On February 28, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in Fernie v. Wincrest Capital Ltd., 2019 NY Slip Op. 30510(U), granting a forum non conveniens dismissal, explaining:

Ordinarily, nonresidents are permitted to enter New York courts to litigate their disputes as a matter of comity. However, the common-law doctrine of forum non conveniens permits a court to stay or dismiss such actions where it is determined that the action, although jurisdictionally sound, would be better adjudicated elsewhere. The burden rests upon the defendant challenging the forum to demonstrate relevant private or public interest factors which militate against accepting the litigation and the court, after considering and balancing the various competing factors, must determine in the exercise of its sound discretion whether to retain jurisdiction or not. Among the factors to be considered are the burden on the New York courts, the potential hardship to the defendant, and the unavailability of an alternative forum in which plaintiff may bring suit. The court may also consider that both parties to the action are nonresidents and that the transaction out of which the cause of action arose occurred primarily in a foreign jurisdiction.

First, the potential hardship on the various Defendants weighs in favor of dismissal. The Directors are all long-time permanent residents of the Bahamas. FJC affirmed in a written affirmation accompanying the motion that travel to New York to defend this lawsuit would impose a personal hardship on him due to a serious medical condition for which he is currently being treated. Thus, there is potential hardship on the Wincrest Defendants in forcing them to litigate this action in New York.

Second, the Bahamas is an available alternative forum in which Plaintiff may bring suit. Plaintiff and the Directors are all domiciled in the Bahamas. Defendant Wincrest is a Bahamian corporation with its principal place of business in the Bahamas. The nexus of the alleged tortious conduct occurred in the Bahamas. Further, Defendants Press Management and HedgePort have expressly consented to be sued in the Bahamas. Thus, the availability of the Bahamas as an alternative forum favors dismissal.

Third, both Plaintiff and the main Defendants in this action are residents of the Bahamas. Five of the seven parties in the action are domiciled in the Bahamas. The claims against the Wincrest Defendants are undoubtedly at the center of this lawsuit, as opposed to the more nominal conspiracy and aiding and abetting causes of action levied against Press Management and HedgePort. Thus, the Bahamian residency of the majority of the parties weighs in favor of dismissal on forum non conveniens grounds.

Fourth, litigation in New York would impose at least a minor burden on the Court due to the applicability of Bahamian law. The applicability of foreign law is an important consideration in determining a forum non conveniens motion and weighs in favor of dismissal.

Finally, this is a case primarily between Bahamian parties involving a dispute over the internal affairs of a Bahamian corporation. This Court, in the interest of comity, defers to the Bahamian interest in resolving that country’s own corporate governance issues. For these reasons, the Court grants Defendants’ motions to dismiss for forum non conveniens.

(Internal quotations and citations omitted).

Disputes regarding commercial contracts involving international parties end up being heard in New York courts. Even if the court has the power to assert jurisdiction of the parties, it can, under the forum non conveniens doctrine discussed above, dismiss the dispute so it can be heard in a forum that is more convenient for the parties. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether New York is the appropriate forum in which a dispute should be heard.

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On March 1, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in Stone & Broad Inc. v. Nextel of N.Y., Inc., 2019 NY Slip Op. 30527(U), dismissing common-law indemnification claims for lack of vicarious liability or fault, explaining:

Nextel argues that the Second Cause of Action must be dismissed because Stone’s common law indemnity claim cannot stand without proof of two critical elements: (1) vicarious liability by Stone for Nextel’s conduct; and (2) lack of fault on Stone’s part. Nextel correctly notes that the Landlord in the underlying action sued Stone for breach of its contractual duty under the Over Lease to return the premises in good condition. The Landlord did not seek to hold Stone vicariously liable for Nextel’s allegedly defective installation in that action, and Nextel was not a named party. Rather, the Landlord claimed that Stone itself had breached the Over Lease by allowing the subtenant to contract with Nextel to have equipment installed without first securing the consent of the Landlord and without ever providing notice as required by the Over Lease. Citing cases such as Dormitory Auth. of State of New York v Scott, 160 AD2d 179, 181 (1st Dep’t 1990), Nextel asserts that indemnification is not available for a party such as Stone who is charged not with vicarious liability for Nextel, but with its own breach of contract. Indeed, Nextel does not even have a relationship with Stone, as Nextel’s contract was with defendant Guliano-Park 88 Broad Street, Inc. (“GP). Stone remains free to pursue its claims against its subtenant GP, which may well make Stone whole for any damage caused by the Nextel equipment, and GP in tum may then be able to pursue any cross-claim it may have against Nextel.

