16. Unlike (re )insurance, where the (re )insurer has no obligation until it receives a demand for coverage, here DBSP promised that the RWs "shall be true and correct" as of the closing date. While both types of agreements have notice requirements, the similarities end there. While in the insurance context no claim may accrue until a demand for coverage is rejected, because that is when the contractual wrong occurs, a breach of a contractual R W as to existing facts occurs when the RW is falsely made and accrual is not deferred until the point in time that a remedy is requested. See Hahn, 18 N.Y.3d at 770-71; Elie, 106 A.D.3d at 443; Daiwa, 2003 WL 548868, at *2-3. Moreover, the lAS Court's statement that the repurchase remedy "functioned as insurance" and "was likely priced accordingly" is without basis. R. 15. The Complaint contains no allegations regarding how the RWs or the repurchase remedy were "priced," and neither party advanced any such argument.

28

or "sole remedy" provisions and are simply not on point. 13

Equally unavailing are those few authorities cited by Plaintiff-

Respondent (but not the lAS Court) which stand for the flawed proposition that

failure to repurchase is an "independent breach" of contract. 14 All of those derive

from a misreading of the First Circuit's decision in Resolution Trust Corp. v. Key

Financial Services, Inc., 280 F.3d 12 (1st Cir. 2002) ("RTC'), which declined to

decide "whether or not [defendant] committed an independent breach by failing to

repurchase on demand." /d. at 18; see also Nomura, 2013 WL 2072817, at *8 (the

cases cited above "misapply ... Resolution Trust ... and are unpersuasive").

Moreover, most of these cases do not even concern statute of limitations issues, let

alone cite or rely on New York statute of limitations cases. See, e.g., LaSalle, 237

F. Supp. 2d at 638; PMC Bancorp, 2013 WL 1095458, at *4; Key Fin. Corp., 2011

WL 1296731, at *11.

13 N. Y Cent. Mut. Fire Ins. Co. v. Glider Oil Co., 90 A.D.3d 1638, 1639 (4th Dep't 2011) (defective construction claim accrued when work was substantially complete); Beller v. Williams Penn Life Ins. Co. of' N. Y, 8 A.D.3d 310, 314 (2d Dep't 2004) (contract imposed duty to consider factors affecting price of insurance before raising rates); Airco Alloys Div. v. Niagara Mohawk Power Corp., 76 A.D.2d 68,80 (4th Dep't 1980) (in decision that did not address RWs or "sole remedy" provisions, the court declined to determine whether the defendant's sale of electricity created a continuing obligation because there were too many disputed facts to resolve on a motion to dismiss); Guilbert v. Gardner, 480 F.3d 140, 150 (2d Cir. 2007) (contract required yearly contributions to pension fund).

14 See Lehman Bros. Holdings, Inc. v. PMC Bancorp, No. LA CV 10-07207 JAK (PJWx), 2013 WL 1095458 (C.D. Cal. Mar. 8, 2013); Lehman Bros. Holdings, Inc. v. Nat'l Bank ofArk., 875 F. Supp. 2d 911 (E.D. Ark. 2012); Lehman Bros. Holdings, Inc. v. Key Fin. Corp., No. 8:09-CV-623-T-17EAJ, 2011 WL 1296731 (M.D. Fla. Mar. 31, 2011); LaSalle Bank, N.A. v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618 (D. Md. 2002).

29

II. THE TRUSTEE'S BELATED SUBSTITUTION DOES NOT RENDER THIS ACTION VIABLE

Based on its incorrect conclusion that Plaintiff-Respondent's claims did

not accrue until after a demand was made and rejected, the lAS Court declined to

address the legal consequences of the Funds' lack of standing and the Trustee's

subsequent, belated substitution. This Court can and should reach that issue and

dismiss Plaintiff-Respondent's claims as time-barred. Hirsch v. New England

Navigation Co., 200 N.Y. 263, 266 (1910) ("[T]he appellate court may affirm or

reverse an order or judgment upon any ground and for any reason that such court

may decide to be controlling, regardless of the ground or reason stated in deciding

such issue by the Special or Trial Term."). 15

As discussed supra, in the months before the six-year anniversary of the

date the R W s were made, the Funds tried to convince the Trustee, the only party

with standing, to bring suit. The Trustee declined. The Funds therefore filed the

defective Summons as a procedural ploy in an attempt to toll the limitations period

while they continued to try to persuade the Trustee to take action. The Trustee did

not agree until nearly seven months later, when the claims were time-baned.

15 Accord Krich v. Wall Indus., Inc., 118 A.D.2d 627, 628 (2d Dep't 1986) (The Appellate Division's scope of review "is co-extensive with that of [the lAS Court] and [it] may exercise [its] discretion independently.") (citations omitted); Small v. Lorillard Tobacco Co., Inc., 94 N.Y.2d 43, 52-53 (1999) (same).

30

A. The Funds Lacked Standing

This Court recently confirmed that certificateholders lack standing to

enforce repurchase remedies. In Walnut Place, a certificateholder sued for

repurchase under a substantially similar contract. 96 A.D.3d 684. This Court

affirmed that the action was "barred by the 'no action' clause in the PSAs, which

plainly limits certificateholders' right to sue to an 'Event of Default,"' which

"involves only the master servicer." ld. at 684. In so holding, the Court rejected

the arguments that the agreement's repurchase protocol "render[ed] the no-action

clause ambiguous" or otherwise "permit[ted] plaintiffs to bring this action,"

finding that the protocol "merely provides for a remedy in the event of a breach,

and does not reference or contemplate actions by certificate holders to achieve that

remedy." Id. at 684-85 (emphasis added); see also Nomura, 2013 WL 2072817, at

*4 ("individual investors ... lack standing to sue.").

As in Walnut Place, the PSA provides that "the Trustee shall enforce" the

repurchase remedy, R. 121-22 (PSA § 2.03(a)), and contains a no-action clause

barring Certificateholders from suing unless they have, among other things, given

the Trustee "a written notice of default and of the continuance thereof, as

hereinbefore provided." R. 214-15 (PSA § 12.03). Defaults under the PSA are

enumerated exclusively in Article VIII, ("Default"), which concerns failures of

performance by the Servicer or Master Servicer. While the PSA contains

31

procedures for Certificateholders to provide "notices of default" to the Trustee in

the event of such failures, 16 it does not authorize Certificateholders to provide

notices of default in connection with R W breaches.

