Scott E. Mollen ()
Commercial Landlord-Tenant—Specific Performance of Right of First Refusal (ROFR)—A ROFR Is an Exception to the General Rule That Covenants of a Lease Are Extended Into a Month-to-Month Tenancy
Plaintiff tenants commenced an action for specific performance of a right of first refusal (ROFR), which was contained in a lease which had been executed in 2011. The lease was for a 12-month period. Upon expiration of the lease, the plaintiffs “continued to occupy the premises pursuant to a month-to-month agreement.” In May 2016, the plaintiffs learned that the owner was “in contract to sell the premises, and demanded that they be given the right to exercise the [ROFR].” The owner asserted that the ROFR had expired when the lease ended in 2012.
The plaintiffs commenced the subject action and filed a notice of pendency on Aug. 30, 2016. The defendant owner answered and counterclaimed. The owner thereafter moved for summary judgment, dismissing the complaint and awarding it judgment on its counterclaim.
The owner asserted that when the lease expired in 2012, the parties had “agreed that plaintiffs would be able to continue their occupancy as month to month tenants.” The owner thereafter entered into a contract of sale in April 2016 and had served the plaintiffs with a 30 day notice of termination. The plaintiffs refused “to vacate the premises, claiming that their [ROFR]…survived and carried into the month-to-month tenancy.” The ROFR provided that “[i]n the event that the landlord will be interested in selling the building, the tenant will be given the first opportunity to purchase the building.”
The plaintiffs argued that the owner’s motion for summary judgment “is premature as questions of fact exist as to whether or not the [ROFR] was intended to continue in the month-to-month tenancy.”
The owner established its prima facie entitlement to summary judgment by showing that the plaintiffs lacked “an enforceable [ROFR] at the time that [owner] entered into a contract of sale.” The plaintiffs had not renewed or extended the lease in accordance with its terms. Rather, “they entered into an oral agreement whereby they were month-to-month tenants. Thus, following the expiration of the lease, the plaintiffs no longer maintained an enforceable [ROFR]….” The court cited appellate authority which held that “[t]he [ROFR] is an exception to the general rule that the covenants of a lease are extended into a month-to-month tenancy….”
Additionally, the court found that the plaintiffs had failed to raise a triable issue of fact. The plaintiffs’ attorney lacked “personal knowledge” of the relevant facts. His affirmation was “insufficient to raise of triable issue of fact with respect to plaintiffs’ claim” that the parties’ intent “was to continue the [ROFR].” Although the complaint was verified, it was only verified by “an attorney who lacks personal knowledge of the facts constituting the claim.” Thus, the attorney’s assertions as to the intent of the parties were “merely speculative, unsupported by any evidence, and insufficient to raise a triable issue of fact.”
The court denied the owner’s counterclaim for “slander of title,” based on the notice of pendency. The court explained that a notice of pendency did “not give rise to a cause of action sounding in slander of title….” Accordingly, the court granted the owner’s motion for summary judgment, dismissed the complaint and denied the owner’s motion for summary judgment.
Residential Mortgage-Backed Securities—Leave to Utilize Sampling of Loans to Prove Liability and Damages Denied—Claims Must Be Established on a Loan-to-Loan and Trust-By-Trust Basis— Burden and Expense of Sampling Must Be Proportionate to the Case
This case was commenced “by certificateholders of residential mortgage-backed securities (RMBS) trusts against the trustee.” The plaintiffs sought “leave to re-underwrite a sample of loans to establish pervasive breach rates across the…loans” of the subject trusts to prove liability and damages. The trustee contended that “the plaintiffs cannot prove their case through sampling but rather must prove each element of their claims on a loan-by-loan and trust-by-trust basis.”
The trustee “owed certain ‘limited, contractual’ duties to the certificateholders” pursuant to the governing documents (PSAs”or the agreements) and, inter alia, the “mortgage loan purchase agreements and servicing agreements.” The plaintiffs’ claims arise from Sections 2.03 and 8.01 of the PSAs. Section 2.03, provides:
Upon discovery or receipt of notice of any materially defective document in, or that a document is missing from, a Mortgage File or of a breach by the seller of any representation, warranty…under the mortgage loan purchase agreement [defect]…that materially and adversely affects the value of such Loan…, the trustee shall promptly notify the seller of such defect,…and request that the seller deliver such missing document, cure such defect or breach within 60 days…and if the seller does not deliver such missing document or cure such defect or breach…during such period, the trustee shall enforce the obligations of the seller under the mortgage loan agreement to repurchase such Loan…, if…the seller is obligated to do so under the mortgage loan purchase agreement.
…. PSA Section 2.03 imposes two threshold requirements before [trustee] must enforce the loan seller’s repurchase obligation. [trustee] must “discover” or obtain written notice of missing documentation…or an R&W breach. Id. And the breach or deficiency must “ materially and adversely” affect the value of the particular loan. Id. Upon both requirements being satisfied, [trustee's]…obligations as trustee are triggered. [trustee] must promptly notify the loan seller of the defect in the particular loan. If the seller fails to cure or repurchase the defective loan . . , [trustee] must then “enforce the obligations of the seller…to repurchase such Loan.” Id. This remedy, also referred to as the “put-back” remedy, is the “sole remedy” in the event of an R&W breach.
