Matter of Wells Fargo Bank v. HBK Master Fund L.P.

Matter of Wells Fargo Bank v HBK Master Fund L.P.

2026 NY Slip Op 05368 September 17, 2026 Appellate Division, First Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This decision is uncorrected and subject to revision before publication in the Official Reports. In the Matter of Wells Fargo Bank, etc., Petitioner-Respondent,

v

HBK Master Fund L.P., et al., Respondents-Appellants, Poetic Holdings 8 LP, et al., Respondents. Decided and Entered: September 17, 2026

Index No. 154984/21|Appeal No. 6159|Case No. 2025-04773|

Before: Moulton, J.P., Friedman, Gesmer, O'Neill Levy, Chan, JJ.

Akin Gump Straus Hauer & Feld LLP, New York (Julius Chen of counsel), for HBK Master Fund L.P., appellant. Gibbs & Bruns LLP, Houston, TX (Caitlin Halpern of counsel), Sadis & Goldberg LLP, New York (Samuel J. Lieberman of counsel), Warner Partners, P.C., New York (Kenneth E. Warner of counsel), and Sheeren Law PLLC, McLean, VA (David Sheeren of counsel), for Deer Park Road Management Company, LP, STS Master Fund, Ltd., Deer Park 1850 Fund, LP, Northern Lights Fund Trust â​​ Deer Park Total Return Credit Fund, One William Street Capital Master Fund, Ltd., OWS Credit Opportunity I, LLC, Baldr Sherwood Fund Inc., OWS ABS Master Fund II, LP, IWS Credit Income Fund, Axonic Capital LLC, Axonic Funds and Pacific Investment Management Company LLC, appellants. Faegre Drinker Biddle & Reath LLP, New York (Mark D. Taticchi of counsel), for Wells Fargo Bank, National Association, respondent.

McKool Smith PC, New York (Courtney B. Statfeld of counsel), for LA Verdad Holdings, LLC, Robert Dechert and 400 Capital Credit Opportunities Master Fund, respondents.

[*1]

Order, Supreme Court, New York County (Andrew Borrok, J.), entered on or about July 21, 2025, which, after a nonjury trial, held that the payment of previously deferred principal treated as a realized loss in connection with the modification of mortgage loans under the Home Affordable Modification Program (HAMP) is a "Subsequent Recovery"

within the meaning of the Pooling and Servicing Agreements (PSAs) and, that even if it is not, it should be treated as such, unanimously affirmed, without costs.

Petitioner Wells Fargo, the Securities Administrator and/or Trustee (the Trustee) for 34 residential mortgage-backed securities trusts, commenced this CPLR article 77 proceeding for judicial instruction regarding an investor dispute. Except for respondent HBK Master Fund, L.P., respondents are either the trusts' senior or subordinate certificateholders. HBK holds a variety of classes of certificates, including the most subordinate class of certificates known as residual certificates.

The dispute concerns the proper allocation to investors of mortgage loan principal payments that were previously deferred when the underlying homeowners' loans were modified under HAMP. The Trustee's position, with which the subordinate certificateholders agree, is that the payments are "Subsequent Recoveries" under the PSAs resulting in an increase or "write up" of a certificate's principal balance, and that even if they are not, they should be treated as such. If the payments are Subsequent Recoveries, or if they are treated as such, only the subordinate certificateholders benefit. This is the result of the PSAs' Subsequent Recoveries provision, which expressly provides for a mechanism that economically benefits only the holders of subordinate certificates, thereby excluding senior certificateholders from any benefit.

Apparently cognizant of this problem, the senior certificateholders argue that the payments of deferred loan principal are not Subsequent Recoveries. Rather, they argue that the payments should be applied to reverse losses in the order of seniority, pointing to the PSAs' general senior-subordinate structure. Like the senior certificateholders' position, HBK's position is that the payments are not Subsequent Recoveries. However, unlike the senior certificateholders' position, HBK contends that the payments should be treated under the PSAs' "Principal Funds" provision (i.e., as payments of principal made on or in advance of the due date of the loan), which are distributed through the trusts' waterfall provisions.

[*2]

On a prior appeal, we modified Supreme Court's summary determination that the Deferred Principal Payments are Subsequent Recoveries because "[t]he PSAs are ambiguous with respect to whether Deferred Principal Payments constitute Subsequent Recoveries, and guidance issued by the United States Department of the Treasury did not

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definitively resolve this ambiguity" (Wells Fargo Bank, N.A. v All Respondents for This Special Proceeding, 227 AD3d 597, 597 [1st Dept 2024] [internal parenthetical omitted]).

To resolve the ambiguity, Supreme Court presided over a 17-day bench trial in May and June 2025. Supreme Court issued a posttrial decision agreeing with the position of the Trustee and the subordinate certificateholders. The senior certificateholders and HBK appealed. We now affirm for the reasons stated herein.

