Second Circuit holds that assignee of notes lacks standing to file suit against insolvent telecom company.

In Cortland Street Recovery Corp. v. Hellas Telecomm. et al, the Second Circuit affirmed the District Court’s opinion and held that plaintiffs, Cortlandt, were merely assignees with rights limited that of being of a power of attorney rather than having full ownership rights.  Further, the Court held that the lower court did not abuse its discretion in denying Cortlandt to substitute the owners of the notes as plaintiffs pursuant to Fed. R. Civ. P. 17 (a)(3).

Cortlandt was assigned the rights by various Sub Note holders to collect €83.1 million as a result of the default by Hellas.  The plaintiffs filed a complaint in the Southern District Court of New York contending that the defendants used the Sub Notes to defraud their creditors.

With respect to the standing issue, pursuant to Baker v. Carr, 369 U.S.186, “the plaintiff must have alleged such a personal stake in the outcome of the controversy as to warrant its invocation of federal court jurisdiction and to justify exercise of the court’s remedial powers on its behalf.” Furthermore pursuant to Lujan v. Defenders of Wildlife, 504 U.S. 555, the plaintiff must establish that he has suffered an injury in fact which is both (1) “concrete and particularized” and (2) “actual or imminent”.  Here, Cortlandt did not suffer a direct injury as a result of the default, and the real issue between the parties was whether in the nature of the assignment, Cortlandt was assigned standing to sue for any claims.

The Court observed that Cortlandt failed to demonstrate any transfer or title or ownership of the claims.  The Court followed the reasoning in its previous holding in Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11 (2d Cir. 1997), which stated that in order “to assign a claim effectively, the claim’s owner “must manifest an intention to make the assignee the owner of the claim”.  Thus, there must be an intention that established that the title or ownership must be transferred.  Here, Cortlandt was assigned the “full rights under the assignments to collect principal and interest due and to pursue all remedies” and “collect on the Sub Notes on behalf of the holders”  and therefore, since ownership or title had not been transferred pursuant to the assignment agreement, Cortlandt did not have Article III standing when it filed its claim.

Cortlandt further argued that even if it lacked Article III standing, it should at least be given the oportunity to cure the deficiency pursuant to Fed. R. Civ. P. 17 (a)(3).  Rule 17 (a)(3) states that:

“The court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action. After ratification, joinder, or substitution, the action proceeds as if it had been originally commenced by the real party in interest.”

The Court distinguished Advanced Magnetics where it permitted the plaintiffs in that case to substitute the parties since inter alia the factual allegations remained the same after the parties were substituted.  Further, an important distinction that was drawn was the fact that the named plaintiff had standing on some of the claims, whereas Cortlandt did not.  The Court further reasoned that even if there could be no substitution at the commencement of the suit, there was no complete assignment of ownership and thus there was no one to substitute for in the first place.
The Court further noted that even if the district court granted the motion to substitute parties, this would result in dismissing the case on subject matter jurisdiction grounds since the note owners and the defendants are both foreign entities which would result in losing diversity.

Even though Cortlandt requested leave to obtain a new assignment, the Court concluded that this would not enable Cortlandt to alter its complaint in the district court.   Since Cortlandt alleged in its first complaint had full rights under assignment to collect principal and interest  The Court further reasoned that any change in the nature of the assignment would also change the factual allegations and thus would be impermissible.  Furthermore, the Court appeared to be open to substituting the parties had there be no change in the factual or legal substance of the claim.

The Concurrence (ironically also written by Judge Sack who wrote the majority opinion) added that Zurich would not be adopted in the Second Circuit and had some issue with the substantive merits of the decision.  Whereas the Sixth Circuit took a more rigid approach in in regards to the approach in which jurisdiction must be established at the outset of litigation.  Unlike the Sixth Circuit which appeared to decline to amend a complaint to correct a defect, the Judge Sack appeared to take a more lenient approach in that he would allow plaintiffs to cure the defect provided it can be remedied and it would not affect the legal or factual allegation of the claim.

Ultimately, the conclusion is that when assignees are entrusted in enforcing claims of various noteholders, it is better to ensure that they also have title or ownership of the notes to ensure that there is no defect in standing.


