Opinion
No. 650504/2012.
2012-07-25
SAND CANYON CORPORATION, Plaintiff, v. HOMEWARD RESIDENTIAL, INC., Defendant.
Edward Krugman, Cahill Gordon & Reindel LLP, New York, for Plaintiff. Ray Galbraith, Hunton & Williams, LLP, New York, for Defendants.
Edward Krugman, Cahill Gordon & Reindel LLP, New York, for Plaintiff. Ray Galbraith, Hunton & Williams, LLP, New York, for Defendants.
MELVIN L. SCHWEITZER, J.
This is a breach of contract action in which Sand Canyon Corporation (Sand) alleges that Homeward Residential, Inc. (HRI) has failed to abide by the terms of a Cooperation Agreement, entered in 2008, by “knowing[ly] facilitat [ing] [meritless] third-party claims against Sand in direct violation of HRI's contractual obligations to cooperate with Sand in Sand's defense of such claims.” The core of Sand's complaint is that HRI has made certain information available to third parties by electronic means, rather than limiting access to such information to Sand's offices.
HRI moves to dismiss Sand's claim on the grounds that (i) HRI is not breaching the Cooperation Agreement because Sand's demand that HRI not provide electronic information is not reasonable, and the Cooperation Agreement is unenforceable as contrary to public policy, (ii) the relevant pooling and servicing agreements require HRI to provide information electronically, (iii) the Cooperation Agreement only applies to “Covered Actions” and not all disseminated information Sand complains about concerns “Covered Actions,” and (iv) Sand's allegations of breach of the Cooperation Agreement's confidentiality provisions do not state a claim against HRI. The motion is denied.
Background
Sand, formerly known as Option One, originated and serviced residential mortgage loans until 2008. Sand securitized a majority of its loans under a process in which pools of loans were transferred to a trust as collateral for mortgage-backed securities which were sold to third-party investors. When Sand entered into securitization transactions, it retained the servicing rights with respect to the loans. A pooling and servicing agreement set forth the respective rights and obligations of the parties to the transaction, including the servicer and trustee. Although pooling and servicing agreements differ in certain respects for individual transactions, a standard pooling and servicing agreement governs the terms on which loan files and servicing data for a transaction may be accessed. These loan files and servicing data include personal and confidential financial and identity information provided by borrowers to enable originators to underwrite loans. Standard pooling and servicing agreements limit access to this information by all parties, including trustees, insurers, and investors, to reasonable requests during normal business hours at the offices of the servicer. No pooling and servicing agreement at issue provides for a third-party to receive electronic copies of loan files.
Sand sold its loan-servicing business to HRI pursuant to a purchase agreement (Purchase Agreement) in 2008. The Purchase Agreement addressed the allocation of potential liabilities between those assumed by HRI (Assumed Liabilities) and those retained by Sand (Retained Liabilities). Under the Purchase Agreement, Sand and HRI agreed that Sand would retain liability and indemnify HRI for certain losses arising out of pre-sale activities, including repurchase requests that were based on allegations concerning Sand's presale conduct.
Sand and HRI also entered into the Cooperation Agreement. The Cooperation Agreement sets forth HRI's duty to provide “all reasonable cooperation and assistance” to Sand in dealing with any third-party dispute or threatened dispute related to Retained Liabilities. Sand's interpretation of “reasonable cooperation and assistance” requires HRI to refrain from providing electronic access to mortgage loan information because doing so results in an increased number of third-party claims against Sand. Sand's interpretation of the Cooperation Agreement, which allegedly impedes claims by third-parties arising out of alleged breaches of representations and warranties is, according to HRI, unenforceable as contrary to public policy. HRI further contends that “reasonable cooperation and assistance” cannot be interpreted to prevent the providing of electronic access by HRI to trustees and investors.
