Second Circuit Reverses and Remands Trial Court's Summary Judgment Order in Favor of Morgan Stanley in a CMBS Case
On April 27, 2016, the Second Circuit Court of Appeals vacated and remanded the district court's summary judgment order entered in favor of defendant Morgan Stanley Mortgage Capital, Inc. in the Southern District of New York. Plaintiff Bank of New York Mellon Trust Company, N.A., as trustee of a CMBS deal, alleged that Morgan Stanley breached an environmental conditions contract representation, requiring Morgan Stanley to repurchase an $81 million mortgage loan. The Second Circuit reversed the trial court's conclusion that Morgan Stanley was not contractually obligated to repurchase the mortgage loan because the Trustee's duty to give "notice of cure" within three business days of becoming aware of a material breach was a condition precedent to Morgan Stanley's repurchase obligation. The Second held that a request to cure a material breach was not a condition precedent under the contract. In so holding, the Second Circuit distinguished between the Mortgage Loan Purchase Agreement's separate obligations of "notice of breach" and "request to cure." As to the "request to cure" obligation, the Court found nothing that made it clear that Morgan Stanley's remedy obligation does not arise until a request for cure is made. The Court remanded the case to the trial court to reassess the timeliness of the Trustee's notice for cure, which was a fact issue that must be presented to the factfinder at trial to determine when the Special Servicer concluded its investigation. In addition, because request for cure is not a condition precedent, the jury would have to decide the question of substantial performance. The Court held that a reasonable jury could find that, even if there was some delay in requesting cure, it could determine that substantial performance occurred. Decision.
Justice Friedman of the New York Supreme Court Dismisses Two FHFA Repurchase Actions
On April 12, 2016, Justice Marcy Friedman of the New York Supreme Court granted motions to dismiss in two RMBS breach of contract actions filed by FHFA against Morgan Stanley ABS Capital I Inc. ("MSAC") and Morgan Stanley Mortgage Capital Holdings LLC ("Morgan Stanley"). In the decisions, he Court dismissed the actions on similar grounds and granted the parties the opportunity to brief claims for failure to notify, in light of the October 13, 2015 First Department's decision in Nomura Home Equity Loan Inc. Series 2006-FM2 et al. v. Nomura Credit & Capital Inc.
Like Justice Friedman's ruling last month in ACE Securities v. DB Structured Products, Inc., which we previously covered, the Court held that both actions were not rendered untimely by the Plaintiff's failure to file repurchase demand condition precedent prior to the filing of the summons with notice. However, the FHFA, as certificate holder, lacked standing to commence the action and thus the Trustee's cause of action was untimely because it did not relate back to the FHFA's summons with notice. In so holding, the Court rejected the Trustee's arguments in both cases that the action was timely commenced, and also that the accrual clause in the RMBS extended the statute of limitations, and that the federal Housing and Economic Recovery Act of 2008, applicable to certain actions brought by FHFA, extended the limitations period. Finally, the Court also held that no tolling agreements saved Trustee's claims, and also dismissed the causes of action for breach of the implied covenant of good faith and fair dealing, breach of repurchase obligations, and anticipatory breach. Decision 116. Decision 134.
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