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Financial Services Law Insights and Observations

New York Court of Appeals narrows trust’s RMBS repurchase action

Courts RMBS State Issues Mortgages


On March 17, the New York Court of Appeals majority narrowed the scope of a 2013 repurchase action brought by the trustee of a residential mortgage-backed securities trust (trustee) against the trust’s sponsor (sponsor). The trustee filed suit after flagging roughly 1,204 nonconforming loans that were allegedly “in breach of the representations and warranties based on, among other things, borrower misrepresentation of income and occupancy status, miscalculations of borrowers’ debt to income ratios, and the charging of high-cost interest on the loans.” The trustee demanded that the sponsor buy back the defective loans as contractually promised. A separate, smaller set of loans was eventually added to the suit after being identified as defective during the discovery phase. The trustee contended that the original repurchase demands were sufficient under the repurchase protocol to satisfy the notice requirement for all allegedly problematic loans in the trust, including loans flagged after litigation had begun.

The sponsor moved for partial summary judgment on the trustee’s claims, arguing that the trustee could not pursue recovery for loans “not specifically identified in the pre-suit letters to the extent that the trustee relied on a notice, rather than an independent discovery, theory.” The sponsor also sought summary judgment with respect to the method of calculation of the repurchase price. The New York Supreme Court denied the sponsor’s motion for partial summary judgment, concluding, among other things, that “‘because the repurchase letters identified some timely claims, the later identified claims relate back to the original filing.’” The appellate division affirmed, stating that the trustee’s December 2011 letter timely informed the sponsor “that a substantial number of identified loans were in breach, and that the pool of loans remained under scrutiny, with the possibility that additional nonconforming loans might be identified.” The appellate division also agreed “that ‘interest could be calculated on liquidated loans, at the applicable mortgage rate, up until the repurchase date.’”

In narrowing the scope of the loans subject to repurchase, the Court of Appeals majority held that it would be “inconsistent” with the contractual language of the repurchase protocol to conclude that loan-specific notice is not required, adding that the trustee could not rely on the relation back doctrine “to avoid the consequences of its failure to comply with the contractual condition precedent with respect to the loans in question prior to commencing this action.” “The parties agreed to a limited remedy for the inclusion of nonconforming loans in the trust and made that remedy available only if the trustee first complied with certain loan-specific notice requirements, providing the sponsor an opportunity to cure or repurchase the identified loans,” the majority wrote. “We cannot rewrite the contract by substituting a different, post-suit notice procedure in place of the one chosen by the parties.” The majority further concluded that under the parties’ agreement, interest recoverable on liquidated loans was limited to interest that accrued prior to liquidation.

The dissenting judge disagreed, stating that “[i]t could not have been the intent of the parties to provide a remedy for a few defective loans but allow for systemwide breaches affecting thousands of loans in the pool—allegedly 80% here—or to permit the sponsor to escape the contractual cure and repurchase obligations simply because [the sponsor] was informed there was a significant problem with its securitization but not given the corresponding number for every loan it allegedly failed to properly vet.”