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Financial Services Law Insights and Observations

Trustee allowed to file amended complaint concerning RMBS breach of contract claims

Courts Appellate State Issues RMBS Securities

Courts

On April 25, the New York Supreme Court, Appellate Division held that a trustee for two residential mortgage-backed securities (RMBS) trusts is entitled to file an amended complaint concerning “express breach of contract claims.” The issue arose from whether the sponsor breached its agreements with the trustee when it allegedly failed to disclose breaches of representations and warranties discovered during a due diligence review of the RMBS trusts after the transactions closed. According to the opinion, the sponsor claimed that no fraud or misrepresentations had occurred with respect to the loans, but it was later discovered that this was not true. However, the sponsor still moved to dismiss, arguing it was not bound under the mortgage purchase agreements to disclose any breach of the representations and warranties. The trial court dismissed the claims and blocked the trustee from filing an amended complaint after it determined the sponsor was not obligated to relay the loans’ issues after they were discovered.

On review, the appeals court found that the relevant contractual language, requiring the sponsor, upon discovery of any breach to give written notice of the breach to itself, was ambiguous, but opined that “[a]llowing the clause to remain as written would render this provision meaningless”—an important fact since “courts should avoid interpretations that would render contractual language mere surplusage.” The trustee claimed that because the sponsor is included on the list of parties required to provide notice, there must be another unnamed party, other than the sponsor, available to receive notice, whereas the sponsor argued that its inclusion on the list of parties required to give notice was “due to ‘alleged drafting imperfections’” since it is the party that is entitled to receive such notices. Because both parties presented “reasonable competing interpretations,” the appeals court noted, additional proceedings are necessary.

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