Contract; breach; Residential Mortgage-Backed Securities.
By Evan Jaffe | Staff Writer
Plaintiff, as Trustee, brought suit for breach of contract for a residential mortgage-backed security (RMBS). Plaintiff alleged Defendant Morgan Stanley, as “sponsor” and “seller” of the Trust, selected the mortgage loans for purchase from the mortgage loan originators, including Defendant GreenPoint, to be pooled in the Trust. Defendant Morgan Stanley made certain representations and warranties regarding the adequacy of the mortgage loans. However, a pool of loans, including those from Defendant GreenPoint, breached Defendant Morgan Stanley’s representations and warranties causing over $182 million is losses for Plaintiff. Plaintiff demanded each Defendant repurchase the defective loans within the applicable cure or repurchase periods under the various agreements but Defendants failed to do so.
Three intertwining agreements govern Defendants’ obligations under the Trust: a pool and servicing agreement (PSA), mortgage loan purchase agreement (MLPA), and mortgage loan sale and servicing agreement (MLSSA). Section 2.05 of the PSA provides that the cure, substitution or repurchase of any such defective loan is the “sole remedy against [Defendant Morgan Stanley] respecting such omission, defect or breach available to the Trustee on behalf of the
Certificateholders.” Section 3.01 of the MLPA requires that, in the event the Trustee believes there have been breaches of the representations and warranties, it must provide “prompt written notice” of such alleged breaches to Defendant Morgan Stanley, and Defendant Morgan Stanley then has 90 days to cure, repurchase or substitute any materially defective loans. The contract goes on to provide that “the obligations of [Defendant Morgan Stanley] . . . to cure, repurchase or substitute for a defective Mortgage Loan constitutes the sole remedy . . . respecting . . . a breach of the representations or warranties contained in this Section 3.01.” Finally, Section 7.03 of the MLSSA provides that the cure, substitution or repurchase of any such defective loan is the “sole remedy.”
Defendants Morgan Stanley and Greenpoint moved to dismiss Plaintiff’s complaint. Defendant Morgan Stanley argued Plaintiff lacked standing and failed to timely notify of any alleged breaches. Defendant Greenpoint contended Plaintiff failed to timely notify of any alleged breaches. Both Morgan Stanley and Greenpoint argued Plaintiff’s sole remedy was repurchase and not rescissory or compensatory damages. Plaintiff argued Defendants failed to follow the repurchase obligations regarding defective loans. Plaintiff alleged Defendants breached the contracts with their false representations and warranties; therefore, Plaintiff was entitled to rescissory and compensatory damages.
The court agreed with Defendants that Plaintiff’s sole remedy is repurchase of defective loans; therefore, Plaintiff’s claim for rescissory and compensatory damages was dismissed. The court held Plaintiff timely filed the action as a cause of action for breach of contract accrued on the date of the representations and warranties. Plaintiff adequately followed the procedures regarding notice of defective loans. Based on controlling case law, Plaintiff properly plead breaches for certain groups of loans and individual identification was not necessary. The court dismissed the first cause of action for breach of contract and specific performance to the extent Plaintiff alleged breach of Defendants’ repurchase obligations constitute independent breaches. The court dismissed the second cause of action for breach of contract and damages to the extent Plaintiff alleged breach of Defendants’ repurchase obligations constitute independent breaches and rescissory and compensatory damages were inconsistent with the repurchase protocol.
Morgan Stanley Mortgage Loan Trust 2007-2AX v. Morgan Stanley Mortgage Capital Holdings LLC, Index No. 650339/2013 (Friedman, J.).