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Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC

Court of Chancery of Delaware

January 12, 2015

BEAR STEARNS MORTGAGE FUNDING TRUST 2006-SL1, by U.S.Bank, N.A., as Trustee, Plaintiffs,

Submitted: November 6, 2014

Philip A. Rovner, Jonathan A. Choa, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Philippe Z. Selendy, Sanford I. Weisburst, Erica P. Taggart, Alexei Tsybine, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; Attorneys for Plaintiff Bear Stearns Mortgage Funding Trust 2006-SL1, by U.S. Bank, N.A., as Trustee.

Daniel B. Rath, Rebecca L. Butcher, LANDIS RATH & COBB LLP, Wilmington, Delaware; Robert A. Sacks, SULLIVAN & CROMWELL LLP, Los Angeles, California; Brent J. McIntosh, SULLIVAN & CROMWELL LLP, Washington, D.C.; Darrell S. Cafasso, SULLIVAN & CROMWELL LLP, New York, New York; Ryan J. McCauley, SULLIVAN & CROMWELL LLP, Palo Alto, California; Attorneys for Defendants EMC Mortgage LLC and JPMorgan Chase Bank, N.A.



The defendants previously moved to dismiss the plaintiff's verified amended complaint (the "Complaint") on grounds of laches. The court granted the motion to dismiss in part, ruling that all but one of the counts in the Complaint were untimely under Delaware's three-year statute of limitations (the "Dismissal Ruling").

The plaintiff moved for reargument under Court of Chancery Rule 59(f). This decision grants the motion and holds that the plaintiff's claims are timely. The meritorious grounds for reargument are (i) the identification of a controlling Delaware Supreme Court decision that the parties had not discussed, (ii) the further explication of a key contractual provision, and (iii) the implications of an amendment to the Delaware Code that the parties had not identified as having become effective.

The granting of the motion for reargument requires that the court reach arguments for dismissal that were not previously addressed. The upshot is that the motion to dismiss is granted as to Counts IV and VIII of the Complaint. Otherwise, it is denied.


The facts are drawn from the Complaint and the documents it incorporated by reference. At this procedural stage, the Complaint's allegations are assumed to be true, and the plaintiff receives the benefit of all reasonable inferences.

A. The Trust

Defendant EMC Mortgage LLC ("EMC") is the successor to EMC Mortgage Corporation, a company which created and sold residential-mortgage-backed securities. As their name implies, securities of this type give investors the right to receive cash flows generated by a portfolio of loans secured by mortgages on residential real estate. At the time of the securitization giving rise to this lawsuit, EMC was a wholly owned subsidiary of Bear Stearns Companies LLC ("Bear Stearns").

In the securitization giving rise to this case, EMC sold 8, 447 loans (the "Mortgage Loans") to the plaintiff, Bear Stearns Mortgage Funding Trust 2006-SL1 (the "Trust"), a common law trust governed by the laws of New York. As a technical legal matter, EMC did not sell the Mortgage Loans directly to the Trust or create the Trust itself. Instead, EMC sold the Mortgage Loans to Bear Stearns Asset Backed Securities I LLC (the "Conduit"), another wholly owned subsidiary of Bear Stearns. The Conduit then created the Trust and designated the Mortgage Loans as the trust fund for the Trust. The sale of the Mortgage Loans from EMC to the Conduit was governed by a Mortgage Loan Purchase Agreement dated July 28, 2006 (the "Purchase Agreement" or "MLPA").

In return for the Mortgage Loans, the Trust created and issued to the Conduit certificates representing beneficial ownership interests in the cash flows generated by the Mortgage Loans (the "Certificates"). The issuance of the Certificates to the Conduit was governed by a Pooling and Servicing Agreement dated as of July 1, 2006 (the "Servicing Agreement" or "PSA"). Other parties to the Servicing Agreement included the Trustee and EMC, which acted initially as the servicer for the Mortgage Loans. In that capacity, EMC was responsible for collecting principal and interest payments on the Mortgage Loans and depositing them with the Trustee for distribution to investors who held Certificates. As servicer, EMC also was responsible for maintaining documentation relating to the Mortgage Loans and for modifying Mortgage Loans or foreclosing on mortgaged properties if the Mortgage Loans became delinquent. EMC received fees for these services. Effective April 1, 2011, defendant JPMorgan Chase Bank, N.A. ("JPMorgan"), succeeded EMC as servicer.

After receiving the Certificates pursuant to the Servicing Agreement, the Conduit passed the Certificates along to Bear Stearns & Co. Inc. (the "Underwriter"), another wholly owned subsidiary of Bear Stearns. The Underwriter sold the Certificates to investors pursuant to a prospectus dated June 7, 2006, and a prospectus supplement dated July 27, 2006.

The securitization closed on July 28, 2006. With the securitization completed, the Conduit dropped out of the picture. Any role it might have under the Purchase Agreement or the Servicing Agreement was ceded to the trustee of the trust, a position initially filled by LaSalle Bank, N.A., and presently occupied by U.S. Bank, N.A. ("U.S. Bank" or the "Trustee").

B. Problems With The Mortgage Loans

As of July 1, 2006, the Mortgage Loans had an aggregate principal balance of $501, 324, 359.27. But the Mortgage Loans experienced high rates of defaults and delinquencies, and in the first year, the Trust suffered $35.6 million in losses. By the second year, the Trust's losses had reached $136.6 million. As of February 2014, the Trust had suffered some $295 million in losses, representing nearly 60% of the original principal loan balance. Based on the loans' performance, certain investors who held Certificates began to suspect that EMC might have sold a bad batch to the Trust.

