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In re Part 60 Put-Back Litigation

Supreme Court of New York, First Department

January 17, 2017

In re: Part 60 Put-Back Litigation Federal Housing Finance Agency, etc., Plaintiff, Deutsche Bank National Trust Company, in its capacity as Trustee for the MSAC 2007-NC1 Trust, Plaintiff-Appellant,
v.
Morgan Stanley ABS Capital I Inc., Defendant-Respondent. In re: Part 60 Put-Back Litigation Federal Housing Finance Agency, etc., Plaintiff, Deutsche Bank National Trust Company, in its capacity as Trustee for the MSAC 2007-NC3 Trust, Plaintiff-Appellant,
v.
Morgan Stanley Mortgage Capital Holdings LLC, as successor-by-Merger to Morgan Stanley Mortgage Capital Inc., Defendant-Respondent.

          MoloLamken LLP, New York (Robert K. Kry of counsel), for appellant.

          Davis Polk & Wardwell LLP, New York (Brian S. Weinstein of counsel), for respondent.

          Acosta, J.P., Mazzarelli, Manzanet-Daniels, Webber, Gesmer, JJ.

         Orders, Supreme Court, New York County (Marcy S. Friedman, J.), entered April 20, 2016, which, insofar as appealed from, granted defendant's motions to dismiss, unanimously affirmed, with costs.

         The NC3 Trust

         The tolling agreement between nonparty National Credit Union Administration (NCUA) - a certificateholder in the NC3 Trust - and various Morgan Stanley entities - the sponsor of the securitization - states, "the Potential Claims do not include causes of action and claims by any person or entity that is not a party to this tolling agreement as set forth in the first paragraph, " i.e., any person or entity other than NCUA and Morgan Stanley. Hence, plaintiff is not an intended third-party beneficiary (see e.g. Fort Lincoln Civic Assn., Inc. v Fort Lincoln New Town Corp., 944 A.2d 1055, 1069 [DC App 2008]). (The NCUA tolling agreement is governed by District of [*2]Columbia law.)

         Plaintiff contends that we should infer that NCUA and Morgan Stanley intended to benefit plaintiff because it was the only one who could pursue a claim. That is incorrect. First, while certificateholders' rights to sue "upon or under or with respect to" the Pooling and Servicing Agreement (PSA) are limited (emphasis added), that is not the same as saying that only plaintiff (the trustee under the PSA) can pursue a claim. Second, the tolling agreement was not limited to claims under the PSA. To the extent NCUA had non-contract claims, they would not have been barred by the no-action clause in the PSA (see Quadrant Structured Prods. Co., Ltd. v Vertin, 23 N.Y.3d 549, 552 [2014]). Third, as a matter of fact, NCUA brought its own lawsuit.

         Because plaintiff cannot take advantage of the tolling agreement, its deadline to sue was May 31, 2013. On that date, Federal Housing Finance Agency (FHFA), as conservator for the Federal Home Loan Mortgage Corporation - an NC3 certificateholder - filed a summons with notice, purportedly on behalf of the trustee (i.e., plaintiff). On August 27, 2013, plaintiff first asked defendant to cure or repurchase defective loans. On November 6, 2013, plaintiff filed the complaint. Under similar circumstances, we have held that the trustee's claims are time-barred on standing grounds (see U.S. Bank N.A. v DLJ Mtge. Capital, Inc., 141 A.D.3d 431, 432-433 [1st Dept 2016]; Nomura Asset Acceptance Corp. Alternative Loan Trust v Nomura Credit & Capital, Inc., 139 A.D.3d 519, 520 [1st Dept 2016]; ACE Sec. Corp. v DB Structured Prods., Inc., 112 A.D.3d 522');">112 A.D.3d 522 [1st Dept 2013], affd 25 N.Y.3d 581');">25 N.Y.3d 581 [2015]).

         Citing Campbell v Hudson & Manhattan R.R. Co. (277 A.D. 731 [1st Dept 1951], affd 302 NY 902 [1951]), plaintiff contends that the above cases and the no-action clause in the PSA do not apply because FHFA commenced this action on behalf of the trustee. This argument is unavailing. Campbell said, "If a trustee under ... an indenture acts in bad faith, or, abdicating its function ..., declines to act at all, bondholders for themselves and others similarly situated may bring a derivative action in the right of the trustee .... In that event they are not subject to the limitations of" the no-action clause (277 A.D. at 734-735 [emphasis added]; see also Velez v Feinstein, 87 A.D.2d 309, 314 [1st Dept 1982], lv dismissed in part and denied in part 57 N.Y.2d 605 [1982]). FHFA did not allege that plaintiff (the trustee) had acted in bad faith or declined to act. In addition, FHFA failed to "set forth with particularity [its] efforts ... to secure the initiation of the action by the trustee[], or the reasons for not making such effort" (Velez, 87 A.D.2d at 316 [internal quotation marks omitted]).

         The NC1 Trust

         The tolling agreement between various HSH entities (at least one of which was a certificateholder in the NC1 trust) and various Morgan Stanley entities did not clearly establish HSH's and Morgan Stanley's intent to confer an immediate benefit on plaintiff (see e.g. State of Cal. Pub. Employees' Retirement Sys. v Shearman & Sterling, 95 N.Y.2d 427, 434-435 [2000]; LaSalle Natl. Bank v Ernst & Young, 285 A.D.2d 101, 108-109 [1st Dept 2001]). The word "representatives" simply will not bear the weight that plaintiff wants to put on it (see generally Matter of Westmoreland Coal Co. v Entech, Inc., 100 N.Y.2d 352, 358 [2003] ["The meaning of a writing may be distorted where undue force is given to single words or phrases"] [internal quotation marks omitted]).

         Plaintiff's arguments that (1) it is an implied intended beneficiary of the HSH-Morgan Stanley agreement because it is the only one who can recover and (2) the no-action clause does not apply to a derivative action are unavailing for the same reasons set forth relative to "The NC3 Trust, " supra.

         In light of the particular wording of the backstop obligation in this case, we find that plaintiff's demand on defendant was not a condition to defendant's performance; therefore, accrual of plaintiff's claim was not delayed (see ACE Sec. Corp., Home Equity Loan Trust, Series 2006-SL2 v DB Structured Prods., Inc., 25 N.Y.3d 581');">25 N.Y.3d 581, 597 [2015]; Deutsche Bank Natl. Trust Co. v Flagstar Capital Mkts. Corp., 143 A.D.3d 15, 22 [1st Dept 2016]). Unlike the situation in U.S. Bank, it was not a condition precedent to enforcement of defendant's backstop obligation that the ...


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