Plaintiff Can Cure Standing Defect After Suit Commenced

On October 13, 2022, Justice Margaret A. Chan of the New York County Commercial Division issued a decision in Park Royal I LLC v. HSBC Bank USA, N.A., 2022 N.Y. Slip Op. 33501(U), denying defendant's motion for leave to reargue and declining to dismiss a suit brought by a plaintiff that lacked standing at the time of suit on the ground that plaintiff later cured this standing defect, explaining:

[T]he court finds that defendant has failed to show that this court overlooked, misapprehended the relevant facts, [*5] or misapplied the law so as to warrant a grant of reargument. Defendant tries to frame the issue as a different one that is not present in this action: when plaintiffs lack of standing is inherently incurable, whether a subsequent assignment that conferred standing can relate back to the moment plaintiff commenced the actions. The cases relied on by defendant, which are not previously cited, are inapposite since unlike here, the plaintiffs in those cases were asserting claims even though they lack beneficial or legal interest in such claims and thus the lack of standing was simply not curable (Rizack v Signature Bank, N.A., 169 AD3d 612, 613, 95 N.Y.S.3d 171 [1st Dept 2019] ["Plaintiff's lack of standing at the commencement of this action was not cured by this subsequent assignment of the claim" since "plaintiff did not possess or have any legal rights to the IRA agreement claim when he filed the original complaint"] [emphasis added]; [**4] Goldberg v Camp Mikan-Recro, 42 NY2d 1029, 369 N.E.2d 8, 398 N.Y.S.2d 1008 [1977] [the decedent's father lacked standing to bring a wrongful death claim for "the infant's personal injuries"]). In contrast, here, because plaintiffs are the beneficial owners of the certificates whose lack of standing was based solely on the negating clause in the PSAs, the defect in their standing has been found to be curable.

Defendant also incorrectly relies on a line of condition precedent cases (see e.g. UMB Bank N.A. as Trustee v Neiman Marcus Group, Inc., 68 Misc 3d 977, 983, 128 N.Y.S.3d 823 [Sup Ct, NY County 2020]; S. Wine & Spirits of Am., Inc. v Impact Envtl, Eng'g, PLLC, 80 AD3d 505, 505, 915 N.Y.S.2d 541 [1st Dept 2011]).3 As the court found in the Original Decision, those cases concern situations where the lack of standing has been found incurable such as when plaintiffs failed to fulfill "a condition precedent to plaintiffs' right to bring any legal action" (S. Wine & Spirits, 80 AD3d at 505). It is settled that a plaintiff's lack of standing when it fails to satisfy the pre-suit condition cannot be cured, so that any postfiling satisfaction of that condition cannot relate back (see Phoenix Light SF Ltd. v Deutsche Bank Nat'l Trust Co., 585 F. Supp. 3d 540, 568 [SD NY 2022] [reasoning that a plaintiff cannot cure such failure to comply since "the subsequent satisfaction of the condition precedent cannot relate back because the inherent nature of a condition precedent to bringing suit is that it actually precedes the action"] [internal quotation marks and citation omitted]). The standing problem with the failure to satisfy a condition precedent to litigation is that plaintiff lacks a cause upon which to sue, and thus no legally cognizable remedy is available when plaintiff files the lawsuit. But this is not the case here.

As emphasized in the Original Decision, Cede & Co., as a street name, has only book entry interest but no actual interest in those RMBS, while plaintiffs are the real party in interest as beneficial owners (NYSCEF # 88, citing Diverse Partners, LP v. AgriBank, 2017 U.S. Dist. LEXIS 149572, 2017 WL 4119649, *5 [SD NY, Sept. 14, 2017]). Given that section 6.06(d) of the PSAs provides that certificate owners can exercise their rights through the depository, the provision negates their ability to directly bring an action (PSA § 6.06[d]). This defect in standing, caused by a negating clause, does not eliminate plaintiffs' cognizable stake in this action or the court's jurisdiction to hear [*7] it. As such, the standing defect is curable and could be cured retroactively by obtaining the registered holders' authorization to sue (Springwell, 81 AD3d at 558 [with the authorization, "plaintiff's status has changed, and its prior lack of capacity has been cured"]; Cortlandt, 47 Misc. 3d at 558-559 ["[i]f a party that lacked standing under such an indenture subsequently obtains authorization to sue from a registered holder, its lack of standing is cured"]; see also Bank of NY v. Bearingpoint, Inc., 13 Misc. 3d 1209[A], 824 N.Y.S.2d 752, 2006 NY Slip Op 51739[U] [Sup Ct, NY County 2006] [**5] ["[n]otably, the filing by the beneficial Holders has now been retroactively ratified by the registered Holder," citing Applestein, 145 F3d 242]).

As this case shows, whether a plaintiff's lack of standing at the time of suit can be cured turns on whether the plaintiff had an interest in the underlying dispute at the time of suit. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning curing a standing issue after a suit has been commenced.