Background

In 2009, the United States Department of the Treasury launched HAMP to address the 2007 mortgage crisis, which cascaded into nationwide mortgage foreclosures and economic recession one year later. HAMP incentivized mortgage servicers to modify loans to lower homeowners' monthly payments and avoid foreclosure. HAMP permitted a servicer to, among other things, defer (but not forgive) a portion of the borrower's outstanding principal obligation until the loan matured, or an earlier date if the loan was repaid or the property was sold before maturation. Interest with respect to the deferred principal would no longer accrue. In that sense, interest was lost but not technically extinguished. The portion of the loan's principal balance that was not deferred remained due and owing, along with the interest that accrued thereon.

Bear Sterns, the now-defunct investment bank, created the 34 trusts at issue. The trusts issued certificates, which were divided into classes and sold to investors. The trusts are governed by PSAs, which entitle investors to distributions up to the amount of their certificate principal balance, as defined in the PSAs. Depending on the circumstance, the Trustee can decrease that balance (known in the industry as a "write down") or increase it (known in the industry as a "write up").

The PSAs were all executed between 2005 and 2007. Presumably, the drafters did not anticipate the ensuing mortgage crisis or the advent of HAMP. Thus, unsurprisingly, the PSAs do not use the term "deferred principal." Only a few PSAs refer to partial liquidations, which might encompass HAMP modifications. The PSAs do not squarely address the treatment of HAMP deferred principal either at the time of the modification (i.e., whether principal deferment constitutes a loss) or at the time that the deferred principal is ultimately paid, if that occurs. [*3]

Shortly after loans were modified under HAMP, servicers began reporting the forborne principal as a realized loss, including for the loans held by the trusts here. The PSAs define a "Realized Loss" as: "Any (i) Bankruptcy Loss or (ii) as to any Liquidated Mortgage Loan, (x) the Outstanding Principal Balance of such Liquidated Mortgage Loan plus accrued and unpaid interest thereon at the Mortgage Interest Rate through the last day of the month of such liquidation, less (y) the Net Liquidation Proceeds with respect to such Mortgage Loan and the related Mortgaged Property." When servicers reported such a loss, the Trustee treated the deferred principal in the same manner, notwithstanding that a portion of the loan was still active and had to be paid.

On June 18, 2009, the American Securitization Forum issued a white paper to address the treatment of HAMP loan modifications. The report reflected its constituents' agreement that "[i]f the forborne amount is treated as a realized loss at the time of the modification," a repayment of that amount "would most likely be considered a 'recovery.' "

On July 22, 2009, the Treasury issued a document to address HAMP's "Frequently Asked Questions." Answering the question whether "the earlier FDIC guidance on accounting treatment of principal forbearance appl[ies] under HAMP,"

the Treasury advised that "[f]or loans within securitizations, principal forbearance should be passed through as a write off of principal to the securitization trust . . . with any future collections at the time of pay-off submitted to the trust as a principal recovery."

On June 30, 2010, the Treasury issued Supplemental Directive 10-05 to guide the industry. The directive addressed when to treat deferred principal as a realized loss but provided no guidance on how to treat payments of deferred loan principal. The directive stated that the trustee or securities administrator "must allocate . . . forborne principal as a realized loss to the trust" when the servicer reported it as such, unless, among other things, the PSA "explicitly and affirmatively directs that such forborne principal not be treated as a realized loss."

Consistent with SD 10-05, the Trustee treated the principal deferment as a Realized Loss under the PSAs when the servicer reported it that way. The treatment resulted in hundreds of millions of dollars in write downs to the principal balances carried by the trusts' certificates in reverse order of seniority. In many cases, the write downs reduced outstanding certificate principal balances to zero.

Ultimately, the housing market rebounded. That enabled many borrowers to pay the deferred principal amounts that the Trustee had previously treated as Realized Losses. The Trustee was then faced with another issueâ​​how to treat the payments.

[*4]

The Trustee maintains that it has consistently treated deferred principal payments as Subsequent Recoveries and that the investors knew about, and knowingly acquiesced in, the Trustee's practice, as amply demonstrated by the trial record. As the Trustee points out, this dispute arose only after a decision from this Court caused the Trustee to change its practice as to which class ofcertificateholders economically benefitted from the Subsequent Recoveries provision (see Matter of Wells Fargo Bank, N.A., 198 AD3d 156, 162-163 [1st Dept 2021], lv dismissed 38 NY3d 998 [2022], lv denied 41 NY3d 910 [2024], lv dismissed 41 NY3d 1013 [2024]) (the JPM action). Discussion

We find, as an initial matter, that the trial court did not make any reversible errors in its evidentiary rulings. All

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relevant language variations of the PSAs are included in the record, as is a summary chart, so the court's decision not to admit copies of all 34 PSAs was not material. The court did not impermissibly rely on the filings in the JPM action, the Deer Park letters,^FN1 or government and rating agency publications for the truth of the matter asserted therein, relying instead on these documents as evidence of notice and their effect on the listener. In any event, any error was harmless in view of the cumulative nature of this evidence.

Turning to the merits, we find that, although the deferred principal payments do not fit squarely within the contractual definition of Subsequent Recoveries under most of the PSAs, they should nonetheless be treated as Subsequent Recoveries. Two PSAs, BSMF 2007-AR5 and BSABS 2007-AC6, define Subsequent Recoveries to include "a Mortgage Loan that has been modified which resulted in a Realized Loss." With respect to the other PSAs, the definition of Subsequent Recoveries typically appears in Section 6.02, entitled "Allocation of Losses and Subsequent Recoveries."

