First Department of the Appellate Division of the Supreme Court for the State of New York

New York Appellate Court Affirms Motion to Dismiss RMBS Complaint Against Morgan Stanley

On January 12, 2016, the Appellate Division, First Department, of the New York State Supreme Court affirmed a trial court order granting Morgan Stanley’s motion to dismiss claims brought by Dexia SA’s subsidiary FSA Asset Management LLC (“FSAM”). Plaintiffs asserted fraud claims against Defendants based on allegations that Defendants knowingly misrepresented the quality of more than $626 million in RMBS sold by Morgan Stanley to Plaintiffs in 2006 and 2007.  The Court’s ruling rested on a recent New York Court of Appeals decision holding that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note, and that there must be some language to evince that intent and transfer such rights.  Specifically, the Court found that FSAM’s agreement to deliver “all right, title and interest” in the RMBS to the Dexia Plaintiffs did not transfer the right to bring fraud claims.  The Court also concluded that FSAM could not establish damages because it received from the Dexia Plaintiffs the same amount it originally paid for the securities. Opinion.

New York Appellate Court Allows Repurchase Claims Against Nomura To Proceed

On October 13, 2015, the First Department of the Appellate Division of the Supreme Court for the State of New York decided an appeal in four actions brought by HSBC Bank as Trustee on behalf of four RMBS trusts against Nomura Credit & Capital, Inc. and related entities.  We previously covered Justice Friedman’s trial court decision in one of the actions here. In a decision written by Justice John W. Sweeney, the First Department held that the trusts can proceed with claims relating to loans that were not the subject of pre-suit breach notices or where Nomura was not given the contractual 90-days-notice of the alleged breaches before suit was filed.  The First Department distinguished its decision in Ace (previously covered here) on the basis that in Ace there were no timely claims.  The court reasoned that the untimely claims here would have related back in an amended pleading to timely claims in the complaint, and cited the trusts’ allegations that Nomura independently discovered the alleged breaches.

Affirming Justice Friedman’s decision, the court also held that the trusts are not limited by the contractual “sole remedy” of repurchase of loans breaching representations and warranties if the loans have been liquidated or foreclosed.  Instead, the trusts may seek money damages for breaching loans where specific performance of the repurchase sole remedy is impossible.  The court further affirmed the lower court’s decision that the trusts’ claims for breach of the implied covenant of good faith and fair dealing were duplicative of their breach of contract claims and affirmed the dismissal of the trusts’ claims for rescission or rescissory damages.

The court reversed Justice Friedman’s decision insofar as it dismissed the trusts’ claims that Nomura breached its representation that the deal documents did not contain any untrue statements.  The court held that alleged breaches of that provision were not subject to the contract’s sole remedy of repurchase.  The court further held that the trusts’ claims for damages for the failure to repurchase were properly dismissed, but the lower court erred in dismissing claims for damages for Nomura’s failure to give notice of breaches that it allegedly discovered.  Decision.