Without identifying particular loans, the plaintiffs alleged that the trustee “breached its Section 2.03 obligations when it ‘discovered’ breaching loans that had a material and adverse effect and failed to require cure or repurchase.” The parties disagreed as to the meaning of “discovery” for purposes of Section 2.03 and “the appropriate method of proving [trustee's] breach of its Section 2.03 obligations.” The plaintiffs contended that “‘discovery’ requires only inquiry notice of breaches, which triggers [trustee's] duty to investigate breaches, determine breach rates, and enforce the seller’s repurchase obligation.” The trustee argued that “discovery” requires “actual knowledge of breaches” and the trustee “had no duty, before the occurrence of a defined Event of Default [EOD], to investigate breaching loans.” An EOD is defined in the PSAs “as a failure of the master server to perform its servicing duties in compliance with the [PSAs] and to cure such failure within 30 days.”
The plaintiffs argued that “statistical sampling…, rather than reviewing the entire universe of at-issue loans, has been allowed by other courts…and is appropriate in this context.” The plaintiffs believed that “sampling will generate breach rates” and prove what “a prudent person would have found if an investigation of breaches had been performed.” The trustee asserted that the plaintiffs must demonstrate that the trustee “knew of loan-specific breaches with a material and adverse effect and that sampling cannot capture such loan-level specificity.” The trustee’s obligations under Section 8.01, “are triggered by actual knowledge or written notice of an EOD….” Section 8.1 provides in pertinent part:
he trustee shall not be deemed to have knowledge of a master server [EOD] unless a Responsible Officer of the trustee…has actual knowledge…or unless written notice of any event which is . . a master server [EOD] is received by the trustee and such notice references the certificates, the trust or this agreement.
Generally, “statistical sampling is an accepted method of proving liability…, ‘relating to RMBS and…repurchase claims.’” However, courts are not to authorize “the expense and burden of sampling if it is not ‘proportional to the needs of the case.’” FRCP 26 identifies “various factors to evaluate proportionality….” The court focused on “‘the importance of the discovery in resolving the issues’ and ‘whether the burden or expense of the proposed discovery outweighs its likely benefit.’”
The proposed sampling would be “costly, time consuming, and will likely result in challenges to the admissibility of the evidence.” The defendant argued that the sampling “cannot prove plaintiffs’ claims.” This decision addressed the parties’ burden of proof and was “intended to guide the Court’s proportionality analysis.” Accordingly, at summary judgment or trial, the conclusions of law in this decision are not to be treated as the “law-of-the-case effect.”
The court noted that since the subject action had “progressed beyond the pleading stage and is well on its way to summary judgment and trial,” the “plaintiffs must be ready to prove [trustee's] alleged misconduct ‘loan-by-loan and trust-by-trust’…. Whether [the trustee…] was obligated to repurchase a given loan’” requires examination of “which loans, in which trusts, were in breach of the representations and warranties.” Additionally, courts “have dismissed theories of generalized wrongdoing after the pleading stage.”
To prevail on a Section 2.03 breach of contract claim, the plaintiffs have to prove that the trustee “failed to act as required under the PSA,” i.e., provide “loan-specific proof” related to a particular material defect, “that [trustee] failed to act with respect to the loan-specific remedies…, and that such failure caused the plaintiffs harm.” The court opined that utilizing “extrapolated pool-or trust-wide breach rates ignores the Court of Appeals’ requirement that breaches be proven on a loan-by-loan basis.”
The plaintiffs had to “establish the…underwriting guidelines and show that the loan breached a specific R&W [Representation and Warranty].” Moreover, “[t]he materiality of an R&W breach is also loan-specific.” The court explained that “beyond those loans within the sample, sampling cannot reliably prove which loan defects had a material and adverse effect on the value of a particular loan.” “Sampling will not ‘adequately distinguish between breaches that are material and adverse as to a particular loan and those that are not.’” Although sampling may “detect a technical breach or deviation from underwriting standards,” it may “fail to capture mitigating circumstances or compensating factors.” Furthermore, “the cure and repurchase remedies, the sole remedies under the PSAs, are themselves loan-specific.” Additionally, none of the authorities cited by the plaintiffs “authorize costly expert discovery that will not satisfy the plaintiffs’ burden of proof….”
Moreover, Section 2.03 claims require proving “discovery” of the underlying breach. The plaintiffs contended that “discovery” for purposes of Section 2.03, involves “only inquiry or constructive notice….” and that the trustee “‘discovered’ the breaches…because it should have known they existed due to the pervasive breach rates.” However, absent knowledge of “specific document defects in specific loans, [trustee] could not have ‘discovered’ any breaches…and provide notice.” Additionally, “[e]quating ‘discovery’ with constructive knowledge is…inconsistent with the…terms of the PSAs, which limit [trustee's] pre-EOD duties as trustee to the four corners of the governing agreements.” The PSAs “did not obligate [trustee] to investigate until it received notice or obtained actual knowledge of a master server EOD….” The court stated that “[i]mporting a ‘should have known’ standard is…inconsistent with cases that have emphasized the limited role of an indenture RMBS trustee.”