B. The Trustee's Attempted Substitution Does Not Relate Back To The Filing Of The Summons

The Funds' lack of standing rendered the Summons a legal nullity, and

therefore the Complaint cannot be deemed commenced on the date of the

Summons. Goldberg v. Camp Mikan-Recro, 42 N.Y.2d 1029, 1029 (1977)

Uurisdiction does not attach upon the filing of a summons by a party that "lacks

capacity to sue," and the filing of a subsequent summons by a pmiy with standing

does not relate back). That is because "[r]elation-back applies to the amendment

of claims ... and is dependent upon the existence of a valid preexisting action."

Nomura, 2013 WL 2072817, at *6 (quoting S. Wine & Spirits of Am., Inc. v.

Impact Envt'l Eng'g, PLLC, 80 A.D.3d 505, 505-06 (1st Dep't 2011)); George v.

Mt. Sinai Hsp., 47 N.Y.2d 170, 179 (1979) ("relation-back" requires "a valid pre-

existing action."). Where, as here, "the original plaintiff ... did not have standing

to sue . . . there was no valid preexisting action to which the amendment

(substituting the Trustee) can relate." Nomura, 2013 WL 2072817, at *7; see also

16 SeeR. 194-97 (PSA §§ 8.01(a)(i), 8.0l(a)(ii), 8.0l(b)(i)) (each concerning specified events of default which "continue[] unremedied" for a set period "after the date on which written notice of such failure ... shall have been given ... by the 1 Iolders of Certificates entitled to at least 25% of the Voting Rights").

32

Truty v. Fed. Bakers Supply Corp., 217 A.D.2d 951, 952 (4th Dep't 1995) ("The

original action was not brought by parties with standing to sue for breach of

contract. When plaintiffs sought to serve an amended complaint in April 1994, the

Statute of Limitations had run and there was no valid pre-existing action to which

the amended complaint could 'relate-back."') (quotation omitted).

Here, the Funds lacked standing, and the Trustee, a sophisticated party,

declined to bring suit within the limitations period. This case is therefore easily

distinguishable from the cases in which courts permit substitution to correct

technical errors or to name the proper corporate affiliate. 17 Having declined to

bring a timely action, the Trustee cannot change its mind after the limitations

period expired and interpose itself in a suit it earlier chose not to initiate. Cf

Buran v. Coupal, 87 N.Y.2d 173, 181 (1995) ("When a plaintiff intentionally

decides not to assert a claim against a party known to be potentially liable, there

has been no mistake and the plaintiff should not be given a second opportunity to

17 For example, American Home Assurance Co. v. Scanlon, 164 A.D.2d 751 (1st Dep't 1990), l?rankart Furniture Staten Island, Inc. v. Forest Mall Assocs., 159 A.D.2d 322 (1st Dep't 1990), and HSBC Guyerzeller Bank AG v. Chascona NV., 42 A.D.3d 381 (1st Dep't 2007) involve amendments to pleadings which initially named the wrong corporate affiliate; Fulgum v. Town of Cortlandt Manor, 19 A.D.3d 444 (2d Dep't 2005) and .!CD Farms, Inc. v . .Juul-Nielsen, 300 A.D.2d 446 (2d Dep't 2002) involve amendments substituting close corporations for their sole shareholders; Glaze, Inc. v. Coach Choice Apparel, Inc., 28 Misc.3d 1225(A), 2010 WL 3294300, at *3 (Sup. Ct. N.Y. Cty. 2010) substituted the plaintiffs successor in interest, a change described as "essentially ministerial"; and Fairbanks Capital Corp. v. Nagel, 289 A.D.2d 99 (1st Dep 't 2001) involved a suit by a servicer who was replaced by the subsequent assignee of the mortgage.

33

assert that claim after the limitations period has expired."). 18

III. DENIAL OF DBSP'S MOTION AS TO LIQUIDATED AND RELEASED LOANS WAS ALSO ERROR

The lAS Court also denied the aspect of DBSP's motion which sought

dismissal on the grounds that the Complaint asserted claims concerning loans

which were not subject to repurchase. This Court need not reach this issue if it

finds, as it should, that the Action is untimely. See Ely-Cruikshank Co., Inc. v.

Bank of Montreal, 81 N.Y.2d 399, 404 (1993) ("Because the disposition of this

case turns entirely on the application of settled breach of contract Statute of

Limitations principles, we do not reach [the] other arguments addressed to the

merits of the dispute.").

The repurchase remedy is defined and circumscribed by the terms of the

PSA. As the Court of Appeals explained in Metropolitan Life Insurance Co. v.

Noble Lowndes International, Inc.:

With certain exceptions, 19 the courts see no harm in express agreements limiting the damages to be recovered for breach of contract. . . . Parties sometimes make agreements and expressly provide that they shall not be enforceable at all, by any remedy legal

18 See also 15 E. lith Apt. Corp. v. Elghanayan, 232 A.D.2d 289, 289 (1st Dep't 1996) (intervention improper where "[t]he initial omission of appellants as plaintiffs ... was the result of a conscious strategic decision"); Everhome Mortg. Co. v. Charter Oak Fire Ins. Co., No. 07 Civ. 98, 2012 WL 868961, at * 12 (E.D.N.Y. Mar. 14, 2012) (no basis under CPLR to "allow LaSalle the benefit of Ever Home's filing date . . . where [LaSalle] had ample notice and opportunity to bring claims ... within the statutory period").

19 These exceptions are "contracts of adhesion" and "when the breach is also tortious." Metro. Lffe, 84 N.Y.2d at 436 n.l. Neither is alleged here.

34

or equitable. They may later regret their assumption of the risks of non-performance in this manner; but the courts let them lie on the bed they made.

