Motion sequences numbers 01, 02 and 04 are consolidated for disposition.

This action arises out of a warehouse lending arrangement that plaintiff, First Acquisition Funding LLC (FAF), a hedge fund, provided to defendant, 1st Alliance Lending, LLC (1st Alliance), an originator of mortgages.

In motion sequence 01, FAF moves for summary judgment as to liability: (1) on its claim for breach of contract that 1st Alliance materially breached the contract by failing to share profits from short refinance loans; (2) for a declaration that [*2]1st Alliance must share profits from short refinance loans for the duration of the term of the agreement; and (3) for legal fees. 1st Alliance cross-moves for summary judgment dismissing the complaint.

In Motion sequence 02, 1st Alliance moves for leave to amend its answer in order to add the additional affirmative defense of illegality.^[FN1]

In motion sequence 04, 1st Alliance moves to strike from the record all references to settlement communications that are contained within FAF's submissions.

In the fall of 2008, the Federal government, hoping to stabilize the American economy and housing market, passed the Emergency Economic Stabilization Act and the Hope for Homeowners Program, known as the H4H program, under section 203 (b) of the National Housing Act (NHA).^[FN3] H4H was designed to help distressed homeowners avert foreclosure by forgiving a portion of the principal balance and refinancing the loan into an affordable, fixed rate mortgage insured by the FHA. With FHA insurance in place, mortgages are more readily securitized into Government National Mortgage Association (Ginnie Mae) mortgage-backed securities, which can then be sold to investors in the market. The securitization of mortgages has in the past resulted in extensive litigation that is, so far, happily absent in this case.

In order to facilitate the refinancing of an existing mortgage into an H4H mortgage, a mortgagee must have enough available cash or credit to "hold" the refinanced mortgage until it can be sold or securitized, which is known as "warehouse" lending.

FAF is a special purpose entity that was established by a hedge fund solely for the purpose of providing warehouse lending to 1st Alliance, a mortgage originator that has, since the economic crash of 2008, become licensed to originate H4H loans.

On March 4, 2010, FAF and 1st Alliance entered into several [*3]agreements whereby FAF agreed to provide, either itself or through a third party, a warehouse financing line of credit of $20 million to 1st Alliance for the purpose of supporting 1st Alliance's business of originating H4H loans to distressed borrowers.

The parties executed a "Master Repurchase Agreement" (MRA), which sets forth in detail the manner in which FAF "purchased" H4H loans from 1st Alliance and held them until they were securitized and sold in the secondary market. The parties also executed a "Fee Side Letter" (FSL), which sets forth the terms of FAF's compensation for either providing or arranging funding to 1st Alliance. As payment for FAF's services, 1st Alliance agreed to share half of the profits it earned for originating H4H loans, after the deduction of certain expenses (Exhibit A, annexed to the Taylor Aff.).

FHA Short Refinance Loans

In March 2010, the FHA announced that it was expanding its mortgage insurance program under section 203 (b) of the FHA with the Short Refinance Program (Short Refi). The Short Refi program was designed to provide relief to underwater borrowers with negative equity in their homes and enabling them to refinance into affordable FHA loans.

Around this time, 1st Alliance also obtained a license to sell Ginnie Mae securities directly into the market, which permitted it to securitize and sell loans directly to investors.^[FN4]The parties discussed their wish to expand their relationship in order for 1st Alliance to use the warehouse line to also finance Short Refi loans and to cover 1st Alliance's sale of Ginnie Mae securities. In December 2010, the parties revised the MRA and FSL, followed by a second revision in January 2011.Under the second amended restated Master Purchase Agreement (SA MRA) and second amended Fee Letter (SA FSL) (together, the SA Agreements), FAF's affiliate, Erskine, replaced FAF as the entity funding the warehouse line, and FAF remained a party only to the SA FSL. The parties extended the default terms of the SA Agreements one year, to December 12, 2013, in addition to other modifications.

At some point, a dispute arose between the parties when 1st Alliance protested FAF's retention of certain funds which 1st Alliance believed it was not entitled. As the "credit crunch" eased and the warehouse lending market improved significantly, [*4]1st Alliance notified FAF that it was exercising its right to terminate their relationship in order to enter into a separate warehousing line with another bank, and FAF consented.

In August 2011, the parties entered into a consent agreement (Consent Agreement) pursuant to which they consensually terminated the SA MRA. Not long after execution of the Consent Agreement, the parties were unable to agree as to whether 1st Alliance remained bound to share its profits for H4H and Short Refi loans originated after the SA MRA was terminated.