Turning to the second prong for indemnification, Nextel cites Trustees of Columbia Univ. v Mitchell/Giurgola Assocs., 109 AD2d 449, 453 (1st Dep’t 1985), to argue that Stone, who itself participated at least to some degree in the wrongdoing, cannot receive the benefit of the doctrine of common law indemnification. Further, the $750,000 settlement at issue undeniably covered claims for which Nextel had no involvement, such as Stone’s alleged nonpayment of rent and fire damage allegedly caused by a different party.

Stone in opposition attempts to disown any fault, claiming that Stone’s subtenant had assumed Stone’s obligations relative to the Landlord and that the damage to the building was, in any event, caused by the negligent installation of Nextel’s equipment and not by Stone’s failure to notify the Landlord of the work and obtain consent. Stone further argues that the alleged liability of some other defendants for a portion of the settlement is not a bar to indemnification. Stone’s arguments, as well as its attempts to distinguish Nextel’s cases, fail. The two criteria for indemnification — vicarious liability by Stone for Nextel’s conduct and lack of fault on Stone’s part — have not and cannot be alleged. Indemnity involves an attempt to shift the entire loss from one who is compelled to pay for a loss, without regard to his own fault, to another party who should more properly bear responsibility for that loss because it was the actual wrongdoer. Such is not the case here. Therefore, Nextel is entitled to dismissal of the Second Cause of Action asserted against it by Stone, even though Nextel must remain a party to the case at this point based on the cross-claims asserted by various co-defendants.

(Internal quotations and citations omitted).

We frequently litigate issues relating to the advancement or indemnification of litigation expenses such as attorneys’ fees to corporate officers, directors and employees, as well as claims for common law indemnification or contribution as is described in this decision. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a situation where you may be held liable for someone else’s negligence.

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On March 5, 2019, the First Department issued a decision in Bliss World LLC v. 10 W. 57th St. Realty LLC, 2019 NY Slip Op. 01509, holding that a tenant was not entitled to a Yellowstone injunction when it could not cure the lease breaches, explaining:

The purpose of a Yellowstone injunction, which tolls the period in which a tenant may cure a claimed violation of the lease, is for a tenant to avoid forfeiture after a determination against it has been made on the merits, because the tenant will still have an opportunity to cure.

A necessary lynchpin of a Yellowstone injunction is that the claimed default is capable of cure. Where the claimed default is not capable of cure, there is no basis for a Yellowstone injunction. Here, the claimed defaults are the tenant’s failure to procure insurance and improper assignment of the lease. The tenant provides various steps that it will take to cure if it is ultimately found to be in material violation of the insurance provisions of the lease. None of these proposed cures involve any retroactive change in coverage, which means that the alleged defaults raised by the landlord are not susceptible to cure.

With respect to the assignment of the lease, although the tenant has generally stated that it is willing to cure any assignment violation, it does not explain how it will undo the assignment or indicate whether it is willing or able to do so. Although some of our decisions have indicated that seeking late consent from the landlord remains a cure in assignment cases, even were that theoretically true, there is no claim made here that this tenant would pursue that cure.

There is an ongoing dispute between the parties regarding whether the landlord’s claimed defaults are meritorious, either because they are not really defaults or they are not sufficiently substantial. We do not resolve those disputes. The denial of a Yellowstone injunction does not resolve the underlying merits of disputes about whether there is any default warranting termination of the lease in the first instance. Consequently, it is not necessary to resolve those issues in the context of whether a Yellowstone injunction is warranted. A reversal in this case does not relieve the landlord of proving the bona fides of the claimed default or prevent the tenant from defending itself. These disputes will be resolved either in connection with the complaint and counterclaim in this action or in a subsequently commenced commercial summary holdover proceeding.

(Internal quotations omitted).

We litigate Yellowstone injunctions–a motion to prevent a landlord from evicting a commercial tenant for defaults under the lease–for both landlords and tenants. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding the termination of a commercial lease because of a default under the lease.