Court holds that breach of representations and warranties accrues from execution of contract and not at the time of discovery of breach.

In ACE Sec. Corp. v. DB Structured Products, 2015 Slip Op. 04873 (Ct App 2015), the Court of Appeals affirmed the decision of the First Appellate Division and held that breach of any warranties or representations accrued at the point of contract execution.  The Court further held that the plaintiff failed to fulfill the conditional precedent by allowing the defendants to cure the breach within 60 days or repurchase the loans with 90 days.

The defendants purchased a series of mortgages and sold the pool of loans to the plaintiff pursuant to a Mortgage Loan Purchase Agreement (MLPA).  Pursuant to a Pool and Servicing Agreement (PSA), the plaintiff transferred the mortgages to a trust.  The parties to the PSA include the plaintiff; OCWEN Loan Servicing as servicer; Wells Fargo as master servicer and securities administrator, and HSBC USA as trustee.  Both agreements were executed on March 26th, 2006.

The defendants made several representations and warranties in the MLPA, and allowed the trustee to examine all the mortgage files to determine whether they complied with the representations and warranties.  The MLPA stated that the remedy for any breach would be the ability to cure within 60 days or to repurchase the loans within 90 days of the discovery of the breach.

Over a period of time, the losses accumulated to $330 million due to various defaults on the mortgage.  Two certificate holders, RMBS Recovery Holdings 4, LLC & VP Structured Products, LLC were prompted to hire independent forensic mortgage loan reviewers to examine the loans.  It was concluded that over ninety percent of the loans failed to comply with the representations and warranties in the MLPA.

On January 12, 2012, these certificate holders wrote to the trustee indicating that the loans were in breach of the representations and warranties and urged the trustee to enforce the provision making the defendant to repurchase the loans.  The trustee took no action and thus the certificate holders filed a summons and complaint against the defendants on March 26th, 2012 alleging one cause of action for breach of contract and seeking damages of $250 million.

The trustee subsequently filed as substitute of plaintiff on September 13, 2012.  In its pleading, the trustee indicated that it had provided notice to the defendants indicating the breach of representations.  On November 20, 2012, the defendants moved to dismiss the complaint since (1) the claims were barred by the statute of limitation, (2) there was no sufficient time given to cure and (3) the certificate holders who originally brought the suit lacked standing.

The Court indicated that the “discovery” rules do not apply in New York and citing Ely-Cruikshank Co. v Bank of Montreal, 81 NY2d 399, 403 [1993]), reiterated that the “statutory period of limitations begins at the time when the liability of the wrong has risen even though the injured party may be ignorant of the existence of the wrong or injury”.

In this light, the Court rejected the trust’s argument that the cure or repurchase of loans as a “separate promise of future performance that continued for the life of the investment”.  In rejecting the trust’s argument, the Court reasoned that the there was no express guaranty of future performance of the loans.  At best, the the representations and warranties about the loan characteristics on March 28th, 2006 and expressly stated that those representations and warranties did not survive the closing date.  The Court further reasoned that it would be unrealistic for a seller of the loans to guarantee the performance of the loans during the course of their lifetime.

The Court further analyzed the trust’s argument that unless the defendants cured or repurchased the loans, the trust had no basis for a cause of action since the condition precedent was not fulfilled.  In rejecting the trust’s argument, the Court cited its decision, Bulova Watch Co. v Celotex Corp. (46 NY2d 606 [1979]) where it was held that unless there was an explicit provision to provide a separate and distinct and thus guaranteed a future promise.  Here, the Court distinguished Bulova by stating that the defendants never guaranteed the future performance of the mortgage loans.  At best, the defendants made representations and warranties regarding the loan characteristics and further explicitly stated that such representations and warranties did not survive the closing date.  Rather, it appeared that the Court was looking for an explicit provision that stated that either the cure or the repurchase of the loans would continue for the lifetime of the loans.

Ultimately, the Court concluded that the breach occurred at the execution of the MLPA and that the trust failed to bring a cause of action within six years of execution.