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IN THESE ACTIONS BY INVESTORS AGAINST TRUSTEES STEMMING FROM THE COLLAPSE OF RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) THE COURT HELD (1) CLAIMS AGAINST TRUSTEES ARE NOT PROHIBITED BY A NO-ACTION CLAUSE (2) THE TRUSTEES WERE NOT REQUIRED TO ENFORCE REPURCHASE OBLIGATIONS AND (3) THE TORT CLAIMS WERE DUPLICATIVE OF THE BREACH OF CONTRACT CLAIMS (CT APP).

​The Court of Appeals, reversing (modifying) the appellate division, over two dissents, in these actions by investors against the trustees stemming from the collapse of residential mortgage-backed securities [RMBS], determined (1) claims against a trustee are not precluded by a “no action” clause, (2) trustees are not required to enforce repurchase obligations, and (3) the tort claims are duplicative of the breach of contract claims:

… RMBS [residential mortgage-backed securities] are financial instruments, popular in the mid-2000s, backed by individual mortgage loans …  The securitization process involves a “sponsor” who acquires a bundle of loans from banking institutions (“originators”) and sells the pooled loans to a “depositor,” who places the loans into a trust … . The trust issues certificates purchased by investors, who are entitled to a portion of the revenue stream from the borrowers’ payments … . The mortgage loans in the trust are serviced by a “servicer,” a party typically affiliated with the sponsor or originator. Each trust has a Trustee which acts on behalf of the Trust and whose responsibilities are prescribed by the securitization trusts’ governing agreements. While our previous RMBS cases have been brought by RMBS trustees, investors, or their insurers against RMBS sponsors, depositors, servicers, and originators (collectively, obligated parties) to recover for losses on the certificates, here the investors are suing the RMBS Trustees. * * *

… [C]laims against the trustee . . . cannot be prohibited by a no-action clause” … . “Because a standard no-action clause vests in the trustee all of the securityholders’ rights to bring suit, making the trustee the only path to a remedy, courts have been unwilling to enforce such clauses when the trustee’s conflicts or irrationality bar that path to relief” … . … [t]he Trustee cannot not sue itself ,,, and therefore compliance was not required. * * *

Defendants moved to dismiss plaintiffs’ claims that they breached the governing agreements by failing to enforce repurchase obligations, arguing that these agreements do not impose such a duty on trustees…. . We … hold that the governing agreements do not impose on defendants an affirmative duty to enforce repurchase obligations and so those claims should be dismissed. * * *

We hold that, to the extent any tort claims remain, they should be dismissed as duplicative of the breach of contract claims. IKB Intl., S.A. v Wells Fargo Bank, N.A., 2023 NY Slip Op 03302, CtApp 6-15-23

Practice Point: Here residential mortgage-backed securities (RMBS) investors sued the trustees. The actions were not prohibited by no-action clauses. The trustees were not obligated to enforce repurchase agreements. And the tort claims were duplicative of the breach of contract claims.

 

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THE “NO ACTION” PROVISION IN THE CONTRACT PRECLUDED PLAINTIFFS FROM BRINGING A JUDICIAL BREACH OF CONTRACT ACTION; THE AVAILABLE CONTRACTUAL REMEDIES WERE DEEMED EXCLUSIVE (FIRST DEPT). ​

The First Department, reversing the appellate division, in a full-fledged opinion by Justice Oing, over a two-justice dissent, determined the complaint seeking a judicial determination whether the contingent resource payment (CRP) agreement was breached when Exxon purchased InterOil Corporation was properly dismissed. Exxon successfully argued that plaintiffs’ only recourse was contractual under the terms of the CRP. The opinion is far too detailed to fairly summarize here:

[The CRP] § 8.05’s penultimate sentence not only provides that plaintiffs cannot bring a class action to challenge any aspect of the CRP agreement, but it also bars them from bringing any action or proceeding altogether, “[n]otwithstanding anything to the contrary in this Agreement . . . no individual Holder or other group of Holders will be entitled to exercise such rights.” Such “rights,” written in the plural as opposed to in the singular, refer to those set out in the beginning of the sentence — namely, “institut[ing] any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Agreement.” Mulacek v ExxonMobil Corp., 2023 NY Slip Op 02829, First De[t 5-25-23

Practice Point: Here a provision in the contract providing that no court action for breach of contract could be brought, a so-called “no action” clause, precluded plaintiffs’ lawsuit.