84 N.Y.2d 430,436 (1994) (quoting 5 Corbin, Contracts,§ 1068, at 386).

In this case, the PSA clearly states that the sole remedy for incurable R W

breaches is "repurchase" of a breaching "Mortgage Loan" from "REMIC I" - the

primary trust created under the PSA- at the "Purchase Price." R. 121-22 (PSA §

2.03(a))?0 To effect a repurchase, DBSP must "remit[ ]" the Purchase Price "to

the Servicer," and the Trustee must "release to [DBSP] the related Mortgage File

and . . . execute and deliver such instruments of transfer or assignment" as are

needed to "vest" such Mortgage Loan in DBSP. I d. No other form of recovery is

contemplated. See id. ("[T]he obligation of the Sponsor to cure or to repurchase

any Mortgage Loan . . . shall constitute the sole remedy respecting [any R W]

?] breach.").-

20 The PSA also provides that DBSP may substitute a replacement loan, but this alternative remedy is only available in the first two years, R. 122-23 (PSA § 2.03(b)), as required by federal law. See 26 U.S.C. § 860G(a)(4)(B)(ii).

21 Like the limitation on the substitution remedy discussed above, the repurchase remedy is itself written into federal tax law, which imposes "a tax equal to 100 percent of the net income derived from" a broadly-defined set of "prohibited transactions." 26 U.S.C. § 860F(a)(l ). These prohibited transactions include the "receipt of any income" other than from "qualified mortgages," the "disposition of any qualified mortgage transferred to the REMIC" other than through (i) "substitution" or "repurchase"; (ii) "disposition incident to the foreclosure, default, or imminent default of the mortgage"; (iii) "bankruptcy or insolvency of the REMIC"; (iv) "qualified liquidation" of the REMIC, and a limited category of "permitted investments." Id. § 860F(a)(2)(A)-(B). Therefore, if the PSA permitted a remedy other than repurchase, recoveries thereunder may be subject to 100% taxation. The PSA expressly prohibits this outcome. See R.

35

A. Plaintiff-Respondent May Only Obtain Repurchase Of "Mortgage Loans" Which Are Assets Of The Trust

The Trustee can only require DBSP to repurchase a breaching Mortgage

Loan if the Trust holds the loan when the demand is made. Furthermore, the only

sum DBSP can be required to pay is the contractual "Purchase Price."22

A mortgage-backed security is "backed by a discrete pool of self-

liquidating financial assets," Asset-Backed Sec., 70 Fed. Reg. 1506, 1508 (Jan. 7,

2005). Thus, the pool of assets is expected to shrink over time, as loans are paid

off: liquidated, or otherwise removed from the Trust. The PSA consistently

reflects this understanding. It defines "Mortgage Loan" as "( e ]ach mortgage loan .

. . held from time to time as part of the Trust Fund" and "identified in the Mortgage

Loan Schedule," which itself is to be "amended from time to time" to reflect, "[a]s

of any date, the list of Mortgage Loans included in REMIC I on such date." R. 87-

89 (PSA § 1.01 ). Similarly, "REMIC I" is defined to include "such Mortgage

Loans ... as from time to time are subject to this Agreement." R. 102 (PSA §

1.0 l ). Once a loan no longer exists or is no longer held by the Trust it can no

longer be repurchased from the Trust.

209-11 (PSA § ll.Ol(f)) ("the Trustee ... shall not take any action" that could "result in the imposition of a tax upon the Trust Fund").

22 The lAS Court recognized that "any recovery under Section 2.03 must be limited to the formula set forth in the PSA." R. 19. However, as discussed below, the lAS Court's interpretation of this formula was f1awed.

36

This reflects the parties' contractual allocation of risk. See Metro. L~fe,

84 N.Y.2d at 436 ("Agreement[s] on the allocation of the risk of economic loss"

should be "honor[ ed]."). Until a repurchase demand is made, Plaintiff-Respondent

bears the risk that the loan will be liquidated; post-demand, that risk shifts to

DBSP. See RTC, 280 F .3d at 18 n.l4 (defendant bore risk of liquidation "from the

moment a proper repurchase demand was made."). This obligates Plaintiff-

Respondent to timely inform DBSP of alleged breaches, rather than wait for years

and indiscriminately assert thousands of breach claims (as happened here). This

fully comports with the PSA's requirement that DBSP receive "prompt notice" of

breaches and an opportunity to cure (or to substitute, if applicable). See MASTR

Asset Backed Sec. Trust 2006-H£3 v. WMC Mortg. Corp., No. 11 Civ. 2542, 2012

WL 4511065, at *7 (D. Minn. Oct. 1, 2012) ("MASTR If') ("[P]roviding notice of

an alleged R & W breach only after foreclosing on the property securing the loan

cannot constitute 'prompt notice' under any reasonable understanding of that term

because such notice functionally deprived [defendant] of a meaningful opportunity

to attempt to cure the alleged breaches or mitigate its losses in any way."). 23

The parties to the PSA not only understood that the pool of Mortgage

23 The requirement of prompt notice makes all the more sense in light of the fact that the parties did not expect the loans to last their full 30-year terms. Indeed, as the Prospectus Supplement described, the "weighted average life" of the ce1iificates- i.e., "the average amount oftime that will elapse from the date of issuance of a security until each dollar of principal of that security will be repaid to the investor" (ACE 2006-SL2 PS at S-40-41)- is likely to be far shorter than the full 30-year terms of the underlying loans, due to prepayments.

37

Loans would decrease over time; they also received regular notices of Mortgage

Loans that were non-performing and, thus, knew well in advance whether certain

Mortgage Loans were candidates for release or liquidation. The lAS Court

commented on this fact during the oral argument. See R. 1200-01 (Hr' g Tr. at

57:21-58:6) ("didn't you discover that when these loans went bad ... when the

loans weren't being paid ... there was never a demand for these loans to be bought

back").

Several courts have recognized that a repurchase remedy only applies to

loans that the plaintiff still holds. See Nationwide Advantage Mortg. Co. v. Mortg.