Sand alleges that despite the express promise in the Cooperation Agreement and the express limitation on access rights in the pooling and servicing agreements, HRI is providing electronic copies of mortgage loan information to third-parties. Sand has requested HRI to provide third-parties with access to the loan information only as provided for in the pooling and servicing agreements. HRI has informed Sand that it intends to continue providing electronic access unless a court orders HRI not to do so. HRI claims this is required under the “best interests” clause in the pooling and servicing agreements. Although HRI has interpreted the provision, to “[act] in the best interests of [the investors and other third-parties],” to require HRI to provide mortgage loan information by electronic means, HRI also claims that the third-parties themselves assert that HRI's duties as a servicer disallows HRI from impeding third-parties' access in the manner Sand demands.
Sand contends that the sole purpose of the third-parties' requests for this information is to maximize the number of claims asserted against Sand. Sand says every information request made to HRI by third-parties has resulted in the assertion of meritless claims or repurchase requests against Sand. Sand also alleges that the third-parties making these information requests are being advised by, or are sharing the information obtained from the requests with, a plaintiff's law firm that routinely brings claims or repurchase requests against mortgage originators, including Sand.
Under Section 2.1(a) of the Cooperation Agreement, HRI is required to “provide all reasonable cooperation and assistance as may be requested by [Sand] in connection with [any] Covered Action.” A Covered Action is defined as “(i) any Action relating to the Business, (ii) any Action relating to the Mortgage Loan origination business of Sellers, or (iii) any Specified Mortgage Claim, in each case, that gives rise to Assumed Liabilities or Retained liabilities.” A “Specified Mortgage Loan Claim” means “any complaint, asserted claim, or other dispute raised, made or threatened by any Governmental Authority or private party ... relating to the origination or servicing of Mortgage Loans that are serviced by the Business as of the Closing Date.” Sand contends that the claims brought by third-parties constitute “Covered Actions.” According to Sand, HRI has not provided “reasonable cooperation and assistance” in connection with any of these “Covered Actions.”
Sand notes that Article IV of the Cooperation Agreement affords Sand notice and control of any purchase request from a third-party under a servicing agreement or mortgage loan purchase agreement, including “sole responsibility for and control of the management of any such [request].” Sand contends that it has been unable to exercise this control since HRI began providing access to mortgage loan files through electronic disk delivery. Sand contends that the information on these disks constitutes “Information” under Section 1.1 of the Cooperation Agreement. Under Section 2.4, “Information” must be maintained in confidence and is subject to the limited access rights as provided in the pooling and servicing agreements. Sand alleges it repeatedly requested that HRI abide by the limited access provisions and its obligation to cooperate under the Cooperation Agreement, but HRI has failed to do either.
Sand filed its complaint alleging breach of contract and breach of the implied covenant of good faith and fair dealing. Sand seeks a declaratory judgment and injunctive relief against HRI because Sand “has and continues to suffer irreparable injury for which it has no remedy at law” and “as a result of [the] breaches ... Sand has also been damaged by being forced to defend a large number of meritless repurchase requests and claims....”
Standard of Review
HRI moves to dismiss Sand's complaint pursuant to CPLR 3211. CPLR 3211(a) provides, in relevant part, that “[a] party may move for judgment dismissing one or more causes of action asserted against him on the ground that (1) a defense is founded upon documentary evidence; or ... (7) the pleading fails to state a cause of action....”
