U.S. Bank, Nat'l Ass'n v. UBS Real Estate Sec. Inc.

205 F.Supp.3d 386

U.S. BANK, NATIONAL ASSOCIATION, solely in its capacity as Trustee of Mastr Adjustable Rate Mortgages Trust 2006-OA2, Mastr Adjustable Rate Mortgages Trust 2007-1, and Mastr Adjustable Rate Mortgages Trust 2006-3, Plaintiffs,

v.UBS REAL ESTATE SECURITIES INC., Defendant.

12-cv-7322 (PKC) (JCF)

United States District Court, S.D. New York.

Signed September 6, 2016

Sean P. Baldwin, David L. Elsberg, Andrew R. Dunlap, Steven M. Edwards, Nicholas F. Joseph, Paul P. Hughes, Mario A. Pecora, QUINN EMANUEL URQUHART & SULLIVAN LLP, Attorneys for Plaintiff

Scott D. Musoff, Robert A. Fumerton, Thomas J. Nolan, Charles F. Smith, Alexander C. Drylewski, Robert L. Dunn, Allison B. Holcombe, Abraham A. Tabaie, Lara A. Flath, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Attorneys for Defendant

MEMORANDUM AND ORDER

CASTEL, United States District Judge.

OVERVIEW OF THE AGREEMENTS AND CLAIM ...400

SUBJECT MATTER JURISDICTION ...405

A. It Is Unlikely that the Court Ever Had Bankruptcy Jurisdiction ...406

B. The Court Has Diversity Jurisdiction ...408

1. Legal Standard ...408

2. Diversity Jurisdiction Existed When the Action Commenced ...408

3. Judge Baer Concluded that the Action Was Brought by U.S. Bank on Behalf of the Trusts...409

4. U.S. Bank Is the Real Party to the Controversy ...409

5. The Recent Americold Decision Does Not Alter This Analysis ...410

6. The Amended Complaint Expressly Alleges Diversity Jurisdiction ...411

CHOICE OF LAW ...411

BURDEN OF PROOF ...411

RELEVANT NEW YORK CONTRACT PRINCIPLES ...412

A. The PSAs' Unambiguous Terms Are Construed to Reflect the Intent of the Parties as Manifested in the Agreements ...412

B. Parol Evidence Plays No Role in Interpreting an Unambiguous Contract ...413

C. No Party Asserts that Contra Preferentem Applies ...413

D. Contractual Warranties under New York Law ...414

THE TRUSTS MAY RECOVER THE MONEY DAMAGE EQUIVALENT OF THE REPURCHASE REMEDY FOR BREACHED LOANS WHERE REPURCHASE IS NOT POSSIBLE ...414

THE TRUSTS, THE TRUSTEE AND RELATED PERSONS ...415

THE NOTICE AND DISCOVERY REQUIREMENT ...416

A. The Requirements of Section 2.03 ...416

1. UBS Received Written Breach Notices of that Identified 4,869 Breached Loans, Including 4,462 Breaches that Were Timely Identified Before the Commencement of this Action ...417

a. The Assured Breach Notices ...418

b. The U.S. Bank Breach Notices...420

2. Upon Receipt of the Holt Report of August 2015, UBS Had Knowledge of Purported Breaches in the Loans Identified Therein...420

3. Lapse of the 90-Day Cure Period as Condition Precedent...422

4. Discovery of a Breach by UBS Triggers Its Cure and Repurchase Obligations...423

5. Knowledge on the Part of UBS Cannot Be Premised on "Pervasive Breach" or "Constructive Knowledge...424

6. UBS's Knowledge of a Breach May Be Proved Circumstantially or Through Evidence of Willful Blindness...425

a. The Trusts Have Proved Discovery of Breaches as to Certain Non-Noticed Loans...425