Servs.III, LLC., No. 13 Civ. 83,2013 WL 1787551, at *2 (N.D. Ill. Apr. 25, 2013)

("[Defendant] cannot repurchase either the Mortgage Loan or the property because

[plaintiff] owns neither. [Plaintiffs] attempt to alter or broaden the term

'repurchase' is unpersuasive.") (Iowa law); MASTR II, 2012 WL 4511065, at *5

(reading contracts "to contemplate repurchase following foreclosure and sale of the

collateral securing the loans would ... be contrary to both the apparent intent of

the parties and common sense") (New York law); First Place Bank v. Skyline

Funding, Inc., No. 10 Civ. 2044, 2011 WL 3273071, at *4 (N.D. Ill. July 27, 2011)

("First Place If') (dismissing claim where defendant could not have

"repurchase[ d] loans that plaintiff did not own when it demanded that [defendant]

repurchase them") (Illinois law); Key Fin. Corp., 2011 WL 1296731, at* 11 ("It is

38

not clear to the Court how a loan that has been liquidated could be repurchased.")

(New York law). The same is true here.

1. "Released Loans" Are Not Subject To Repurchase

The Trust was established to hold second liens, which are junior to first

liens secured by the same properties. Because of this, foreclosure proceeds must

be fully used to satisfy the first lien before the second lien is paid, rendering

foreclosure uneconomical in many cases. The PSA therefore contains procedures

for charging off defaulted loans and removing them from the Trust without

foreclosure. Specifically, the Servicer is "obligated to charge off' such a loan

when it "becomes 180 days delinquent," R. 141-42 (PSA § 3.13(a)(iii)), and then,

after another six months, to "release" the loan "from the Trust Fund" and "transfer

[it] to the Class CE-2 Certificateholders."24 R. 141-42 (PSA § 3.13(a)(iv)). Such

Released Loans "will no longer be an asset of any REMIC," and "the Class CE-2

Certificateholders will be entitled to any amounts subsequently received in respect

of any such Released Loans."25 Id.

The obvious import of these provtswns 1s that Plaintiff-Respondent

24 The Class CE-2 Certificates do not receive principal and interest distributions, but are instead entitled to certain servicing fees and Released Loans. SeeR. 135-37; 141-42; 163-71 (PSA §§ 3.09(b)(viii); 3.13(a)(iv); 5.01). An affiliate ofDBSP received the Class CE-2 Certificates under Section 3 of the MLPA "[i]n consideration for the Mortgage Loans to be purchased hereunder." R. 290.

25 See also R. 102 (PSA § 1.01) ("Any Released Loan will no longer be an asset of any Trust REMIC or the Trust Fund").

39

cannot demand that DBSP repurchase Released Loans. First, Released Loans are

not assets of the Trust, so they clearly cannot be "repurchase[ d] from REMIC I."

R. 121-22 (PSA § 2.03(a)). See Nationwide Advantage, 2013 WL 1787551, at *2

(A '"repurchase' is the 'act or an instance of buying something back or again.'

[Defendant] cannot repurchase either the Mortgage Loan or the property because

[plaintiff] owns neither.") (quoting Black's Law Dictionary (8th ed. 2004)).

Second, the Class CE-2 Certificateholders alone are "entitled to any amounts"

subsequently received "in respect of any ... Released Loans." R. 141-42 (PSA §

3.13(a)(iv)). Accordingly, even if breach claims could be maintained on such

loans, the Class CE-2 Certificateholder, an affiliate of DBSP (see note 22), would

be "entitled to any amounts" recovered.

2. Liquidated Loans Are Not Subject To Repurchase

When investors would benefit, the Servicer must liquidate a defaulted

loan by "foreclos[ing]," "tak[ing] a deed in lieu of foreclosure," or "accept[ing] a

short sale," rather than charging it off. R. 141 (PSA § 3.13(a)(i)). This process

triggers a "Liquidation Event" under the PSA, which occurs when (i) a loan "is

paid in full"; (ii) the Servicer determines that no further recoveries are anticipated

on a defaulted loan; or (iii) a loan "is removed from REMIC I by reason of its

being purchased, sold or replaced." R. 85 (PSA § 1.01 ). In each circumstance­

repayment, liquidation after default, or removal there is no longer a "Mortgage

40

Loan" to repurchase.

Importantly, DBSP is only required to repurchase "Mortgage Loans," R.

141-42 (PSA § 2.03(a)), and once its lien is released in a liquidation, a loan is no

longer a "Mortgage Loan," since a "mortgage loan" held by a REMIC must be an

"obligation ... which is principally secured by an interest in real property." 26

U.S.C. § 860G(a)(3)(A)?6 Thus, even if the Trust continued to hold a post-

liquidation remnant of a loan, that asset would not be a "Mortgage Loan" subject to

repurchase. See MASTR II, 2012 WL 4511065, at *4 (post-foreclosure remnants

are not "Mortgage Loans"); First Place II, 2011 WL 3273071, at *4 (same).Z7

The PSA' s definition of "Purchase Price" states that the balance of

26 That a "mortgage loan" must, by definition, be secured by real property is also true as a matter of black-letter property law. See D&L Holdings, LLC v. RCG Goldman Co., LLC, 287 A.D.2d 65, 71 (1st Dep't 2001) ("A mortgage is defined as 'any conveyance of land intended by the parties at the time of making it to be a security for the payment of money or the doing of some prescribed act."') (quoting Burnett v. Wright, 135 N.Y. 543, 547 (1892)); Black's Law Dictionary (9th ed. 2009) (a "mortgage loan" is a "loan secured by a mortgage or deed of trust on real property").

27 In Trust For Cert(ficate Holders of Merrill Lynch Mortgage Pass-Through Cert~ficates Series 1999-C 1 v. Love Funding Corp., a federal district comi found that repurchase of a foreclosed loan was not "barred by the doctrine of impossibility" because the relevant definition of "Mortgage Loan" "'includes without limitation . . . Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds, and all other rights, benetits, proceeds, and obligations arising from or in connection with such Mortgage Loan," "several [of which] components ... continue[d] to exist." No. 04 Civ. 9890(SAS), 2005 WL 2582177, at *8 (S.D.N.Y. Oct. 11, 2005). This decision is inapplicable on its own terms. First, the PSA's definition of "Mmigage Loan" includes none of these components. Second, DBSP's argument is not that its performance has been rendered impossible by an unforeseen circumstance, but rather that the PSA does not contemplate the performance Plaintiff-Respondent seeks. See MASTR II, 2012 WL 4511065, at 6 n.l 0 (agreement did not contemplate repurchases of liquidated loans, so it was " unnecessary to address" impossibility argument).