They define Subsequent Recoveries as: "As of any Distribution Date, amounts received during the related Prepayment Period by the Servicer . . . specifically related to a Liquidated Mortgage Loan . . . that resulted in a Realized Loss, after liquidation or disposition of such Mortgage Loan." The PSAs in turn define a Liquidated Mortgage Loan as: "Any defaulted Mortgage Loan as to which the Servicer has determined that all amounts it expects to recover from or on account of such Mortgage Loan have been recovered."

[*5]

The trial record is devoid of evidence that any servicer determined that, in connection with HAMP modified loans, "all amounts" that the servicer expected to be recovered, were recovered, as required under the PSAs' definitions of Liquidated Mortgage Loan and Realized Loss. Indeed, such a determination would be illogical because the loans remained "active," with the nondeferred balance still being paid and the deferred portion remaining due and payable at a later date, and there being no actual bifurcation of the loans. Thus, even if the expected overall recovery on the deferred portion of the loans was de minimis, it was anticipated that there could be some additional recovery, which is inconsistent with a determination that "all amounts" have been recovered. Such a determination would also be illogical because the HAMP handbook provides servicers with safe harbor protection only when the modification "will likely provide an anticipated recovery on the outstanding principal mortgage debt in excess of the anticipated recovery through foreclosure." Nevertheless, the Treasury's direction to treat the underlying deferred principal as a Realized Loss reflects an understanding that the deferral was akin to a functional partial liquidation, which understanding is corroborated by the testimony of several witnesses as well as expert opinion.

The PSAs do not define the terms "liquidated" or "liquidation," although some PSAs incorporate by reference the Fannie Mae Guide, which defines "liquidation" as "[a]n event that extinguishes the outstanding balance of the mortgage loan without full payment" including a "foreclosure sale, Mortgage Release (deed-in-lieu of foreclosure), third party sale, short sale and charge-off." Here, even if the concept of liquidation is open to interpretation, it cannot be said that the loans were liquidated as the result of HAMP modifications because no portion of the underlying loans was extinguished. It does not matter that a certain amount of unaccrued interest would never come due as a result of the loan modification because there is no entitlement to interest until the time of accrual. There was, however, ample evidence at trial supporting the court's finding that the HAMP modifications were akin to a functional partial liquidation and were understood by the parties as such.

Consequently, the deferred principal payments fit within the spirit, but not the letter, of the PSAs' Subsequent Recoveries definitions. Regardless of the ill-fitting contractual language, we find that the deferred principal payments should be treated as Subsequent Recoveries considering the structure of the PSAs and, more importantly, the parties' course of performance.^FN2

[*6]

The structure of the PSAs generally supports treating deferred principal payments as Subsequent Recoveries. It is true that "where there is ambiguity, if parties to a contract omit termsâ​​particularly, terms that are readily found in other, similar contractsâ​​the inescapable conclusion is that the parties intended the omission" (Quadrant Structured Prods. Co., Ltd. v Vertin, 23 NY3d 549, 560 [2014]). However, it is of no import that two trusts, BSMF 2007-AR5 and BSABS 2007-AC6, define Subsequent Recoveries to include "a Mortgage Loan that has been modified which resulted in a Realized Loss" while the other 32 trusts lack this language.

The maxim of expressio unius est exclusio alterius is not a useful aid to determine whether the parties intended to omit deferred principal payments from the Subsequent Recoveries provision in 32 of the PSAs. The parties did not foresee or account for the unusual events that unfolded, including the Treasury's directive to treat deferred principal payments as a realized loss at the time of modification. Even assuming the usefulness of the maxim, we cannot conclude that the parties intended to exclude deferred principal payments from the Subsequent Recoveries provision in 32 of the PSAs. The language is not "readily found in other, similar contracts" when the language is found in only 2 of the 34 trusts (id.). It was also within the court's purview to reject the expert testimony of Vincent Varca, who testified for the senior certificateholders, and to credit the other experts' testimony that Subsequent Recoveries are the only way to write back up certificates that have been written down based on a Realized Loss. Although there are other ways to recover losses, they do not operate in the same way as a writeup and would not necessarily fully reverse the loss (if at all), creating a risk of overcollateralization and unanticipated payments to residual certificateholders. While it is not clear that the PSAs necessarily require a write up, Supreme Court could have reasonably concluded that the parties would have wanted to write up certificates that were written down based on the evidence presented at trial, including the Trustee's expert's testimony that Realized Losses and Subsequent Recoveries are "two sides of the same coin" (see e.g. Herbert Rosenthal Jewelry Corp. v St. Paul Fire & Mar. Ins. Co., 21 AD2d 160, 165 [1st Dept 1964], affd

17 NY2d 857 [1966] ["faced with what may be, in retrospect . . . a failure to anticipate the future situation which arose, a court is faced . . . with the function of . . . construing the language to accord with what would have been the intention and the honorable agreement of the parties if their attention had been drawn to the possible events as they actually

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