Filed: Apr. 27, 2016
Latest Update: Mar. 02, 2020
Summary: 14-2619 Bank of New York Mellon Trust v. Morgan Stanley Mortgage In the United States Court of Appeals For the Second Circuit _ August Term, 2015 (Argued: August 19, 2015 Decided: April 27, 2016) Docket No. 14-2619-cv _ THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., Trustee for the Registered Certificate Holders of Morgan Stanley Capital I Inc. Commercial Mortgage Pass-Through Certificates Series 2007-IQ14, Acting by and Through C-III Asset Management LLC, As Special Servicer, Plaintiff-Appell
Summary: 14-2619 Bank of New York Mellon Trust v. Morgan Stanley Mortgage In the United States Court of Appeals For the Second Circuit _ August Term, 2015 (Argued: August 19, 2015 Decided: April 27, 2016) Docket No. 14-2619-cv _ THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., Trustee for the Registered Certificate Holders of Morgan Stanley Capital I Inc. Commercial Mortgage Pass-Through Certificates Series 2007-IQ14, Acting by and Through C-III Asset Management LLC, As Special Servicer, Plaintiff-Appella..
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14-2619
Bank of New York Mellon Trust v. Morgan Stanley Mortgage
In the
United States Court of Appeals
For the Second Circuit
________________
August Term, 2015
(Argued: August 19, 2015 Decided: April 27, 2016)
Docket No. 14‐2619‐cv
________________
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., Trustee for the
Registered Certificate Holders of Morgan Stanley Capital I Inc. Commercial
Mortgage Pass‐Through Certificates Series 2007‐IQ14, Acting by and Through
C‐III Asset Management LLC, As Special Servicer,
Plaintiff‐Appellant,
—v.—
MORGAN STANLEY MORTGAGE CAPITAL, INC.,
Defendant‐Appellee.
________________
Before:
CABRANES, RAGGI, and WESLEY, Circuit Judges.
________________
1
On appeal from an award of summary judgment entered in favor of
defendant Morgan Stanley Mortgage Capital, Inc. in the Southern District of
New York (McMahon, J.), on a claim of breach of contract, plaintiff Bank of New
York Mellon Trust Company, N.A. argues that the district court erred in
(1) identifying a contractual duty to give “notice to cure” within three business
days of becoming aware of a material breach as a condition precedent to
defendant’s remedy obligations; and (2) concluding, as a matter of law, that
plaintiff’s communication of notice of breach and request for cure was untimely,
thereby absolving defendant of any obligation to repurchase without considering
whether plaintiff’s request demonstrated substantial performance.
VACATED AND REMANDED.
Judge WESLEY dissents in a separate opinion.
________________
DAVID A. BARRETT (Joshua J. Libling, on the brief), Boies, Schiller &
Flexner LLP, New York, New York, for Plaintiff‐Appellant.
STEVEN G. KOBRE (Steven W. Perlstein, Josef M. Klazen, Lara
Levinson, on the brief), Kobre & Kim LLP, New York, New
York, for Defendant‐Appellee.
________________
2
REENA RAGGI, Circuit Judge:
In this breach‐of‐contract action, plaintiff Bank of New York Mellon Trust
Company, N.A. (“BNY” or “Trustee”) appeals an award of summary judgment
in favor of defendant Morgan Stanley Mortgage Capital, Inc. (“Morgan Stanley”)
entered on June 17, 2014, in the United States District Court for the Southern
District of New York (Colleen McMahon, Judge). BNY argues that the district
court erred in concluding, as a matter of law, that Morgan Stanley was not
contractually obliged to repurchase a mortgage loan allegedly issued in breach of
a contract representation because (1) the Trustee’s duty to give “notice to cure”
within three business days of becoming aware of a material breach was a
condition precedent to the seller’s repurchase obligation, Bank of N.Y. Mellon Tr.
Co. v. Morgan Stanley Mortg. Capital, Inc., No. 11 Civ. 0505 (CM) (GWG) (“BNY
I”), 2013 WL 3146824 (S.D.N.Y. June 19, 2013); and (2) that condition was not
performed within the specified three days, but two to four weeks later, see Bank
of N.Y. Mellon Tr. Co. v. Morgan Stanley Mortg. Capital, Inc., No. 11 Civ. 0505
(CM) (GWG) (“BNY II”), 2014 WL 2745011 (S.D.N.Y. June 16, 2014).
3
For reasons explained herein, we conclude that the contract at issue did
not require notice to cure as a condition precedent to Morgan Stanley remedying
breach. Indeed, the phrase “notice to cure” does not appear in the contract.
Rather, the contract contains distinct provisions for giving notice of breach and
making request for cure, neither of which is cast in the express language of
condition. To the extent a condition precedent might be inferred from the fact
that notice of breach is a necessary trigger for the 90‐day cure period, that
rationale would pertain only to the giving of that notice, not to its timeliness, and
much less to request for cure, which performs no triggering role. Thus, request
for cure is not a condition precedent to Morgan Stanley’s remedy obligations,
and the timeliness of a request for cure, as well as of a notice of breach, is
properly construed as a promise and reviewed for substantial performance.
On review of the record, we further conclude that the notice of breach and
request for cure in this case cannot be held untimely as a matter of law,
particularly when reviewed for substantial performance. Accordingly, we vacate
the award of summary judgment in favor of Morgan Stanley, and we remand the
case to the district court for further proceedings consistent with this opinion.
4
I. Background
A. The Mortgage Loan Purchase Agreement
The contract at issue is a May 1, 2007 Mortgage Loan Purchase Agreement
(“MLPA”), pertaining to an $81 million mortgage loan that Morgan Stanley
issued to City View Center, LLC (the “City View Loan”) on December 29, 2006,
for the purchase of a retail center in Garfield Heights, Ohio (the “City View
Property”). Pursuant to the MLPA, Morgan Stanley sold the City View Loan to
Morgan Stanley Capital I, Inc., which, pursuant to a Pooling and Servicing
Agreement (“PSA”) of the same date, placed the City View Loan into Morgan
Stanley Capital I Trust 2007‐IQ14 (the “Trust”), then valued at nearly five billion
dollars. The Trust was later securitized and sold to investors.