b. The Trusts Have Not Proved Willful Blindness on the Part of UBS...425

THE MORTGAGE LOAN SCHEDULE WARRANTY...427

A. Overview of the MLS Warranty...427

B. The Timing of Representation and Warranty Listed in the MLS...427

C. The MLS Warranty is Absolute and Does Not Merely Guarantee Accurate Transcription...428

D. The Trusts' Evidence Concerning MLS Warranty Breaches...430

E. The Seven Items of MLS Data at Issue...430

1. Occupancy Status...430

2. Property Type...431

3. Loan Purpose...431

4. LTV Ratio...432

a. Construction...432

b. AVM Data Is Not A Substitute for An Appraisal...434

5. Documentation Style...437

6. Credit Score...437

a. Construction...437

b. Application...438

7. DTI Ratio...439

a. Construction...439

b. Application...440

c. The MERS Database...441

d. Other Databases...441

e. Multiple Credit Inquiries...442

f. Credit Reports...442

g. Evidence of Multiple Misrepresentations as Evidence that a Borrower Also Misrepresented Debt...443h. Social Security Administration Data and Pension Custodian Statements...443

i. Employer Income Statements, Including W-2 Forms...443

j. BLS Data...444

k. Other Salary Databases...444

l. Borrower Tax Returns...445

m. Borrower Bankruptcy Filings...445

n. Borrower Hardship Letters...446

o. Red Flags...447

THE GUIDELINES WARRANTY...447

A. Overview of the Guidelines Warranty and Its Relationship to the MLS Warranty...447

B. Automated Underwriting Systems...448

C. Exceptions to the Guidelines Must Be Documented...449

D. The Loan Files Are Provisionally Received Into Evidence...451

E. Permissible Use of Post-Origination Information by an Expert...455

F. Individual Guidelines Breaches...456

1. The Absence of "Core Documents" in Loan Files...456

2. Failure to Inquire As to the Stated Income That Does Not Appear Reasonable...457

3. Guidelines Exception...458

4. The Relationship between the MLS Warranty and the Guidelines Warranty...459

THE MAXIMUM LTV WARRANTY...460

THE MORTGAGE FILE WARRANTY...460

THE TITLE INSURANCE WARRANTY ...461

THE HAZARD INSURANCE WARRANTY...463

THE "MATERIALLY AND ADVERSELY AFFECTS" REQUIREMENT...464

A. "Materially and Adversely Affects" Is Measured from the Date of the Repurchase Demand, Not from the Date that the Warranties Were Made...464

1. The "Materially and Adversely Affects" Requirement of Section 2.03 Is Analyzed Separately from the Materiality Requirement Contained in Individual Representations and Warranties...467

2. A Material Adverse Effect under Section 2.03 May Be Proved with Evidence of an Increased Risk of Loss to the Certificateholders...467

