Wells Fargo Bank N.A. v. Sovereign Bank, N.A.

Filing 58

MEMORANDUM AND ORDER. For the foregoing reasons, we grant defendant's motion to dismiss and for summary judgment and deny plaintiff's motions to amend the complaints. Granting 38 Motion to Dismiss; Denying 45 Motion for Leave to File Document; Granting 11 Motion to Dismiss; Granting 11 Motion for Summary Judgment. (Signed by Judge Naomi Reice Buchwald on 9/8/2014) Copies Mailed By Chambers. (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
WELLS FARGO BANK N.A., as Trustee for the
Certificateholders of Sovereign Commercial
Mortgage Securities Trust, 2007 C-1,
Commercial Mortgage Pass-Through
Certificates, Series 2007-C1, acting by
and through WATERSTONE ASSET MANAGEMENT,
LLC, as Sub-Special Servicer,

MEMORANDUM AND ORDER
13 Civ. 1222 (NRB)
13 Civ. 4313 (NRB)

Plaintiff,
- against SOVEREIGN BANK, N.A.,
Defendant.
----------------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE

Plaintiff Wells Fargo Bank, N.A. (“Wells” or “plaintiff”),
as

Trustee

of

the

Sovereign

Commercial

Mortgage

Securities

Trust, 2007-C1, Commercial Mortgage Pass-Through Certificates,
Series 2007-C1 (the “Trust”), acting by and through the Trust’s
Sub-Special

Servicer,

(“Waterstone”),
contract

and

brings

breach

of

Waterstone
two

related

warranty

Asset
actions

against

Bank, N.A. (“Sovereign” or “defendant”).1
out

of

a

commercial

Management,

mortgage-backed

for

defendant

breach

LLC
of

Sovereign

Both actions arise
securities

(“CMBS”)

transaction involving two hundred and sixty-four mortgage loans

1

Sovereign changed its name to Santander Bank, N.A. on October 17, 2013.
For purposes of this case, however, we refer to it as Sovereign.

worth over $1 billion.

The first action –- 13 Civ. 1222 (the

“Enco Loan Action”) –- pertains to one loan, while the second –
- 13 Civ. 4313 (the “Five Loans Action”) –- pertains to five.
Plaintiff seeks the repurchase of these loans as a remedy for
the various alleged breaches relating to them.
Presently

before

the

Court

are

defendant’s

motion

to

dismiss and for summary judgment, and plaintiff’s motions to
amend the complaints to add additional claims.
was held on the motions on August 14, 2014.2

Oral argument
For the reasons

set forth below, we grant defendant’s motion to dismiss and for
summary judgment and deny plaintiff’s motions to amend.
BACKGROUND3
I.

The CMBS Transaction
In this CMBS transaction, defendant sold two hundred and

sixty-four loans to Morgan Stanley Capital I, Inc. (“Morgan
Stanley”) pursuant to a Mortgage Loan Purchase Agreement (the
“MLPA”).

The MLPA –- entered into by Sovereign as Seller and

Morgan Stanley as Purchaser -- was executed on June 8, 2007 and

2

References preceded by “Tr.” refer to the transcript of oral argument.
The following facts are derived from the Complaint (“ELC”) and the proposed
Amended Complaint (“ELPAC”) in 13 Civ. 1222 (the “Enco Loan Action”); the
Complaint (“FLC”), the Amended Complaint (“FLAC”), and the proposed Second
Amended Complaint (“FLPSAC”) in 13 Civ. 4313 (the “Five Loans Action”); the
Declaration of Robert J. Malatak (“Malatak Decl.”) and the exhibits annexed
thereto; the Declaration of Paul D. Snyder (“Snyder Decl.”) and the exhibits
annexed thereto; and the Declaration of James B. McClernan (“McClernan
Decl.”) and the exhibits annexed thereto, including the Mortgage Loan
Purchase Agreement (“MLPA”) (Ex. E), the Pooling and Service Agreement
(“PSA”) (Ex. F), the Confidential Offering Memorandum (“COM”) (Ex. C), and
the Preliminary Confidential Offering Memorandum (“pre-COM”) (Ex. D).

3

2

had a closing date of June 21, 2007.

Once the loans were sold

to Morgan Stanley, they were pooled into a trust (the “Trust”)
and

sold

and

assigned

to

Wells,

as

Trustee,

Pooling and Service Agreement (the “PSA”).

pursuant

PSA § 2.01.

to

a

The

PSA, which was executed on June 1, 2007 and had a closing date
of June 21, 2007, was entered into by, among others, Sovereign
(as Special Servicer), Morgan Stanley (as Depositor), and Wells
(as Trustee, Paying Agent, and Custodian).

As the governing

documents in the CMBS transaction, the MLPA and PSA are the
operative contracts at issue in these cases.
II.

Disclosure of Second Mortgage Loans
Once the Trust was created, shares of the mortgage loan

pool were sold to investors as certificates.

In evaluating

whether to purchase these certificates, which were divided into
different classes, the investors –- known as certificateholders
–-

had

access

to

not

only

the

MLPA

and

PSA,

but

also

a

Confidential Offering Memorandum (“COM”) prepared by Sovereign
and

Morgan

Stanley.

See

COM

at

iv.

The

COM

contained

extensive information about the offered certificates as well as
the mortgage loans underlying them.
Among the information disclosed in the COM were details
about certain mortgage loans whose properties secured second
mortgages

not

held

by

the

Trust.

3

This

information

was

disclosed

in

several

places

in

the

COM,4

most

notably

for

present purposes the Mortgage Loan Schedule attached to the
COM.

