RMBS Trustee's Failure to Give With Notice to Cure Within Limitations Period Does Not Bar Trustee from Curing Failure and Refiling Suit

On February 19, 2019, the Court of Appeals issued a decision in U.S. Bank Natl. Assn. v. DLJ Mtge. Capital, Inc., 2019 NY Slip Op. 01169, holding that an RMBS "[t]rustee's failure to comply with the notice and cure or repurchase condition precedent within the applicable statute of limitations does not foreclose refiling of its action for alleged breach of RMBS representations and warranties pursuant to CPLR 205(a)," explaining:

DLJ argues that our prior holding in ACE controls here and stands for the proposition that an action based on alleged violations of RMBS representations and warranties is untimely if the Trustee does not provide notice and an opportunity to cure as required by the PSA, within the CPLR six-year statute of limitations. For its part, the Trustee maintains that the notice to seller and opportunity to cure or repurchase the defective loan requirement is a procedural condition precedent that does not impact the running of the six-year statute of limitations, and therefore the first filed action was properly dismissed without prejudice to the Trustee refiling pursuant to CPLR 205 (a). We agree with the Trustee.

CPLR 205 (a) provides, in relevant part,

If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff, or, if the plaintiff dies, and the cause of action survives, [the plaintiff's] executor or administrator, may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period.

This provision implements the Legislature's policy preference for the determination of actions on the merits. The statute is remedial in nature and, where applicable, allows plaintiffs to avoid the harsh consequences of the statute of limitations and have their claims determined on the merits where a prior action was commenced within the limitations period, thus putting defendants on notice of the claims. The Court has also warned that the provision's broad and liberal purpose is not to be frittered away by any narrow construction. The effect of the statute is quite simple: if a timely brought action has been terminated for any reason other than one of the reasons specified in the statute, the plaintiff may commence another action based on the same transactions or occurrences within six months of the dismissal of the first action, even if the second action would otherwise be subject to a Statute of Limitations defense, so long as the second action would have been timely had it been commenced when the first action was brought. The statute by its very terms comes into operation in instances where a proceeding has been terminated for some fatal flaw unrelated to the merits of the underlying claim and it is to be liberally construed.

In ACE, we held that the statute of limitations for alleged violations of the representations and warranties in an RMBS agreement commences on the effective date of those promises. Two certificate holders had notified the trustee of alleged breaches of the representations and warranties in several mortgage loans. When the trustee failed to sue, the certificate holders filed their own lawsuit against the sponsor six years from the date of the contract execution. Months later, after the expiration of the statute of limitations, the trustee sought to be substituted as plaintiff and filed a complaint on behalf of the trust. The sponsor moved to dismiss the complaint as untimely because it was filed more than six years after the contract was executed. We rejected the trustee's argument that the action accrued only once the notice and cure provisions were satisfied. We clarified that the provisions were a procedural prerequisite to suit and not a substantive condition precedent to the seller's performance, as the trustee argued.

DLJ maintains that ACE requires the Trustee here to have complied with the notice and sole remedy provision—including affording DLJ 90 days in which to cure—before filing a complaint within the six-year statute of limitations. Contrary to DLJ's interpretation of ACE, we held only that the notice and sole remedy provisions did not delay accrual for statute of limitations purposes. We did not expressly hold, and it is not implicit in our analysis, that failure to comply with those provisions before the expiration of the statute of limitations rendered the trustee's action untimely. In point of fact, ACE turned on when claims for breach of representations and warranties accrue, not whether failure to comply with a remedial provision within the limitation period bars those claims. What made the trustee's claims untimely in ACE was that the claims accrued when the underlying agreement was executed, and the trustee did not commence its action within six years of that date.

Indeed, the sponsor argued in ACE, similar to DLJ here, that the certificate holders' summons and notice was a nullity because they did not comply with the notice and cure or repurchase deadlines before bringing their lawsuit. We did not address CPLR 205(a) in ACE, and we left open the precise question disputed by the Trustee and DLJ: whether the notice and cure or repurchase condition precedent in an RMBS agreement must be satisfied within six years of when the contract is executed in order for a trustee to maintain a timely action for alleged breaches of mortgage loan representations and warranties.

