Opinion
INDEX NO. 650339/2013
04-04-2019
MORGAN STANLEY MORTGAGE LOAN TRUST 2007-2AX (MSM 2007-2AX), by U.S. BANK NATIONAL ASSOCIATION, solely in its capacity as Trustee, Plaintiff, v. MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS LLC, GREENPOINT MORTGAGE FUNDING, INC. Defendant.
NYSCEF DOC. NO. 233 MOTION DATE __________ MOTION SEQ. NO. 005
DECISION AND ORDER
HON. MARCY S. FRIEDMAN: The following e-filed documents, listed by NYSCEF document number (Motion 005) 216, 217, 218, 219, 221, 222, 223, 224, 226 were read on this motion to/for LEAVE TO RENEW.
In this residential mortgage-backed securities (RMBS) "put-back" action, plaintiff-trustee seeks to enforce the obligation of defendant-sponsor, Morgan Stanley Mortgage Capital Holdings LLC (Morgan Stanley), and defendant-originator, Greenpoint Mortgage Funding, Inc. (Greenpoint), to repurchase allegedly defective loans—i.e., loans, the value of which was allegedly materially and adversely affected by defendants' breaches of representations and warranties regarding the quality and characteristics of the loans. Defendants jointly seek leave to renew their separate motions to dismiss, which were decided by this court's decision and order dated November 25, 2014, (2014 NY Slip Op 33023 [U], 2014 WL 6669698 [Sup Ct, NY County Nov. 25, 2014] [prior decision].) On this motion, defendants seek dismissal with prejudice of all of plaintiff's "notice-based claims" for breach of representations and warranties "for any loans not identified in [plaintiff's] presuit breach notice." (Defs.' Memo. In Supp., at 2.)
The court assumes familiarity with the prior decision.
On the motions to dismiss, defendants argued that plaintiff-trustee's claim for breaches of representations and warranties was maintainable only as to 56 loans identified in two presuit breach notices—i.e., notices which demanded repurchase of such loans (the Initial Breach Notices). Morgan Stanley thus argued: ". . . [E]ven if the complaint were deemed to be timely, the only timely claim that could be brought would be for the 56 loans for which the Trustee has provided the contractually required notice of alleged breaches, because the Trustee has not provided notice of any other alleged breaches within the six-year statute of limitations." (Morgan Stanley Memo. In Supp. of Prior Motion, at 2.) GreenPoint argued: "The contract under which Plaintiff sues GreenPoint . . . permits a claim for repurchase of a loan only when Plaintiff has first provided notice of breach of the R&W with respect to the loan and an opportunity to cure." (GreenPoint Memo. in Supp. of Prior Motion, at 1.)
By presuit breach notice to Morgan Stanley, dated March 12, 2012, plaintiff identified breaches affecting 56 loans and demanded repurchase of the Subject Loans. (Compl. ¶ 7; Breach Notice [Abrams Aff., Ex. A].) By presuit breach notice to GreenPoint, dated August 29, 2012, plaintiff identified breaches affecting 55 loans, and demanded repurchase of the Subject Loans. (Compl. ¶ 7; Breach Notice [Abrams Aff., Ex. B].) The Initial Breach Notices did not refer to an investigation into breaches affecting other loans. After the cure period had passed, this action was commenced by summons with notice filed on January 30, 2013, within six years of the closing date, January 31, 2007.
In response to the motions to dismiss, plaintiff argued: ". . . the Trust is entitled to recover for breaches of R&W's in connection with Loans other than the 56 Defective Loans for which the Trustee provided written notice of breach to Defendants. Under the Agreements, each Defendant has an independent obligation, set forth in the Agreements, to provide notice to the other parties of any Defective Loans that such Defendant discovers, and to repurchase those Loans, and that Independent obligation is not at all tethered to any notice given by the Trustee." (Pl.'s Memo. In Opp. to Prior Motion, at 4 [emphasis in original].)
As is typical in RMBS securitizations, the governing agreement for the trust at issue required the defendant to repurchase defective loans upon either written notice to the defendant of breach of any representation or warranty or upon the defendant's discovery of such breach. (Pooling and Servicing Agreement § 2.05 [PSA].) The court accordingly rejected defendants' contention that plaintiff's claims related to defective loans that were not the subject of its timely repurchase demands (i.e., the Initial Breach Notices) were not adequately pleaded. (Prior Decision, 2014 WL 6669698, at * 2.) The court further held that plaintiffs' pleading of discovery of breaches was not deficient as a matter of law either because the complaint did not specifically identify each defective loan that the defendants were claimed to have discovered, or because the repurchase demands did not specifically identify each loan as to which repurchase was sought. (Id.)