Footnote 5 of the Mortgage Loan Schedule provides the

following data about the six mortgage loans at issue in this
litigation:
With respect to Mortgage Loan No. 60
[(the “Caroline Arms Loan”)], 6457 Fort
Caroline Road, the Borrower has $1,025,000
of
additional
secured
subordinate
financing.
With respect to Mortgage Loan No. 69
[(the
“Linden
Loan”)],
1975
Linden
Boulevard, the Borrower has $120,000 of
additional secured subordinate financing. .
. .
With respect to Mortgage Loan No. 124
[(the
“Magnolia
Terrace
Loan”)],
509
Magnolia
Drive,
the
Borrower
has
a
subordinate second lien in the amount of
$475,000
held
by
the
Housing
Finance
Authority of Leon County, Florida. . . .
With respect to Mortgage Loan No. 226
[(the “Enco Loan”)], 1720 East Tiffany
Drive, the Borrower has $170,000 of secured
financing in the form of a second lien,
which is payable to Sovereign Bank.
With respect to Mortgage Loan No. 252
[(the
“Grand
Loan”)],
69-53/57
Grand
Avenue, the Mortgaged Property also secures
two secured subordinate mortgages, one in
the
amount
of
$460,000
and
$370,000,
respectively.
4

Pages 4 and 54 of the COM state that “several Mortgaged Properties also
secure or may secure additional subordinate indebtedness incurred by the
related Borrower or to which the related Borrowers interest in the Mortgaged
Property is subject, which subordinated indebtedness is not part of the
Trust Fund.”
COM at 4, 54.
Pages 13 and 41 state: “We are aware that
twelve (12) Mortgage Loans, representing approximately 9.0% of the Initial
Pool Balance . . . currently have additional second lien mortgages or lines
of credit in place that are secured on a subordinate basis by the related
Mortgaged Property.” Id. at 13, 41. These same disclosures were made in a
preliminary COM (the “pre-COM”) dated May 24, 2007.

4

With respect to Mortgage Loan No. 4
[(the “Marina Palms Loan”)], The Marina
Palms
Apartments,
the
Borrower
has
mezzanine
financing
in
the
amount
of
$3,000,000.
COM Ex. A-1, n. 5.5
The MLPA and PSA also contain copies of the Mortgage Loan
Schedule.

In those copies, however, the footnote number “5”

appears in the same place (in the top row by the column titled
“Cut-Off
missing.

Date

Balance”),

but

the

text

of

the

footnote

is

Due to an error by Sovereign and/or Morgan Stanley,

footnote numbers 1, 5, 9, 10, 12, and 18 are included, but
their underlying text is not.6

McClernan Decl. ¶ 15.

III. Alleged Breaches of the Representations and Warranties
In the MLPA, Sovereign made a number of Representations
and

Warranties

origination,

(“Reps”)

quality,

concerning,

servicing,

mortgages as of the closing date.

and

among

other

default

things,

status

of

the
the

Three of these Reps –- 18,

10, and 7 -- are relevant to the present actions.
Rep 18 provides, in pertinent part: “No Mortgaged Property
secures any mortgage loan not represented in the Mortgaged Loan
Schedule; . . . [N]o mortgaged loan is secured by property that
secures another mortgage loan other than one or more Mortgage
5

Identical disclosures were made in the pre-COM as well as the computer disk
that was placed in the inside back cover of the COM (the “COM disk”).
McClernan Decl. ¶ 4, 9.
6 The copies of the Mortgage Loan Schedule attached to the MLPA and PSA
contain a footnote 19, which is not contained in the copy attached to the
COM, and that is the only footnote whose text is not missing.

5

Loans as shown on the Mortgage Loan Schedule.”

MLPA Ex. B ¶

18.
Rep.

10

provides,

in

pertinent

part:

“The

origination,

servicing and collection practices used by [Sovereign] . . .
with respect to such mortgage loans have been in all material
respects

legal,

proper

industry standards.”

and

prudent

and

have

met

customary

Id. ¶ 10.

Finally, Rep. 7 provides, in pertinent part: “There exists
no material default, breach, violation or event of acceleration
(and,

to

passage

[Sovereign’s]
of

time

or

knowledge,

the

giving

no

of

event

notice,

that,
or

with

both,

the

would

constitute any of the foregoing) under the documents evidencing
or securing the Mortgage Loan . . . .”

Id. ¶ 7.

Plaintiff alleges that defendant breached some or all of
these Reps with respect to the mortgage loans at issue in these
actions.
A. The Enco Loan Action
The current complaint in the Enco Loan Action alleges that
defendant

breached

Rep

18

by

not

disclosing

in

the

MLPA’s

Mortgage Loan Schedule that the property securing the Enco Loan
was encumbered by a second mortgage in the amount of $170,000.7

7

The Enco Loan had an original principal balance (“OPB”) of $1,330,000.
¶ 19.

6

ELC

In the proposed Amended Complaint, plaintiff seeks to add
an additional cause of action for breach of Rep 10 due to
numerous alleged flaws with the origination and servicing of
the Enco Loan.
B. The Five Loans Action
The Five Loans Action, as the name suggests, involves five
loans which are referred to as follows: the Linden Loan, the
Caroline Arms Loan, the Magnolia Terrace Loan, the Grand Loan,
and the Marina Palms Loan (collectively, the “Five Loans”).8
The current complaint in that action alleges that defendant
breached: Rep 18 with respect to the Linden Loan, the Caroline
Arms

Loan,

because

the

the

Magnolia

mortgaged

Terrace

properties

Loan,
were

and

the

encumbered

Grand
by

Loan

second

mortgages not disclosed in the MLPA’s Mortgage Loan Schedule;
Rep 10 with respect to each of the Five Loans due to various
loan origination and servicing defects; and Rep 7 with respect
to the Caroline Arms Loan, the Grand Loan, and the Marina Palms
Loan

because

the

borrowers

were

in

material

default

and/or

breach under the documents evidencing or securing the loans as
of the closing date.

8

The Linden Loan had an OPB of $4,880,000; the Caroline Arms Loan had an OPB
of $5,500,000; the Magnolia Terrace Loan had an OPB of $2,750,000; the Grand
Loan had an OPB of $1,200,000; and the Marina Palms Loan had an OPB of
$17,480,000. FLAC ¶ 5.

7

Because the Magnolia Terrace Loan has been paid in full,
plaintiff is no longer pursuing the claims relating to that
loan.
IV.