The parties spent approximately six months attempting to negotiate a settlement to their dispute. Once these discussions proved unsuccessful, FAF commenced this action. FAF asserts claims for breach of contract arising out of 1st Alliance's refusal to continue sharing its profits under the SA FSL, and for failure to provide electronic access to information pertaining to the reserve accounts. FAF also seeks a declaration that all mortgage loans originated and securitized by 1st Alliance following termination of the SA MRA are subject to the full extent of the SA FSL through December 31, 2013, and that its legal fees and expenses are recoverable, under an indemnification clause contained within the agreements.

1st Alliance served an answer with a counterclaim for breach of contract arising out of FAF's retention of certain fees it alleges is inconsistent with the SA FSL, and seeks the return of payments made to FAF for mortgage loans which FAF did not fund or arrange for the funding of the mortgage loans.

1st Alliance also alleges that it was a mutual mistake to include all section 203 (b) loans in the agreements, as the parties intended that the profit sharing provision would apply exclusively to mortgage loans under the H4H and Short Refi programs, rather than all loans originated by 1st Alliance and insured by the FHA under its general authority to insure a host of different mortgage loans. 1st Alliance seeks a declaration and reformation of the SA FSL to this effect.

1st Alliance maintains that it has properly shared profits with FAF on all mortgage loans that it has sold and/or securitized under the H4H and Short Refi program and which were financed by FAF under the relevant SA MRA. To the extent that FAF is no longer providing warehouse financing following termination of the SA MRA, 1st Alliance insists that the SA FSL survives merely as an "agreement to agree," and creates no enforceable obligations on the part of either party. 1st Alliance's claim is simply that if FAF did not provide the fund it is not entitled to any profits on the mortgages it did not fund.

Finally, 1st Alliance seeks the return of profits which FAF received after the SA MRA's termination. 1st Alliance also seeks to amend its answer to add the defense of illegality under the Real Estate Settlement Procedures Act (RESPA).

I. Summary Judgment

FAF moves for summary judgment as to liability on the ground that there are no material facts in dispute that 1st Alliance breached the SA FSL by refusing to share profits from mortgage loans that 1st Alliance originated and securitized under the H4H and Short Refi programs following termination of the SA MRA.^[FN5] FAF argues that section 3 of the SA FSL makes clear that 1st Alliance remains obligated to continue profit sharing until December 31, 2013, despite the fact that FAF is no longer providing funds to 1st Alliance or arranging third party funding.

In opposition, 1st Alliance argues that disputed issues of material fact defeat FAF's motion, and FAF's motion hinges on evidence that is inadmissable under CPLR 4547.

In support of its cross-motion for summary judgment to dismiss the complaint, 1st Alliance offers a markedly different interpretation of the relevant provisions of the SA FSL to argue that, with the termination of the SA MRA and the cessation of FAF's provision of, or arrangement, of funding, the SA FSL has no effect and is merely an "agreement to agree."

According to 1st Alliance, section 3 of the SA FSL, which FAF insists obligates 1st Alliance to continue sharing its profits, only applies where FAF has provided funding or arranged a "Third Party Funding Facility," as therein defined. 1st Alliance argues in the alternative that the interpretation urged by FAF renders the agreement illegal under RESPA.

The issue raised is whether the SA FSL unambiguously reflects an intent by the parties to extend 1st Alliance's obligation to share its profits earned from originating and securitizing H4H and Short Refi loans after termination of the SA MRA, despite the cessation of FAF's provision or arrangement of funding in support of 1st Alliance's business.

The fundamental rule of contract interpretation is that agreements are construed in accord with the parties' intent, and the best evidence of what parties to a written agreement intend is what they say in writing (W.W.W. Assoc. V Giancontieri, 77 NY2d 157, 162 [1990]). Thus, a written agreement that is clear and unambiguous on its face must be enforced according to the plain meaning of its terms, and extrinsic evidence of the parties' intent may be considered only if the agreement is ambiguous.

With these principles in mind, it is evident that the SA FSL, which governs FAF's commitment to provide funding to 1st [*6]Alliance or to arrange other funding in exchange for a share of 1st Alliance's profits, contains no language from which it can be inferred that the parties intended to extend 1st Alliance's profit sharing obligation beyond the consensual termination of the SA MRA.

