Page 11 - Litigation

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Litigation | MONDAY, JULY 14, 2014 | S11

Warranties
Southern District of New York, alleging breach

of the warranty that all the documents associ-
ated with the mortgage, including the defective Are your clients aware of
« Continued from page S8
guaranty, were enforceable. Dexia iled a motion
at the inception of liability, it is unenforceable to dismiss, arguing that the suit was barred by
because a party cannot agree in advance to the statute of limitations as it was based on
abrogate a statute founded on public policy). warranties given more than six years earlier. their fraud risk?
As the court in Nomura reasoned, the statute of The trust argued that the MLPA did not provide
limitations cannot run from the time a plaintiff an immediate recourse upon the discovery of
chooses to seek a remedy. “To ind otherwise a breach of warranty. Pursuant to the MLPA,
FRAUD costs U.S. businesses billions of dollars
would allow [plaintiff] to essentially circumvent the breach needs to have a material effect on
the statute of limitations indeinitely deferring the value of the collateral to trigger recourse. annually. Many business owners ind out too late
its demand for payment.” Nomura, 2013 WL That effect did not occur until the Minnesota that even the most loyal employee may commit
2072817 at *9, accord, Lehman XS Trust, 2014 court ruled the guaranty unenforceable. The fraud. We may be overly trusting of employees
WL 108523 at *4.
district court agreed with the trust, denying and vendors, not familiar with all the different
Finally, courts have rejected the argument the motion to dismiss.
ways we can be deceived, reliant on old systems
that each failure to cure or repurchase defec- to process transactions, or just too busy to pay
tive loans after a demand is made constitutes a attention.
Nomu- Conclusion
separate, new breach of the agreement. Internal and external factors may endanger your
ra, 2013 WL 2072817 at *8; Lehman XS Trust, The lesson to be gleaned from these cases client’s business, so it’s important to get an
2014 WL 108523 at *4. Courts, regard the cure is that sellers of the loans have a more limited assessment of their potential risk.
provision as a remedy, which is not indepen- exposure to damages for breach of warran-
dent of the representations or warranties given. ties than they could have expected from the EisnerAmper’s team of forensic accountants and
Lehman XS Trust, 2014 WL 108523 at *4. As contractual language used in the sale docu- certiied fraud examiners conduct investigations
such, under New York law, these remedial pro- ments. Since it may not be possible to extend to detect, prevent, and address all levels of fraud.
visions are not recognized as separate prom- the liability of the seller beyond six years from Our team can assist your client every step of
ises that can support an independent cause of the time the representations are made, buyers the way.

action.2 See also Deutsche Alt-A Securities Mortg. will need to conduct whatever due diligence Read more on fraud at EisnerAmper.com/fraud
Loan Trust, Series 2006-OA1 v. DB Structured they deem necessary at early stages. This
Products, 2013 WL 3863861 *10 (S.D.N.Y. 2013).
would likely increase transaction costs that
The commonality in these recent cases in turn may affect the pricing of the securi-
appears to be that the main allegations simply ties. Equally signiicant, the limited exposure
involved breaches of the representations and of the sellers may also affect the premium
warranties in the MLPAs. A trust may not be that insurance companies charge to insure Let’s get down to business.® eisneramper.com 212.891.4028
barred, however, if the breaches of the repre- the mortgages in the pools. Dexia, however,
sentations and warranties can be tied to sub- shows that the limitation to exposure after six DennisNeier [email protected]