The PSA designated BNY as trustee of the Trust and, thus, the entity
entitled to enforce various agreements, including the MLPA here at issue. The
PSA also designated Wells Fargo National Association (“Wells Fargo”) as a
Master Servicer, responsible for administering the Trust’s loans and collecting
payments, and Centerline Servicing Inc. (“Centerline”) as Special Servicer,
5
responsible for servicing any defaulted loans.1 On May 30, 2007, Trustee BNY
granted the Master and Special Servicers authority to act on its behalf when
servicing and administering the Trust’s loans.
B. City View’s Default on the Loan
On September 9, 2008, Master Servicer Wells Fargo informed Special
Servicer Centerline that the City View Loan would likely go into default within
60 days because (1) City View had received numerous notices of lease default
from Wal‐Mart, the anchor tenant of the City View Property, based on methane
gas intrusion into the store; (2) the Ohio Attorney General had filed a complaint
against City View (and others) for regulatory violations on the City View
Property, including the failure to control the migration of combustible gases; and
(3) the Ohio Agency for Toxic Substances & Disease Registry had determined
that conditions at the City View Property amounted to an urgent public hazard.
On September 15, 2008, Wal‐Mart in fact closed its City View Property store and,
1 On May 10, 2010, pursuant to transactions not relevant here, C‐III Asset
Management LLC replaced Centerline as the Trust’s Special Servicer. For
purposes of this appeal, we need only refer herein to the “Special Servicer,”
without regard to the specific entity then serving in that capacity.
6
soon after, canceled its lease. On November 8, 2008, City View defaulted on a
mortgage‐loan payment. Four days later, Wells Fargo transferred the City View
Loan to Centerline for special servicing.
C. Notice of Breach and Request for Cure
Upon transfer, Centerline’s Director of Special Servicing, Jennifer Wilkicki,
began investigating Morgan Stanley’s possible breach of the MLPA.2 On
February 16, 2009, Wilkicki sent a document captioned “Representation and
Warranty Claim” to Centerline’s Associate General Counsel, Jenna Unell. That
four‐page document appears to be a draft notice of breach to the Seller in that its
opening sentence states as follows: “The Special Servicer believes it has
discovered a Material Breach of the Seller’s Representations and Warranties and
hereby provides notice as required by the governing Pooling and Servicing
2 As the district court detailed, Wilkicki was not then totally unfamiliar with the
City View Loan. Prior to securitization, Centerline (and its predecessor) had
acted as Interim Servicer at Morgan Stanley’s behest. Centerline’s parent
company was then evaluating whether to invest in the Trust, and Wilkicki was
among the Centerline employees who conducted due diligence. See BNY I, 2013
WL 3146824, at *3, *25. The district court explained why the Trustee cannot be
charged with knowledge obtained by Centerline when not acting on its behalf,
see id. at *25–29, and the parties do not argue otherwise on this appeal. Thus, we
do not discuss that further.
7
Agreement.” J.A. 896. The document proceeds to identify
“Representation/Warranty (12)” as the provision breached insofar as Morgan
Stanley had represented that it had “no knowledge of any material and adverse
environmental condition or circumstance” affecting the City View Property not
disclosed in a referenced Environmental Report when it had, in fact, learned
otherwise. Id. (internal quotation marks omitted).3 The document supports this
conclusion by citing Morgan Stanley’s January 5, 2007 Closing Counsel
Transaction Summary, which acknowledged the Environmental Report’s failure
3 Representation 12 is entitled “Environmental Conditions” and states as follows:
(i) With respect to the Mortgaged Properties securing the
Mortgage Loans . . . an environmental site assessment, or an update
of a previous such report, was performed with respect to each
Mortgaged Property in connection with the origination or the
acquisition of the related Mortgage Loan, a report of each such
assessment (or the most recent assessment with respect to each
Mortgaged Property) (an “Environmental Report”) has been
delivered to the Purchaser, and the Seller has no knowledge of any
material and adverse environmental condition or circumstance
affecting any Mortgaged Property that was not disclosed in such
report.
J.A. 473 (emphasis in original).
8
to address the fact that the City View Property was subject to state regulation as
a “closed land fill” and that the property had received “numerous ‘notices of
violation’ issued by the Ohio Environmental Protection Agency.” Id.4 The
document also details “additional facts . . . to demonstrate the material and
adverse effect” the noticed breach had on “the interests of the holders of the
Certificates in the Mortgage Loan.” Id.; see id. at 897–98. Among these were
Wal‐Mart’s departure from the City View Property and its cessation of rent
payments, as a result of which other tenants exercised co‐tenancy clauses
resulting in terminated leases, reduced rents, or discontinued rent payments.
The document also explains that this left City View with insufficient operating
income, causing it to discontinue loan payments to the Trust, which now faced
the legal expenses of petitioning “the federal court to place a receiver at the
property,” proceeding against defaulting tenants, and appealing the rejection of
City View’s insurance claim. Id. at 898. Attributing the catalogued adverse
effects to Morgan Stanley’s breach of Representation 12, the document
4 On this appeal, we express no view as to the merits of the Servicer’s (and,
therefore, Trustee BNY’s) breach conclusion. We consider only whether BNY
failed to satisfy an MLPA condition precedent for securing a remedy for breach.
9
concluded, “[t]he Mortgage Loan should be repurchased pursuant to the terms
and conditions set forth in the PSA and the applicable MLPA.” Id.
Three days later, on February 19, 2009, Unell advised Wilkicki that she had
reviewed pertinent materials and agreed “that there [was] evidence that [Morgan
Stanley] knew that there were material environmental conditions or
circumstances affecting the Property that were not disclosed in the Phase I
report.” Id. at 1266. Unell asked Wilkicki to call her “to discuss further,”
concluding, “I think that the breach notice should be sent.” Id.
A breach notice was sent approximately one month later, on March 18,
2009. In the interim, Wilkicki secured an appraisal, which on February 27, 2009,
valued the City View Property at $22.3 million, a steep decline from the $103.4
million appraisal of two years earlier. Another appraisal, confirming the $22.3
million valuation, was received on March 13, 2009.
