U.S. Bank Nat'l Ass'n v. DLJ Mortg. Capital, Inc.

• Citation: 33 N.Y.3d 72,122 N.E.3d 40,98 N.Y.S.3d 523
• Decision Date: 19 February 2019
• Docket Number: No. 7,7
• Parties: U.S. BANK NATIONAL ASSOCIATION, Solely in its Capacity as Trustee of the Asset Backed Securities Corporation Home Equity Loan Trust, Series AMQ 2006-HE7 (ABSHE 2006-HE7), Respondent, v. DLJ MORTGAGE CAPITAL, INC., Appellant.
• Court: New York Court of Appeals

33 N.Y.3d 72

122 N.E.3d 40

98 N.Y.S.3d 523

U.S. BANK NATIONAL ASSOCIATION, Solely in its Capacity as Trustee of the Asset Backed Securities Corporation Home Equity Loan Trust, Series AMQ 2006-HE7 (ABSHE 2006-HE7), Respondent,

v.DLJ MORTGAGE CAPITAL, INC., Appellant.

No. 7

Court of Appeals of New York.

February 19, 2019

Orrick, Herrington & Sutcliffe LLP, New York City (Barry S. Levin, John Ansbro, Richard A. Jacobsen, Paul F. Rugani, Daniel W. Robertson, Daniel A. Rubens and Matthew R. Shahabian of counsel) and Washington, D.C. (Robert Loeb and Randall C. Smith of counsel), for appellant.

Selendy & Gay PLLC, New York City (Philippe Z. Selendy, Andrew R. Dunlap, Yelena Konanova and Ryan W. Allison of counsel), and Kasowitz Benson Torres LLP, New York City (Hec- tor Torres, David J. Abrams and David J. Mark of counsel), for respondent.

Wachtell, Lipton, Rosen & Katz, New York City (Elaine P. Golin, Graham W. Meli, Jordan L. Pietzsch and David Shieh of counsel), for Securities Industry and Financial Markets Association, amicus curiae.

OPINION OF THE COURT

RIVERA, J.

U.S. Bank National Association in its capacity as Trustee of the ABSHE 2006 residential mortgage-backed securities (RMBS) trust seeks to sue DLJ Mortgage Capital, Inc. (DLJ), the sponsor and seller of the trust securitization, for alleged violations of representations and warranties regarding the quality of the loans contained in the trust. The initial action against DLJ was dismissed for failure to comply with a contractual condition precedent, without prejudice to refiling. DLJ asserts this was error as the court should have dismissed with prejudice.

As a general rule, under CPLR 205(a) a subsequent action may be filed within six months of a non-merits dismissal of the initial timely-filed matter. Here, we conclude that CPLR 205(a) applies to an RMBS trustee's second action when its timely first action is dismissed for failure to comply with a contractual condition precedent.

I. Factual and Procedural Background

DLJ purchased a group of residential mortgage loans from codefendant Ameriquest Mortgage Company, the loan originator, pursuant to a Mortgage Loan Purchase and Interim Servicing Agreement (MLPA). In the MLPA, Ameriquest made various representations and warranties regarding the general underwriting practices and quality of the individual loans. Defendants later entered a Reconstitution Agreement (RA) stating that all the provisions of the MLPA remain "in full force and effect." Under the RA, Ameriquest reiterated its representations and warranties regarding loan quality in substantially identical language "to and for the benefit of" the Trustee. DLJ sold the loans to nonparty Asset Backed Securities Corporation (ABSC). ABSC, DLJ, and U.S. Bank, among others, entered pooling and servicing agreement (PSA), establishing the underlying trust and ABSC conveyed its rights under the MLPA and RA to the Trustee.

As is typical of these agreements, the MLPA, RA, and PSA contain a now familiar sole remedy provision, which requires any party that discovers a breach to promptly notify the other relevant party, and upon notice, allows Ameriquest time to remedy the defect (see e.g. ACE Secs. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581, 598–599, 15 N.Y.S.3d 716, 36 N.E.3d 623 [2015] ). Under that provision, no action for breach of the representations and warranties may be brought until Ameriquest has had ninety days to cure or repurchase the allegedly non-compliant loans. The PSA also contains what the parties call a "backstop provision," which requires DLJ to "cure [an] applicable breach or repurchase a related Mortgage Loan" in the event that Ameriquest is "unable" to comply with its cure-or-repurchase obligation.

After the effective date of the PSA and RA, the Trustee notified only DLJ, not Ameriquest, that Ameriquest had breached the representations and warranties of several loans and demanded that DLJ cure or repurchase those loans. When DLJ failed to remedy the breach, the Trustee filed an action within six years of the execution of the PSA and RA.