sequent events that have a negative impact in years is not absolute, but may require a more
the value of the loan or in the interest of the targeted approach that was apparently absent
trust. See, e.g., U.S. Bank, as Trustee v. Dexia in Lehman XS Trust, Nomura and ACE Securities.
Real Estate Capital Markets, 959 F. Supp. 2d
443 (2013).3
•••••••••••••••••••••••••••••
Unlike the cases discussed above, the com- 1. Lehman XS Trust is currently being appealed to the
plaint in Dexia did not allege a massive failure Second Circuit. In ACE Securities, the trust iled a petition
of underwriting that tainted all or many of the for leave to appeal the appellate division’s decision to the
New York Court of Appeals.
representations made in an MLPA. Instead, the 2. The only New York decision that has accepted this argument, other than the reversed decision of the trial
complaint was premised on a single loan and court in ACE Securities, appears to be Federal Housing Fi-
an underlying personal, full-recourse guaranty nance Agency, as Conservator for the Federal Home Loan
that was supposed to be triggered if certain Mortgage on behalf of the Trustee of the Securitized Asset
conditions of the mortgaged property were Backed Receivables Trust-2006-WM4 v. WMC Mortgage,
not met. When the loan defaulted, and after No. 13 Civ. 0584, Dkt. No. 53 (S.D.N.Y. Dec. 17, 2013) (deny- ing the defendant’s motion to dismiss complaint as time-
ascertaining that the full-recourse guaranty had barred on the ground that plaintiff pled the defendant’s
been triggered, the trust sued the guarantor in failure to cure as an independent breach from the warran-
Minnesota state court. The Minnesota court ties). The decision appears to rely on the trial court opin-
ion in ACE Securities, which was reversed by the appellate
ruled that the guaranty was not enforceable as division. Still, the court upon further motion practice and being made aware of the reversal by the appellate division,
it appears that Dexia afixed the guarantors’ sig- denied a motion for reconsideration. The plaintiff has iled
natures to a form that included the full-recourse a motion requesting certiication for appeal, which has yet www.marcumllp.com
provisions that had not been agreed by the to be decided.
guarantors. The trust then sued Dexia in the
3. Interestingly, Judge Shira Scheindlin decided Dexia and Lehman XS Trust.

Fact Witnesses
4.2 & 4.3.
Marcum LLp, one of the largest business
14. Cf. NYCLA Op. 729 (attorney may suggest to a wit-
ness that his client will pay for counsel to represent the valuation practices outside the “Big 4”,
witness).
has the expertise, experience and
15. See, e.g., Rocheux Int’l of N.J. v. U.S. Merchs. Fin.
« Continued from page S7
Group, No. 06-6147, 2009 WL 3246837, at *1-4 (D.N.J. Oct. resources to provide the litigation,
10 percent of plaintiff’s legal fees if defendant prevailed); 5, 2009).
valuation and investigative services
Tricham Hous. Assocs. v. Klein, 113 A.D.3d 432 (1st Dep’t 16. See ABA Op. 96-402; N.Y. R. Prof’l Conduct 3.4.
you deserve.
2014) (vacating agreement as contrary to public policy 17. See, e.g., Consol. Rail, 2012 WL 511572, at *11 (fail-
and creating an incentive for false testimony whereby ure to disclose circumstances of consultant/fact witness’ compensation found to be “troubling and indicative of
settling defendant would testify on plaintiff’s behalf and plaintiff would pay defendant’s legal fees if plaintiff de- improper conduct”).
feated non-settling defendants’ counterclaims).
18. Nissan N. Am., Inc. v. Johnson Elec. N. Am., No.
13. N.Y. State Bar Ass’n Comm. on Prof’l Ethics, For- 09-11783, 2010 WL 10107597, at *4-5 (E.D. Mich. May 12,
mal Op. 962 (2013); N.Y. Cnty. Lawyers’ Ass’n Comm. on 2010).
Discover the Diference
Prof’l Ethics, Formal Op. 729 (2000) [hereinafter NYCLA 19. See New York v. Solvent Chem., 166 F.R.D. 284, 289-
Op. 729]. Compensation-related considerations aside, 90 (W.D.N.Y 1996).
ASSURANCE I TAX I ADVISORY
be mindful of ethical restrictions regarding communica- tions with persons already represented by counsel and 20. Caldwell, 20 N.Y.3d at 371.
21. 28 U.S.C. §1871(b) (2012); N.Y. Jud. Law §521(a) International Member of Leading Edge Alliance
with unrepresented persons. See N.Y. R. Prof’l Conduct
(McKinney 2003).