Between receipt of these two appraisals, on March 3, 2009, Wilkicki sent
Unell a more formally worded draft breach notice and request for cure, and
solicited her comments. On March 13, Unell emailed Wilkicki her edits to the
draft notice. The next day, Wilkicki sent the revised draft to her supervisor,
10
Chris Crouch, who approved it on March 16 and directed Wilkicki to send it on
to Centerline’s President, Paul Smyth, “for go ahead to release.” Id. at 1347.
After receiving Smyth’s authorization for release, Wilkicki sent Morgan Stanley a
formal notice of breach and request for cure on March 18, 2009. Tracking
language in the MLPA and PSA, the notice stated that if the material breach were
not corrected or cured within 90 days of receipt, Morgan Stanley would be
contractually obligated to repurchase or to replace the City View Loan. It is, in
fact, undisputed on this appeal that the breach was one that could not be cured.
Approximately two months later, by letter dated May 11, 2009, Morgan
Stanley replied that it disagreed with Centerline’s “characterization of the facts
and circumstances” and “intend[ed] to vigorously defend its underwriting and
disclosures made in the PSA and the Mortgage Loan.” Id. at 1093. Thus, it did
not repurchase or replace the City View Loan.
On September 24, 2010, the Special Servicer sent Morgan Stanley a “Second
and Supplemental Notification of Material Breach.” In addition to alleging more
facts to support the earlier noticed breach of Representation 12, it asserted a
11
breach of Representation 27, the MLPA’s No Material Default Representation.5
In its December 22, 2010 reply, Morgan Stanley reiterated its intent to defend its
representations, and asserted that the Special Servicer’s March 18, 2009 and
September 24, 2010 letters were, in any event, deficient because they
“constitute[d] late notice.” Id. at 1096.
D. District Court Proceedings
On January 25, 2011, BNY filed this lawsuit against Morgan Stanley for
breach of the MLPA. Following amended pleadings and discovery, both parties
moved for summary judgment. On June 19, 2013, the district court granted
Morgan Stanley partial summary judgment on BNY’s breach claim as to the No
5 In Representation 27, Morgan Stanley warrantied that, to its knowledge, there
was “no material default, breach, violation or event of acceleration (and no event
which, with the passage of time or the giving of notice, or both, would constitute
any of the foregoing) under the documents evidencing or securing the Mortgage
Loan” that would materially and adversely affect the value of the mortgage loan
or property. J.A. 478–79. The Special Servicer asserted that Morgan Stanley
breached this representation because, by December 2006, at the latest, it knew
that Wal‐Mart was claiming lease default, and yet Morgan Stanley represented in
May 2007 that there was no material default underlying the City View Loan. See
id. at 781–82.
12
Material Default Representation provision.6 That ruling is not at issue on this
appeal. As to the claimed breach of the Environmental Conditions
Representation, the district court granted BNY summary judgment on Morgan
Stanley’s waiver defense, but concluded that “many issues of disputed fact”
precluded a general award in favor of BNY. BNY I, 2013 WL 3146824, at *30.
Although the district court agreed with Morgan Stanley that timely “notice to
cure” was a “condition precedent” to any buyback obligation for breach of the
Environmental Conditions Representation, it decided that further discovery was
needed to determine when the Special Servicer became aware of that alleged
breach. Id. at *16–17; see id. at *19–22.
After discovery closed, the district court determined, as a matter of law,
that BNY’s “Special Servicer became aware of a material breach of the
Environmental Representation more than three business days before March 18,
2009,” making its breach notice on that date untimely, thereby failing to satisfy
6 The district court concluded that the Special Servicer had possession of all facts
necessary to investigate and bring a claim for breach of this representation by
March 16, 2009, making its September 24, 2010 notice of breach untimely. See
BNY I, 2013 WL 3146824, at *23. This conclusion is not challenged on appeal and,
thus, we do not discuss it further.
13
that condition precedent to Morgan Stanley’s repurchase obligation. BNY II,
2014 WL 2745011, at *7–9. Accordingly, on June 17, 2014, the district court
entered summary judgment in favor of Morgan Stanley on the Environmental
Representation breach claim.
This timely appeal followed.
II. Discussion
This appeal presents two questions for de novo review: (1) whether the
MLPA’s request‐for‐cure obligation is a condition precedent that must be timely
performed by the Servicer before Morgan Stanley has any obligation to cure or to
repurchase a noticed defective loan; and (2) whether it can be determined as a
matter of law on the existing record that the request for cure in this case was
untimely. See Lynch v. City of New York, 737 F.3d 150, 156 (2d Cir. 2013)
(reviewing award of summary judgment de novo and upholding only if “there is
no genuine issue of material fact” and “moving party is entitled to judgment as a
matter of law”); Phillips v. Audio Active Ltd., 494 F.3d 378, 384 (2d Cir. 2007)
(interpreting contract de novo). We answer both questions in the negative and,
therefore, vacate the award of summary judgment in favor of Morgan Stanley
14
and remand the case to the district court for further proceedings consistent with
this opinion.
A. MLPA Section 5’s Remedies Provision
The district court derived the condition precedent it identified—an
obligation to give “notice to cure” within three business days of the Servicer
becoming aware of a material breach—from MLPA Section 5, titled “Remedies
Upon Breach of Representations and Warranties Made by the Seller.” Thus, we
begin by examining the relevant text, which states as follows:
[I]f there is a breach of any of the representations and warranties
required to be made by the Seller regarding the characteristics of
the Mortgage Loans and/or the related Mortgaged Properties . . . and
. . . [such] breach, either (i) materially and adversely affects the
interests of the holders of the Certificates in the related Mortgage
Loan, or (ii) both (A) the . . . breach materially and adversely affects
the value of the Mortgage Loan and (B) the Mortgage Loan is a
Specially Serviced Mortgage Loan . . ., [1] the party discovering such
. . . Material Breach shall promptly notify, in writing, the other party
. . . . [2] Promptly (but in any event within three Business Days)
upon becoming aware of any such . . . Material Breach, the Master
Servicer shall, and the Special Servicer may, request that the Seller,
not later than 90 days from the Seller’s receipt of the notice of such
. . . Material Breach, cure such . . . Material Breach . . . .
