Commercial Division Blog

Posted: May 30, 2017 / Categories Commercial, Contracts, Standing

When Plaintiffs Sold Bonds Their Tort Claims Automatically Transferred to the Purchaser

On May 15, 2017, Justice Bransten of the New York County Commercial Division issued a decision in One William Street Capital Management L.P. v. U.S. Education Loan Trust IV, LLC, 2017 NY Slip Op. 31079(U), holding that the plaintiffs lacked standing because when they their sold bonds, their tort claims automatically were transferred to the purchaser, explaining:

Unless expressly reserved in writing, a transfer of any bond shall vest in the transferee all claims or demands of the transferrer, whether or not such claims or demands are known to exist, (a) for damages or rescission against the obligor on such bond, (b) for damages against the trustee or depositary under any indenture under which such bond was issued or outstanding, and (c) for damages against any guarantor of the obligation of such obligor, trustee or depositary. Under § 13-107(1), when a bond is sold, the buyer receives exactly the same claims or demands as the seller held before the transfer. Such a sale thus automatically assigns the seller's bond-related claims to the buyer whether or not those claims were known to exist at the time of transfer.

As Defendants contend, cases applying General Obligations Law § 13-107(1) as interpreted by the Bluebird court make no distinction between bond-related contract claims and bond-related tort claims.

The cases cited by Plaintiffs in opposition do not necessitate a different conclusion. For example, the primary case relied upon by Plaintiffs, Commonwealth of Pennsylvania Public School Employees' Retirement System v. Morgan Stanley & Co., 25 N.Y.3d 543 (2015), is distinguishable on the facts. In Commonwealth, holders of mortgage-back securities sued a placement agent and several ratings agencies for fraud when the securities lost value during the credit crisis. The Court of Appeals concluded that the plaintiffs, who purchased a portion of the securities from previous holders, did not have standing to sue for fraud committed against the previous securities holders because those fraud claims were not automatically assigned to plaintiffs upon their purchase of the securities. There, because the defendants were placement agents and ratings agencies rather than obligors, trustees, or depositories of the securities, General Obligations Law 13-107's automatic assignment rule did not apply. Thus, the Commonwealth court was left to apply New York common law, which contains no independent doctrine of automatic assignment.

By contrast, here, Defendant BNYM is the Trustee of the Notes, and Defendant EL T is the issuer and original obligor of the Notes, As such, there is no doubt that BNYM and ELT are directly subject to § 13-107(l)'s automatic assignment rule. The Court finds Plaintiff's citation to In re Nucorp Energy Sec. Litigation., 772 F .2d 1486, 1493 (9th Cir. 1985) to be similarly unpersuasive because Nucorp relied on reasoning rejected by the New York Court of Appeals in Bluebird. In Nucorp, the Ninth Circuit declined to dismiss the plaintiff's fraud claims under New York's General Obligations Law § 13-107 when the plaintiff sold the bonds underpinning its suit, declaring that such a dismissal would remove the remedy from those to whom the statute provides it, i.e., those who were defrauded, by gratuitously giving it to those who were not defrauded and have suffered no injury under the securities law. However, in reversing a First Department decision which cited to Nucorp for this very proposition, the Court of Appeals subsequently held that under § 13-107(1), purchasers of bonds may assert any claims which the sellers could have asserted whether or not the transferees themselves suffered any actual injuries. Bluebird thus expressly rejected the notion that General Obligations Law § 13-107 excludes tort claims from its automatic assignment rule out of a concern that the purchaser of the bonds will be unable to show actual injury. Plaintiffs reliance on Quadrant Structured Prods. Co., Ltd. v. Verlin, 23 N.Y.3d 549 (2014) for the proposition that§ 13-107(1) distinguishes between contract claims on the bond and non-contract claims related to the bond is similarly unavailing. In Quadrant, the plaintiff sued the issuer of debt instruments for alleged wrongs surrounding the plaintiffs purchase of the debt, alleging causes of action based on contract, tort, and state statute. The defendant moved to dismiss, arguing that a no-action clause in the parties' contract barred all of plaintiffs' claims relating to the purchased debt. The Quadrant court applied principles of contract interpretation to determine that, because the no-action clause explicitly mentioned contract claims, the clause barred only contract based claims but permitted by implication common law and statutory claims.

As an initial matter, the Court notes that Quadrant is distinguishable because there, the Court of Appeals applied canons of construction to a provision of the specific contract at issue in that case, where here the Court is asked to construe the language of a New York state statute, General Obligations Law§ 13-107(1). The Court further declines to extend the logic of that case to apply to § 13-107(1) because, on review, the Court of Appeals decision in Bluebird forecloses any such application. York wants to make another attempt at conforming its rule to other jurisdictions or retain it in its present fonn is a decision for the Legislature. Like the contract at issue in Quadrant, § 13-107(1) by its language applies to claims for damages or rescission against the obligor on such bond. However, the Bluebird court described § 13-107(1) as applying more broadly to bond-related claims. Thus, while the phrase on such bond might otherwise restrict the statute to contract claims on the Indenture itself, the Bluebird Court nonetheless made it eminently clear that § 13-107(1) provides the purchaser with exactly the same claims or demands as the seller had before the transfer even if those claims are merely related to the bonds at issue or the Indenture which created them. Plaintiffs proposed application of Quadrant's reasoning to this case would thus impermissibly contradict Bluebird's binding interpretation of§ 13-107(1), and does not withstand scrutiny.

Based on the foregoing analysis, the Court concludes that, pursuant to General Obligations Law § 13-107(1), Plaintiffs' standing to bring Note-related tort claims against BNYM and EL T was automatically transferred to the Notes' purchaser upon sale on January 15, 2016.

(Internal quotations and citations omitted).