Alleged Breaches of Section 2.03(b) of the PSA
In addition to the breach claims regarding Reps 18, 10,

and 7, plaintiff also claims, in both actions, that defendant
breached Section 2.03(b) of the PSA (“Section 2.03(b)”).
section provides, in pertinent part:
If
any
Certificateholder,
the
Master
Servicer, the Special Servicer, the Paying
Agent,
the
Custodian
or
the
Trustee
discovers . . . or received notice of a . .
. breach of any representation or warranty
with respect to a Mortgage Loan set forth
in, or required to be made with respect to
a Mortgage Loan by the Mortgage Loan Seller
pursuant to, the Mortgage Loan Purchase
Agreement (a “Breach”), which . . .
materially and adversely affects the value
of
such
Mortgage
Loan,
the
related
Mortgaged Property or the interests of the
Trustee or any Certificateholder in the
Mortgage Loan or the related Mortgaged
Property,
such
Certificateholder,
the
Master Servicer, the Special Servicer, the
Trustee, the Paying Agent, the Custodian or
the Controlling Class Representative . . .
shall give prompt written notice of such .
. . Breach . . . to the Depositor, the
Master Servicer, the Special Servicer, the
Mortgage Loan Seller, the Trustee, the
Paying
Agent,
the
Custodian
and
the
Controlling Class Representative and shall
request in writing that the Mortgage Loan
Seller, not later than 90 days after . . .
the Mortgage Loan Seller’s receipt of such
notice . . . , (i) cure such . . . Breach .
.
.
in
all
material
respects,
(ii)
repurchase the affected Mortgage Loan or

8

This

REO Loan at the applicable Purchase Price
and in conformity with the Mortgage Loan
Purchase Agreement and this Agreement or
(iii) substitute a Qualified Substitute
Mortgage Loan for such affected Mortgage
Loan or REO Loan . . . .
PSA § 2.03(b).9
Plaintiff asserts two types of breaches regarding Section
2.03(b).

In

the

current

complaints,

plaintiff

claims

that

defendant –- the initial Special Servicer for the loans -breached Section 2.03(b) by failing to provide notice of its
own Rep breaches.
In the proposed amended complaints, plaintiff asserts an
additional claim for defendant’s alleged failure to repurchase
the loans after being notified of certain Rep breaches relating
to those loans.

Notification regarding the Enco Loan came on

February 9, 2012.

On that date, plaintiff notified defendant

of a breach of Rep 18 due to the undisclosed second mortgage on
the Enco Loan property, and requested that defendant cure or
repurchase
Defendant

the

loan

refused

on

within
the

90

days.

grounds

9

that

Malatak
there

Decl.

was

no

Ex.

A.

Rep

18

Section 6.5 of the MLPA mirrors the obligations outlined in Section 2.03(b)
of the PSA. It provides, in pertinent part: “Upon notice [of any Breach . .
. that materially and adversely affects the value of a Mortgage Loan, the
value
of
the
related
Mortgage
Property
or
any
interest
of
any
Certificateholder in the Mortgage Loan or the related Mortgaged Property],
Seller shall, not later than 90 days from the . . . Seller’s receipt of the
notice . . . , (i) cure such Breach . . . in all material respects, (ii)
repurchase the affected Mortgage Loan at the applicable Repurchase Price . .
. or (iii) substitute a Qualified Substitute Mortgage Loan . . . for such
affected Mortgage Loan . . . .” MLPA § 6.5.

9

breach.

ELPAC ¶ 58; Snyder Decl. Ex. 4 at 3.

Nevertheless, it

offered to either discharge the second mortgage or assign it to
the Trust.

Id.

Plaintiff rejected both options.

On March 19, 2013, after litigation had already commenced
in the Enco Loan Action, plaintiff notified defendant that Reps
18 and 10 were breached with respect to the Five Loans, and
demanded that defendant repurchase the loans within 90 days.
Malatak

Decl.

properties

Ex.

C.

securing

The
the

notification

Five

Loans

explained
were

that

the

encumbered

by

undisclosed second mortgages, thus constituting a breach of Rep
18.

Id.

The notification further explained that the existence

of these second mortgages, combined with “the general manner in
which the Loans were originated,” constituted a breach of Rep
10.

Id.

In its response, defendant denied any such breaches

of Reps 18 or 10 and refused to repurchase the loans.

FLPSAC ¶

144; Snyder Decl. Ex. 6.
V.

Procedural History
On

complaint

February
in

22,

the

Enco

2013,
Loan

plaintiff
Action

filed

alleging

its
that

original
defendant

breached Rep 18 and Section 2.03(b) by failing to disclose the
existence
property.
Five

Loans

of

a

second

mortgage

encumbering

the

Enco

Loan

Plaintiff then filed the original complaint in the
Action

on

June

20,

2013,

asserting

breaches of Reps 18 and 10 and Section 2.03(b).

10

claims

for

Defendant

moved to dismiss and/or for summary judgment in both actions on
October

25,

2013.

On

November

15,

plaintiff

filed

its

opposition, to which defendant replied on December 13.
However,

before

the

Court

could

rule

on

the

pending

motion, plaintiff filed an amended complaint in the Five Loans
Action.

The amended complaint added claims for breach of Rep

7, and revised the Rep 10 claims to allege numerous flaws with
the origination and servicing of the loans beyond the fact that
there were second mortgages.

Plaintiff then submitted a letter

requesting a pre-motion conference to amend its complaint in
the Enco Loan action.

The Court held a telephone conference

with the parties on January 10, 2014 during which it ordered a
new round of briefing to allow plaintiff to move to amend its
complaint in the Enco Loan Action and defendant to move to
dismiss the amended complaint in the Five Loans Action.
On February 14, 2014, plaintiff moved for leave to file an
amended complaint in the Enco Loan Action to add claims for
breach of Rep 10 and breach of Section 2.03(b) arising from
defendant’s failure to cure or repurchase the Enco Loan.
On March 18, 2014, defendant opposed plaintiff’s motion
for leave to file an amended complaint in the Enco Loan Action

11

and moved to dismiss the amended complaint in the Five Loans
Action.10
On April 11, 2014, plaintiff opposed defendant’s motion to
dismiss the Five Loans Action.

Plaintiff also cross-moved for

leave to file a second amended complaint in the Five Loans
Action

to

assert

a

breach

of

contract

claim

arising

from

defendant’s failure to cure or repurchase the loans pursuant to
Section 2.03(b).
On May 2, 2014, defendant opposed plaintiff’s cross-motion
for leave to file a second amended complaint in the Five Loans
Action.
VI.

