In an opinion refusing to dismiss a lawsuit by several RMBS mortgage trusts in connection with $1.6 billion of mortgage loans, Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York, held that the plaintiffs would be limited to the loan purchase price as the contractual measure of damages for failing to repurchase a loan as contractually required, and could not obtain damages beyond that amount.
The trusts allege that UBS failed to repurchase mortgage loans that violated representations and warranties in the underlying agreements, and UBS moved to dismiss the trusts’ request for monetary damages based on a contractual clause limiting the for breaches of representations and warranties to repurchase.
The court rejected the trusts’ argument, holding that monetary damages could be available in lieu of specific performance (i.e., repurchase) if specific performance was unavailable, but limited any damages to the purchase price of the subject loans. The court reasoned that while the “sole remedy” clause did not preclude a claim for monetary damages, it did limit any potential damages to an amount commensurate with the sole remedy clause.
While many loan purchase agreements between loan originators and correspondent banks do not include such “sole remedy” clauses, some do, and even if they do not, Judge Baer’s opinion in MASTR Trust v. UBS Real Estate, 12-CIV-7322 (S.D.N.Y. Aug. 15, 2013), could nonetheless be used by originators to bolster their argument that it would be unfair and unreasonable to hold them liable for damages beyond the loan purchase price (minus, for example, any monies collected by the correspondent bank from the sale and servicing of the loan or underlying property) – assuming they are liable at all for alleged violations of representations and warranties.