The main question in this case was whether a pooling and servicing agreement for a residential mortgage-backed securities trust requires the trustee to notify the trust’s sponsor that individual loans were included in the trust in breach of the sponsor’s representations and warranties. In a 6–1 decision, the Court (DiFiore, C.J.) held that the trustee must give the sponsor loan-by-loan notice, and so can sue for the sponsor to repurchase only those loans included in the trustee’s pre-suit notice. (Justice LaSalle of the Second Department was vouched in for Judge Wilson, who was recused.) The Court also unanimously held that the repurchase price for liquidated loans included only the interest that had accrued until the liquidation date.
This case involved a residential mortgage-backed securities (RMBS) trust. The trust’s sponsor got to select which loans were included in the trust and, in return, had to represent that the loans were of a minimum quality—for instance, that the loans were extended based on accurate documentation. The sponsor also agreed that if it was notified of any breaching loans, it would, within 90 days, cure any defects or repurchase the loans at the “Repurchase Price”: remaining principal balance plus accrued and unpaid interest. If the sponsor did not do so within 90 days, the trustee could sue to enforce the cure-or-repurchase obligation.
The majority held that a lawsuit brought to enforce cure-or-repurchase obligation pertains only to the loans for which the sponsor received pre-suit notice of breach. A pre-suit notice informing that sponsor that other loans in the trust may also be in breach does not suffice to put the sponsor on notice of those additional breaches. The majority reasoned that the agreement’s plain language, in describing the cure-or-repurchase obligation, referred to the cure or repurchase of specific loans. The majority also observed that, had the parties wished to allow the trustee to put the sponsor on notice of loan-level breaches, they would have given the sponsor more than the “abbreviated” 90-day window in which to cure or repurchase. And, the majority held, CPLR 203(f), which allows for the claims in amended complaint to relate back to the date on which the original complaint was filed, did not allow for a trustee to notify the sponsor in an expert report, years into the suit, that additional loans were in breach. CPLR 203(f) applies only to amended pleadings, not to expert reports, and does not allow a trustee to give post-suit notice of breaches when the contract requires pre-suit notice.
Judge Rivera dissented. She believed that a notice informing that sponsor of specific defects with certain loans—and stating that other loans in the trust may also be in breach—was all that the sponsor bargained for. She also noted that the 90-day repurchase period was immaterial to the analysis: if the sponsor had wanted a longer window, it could have struck a different deal. Regardless, Judge Rivera opined, CPLR 203(f) applied to any loans about which the trustee notified the sponsor after the action commenced, observing that CPLR 203(f) is designed to relax “strict, formalistic pleading requirements.”
Both the majority and the dissent agreed on one other issue: how to treat liquidated loans. Liquidated loans are those that have defaulted and thus no longer exist. The majority held, and the dissent agreed, that because the “Repurchase Price” includes “accrued and unpaid interest,” the Repurchase Price for liquidated loans includes only accrued and unpaid interest through the date of liquidation. After that date, interest ceases to accrue. So a court cannot include additional interest in the Repurchase Price by calculating what the accrued interest would have been at the repurchase date.