[3] The Seller hereby covenants and agrees that, if any such . . .
Material Breach cannot be corrected or cured in all material aspects
within the above cure period[], the Seller shall, on or before the
15
termination of such cure period[], either (i) repurchase the affected
Mortgage Loan . . . from the Purchaser or its assignee at the
Purchase Price as defined in the Pooling and Servicing Agreement,
or (ii) if within the two‐year period commencing on the Closing
Date, at its option replace, without recourse, any Mortgage Loan . . .
to which such defect relates with a Qualifying Substitute Mortgage
Loan. If such . . . Material Breach would cause the Mortgage Loan to
be other than a “qualified mortgage” (as defined in the Code), then
notwithstanding the previous sentence, such repurchase or
substitution must occur within 90 days from the earlier of the date
the Seller discovered or was notified of the breach or defect.
J.A. 454–55 (emphasis added).7
In fact, the quoted language identifies three obligations (corresponding to
the inserted highlighted numbers). First, a notice‐of‐breach obligation, which
requires any party—whether the Trustee, Master Servicer, Special Servicer, or
even the Seller—“discovering” a material breach of representation promptly to
notify the other party of its discovery of such breach. Second, a request‐for‐cure
obligation, which requires the Master Servicer, and permits the Special Servicer,
7 Section 2.3(a) of the PSA contains similar, but not identical, breach and recourse
language. See J.A. 121–22. The district court focused on the language in the
MLPA as it was the only contract to which Morgan Stanley was a party. As
neither party challenges that approach on appeal, we do the same without
considering any language discrepancies between the MLPA and the PSA.
16
promptly, but in any event within three business days of “becoming aware” of
the material breach, to request that the Seller cure breach within 90 days of the
receipt of notice. Third, a cure‐or‐repurchase obligation, which requires the
Seller either (a) to cure the material breach within 90 days of receiving notice, or
(b) if the breach cannot be cured, to repurchase or to replace the defective
mortgage loan.
As this parsing demonstrates, Section 5 nowhere references “notice to
cure.” We understand the district court to have used that phrase as a shorthand
reference for both the notice‐of‐breach and request‐for‐cure obligations,
concluding that where, as in this case, the Servicer is the party “discovering” the
material breach, it can be said to have become “aware” of the breach (triggering
its request‐for‐cure obligation) at the same time it “discovered” it (triggering its
notice‐of‐breach obligation). See BNY I, 2013 WL 3146824, at *20. As we explain
in the next section of this opinion, that reasoning is not without some force in
explaining how a common trigger date applies to these two MLPA obligations in
the circumstances of this case. See infra pp. 30–32. But, it does not support
merging the provisions for purposes of condition‐precedent review. Indeed,
17
Morgan Stanley defends the district court’s identification of a condition
precedent only by reference to the request‐for‐cure obligation. Accordingly, we
here decide whether request for cure is a condition precedent to Morgan
Stanley’s obligation to cure or repurchase.
B. Request for Cure Is Not a Condition Precedent to Cure or
Repurchase
Under New York law, which controls our construction of the MLPA, a
condition precedent is “an act or event, other than a lapse of time, which, unless
the condition is excused, must occur before a duty to perform a promise in the
agreement arises.” Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86
N.Y.2d 685, 690, 636 N.Y.S.2d 734, 737 (1995) (internal quotation marks omitted).
Conditions precedent are not readily assumed. While specific, talismanic words
are not required, the law nevertheless demands that conditions precedent be
“‘expressed in unmistakable language.’” Id. at 691, 636 N.Y.S.2d at 737 (quoting
Restatement (Second) of Contracts § 229, cmt. a, at 185). Thus, “[i]n determining
whether a particular agreement makes an event a condition[,] courts will
interpret doubtful language as embodying a promise or constructive condition
rather than an express condition.” Id.; see Unigard Sec. Ins. Co. v. N. River Ins.
18
Co., 79 N.Y.2d 576, 581, 584 N.Y.S.2d 290, 292 (1992); see also Israel v. Chabra,
537 F.3d 86, 93 (2d Cir. 2008) (citing Oppenheimer in acknowledging New York
courts’ caution when interpreting contract clause as condition precedent).
Applying these principles here, we conclude that, under the MLPA, the
Servicer’s obligation to request cure within three business days of becoming
aware of a material breach is not unmistakably cast as a condition precedent to
Morgan Stanley’s cure‐or‐repurchase obligation, and, therefore, must be
construed as a promise.
Certainly, the MLPA does not caption or otherwise label the request‐for‐
cure provision as a “condition precedent” to Section 5 remedies, as one might
expect sophisticated parties to do if that were their intent. See, e.g., Lindenbaum
v. Royco Prop. Corp., 165 A.D.2d 254, 259, 567 N.Y.S.2d 218, 220 (1st Dep’t 1991)
(concluding that contract clearly imposed condition precedent where, under
heading “Conditions of Loan Approval,” parties expressly noted that certain
“conditions must be satisfied prior to the issuance of Closing Instructions”
(emphasis omitted)).
19
Nor does MLPA Section 5 employ any recognized “linguistic conventions”
of condition—such as “‘if,’ ‘on condition that,’ ‘provided that,’ ‘in the event that,’
and ‘subject to,’”—to make plain that Morgan Stanley’s remedy obligations do
not arise unless and until the Servicer requests cure. Israel v. Chabra, 537 F.3d at
93 (quoting Ginett v. Comput. Task Grp., 962 F.2d 1085, 1100 (2d Cir. 1992))
(identifying notice obligation introduced by underscored phrase “provided,
however,” as condition precedent to immediately preceding guaranties); see
Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d at 691, 636
N.Y.S.2d at 737 (recognizing “if” and “unless and until” as “unmistakable
language of condition”).
