Commercial Division Blog
Assignee of Notes for Purposes of Collection Only Lacks Standing
On September 16, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Cortlandt St. Recovery Corp. v. Hellas Telecom., S.A.R.L., 2014 NY Slip Op. 24268, discussing the standing of an assignee of a note to bring an action to collect on the note.
In Cortlandt St. Recovery Corp., a set of four related actions concerning the payment of "notes issued in public offerings," the defendant moved to dismiss the complaint of plaintiff "Cortlandt Street Recovery Corp. (Cortlandt), an assignee for collection," on the ground that it lacked standing. The trial court both granted the motion and denied Cortlandt's motion to amend, explaining:
In moving to dismiss Cortlandt's claims on the ground that it lacks standing to maintain these actions, defendants argue, and Cortlandt does not dispute, that the PIK and the Sub Notes indentures both authorize only a "Holder" of Notes (Holder) or the trustee to maintain an action to recover on the Notes. Holder is defined in both indentures as: "with respect to any Note, the Person in whose name such Note is registered in the register maintained by the registrar pursuant to the provisions of this Indenture." "Definitive Note" is defined in both indentures as: "a certificated Note registered in the name of the Holder thereof . . . ." Cortlandt does not dispute that it is not a Holder of either the PIK or Sub Notes, and that the initial assignment to it was of the right to collect the amounts due on the Notes, and not an assignment either of the Notes or of title to or ownership of the claims.
In Cortlandt Street Recovery Corp. v Deutsche Bank AG (2013 WL 3762882, 2013 US Dist LEXIS 100741 [SD NY, 12CV9351, Oetken, J., 2013], appeal dismissed 2d Cir 2013]), the Court granted a motion to dismiss Cortlandt's action to recover on Subordinated Notes issued by Hellas II, based on Cortlandt's lack of standing. . . . . The Court concluded that because the assignment did not manifest the owners' intention to transfer title or ownership to Cortlandt, Cortlandt failed to satisfy the standing requirements of Article III of the Constitution, which provides that federal courts may decide cases or controversies.
New York does not have an analogue to Article III. However, the New York standards for standing are analogous, as New York requires the existence of an injury in fact — an actual legal stake in the matter being adjudicated. This requirement ensures that the party seeking review has some concrete interest in prosecuting the action which casts the dispute in a form traditionally capable of judicial resolution.
Under longstanding New York law, an assignee is the real party in interest where the title to the specific claim is passed to the assignee, even if the assignee may ultimately be liable to another for the amounts collected.
This doctrine is fully consistent with federal law under which an assignee for purposes of collection — i.e., an assignee who has promised to remit proceeds of the litigation to its assignor — has standing to bring suit, provided that the assignment transferred to the assignee title to the claims.
(Internal quotations and citations omitted) (emphasis added).
Cortlandt's lack of standing could not be cured by amendment. The court ruled that the deficiency was, as a general matter, curable, explaining:
Standing is an aspect of justiciability which, when challenged, must be considered at the outset of any litigation. The Court of Appeals has held unequivocally, albeit without elaboration, that a challenge to a party's standing was waived because it was not raised as an affirmative defense, or by way of motion to dismiss. The Court has, however, also noted that questions of standing of parties may be characterized as raising questions of subject matter jurisdiction. Subsequent intermediate appellate decisions on the issue are in conflict.
A number of decisions hold that lack of standing deprives the court of subject matter jurisdiction and is therefore incurable, based on the settled precept that lack of subject matter jurisdiction cannot be waived.
The weight of authority holds, however, that a defense of lack of standing may be waived. As this Department has reasoned: The question of subject matter jurisdiction is a question of judicial power: whether the court has the power conferred by the Constitution or statute, to entertain the case before it. Because New York's Supreme Court is a court of original, unlimited and unqualified jurisdiction, it is competent to entertain all causes of action. As the Second Department has similarly held: A court lacks subject matter jurisdiction when it lacks the competence to adjudicate a particular kind of controversy in the first place. Whether the action is being pursued by the proper party is an issue separate from the subject matter of the action or proceeding, and does not affect the court's power to entertain the case before it.
The Court of Appeals' decision in Lacks in fact supports the cases that have held that a claim of lack of standing may be waived. The issue before the Court, on the appeal of a determination of a defendant-wife's motion to vacate a judgment in a matrimonial action, was whether the plaintiff-husband's alleged failure to comply with statutory residence requirements deprived the Court of subject matter jurisdiction. The Court elucidated the concept of subject matter jurisdiction, stating that jurisdiction is a word of elastic, diverse, and disparate meanings. Although the Court noted that questions of mootness and standing may be characterized as raising questions of subject matter jurisdiction, it immediately went on to say: But these are not the kinds of judicial infirmities to which CPLR 5015 (subd [a], par 4) is addressed. That provision is designed to preserve objections so fundamental to the power of adjudication of a court that they survive even a final judgment or order. The Court further distinguished between a court's competence to entertain an action, absence of which deprives the court of subject matter jurisdiction, and its power to render a judgment on the merits, absence of which does not affect subject matter jurisdiction.
Here, following the predominant and more persuasive authority, the court holds that an objection to an assignee's lack of standing to recover on a note is curable or, put another way, is not so fundamental as to implicate the court's subject matter jurisdiction or power to hear an action on the note. Cortlandt's lack of standing to maintain this action under an assignment that gives it only a right of collection is therefore subject to cure.
(Internal quotations, elisions and citations omitted). However, the court went on to hold that the allegations in Cortlandt's proposed amended complaint did not establish that ownership of the claims had been assigned to it, and thus was insufficient.
Complex financial transactions sometimes result in complicated financial arrangements, such as the assignment to Cortlandt for collection only. As this decision shows, one danger of such complication is it can create a situation where the right to enforce an obligation is brought into doubt.