Section 5 of the SA FSL is the only provision which discusses termination. Sections 5 (a) and 5 (b) of the SA FSL provide for the means by which the parties may terminate the SA FSL prior to December 31, 2013 under certain circumstances stemming from an Available Commitment Shortfall, which occurs when FAF is unable or unwilling to commit funds to 1st Alliance or to arrange funding.

In the Consent Agreement, the parties expressly agreed that no Available Commitment Shortfall has occurred or will be deemed to have occurred by virtue of the termination of the SA MRA (Exhibit J, annexed to the Taylor Aff.).

Otherwise, section 5 (c) provides for what happens if FAF terminates the SA FSL as a result of "bad faith actions" or the failure to use "good faith actions" on the part of 1st Alliance. This provision states that in the event the agreement is terminated as a result of 1st Alliance's bad behavior, FAF shall continue to be entitled to profit-sharing under section 3 of the SA FSL with respect to mortgage loans originated or securitized after the date of termination:

[I]f this Second Amended and Restated Fee Side Letter is terminated because of [1st Alliance's] Bad Faith Actions, or a failure to use Good Faith Actions, on the part of Seller [1st Alliance], then FAF shall continue to have the rights set forth in Section 3 hereof ... with respect to Mortgage Loans originated after the date of such termination (emphasis added).

This provision is significant because it is the only provision in the SA FSL which contains express language extending 1st Alliance's obligation to share profits. FAF does not allege that 1st Alliance's bad faith or failure to use good faith caused the breakdown of the parties' arrangement. The only logical conclusion that follows is that the specific mention of one circumstance where the profit sharing obligation continues post-termination implies the exclusion of all other circumstances.

Largely ignoring the import of section 5, FAF insists that it was understood by the parties that terminating the SA MRA did not terminate 1st Alliance's rights to share profits according to the SA FSL, and section 3 (a) (ii) of the SA FSL reflects this intent.

This Court rejects FAF's interpretation based upon the plain contractual language of the agreement. Section 3 of the SA FSL, entitled "Allocation of Income," and in particular, sub-part (a), which covers "Production Costs of Mortgage Loans," establishes the formula and mechanism for the profit sharing that FAF was to [*7]receive as compensation for its services. The services that FAF provided under the agreements is defined as the "Available Commitment," which means FAF's commitment to provide its own funds to 1st Alliance in support of its business of originating and securitizing "Mortgage Loans," or to arrange, by way of a subordinating facility, for third party funding.^[FN6] Section 3 contains no language pertaining to termination, and FAF does not cite to any. [*8]

SA FSL § 3 (a) (I) states:

Upon the sale of a Mortgage Loan or securitization of a Mortgage Loan and subsequent sale or securitization of the resulting Ginnie Mae Security, Seller [FAF] shall be entitled to retain from sale proceeds an amount ...

SA FSL § 3 (a) (ii) states:

Upon the sale of a Mortgage Loan or securitization of a Mortgage Loan and subsequent sale of the resulting Ginnie Mae security, each of Seller [1st Alliance] and FAF shall earn a "Loan Margin Fee" ... For Mortgage Loans that are not Purchased Mortgage Loans, Seller shall pay FAF weekly for FAF's share of the foregoing with respect to Mortgage Loans sold during the prior week. (Emphasis added).

Section 3 of the SA FSL, which details the manner in which 1st Alliance shares its profits with FAF, creates enforceable obligations only insofar as Mortgage Loans and/or Purchased Mortgage Loans, as defined, are either sold or securitized by 1st Alliance. To fall within the definition of either Mortgage Loans or Purchased Mortgage Loans presupposes that FAF has provided an Available Commitment, meaning that FAF provided its own funds to 1st Alliance for the origination and sale of Ginnie Mae securities, or arranged funding, by way of a subordinated facility, under the SA MRA or under another funding agreement "reasonably satisfactory" to 1st Alliance.

Following the termination of the SA MRA, the parties could have extended their relationship by executing "another funding agreement reasonably satisfactory" to 1st Alliance, as set forth in the definition of Available Commitment; they did not.

In any event, by reading a perpetual obligation on 1st Alliance's part to share profits following termination of the SA MRA in the last phrase of section 3 (a) (ii), as FAF urges, is to read the provision out of context. SA FSL § 3 (a) (ii) states that 1st Alliance must also pay FAF its share of profits for "Mortgage Loans that are not Purchased Mortgage Loans." The key to understanding the difference between Mortgage Loans and Purchased Mortgage Loans is in comprehending the mechanics of the parties' warehouse lending relationship, which requires reading the inter-locking agreements together.