The failure to couch the request‐for‐cure provision in the explicit language
of condition is particularly significant here because the sophisticated drafters
elsewhere employed precisely such language to establish undoubted conditions
precedent. See, e.g., J.A. 448 (providing in MLPA for certain actions “in the
event that . . . the Mortgage Loans . . . are held to be the property of the Seller”
(emphasis added)); id. at 450 (providing in MLPA for agent or designee to
exercise purchaser’s rights “provided the Purchaser has provided the Seller with
20
prior notice of the identity of such designee or agent” (emphasis added)); see also
id. at 264 (stating in PSA that “successor master servicer must assume all of the
obligations of the terminated Master Servicer . . . as a condition precedent to its
becoming Master Servicer hereunder” (emphasis added)); id. at 341 (stating in
PSA that, “as a condition precedent to the indemnification provided for in this
Section,” indemnitee must “notify the applicable Indemnifying Party in writing”
of commencement of any action (emphasis added)).8
Indeed, even within MLPA Section 5, its drafters employed the
unmistakable language of condition in detailing Morgan Stanley’s repurchase
obligation. See id. at 455 (stating that Seller “covenants and agrees that, if any
8 There is no indication that BNY played any part in drafting the MLPA. Rather,
Morgan Stanley appears to have drafted this document, as the same Morgan
Stanley Vice President signed the agreement on behalf of both Morgan Stanley
and Morgan Stanley Capital I, Inc., the sole contracting parties. See J.A. 465.
While BNY, as the named Trustee, is a party to the PSA, there is no indication in
the record as to its role in drafting that agreement. In any event, because the
point is not raised, we have no occasion to consider whether any ambiguities in
MLPA provisions are properly construed against Morgan Stanley as drafter. See
Village of Ilion v. County of Herkimer, 23 N.Y.3d 812, 820, 993 N.Y.S.2d 648, 652
(2014). It suffices that the law requires ambiguous provisions to be construed as
promises rather than conditions precedent. See Oppenheimer & Co. v.
Oppenheim, Appel, Dixon & Co., 86 N.Y.2d at 691, 636 N.Y.S.2d at 737.
21
such . . . Material Breach cannot be corrected or cured in all material aspects
within the [90‐day] cure period[], the Seller shall . . . either (i) repurchase the
affected Mortgage Loan . . . or (ii) . . . replace, without recourse, any Mortgage
Loan” (emphasis added)). In short, Section 5 makes plain that Morgan Stanley is
required to repurchase or replace a defective loan only if it is unable to cure the
defective representation within the 90‐day period afforded by the MLPA. There
is no comparable contract language, however, that conditions this remedy
obligation on a request for cure, much less on such a request being made within
three business days. See Realtime Data, LLC v. Melone, 104 A.D.3d 748, 750–51,
961 N.Y.S.2d 275, 277–78 (2d Dep’t 2013) (invoking canon expressio unius est
exclusio alterius to conclude that contract language conditioning employee
bonus “upon” sale of assets implies that bonus does not apply to distributions
otherwise based); see also International Fid. Ins. Co. v. County of Rockland, 98 F.
Supp. 2d 400, 412 (S.D.N.Y. 2000) (recognizing that “[s]ophisticated lawyers . . .
must be presumed to know how to use parallel construction and identical
wording to impart identical meaning when they intend to do so, and how to use
different words and construction to establish distinctions in meaning”).
22
Thus, the very contract language employed by the parties undermines our
dissenting colleague’s conclusion that Morgan Stanley cannot be expected to cure
breaches of which it has been notified but for which it has not received a formal
request for cure. See Dissenting Op., post at 4–8. In fact, its obligation to
repurchase is conditioned only on its inability to cure within the 90‐day cure
period. And, as the MLPA makes clear, that cure period is triggered exclusively
by “the Seller’s receipt of the notice of . . . Material Breach,” not the Servicer’s
request for cure. J.A. 454 (emphasis added).
While New York courts have construed some triggering events as
conditions precedent, they have done so only when the trigger is necessary to a
party’s ability to perform the obligation at issue. See, e.g., ALJ Capital I, L.P. v.
David J. Joseph Co., 15 Misc. 3d 1127(A), 2007 WL 1218355, at *2, *5 (Sup. Ct.
Mar. 13, 2007) (holding notice of disallowance a condition precedent to
defendant’s repayment obligation because notice was necessary to afford
defendant opportunity to cure disallowance within cure period, upon failure of
which plaintiff could demand repayment), aff’d 48 A.D.3d 208, 208, 851 N.Y.S.2d
154, 155 (1st Dep’t 2008); see also Assured Guar. Mun. Corp. v. DB Structured
23
Prods., Inc., 33 Misc. 3d 720, 731, 742–44, 927 N.Y.S.2d 880, 887–88, 895–97 (Sup.
Ct. July 25, 2011) (assuming that notice of breach triggering 60‐day cure period
was condition precedent to repurchase obligation in holding notice adequate);
Morgan Guar. Tr. Co. v. Bay View Franchise Mortg. Acceptance Co., No. 00 Civ.
8613 (SAS), 2002 WL 818082, at *4–5 (S.D.N.Y. Apr. 30, 2002) (applying New York
law in recognizing request to cure as condition precedent where it was exclusive
trigger for 30‐day cure period, which, if not met, gave rise to repurchase
obligation).
Even if the MLPA’s notice‐of‐breach provision might be construed as a
condition precedent because it is the necessary trigger for the cure period
afforded Morgan Stanley,9 its request‐for‐cure provision serves no comparable
essential function without which Morgan Stanley could not understand or
perform its cure obligation. Because we are not free to “rewrite into
a contract conditions the parties did not insert by adding or excising terms under
9 We need not decide this question because, as earlier noted, Morgan Stanley
defends the district court’s judgment only by reference to the contract’s request‐
for‐cure obligation.
24
the guise of construction,” Slamow v. Del Col, 174 A.D.2d 725, 726, 571 N.Y.S.2d
335, 336 (2d Dep’t 1991), we here conclude simply that whatever triggering
rationale might apply to notice of breach, it does not extend to request for cure.