Defendant’s Asserted Grounds for Dismissal and for Denying
Plaintiff’s Motions to Amend
Defendant

advances

seven

grounds

for

dismissing

both

actions and denying plaintiff’s motions to amend: first, that
defendant’s disclosure of the second mortgages in the COM and
other preliminary transactional documents, combined with the
inclusion of footnote number 5 in the MLPA’s Mortgage Loan
Schedule,

preclude

plaintiff

failed

plaintiff’s
to

provide

Rep

18

claims;

defendant

with

second,

that

contractually

required notice and an opportunity to cure with respect to the
alleged

Rep

breaches

that

do

10

not

relate

to

the

second

In its briefing papers, defendant incorporated by reference the briefs it
submitted on its earlier motion despite the fact that portions of those
briefs were moot or redundant.

12

mortgages;

third,

that

plaintiff

has

not

adequately

alleged

that the origination and servicing of the loans were illegal,
improper,

imprudent,

or

failed

to

meet

customary

industry

standards; fourth, that plaintiff’s assertion that defendant
breached Section 2.03(b) by failing to disclose the various Rep
breaches is too conclusory to state a valid claim and, in any
case,

fails

because

there

were

no

underlying

Rep

breaches;

fifth, that New York law does not recognize a separate and
distinct cause of action premised upon a failure to repurchase
loans; sixth, that the Five Loans Action should be dismissed
because

it

was

filed

after

the

statute

of

limitations

had

expired; and finally, that the proposed amended claims in both
actions do not relate back to the original complaints.

We

address these arguments, where relevant, below.
DISCUSSION
I.

Legal Standards
A. Motion to Dismiss
On

a

motion

to

dismiss

under

Federal

Rule

of

Civil

Procedure (“Rule”) 12(b)(6), the Court must accept as true all
factual allegations in the complaint and draw all reasonable
inferences in the plaintiff’s favor.

ATSI Commc’ns, 493 F.3d

at 98; Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d
Cir. 1998).

Nonetheless, “[f]actual allegations must be enough

to raise a right of relief above the speculative level, on the

13

assumption that all of the allegations in the complaint are
true.”

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)

(internal citation omitted).

Ultimately, plaintiff must allege

“enough facts to state a claim to relief that is plausible on
its face.”

Id. at 570.

If plaintiff “ha[s] not nudged [its]

claims across the line from conceivable to plausible, [its]
complaint must be dismissed.”

Id.

applies in “all civil actions.”

This pleading standard

Ashcroft v. Iqbal, 556 U.S.

662, 684 (2009) (internal quotation marks omitted).
When deciding a motion to dismiss, the Court “may consider
any written instrument attached to the complaint, statements or
documents incorporated into the complaint by reference . . .
and documents possessed by or known to the plaintiff and upon
which it relied in bringing the suit.”

ATSI Commc’ns, Inc. v.

Shaar Fund. Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

“Evidence

outside these parameters may be introduced in connection with a
motion for summary judgment.”

Hahn v. Rocky Mt. Express Corp.,

No. 11 Civ. 8512 (LTS)(GWG), 2012 U.S. Dist. LEXIS 100466, at
*4 (S.D.N.Y. June 16, 2012).
B. Motion for Summary Judgment
A

motion

for

summary

judgment

is

appropriately

granted

when there is no genuine issue as to any material fact and the
moving party is entitled to judgment as a matter of law.
R. Civ. P. 56(a).

Fed.

In this context, “[a] fact is ‘material’

14

when it might affect the outcome of the suit under governing
law,” and “[a]n issue of fact is ‘genuine’ if the evidence is
such that a reasonable jury could return a verdict for the
nonmoving party.”

McCarthy v. Dun & Bradstreet Corp., 482 F.3d

184, 202 (2d Cir. 2007) (internal quotation marks omitted).
“In assessing the record to determine whether there is [such] a
genuine issue [of material fact] to be tried, we are required
to resolve all ambiguities and draw all permissible factual
inferences in favor of the party against whom summary judgment
is sought.”

Gorzynski v. JetBlue Airways Corp., 596 F.3d 93,

101 (2d Cir. 2010) (citing Anderson v. Liberty Lobby, Inc., 477
U.S.

242,

255

(1986)).

On

a

motion

for

summary

judgment,

“[t]he moving party bears the initial burden of demonstrating
‘the absence of a genuine issue of material fact.’”
v.

Great

Am.

Ins.

Co.,

607

F.3d

288,

292

(2d

F.D.I.C.

Cir.

2010)

(quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)).
Where that burden is carried, the non-moving party “must come
forward with specific evidence demonstrating the existence of a
genuine dispute of material fact.”
U.S. at 249).

Id. (citing Anderson, 477

The non-moving party “must do more than simply

show that there is some metaphysical doubt as to the material
facts

. . .

and

may

not

rely

unsubstantiated speculation.”

on

conclusory

allegations

or

Brown v. Eli Lilly and Co., 654

15

F.3d 347, 358 (2d Cir. 2011) (internal quotation marks and
citations omitted).
C. Motion to Amend
Rule 15(a)(2) requires that the Court “freely give leave
[to amend] when justice so requires.”

Nonetheless, “it is

within the sound discretion of the district court to grant or
deny leave to amend.”

McCarthy v. Dun & Bradstreet Corp., 482

F.3d 184, 200 (2d Cir. 2007).

Thus, “[l]eave to amend, though

liberally granted, may properly be denied for: undue delay, bad
faith or dilatory motive on the part of the movant, repeated
failure to cure deficiencies by amendments previously allowed,
undue prejudice to the opposing party by virtue of allowance of
the amendment, [or] futility of amendment.”
New York, 514 F.3d 184, 191 (2d Cir. 2007).

Ruotolo v. City of
“The futility of

an amendment is assessed under the standard for a Rule 12(b)(6)
motion to dismiss.”

Martinez v. Capitol One, N.A., No. 10 Civ.

8028 (RJS), 2014 U.S. Dist. LEXIS 116659, at *5 (S.D.N.Y. Aug.
20, 2014).
Because defendant argues that the claims in plaintiff’s
proposed amended complaints are futile, the question before the
Court

is

whether

these

claims

dismiss.

16

would

survive

a

motion

to

II.