The terms "breach notice" and "repurchase demand" are used interchangeably in this decision.
Although not explicitly stated in the prior decision, the court's holding was that the repurchase obligation could be triggered by either discovery or notice, and that it was not necessary to plead a repurchase demand for loan(s) as to which the defendant's discovery of a breach of representations or warranties was claimed. The decision was thus consistent with earlier decisions of this court holding that a breach of representation and warranty cause of action was maintainable based on discovery, even in the absence of a repurchase demand (see e.g. ACE Secs. Corp. v DB Structured Prods., Inc., 2014 NY Slip Op 32451[U], 2014 WL 4785503 [Sup Ct, NY County Aug. 28, 2014, Index No. 651936/2013]) and with later decisions of this court and the Appellate Decision, which refer to repurchase demand(s) and discovery as separate or alternative triggers. (U.S. Bank N.A. v GreenPoint Mtge. Funding, Inc., 147 AD3d 79 [1st Dept 2016] [GreenPoint]; appeal withdrawn 32 NY3d 1123 [2018]; Natixis Real Estate Capital Trust 2007-HE2 v Natixis Real Estate Holdings, LLC, 149 AD3d 127, 138-139 [1st Dept 2017], affg 2015 NY Slip Op 32360[U], 2015 WL 4038760 [Sup Ct, NY County July 1, 2015].
Contrary to defendants' assertion, this court did not reach the conclusion in the prior decision that "because U.S. Bank had provided defendants with timely contractual notice of certain allegedly breaching loans, it had satisfied the notice requirement and could later expand its notice-based claims by identifying additional allegedly breaching loans." (Defs.' Memo. In Supp. at 4.) Rather, as discussed above, this court held that discovery of breaches by each defendant had been adequately pleaded, although plaintiff had not specifically identified all defective loans for which repurchase was sought in the complaint. To the extent that plaintiff sought repurchase based on the defendants' own discovery of breaches affecting loans, the court held that a presuit notice identifying such loans was not required to be pleaded.
In moving for renewal, defendants claim that GreenPoint "clarified the conditions under which a trustee can pursue notice-based repurchase claims." (Defs.' Memo. In Supp., at 4.) GreenPoint considered the relation back doctrine with respect to "a late breach notice"—i.e., a breach notice as to which the contractual cure or repurchase period had not expired before the commencement of the action. As explained by the Court, it "consider[ed] whether an otherwise late breach notice can relate back in time to the commencement of the underlying action in order to avoid dismissal." (147 AD3d at 81.) Under the circumstances at issue in which there was no pre-commencement breach notice, the Court held that the breach notices served after the commencement of the action by filing of the summons with notice, but prior to the service of the complaint, did not relate back to the commencement of the action (id. at 87), and that "[t]he doctrine of relation back cannot render these otherwise untimely breach notices timely." (Id. at 86.) GreenPoint also reaffirmed that where a breach of contract claim is "based upon defendant's alleged independent discovery" of mortgage loans affected by breaches of representations and warranties, a breach notice is not required "to be sent before an action may be brought." (Id.) Put another way, the Court held that a breach notice is a condition precedent to commencement of an action based on notice to the defendant of loans affected by breaches of representations and warranties, but that an action may also be based on the defendant's independent discovery of breaches without a breach notice. (Id. at 85.)
In applying the relation back doctrine, the GreenPoint majority discusses whether the late breach notices themselves relate back to the commencement of the action. (147 AD3d at 87.) The majority distinguishes between notice-based claims and discovery-based claims (id. at 86), and holds that, for the former, "breach notices [a]re a contracted-for condition precedent to bringing the action." (Id.) As the majority recognized, however, the cause of action is for "breach of representations and warranties" (id. at 85), although there are separate bases—notice to the defendant or the defendant's own discovery—on which the repurchase obligation in connection with such breach may be triggered. (Id.) In applying the relation back doctrine, the dissent, in contrast, focuses not on the condition precedent but on whether the timely summons with notice gave notice of the plaintiff's subsequent claims in the post-commencement breach notices. The dissent reasons that "a claim may relate back, even where the plaintiff has failed to fulfill a procedural condition precedent, so long as there is a timely, valid action to which the claims can relate back." (Id. at 92.) The dissent reasons, more specifically, that the timely summons with notice, which was based on allegations that defendant discovered defects in the loans (id. at 89), gave notice of "an action on related grounds" (id. at 93, 92 n 4) and that, under these circumstances, the failure to satisfy the condition precedent was "irrelevant." (Id. at 93.)