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On February 28, 2019, the Third Department issued a decision in Galasso v. Cobleskill Stone Prods., Inc., 2019 NY Slip Op. 01483, holding that a business valuation was not protected by the attorney-client privilege, explaining:

The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship. The party asserting the privilege bears the burden of establishing that the communication at issue was between an attorney and a client for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship and that the communication was predominately of a legal character. The purpose of the privilege is to ensure that one seeking legal advice will be able to confide fully and freely in his or her attorney, secure in the knowledge that his or her confidences will not later be exposed to public view to his or her embarrassment or legal detriment. Generally, communications made in the presence of third parties, whose presence is known to the client, are not privileged. However, statements made to the agents or employees of the attorney or client, or through a hired interpreter, retain their confidential (and therefore, privileged) character, where the presence of such third parties is deemed necessary to enable the attorney-client communication and the client has a reasonable expectation of confidentiality.

. . .

[W]e are unpersuaded by plaintiff’s contention that the valuation report was protected by attorney-client privilege. Although MPI was hired by plaintiff’s counsel and the agreement between MPI and plaintiff’s counsel states that its communications would be confidential, the primary purpose for which MPI was hired was to appraise plaintiff’s stocks in defendant for estate tax filing purposes. In fact, the instant action was not commenced until after MPI expressed “serious and substantial concerns” upon completion of its appraisal. Therefore, the mere fact that MPI’s report now supports plaintiff’s legal action does not eliminate the fact that the report was not initially done for legal purposes. In fact, during a court conference, plaintiff confirmed that the valuation report did not include any legal information, nor did it disclose plaintiff’s confidences. Thus, given that the primary purpose of MPI’s valuation report was for estate tax purposes and is not of a legal character, Supreme Court properly held that it was not protected by the attorney-client privilege. We also reject plaintiff’s assertion that the Kovel privilege attaches to the valuation report because the purpose of the report was not to facilitate or clarify communications between plaintiff and his attorneys.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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On February 28, 2019, the First Department issued a decision in Rizack v. Signature Bank, N.A., 2019 NY Slip Op. 01494, holding that a claim was time-barred because it was not assigned to the plaintiff until after the statute of limitations had run, explaining:

In September 2007, West End Financial Advisors LLC entered into a $200 million credit and security agreement with the German Bank then known as WestLB AG. Two months later, as provided for in the credit agreement, WestLB entered into an interest reserve account agreement (IRA agreement) with defendant Signature Bank. Plaintiff alleges that, from early 2008 to January 2009, defendant permitted West End’s principal to make transfers out of the interest reserve account in breach of the IRA agreement.

In 2011, WestLB entered into an assignment agreement with West End where it appeared to assign all claims it held “in connection with” the credit agreement “and the other Transaction Documents” as defined in the credit agreement. This assignment, however, was explicitly amended and restated in a 2014 assignment. The 2014 assignment limited the claims actually assigned to those held in connection with the credit agreement. The language of this 2014 assignment unambiguously limits the claims transferred to the credit agreement, and there is no evidence in the assignment language that the parties intended to transfer any of WestLB’s claims under the IRA agreement. Accordingly, plaintiff did not possess or have any legal rights to the IRA agreement claim when he filed the original complaint in December 2014. Therefore, he lacked standing at the commencement of the case.

In July 2015, realizing that the 2014 assignment did not transfer the IRA agreement breach of contract claim, the parties explicitly transferred this claim. Plaintiff’s lack of standing at the commencement of this action was not cured by this subsequent assignment of the claim.

Moreover, the six-year statute of limitations for all claims alleging breach of the IRA agreement expired in January 2015. As such, the allegations in the second amended complaint were time-barred.

(Internal quotations and citations omitted).

New York law allows the owner of a legal claim to assign it someone else to prosecute. However, when an entity that owns a claim by assignment attempts to enforce it, it is not unusual for there to be litigation over whether claim was properly assigned under New York law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a claim that has been assigned.

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On February 28, 2019, the First Department issued a decision in Free People of PA LLC v. Delshah 60 Ninth, LLC, 2019 NY Slip Op. 01505, holding that a lease’s rent credit was an unenforceable penalty, explaining:

The trial court correctly determined, giving due consideration to the nature of the contract and the circumstances, that the rent credits provision in the parties’ lease constituted an unenforceable penalty. The rent credit sought by plaintiff as liquidated damages under the lease agreement was grossly disproportionate to its estimated and actual loss, creating a windfall for plaintiff, and the damages flowing from the breach were readily ascertainable at the time the parties entered into the lease.