The plain language of the MLPA obligates Morgan Stanley to cure or to
repurchase a noticed defective loan within 90 days of the receipt of a notice of
breach. The obligation makes no mention of receipt of a request for cure.10
10 Judge Wesley deems it implausible that Morgan Stanley would be obligated to
cure in the absence of a request. He maintains that because the Special Servicer
was under no obligation to request cure, its request for cure provided essential
signaling and demand functions. See Dissenting Op., post at 4–7, 7 n.4. The
conclusion is undermined not only by the MLPA’s express assignment of the
signaling function to notice of breach, but also to its assignment of a mandatory
request‐for‐cure obligation to the Master Servicer. See J.A. 454 (explaining that,
upon becoming aware of any material breach, Master Servicer must, and Special
Servicer may, request cure). We need not parse the difference between the
Master Servicer’s and the Special Servicer’s request‐for‐cure obligations further
because, in any event, the MLPA has not unequivocally identified request for
cure as a condition precedent. Thus, in the situation here, where Morgan Stanley
is alleged to have breached its cure‐or‐repurchase obligation and the Servicer is
alleged to have breached its obligation to request cure within three days, the law
considers two broken promises (three, when one considers Morgan Stanley’s
alleged breach of Representation 12) and compensates the parties accordingly,
taking into account, among other things, the issue of substantial performance.
See, e.g., Schwartz v. Pierce, 57 A.D.3d 1348, 1350–51, 870 N.Y.S.2d 161, 163–65
(3d Dep’t 2008) (affirming damages award where jury found both parties to be in
breach of contract).
25
Thus, when the district court held that “sending a notice to cure is
unmistakably required to trigger the cure period and the buyback obligation,”
BNY I, 2013 WL 3146824, at *17 (emphasis added), it could only have been
referring to the MLPA’s notice‐of‐breach obligation, the exclusive trigger for the
90‐day period. That same conclusion pertains to the district court’s statement
that, because the MLPA’s repurchase provision “expressly refers back to the
notice to cure,” Morgan Stanley’s obligation to repurchase is “dependent on that
notice.” Id. (alteration and internal quotation marks omitted). What the
repurchase provision expressly refers back to is “the date the Seller discovered or
was notified of the breach or defect,” J.A. 455; it nowhere mentions “notice to
cure.” The district court went on, however, to conclude that “notice to cure” was
a condition precedent that had to be performed within three business days: “The
notice to cure is a condition precedent to the repurchase obligation, and the
parties plainly bargained for the ‘three day’ provision in the contract.” BNY I,
2013 WL 3146824, at *21. We disagree. Even if the first part of the quoted
sentence might find support in the MLPA’s notice‐of‐breach obligation, the
parties did not plainly bargain to subject notice of breach to the three‐day
26
limitation applicable only to request for cure. Indeed, when it recited that “[t]he
MLPA gave the Special Servicer three days to send out notice of any breach,”
BNY II, 2014 WL 2745011, at *3, the district court misstated the contract.
In sum, because (1) the obligation to request cure within three business
days is neither framed in conditional language nor a necessary trigger for
Morgan Stanley’s remedy obligations; (2) notice of breach is, in fact, the exclusive
trigger for the 90‐day period within which Morgan Stanley was obligated to cure
or to repurchase; and (3) the timeliness of notice of breach is not contractually
limited to three days, we conclude that the MLPA cannot be construed to make
either notice of breach within three business days or request for cure conditions
precedent to Morgan Stanley’s remedy obligations. See Oppenheimer & Co. v.
Oppenheim, Appel, Dixon & Co., 86 N.Y.2d at 691, 636 N.Y.S.2d at 737. Rather,
timely request for cure is properly construed as a promise, which on remand
should be reviewed only for substantial performance. See Israel v. Chabra, 537
F.3d at 93.
27
C. The Timing of the Servicer’s Request for Cure Cannot Preclude a
Finding of Substantial Performance as a Matter of Law
The district court determined, as a matter of law, that the Servicer’s March
18, 2009 communication to Morgan Stanley of notice of breach and request for
cure was untimely. See BNY II, 2014 WL 2745011, at *9. We here conclude that
the timing of the Servicer’s request for cure cannot preclude a finding of
substantial performance as a matter of law. In explaining this conclusion, we
first examine the reasoning informing the district court’s timeliness analysis,
some of which we accept, but other parts of which are at odds with the plain
language of the MLPA.
As already detailed, the MLPA requires a party to give notice of breach
promptly upon discovering a material breach of representation. It also requires a
Servicer to act promptly in requesting cure after becoming aware of the breach.
But it is only as to the latter obligation that the MLPA cabins promptness to three
business days. The district court, however, appears to have concluded that
where, as here, the Servicer is the discovering party, notice of breach is not
prompt if not made within three days. See id. at *3 (“The MLPA gave the Special
Servicer three days to send out notice of any breach.”); id. at *9 (holding that,
28
because Servicer’s notice to Morgan Stanley was not sent within three business
days of what court found to be “absolute, drop‐dead date” for awareness of
breach, “breach notice was therefore untimely”). In view of the Servicer’s having
discovered the breach, the district court concluded that (1) any difference in the
obligations’ triggering words—“discovering,” and “becoming aware of”—was
“of no moment,” BNY I, 2013 WL 3146824, at *20; (2) awareness, like discovery,
occurs only at the conclusion of an investigation of the suspected breach,
provided the investigation is concluded within a reasonable time, see id. at *19–
21; (3) the Servicer had reasonably concluded its investigation and, thus, become
“aware” of Morgan Stanley’s alleged breach (a) by “February 16, when Wilkicki
prepared her memorandum” to Unell, or certainly (b) “by February 19, when
Unell agreed with Wilkicki’s assessment and instructed her to send the breach
notice,” but in no event later than (c) “February 27, when the draft appraisal
came in,” BNY II, 2014 WL 2745011, at *9. Thus, the Servicer’s delay of some two
weeks after the last of these dates to transmit a request for cure was held
untimely as a matter of law.
