On February 19, the New York State Court of Appeals issued two rulings in cases brought by a trustee against a seller and sponsor of three residential mortgage-backed securities (RMBS) trusts.
The first action involved a lawsuit filed by the trustee more than six years after the execution of the relevant Pooling and Servicing Agreement (PSA). The seller/sponsor moved to dismiss the complaint asserting that it was time-barred because the trustee failed to comply with the sole remedy provision within the six-year statute of limitations. The trustee alleged that its claim was timely because it should relate back to a similar action a certificate holder had timely filed against the seller/sponsor. The lower court granted the motion to dismiss the action with prejudice and the appellate division affirmed. On review by the state’s highest court, the Court affirmed, noting that a complaint only can relate back to a prior action where a valid pre-existing action has been filed. In this instance, the Court found that the certificate holder’s action was not valid because, as lower courts concluded, the PSA’s no action clause prevented the certificate holder from bringing an action against the seller/sponsor on behalf of itself or the trustee. Thus, there was no valid claim for which the trustee’s claim could relate back.
The second case involved a different action brought by the same trustee against the same seller/sponsor related to a different RMBS trust. In that case, the lower court dismissed the action without prejudice, concluding the action was timely-filed, but the trustee failed to comply with the sole remedy provision of the PSA and other controlling agreements. Specifically, the lower court concluded the trustee failed to provide notice of the suspected breach, allowing the loan originator 90 days to cure or repurchase the allegedly non-compliant loans. The appellate division affirmed the dismissal without prejudice, allowing the trustee to refile. The seller/sponsor appealed, arguing the case should be dismissed with prejudice because the trustee did not comply with its obligations under the sole remedy provision within the six-year limitations period. The Court of Appeals disagreed, determining the sole remedy provision is “a procedural condition precedent that does not impact the running of the six-year statute of limitations,” and therefore, does not foreclose refiling of the action. Thus, the action was properly dismissed without prejudice as CPLR 205(a) states that if a timely-filed action that has been terminated for any reason other than those specified in the statute, a second action based on the same transactions or occurrences can be commenced within six months of dismissal of the first action.