The court further opined that “[s]ampling cannot establish that [trustee] had actual knowledge of specific breaches on the requisite loan-by-loan basis.” Although sampling could “identify deficiencies within a drawn loan pool, [trustee's] duties…, including its obligation to enforce the repurchase remedy, are triggered only when it knew or received written notice of a defect for a particular loan….” Thus, “[c]onducting a sampling review seven or eight years after the fact cannot establish which specific loans [trustee] would have actually found to be in breach had it performed an investigation at the time.”
Additionally, “[u]nder the PSAs, an EOD (and, relatedly, [trustee's] duty to act as a prudent investor) is triggered by a servicing breach by the master server….” “The master server must then receive written notice of the breach from certain enumerated parties. The master server’s failure to cure the breach after a 30 or 60-day period culminates in a master server EOD.” The trustee’s “heightened duties, including providing notice to noteholders, are triggered only when it obtains actual knowledge or written notice of a master server EOD.” Without receiving notice or knowledge, the trustee’s “obligations are ‘still circumscribed by the indenture.’”
The plaintiffs argued that based on the “widespread, public nature of the financial crisis, servicer EODs occurred when servicers failed to notify [trustee] of R&W breaches,” i.e., the trustee had “actual knowledge” of the breaches, “based on publicly available information…and the [trustee] breached its obligations when, after obtaining actual knowledge of such servicer EODs, it failed…to investigate, to uncover the full extent of breaching loans, and to then successfully repurchase the loans.” The plaintiffs asserted that “re-underwriting a sample of loans will prove the existence and rate of breaching loans.” The court rejected that argument.
The court explained that any failure by the trustee to send notice as to discovery of mortgage loan R&W breaches is based on “the existence of underlying R&W breaches that are loan-specific in nature.” To establish the occurrence of an EOD related to R&W breaches, the plaintiffs had to prove “loan-specific, material and adverse R&W breaches,” “the servicer’s discovery of those individual breaching loans,” and “the servicer’s failure to report those loans to [the trustee].” The plaintiffs’ description of EODs as servicer failures overlooked “the fact that most of the PSAs…indicate that an EOD triggering prudent conduct by the trustee requires misconduct or a failure to perform by the master servicer, not just any servicer.”
The court further observed that “[i]n order to trigger Section 8.01′s prudent person standard, [trustee] must have obtained actual knowledge or written notice of the EOD.” The “publicly available information did not identify individual loans in breach. Generalized information indicating the trusts with loan defaults or R&W breaches…cannot substitute for proof that a servicer or master server had actual knowledge of loan-specific R&W breaches and that [trustee] actually knew of the servicer’s or master server’s failure to report those breaches.” Thus, “sampling will not aid plaintiffs in this endeavor.”
Additionally, the plaintiffs did not demonstrate that under Section 8.01′s prudent person standard, the trustee was required “to investigate unreported R&W breaches, such as by performing…sampling review, and failed to do so.” Even after an EOD, “[t]he trustee is not required to act beyond his contractually conferred rights and powers.” The governing agreements permit “a trustee to refrain from expending or risking its own funds in conducting an investigation without securing satisfactory indemnification.” The plaintiffs had “not established that the PSAs required the [trustee] to assume the extremely burdensome task of performing a review of the trusts in order to find the specific breaching loans.”
Moreover, the plaintiffs failed to cite evidence, “such as industry standards or customs at the time, showing that performing some kind of sampling review,…investigating loan breaches, and…enforcing repurchase was ‘what a prudent person would have done’ following an EOD.” Thus, the plaintiffs’ argument that the trustee should have conducted extensive sampling was “‘simply too distant a leap for this Court to make without plausible allegations that other RMBS trusts’ trustees have taken similar action in similar circumstances (bolstering the actions a ‘prudent person’ would have taken).’”
Although the plaintiffs argued that sampling would demonstrate the existence and rate of defective loans the trustee would have uncovered, “had it acted as a prudent person,” the court reasoned that “to successfully enforce repurchase of a specific loan after a defined EOD has occurred, [trustee] would have needed to locate the individual breaching loans themselves rather than determine trust-wide breach rates.” The court opined that it was unclear as to how sampling could show that following an investigation, the trustee “would have located the specific breaching loans outside of a sample based on the existence and rate of defective loans within the given sample.”
The plaintiffs had not cited authority that established “in the context of a defendant RMBS trustee obtaining actual knowledge of servicer EODs, the rate of breaches in a sample of breaching loans allows the trustee to identify specific breaching loans outside the sample.” The court concluded that such “attenuation is made all the more glaring by the fact that the loans in the trusts…vary in terms of maturity date, interest rate, and type.” Accordingly, the court denied the plaintiffs’ motion “to re-underwrite a sampling of loans” in order to demonstrate the trustee’s liability and damages beyond the loans in the sample.
Royal Park Investments v. HSBC Bank, 14-CV-08175, NYLJ 1202782108209, at *1 (SDNY, Decided March 10, 2017), Netburn, Magistrate Judge.