 

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A MUTUAL MISTAKE IN AN AGREEMENT CONCERNING THE PRICE OF SHARES OF STOCK WARRANTED REFORMATION OF THE CONTRACT (FIRST DEPT). ​

The First Department, in a full-fledged opinion by Justice Pitt-Burke, determined a mutual mistake in an agreement justified reformation of the contract. The opinion is too detailed to fully summarize here:

… [W]e find that Supreme Court correctly held that the parties intended to include an antidilution provision that provided for the adjustment of both the share price and the number of shares when common stock was issued at a price below plaintiffs’ exercise price, and that, as result of mutual mistake, inadvertently left the word “sentence” and did not change it to the plural, “sentences” in section 3(b) … .Accordingly, upon exercise of their warrants, plaintiffs were entitled to the value of the adjusted number of shares that were owed but not delivered (565,822 shares). Empery Asset Master, Ltd. v AIT Therapeutics, Inc., 2023 NY Slip Op 01585, First Dept 3-23-23

Practice Point: A mutual mistake in a contract allows reformation of the contract to reflect the intent of the parties.

 

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PLAINTIFF-INVESTOR’S COMPLAINT ALLEGING THE REGISTRATION STATEMENT FILED BY DEFENDANT PHARMACEUTICAL COMPANY ABOUT THE EFFICACY OF ITS DRUG WAS MISLEADING AND VIOLATED THE FEDERAL SECURITIES ACT SHOULD HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Gische, reversing Supreme Court, determined defendant pharmaceutical company’s, Genfit’s, motion to dismiss the complaint alleging the company misrepresented the efficacy of a drug in violation of the Federal Securities Act should have been granted. The court noted that the pleading requirements for misrepresentation in this context are not the heightened pleading requirements for fraud:

The gravamen of plaintiff’s complaint is that Genfit made misrepresentations and/or omissions in the registration statement and prospectus (collectively offering documents) it filed with the Securities and Exchange Commission in connection with the IPO (initial public offering). Before a company may sell securities in interstate commerce, it must file a registration statement with the SEC. Pursuant to section 11 of the 1933 Securities Act, if … the registration statement contains an untrue statement of material fact or omits a material fact necessary to make the statement therein not misleading, a purchaser of the stock may sue for damages (15 USC § 77 [k] …). * * *

Plaintiff … objects to certain statements in the offering documents, which we characterize as opinions. … Opinions in offering documents are subject to an analysis under the Supreme Court Decision in Omnicare, Inc. v Laborers Dist. Council Constr. Indus. Pension Fund (575 US 175, 184 [2015]). Under Omnicare, an opinion is actionable if (1) the speaker does not actually hold the stated belief … ; or (2) the opinion affirms an underlying fact … a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself … .

[The] statements of opinion do not affirm underlying facts. … … Plaintiff claims … [the] statements are misleading because Genfit does not actually believe the opinions stated and that the offering documents omit material facts and knowledge. The complaint, however, alleges no facts supporting these conclusions. Schwartz v Genfit, S.A., 2022 NY Slip Op 06892, First Dept 12-6-22

Practice Point: The allegation that a company’s registration statement is misleading in violation of the Federal Securities Act is not subjected to the heightened pleading requirements for fraud. Here the allegations in the complaint did not support even the less stringent pleading requires for misleading statements.

 

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PLAINTIFF ALLEGED DEFENDANT CORPORATION’S REGISTRATION STATEMENT CONTAINED FALSE AND MISLEADING CLAIMS WHICH INDUCED PLAINTIFF TO BUY STOCK IN DEFENDANT’S CORPORATION; THE CLAIMS IN DEFENDANT’S REGISTRATION STATEMENT WERE MERE PUFFERY AND WERE NOT ACTIONABLE VIOLATIONS OF THE SECURITES ACT OF 1933 (FIRST DEPT).

he First Department, reversing Supreme Court, determined the complaint alleging several violations of the Securities Act of 1933 should have been dismissed. The complaint alleged that it was induced to buy stock by defendant’s registration statement. The First Department concluded the statements not false or misleading and therefore were not actionable:

The … registration statement … includes the following statements: “We believe we have created a financially strong company built upon a foundation of three thriving, independent brands with significant global growth potential.” “New product development is a key driver of the long-term success of our brands. We believe the development of new products can drive traffic by expanding our customer base.” “We face intense competition in our markets, which could negatively impact our business. . . Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products, [and] to effectively respond to consumer preferences.” * * *

… [T]he statements were nonactionable immaterial puffery and/or nonactionable opinion … .

The statements did not become misleading by omission as a result of a failure to disclose a slight decline in “same-store sales” for a single quarter’s sales … . City of Warwick Mun. Empls. Pension Fund v Restaurant Brands Intl. Inc., 2022 NY Slip Op 06315, First Dept 11-10-22

Practice Point: Statements which are mere puffery are not actionable violations of the Securities Act of 1933. Here plaintiff alleged false and misleading claims in defendant corporation’s registration statement induced plaintiff to buy defendant corporation’s stock. Supreme Court should have granted defendant’s motion to dismiss the complaint.