(Internal citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, agreeing beforehand on the damages that will result from a breach of contract does not always result in an enforceable agreement. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.

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On February 26, 2019, the First Department issued a decision in L.Y.E. Diamonds, Ltd. v. Gemological Inst. of Am., Inc., 2019 NY Slip Op. 01360, holding that a defamation claim was barred by qualified privilege, explaining:

The motion court correctly dismissed, pursuant to CPLR 3211(a)(1), the defamation and trade libel causes of action on the ground that the statements at issue were protected by a qualified privilege.

GIA and Moses produced client agreements that conclusively demonstrate that they made the challenged statements in the discharge of some public or private duty, legal or moral, or in the conduct of their own affairs, in a matter where their interest was concerned. In the agreements, plaintiffs acknowledged GIA’s stated duty to serve the public and to maintain its trust in the diamond trade, acknowledged that the duty could be executed by, among other things, public disclosure of information about the diamonds that GIA inspected, including GIA’s reasonable suspicions about the quality of the diamonds, and further acknowledged that GIA could make such public disclosures at its discretion and without their prior authorization.

. . .

Plaintiffs argue that, even where a qualified privilege has been conclusively established, a plaintiff should have an opportunity to show common-law or constitutional malice to defeat it. They raise the reasonable concern that holding the plaintiff to the allegations in the complaint, where the defendant has established the affirmative defense on a pre-answer motion to dismiss, deprives the plaintiff of an adequate opportunity to defeat the affirmative defense. However, holding these particular plaintiffs to the allegations in their amended complaint does not present the risk of unfair surprise. As a result of motion practice on the original complaint, plaintiffs were aware of defendants’ qualified privilege arguments. Yet, rather than amending the complaint to allege facts that would establish malice, they continued to assert only the most conclusory allegations of malice. Plaintiffs rely on Whelehan v Yazback (84 AD2d 673 [4th Dept 1981]). However, this Court has determined that conclusory allegations do not suffice.

Nor do the arbitration proceedings buttress the malice allegations, as those proceedings post-date the statements at issue and shed no light on whether defendants made the statements with the requisite disregard for the truth. In any event, plaintiffs acknowledge that the arbitration resulted in a monetary award against them.

Plaintiffs failed to show that the court applied an incorrect standard in determining the motion to dismiss the amended complaint. Their argument consists of conclusory statements without supporting facts, such as the assertion that it was “entirely possible” that defendants sought to defame them with malice. Nor do these conclusory statements suffice to justify further discovery.

(Internal quotations and citations omitted).

Civil litigation can involve claims that cause real reputational harm, but not every statement can be the subject of a defamation claim. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about whether statements about you or your business can be the basis for a claim for defamation.

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On February 20, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Julius Silvert, Inc. v. Open Kitchen 17, LLC, 2019 NY Slip Op. 30394(U), holding that an attorney fee provision entitling the plaintiff to one third of the award to it for attorneys’ fees was unenforceable, explaining:

By contrast, Plaintiffs demand for $14,119.42 in attorney’s fees, based solely on the provision in the Agreement quoted above, does not warrant summary judgment in its favor. Contrary to Plaintiffs claims, the fact that the Agreement provides for a 33 1/3% fee does not, in and of itself, settle the issue..

Fixing attorney’s fees at an arbitrary percentage of an unknown amount (i.e., “the balance due”) acts as a kind of liquidated damages provision, one which may constitute an unenforceable penalty.

In Equitable Lumber, the Court of Appeals held that this type of attorney’s fee provision may be unenforceable under the Uniform Commercial Code if it does not relate to the normal contingent fee charged by attorneys in the collection context, or is so unreasonably large that it serves as a penalty rather than a good faith attempt to pre-estimate damages. Although a number of cases have permitted the party seeking fees under such a fixed-percentage provision to obtain reasonable fees that are actually incurred, the Court in Equitable Lumber stated that in the proper case a provision that one party to a contract pay the other party’s attorney’s fees in the event of breach may be unconscionable.