29
BNY faults this reasoning on several grounds. We focus here on the
argument it derives from the well established principle that, where contract
provisions use different language, courts must assume the parties intended
different meanings. See Frank B. Hall & Co. of N.Y. v. Orient Overseas Assocs.,
48 N.Y.2d 958, 959, 425 N.Y.S.2d 66, 67 (1979). Thus, BNY argues, “discovering”
breach must mean something different from “becoming aware” of breach, with
“awareness” necessarily coming after “discovery”—indeed, after communication
of the notice of breach triggered by discovery—to avoid the absurdity of
requiring a Servicer to request cure (within three business days of awareness)
before requiring the party discovering the breach to give notice (subject to an
undefined promptness obligation), thereby triggering the cure period.
BNY’s argument makes sense when the Servicer is not the party
discovering the breach. In that circumstance, it will generally only be upon
receipt of the discoverer’s notice of breach that the Servicer acquires the
awareness necessary for it to request cure. Further, to the extent the discoverer
conducted an investigation of the breach that the Servicer has no need to
30
duplicate, the latter can reasonably be expected to make its request for cure
within three business days of receiving the notice of breach.
But, when the Servicer is the party discovering breach, we cannot
categorically conclude, as BNY urges, that it does not become aware of the
breach until it transmits its own notice of breach to others. Dictionary definitions
may admit the possibility of discovery without awareness. Compare Webster’s
Third New Int’l Dictionary 656 (2002) (defining “discover” as “to obtain for the
first time sight or knowledge of” or “to detect the presence of”), with id. at 152
(defining “aware” as “marked by realization, perception, or knowledge”).11 The
conclusion, however, does not transfer here, where, as the district court correctly
observed, the law charges a party with discovery of breach only after it has had a
reasonable opportunity to investigate and confirm its suspicions—in short, when
it effectively becomes aware, rather than simply suspicious, of breach. The
reason the law thus delays discovery of a breach is to avoid creating an incentive
for litigation before a party knows that it has suffered injury. See BNY I, 2013
11 Thus, Columbus can be said to have discovered the Americas without being
aware that they were new continents, while Vespucci can be said to have been
aware that the Americas were new continents without having discovered them.
31
WL 3146824, at *19 (collecting cases); id. at *21 (acknowledging that, in complex
circumstances, confirming investigation can take several months).
We therefore decline to hold as a matter of law that a Servicer who
discovers a breach cannot be charged with awareness until it transmits notice.
The fact that the Servicer in this case simultaneously transmitted its request for
cure with its notice of breach does not necessarily mean that the former was filed
within the requisite three business days. Rather, the timeliness of both notice of
breach and request for cure may depend, as the district court recognized, on
whether they were sent promptly after the Special Servicer reasonably concluded
its investigation of breach.
Where we depart from the district court is in its conclusion that notice of
breach, as well as request for cure, had to be communicated within three
business days to be deemed prompt. As already discussed, the MLPA imposes a
three‐day limitation on the word “promptly” only as to requests for cure. The
absence of such a limitation from the notice‐of‐breach obligation indicates that
the word is to be construed more flexibly in light of the totality of circumstances.
See United States Fid. & Guar. Co. v. Annunziata, 67 N.Y.2d 229, 233, 501
32
N.Y.S.2d 790, 792 (1986) (recognizing that where condition included in one
provision is omitted from another, it “must be assumed to have been intentional
under accepted canons of contract construction”); Sterling Inv’r Servs., Inc. v.
1155 Nobo Assocs., LLC, 30 A.D.3d 579, 581, 818 N.Y.S.2d 513, 516 (2d Dep’t
2006) (same).
We further conclude that the district court could not identify the
reasonable conclusion date for the Special Servicer’s breach investigation—or
even three possible conclusion dates—as a matter of law. Where the promptness
of breach discovery is questioned, resolution depends on an assessment of the
totality of circumstances, necessarily including the credibility of witnesses and
the weight particular evidence will bear. Such matters are generally determined
by the trier of fact rather than the court, particularly when the ultimate question
is reasonableness. See Hartford Ins. Co. v. County of Nassau, 46 N.Y.2d 1028,
1030, 416 N.Y.S.2d 539, 541 (1979) (noting that “question whether a notice . . . has
been sent ‘as soon as is reasonably possible’ is a question of fact which depends
on all the facts and circumstances, especially the length of and the reasons for the
delay,” and that “[i]t is only in the exceptional case that it may be decided as a
33
matter of law”); Deso v. London & Lancashire Indem. Co. of Am., 3 N.Y.2d 127,
129, 164 N.Y.S.2d 689, 691 (1957) (explaining that “reasonableness of a delay” in
timely written notice is usually question for jury); Vale v. Vt. Mut. Ins. Grp., 112
A.D.3d 1011, 1013, 977 N.Y.S.2d 117, 120 (3d Dep’t 2013) (stating that where
party fails to comply with condition precedent requiring timely notice, delay
may be excused if reasonable, which will generally be “question of fact for a
jury”). Thus, while the district court identified February 27, 2009, the date
Wilkicki received a draft appraisal for the City View Property, as “the absolute,
drop‐dead date” for a reasonable investigation to have concluded, a factfinder
might determine that where, as here, the investigating party is not an individual
but a corporate entity, some degree of chain‐of‐command review is part of a
reasonable investigation, and the entity should be permitted to undertake such
review before it is charged with discovering or becoming aware of the breach.