With respect to a Purchased Mortgage Loan, FAF directly provides funds to 1st Alliance or arranges, through a subordinated lending facility, a third party to provide funding to 1st Alliance, as set forth in the definition of Available Commitment. In such event, 1st Alliance, as Seller, transfers to FAF or its affiliate, as Buyer, Mortgage Loans against the transfer of funds by FAF, with a simultaneous agreement by FAF to transfer to 1st Alliance such loans at a future date against the transfer of funds by 1st Alliance (SA MRA, § 1; SA FSL § 1). Thus, under the complete definition set forth in the SA MRA, Purchased Mortgage Loans refers to the Mortgage Loans that FAF [*9]directly financed and thereafter "purchased." Section 3 (a) (I) and (ii) sets forth the profit sharing formula for FAF's compensation.

Where FAF is fulfilling its contractual obligation to provide the Available Commitment by arranging alternate funding to 1st Alliance through a subordinated lending facility, section 3 (a) (ii) merely sets forth the manner in which FAF is paid its profit share upon 1st Alliance's sale of loans, i.e. "Mortgage Loans that are not Purchased Loans."

FAF's attempt to introduce communications exchanged during the parties' attempt to settle their dispute and evidence as to their past practices in order to show their purported intent is rejected.

Extrinsic evidence will not be considered to vary the terms of the agreement because the SA FSL, perhaps inartfully drafted, is not ambiguous (Savoy Mgmt. Corp. v Leviev Fulton Club, LLC, 51 AD3d 520, 520 [1st Dept 2008]). Otherwise, FAF can point to no language in the SA FSL which grants it a perpetual and exclusive right to share in profits for mortgage loans originated and/or securitized by 1st Alliance following the parties' consensual termination of the SA MRA for which FAF did not provide or arrange for funding of the mortgage loans.

The Court has considered FAF's remaining arguments and finds them unavailing.

Therefore, FAF's motion for summary judgment is denied in its entirety. 1st Alliance's cross-motion for summary judgment dismissing the complaint is granted.

For these reasons, 1st Alliance's motion for leave to amend its answer to include the affirmative defense of illegality under RESPA is denied as academic.

II. Motion to strike settlement communications from the record.

1st Alliance moves to strike pre-litigation offers and communications made during settlement discussions included in FAF's motion papers, which it argues are not admissible pursuant to CPLR 4547. FAF counters that the communications it references are admissions of fact which are not barred by CPLR 4547.

Under CPLR 4547, evidence of offers or promises to settle a claim are inadmissible when offered as proof of liability or the invalidity of a claim, where the statements arose in the context of compromising a disputed claim. However, communications stating a defendants' position without any proffer of settlement are admissible (Nineteen Eighty-Nine, LLC v Icahn, 96 AD3d 603 [1st Dept 2012]; Java Enterprises, Inc. v Loeb, Block & Partners LLP, 48 AD3d 383 [1st Dept 2008]). Admissions of fact made in connection with settlement negotiations are also admissible (Central Petroleum Corp. v Kyriakoudes, 121 AD2d 165 [1st Dept 1986]).

The Court grants the motion, in part, as to all offers to settle the disputes contained within the relevant emails, and is [*10]otherwise denied as the other portions of the communications that do not contain offers to settle. In any event, the Court has not considered the substance of these communications which are legally immaterial in light of the terms of the SA FSL itself.

Accordingly, it is

ORDERED that plaintiff First Acquisition Funding LLC's motion (001) for summary judgment is denied in its entirety, and it is hereby

ORDERED, ADJUDGED and DECLARED that plaintiff is not entitled to the declaration it seeks because the Second Amended Fee Side Letter does not obligate defendant 1st Alliance Lending, LLC to share profits from short refinance loans and H4H loans for the duration of the term of the agreement that were originated or securitized following termination of the Second Amended Master Repurchase Agreement which were not financed directly or indirectly by plaintiff; and it is further

ORDERED that defendant 1st Alliance Lending LLC's cross-moves for summary judgment is granted and the complaint is dismissed with costs and disbursements to defendant as taxed by the Clerk of the Court upon submission of an appropriate bill of costs, and the Clerk is directed to enter judgment accordingly; and it is further

ORDERED that motion sequence number 02 is denied as moot, and it is further

ORDERED that motion sequence 04 is granted, in part, and is otherwise denied.

The action shall continue as to the counterclaims.

Dated: August 21, 2013 ENTER:

________________J.S.C.