U.S. Bank National Ass'n v. GreenPoint Mortgage Funding, Inc.

2016 NY Slip Op 8968, 147 A.D.3d 79, 45 N.Y.S.3d 11

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: December 29, 2016
• Docket: 651954/13 1493
• Status: Published

Opinions

OPINION OF THE COURT

Gische J.

This is a “put-back” action, involving residential mortgage backed securities (RMBS). Plaintiff U.S. Bank National Association, the trustee of the securitization trust, claims that a large number of the mortgages, originated by defendant, Green-Point Mortgage Funding, Inc., and held by the trust, breached the representations and warranties that GreenPoint made regarding their quality. Although under the governing agreements GreenPoint was obligated to cure any nonconforming mortgage within 60 days of either discovering or being notified of a breach, the trustee claims that GreenPoint failed to cure by either replacing or repurchasing the nonconforming mortgages.

The issues before us are related to the contractual requirement and sufficiency of notices of breach (breach notice). We consider whether a breach notice is required when the underlying contract claim is based upon a defendant’s independent discovery or knowledge of the nonconforming mortgages. We also consider whether an otherwise late breach notice can relate back in time to the commencement of the underlying action in order to avoid dismissal. For the reasons that follow, we hold that the breach of contract claims based upon defendant’s alleged independent discovery or likely knowledge of nonconforming mortgage loans do not require breach notices to be sent before an action may be brought. We further hold that the doctrine of relation back does not save claims that do require that a breach notice be sent as a precondition to bringing an action.

GreenPoint originated 418 mortgage loans that were sold to a nonparty sponsor pursuant to a mortgage loan sale agreement (MLSA) dated August 1, 2005. The MLSA included various representations and warranties concerning the characteristics, quality and risk profile of the mortgage loans. Those and other loans were pooled together and conveyed to the J.P. Morgan Alternative Loan Trust (JPMALT) for securitization through the issuance of RMBS certificates. The securitization closed on May 31, 2007, and plaintiff is JPMALT’s trustee. The representations and warranties in the MLSA were incorporated and reconstituted in a separate agreement, also dated May 31, 2007, made for the benefit of the trustee (and others).

Plaintiff contends that most of the loans owned by the trust, which originated with GreenPoint, breached the representations, warranties and other covenants set forth in MLSA §§ 7.01 and 7.02. The representations include statements that none of the loans are in default, that the mortgaged property is lawfully occupied, and that no mortgage loan has been more than 30 days delinquent since origination (MLSA § 7.01). MLSA § 7.02 (1) also states, in sum and substance, that the MLSA contains no untrue statements or omissions of material fact.

MLSA § 7.03 sets forth the rights and remedies of the parties (repurchase protocol) in the event nonconforming, breaching loans are either discovered by GreenPoint, or nonparty Wells Fargo, as the servicer and securities administrator, notifies GreenPoint of the nonconforming mortgage. It provides that

“[u]pon discovery by the Seller, the Servicer or the Purchaser of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of the Mortgage Loans [,] . . . the party discovering such breach shall give prompt written notice to the others.

“Within sixty (60) days of the earlier of either discovery by or notice to either the Seller or the Servicer (such period, the “Cure Period”) of any breach of a representation or warranty which materially and adversely affects the value of a Mortgage Loan or the Mortgage Loans or the interest of the Purchaser therein, the Seller or the Ser-vicer, as the case may be, shall use its best efforts promptly to cure such breach in all material respects and, if such breach cannot be cured, the Seller shall repurchase such Mortgage Loan or Mortgage Loans at the Repurchase Price.”

The repurchase protocol states further that GreenPoint’s obligation to cure, repurchase or provide a substitute for a defective mortgage loan and/or to indemnify the purchaser “constitute the sole remedies of the Purchaser respecting a breach of the representations and warranties set forth in Subsections 7.01 and 7.02.”

By letter dated May 29, 2013, the Federal Home Loan Mortgage Corp. (Freddie Mac), an investor and certificate holder, notified plaintiff that its independent loan-level forensic review had revealed pervasive breaches of GreenPoint’s representations and warranties. On May 31, 2013, plaintiff commenced this action by filing a summons with notice. The filing was effectuated exactly six years after May 31, 2007, the closing date of the underlying transaction in which the representations and warranties were made.

