Commercial Division Blog

Posted: January 9, 2017 / Categories Commercial, Contracts

RMBS Issuer's Obligation to Cure Triggered by its Discovery of Defects; Notice Unnecessary

On December 29, 2016, the First Department issued a decision in U.S. Bank N.A. v GreenPoint Mortgage Funding, Inc., 2016 NY Slip Op. 08968, holding that an RMBS issuer's obligation to cure defective loans was triggered by its becoming aware of the defects and that it was unnecessary for the RMBS trustee to give notice for the claims to arise, explaining:

Under MLSA § 7.03, GreenPoint's obligation to cure a nonconforming loan is triggered in one of two ways. One way is if GreenPoint discovers on its own that a loan it sold breached the representations and warranties contained in the governing documents. The other way is if it is notified by the servicer of a nonconforming loan. We have recognized that these alternative contractual obligations give rise to independent, separate claims for breach of contract. In either case, GreenPoint is contractually entitled to a 60-day period in which to cure its default, presumably so litigation can be avoided. GreenPoint may replace the defective loan with a compliant one, but if it does not replace the loan within the 60-day cure period, then, under the repurchase protocol, GreenPoint must repurchase the defective loan.

Regardless of when GreenPoint discovers a breach or is notified of the nonconforming mortgage, the breach of contract cause of action accrues on the date of the closing of the underlying transaction, which is when the representations and warranties were made. This action was timely brought within six years after the date of closing.

Central to this appeal is whether the notice provision in the repurchase protocol applies to contract claims where a defendant itself knows about the nonconforming mortgages. In other words, is a breach notice still required when the contract claim is predicated on nonconforming mortgages that defendant itself discovered? Relying on the terms of the MLSA repurchase protocol, we find that it would have been wholly illogical for plaintiff to be required to notify GreenPoint about the existence of nonconforming mortgages that GreenPoint already knew about or would have discovered through its own due diligence. For these claims, no precommencement breach notice was necessary. The terms of the repurchase protocol provide that the cure period is triggered upon discovery by or notice to GreenPoint. Thus, this action, to the extent it alleges that GreenPoint's obligation to cure was triggered by its own discovery of nonconforming mortgages, but no cure was effected, is not only timely, but it also may proceed regardless of the validity of the late breach notices.

(Internal quotations and citations omitted) (emphasis added).