Analysis
A. Notice is a Condition Precedent
Defendant

argues

that

the

claims

in

the

current

and

proposed amended complaints that do not relate to the allegedly
undisclosed

second

mortgages

should

be

dismissed

because

plaintiff failed to provide notice of these claims, and such
notice is a condition precedent.
Under New York law, which governs the instant dispute, “a
condition precedent is an act or event which must occur before
another party’s duty to perform its promise arises.”

LaSalle

Bank Nat. Assoc. v. Citicorp Real Estate, Inc., No. 02 Civ.
7868 (HB), 2003 U.S. Dist. LEXIS 12043, at *14 (S.D.N.Y. July
16, 2003).

“To make a provision in a contract a condition

precedent, it must appear from the contract itself that the
parties

intended

the

provision

so

to

operate.”

Torres

v.

D’Alesso, 80 A.D.3d 46, 57 (N.Y. App. Div. 2010) (quoting 22
N.Y.

Jur.

2d,

ordinarily

will

Contract
not

be

§

262).

construed

“[A]
as

a

contractual

condition

duty

precedent

absent clear language showing that the parties intended to make
it a condition.”

Unigard Sec. Ins. Co. v North Riv. Ins. Co.,

79 N.Y.2d 576, 581 (N.Y. 1992).

“The interpretive preference

favoring construction of contractual language as embodying a
promise

or

a

constructive

condition

rather

than

an

express

condition, however, cannot be employed if the occurrence of the

17

event as a condition is expressed in unmistakable language, or
where

the

event

is

within

the

obligee’s

control

circumstances indicate that it has assumed the risk.”

or

the

Bank of

N.Y. Mellon Trust Co. v. Morgan Stanley Mortg. Capital, No. 11
Civ. 0505 (CM)(GWG), 2013 U.S. Dist. LEXIS 87863, at *44-45
(S.D.N.Y. June 19, 2013) (internal quotation marks omitted).
Section

2.03(b)

of

the

PSA

sets

forth

obligation to provide notice of a Rep breach.
pertinent

part:

“If

.

.

.

[plaintiff]

plaintiff’s
It reads, in

discovers

.

.

.

or

received notice of a breach of any representation or warranty .
. . [it] shall give prompt written notice of such . . . Breach
. . . to . . . [defendant] . . . and shall request in writing
that

[defendant],

not

later

than

90

days

after

.

.

.

[defendant’s] receipt of such notice . . . , (i) cure such . .
. Breach . . . , (ii) repurchase the affected Mortgage Loan . .
. or (iii) substitute a Qualified Substitute Mortgage Loan . .
. .”
clearly

PSA § 2.03(b) (emphasis added).
states

that

plaintiff

must

Thus, Section 2.03(b)
provide

defendant

with

written notice of any Rep breach, and must allow defendant 90
days after it receives such notice to implement one of the
three remedy options.11

11

However, Section 2.03(b) provides that “in no event shall any such
substitution occur on or after the second anniversary of the Closing Date.”
PSA § 2.03(b).

18

Defendant’s obligation to remedy a Rep breach is therefore
conditioned upon the receipt of plaintiff’s notice.

Section

6.5 of the MLPA confirms this point.

It reads, in pertinent

part:

[defendant]

“Upon

notice

[of

any

Breach],

shall,

not

later than 90 days from . . . [defendant’s] receipt of the
notice . . . , (i) cure such Breach . . ., (ii) repurchase the
affected Mortgage Loan . . . or (iii) substitute a Qualified
Substitute Mortgage Loan . . . .”
Thus,

there

is

no

question

MLPA § 6.5 (emphasis added).

that

notice

is

required

defendant is bound to remedy a Rep breach.

Had the parties

intended otherwise, they certainly knew how to say so.
6.5

of

the

MLPA

and

Section

2.03(b)

of

before

the

PSA

Section
condition

defendant’s obligation to remedy a different type of breach –one not at issue in this litigation -- on defendant’s receipt
of notice or its own discovery of the breach.

See MLPA § 6.5;

PSA § 2.03(b)(ii).
The

fact

that

defendant’s

obligation

to

remedy

a

Rep

breach is triggered exclusively by receipt of notice, and not
also

by

discovery,

is

significant.

Indeed,

in

other

CMBS

cases, courts have distinguished between these two types of
obligations: those that are triggered only by receipt of notice
have been found to constitute a condition precedent, see, e.g.,
Bank of N.Y. Mellon Trust Co., 2013 U.S. Dist. LEXIS 87863, at
*46;

Morgan

Guar.

Trust

Co.

v.

19

Bay

View

Franchise

Mortg.

Acceptance Co., No. 00 Civ. 8613 (SHS), 2002 U.S. Dist. LEXIS
7572, at *15 (S.D.N.Y. Apr. 23, 2002); whereas those that are
triggered by either receipt of notice or discovery have not,
see,

e.g.,

Trust

for

Certificate

Holders

of

Merrill

Lynch

Mortg. Passthrough Certificates Series 1999-Cl v. Love Funding
Corp., No. 04 Civ. 9890 (SAS), 2005 U.S. Dist. LEXIS 23522, at
*32 (S.D.N.Y. 2005); LaSalle Bank, 2003 U.S. Dist. LEXIS 12043,
at *14-15.
Although
requirement

“courts
is

a

have

declined

condition

to

find

precedent

when

that
the

a

notice
[remedy

obligation] can be triggered by something other than a notice,
or where the [remedy] provisions and notice provisions do not
expressly refer to each other,” U.S. Bank Nat’l Ass’n v. Dexia
Real Estate Capital Mkts., No. 12 Civ. 9412 (SAS), 2014 U.S.
Dist. LEXIS 93543, at *17 (S.D.N.Y. July 9, 2014) (internal
quotation

marks

omitted),

neither

scenario

is

present

here.

Therefore, while it is true that the law prefers interpreting a
contractual condition as a promise, rather than a condition
precedent, that preference is inapplicable in this case since
defendant’s obligation to cure, repurchase, or substitute is
unmistakably triggered solely by the receipt of notice.

See

Nat’l Fuel Gas Distribution Corp. v. Hartford Fire Ins. Co.,
814 N.Y.S.2d 436, 437 (N.Y. App. Div. 2006).