Prior to the commencement of the action, GreenPoint was not notified that any of the loans it had originated were in breach of its representations and warranties; nor was any demand made for GreenPoint to cure or repurchase any of the mortgages. The summons with notice refers to a breach of contract claim solely predicated on defendant’s knowing about the nonconforming mortgages at closing. It states in relevant part:

“On information and belief, Defendant was aware from the Closing Date that the mortgage loans that were sold to the Trust were in breach of the R&W [representations and warranties]. Defendant is in breach of its obligations under the applicable agreements to cure breaches of the R&Ws or repurchase breaching mortgage loans within the contractually specified time periods. Defendant has failed to cure or repurchase any of its mortgage loans in breach of the R&Ws as required by the Repurchase Obligation.”

Only after this action was commenced were three breach notices then sent to GreenPoint. The first notice, dated June 13, 2013, identified 85 defective loans, the second notice, dated August 30, 2013, identified another 98 loans, and the third, dated November 4, 2013, identified yet an additional 17 loans that breached GreenPoint’s representations and warranties. By the time these breach notices were sent, the applicable statute of limitations had expired. None of the breach notices provided for a 60-day cure period, as the MLSA allows, and the November 4, 2013 breach notice was sent only two days before the complaint was filed.

On November 6, 2013, more than six months after the action was commenced, plaintiff filed its complaint. The complaint contains a breach of contract cause of action, based, in part, upon the following allegations:

“5. GreenPoint . . . was in a unique position to know and, based on the nature of the breaches that have been identified to date, as well as the nature of the loan review undertaken by GreenPoint in originating the Mortgage Loans, upon information and belief likely did know, about the defective nature of the Mortgage Loans long before the Trustee did. It is unlikely that GreenPoint, in performing the procedures it averred it undertook, could have generated such a high percentage of breaching Mortgage Loans without knowing it was doing so. Rather, it is likely that GreenPoint did discover the breaches, or was willfully blind or grossly negligent in not discovering them, long before the Cértificateholder and the Trustee did so.

“6. Given GreenPoint’s likely knowledge of breaches of representations and warranties, it breached its contractual obligations to provide notice to the Trustee of the breaches and, based on its own discovery of the breaches (and prior to notice thereof from the Securities Administrator), to cure the breaches or repurchase the affected Mortgage Loans. Rather, GreenPoint willfully has remained silent and has failed to cure or repurchase, repudiating its contractual obligations.

“7. When the Trustee, which is not obligated under the parties’ agreements to investigate GreenPoint’s compliance with its representations and warranties or to inspect loan files, learned of the breaches, it notified the Securities Administrator, which provided prompt notice thereof to GreenPoint and demanded that GreenPoint cure the breaches or repurchase the loans at issue. GreenPoint has not repurchased a single Mortgage Loan in response to these demands and, with respect to the contracts at issue here and elsewhere, has repudiated its repurchase obligations. The Trustee at the direction of the Cértificateholder now sues, seeking specific performance, damages, and rescission, and to the extent rescission is impracticable,. . . rescis-sory damages in lieu of rescission.”

The complaint includes the breach of contract claim, as originally asserted in the summons with notice, that Green-Point was in a unique position to know and likely knew of the defective nature of the loans but failed to take curative measures. The complaint also includes new allegations, that GreenPoint had been given notice of the nonconforming loans, but had failed to cure by replacing or repurchasing them.

Under MLS A § 7.03, GreenPoint’s obligation to cure a nonconforming loan is triggered in one of two ways. One way is if GreenPoint discovers on its own that a loan it sold breached the representations and warranties contained in the governing documents. The other way is if it is notified by the servicer of a nonconforming loan. We have recognized that these alternative contractual obligations give rise to independent, separate claims for breach of contract (Morgan Stanley Mtge. Loan Trust 2006-13ARX v Morgan Stanley Mtge. Capital Holdings LLC, 143 AD3d 1, 4 [1st Dept 2016]; Nomura Home Equity Loan, Inc., Series 2006-FM2 v Nomura Credit & Capital, Inc., 133 AD3d 96, 108 [1st Dept 2015]). In either case, GreenPoint is contractually entitled to a 60-day period in which to cure its default, presumably so litigation can be avoided. GreenPoint may replace the defective loan with a compliant one, but if it does not replace the loan within the 60-day cure period, then, under the repurchase protocol, GreenPoint must repurchase the defective loan.