41

liquidated loans is "zero," which further confirms that the parties did not intend the

repurchase remedy to survive liquidation. See MASTR II, 2012 WL 4511065, at *6

n.9 ("[T]hat the repurchase price of the 80 loans, calculated per the terms of the

Purchase Agreement, would amount to $0 per loan were the Trustee able to compel

repurchase further shows that the parties did not contemplate the repurchase

remedy as being applicable in the present circumstance.").

Under the PSA, the "Purchase Price" is composed of"100% of the Stated

Principal Balance" as of the date of determination, accrued interest thereon, and

certain servicing fees and expenses. R. 99-100 (PSA § 1.01 ). Before the date "on

which the proceeds, if any, of a Liquidation Event with respect to such Mortgage

Loan would be distributed," the Stated Principal Balance of a Mortgage Loan is its

original principal balance, less amounts previously received on the loan. R. 114

(PSA § 1.01 ). Once the "proceeds of a Liquidation Event" with respect to the loan

are distributed, however, the Stated Principal Balance becomes "zero." Id.

('"Stated Principal Balance': With respect to any Mortgage Loan: ... as of any

date of determination coinciding with or subsequent to the Distribution Date on

which the proceeds, if any, of a Liquidation Event with respect to such Mortgage

Loan would be distributed, zero.").

A "Liquidation Event" occurs as to any Mortgage Loan when the

Servicer makes a "Final Recovery Determination" - a determination that all

42

"payments or recoveries which the Servicer, in its reasonable good faith judgment,

expects to be finally recovered have been so recovered. "28 R. 83, 85 (PSA § 1. 0 l ).

Distributions occur on the "Distribution Date, i.e., the 25th day of each month. R.

82 (PSA § 1.01 ). Thus, the "proceeds, if any, of a Liquidation Event" will be

distributed on the 25th day of the month in which a "Final Recovery

Determination" is made. If the Purchase Price is calculated after this final

distribution is made, the loan's Stated Principal Balance - and therefore its

"Purchase Price"- will be "zero." R. 99-100, 114 (PSA § 1.01) ("Purchase Price";

"Stated Principal Balance").

B. The lAS Court Erred By Placing The Burden Of Demonstrating Whether A Loan Was Subject To Repurchase On DBSP

The lAS Court found that "questions of fact clearly preclude dismissal"

because "[ e ]ven if DBSP were correct that Released, Charged Off, and Liquidated

Loans are not subject to repurchase, dismissal would still not be warranted because

DBSP needs to establish that all of the non-conforming loans fell into these defined

categories." R. 18. This ruling improperly relieved Plaintiff-Respondent of its

burden to plead the elements of its claim. DBSP can only be obligated to

repurchase loans if those loans are still held by the Trust. The Trustee, in whose

name the Complaint was filed, clearly has access to the Mortgage Loan Schedule

28 A "Liquidation Event" also occurs when a Mortgage Loan "is paid in full" or "is removed from REMIC I by reason of its being purchased, sold, or replaced." R. 85 (PSA § 1.01).

43

and knows which loans were assets of the Trust at the time repurchase demands

were made, but the Complaint failed to identify which, if any, of Plaintiff-

Respondent's claims pertained to such loans. See First Place Bank v. Skyline

Funding, Inc., No. lO CV 2044, 2011 WL 824612, at *2 (N.D. Ill. Mar. 4, 2011)

("First Place f') (dismissing complaint that failed to "allege that plaintiff owned

the loans when it demanded [defendant] repurchase them" because "[ w ]ithout

alleging that plaintiff had the loans when it made its demand to [defendant], the

complaint does not allow the court to conclude that [defendant] could have

repurchased the loans."). Holding that this was DBSP's burden to develop in

discovery was error, as "[t]he purpose of discovery is to find out additional facts

about a well-pleaded claim, not to find out whether such a claim exists." Stoner v.

Walsh, 772 F. Supp. 790, 800 (S.D.N.Y. 1991) (citing Auerbach v. Bennett, 47

N.Y.2d 619, 636 (1979)).

C. The lAS Court's Construction Of The PSA's Repurchase Provisions Was Erroneous

Notwithstanding the unambiguous contract language cited above, the

Order found "unconvincing" "DBSP' s argument that loans in these categories are

not subject to repurchase because they are no longer assets of the Trust (or that

their defined Purchase Price is now $0)." R. 18. This conclusion was based on

misreadings of the PSA, policy arguments, and assumptions concerning the

parties' incentives.

44

Preliminarily, because the lAS Court first found that "discovery [wa]s

necessary," it appears that its further analysis of the PSA was dicta, from which

"no appeal lies." B&N Props., LLC v. Elmar Assocs., LLC, 51 A.D.3d 831, 832

(2d Dep't 2008). If this Court also finds that this issue is not capable of resolution

at this stage of the proceedings, the parties should be permitted to develop their

arguments in discovery, and to present their cases at summary judgment or trial.

If, however, this Court finds that the lAS Court's construction of the PSA

constitutes an appealable holding, it should reverse for the reasons stated herein.

1. The Order Fundamentally Misconstrued The PSA And DBSP's Argument Concerning "Released Loans"

The Order's treatment of Released Loans was unmoored from the text of

the PSA and was both factually incorrect and logically unsound:

[T]fDBSP learned that loans were non-conforming and played a crafty game of accounting by moving them off the Trust's books to their own to evade their repurchase obligations, such actions would be a breach of the duty of good faith and fair dealing. Consequently, it is to no avail to contend that the non-conforming loans are long gone and the Trustee's repurchase rights have been extinguished by DBSP' s actions.

R. 18. The concern about a "crafty game" was both misplaced and irrelevant.

First, as the PSA makes clear, the Servicer, not DBSP, is responsible for

determining whether and when to charge off and release loans, and does so in

accordance with specific PSA provisions. Second, the process of releasing loans to

the Class CE-2 Certificateholder is nondiscretionary: charged-off loans "will be

45

released from the Trust Fund, will no longer be an asset of any REMIC, and will

be transferred to the Class CE-2 Certificateholders." R. 141-42 (PSA §

3.13(a)(iv)) (emphases added). There is no room under these provisions for the

Servicer to "play[ ] a crafty game," and still less for DBSP, which does not control

h. 29 t 1s process.

