U.S. Bank National Association v. Goldman Sachs Mortgage Company

Background

U.S. Bank served as trustee for the GSAMP Trust 2007-HE1 and GSAMP Trust 2007-HE2, which pooled approximately 8,500 mortgage loans used to back residential mortgage-backed securities. Goldman Sachs Mortgage Company sponsored the trusts and underwrote the loans; GS Mortgage Securities Corp. deposited the loans into the trusts.

The parties’ agreements required Goldman Sachs Mortgage Company to cure or repurchase loans affected by material breaches of contractual representations and warranties. The agreements also made repurchase the sole remedy for those breaches and defined the repurchase price using characteristics of each individual loan, including its unpaid principal balance, interest rate, servicing advances, and certain expenses.

U.S. Bank alleged that at least 617 loans in the first trust and 1,041 loans in the second trust materially breached the representations and warranties. It claimed that Goldman had not cured the breaches or repurchased the loans. The court had previously allowed U.S. Bank’s claims to proceed and held that U.S. Bank could seek damages for breach of contract.

Motion and proposed sampling method

U.S. Bank moved for partial summary judgment on whether it could use statistical sampling at trial to prove liability and damages. Its proposed method would have selected 400 loans from each loan group in each trust, for 1,600 liquidated loans in total. U.S. Bank’s experts would reunderwrite those loans, determine the percentage containing defective loans, and extrapolate that rate to the relevant loan groups. U.S. Bank proposed loan-by-loan proof for active loans it claimed were defective.

U.S. Bank argued that sampling was allowed because the contracts did not expressly prohibit it and because sampling would reduce the number of loans requiring reunderwriting. Goldman argued that the contracts did not unambiguously permit sampling and instead required loan-by-loan proof.

The parties agreed that the question presented by the motion was one of contract interpretation. The reliability or admissibility of the experts’ methodology under Federal Rule of Evidence 702 was a separate issue that the court did not decide.

Court’s analysis

The court applied New York contract law. Summary judgment is appropriate on a contract issue only when the relevant language is wholly unambiguous and has a definite meaning. The court concluded that the agreements did not provide an unambiguous basis for U.S. Bank’s proposed sampling method.

The court focused on the agreements’ repeated use of loan-specific language. The representations and warranties required Goldman to cure or repurchase “such Mortgage Loan” when a breach materially and adversely affected the value of the particular loan or the trust’s interest in it. The contracts also described the remedy as repurchase or substitution of “a Mortgage Loan in breach.” In addition, the repurchase price depended on characteristics of each loan.

According to the court, this structure required loan-specific proof of the breach, the material and adverse effect, and the repurchase price. The court therefore declined to interpret the contracts as allowing statistical evidence to establish those matters for a broader group of loans without identifying the particular loans and breaches.

The court considered decisions that had reached different conclusions about sampling in residential mortgage-backed securities cases. It was not persuaded that those decisions required a different result. The court also rejected the argument that the cost or inconvenience of loan-by-loan proof could change the contracts’ meaning. It noted that denying sampling would increase the number of loans requiring reunderwriting from 1,600 to 4,305, but found that burden significant rather than prohibitive.

Issues not decided

The court did not decide Goldman’s alternative argument that U.S. Bank should be barred from seeking sampling because of positions U.S. Bank allegedly took in earlier cases. The court also did not decide whether U.S. Bank’s demand concerning “any other defective Loans” satisfied the agreements’ notice requirement or whether compliance with that requirement was necessary before filing suit.

Disposition

Judge Alison J. Nathan denied U.S. Bank’s motion for partial summary judgment. The court also denied the parties’ requests for oral argument. The parties were ordered to file a revised case-management plan within two weeks of the opinion’s date. The order resolved the listed motion and oral-argument requests in both related cases.