3. The Trusts May Also Prove a Material Adverse Effect with Evidence that a Breach Resulted in Altered Loan Terms ...468

4. Multiple Breaches as Evidence of Material and Adverse Effect ...469

5. Proof of Intentional Misrepresentations by a Borrower Will Prove a Material and Adverse Effect...470

6. The Trusts' Proof of a Material and Adverse Effect...470

THE "MISSING" INDYMAC FILES...475

EXEMPLAR LOANS...476

A. Loan 1456451...478

1. Occupancy Misrepresentation...478

2. Income Misrepresentation with Red Flags...480

3. Material and Adverse Effect at the Time of Discovery or Notice...480

B. Loan 40577613...481

1. Income Misrepresentation...481

2. The Presence of Undisclosed Mortgages...482

3. Missing Title Insurance...483

4. Employment Verification...483

5. Housing History Violation...483

6. Material and Adverse Effect at the Time of Discovery or Notice...483

C. Loan 40599698...484

1. Misrepresented Income...484

2. Undisclosed Mortgage...485

3. Resulting DTI Breaches...485

4. LTV Breaches...485

5. Occupancy Misrepresentation...485

6. Missing Title Insurance...486

7. Material and Adverse Effect at the Time of Discovery or Notice...486

D. Loan 40588193...486

1. Income Misrepresentation and/or Lack of Reasonableness Inquiry...487

2. Mortgage Payment History...487

3. Verification of Employment...488

4. Missing Title Insurance...488

5. No Breach...488

E. Loan 1447951...488

1. Employment Misrepresentation...489

2. Reasonableness of Stated Income and Income Misrepresentation...489

3. The LTV Ratio Defects...490

4. Material and Adverse Effect at the Time of Discovery or Notice...490

F. Loan 40595372...490

1. Employment Verification...490

2. Missing Note...491

3. Missing Title Insurance...491

4. No Breach...491

G. Loan 1416352...492

1. Undisclosed Mortgage...492

2. Income Misrepresentation and Reasonableness of Stated Income ...492

3. Improper Calculation of Debt...493

4. Housing History Violation...493

5. Arm's Length Violation...494

6. The LTV Ratio Defects...494

7. Material and Adverse Effect at the Time of Discovery or Notice...494

H. Loan 1450507...495

1. Employment Misrepresentation...495

2. Document Defect...495

3. Missing Title Insurance...496

4. Correlated DTI Discrepancy...496

5. Material and Adverse Effect at the Time of Discovery or Notice...496

I. Loan 40595823...497

1. Income Misrepresentation...497

2. Undisclosed Mortgage...498

3. Missing or Inadequate Title Insurance...498

4. The LTV Ratio Defects...498

5. Material and Adverse Effect at the Time of Discovery or Notice...498

J. Loan 158522879...499

1. Undisclosed Mortgage Debt...499

2. Asset Violations...500

3. Missing Loan Application...500

4. Employment Violation...501

5. Material and Adverse Effect at the Time of Discovery or Notice...501

K. Loan 124359279...502

1. Document Deficiency...502

2. The Trust Has Not Proved a Material and Adverse Effect on the Interests of the Certificateholders at the Time of Notice or Discovery...502

L. Loan 1423423...502

1. Income Misrepresentation...503

2. LTV Ratio Defects...504

3. Material and Adverse Effect at the Time of Discovery or Notice...504

M. Loan 138058233...504

1. Income Misrepresentation...504

2. Seasoning Violation...505

3. Missing or Inadequate Title Insurance...506

4. LTV Ratio Defects...506

5. No Breach...506

N. Loan 1418398...506

1. Occupancy Misrepresentation and Income Violation...507

2. Breach of the MLS Warranty Based on Misstated DTI Ratio...508

3. Correlated DTI Discrepancy...509

4. No Breach...509

O. Loan 1477160...509

1. Unreasonable Stated Income...509

2. Undisclosed Debt...510

3. The Borrower's Occupancy Representation...510

4. Correlated DTI Ratio Defects...511

5. The LTV Ratio Defects...512

6. Material and Adverse Effect at the Time of Discovery or Notice...512

P. Loan 158514566...513

1. Income Misrepresentation and Reasonableness of Stated Income...513

2. DTI Ratio...514

3. Document Deficiency...515

4. Title Insurance...515

5. LTV Breaches...515

6. Material and Adverse Effect at the Time of Discovery or Notice...515

Q. Loan 1470345...516

1. Unreasonableness of Stated Income...516

2. Undisclosed Mortgage Debt...517

3. LTV Breaches...517

4. Material and Adverse Effect at the Time of Discovery or Notice...518

R. Loan 158609489...518

1. Income Misrepresentation...518

2. Occupancy Misrepresentation and the Related "Property Violation" Defect... 519

3. Undisclosed Mortgage Debt with Red Flags...521

4. DTI Ratio Defect...521

5. Material and Adverse Effect at the Time of Discovery or Notice...521

S. Loan 1416080...522

1. Undisclosed Mortgage Debt...522

2. Housing History Violation...522

3. DTI Ratio Defect...523

4. Material and Adverse Effect at the Time of Discovery or Notice...523

T. Loan...