20

Furthermore,

the

fact

that

the

PSA

and

MLPA

allow

defendant three options for remedying a Rep breach supports the
conclusion that notice is a prerequisite to bringing suit.

If

plaintiff could file a lawsuit to obtain the repurchase of a
loan

without

first

providing

defendant

90

days’

notice,

it

would deprive defendant of its right to cure the underlying
breach or substitute a different loan, both of which could be
far

more

notice

cost-effective

requirement

situation
remedy.

and

as

than
a

repurchasing.

Construing
prevents

ability

this

precedent

defendant’s

preserves

condition

the

to

choose

the

Cf. Bank of N.Y. Mellon Trust Co., 2013 U.S. Dist.

LEXIS 87863, at *45 (holding notice to be a condition precedent
where

defendant

was

required

to

repurchase

loan

only

after

breach could not be cured within 90 days of notice being sent).
Plaintiff’s
2.03(b)

to

misplaced.
contained

reliance

avoid
That

in

this

the

finding

a

on

of

sentence

last
a

reads:

Agreement

or

sentence

condition

of

precedent

“Notwithstanding

the

Mortgage

Section

Loan

is

anything
Purchase

Agreement, no delay in either the discovery of a . . . Breach
or

delay

on

the

part

of

any

party

to

this

Agreement

in

providing notice of such . . . Breach shall relieve [defendant]
of its obligation to repurchase if it is otherwise required to
do so under the Mortgage Loan Purchase Agreement and/or this
Agreement.”

PSA

§

2.03(b).

21

Contrary

to

plaintiff’s

contention, this provision does not excuse a failure to provide
notice of a Rep breach.

Rather, it merely excuses a failure to

provide prompt notice of such a breach.

This is a critical

difference, one that distinguishes the PSA here from the PSA at
issue

in

LaSalle

Bank

Nat’l

Ass’n

v.

Nomura

Asset

Capital

Corp., No. 00 Civ. 8720 (NRB), 2004 U.S. Dist. LEXIS 18599
(S.D.N.Y. Sept. 13, 2004), upon which plaintiff relies.12
Therefore, in sum, we hold that the notice provisions in
the PSA and MLPA constitute a condition precedent such that
written notice is required for each breach that is alleged.13
Consequently,

the

only

claims

plaintiff

may

assert

in

this

litigation are those of which it provided notice to defendant.
Although neither the PSA nor MLPA explain what the required
notice must include, “[i]t is settled law . . . that the notice
must

be

specific

enough

so

as

to

give

the

other

party

a

reasonable opportunity to cure the breach if this can be done.”
Ulla-Maija, Inc. v. Kivimaki, No. 02 Civ. 3640 (TPG), 2005 U.S.
Dist. LEXIS 22249, at *11 (S.D.N.Y. Sept. 30, 2005).

12

The PSA in Lasalle provided: “The Servicer, Special Servicer or the
Trustee shall notify the Mortgage Loan Seller and the Depositor upon such
party’s becoming aware of any breach of the representations and warranties
contained in this Agreement or the Mortgage Loan Purchase and Sale Agreement
that gives rise to a cure or repurchase obligation; provided, that the
failure of the Servicer, the Special Servicer or Trustee to give such
notification shall not constitute a waiver of any cure or repurchase
obligation.” LaSalle, 2004 U.S. Dist. LEXIS 18599, at *19 (emphasis added).
13 See PSA § 2.03(b) (requiring plaintiff, upon discovering or receiving
notice of a breach, to “give prompt written notice of such . . . Breach”)
(emphasis added); MLPA § 6.5 (requiring defendant, upon receiving notice of
any breach, to, inter alia, “cure such Breach”) (emphasis added).

22

B. The Notices Provided by Plaintiff
As

discussed

previously,

plaintiff

sent

defendant

two

notices of breach, one on February 9, 2012 relating to the Enco
Loan and another on March 19, 2013 relating to the Five Loans.
The Enco Loan notice claimed that defendant breached Rep 18 by
not properly disclosing the second mortgage on the Enco Loan
property.

Malatak

Decl.

Ex.

A.

The

Five

Loans

notice

similarly focused on allegedly undisclosed second mortgages.
Specifically, it stated that the existence of such mortgages on
the Five Loans properties, as well as “the general manner in
which the Loans were originated,” constituted breaches of Reps
18 and 10.

Malatak Decl. Ex. C.

Although the Five Loans

notice claimed breaches of Reps 18 and 10, plaintiff concedes
that

these

Seconds.”14

breaches

were

both

“based

upon

the

Undisclosed

Pl. Opp. at 5.

Thus, the only breaches of which defendant was notified –and for which it may be held liable in this litigation -- were
those relating to the allegedly undisclosed second mortgages.15

14

Even without this concession, we would nonetheless find that the notice
was limited to the second mortgage issue.
The passing reference to a
problem with “the general manner in which the Loans were originated” is too
vague to provide adequate notice of a Rep 10 breach.
15 Plaintiff’s argument that it did not need to send notice of the other
alleged breaches when it later discovered them –- because defendant had
already declined to repurchase the loans after receiving notice of the
earlier alleged breaches and because litigation had already commenced -- is
unavailing. Plaintiff may not escape the notice requirement merely because
it assumed, based on defendant’s responses to earlier, unrelated breach
allegations, that defendant would have refused to repurchase the loans.
A

23

Consequently, the Rep 7 claims are dismissed, as are the Rep 10
and

Section

2.03(b)

claims

to

the

extent

they

allegations unrelated to the second mortgages.

rely

on

Similarly, all

claims in the proposed amended complaints that do not relate to
the second mortgages are futile.16
C. Claims Based on Allegedly Undisclosed Second Mortgages
i.

Rep 18

Defendant warranted in Rep 18 that: “No Mortgaged Property
secures any mortgage loan not represented in the Mortgage Loan
Schedule; . . . [N]o mortgaged loan is secured by property that
secures another mortgage loan other than one or more Mortgage
Loans as shown on the Mortgage Loan Schedule.”

MLPA Ex. B ¶

18.

this

Plaintiff

claims

that

defendant

breached

Rep

by

failing to properly disclose the existence of second mortgages
on five mortgaged properties (those securing the Enco Loan,
Linden Loan, Caroline Arms Loan, Magnolia Terrace Loan, and
Grand Loan).

