New York Court of Appeals Tightens Notice Requirements in RMBS Litigation

On March 17, 2022, the New York State Court of Appeals issued a significant decision affecting RMBS putback litigation governed by New York law. The decision, U.S. Bank National Association v. DLJ Mortgage Capital, 2022 WL 801440 (N.Y. March 17, 2022), resolves an issue that had been disputed in the courts for many years — namely, the form and manner of notice necessary to trigger a defendant’s obligation to repurchase defective loans from an RMBS securitization. 

Background

U.S. Bank National Association (U.S. Bank), as trustee of an RMBS trust sponsored by DLJ Mortgage Capital (DLJ) in 2007, brought a breach of contract suit against DLJ in 2013, alleging breach of the pooling and servicing agreement (PSA) that established the trust. That PSA contained typical RMBS remedy provisions, including that the trustee’s “sole remedy” against DLJ for any breaches of representations and warranties would be the PSA’s “repurchase protocol.” Among other things, that protocol provided that, “[u]pon discovery by any of the parties . . . of a breach” of representations or warranties materially and adversely affecting the certificateholders’ interest “in any Mortgage Loan, the party discovering such breach shall give prompt notice thereof to the other parties.” Such notice (or alternatively, DLJ’s own discovery of the breach) triggered a 90-day period during which DLJ was required either to cure the breach or to repurchase the defective loan. 

Prior to commencing suit, U.S. Bank sent DLJ a series of notices, which identified 1,204 of the 5,100 loans in the trust as defective and requested that DLJ repurchase these loans and “all other” defective loans. U.S. Bank’s complaint sought damages for those 1,204 loans, as well as for all other defective mortgage loans in the trust. Subsequently, U.S. Bank identified an additional 480 allegedly nonconforming loans, which had not been specifically identified in its pre-suit notices. DLJ then moved for partial summary judgment, seeking a ruling that U.S. Bank should not be allowed to recover for these additional loans, but only for the 1,204 loans for which it had given specific pre-suit notice. The New York trial court denied DLJ’s motion, and the Appellate Division, First Department, affirmed. DLJ appealed to the New York Court of Appeals, which reversed, holding that U.S. Bank may recover only for (a) loans for which it gave specific pre-suit notice and (b) loans that DLJ independently discovered to be in breach.

The Decision

The Court of Appeals based its decision squarely on the plain meaning of the securitization documents: “Applying well-settled principles of contract interpretation and giving effect to the plain meaning of the contract language, the repurchase protocol requires that plaintiff trustee provide loan-specific pre-suit notice in order to invoke defendant sponsor’s repurchase obligation and satisfy the contractual prerequisite to suit.” 2022 WL 801440, at *1. The court emphasized that the PSA’s repurchase protocol plainly required that notice be given, and remedies be provided, on a loan-by-loan basis — “requiring first the identification of a specific breaching ‘Mortgage Loan’ and then, if the breach is substantiated as to that loan, the removal and substitution or repurchase of that particular loan from the trust.” Id. at *4. In the court’s view, U.S. Bank’s conclusory statement in its pre-suit notice that “all loans” in the trust were defective simply did not satisfy the contractual requirement that notice be given on a loan-by-loan basis prior to the commencement of suit. Id. at *5.

The Court of Appeals also rejected U.S. Bank’s argument that its post-suit identification of additional defective loans “related back” to its complaint under CPLR 203(f), which permits certain claims asserted in amended complaints to relate back to the date of the original complaint for statute of limitations and other purposes. The court held that, while “the relation back doctrine provides a vehicle in the context of civil litigation to excuse noncompliance with other statutory procedural requirements[,] [i]t has no application here to excuse the trustee’s failure to comply with the contractual prerequisite to suit.” Id. at *6.

The issue of whether DLJ had itself independently discovered breaches relating to loans for which U.S. Bank failed to give specific notice was not before the Court of Appeals, and the court therefore did not address that issue.

Conclusion

The Court of Appeals’ decision in U.S. Bank v. DLJ substantially tightens the pre-suit notice requirements in RMBS putback litigation governed by New York law. Specifically, the ruling reverses a number of RMBS decisions by lower New York courts (including the First Department, which hears appeals from trial courts in New York City), which had held the notice requirements of similar RMBS repurchase protocols may be satisfied by generalized, rather than loan-by-loan, notice.

For trustees overseeing tens or hundreds of thousands of RMBS loans, the loan-by-loan notice requirement of U.S. Bank v. DLJ may be very difficult to satisfy. A practical solution may need to await the drafting of new PSAs for future RMBS securitizations, since the practical problems posed by the Court of Appeals’ decision are rooted in the loan-by-loan language of PSAs that were drafted 15 or more years ago, before the onset of large-scale RMBS litigation. In the meantime, trustees prosecuting putback litigation may find that a significant portion of their claims are now subject to dismissal on notice grounds — except to the extent they can show that the defendant independently discovered breaches of representations and warranties. What evidence is required for such a showing and whether or not it will require actual or constructive discovery are questions that are likely to be hotly litigated in the remaining RMBS putback cases.