On such a motion to dismiss, the court must determine whether “from the [complaint's] four corners[,] factual allegations are discerned which taken together manifest any cause of action cognizable at law.” Gorelik v. Mount Sinai Hosp. Ctr., 19 A.D.3d 319, 319, 797 N.Y.S.2d 497 (1st Dept 2005) (quoting Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275, 401 N.Y.S.2d 182, 372 N.E.2d 17 (1997)). The court must accept the well-pleaded facts as true. See Chelsea 18 Partners, LP v. Mak, 90 A.D.3d 38, 43, 933 N.Y.S.2d 204 (1st Dept 2004) (stating that a court must find all allegations as true and afford them every favorable inference under a CPLR 3211 motion to dismiss). A complaint should not be dismissed on a pleading motion so long as a cause of action exists when the plaintiff is given the benefit of every possible favorable inference. Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 634, 389 N.Y.S.2d 314, 357 N.E.2d 970 (1976). “Although ... the facts pleaded are presumed to be true” for purposes of a CPLR 3211 motion, “allegations consisting of bare legal conclusions, as well as factual claims either inherently credible or flatly contradicted by documentary evidence, are not entitled to such consideration.” Liebert v. McKoan, 228 A.D.2d 232, 232, 643 N.Y.S.2d 114 (1st Dept 1996). The court “is not required to accept factual allegations that are plainly contradicted by the documentary evidence.” Water St. Leasehold, LLC v. Deloitte & Touche, LLP, 19 A.D.3d 183, 185, 796 N.Y.S.2d 598 (1st Dept 2005) (quoting Robinson v. Robinson, 303 A.D.2d 234, 235, 757 N.Y.S.2d 13 (1st Dept 2003)). Pursuant to CPLR 3211(a)(7), when evidentiary material submitted on a motion to dismiss can “conclusively establish that plaintiff has no cause of action, dismissal is warranted.” Allen v. Gordon, 86 A.D.2d 514, 514, 446 N.Y.S.2d 48 (1st Dept 1982); see also Grant v. Aurora Loan Servs., 88 A.D.3d 949, 950, 932 N.Y.S.2d 74 (2d Dept 2011).
Discussion
HRI contends that the Cooperation Agreement's provision requiring HRI to provide “reasonable cooperation and assistance” does not include Sand's demand for HRI to not provide electronic information to third-parties because that requirement is not “reasonable.” HRI is mistaken.
Time and place restrictions on access to information, such as the ones set out in the pooling and servicing agreements, are reasonable and routinely enforced. These limit the provision of information to inspection “during ordinary business hours” and “at the place of business of the Servicer.” Restrictions on documents are widely recognized in the context of trusts, and in the context of shareholder access to corporate materials. See In re Estate of Rosenblum, 459 Pa. 201, 328 A.2d 158, 164–65 (Pa.1974) (upholding reasonable time and place restrictions on trust beneficiary's access to documents); Security First Corp. v. U.S. Die Casting and Development Co., 687 A.2d 563, 571 (Del.1997) (explaining that stockholders have a right to at least a limited inquiry into books and records in which they have established some credible basis to believe there has been wrongdoing). These limitations serve the purpose of preventing the “potential for abuse” and are enforceable.
HRI contends that if the Cooperation Agreement requires HRI to restrict a trustee's access to electronic mortgage loan information, the Cooperation Agreement is unenforceable as contrary to public policy. Sand's interpretation of the Cooperation Agreement is not a violation of public policy because third-parties, including trustees, are not barred access to mortgage loan information, they have the access to information they agreed to in the pooling and servicing agreements. Sand's interpretation of the Cooperation Agreement does not prevent any third-parties from an opportunity to have their “day in court,” as HRI has asserted. The requirement that HRI stop providing the mortgage loan information electronically does not prevent third-parties from bringing claims against Sand, because third-parties still have the agreed upon access to the information. HRI's public policy argument fails.
In sum, HRI cannot reasonably believe that the pooling and servicing agreements require HRI to provide mortgage loan information electronically to third-parties. As Sand has pointed out, the contractual limitations on trustees' access to electronic loan information was negotiated by the trustees themselves. The trustees have years of experience, and if these trustees had found the limitation requirements of the pooling and servicing agreements unreasonable or onerous, they could have demanded expanded access before agreeing to the provisions. They did not.
Next, HRI argues that the Cooperation Agreement only applies to “Covered Actions” and not all the information requests Sand complains about concern “Covered Actions.” The point at issue here is whether an information request to HRI by a third-party constitutes a “threatened claim” under a “Covered Action.” HRI contends that the very act of seeking loan information, whether or not any repurchase claim has been made with respect to that loan, does not constitute a “threatened” claim or dispute. However, according to Sand, HRI is fully aware that the information requests by third-parties are being made for the purpose of making claims against Sand, and that every information request made to HRI ultimately has resulted in the assertion of claims or repurchase requests against Sand.