Moreover, as is expressly provided in the Uniform Commercial Code: If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

In this case, Plaintiff has submitted no evidence showing that the attorney’s fees it seeks relate in any way to the legal services actually rendered. Instead, Plaintiffs claim rests entirely on the face of the Agreement. And the Agreement seems particularly susceptible to abuse here. Not only does the fee provision exact a large and seemingly arbitrary percentage of any unpaid balance, it does so whether or not suit is instituted, ignoring the nature of the work done by counsel and thus the costs incurred by Plaintiff. Even if a suit is instituted, the nature of the work required by an attorney presumably will vary depending on the circumstances. For example, a sizeable unpaid balance may be recovered in a straightforward suit, while a smaller sum may well implicate thornier legal issues and prompt a more protracted, costlier action. The Agreement here makes no such distinctions. Without more, the arbitrary figure in the Agreement does not establish Plaintiffs right to a 33 1/3% fee as a matter of law.

(Internal quotations and citations omitted).

It is not uncommon for contracts to provide that the prevailing party in a suit arising out of the contract is entitled to an award of its attorneys’ fees. Litigating for fees can be hard–both because of the high burden you sometimes must meet to be entitled to fees and because it is important to avoid the pitfall of getting an award of fees that is less than what it cost to move for fees. But as this decision shows, deciding on the amount of fees beforehand might not be enforceable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are litigating an attorney fee award.

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On February 14, 2019, the First Department issued a decision in Cohen v. Saks Inc., 2019 NY Slip Op. 01162, holding that a stipulation to support a class action settlement was unenforceable, explaining:

While plaintiffs’ promise to support the stipulation and cooperate in seeking court approval is not an unenforceable statement of intention to do something in the future, it is nonetheless unenforceable. Plaintiffs and their counsel owe fiduciary duties to absent class members and thus cannot be required to support a settlement that is contrary to the best interests of those class members.

(Internal citations omitted).

Class actions are a way for one member of a large group of potential plaintiffs to vindicate the group’s rights. As this decision shows, while the class representatives and their lawyers litigate the class action, they owe a duty to all class members. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a class action.

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On February 15, 2019, Justice Friedman of the New York County Commercial Division issued a decision in HSBC Bank USA, N.A. v. Merrill Lynch Mtge. Lending, Inc., 2019 NY Slip Op. 30358(U), clarifying the rules for the accrual of RMBS failure-to-notify put-back claims, explaining:

The court adheres to its holding that accrual of a failure lo notify cause of action requires both the defendants discovery of breaches and its failure to give prompt written notice of the breaches to the trustee.

On the prior motion to dismiss, Countrywide argued that HSBC’s failure to notify cause of action accrued at the latest on October 1, 2007, prior to the limitations period, at the time it allegedly made its last sale of loans to the sponsor. In support of this contention, Countrywide cited the allegation of the complaint that Countrywide had knowledge by that date of the falsity of the representations and warranties it made to the sponsor about the loans, as a result of its origination of the loans. In opposition to the motion to dismiss, HSBC disputed not only that October 1, 2007 was the date of the last sale of the loans, but also that October 1, 2007 was the date as of which Countrywide made its representations knowledge that such representations and warranties had been breached. HSBC also argued that notice within two months of discovery of a breach is prompt as a matter of law and that, even assuming that Countrywide made representations and warranties and had knowledge of breaches by October 1, 2007 (i.e., more than six years before the assertion of the failure to notify claim), notice given two months later (i.e., within the six-year limitations period) would still have been prompt.

The prior decision held that Countrywide failed to submit evidence sufficient to show that Countrywide did not discover breaches of representations and warranties between October 1, 2007 and the closing date of the securitization on October 31, 2007, and therefore that there wen.: no discoveries after October 1 that may benefit from the Tolling Agreement in effect between October 16, 2013 and May 18, 2016. Further, the prior decision held that the complaint pleaded that Countrywide discovered breaches of representations and warranties through post-closing internal quality control and review processes, and that the trustee’s failure to notify cause of action against Countrywide was maintainable based on these allegations as to post-dosing discovery. It was in this context that the court found that the complaint pleaded a timely cause of action against Countrywide to the extent that it was based on Countrywide’s discovery of such breaches, and failure to provide prompt written notice thereof- within the six-year limitations period preceding the assertion of the failure to notify cause of action, accounting for the tolling period.

It was not the court’s intention to suggest that discovery and provision of notice of the breaches must both occur within the limitations period. Rather, having found that the complaint pleaded timely failure to notify claims based on discovery within the limitations period, the court did not reach HSBC’s argument that the complaint also pleaded timely failure to notify claims based on discovery prior to the limitations period and failure to give notice within the limitations period, provided that notice within the limitations period would still have been prompt In particular, the court did not reach HSBC’s argument that even if Countrywide discovered breaches on an October 1, 2007 loan sale date, prior to the closing and prior to the limitations period, the failure to notify claims were also timely to the extent that they were based on Countrywide’s failure to give notice up to two months later, within the limitations period.

