Phoenix Light SF Limited v. HSBC Bank USA, National Association

Background

The plaintiffs sued HSBC in its role as trustee for 29 trusts composed of residential mortgage-backed securities. The action was coordinated with five similar suits against HSBC and used a bellwether process, in which a limited number of trusts proceeded through discovery, motions, and possible trial while claims involving other trusts were deferred.

HSBC moved to amend its answer to add four defenses: champerty under New York Judiciary Law § 489(1), impossibility, impracticability, and frustration of purpose under the governing trust agreements. The court had not previously set a deadline for amending pleadings. Fact discovery for the four bellwether trusts had closed, expert discovery was scheduled to close on April 7, 2021, and summary-judgment and evidence-related motions were scheduled to be completed by September 7, 2021.

Legal standard

Under Federal Rule of Civil Procedure 15(a)(2), after the time for amending an answer as of right has passed, a party may amend only with the opposing parties’ consent or the court’s permission. Courts should freely grant permission when justice requires, but may deny it for reasons including undue delay, undue prejudice, bad faith, or futility. Futility means that the proposed amendment could not survive a motion to dismiss or otherwise does not present a legally valid issue.

The plaintiffs did not claim that HSBC acted in bad faith or with a delaying motive. The court therefore focused on undue delay, undue prejudice, and futility.

Champerty defense

Champerty is a doctrine intended to prevent the commercialization or trading of litigation. HSBC argued that the plaintiffs’ assignments from the alleged true claimholder were champertous and that the plaintiffs therefore lacked standing to sue. HSBC also argued that the assignments, their form and purpose, and related standing issues had already been addressed in discovery and that the plaintiffs possessed the relevant evidence.

The court found that the plaintiffs did not identify what additional discovery would be needed to oppose the champerty defense. A general assertion that the defense had not previously been pleaded was not enough to show that adding it would require significant additional resources or reopening discovery. The court also rejected the plaintiffs’ futility argument, concluding that they had not shown the champerty defense could not legally be raised in this posture.

Impossibility, impracticability, and frustration of purpose

HSBC sought to add defenses concerning its ability to perform alleged duties as an RMBS trustee. HSBC argued that if it had a duty to investigate and pursue large numbers of loan-repurchase claims, the 2008 Financial Crisis made that performance impossible or impracticable and frustrated the purpose of the obligations. The proposed defenses also placed at issue whether HSBC could undertake the alleged litigation efforts and whether loan sponsors could repurchase loans in the volumes asserted by the plaintiffs.

The court found the plaintiffs’ showing of prejudice stronger as to these defenses. The plaintiffs argued that they would need discovery concerning non-bellwether trusts, HSBC’s repurchase demands and litigation, its actions involving servicers and similar securitization structures, its knowledge of alleged breaches, and its ability to obtain recoveries or servicing improvements. They also argued that HSBC had previously limited discovery into many of these subjects.

The court agreed that the proposed defenses would likely require reopening discovery nearly four years after fact discovery had closed. It further found that HSBC largely controlled documents and information needed to rebut the defenses and that reopening discovery would likely delay expert discovery, summary judgment, and the scheduled evidence-related motions. Because adding these defenses would cause undue prejudice, the court denied permission to add them and did not decide whether they would also be futile.

Disposition

Judge Sarah Netburn’s order granted in part and denied in part HSBC’s motion to amend its answer. HSBC was permitted to add the champerty defense. The motion to add the impossibility, impracticability, and frustration-of-purpose defenses was denied. The court directed the Clerk of Court to terminate the motion at ECF No. 361.