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Natixis Real Estate Capital Trust 2007-HE2 v. Natixis Real Estate Holdings, LLC

Supreme Court of New York, First Department

March 9, 2017

Natixis Real Estate Capital Trust 2007-HE2, etc., Plaintiff-Respondent,
Natixis Real Estate Holdings, LLC, Defendant-Appellant.

         Defendant appeals from an order of the Supreme Court, New York County (Marcy S. Friedman, J.), entered on or about July 2, 2015, which, insofar as appealed from, denied defendant's motion to dismiss the complaint pursuant to CPLR 3211.

          Davis & Gilbert LLP, New York (Bruce M. Ginsberg, Joseph Cioffi, James R. Serritella and Massimo Giugliano of counsel), for appellant.

          Quinn Emanuel Urquhart & Sullivan, LLP, New York (Andrew Dunlap, Philippe Z. Selendy, Maya D. Cater and Stephen Schweizer of counsel), for respondent.

          David Friedman, J.P., Dianne T. Renwick, Paul G. Feinman, Judith J. Gische, Barbara R. Kapnick, JJ.


          RENWICK, J.

         This appeal stems from a transaction involving residential mortgage backed securities (RMBS). Plaintiff, the administrator of the securitized trust, seeks to enforce the loan repurchase rights, more commonly referred to as putback rights, against defendant sponsor of the securitized transaction for breach of the representations and warranties defendant made regarding the quality of the mortgage loans. This action raises a number of issues that regularly recur in putback actions, including whether the action was timely commenced, whether or not the action is unripe for failing to comply with a condition precedent to commencement of the action, and whether plaintiff adequately pleaded a cause of action for breach of the representations and warranties. This action also raises an issue of first impression of whether enforcement of putback rights is within the exclusive domain of a RMBS's trustee so as to deny plaintiff Securities Administrator standing to commence this action.

         Factual and Procedural Background

         In its role as sponsor of the securitization that is at the core of this case, defendant Natixis Real Estate Holdings, Inc. (Natixis) purchased 4, 704 residential mortgage loans worth more than $877 million pursuant to a Mortgage Loan Purchase Agreement (MLPA). The MLPA contains numerous representations and warranties from the loan originators (Originators' Warranties) about the quality of the loans. Natixis then sold the loans to a passthrough deposit entity, Morgan Stanley ABC Capital I, Inc. (Depositor), pursuant to an Unaffiliated Seller Agreement (SA). In the SA, Natixis made several representations and warranties to the Depositor, which were separate and independent from those issued by the Originators in the MLPA.

         Morgan Stanley then deposited the loans, including its representation and warranties in the MLPA and SA, into a securitized trust pursuant to a pooling and servicing agreement (PSA). The parties to the PSA included Morgan Stanley, as Depositor, Deutsche Bank National, as the Trustee, and Wells Fargo, NA, as Securities Administrator. The individual mortgage loans served as collateral for the certificates issued by the Trustee, who paid principal and interest to certificate holders from the cash flow generated from the mortgage loan payments. Thus, the certificate holders made money when the borrowers made payments to the loans. The trust held legal title to the mortgages and the Trustee was responsible for servicing them. The servicing administrator is the trust's collection agent pursuant to the PSA.

         Putback actions are typically brought by a trustee on behalf of the trust (securitization vehicle) asserting claims of breach of contract (see 4C Commercial Litigation in New York State Courts § 91:9 at 888 [4th ed 2015]). In this case, however, it is the Securities Administrator who brings the breach of contract claims against the sponsor, Natixis [1]. The complaint alleges that the PSA transaction imposes an obligation upon Natixis to repurchase the loans because it breached the SA representations and warranties. In addition, plaintiff avers that Natixis had the "backstop" obligation to repurchase defective loans that breached the Originators' representations and warranties, once the Originators failed to cure or repurchase them. As indicated, the complaint alleges breaches of two sets of representations and warranties, each of which independently triggers a duty to repurchase the defective loans: (i) the warranties made by the Originators in the MLPAs and the Assignment and Recognition Agreements (Originator Warranties); and (ii) the warranties made by Natixis in the SA (SA Warranties).

         The Originator Warranties in the MLPAs include, among others, that "[n]o fraud, error, omission, misrepresentation, negligence or similar occurrence" had occurred on the part of any person; that borrowers "had a reasonable ability to make timely payments" on the mortgage; that each pool of loans complied with the relevant Originators' underwriting guidelines; and that "the information set forth in the mortgage loan schedule was true and correct[.]" According to the MPLA, the complaint continues, if any of these Originator Warranties were false, the relevant Originator was required to repurchase any affected loans within 60 days of the Originators' discovery or receipt of notice of that breach. As backstop duties, the PSA required Natixis to repurchase any loan that breached the MLPA representations and warranties if the Originators failed to repurchase the defective loans pursuant to the MPLA.

         Finally, the complaint avers that Natixis and the Depositor also executed the SA on the closing date. In the SA, Natixis transferred the loans to the Depositor and made the SA Warranties. The SA Warranties include, among other things, that no event had occurred that would render the Originators' warranties untrue, that the loans were not selected in a manner adverse to the trust; and that the loans complied with all applicable law. The PSA required Natixis to repurchase all loans that breach the SA's representations and warranties within 90 days of its discovery or receipt of notice of such breach.

         Natixis moved to dismiss the complaint arguing that plaintiff: 1) as Securities Administrator, lacked standing to sue; 2) failed to comply with certain conditions precedent prior to commencing the action; 3) failed to timely commence the action; and 4) failed to sufficiently plead a breach of contract claim based upon a breach of the SA representations and warranties. Supreme Court declined to dismiss the action (or any claim) on such grounds. We now affirm for the reasons explained below.



         We begin by examining the threshold question of standing. We find that Supreme Court properly held that the Securities Administrator has standing to prosecute this action. To be sure, we recognize that an RMBS trust is not unlike a typical common-law trust in which the trustee (rather than the trust itself, which is a legal fiction) holds the asset for the benefit of the certificate holders (who are the beneficiaries of the trust) (see Beck v Manufacturers Hanover Trust Co., 218 A.D.2d 1, 12 [1st Dept 1995). Under such legal structure, we agree with Natixis, that the trustee itself is recognized under New York Law as the party in interest for the purpose, among others, of ...

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