There is a substantial body of law, outside the RMBS context, that the relation back doctrine is unavailable to cure an initial complaint that is invalid as a result of the failure of the plaintiff to comply with a procedural condition precedent to the commencement of the action. (See ACE Secs. Corp. v DB Structured Prods., Inc., 52 Misc. 3d 343 [Sup Ct, NY County March 29, 2016] [this court's prior decision discussing authorities].) As is typical in RMBS securitizations, however, the governing agreements in GreenPoint permitted maintenance of the breach of contract cause of action based on either notice to the defendant or the defendant's discovery of breaches. Not surprisingly, neither the majority nor the dissent had available to it non-RMBS authority which had applied the relation back doctrine to a hybrid situation in which there was a valid action despite the failure to comply with a condition precedent. Authority within the RMBS context is developing. (Compare GreenPoint with Nomura Home Equity Loan, Inc. v Nomura Credit & Capital, Inc., 133 AD3d 96, 108 [1st Dept 2015] [Nomura] [upholding this court's denial of a motion to dismiss claims "relating to loans that plaintiffs failed to mention in their breach notices or that were mentioned in breach notices sent less than 90 days before plaintiffs commenced their actions" where there were "some timely claims" and the timely presuit notices "put defendant on notice that the certificateholders whom plaintiffs (as trustees) represented were investigating the mortgage loans and might uncover additional defective loans for which claims would be made"], mod on other grounds sub nom Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA N.A. v Nomura Credit & Capital, Inc., 30 NY3d 572 [2017].)
A motion for leave to renew may be based on "a change in the law that would change the prior determination." (CPLR 2221 [e] [2].) Here, however, GreenPoint did not clarify any issue that was before this court on the motions to dismiss. Although defendants seek dismissal of all notice-based claims regarding any loans other than the 56 loans that were the subject of the Initial Breach Notices, plaintiff has not served any subsequent breach notices. Nor does plaintiff assert that it intends to do so. Moreover, the summons with notice in this action was filed after the Initial Breach Notices were sent, but does not refer to the loans identified in the Initial Breach Notices and states that defendants are obligated to repurchase breaching loans "even in the absence of notice from any of the other parties to the PSA." (Summons with Notice at 4.) The complaint pleads notice only of breaches affecting the 56 loans and pleads defendants' own discovery of other breaches. (See Compl., ¶¶ 60-63, 67-79.)
In sum, no breach notices other than the Initial Breach Notices have been served, and no notice-based claims have been pleaded based on breach notices other the Initial Breach Notices. That is, no claims are asserted based on untimely breach notices. There are accordingly no notice-based claims that could be subject to dismissal under the GreenPoint holding as to relation back. As GreenPoint does not represent an intervening change or clarification in the law that would change the prior determination, renewal is unwarranted.
In view of the court's holding that there are no notice-based claims subject to dismissal on this motion, the court does not reach defendants' further claim that the dismissed claims would not be subject to repleading under the savings provision, CPLR 205 (a).
The court notes that, subsequent to the briefing of this renewal motion, the Court of Appeals held that "CPLR 205 (a) applies to an RMBS trustee's second action when its timely first action is dismissed for failure to comply with a contractual condition precedent." (U.S. Bank N.A. v DLJ Mtge. Capital, Inc., 2019 NY Slip Op 01169, 2019 WL 659355 [Feb. 19, 2019].)
In concluding that there are no notice-based claims subject to dismissal, the court declines to consider plaintiff's assertion that the reports of its experts, who re-underwrote loans and calculated damages based on a sample of breaching loans, place defendants on notice as to all breaching loans in the trust. (Pl.'s Memo. In Opp., at 5 n 5, 6.) This claim was not made in opposition to the initial motions to dismiss which were addressed to the pleadings. Nor was this claim addressed by GreenPoint, which considered the application of the relation back doctrine only to notice-based claims predicated on breach notices—i.e., notices that demanded repurchase of specifically identified defective loans. To the extent that plaintiff seeks a determination that it may maintain a notice-based claim predicated on the expert reports, that determination is accordingly not properly made on the renewal motion.
This renewal motion cannot serve as a vehicle for this court either to dismiss impleaded claims or to determine whether notice may be given to defendants by a means other than a breach notice. The court recognizes that there are many open issues in this action, as in the RMBS litigation generally, as to the proof that will ultimately be required to establish both notice-based and discovery-based claims. These issues must be determined on a fully developed record and comprehensive legal authority,
It is accordingly hereby ORDERED that defendants' motion for renewal of defendants' motions to dismiss is denied. 4/4/2019
DATE
/s/ _________
MARCY S. FRIEDMAN, J.S.C.