Action Dismissed Due to Failure to Give Contractually-Required Notice and Opportunity to Cure Before Expiration of Limitations Period

On December 19, 2013, the First Department issued a decision in ACE Sec. Corp. v. DB Structured Prods., Inc., 2013 NY Slip Op. 08517, dismissing a mortgage-backed securities lawsuit as barred by the failure both to give the contractually-required notice and an opportunity to cure and to bring suit before the end of the limitations period.

In ACE Sec. Corp., plaintiff alleged that "defendant breached representations and warranties in connection with the securitization of a pool of mortgage loans governed by a Mortgage Loan Purchase Agreement (MLPA) and a Pooling and Servicing Agreement (PSA). The MLPA and PSA provided that the trustee was not entitled to sue or to demand that defendant repurchase defective mortgage loans until it discovered or received notice of a breach and the cure period lapsed." The trial court denied a motion to dismiss on statute of limitations grounds, holding "that plaintiff's claims did not accrue until defendant either failed to timely cure or repurchase a defective mortgage loan." The First Department disagreed, holding that "the claims accrued on the closing date of the MLPA, March 28, 2006, when any breach of the representations and warranties contained therein occurred."

The "certificate holders commenced an action on behalf of the trust, after plaintiff refused to do so, on March 28, 2012, the last day of the limitations period." Unfortunately for them, the

defendant had not received notice of the alleged breach until February 8, 2012. Thus, the 60- and 90-day periods for cure and repurchase had not yet elapsed. The certificate holders' failure to comply with a condition precedent to commencing suit rendered their summons with notice a nullity.

(Internal quotations and citations omitted).

Moreover,

the certificate holders lacked standing to commence the action on behalf of the trust. The "no-action" clause in § 12.03 of the PSA sets forth as a condition precedent to such an action that the certificate holders provide the trustee with "a written notice of default and of the continuance thereof." However, the "defaults" enumerated in the PSA concern failures of performance by the servicer or master servicer only. Thus, the PSA does not authorize certificate holders to provide notices of "default" in connection with the sponsor's breaches of the representations.

(Internal quotations and citations omitted).

One lesson to be learned here is the need to parse carefully any contractual language governing a claim before bringing a breach of contract action. The failure to perform the condition precedent of giving notice and an opportunity to cure proved fatal to plaintiff's claims here.