 

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PLAINTIFFS ALLEGED THE RESIDENTIAL-MORTGAGE-BACKED-SECURITIES ISSUED BY THE DEFENDANT TRUSTEES WERE WORTHLESS BECAUSE OF DEFENDANTS’ BREACHES OF CONTRACTUAL, FIDUCIARY AND STATUTORY DUTIES; MOST (BUT NOT ALL) OF DEFENDANTS’ MOTIONS TO DISMISS WERE DENIED BASED UPON CONTRACT-INTERPRETATION PRINCIPLES (FIRST DEPT).

The First Department, reversing (modifying) Supreme Court in this residential-mortgage-backed-securities case, over an extensive two-justice partial dissent, determined certain post-Event of Default breach of contract and breach of fiduciary duty claims should have been dismissed, and the pre-Event of Default document defect repurchase enforcement claims should not have been dismissed. “Plaintiffs purchased residential mortgage-backed securities (RMBS) certificates issued by RMBS trusts for which defendants served as the trustees. In six separate actions brought in May 2016, plaintiffs allege that their investments are almost worthless as a result of defendants’ breaches of their contractual, fiduciary, and statutory duties.” The majority decision focuses on refuting the arguments in the partial dissent, resulting in a comprehensive overview of contract-interpretation-law which is worth reading but cannot be fairly summarized here. Generally, Supreme Court’s denial of most of the defendants’ motions to dismiss was affirmed. IKB Intl., S.A. v Wells Fargo Bank, N.A., 2022 NY Slip Op 05058, First Dept 8-30-22

Practice Point: The plaintiffs in this residential-mortgage-backed-securities action alleged the certificates issued by the defendant trustees were almost worthless as a result of the defendants’ breach of contract and fiduciary and statutory duties. Most of the plaintiffs’ causes of action survived defendants’ motions to dismiss. The decision includes a comprehensive discussion of the law of contract-interpretation which is worth consulting.

 

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BREACH OF CONTRACT ACTIONS BY CERTIFICATEHOLDERS AGAINST THE TRUSTEE FOR RESIDENTIAL MORTGAGE BACKED SECURITIES TRUSTS DISMISSED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Pitt, reversing (modifying) Supreme Court, dismissed the remaining actions brought by certificateholders against the trustee (US Bank National Association) for residential mortgage backed securities (RMBS) trusts. The opinion is fact-specific, based upon contract language, and cannot be fairly summarized here:

This case involves residential mortgage-backed securities (RMBS). Usually, this type of case is filed by an RMBS trustee because they are generally the only party with standing to assert the trust’s right to compel repurchase of defective loans and to take action against the parties responsible for the improper servicing of loans. Here, however, plaintiffs, as certificateholders of nine RMBS trusts, bring this action for breach of contract against defendant U.S. Bank National Association, as trustee of the nine RMBS trusts, for failure to carry out its alleged duties as trustee in response to the contractual breaches by other transaction parties. The main issues raised in this appeal are: (1) whether the governing trust documents imposed contractual obligations on the trustee … to identify and take action before an event of default (EOD) arose (pre-EOD claims); and (2) whether plaintiffs may rely on the servicers’ annual assessments and the trustee’s letter to the servicer to satisfy the “written notice” element of the claim that the trustee breached its contractual obligations to take action as a “prudent” trustee after an EOD arose (post-EOD claims). Western & Southern Life Ins. Co. v U.S. Bank N.A., 2022 NY Slip Op 04886, First Dept 8-9-22

Practice Point: Here breach of contract actions by certificateholders against the trustee for residential mortgage backed securities trusts were dismissed.

 

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ONLY THE ORIGINAL PLAINTIFF CAN TAKE ADVANTAGE OF CPLR 205 (A) WHICH ALLOWS RE-COMMENCEMENT OF A LAWSUIT WITHIN SIX MONTHS OF A DISMISSAL WHICH WAS NOT ON THE MERITS (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge DiFiore, over a dissenting opinion, determined the plaintiff, HSBC, could not take advantage of the six-month extension for commencing an action after a dismissal which was not on the merits (CPLR 205(a)) because HSBC was not the original plaintiff:

When a timely-commenced action has been dismissed on certain non-merits grounds, CPLR 205 (a) allows “the plaintiff” in that action “or, if the plaintiff dies,” the “executor or administrator” of the plaintiff’s estate, six months to commence a new action based on the same transaction or occurrence. The new action will be deemed timely based on the commencement of the prior action. Here, after the dismissal of a prior action brought by two certificateholders … —and after the statute of limitations expired—plaintiff HSBC Bank USA, National Association, in its capacity as trustee of a residential mortgage-backed securities (RMBS) trust, commenced this action against the sponsor, invoking CPLR 205 (a). Because HSBC was not “the original plaintiff” in the prior dismissed action … , we agree with the courts below that HSBC could not invoke CPLR 205 (a) to avoid dismissal of this time-barred claim … .* * *