Regardless of when GreenPoint discovers a breach or is notified of the nonconforming mortgage, the breach of contract cause of action accrues on the date of the closing of the underlying transaction, which is when the representations and warranties were made (ACE Sec. Corp., Home Equity Loan Trust, Series 2006-SL2 v DB Structured Prods., Inc., 25 NY3d 581 [2015]). This action was timely brought within six years after the date of closing.

Central to this appeal is whether the notice provision in the repurchase protocol applies to contract claims where a defendant itself knows about the nonconforming mortgages. In other words, is a breach notice still required when the contract claim is predicated on nonconforming mortgages that defendant itself discovered? Relying on the terms of the MLSA repurchase protocol, we find that it would have been wholly illogical for plaintiff to be required to notify GreenPoint about the existence of nonconforming mortgages that GreenPoint already knew about or would have discovered through its own due diligence. For these claims, no precommencement breach notice was necessary. The terms of the repurchase protocol provide that the cure period is triggered upon “discovery by or notice to [GreenPoint].” Thus, this action, to the extent it alleges that GreenPoint’s obligation to cure was triggered by its own discovery of nonconforming mortgages, but no cure was effected, is not only timely, but it also may proceed regardless of the validity of the late breach notices.

We also find that the allegation that defendant breached the repurchase protocol under the contract, because it knew or should have known that the loans were in breach of the warranties and representations, is sufficient to withstand a motion to dismiss. Plaintiff claims that as the originator of the mortgage loans, GreenPoint created and had full access to the loan files and either could or did perform pre- and post-closing due diligence.

The second prong of plaintiff’s contract cause of action is separately based on allegations that GreenPoint was notified of the breaching mortgages, but failed to cure. The breach notices underpinning this separate notice-based claim were sent only after plaintiff had commenced this action by filing its summons with notice. The breach notices did not afford GreenPoint its contractual opportunity to cure its default and thereby avoid this lawsuit, let alone trigger its obligation to repurchase them. We find that the breach notices had to be sent so as to permit GreenPoint its allotted time to cure any claimed breach. The breach notices were a contracted-for condition precedent to bringing this action. The doctrine of relation back cannot render these otherwise untimely breach notices timely.

Our conclusion that a breach notice is a condition precedent to a claim predicated on actual notice of default is mandated by the language of the repurchase protocol in the MLSA and the Court of Appeals decision in ACE (25 NY3d 581). In ACE, the Court determined that a contract requiring a breach notice triggering an opportunity to cure/repurchase is a condition precedent to bringing a contract claim for breach of representations and warranties. ACE was an RMBS put-back action involving contracts substantially similar to those at bar. The dispute in ACE largely centered on when the contractual cause of action accrued for statute of limitations purposes. In finding that the cause of action accrued when the nonconforming representations were made, the Court of Appeals distinguished between procedural prerequisites, which seek a remedy for a preexisting wrong, and substantive prerequisites, which are conditions to performance. The Court of Appeals held that the breach notice and cure period required in ACE, which is substantially identical to the breach notice and cure period required here, was a procedural prerequisite to suit. Thus, in ACE the Court of Appeals affirmed dismissal of the complaint, stating that, “because the Trust admittedly failed to fulfill the condition precedent, we need not and do not address the issues of standing and relation back disputed by the parties” (25 NY3d at 599).

To the extent plaintiff has asserted claims that rely upon GreenPoint’s notification by the servicer of nonconforming mortgages, those claims were correctly dismissed because the breach notices were sent too late. Where, as here, a contract specifies a cure period, any claim premised on the failure to effect a cure is premature if it is brought before the expiration of the cure period (Chumley’s Bar & Rest. Corp. v Bedford Ct. Assoc., 174 AD2d 398 [1st Dept 1991]). Because the breach notices were sent only after the summons with notice was filed, the cure period had not begun, let alone expired, when this action was commenced (see Southern Wine & Spirits of Am., Inc. v Impact Envtl. Eng’g, PLLC, 80 AD3d 505 [1st Dept 2011], citing Yonkers Contr. Co. v Port Auth. Trans-Hudson Corp., 208 AD2d 63 [1995], affd 87 NY2d 927 [1996], and Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 690-692 [1995]). These claims are, therefore, premature.

