Duty to Notify Parties of Defective Loans in RMBS Trust Found to Be Separate Duty, Not Condition Precedent to Duty to Cure

On April 13, 2021, the First Department issued a decision in Matter of Part 60 RMBS Put - Back Litig., 2021 NY Slip Op. 02252, holding that a duty to notify deal parties of defective loans in an RMBS trust was a separate duty, not a condition precedent to the duty to cure defective loans, explaining:

In Count I Natixis claims that Wells Fargo, as Securities Administrator, breached the PSA by failing to provide Natixis with prompt written notice of R&W breaches. The contractual obligation of the Securities Administrator to notify the Unaffiliated Seller of its discovery of R&W breaches is expressly stated in PSA Section 2.03. We hold that the PSA provides an independent contractual obligation for the Securities Administrator to provide Natixis with notice upon its discovery of breaches of the R&Ws concerning the mortgages that were pooled pursuant to the agreement. The motion court correctly denied the motion to dismiss this count.

Wells Fargo argues the right to notification under the PSA does not give rise to an independent claim for breach of contract, because the obligation is only a condition precedent. We disagree. This Court has ruled in numerous cases that the breach of a contractual duty to provide prompt written notice of R&W breaches gives rise to an independent breach of contract claim. Wells Fargo argues that this First Department jurisprudence is called into question by Court of Appeals precedent that a notice obligation in the context of RMBS litigation is a condition precedent to bringing an action, and not a substantive element of a repurchase claim. Wells Fargo's argument might be persuasive if it had a repurchase obligation under the PSA. Under such a circumstance, notice could be considered a condition precedent to bringing an action for breach of R&Ws. Here, however, Wells Fargo, in its capacity as the Securities Administrator, had no such repurchase obligation. Notification under these circumstances cannot be considered a condition precedent to any further obligation under the PSA. We, therefore, conclude that Wells Fargo's contractual obligation to notify is not condition precedent to the remedy of repurchase, but an independent enforceable contractual obligation, which provides an independent basis for an action.

(Internal 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 or repurchase action, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.