DLJ moved to dismiss the complaint, in part, as untimely. Supreme Court found the action to be timely-commenced, but dismissed the complaint without prejudice to refiling pursuant to CPLR 205(a) based on the Trustee's failure to comply with the sole remedy provision by notifying Ameriquest prior to commencing suit. The Appellate Division affirmed ( U.S. Bank Nat. Ass'n v. DLJ Mortg. Capital, Inc., 141 A.D.3d 431, 432, 35 N.Y.S.3d 82 [1st Dept. 2016] ). We granted DLJ leave to appeal and dismissed the Trustee's motion for leave as untimely ( 29 N.Y.3d 1027, 55 N.Y.S.3d 161, 77 N.E.3d 898 [2017] ).

II.

Applicability of CPLR 205(a)

DLJ argues that our prior holding in ACE controls here and stands for the proposition that an action based on alleged violations of RMBS representations and warranties is untimely if the Trustee does not provide notice and an opportunity to cure as required by the PSA, within the CPLR six-year statute of limitations. For its part, the Trustee maintains that the notice to seller and opportunity to cure or repurchase the defective loan requirement is a procedural condition precedent that does not impact the running of the six-year statute of limitations, and therefore the first filed action was properly dismissed without prejudice to the Trustee refiling pursuant to CPLR 205(a). We agree with the Trustee.

CPLR 205(a) provides, in relevant part,

"If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff, or, if the plaintiff dies, and the cause of action survives, [the plaintiff's] executor or administrator, may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period."

This provision implements the Legislature's "policy preference for the determination of actions on the merits" ( Goldstein v. New York State Urban Dev. Corp., 13 N.Y.3d 511, 521, 893 N.Y.S.2d 472, 921 N.E.2d 164 [2009] ). The statute is remedial in nature and, where applicable, "allow[s] plaintiffs to avoid the harsh consequences of the statute of limitations and have their claims determined on the merits where ... a prior action was commenced within the limitations period, thus putting defendants on notice of the claims" ( Malay v. City of Syracuse, 25 N.Y.3d 323, 329, 12 N.Y.S.3d 1, 33 N.E.3d 1270 [2015] ). The Court has also warned that the provision's "broad and liberal purpose is not to be frittered away by any narrow construction" ( Matter of Morris Invs. v. Commr. of Fin. of City of New York, 69 N.Y.2d 933, 935, 516 N.Y.S.2d 635, 509 N.E.2d 329 [1987], quoting Gaines v. City of New York, 215 N.Y. 533, 539, 109 N.E. 594 [1915] ). "The effect of the statute is quite simple: if a timely brought action has been terminated for any reason other than one of the ... reasons specified in the statute, the plaintiff may commence another action based on the same transactions or occurrences within six months of the dismissal of the first action, even if the second action would otherwise be subject to a Statute of Limitations defense, so long as the second action would have been timely had it been commenced when the first action was brought" ( George v. Mt. Sinai Hosp., 47 N.Y.2d 170, 175, 417 N.Y.S.2d 231, 390 N.E.2d 1156 [1979] ). "The statute by its very terms comes into operation in instances where a proceeding has been terminated for some fatal flaw unrelated to the merits of the underlying claim ... and it is to be liberally construed" ( Morris, 69 N.Y.2d at 936, 516 N.Y.S.2d 635, 509 N.E.2d 329 ).

In ACE, we held that the statute of limitations for alleged violations of the representations and warranties in an RMBS agreement commences on the effective date of those promises. Two certificate holders had notified the trustee of alleged breaches of the representations and warranties in several mortgage loans ( 25 N.Y.3d at 591, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). When the trustee failed to sue, the certificate holders filed their own lawsuit against the sponsor six years from the date of the contract execution ( id. at 591–592, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). Months later, after the expiration of the statute of limitations, the trustee sought to be substituted as plaintiff and filed a complaint on behalf of the trust ( id. at 592, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). The sponsor moved to dismiss the complaint as untimely because it was filed more than six years after the contract was executed ( id. ). We rejected the trustee's argument that the action accrued only once the notice and cure provisions were satisfied ( id. at 597, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). We clarified that the provisions were a procedural prerequisite to suit and not a substantive condition precedent to the seller's performance, as the trustee argued ( id. at 597–598, 15 N.Y.S.3d 716, 36 N.E.3d 623 ).

DLJ maintains that ACE requires the Trustee here to have complied with the notice and sole remedy provision—including affording DLJ 90 days in which to cure—before filing a complaint within the six-year statute of limitations. Contrary to DLJ's interpretation of ACE, we held only that the notice and sole remedy provisions did not delay accrual for statute of limitations purposes ( id. at 598, 15 N.Y.S.3d 716, 36 N.E.3d 623 [defendant's "failure to cure or repurchase was not a substantive condition precedent that deferred accrual of the Trust's claim; instead, it was a procedural prerequisite to suit"] ). We did not expressly hold, and it is not implicit in our analysis, that...