Defendant moves for summary judgment on these

condition precedent is controlling regardless of how futile or unnecessary a
party believes it to be.
16 On August 20, 2014, after oral argument was held and well after briefing
on the pending motions was complete, plaintiff sent defendant a notice
letter regarding all the breaches alleged in the present actions that were
not mentioned in the original notice letters.
Plaintiff then submitted a
copy of the letter to the Court and requested that it be considered in
connection with the pending motions. We refuse to consider the letter here
because: (1) defendant is entitled to a 90-day remedy period; (2) the letter
was submitted several months after the briefing deadline; and (3) notice of
breach is a condition precedent to commencing litigation, and when the
instant litigation was commenced, plaintiff had not sent this letter.
Additionally, we are far from persuaded that, in the absence of any conduct
by defendant inhibiting plaintiff from sending the notice letter within the
statute of limitations period, the breach claims are timely.

24

claims,

arguing

that

the

second

mortgages

were

adequately

disclosed through the inclusion of footnote number 5 in the
MLPA’s Mortgage Loan Schedule and the detailed discussion of
these mortgages in the COM and other preliminary transactional
documents.

Alternatively, defendant contends that plaintiff

waived the Rep 18 breach, and that any such breach should be
excused as a mutual mistake or scrivener’s error.
As explained below, we find three separate grounds for
granting summary judgment on the Rep 18 claims.
a. Rep 18 was not Breached
As an initial matter, it is important to note that Rep 18
does not state that there are no second mortgages.
state that there may be second mortgages.

Nor does it

Rather, it states

unequivocally that there are second mortgages on “one or more
Mortgage Loans.”
that

at

least

Thus, anyone relying on Rep 18 is forewarned
one

of

the

Trust’s

mortgaged

properties

is

encumbered by a second mortgage.
Defendant intended to disclose detailed information about
the

second

mortgages

in

footnote

5

of

the

Mortgage

Loan

Schedule, the same footnote where this information is disclosed
in the COM.

However, due to a clerical error by defendant

and/or Morgan Stanley, the second mortgage information –- which
is disclosed in multiple locations in the COM -- was not pasted

25

into

the

text

conspicuously

of

blank.

other footnotes.
Despite
presence

of

The

same

Thus,
error

footnote
also

5

was

affected

left

several

McClernan Decl. ¶¶ 15, 25.

this
a

5.17

footnote

error,

blank

we

nonetheless

footnote

number

conclude

the

combined

5,

that
with

the

language of Rep 18 and the disclosure of the second mortgages
in the COM, is sufficient to satisfy defendant’s disclosure
obligations under Rep 18.

Taken together, these data points

adequately reveal the existence of the second mortgages without
requiring any due diligence.

Indeed, Rep 18 provides notice

that second mortgages exist on one or more mortgaged properties
and that information about these mortgages are provided in the
Mortgage Loan Schedule.
this

information,

numerous
footnotes

but

footnotes
alert

The Mortgage Loan Schedule is missing
the

with

any

no

reason

why

is

corresponding

reasonable

reader

obvious
text.

to

the

from
The

the

blank

absence

of

intended information, which, based on the language of Rep 18,
includes second mortgage data.

A reader need only use his

common sense to find the missing information in the parallel
Mortgage Loan Schedule attached to the COM.

Although the MLPA

contains a “no due diligence” clause (MLPA § 6.3) -- which
provides

that

a

party’s

due

17

diligence

will

not

absolve

As plaintiff concedes, there is no evidence suggesting that the omission
of the second mortgage information from footnote 5 was intentional. Tr. 3.

26

defendant of liability for breaching a Rep -- that clause is
not a license to abandon common sense or ignore what is obvious
in the MLPA and COM.
b. Any Breach is Waived
Regardless, even assuming that defendant breached Rep 18,
plaintiff waived the breach because it knew about and accepted
the

breach

Circuit

before

has

entering

explained

that

into

the

under

contract.

New

York

law,

The

Second

“where

the

seller discloses up front the inaccuracy of certain of his
warranties, it cannot be said that the buyer . . . believed he
was purchasing the seller’s promise as to the truth of the
warranties.”
1997).

“In

Rogath v. Siebenmann, 129 F.3d 261, 265 (2d Cir.
that

situation,

unless

the

buyer

expressly

preserves his rights under the warranties, we think the buyer
has waived the breach.”
and

alterations

Allegheny

Id. at 264 (internal quotation marks

omitted);

Energy,

Inc.,

see
500

also
F.3d

Merrill
171,

186

Lynch

&

(2d

Cir.

Co.

v.

2007)

(“[W]here the seller has disclosed at the outset facts that
would constitute a breach of warranty, that is to say, the
inaccuracy of certain warranties, and the buyer closes with
full knowledge and acceptance of those inaccuracies, the buyer
cannot later be said to believe he was purchasing the seller’s
promise respecting the truth of the warranties.”).

27

The inaccuracy of Rep 18 is obvious from the face of the
MLPA.

Indeed, while the Rep states that there are no second

mortgages except those on “one or more Mortgage Loans as shown
on

the

Mortgage

Loan

Schedule,”

the

Mortgage

Loan

Schedule

identifies no mortgage loans with second mortgages.

Thus, the

inaccuracy of Rep 18 is “disclose[d] up front.”

Rogath v.

Siebenmann, 129 F.3d at 265.

Consequently, because “it cannot

be

believed

said

that

[plaintiff]

[it]

was

purchasing

[defendant’s] promise as to the truth of [Rep 18],” it waived
the breach.

Id.

Moreover, plaintiff cannot seek refuge from

this waiver in the “no due diligence clause.”

That clause does

not preserve the right to sue for a breach of warranty when the
inaccuracy

of

the

warranty

is

clear

from

the

face

of

the

contract.
c. Reformation of the MLPA is Warranted
Plaintiff’s Rep 18 claims are based on nothing more than a
scrivener’s error that was obvious to all.

“Under New York

law, the doctrine of scrivener’s error allows contracts to be
reformed

when

there

is

memorialized the contract.

a

mistake

in

the

writing

that

Where there is no mistake about the

agreement and the only mistake alleged is in the reduction of
that agreement to writing, such mistake of the scrivener, or of
either party, no matter how it occurred, may be corrected.”