We reject plaintiff’s argument that, because the summons with notice put defendants on notice of nonconforming mortgages, the late breach notices, although sent after the summons with notice was filed but before the filing of the complaint, “relate back” to the commencement of this action. Leaving aside the question of whether the notice served with the summons actually did provide notice of a claim for failure to cure and repurchase after notice,

* the breach notice cannot “relate back” because the inherent nature of a condition precedent to bringing suit is that it actually precedes the action. Plaintiff had no right to bring the action unless and until this condition was fulfilled. Even were we persuaded that the belated breach notices in this case could relate back, the earliest date would be when the summons with notice was served. That date would still not suffice because, contractually, defendant must be afforded a 60-day period within which to cure before an action for breach of contract may be commenced. Plaintiff’s argument would simply eviscerate the condition precedent of serving a breach notice, as required by the contract, and defendant’s right to effect a pre-action cure.

Moreover, the notice that accompanies a summons when no complaint is filed at the commencement of an action fulfills a very different purpose than the breach notice required pursuant to the parties’ agreements. A notice that accompanies a summons is simply to let a defendant know the claims being asserted (see Pilla v La Flor De Mayo Express, 191 AD2d 224 [1st Dept 1993]). The contractual requirement of a breach notice, however, triggers the defendant’s right/obligation to cure a claimed default and avoid a lawsuit. The concept of relation back in a pleading context concerns the adequacy of the notice given and is dependant upon the existence of a valid preexisting action (CPLR 203 [f]; Carrick v Central Gen. Hosp., 51 NY2d 242, 248 [1980]). A condition precedent, however, is a contractual obligation (see MHR Capital Partners LP v Presstek, Inc., 12 NY3d 640, 645 [2009]; A.H.A. Gen. Constr. v New York City Hous. Auth., 92 NY2d 20, 31 [1998]; Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 690 [1995]). Consequently, a pleading notice and a breach notice are not natural substitutes for one another.

Nomura (133 AD3d 96), relied upon by the dissent to support the application of relation back, is factually distinguishable. It involved several lawsuits by trustees against the same defendant. With respect to the relation back issue, the most important factual distinction between this case and Nomura is that the trustees actually sent presuit breach notices to the defendant in that case. Although the breach notices identified some, but not all, of the nonconforming mortgages for which the trustees ultimately sought relief, they expressly stated that the trustees were still investigating the matter and that further nonconforming mortgages might be discovered. To the extent the No-mura Court allowed the claims to proceed based upon defendant’s independent knowledge of the nonconforming mortgages, we rule consistently. As for the relation back concept adopted in Nomura, the critical distinction is that the trustees in that case complied with the condition precedent of providing that defendant with notice of its default. Here, no such precom-mencement breach notice was ever sent to GreenPoint, so its obligation to cure (repurchase) or otherwise respond was not triggered; the breach notices were only sent after the action was commenced. Furthermore, although the precommencement breach notices in Nomura did not specifically identify every alleged nonconforming mortgage, the trustees’ presuit demands put the defendant on notice that the certificate holders whom the plaintiffs (as trustees) represented were investigating the mortgage loans and might uncover additional defective loans for which claims would be made (133 AD3d at 108). This did not occur here, and we do not believe Nomura should be extended to cover the claims at bar.

Accordingly, the order of the Supreme Court, New York County (Marcy S. Friedman, J.), entered March 4, 2015, which, insofar as appealed from as limited by the briefs, granted defendant’s motion to dismiss the breach of contract claim to the extent the claim is based upon cure demands made on defendant, and denied the motion to dismiss, that claim to the extent it is based upon allegations of defendant’s independent discovery of breaches should be affirmed, with costs.

The notice served with the summons stated that plaintiff intends to proceed against defendant with a claim that it was “aware from the Closing Date that the mortgage loans that [defendant] sold to the Trust were in breach of the [representations and warranties]” because “such breaches pervade the entire pool of loans.” This summons with notice unmistakably apprised defendant that plaintiff intended to proceed against it on the basis of defendant’s own awareness or discovery of the nonconforming mortgages. There is no language in this notice, however, demanding that defendant fulfill its obligations/right to cure before the commencement of an action.