The difference between a procedural and substantive condition precedent is well-established. A condition precedent is substantive when it describe[s] acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract. In other words, the condition is part of the cause of action and necessary to be alleged and proven, and without this no cause of action exists. As the Court explained in ACE, and reaffirmed in Deutsche Bank National Trust Co. v Flagstar Capital Markets (32 NY3d 139 [2018]), RMBS notice and sole remedy provisions are not substantive elements of the cause of action, but instead limitations on the remedy for a breach of the mortgage loan representations and warranties. They serve as a precondition, a procedural prerequisite to suit, not a separate undertaking by the trustee. Since notice and sole remedy provisions do not create a substantive condition precedent, they do not affect when the statute of limitations commences because the limitations clock begins to run when the contract is executed.

Nevertheless, DLJ argues that the Trustee had to fulfill the procedural condition precedent before the limitations period expired, and its failure to do so rendered the original action untimely, such that a new action cannot be commenced pursuant to CPLR 205(a). DLJ's argument cannot be reconciled with our case law that a suit may be refiled pursuant to CPLR 205(a) despite a plaintiff's failure to comply with a condition precedent prior to the expiration of the statute of limitations.

For example, in Carrick v Central General Hospital (51 NY2d 242 [1980]), the Court held that failure to comply with a procedural condition precedent may be a fatal flaw to maintaining the prior action and grounds for dismissal but is not a judgment on the merits for purposes of CPLR 205(a). There, the plaintiff commenced a malpractice and wrongful death action on behalf of her deceased spouse. The plaintiff identified herself as the proposed administrator because she had not yet been appointed. Supreme Court dismissed the action, and the plaintiff, who had since been appointed administrator, commenced a new action within six months of the dismissal, but outside the applicable limitations period. This Court held that CPLR 205(a) applied even though the prior plaintiff lacked capacity to sue. The Court explained that like any condition precedent, the requirement of a qualified administrator in a wrongful death action, while essential to the maintenance of the suit, is in no way related to the merits of the underlying claim.

We similarly found CPLR 205 (a) applicable in Matter of Morris Investors, Inc. v Commissioner of Finance of the City of New York, where the petitioners filed a timely petition challenging a tax assessment, but failed to deposit the disputed tax deficiency or post an undertaking before commencing the action as required by statute. The original petition was timely-filed within the meaning of CPLR 205(a) because although the first proceeding may have been defective for failure to deposit the tax or post a bond, noncompliance with such a requirement does not put it beyond the saving provision of CPLR 205(a). As the Court explained, the savings clause by its very terms comes into operation in instances where a proceeding has been terminated for some fatal flaw unrelated to the merits of the underlying claim.

The analysis of these cases applies with equal force here, and DLJ's contrary view in reliance on Yonkers Contracting Co. v Port Authority Trans-Hudson Corp. is unavailing. In that case, a contractor sued a subsidiary of the Port Authority of New York and New Jersey for breach of contract. Pursuant to Unconsolidated Laws § 7107, any action against the Port Authority must be commenced within one year of accrual of a claim. The action was initially dismissed because the contractor failed to comply with an alternate dispute resolution provision in the underlying contract. The contractor then complied with the ADR provision and refiled the suit within six months of dismissal, but more than a year after accrual of the claim. This Court concluded that noncompliance with section 7107 required dismissal of the contractor's claims because CPLR 205(a) may extend a Statute of Limitations, but could not obviate the requirements of a statutory condition precedent to suit. The Court explained that case law distinguishes between a Statute of Limitations and a statutory time restriction on commencement of suit. The former merely suspends the remedy provided by a right of action, but the latter conditions the existence of a right of action, thereby creating a substantive limitation on the right. Here, the notice and cure or repurchase condition precedent contained no such time restriction" and, thus, noncompliance within the statute of limitations did not render the action untimely. Yonkers Contracting does not stand for the proposition, advanced by DLJ, that noncompliance with a contractual remedial provision within the limitations period renders CPLR 205(a) inapplicable. Rather, Yonkers Contracting holds that a plaintiff may not proceed under CPLR 205(a) where the plaintiff fails to comply with the conditions contained in the statute that created the right sued upon. There is no rational reason to distinguish between statutory and contractual conditions precedent as DLJ argues. Our focus is on the nature of the condition, not the source.

. . .

The Trustee's failure to comply with the notice and cure or repurchase condition precedent within the applicable statute of limitations does not foreclose refiling of its action for alleged breach of RMBS representations and warranties pursuant to CPLR 205(a). Therefore, its claims were properly dismissed without prejudice.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee's prosecution of a put back action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.