Even if these PSA provisions could somehow give rise to an implied

covenant of good faith claim against DBSP (which they cannot), this would not be

grounds for a court to rewrite that provision. In any event, Plaintiff-Respondent

has brought no such claim and cannot do so. Acceptance of Released Loans, as

expressly provided for by the PSA, cannot constitute a breach of the implied

covenant,30 which clearly does not require the Class CE-2 Certificateholder to

refuse Released Loans when the Servicer transfers them. See Peter R. Friedman,

Ltd. v. Tishman Speyer Hudson Ltd., 2013 N.Y. Slip Op. 4708, 2013 WL 3064724,

29 Given this, there was no basis for the lAS Court to conclude that DBSP's position was that "the Trustee's repurchase rights have been extinguished by DBSP's actions." R. 18. Repurchase rights are "extinguished" by operation of the plain terms of the PSA, not by any action taken by DBSP.

30 In determining whether to charge off and release a loan, the Servicer is required to "take such action as the Servicer would take under similar circumstances with respect to a similar mortgage loan held for its own account for investment" and to determine that such action is "consistent with Accepted Servicing Practices" and "in the best interest of the Trustee and Certificateholders." R. 141 (PSA § 3.13(a)(i)). Thus, if the Servicer somehow arranged for breaching loans to be charged off and released, or delegated its servicing duties with respect to breaching loans to DBSP, so that DBSP could "evade [its] repurchase obligations," this would be a breach by the Servicer of an express contractual obligation, not a breach by DBSP, which has no right under the PSA to charge off or release loans. To be clear, no such allegations against the Servicer have been made.

46

at *1 (lst Dep't June 20, 2013) ("[T]he covenant ... cannot be construed so

broadly as effectively to nullity other express terms of a contract, or to create

independent contractual rights.").

2. The lAS Court's Construction Of The PSA's Purchase Price Was Erroneous

As the lAS Court correctly recognized, "any recovery under Section 2.03

must be limited to the formula set forth in the PSA," i.e., the "Purchase Price." R.

19. The lAS Court, however, erred in rejecting DBSP's argument that the

"Purchase Price [of liquidated loans] is now $0." R. 18. Other than policy

arguments, the only reasoning provided in the Order was that "[t]he PSA's

damages calculation includes foreclosure proceeds." R. 19. This statement reveals

a fundamental misreading of the PSA.

First, there is no "damages" calculation provided for in the PSA. The

"sole remedy" provided is repurchase of a Mortgage Loan and it does not entitle or

permit the Trustee to recover "damages" in connection with a loan that has been

liquidated.

Second, the definition of Stated Principal Balance contains two different

calculations for Mortgage Loans, subsections (a) and (b). Subsection (a) of the

definition applies "as of any date of determination up to but not including the

Distribution Date on which the proceeds, if any, of a Liquidation Event with

respect to such Mortgage Loan would be distributed." R. 114. Subsection (b)

47

applies "as of any date of determination coinciding with or subsequent to the

Distribution Date on which the proceeds, if any, of a Liquidation Event with

respect to such Mortgage Loan would be distributed" and states that the Stated

Principal Balance on that date will be "zero." !d.

The lAS Court noted that Subsection (a) of the Stated Principal Balance

definition provides an offset for "Liquidation Proceeds." This, however, does not

alter the fact that the Purchase Price of a loan following a Liquidation Event is

"zero." The receipt by the Trust of the "proceeds of a Liquidation Event" does not

occur until all Liquidation Proceeds are received. This triggers the post-

Liquidation Event zero balance determination. When only some Liquidation

Proceeds have been received, but the Servicer believes that more will be received

in the future, the Servicer cannot make a "Final Recovery Determination"31 and a

Liquidation Event, by definition, has not occurred. In this scenario, the Purchase

Price will be determined by the pre-Liquidation Event, non-zero, calculation.

By contrast, when the servicer has made a Final Recovery Determination,

a Liquidation Event occurs, and the post-Liquidation Event Purchase Price of a

liquidated loan becomes zero. This creates no ambiguity and does not justify

writing the zero balance provision out of the contract.

31 The PSA expressly contemplates partial collections of liquidation proceeds. See R. 141-44 (PSA § 3 .13( c)) (discussing distribution of "any recovery resulting from a partial collection of Insurance Proceeds or Liquidation Proceeds") (emphasis added).

48

3. The lAS Court Improperly Rewrote The PSA On The Basis Of Inapplicable Equitable Considerations

Although the lAS Court rejected DBSP's interpretation of the PSA, it did

not do so by concluding that the plain language of the PSA had a different meaning

than that put forward by DBSP. Instead, the Order was premised on speculation

about the parties' "incentives." However, "[i]f the parties to a contract adopt a

provision which contravenes no principle of public policy and is not ambiguous,

the courts have no right to relieve one of them from disadvantageous terms by a

process of interpretation." Seifert, Hirshorn & Packman v. Ins. Co. of N. Am., 36

A.D.2d 506, 507-08 (lst Dep't 1971) (citations omitted); see also De Vanzo v.

Newark Ins. Co., 44 A.D.2d 39, 43 (2d Dep't 1974) ("A court may not, of course,

rewrite a contract to accord with its instinct for the dispensation of equity under the

facts of a case.").

The lAS Court reasoned that under DBSP' s interpretation, DBSP "would

be perversely incentivized to fill the Trust with junk mortgages that would

expeditiously default ... before a repurchase claim is made," and that "[i]f, as

DBSP contends, the Certificateholders' recovery on misrepresented loans is

I imited to foreclosure proceeds, the repurchase remedy would be virtually

worthless." R. 19. Even if this were accurate- which, for the reasons below, it is

not - it would not be grounds for the lAS Court to rewrite the contract. See John

Doris, Inc. v. Solomon R. Guggenheim Found., 209 A.D.2d 380, 381 (2d Dep't

49

1994) ("[T]he courts may not rewrite the agreement to relieve a sophisticated

contracting party from terms that it later deems disadvantageous."); Nationwide

Advantage, 2013 WL 1787551, at *3 (rejecting argument that post-foreclosure

repurchase should be required since "it was not [plaintiffs] 'understanding' that it

would be left 'holding the bag,"' because "the Court cannot relieve one of the

parties from the terms of [an] agreement because of equitable considerations"');

Kreiss v. McCown DeLeeuw & Co., 131 F. Supp. 2d 428, 436 (S.D.N.Y. 2001)

(contract provided a "precise mathematical formula for determining the repurchase

price," so plaintiffs argument that it could not have intended its rights to

"eventually have no value whatsoever" failed).