Nor could the court have determined the timeliness of this claim on the record of the motion to dismiss. The record of the prior motion did not identify the specific dates of the loan sales, and there were factual and legal disputes as to the dates on which Countrywide made its representations and warranties and therefore as to when the breaches of the representations and warranties occurred and Countrywide could have known of such breaches. (See supra, at 3.) In addition, HSBC failed to offer any explanation as to how, if Countrywide made representations on or before October 1 and had know ledge of breaches as of October 1, notice up to two months later could have been considered prompt.

The authority on which HSBC relied on the prior motion, and on which it continues to rely, does not support its contention that notice is prompt as a matter of law if given within two months of the knowledge of the breach. The two cases cited by HSBC in its opposition to the motion addressed the promptness of notice given by a trustee as a condition precedent to suit against a defendant securitizer or loan seller for repurchase of loans, and not, as here, the notice to be provided by the defendant to the trustee. HSBC has not discussed the differing purposes for which trustees and the various other parties involved in a securitization are obligated to give notice. Nor has HSBC discussed, or submitted legal authority that addresses, the impact of these differing purposes on the time by which notice must be given in order to be considered prompt and, in the case of a securitizer’s or originator’s obligation, the time by which the trustee’s failure to notify cause of action will accrue if notice is not given.

In the interest of avoiding confusion, however, the court modifies the prior decision to state explicitly that the prior decision did not reach HSBC’s argument that the complaint pleaded timely failure to notify claims based on the defendant securitizer’s or originator’s discovery of breaches of representations and warranties prior to the limitations period and failure to give notice within the limitations period, provided that notice within the limitations period would still have been prompt. The prior decision therefore does not preclude such a claim in future on a fully developed supporting factual record and on supporting legal authority as to the promptness of such notice.

Also in the interest of avoiding confusion, the court notes that this claim was not at issue in its bellwether decision in the coordinated Part 60 RMBS litigation on the standard for accrual of a failure to notify cause of action. The prior decision in the instant action held that the accrual rule for a failure to notify claim set forth by this court in FHFA/Morgan Stanley applied to HSBC’s failure to notify claims in this action. The FHFA/Morgan Stanley decision held that, like other breach of contract claims, the failure to notify claim does not accrue until the time of the breach, and that a defendant does not breach its notification obligation until it discovers a breach of representations and warranties and fails to give prompt written notice to the Trustee.

The defendant-securitizer in each of the actions decided by FHFA/Morgan Stanley argued that failure to notify claims are subject to the same statute of limitations as claims for breaches of representations and warranties, and accrue on the date on which the underlying representations and warranties are made. The Trustee contended that the earliest the breach of a notification obligation could have occurred–and the earliest the statute of limitations could have begun to run–is after the defendant discovered the defective loans but failed to notify the Trustee. The Trustee further contended that under the continuing obligation doctrine, it may assert claims for persistent failures to notify, regardless of when the defendant initially discovered the breaches, because the defendant continued to breach its duty to notify by continuing to fail to provide notice.

In FHFA/Morgan Stanley, the parties did not address the meaning of prompt notice or its proper interpretation in the RMBS context The court thus did not consider whether, or to what extent, the time of discovery differed from the time by which prompt notice must be provided, In holding that the Trustee had misconstrued the continuing obligation doctrine, the court stated that the Trustee’s claim for a breach of the notification obligation will be timely only if the defendant’s discovery occurred within the six-year period before the assertion of the failure to notify causes of action and that claims based on defendants’ discovery of breaches prior to this six-year period will not be timely. Such statements were made in the context of rejecting the Trustee’s apparent contention that, under the continuing obligation doctrine, its failure to notify claims would be timely regardless of when discovery occurred, based on the defendant’s ongoing failure to give notice of the discovery. Although these statements appear to equate the time of discovery with accrual of the fail me to notify claim, they were not intended to alter the accrual rule articulated earlier in the opinion. Nor should they be read to imply that a claim for failure to notify can accrue before the obligation to provide prompt notice is breached.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee’s prosecution of a put back action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.

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