In any event, even if some information requests do not concern Covered Actions, the pooling and servicing agreements limit access to mortgage loan information to third-parties. As mentioned, HRI cannot reasonably believe it is obligated to provide electronic information to these parties because these parties themselves agreed to limited access. Also, whether or not an information request constitutes a “threatened claim” presents a factual question that is inappropriate for a motion to dismiss. See Emigrant Bank v. UBS Real Estate Sec., Inc., 49 A.D.3d 382, 384, 854 N.Y.S.2d 39 (1st Dept 2008) (explaining a question of fact is inappropriate for determination on a motion to dismiss).
HRI also argues that Sand's allegations of breach of the Cooperation Agreement's confidentiality provisions do not state a claim against HRI. Sand alleges that HRI breached Section 2.4 (confidentiality provision) of the Cooperation Agreement, which requires the parties themselves to hold certain information in confidence and use commercially reasonable efforts to cause their representatives to do the same. HRI argues that the confidentiality provision cannot be breached by “communication of loan information to those persons entitled to it by the [pooling and servicing agreements]” and even if the confidentiality provision did apply, it would only be breached if HRI did not use “commercially reasonable efforts” to hold the information confidential. HRI argues that Sand does not plead that HRI did not use commercially reasonable efforts to preserve confidentiality, nor does Sand plead any facts to indicate that HRI's electronic communication of mortgage information to those who are entitled to receive it has not been made with “commercially reasonable efforts” to preserve its confidentiality. In return, Sand argues that HRI has misunderstood the confidentiality provision and that Sand has properly alleged a breach of that provision. Accepting the pleaded facts as true, Sand has properly pleaded a breach of the confidentiality provision by alleging that HRI has not abided by the terms of the confidentiality provision because HRI has been providing mortgage loan information in electronic form.
Finally, HRI argues that Sand's claim for an injunction should be dismissed because “Sand [ ] does not plead essential elements of a claim for an injunction; cannot show that the equities favor an injunction; and proposes an injunction of such vagueness that it cannot be enforced.” To plead a claim for an injunction, there must be irreparable injury and inadequacy of a legal remedy.” Stanklus v. County of Montgomery, 86 A.D.2d 908, 908, 448 N.Y.S.2d 536 (3d Dept 1982) (explaining that “[i]rreparable injury and inadequacy of a legal remedy are prerequisites to an injunction”). “A motion to dismiss a declaratory judgment action prior to the service of an answer presents for consideration only the issue of whether a cause of action for declaratory relief is set forth, not the question of whether the plaintiff is entitled to a favorable declaration.” State Farm Mutual Automobile Insurance Co. v. Anikeyeva, 89 A.D.3d 1009, 1010–11, 934 N.Y.S.2d 196 (2d Dept 2011) (citing Staver Co. v. Skrobisch, 144 A.D.2d 449, 450, 533 N.Y.S.2d 967 (2d Dept 1988).
Sand has argued that it will suffer irreparable injury, including irreparable harm to Sand's reputation, absent the requested relief and that any consequence resulting from a breach of the Cooperation Agreement cannot be remedied by monetary damages because “the delivery of electronic information to third parties cannot be undone and the precise cost in terms of additional claims against Sand [ ] cannot be easily ascertained.” Thus, upon a determination that HRI breached the Cooperation Agreement, an injunction is appropriate. HRI's argument that Sand's request for an injunction is too vague fails because vagueness in a requested injunction is not relevant in a motion to dismiss. Furthermore, a motion to dismiss for failure to state a claim addresses the alleged cause of action and not the remedy sought. See City of New York v. A–1 Jewelry & Pawn, Inc., 247 F.R.D. 296, 353 (E.D.N.Y.2007) (denying a motion to dismiss on allegations that a remedy was too vague). HRI cites no cases to support a dismissal of a claim based on the vagueness of a requested injunction. The court holds Sand has adequately pleaded a claim for an injunction.
Accordingly, it is
ORDERED that HRI's motion to dismiss is denied.