Moreover, the fact that repurchase demands must be made while the

loans they concern still exist and are held by the Trust does not render the remedy

"virtually worthless." It merely means that demands must be made in a timely

fashion, something the Trustee clearly had the ability to do. See Kreiss, 131 F.

Supp. 2d at 436-37 (contract was enforceable and did not work a forfeiture, where

plaintiff "chose not to exercise the options [within a ce1iain time frame], and the

price established by the contract which by its terms could have been something

other than zero- turned out to be zero, a possibility clearly contemplated by the

agreement"). As discussed above, DBSP does not control the timing of a decision

to liquidate or release a Mortgage Loan, or the time-frame for any repurchase

50

demand by the Trustee. The Servicer makes the decision to foreclose or release a

loan after close examination of all the circumstances and is positioned to alert the

Trustee to any possible breach well before a mortgage loan is liquidated. R. 141

(PSA § 3.13(a)(i)). Thus, loans that default "expeditiously" are likely to draw

greater scrutiny for possible R W non-compliance from the Servicer and Trustee -

not less. Consequently, the suggestion that DBSP would ever be incentivized to

"fill the Trust" with loans that would default expeditiously defies both logic and

the structure of the PSA. The lAS Court's decision to rewrite the PSA based on

this erroneous speculation was in error. See Slayko v. Sec. Mut. Ins. Co., 98

N.Y.2d 289, 295 (2002) (absent contrary legislative direction, courts should be

"reluctant to inhibit freedom of contract by finding [contract terms] violative of

public policy").

The lAS Court's "perverse incentives" suppositions also ignore the

economic reality that a sponsor of RMBS that purposefully "filled the Trust with

junk mortgages" that would "expeditiously default" would have done irreparable

harm to its RMBS business. Furthermore, the contractual repurchase remedy is not

the only recourse RMBS investors may seek. The Certificates were registered with

the U.S. Securities and Exchange Commission and publicly offered pursuant to

disclosure documents. If these disclosures contain material misstatements, they

may give rise to statutory or common law claims by investors. (Such claims are

51

not at issue in this suit because, among other things, the Funds purchased their

investments long after the certificates were issued and well after the housing

market collapsed.)

Indeed, the Order's rendition of DBSP's argument - "DBSP contends

[that] the Certificateholders' recovery on misrepresented loans is limited to

foreclosure proceeds" is inaccurate. R. 19. Foreclosure is not the sole, or even

primary, means of liquidation. Repayment also results in liquidation, and the

pa1iies' rights and obligations with respect to both categories of liquidated loans

are the same.

DBSP never argued that foreclosure was an "alternative means of

recovery for non-conforming loans." Id. Foreclosure is simply one of a number of

means of liquidating defaulted loans, regardless of whether those loans breach

RWs. As the Order recognized, loans that comply with RWs can default "due to

myriad unexpected circumstances." R. 18. Most importantly, even using the

Order's inaccurate language, investors are only "limited to foreclosure proceeds"

when repurchase demands are made after foreclosure. This limitation does not

make the remedy "virtually worthless"; it merely means that Plaintiff-Respondent

has assumed the obligation to seek repurchase before liquidation, which is

perfectly consistent with public policy and the parties' freedom of contract. See

Metro. Life, 84 N.Y.2d at 436 ("[T]he law allows [plaintiff] to assume the whole

52

risk, with no remedy whatever," so "it is obvious that it will allow him to assume a

part less than the whole.").

Conspicuously absent from the Order's impermissible attempt to realign

the parties' "incentives" was any acknowledgment of the fact that the Funds are

distressed debt funds who purchased their certificates in order to pursue repurchase

litigation, years after their original issuance and the fallout from the housing crisis.

These investors made their investment knowing that the "sole remedy" under the

PSA was the Trustee's enforcement of the obligation to repurchase Mortgage

Loans. The public policy of New York does not require or pennit - that the

operative contracts be rewritten to render their litigation strategy profitable.

53

CONCLUSION

For the foregoing reasons, the Order of the Supreme Court denying

DBSP's Motion to Dismiss should be reversed and the case remanded with

instructions to dismiss the Complaint in its entirety with prejudice.

Dated: New York, New York July 8, 2013

SIMPSON THACHER & BARTLETT LLP

By: lsi David I Wall

Thomas C. Rice David J. Woll 425 Lexington A venue New York, New York 10017 Tel: (212) 455-2000 Fax: (212) 455-2502

Attorneys for Defendant-Appellant DB Structured Products, Inc.

54

Printing Specifications Statement

Pursuant to Rule 600.10(d)(1)(v), Defendant-Appellant specifies that

this Memorandum of Law was prepared using a computer, Microsoft Windows

and Microsoft Word. Defendant-Appellant used Times New Roman, 14-point

size and the Memorandum of Law contains 13,890 words as calculated by

Microsoft Word.

55

[FILEDTNEW-YORK COUNTY CLERK 0 6 I 0 3 T2lfPJ NYSCEF DOC. NO. 46

SUPREME COURT OF THE STATE OF NEW YORK APPELLATE DIVISION: FIRST DEPARTMENT

ACE SECURITIES CORP., HOME EQUITY LOAN TRUST, SERIES 2006-SL2, by HSBC BANK USA, NATIONAL ASSOCIATION, solely in its capacity as Trustee pursuant to a Pooling and Servicing Agreement, dated as of March 1, 2006,

Plaintiff;

-against-

DB STRUCTURED PRODUCTS, INC.,

Defendant.

INDEX NO. 650980/2012

RECEIVED NYSCEF: 06/03 013

Index No. 650980/2012

PRE-ARGUMENT STATEMENT

Pursuant to Rule 600.17 of the Rules of the Supreme Court of the State of New

York, Appellate Division, First Department, defendant-appellant DB Structured Products, Inc.