In

re Am. Home Mortg. Inv. Trust 2005-2, No. 14 Civ. 2494 (AKH),

28

2014 U.S. Dist. LEXIS 111867, at *56-57 (S.D.N.Y. July 24,
2014) (internal quotation marks omitted).
contract,

a

scrivener’s

convincing evidence.”

error

must

be

In order to reform a
shown

by

“clear

and

Id.

The clear and convincing evidence here –- including the
affidavit testimony of Sovereign employee James McClernan,18 the
blank

footnote

5

in

the

Mortgage

Loan

Schedule,

and

the

disclosure of the second mortgages in footnote 5 of the COM,
pre-COM, and COM disk -- demonstrates that the omission of the
second

mortgage

data

in

the

Mortgage

Loan

Schedule

was

a

clerical error that neither defendant nor Morgan Stanley –- the
parties to the MLPA -- intended.

See In re Am. Home Mortg.

Inv. Trust 2005-2, No. 14 Civ. 2494 (AKH), 2014 U.S. Dist.
LEXIS 111867, at *57 (S.D.N.Y. July 24, 2014) (holding that a
“scrivener’s error was proved clearly and convincingly . . .
from

the

Offering

Documents,

the

Indenture

itself,

and

the

drafting history of the documents”).
Because Morgan Stanley, which helped prepare and draft the
MLPA and COM (McClernan Decl. ¶¶ 4-6, 8), knew about the second
mortgages and failed to correct the footnote mistake, it would
be subject to a scrivener’s error defense if it attempted to

18

McClernan, who was involved in the CMBS transaction, stated that defendant
and Morgan Stanley meant to include the text of the missing footnotes in the
Mortgage Loan Schedule just as they included them in the COM, pre-COM, and
COM disk. McClernan Decl. ¶¶ 15, 25.

29

claim a breach of warranty.

As Morgan Stanley’s assignee,

plaintiff is therefore subject to the same defense.

See Krys

v. Aaron (In re Refco Inc. Secs. Litig.), 890 F. Supp. 2d 332,
354 (S.D.N.Y. 2012) (“an assignee stands in the shoes of the
assignor and thus acquires no greater rights than its assignor”
(internal

quotation

marks

omitted));

Hyosung

Am.

v.

Sumagh

Textile Co., 94 Civ. 0568 (SAS), 1996 U.S. Dist. LEXIS 12829,
at *30 (S.D.N.Y. Aug. 30, 1996) (noting that “Orkid’s knowledge
was imputed to Hyosung by virtue of their assignor/assignee
relationship” and “Orkid's knowledge . . . barred Hyosung’s
claims against Sumagh”); Persky v. Bank of America Nat’l Ass’n,
261 N.Y. 212, 220 (N.Y. 1933) (“It is too well established to
require argument that ordinarily the assignee of an instrument
which is not negotiable takes title subject to all equities and
defenses which could be urged against his assignor.”); Losner
v. Cashline, L.P., 303 A.D.2d 647, 648 (N.Y. App. Div. 2003)
(“an assignee of a mortgage takes subject to any defense that
would have prevailed against its assignor”).
Assignee

status

certificateholders
omission

of

the

were
second

aside,

plaintiff

independently
mortgage

Schedule was a clerical error.

data

and

informed
in

the

the

that

the

Mortgage

Loan

Rep 18 alerts parties to the

existence of second mortgages and states that these mortgages
are

shown

in

the

Mortgage

Loan

30

Schedule.

Although

second

mortgage data is not listed there, several footnotes –- which
are

logical

Because

places

blank

indicates

that

to

insert

footnotes
the

serve

absence

result of a mistake.

this

of

no

data

--

purpose,

second

are

left

their

mortgage

blank.

presence

data

is

the

That conclusion is confirmed by a cursory

review of the Mortgage Loan Schedule attached to the COM, which
discloses the second mortgage data in footnote 5.
Thus, there is no question that all parties knew there
were

second

mortgages

Mortgage Loan Schedule.

and

expected

them

to

appear

in

the

Under these circumstances, reformation

of the Mortgage Loan Schedule to include the missing footnote 5
text is warranted.
ii.

Rep 10

Plaintiff

claims

that

defendant

breached

Rep

10

by

extending mortgage loans on properties that were encumbered by
second mortgages, which made the loans too risky.
15.

Pl. Opp. at

Plaintiff contends that this was not “proper and prudent

and [did not meet] customary industry standards.”
Ex. B ¶ 10.

Id.; MLPA

Leaving aside the fact that plaintiff does not

cite a single law or industry standard that prohibits this
relatively
because

common

the

disclosed

by

practice,

existence
Rep

18.

of

at

it

waived

least

Thus,

one

assuming

this

alleged

second

breach

mortgage

arguendo

that

was
the

existence of a second mortgage is a breach of Rep 10, such

31

breach was,

as discussed above,

"disclose [d]

up front,"

Rogath

v. Siebenmann, 129 F.3d at 265, and is therefore waived. 19
CONCLUSION

For the foregoing reasons,
dismiss and for

we grant defendant's motion to

summary judgment and deny plaintiff's motions

to amend the complaints.

Dated:

New York, New York
September 8, 2014

L.qz~~

NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE

Because we hold that defendant did not breach Reps 18 or 10, the current
and proposed Section 2. 03 (b) claims, which are predicated on the existence
of a Rep breach, must be dismissed and deemed futile, respectively.
19

32

Copies of the foregoing Memorandum and Order have been mailed
on this date to the following:
Attorneys for Plaintiff

Timothy J. Pastore, Esq.
Duval & Stachenfeld LLP
555 Madison Avenue, 6th Floor
New York, NY 10022
Paul D. Snyder, Esq.
Bradley C. Mirakian, Esq.
Snyder Law Firm LLC
13401 Mission Road, Suite 207
Leakwood, KS 66209
Attorney for Defendant

Robert J. Malatak, Esq.
Stephen J. Grable, Esq.
Annie P. Kubic, Esq.
Hahn & Hessen LLP
488 Madison Avenue, 15th Floor
New York, NY 10022

33