Beginning in summer 2011, at the direction of certain investors in the Trust, the Trustee asked EMC for loan origination files, servicing records, and other loan documentation for the Mortgage Loans. In making these requests, the Trustee relied on at least three different sections of the Servicing Agreement, each of which contemplated that the Trustee owned and would have access to the mortgage files and related loan documents for the Mortgage Loans. See PSA §§ 3.04, 3.15 & 11.09.

EMC and its successor as servicer, JPMorgan, were less than cooperative in providing the files and related documents. The Trustee initially requested documents relating to 4, 800 of the 8, 447 loans. By early 2012, JPMorgan had produced files for only 797 loans. JPMorgan produced additional loan documents after the Trustee initiated this action. The Trustee ultimately reviewed the files for 2, 742 loans. The Trustee has continued to seek additional documents, such as servicing files and quality control reports from JPMorgan.

C. The Trustee Invokes The Remedial Framework Of The Purchase Agreement.

Beginning in December 2011, the Trustee notified EMC that certain Mortgage Loans did not comply with representations and warranties that EMC had made in the Purchase Agreement about their quality and characteristics (collectively, the "Loan Representations"). The Loan Representations included the following:

(a) the information set forth in the Mortgage Loan Schedule hereto[1] is true and correct in all material respects;
(d) there is no monetary default existing under any Mortgage or the related Mortgage Note and there is no material event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach or event of acceleration . . .;
(f) no selection procedure reasonably believed by the Mortgage Loan Seller to be adverse to the interests of the Certificateholders was utilized in selecting the Mortgage Loans;
(n) at the time of origination, each Mortgaged Property was the subject of an appraisal which conformed to the underwriting requirements of the originator of the Mortgage Loan . . .;
(r) the information set forth in Schedule A of the Prospectus Supplement with respect to the Mortgage Loans is true and correct in all material respects;
(t) each Mortgage Loan was originated in accordance with the underwriting guidelines of the related originator;
(v) the related Mortgage File[2] contains each of the documents and instruments listed in Section 2.01 of the [Servicing Agreement] . . . .

MLPA § 7. In the Servicing Agreement, EMC reiterated the accuracy of the Loan Representations. Section 2.03 of that agreement stated:

With respect to each Mortgage Loan as of the Closing Date . . ., [EMC] hereby remakes and restates each of the representations and warranties set forth in Section 7 of the [Purchase Agreement] to the [Trust][3] and the Trustee to the same extent as if fully set forth herein.

PSA § 2.03(b)(vii).

After identifying the non-conforming loans, the Trustee asked EMC to comply with a remedial procedure in the Purchase Agreement (the "Repurchase Provision"). It generally required that in the event of a breach of a Loan Representation, EMC would (i) cure the breach, (ii) repurchase the non-conforming loan, or (iii) if the breach occurred within the first two years after the securitization closed, replace the non-conforming loan with a conforming loan. The language of the Repurchase Provision stated:

Upon discovery or receipt of notice by [EMC] . . . or the Trustee of a breach of any [Loan Representation] which materially and adversely affects the value of the interests of the [Trust], [4] the Certificateholders or the Trustee in any of the Mortgage Loans. . ., the party discovering or receiving notice of such breach shall give prompt written notice to the others.
In the case of any such breach of a representation or warranty set forth in this Section 7, within 90 days from the date of discovery by [EMC], or the date [EMC] is notified by the party discovering or receiving notice of such breach (whichever occurs earlier), [EMC] will
(i) cure such breach in all material respects,
(ii) purchase the affected Mortgage Loan at the applicable Purchase Price or
(iii) if within two years of the Closing Date, substitute a qualifying Replacement Mortgage Loan in exchange for such Mortgage Loan;

MLPA § 7 (footnote and formatting added). Here too the Servicing Agreement backed up the Purchase Agreement by reiterating that EMC had an obligation to repurchase non-conforming loans. See PSA § 2.03(c). The version of the Repurchase Provision in the Servicing Agreement also provided that EMC "shall promptly reimburse the Master Servicer and the Trustee for any expenses reasonably incurred by the Master Servicer or the Trustee in respect of enforcing the remedies for such breach." PSA § 2.03(c) (the "Reimbursement Provision").

The Purchase Agreement made the procedure contemplated by the Repurchase Provision the sole and exclusive remedy for any breaches of Loan Representations. The relevant language stated:

The obligations of [EMC] to cure, purchase or substitute a qualifying Replacement Mortgage Loan shall constitute the [Trust's], [5] the Trustee's and the Certificateholder's sole and exclusive remedy under this Agreement or otherwise respecting a breach of representations or warranties hereunder with respect to the Mortgage Loans, except for the obligation of the [EMC] to indemnify the Purchaser for such breach as set forth in and limited by Section 14 hereof.

MLPA § 7 (the "Exclusive Remedy Provision").

D. EMC Repurchases Some Mortgage Loans But Not Others.

In response to the Trustee's requests, EMC agreed to repurchase certain loans but declined to repurchase others. Notably, although the Trustee made its first requests nearly four-and-a-half years after the securitization closed, EMC did not argue that the Trustee's claims of breach came too late such that the statute of limitations had run. It can be inferred at this procedural stage that EMC did not contend that the Trustee's claims of ...

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