HSBC is not “the plaintiff” in the prior action and the benefit of CPLR 205 (a) is unavailable to save its untimely complaint. … [T]his conclusion is consistent with the public policy underpinning the savings statute. CPLR 205 (a) is a remedial statute that … is “‘designed to insure to the diligent suitor'” an opportunity to have a claim heard on the merits … when the suitor has “initiated a suit in time” … but the claim was dismissed on some technical, non-merits-based ground. While the savings statute undoubtedly has a “broad and liberal purpose” … to “ameliorate the potentially harsh effect of the [s]tatute of [l]imitations” … , “[t]he important consideration is that, by invoking judicial aid [in the first action], a litigant gives timely notice to [the] adversary of a present purpose to maintain [its] rights before the courts” … . Where, as here, the litigant commencing the second action is not the original plaintiff, application of CPLR 205 (a) would protect the rights of a dilatory—not a diligent—suitor. By failing to bring the action within the statute of limitations, HSBC signaled that it had no intention to pursue its claims in court. CPLR 205 (a) does not apply and HSBC’s failure to commence an action within the statute of limitations is fatal. ACE Sec. Corp. v DB Structured Prods., Inc., 2022 NY Slip Op 03927, CtApp 6-16-22

Practice Point: Only the original plaintiff can take advantage of CPLR 205 (a) which allows re-commencement of a lawsuit within six months of a dismissal which was not on the merits.

 

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PLAINTIFFS STATED CAUSES OF ACTION FOR VIOLATIONS OF THE SECURITIES ACT BASED UPON ALLEGEDLY MISLEADING INFORMATION IN THE SECONDARY PUBLIC OFFERING (SPO) (FIRST DEPT). ​

The First Department determined plaintiffs, who purchased securities based upon allegedly inaccurate information in defendants’ secondary public offering (SPO), stated causes of action for violations of the Securities Act. The court noted that the heightened pleading requirements of CPLR 3015(b) do not apply to the Securities Act violations alleged in the complaint:

… [C]laims for violations of sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (15 USC §§ 77k, 77l[a][2], and 77o) are not subject to the heightened pleading requirements of CPLR 3016(b) … .

… [T]he alleged misstatements in the SPO cannot be deemed forward-looking or mere puffery as a matter of law because the complaint alleges that defendants knew at the time of the SPO that present facts rendered statements in the SPO misleading or false. The generic, boilerplate risk warnings in the offering documents do not shield defendants from liability … .

… [P]laintiff adequately]alleges that, once [defendant] spoke about its “significant exposure to emerging markets in Asia,” it was obligated to disclose the “whole truth,” namely that its mobile solutions business in China was actually experiencing a sharp decline at the time of the SPO … . Erie County Empls.’ Retirement Sys. v NN, Inc., 2022 NY Slip Op 03473, First Dept 5-31-22

Practice Point: The heightened pleading requirements for fraud (CPLR 3016) do not apply to the causes of action here alleging violations of the Securities Act—allegedly misleading information in a secondary public offering (SPO).

 

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DEFENDANT COMMODITY FUTURES BROKER IS ENTITLED TO COVERAGE UNDER FIDELITY BONDS FOR LOSSES INCURRED BY THE CRIMINAL ACTIONS OF A BROKER AMOUNTING TO $141 MILLION (FIRST DEPT).

The First Department, reversing (modifying) Supreme Court, in a full-fledged opinion by Justice Kapnick, determined defendant MF Global was entitled to coverage under fidelity bonds for losses incurred by the criminal actions of a broker, Dooley, for which Dooley was ordered to pay restitution to MF Global in the amount of $141 million:

This 2009 declaratory judgment action involves a $141 million insurance coverage dispute between plaintiffs New Hampshire Insurance Company, Liberty Mutual Insurance Company, and Axis Reinsurance Company (Insurers) and defendant, commodity futures broker MF Global Finance USA, Inc. (MF Global). New Hampshire issued the primary bond insurance policy to MF Global’s predecessor and Liberty Mutual and Axis Reinsurance each issued excess financial institution bonds, covering the same policy period and incorporating the provisions and terms of the primary bond. Defendant MF Global seeks coverage under those bonds for a trading loss incurred in February 2008 by Evan Brent Dooley, a broker for MF Global, who in 2012 pleaded guilty to exceeding speculative position limits in violation of 7 USC §§ 6a and 13(a)(5). Dooley was sentenced to five years’ imprisonment and one year of supervised release and was ordered to pay restitution of over $141 million to MF Global upon release from prison.

… [W]e hold that defendant is covered under the fidelity bonds for its loss and is entitled to summary judgment in its favor…. . New Hampshire Ins. Co. v MF Global Fin. USA Inc., 2022 NY Slip Op 01880, First Dept 3-17-22

 

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