Motion to Dismiss; Breach of Contract; Statute of Limitations; CPLR 205(a); Condition Precedent
By: Julie Lavoie | Staff Writer
Plaintiff, HSBC Bank USA, National Association (“HSBC”), is the trustee of a residential mortgage backed securities (“RMBS”) trust. Defendant, DB Structured Products Inc. (“DBSP”), is the sponsor of the security who acquires mortgage loans from their originators and then sells them to depositor, ACE Securities Corp. (“ACE”), who then deposits the mortgage loans into the RMBS trust. Next, the trust issues securities to ACE, who sells the securities to investors through an underwriter, and then the trustee, HSBC, holds the loans and administers the trust for the benefit of the investors.
DBSP made over fifty representations and warranties to ACE in the mortgage loan purchase agreement regarding the credit quality and characteristics of the loans it sold to ACE. After several borrower defaults and delinquencies on individual mortgages, the loans in the trust were examined and certificateholders discovered that 99% failed to comply with DBSP’s representations. Consequently, two certificateholders served a repurchase demand on DBSP. The time to comply with this demand, however, did not expire before the certificateholders filed a summons with notice for breach of contract. In this first action, DBSP’s motion to dismiss was granted. After the statute of limitations expired and the appeal of the first action was pending, HSBC initiated the current action to substitute as plaintiff under CPLR 205(a) savings provision, which would permit HSBC to commence a new action for the same breaches despite the expired statute of limitations. DBSP moved to dismiss the action contending that CPLR 205(a) was inapplicable on two bases: (1) HSBC was not a “plaintiff” under the meaning of the provision and (2) the prior action was terminated for being untimely. In opposition, HSBC argued that 205(a) was applicable and that the prior action was not dismissed as untimely.
Ultimately, the court granted DBSP’s motion to dismiss on the basis that HSBC was not a “plaintiff” under 205(a). The court reasoned that the benefit of CPLR 205(a) is “explicitly and exclusively bestowed on the plaintiff who prosecuted the initial action” except where the successor to the claim appears in “a representative capacity akin to that of an administrator who succeeds to a decedent’s own cause of action.” Here, HSBC, the new trustee plaintiff, did not “merely succeed” to the original certificateholder plaintiffs’ cause of action because the certificateholders never had standing under the Pooling and Servicing Agreement (“PSA”) to bring a claim against DBSP. Indeed, the PSA specifically authorized the trustee, HSBC, to bring claims against DBSP. Thus, HSBC was not a “plaintiff” entitled to benefit from 205(a) because HSBC and the certificateholders did not have commensurate legal authority.
Second, the court held that HSBC’s resort to 205(a) was available notwithstanding the dismissal of the first action for a failed condition precedent. The court explained that DBSP’s failure to comply with the repurchase demand was correctly characterized as a procedural prerequisite to suit, which does not delay accrual of a claim, not a substantive condition precedent, which a party must satisfy before a cause of action can even exist. Therefore, DBSP’s failure to comply with the repurchase demand condition precedent did not render the first action “untimely” and does not bar refilling of the second action under 205(a).
Accordingly, the court granted DBSP’s motion to dismiss.
Ace Securities Corp., HOME EQUITY LOAN TRUST, by HSBC BANK USA v. DB Structured Products Inc., 3/29/16 (Friedman, J,).