("DBSP") respectfully submits this pre-argument statement:

I. The title of the action is as set forth in the caption above.

2. The full names of the original parties are: RMBS Recovery Holdings 4, LLC and

VP Structured Products, LLC, as plaintiffs (the "Initial Plaintiffs"); DB Structured Products, Inc.,

as defendant, and HSBC Bank USA, N.A. ("HSBC" or the "Trustee") as nominal defendant. On

September 13, 20 I HSBC, solely in its capacity as Trustee pursuant to a Pooling and Servicing

Agreement, dated as of March 1, 2006, filed the operative complaint in this action, in which it

purported to substitute itself as plaintiff for the Initial Plaintiffs. On November 16, 2012, the

parties stipulated to amend the caption as above to reflect the purported substitution of the

Trustee as plaintiff, without prejudice to DBSP's right to challenge this substitution. This

stipulation was approved by the court below on November 27,2012.

3. The name, address and telephone number of counsel for defendant- appellant is:

SIMPSON THACHER & BARTLETT LLP Thomas C. Rice, Esq. David J. Woll, Esq.

425 Lexington Avenue New York, New York 10017-3954

4. The name, address and telephone number of counsel for plaintiffs- respondents is:

KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Michael Fay, Esq.

1633 Broadway New York, New York 10019

5. The appeal is taken from the Order of the Supreme Court of the State of New

York, County ofNew York, Shirley Werner Kornreich, J.S.C., dated May 13, 2013, and duly

entered with the Clerk of the Court on May 17, 2013, attached as Exhibit A, which denied

DBSP's motion to dismiss the complaint (Motion Sequence No. 001 ).

6. Nature and object of the cause of action: This breach of contract case seeks

specific performance, damages, and declaratory relief for alleged breaches of representations and

warranties concerning the characteristics of certain mm1gage loans made by DBSP in a

Mortgage Loan Purchase Agreement dated March 28, 2006 (the "MLPA"), which were assigned

to HSBC Bank USA, N.A., as Trustee of the ACE Securities Corp. Home Equity Loan Trust,

Series 2006-SL2 (the "Trust"), pursuant to a Pooling and Servicing Agreement dated March 1,

2006 (the "PSA") (together with the MLPA, the "Agreements").

7. Result Reached below: In a Memorandum Decision and Order, Justice Kornreich

denied DBSP's motion to dismiss. Copies of the hearing transcript and order, with notice of

entry, are annexed hereto as Exhibits A and B, respectively.

8. Grounds for reversal: The court below erred by:

(i) ruling that plaintiffs' claims for breach of contractual representations and

2

warranties concerning the characteristics of certain mortgage loans as of

the date of closing of the relevant agreements did not accrue at closing

and, instead, more than six years later when DBSP did not comply with a

demand to repurchase those mortgage loans; and

(ii) disregarding the plain language of the Pooling and Servicing Agreement

concerning the nature and extent of DBSP's obligation to repurchase

Mortgage Loans thereunder.

DBSP seeks to reverse the Memorandum Decision and Order of the court below

on the grounds that the action is barred by the six-year statute of limitations applicable to

contract claims. The court incorrectly found that breach of the representations and warranties in

the Agreements did not constitute a breach of the Agreements, and that the Agreements were

only breached when DBSP failed to repurchase allegedly breaching loans upon demand, and

therefore held that the action was timely despite the fact that (i) the action was commenced by

plaintiffs who lacked standing, and (ii) the substitution of the Trustee, the sole party with

standing, occurred more than six years after the representations and warranties in the Agreements

were allegedly breached. 1 The court below also erred in finding without analysis or factual

allegations that DBSP repudiated the Agreements and that this excused plaintiffs'

noncompliance with the pre-suit notice and cure provisions of the Agreements, even though the

action was filed before the pre-suit period to cure or repurchase any allegedly breaching loans

had expired.

DBSP further seeks to reverse the Memorandum Decision and Order of the court

In an Order dated May 10, 2013, Justice Sherwood reached the opposite conclusion in a case presenting materially indistinguishable facts. See Nomura Asset Acceptance Corp. Alt. Loan Trust, Series 2005-84, by HSBC Bank USA, N.A., etc. v. Nomura Credit & Capital, Inc., No. 653541/2011, 2013 WL 2072817 (Sup. Ct. N.Y. Cty. May 10, 2013).

3

below on the grounds that the court below erred in disregarding the plain language of the

Agreements, which provide that loans are not subject to repurchase after they have been removed

from the Trust, and that the balance to be used in calculating the contractual repurchase price of

any Mortgage Loan after final liquidation is "zero." The Court determined that factual issues

that could not be resolved on a motion to dismiss precluded dismissal on this ground. Instead of

stopping there, the Memorandum Decision and Order provided a policy-oriented discussion of its

views on the manner in which the operative agreements were supposed to operate that

contradicted or is otherwise unsupported by the plan language of the agreements.

The following actions are designated as "related" to the above-captioned action.

Those actions and their statuses arc as follows:

• Federal Hou'dng Finance Agency, as Conservator for the federal Home Loan Mortgage

Corporation, on beha?f of the Trustee of the ACE Securities Corp. Home Equity Loan

Trust. 5'eries 2006-H£2 (ACE 2006-HE2) v. DB Structured Products, Inc., No.

651414/2012 (Kornreich, J.S.C.): motion to dismiss second amended complaint being

briefed.

• Federal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage

Corporation, on beha?f of the Trustee of the ACE Securities Corp. Home Equity Loan

Trust, Series 2006-HE3 (ACE 2006-HE3) v. DB Structured Products, Inc., No.

652331/2012 (Kornreich, J.S.C.): motion to dismiss amended complaint being briefed.

No additional appeals are pending in the above-captioned action.

4

Dated: New York, New York June 3, 2013

To: Michael Fay, Esq.

SIMPSON THACHER & BARTLETT LLP

By: Thomas C. Rice (trice@stblaw.com) David J. Woll (dwoll@stblaw.com)

425 Lexington A venue New York, NY 10017-3954

Tel: (212) 455-2000 Fax: (212) 455-2502

Attorneysfor Defendant-Appellant

Kasowitz, Benson, Torres & Friedman LLP 1633 Broadway New York, New York I 0019

A ttorneyfor Plaintiff-Respondent

5