Were the jury to so find in this case, it could extend the investigation’s conclusion
date to March 16, 2009, when Centerline’s president was first asked to authorize
the notice of breach and request for cure based on the investigation of his
34
subordinates. In that event, the March 18, 2009 transmittal would have been
prompt even under a three‐business‐day limitation.12
Of course, even if a factfinder were to include chain‐of‐command review
within a reasonable breach‐investigation period, disputes might persist as to
whether other events—e.g., commissioning the initial or review appraisals—
unreasonably prolonged the investigation. While the district court dismissed
12 Judge Wesley disagrees, observing that, under New York law, a corporation is
charged with the knowledge of its agents. See Dissenting Op., post at 12. But
none of the cited cases reach that conclusion in the context of a corporate entity
conducting a breach investigation, much less one doing so as the agent of a
trustee. New York University v. First Financial Insurance Co., 322 F.3d 750 (2d
Cir. 2003), does not offer “precisely this situation,” Dissenting Op., post at 17
n.12, because that case involved neither an agent acting on behalf of a trustee nor
a breach investigation similar in nature or scope to the one at issue here. Instead,
an insurer was there charged with its investigative agent’s knowledge of breach
as of the date the insured conceded certain facts to the agent that effectively
admitted the breach precluding recovery under the insurance contract. See New
York Univ. v. First Fin. Ins. Co., 332 F.3d at 753 & n.2. Here, Morgan Stanley did
not similarly confirm its breach of the MLPA to Wilkicki. As already noted, in
such circumstances, the law affords a reasonable time for investigation of breach
to avoid creating an incentive for premature litigation. That concern supports
including some chain‐of‐command review within a reasonable investigation,
rather than demanding action as soon as any corporate agent reaches a
conclusion regardless of his authority to act on it for the corporation. See
Kirschner v. KPMG LLP, 15 N.Y.3d 446, 465, 912 N.Y.S.2d 508, 517 (2010)
(acknowledging that, generally, only acts within scope of agents’ authority are
“presumptively imputed to their principals”).
35
Wilkicki’s explanations for these appraisals as implausible, when we view the
record in the light most favorable to BNY, we cannot conclude that a reasonable
factfinder was precluded as a matter of law from reaching any other conclusion.
Thus, the dispute cannot be resolved on summary judgment. See, e.g., Dillon v.
Morano, 497 F.3d 247, 253–54 (2d Cir. 2007) (vacating award of summary
judgment where permissibility of defendant’s conduct turned on explanation for
it, which necessarily involved credibility determination that was question for
jury).
Further, because request for cure is not a condition precedent, even if a
factfinder were to conclude that the time for reasonable investigation of breach
ended more than three business days before March 18, 2009, it would still have to
decide the question of substantial performance.
“Substantial performance is performance, the deviations permitted being
minor, unimportant, inadvertent, and unintentional.” Cramer v. Esswein, 220
A.D. 10, 11, 220 N.Y.S. 634, 634 (2d Dep’t 1927) (internal quotation marks
omitted); see Bernard v. Las Ams. Commc’ns, Inc., 84 F.3d 103, 108 (2d Cir. 1996);
Callanan Indus., Inc. v. Smiroldo, 100 A.D.2d 717, 718, 474 N.Y.S.2d 611, 612 (3d
36
Dep’t 1984). Such deviations “will sometimes be atoned for by allowance of the
resulting damage.” Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 241 (1921)
(Cardozo, J.).
The question of substantial performance is usually one “of fact and should
be decided as a matter of law only where the inferences are certain.” Merrill
Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 186 (2d Cir. 2007) (collecting
cases, including Hadden v. Consol. Edison Co. of N.Y., 34 N.Y.2d 88, 96, 356
N.Y.S.2d 249, 255 (1974) (assessing substantial performance on basis of several
factors such as absolute and relative magnitude of default, its effect on contract’s
purpose, willfulness, and degree to which injured party was benefited under
contract)). Thus, while BNY points to a number of factors supporting substantial
performance, we do not here decide the question in its favor as a matter of law.
We conclude only that the record does not permit substantial performance to be
rejected as a matter of law. See Jacob & Youngs, Inc. v. Kent, 230 N.Y. at 243
(explaining that substantial performance is question of degree, which, “if there is
doubt,” must be answered by “triers of the facts”).
37
In reaching that conclusion, we reiterate certain undisputed facts. First,
BNY did transmit a request for cure to Morgan Stanley; thus, the only
performance issue is timeliness. Second, the delay in transmittal, even on the
district court’s findings, was in the range of two to four weeks. Third, the
noticed breach of representation was not curable, regardless of the date when
BNY can be charged with awareness of the breach.
These circumstances strongly support substantial performance insofar as
delay in requesting a cure that was never possible would likely be deemed
trivial. As this court recently had occasion to note, “[w]hen contracting parties
agree to a notice‐and‐cure provision, it is reasonable to assume that they do so
with the assumption that the breaches which would be used to terminate the
contract would be curable breaches.” Giuffre Hyundai, Ltd. v. Hyundai Motor
Am., 756 F.3d 204, 210 (2d Cir. 2014) (internal quotation marks omitted)
(emphasis in original). Thus, “New York common law will not require strict
compliance with a contractual notice‐and‐cure provision if providing an
opportunity to cure would be useless.” Id. at 209 (collecting cases).
38
Morgan Stanley attempts to distinguish Giuffre and the cases cited therein
on the ground that they considered the propriety of actions taken by parties who,
instead of providing opportunity to cure, terminated contracts or commenced
actions for damages. It submits that the futility of cure here is no excuse for the
Servicer’s failure timely to request cure because that “is the only mechanism for
Morgan Stanley’s obligation to be triggered.” Appellee Br. 46. The argument
fails because, as we have already concluded, notice of breach, not request for
cure, is the singular trigger for Morgan Stanley’s remedy obligations. Further, it
is by no means evident that the timeliness of notice is essential to this trigger
because the 90‐day cure period would not begin to run until notice was received
and any harm to Morgan Stanley from a delay in notice could offset its remedy
obligations. See 63 N.Y. Jur. 2d, Guaranty & Suretyship § 134 (2006) (stating that
where giving notice within specified time is not condition precedent to liability,
“consequence of not giving such notice may be to relieve or exonerate” the party
entitled to notice “only to the extent of the damage sustained by reason of the
omission”); see also Jacob & Youngs, Inc. v. Kent, 230 N.Y. at 241. Thus, the
39
impossibility of cure is properly recognized as a factor that here could weigh in
favor of substantial performance on remand.
Accordingly, because the timeliness of the Special Servicer’s request for
cure should not have been determined as a matter of law and because a
reasonable jury could find that, even if there was some delay in requesting cure,
the Special Servicer substantially performed this MLPA obligation, these
questions of timeliness and substantial performance cannot be decided in favor
of Morgan Stanley on summary judgment but must be presented to the factfinder
at trial.
III. Conclusion
To summarize, we conclude as follows:
1. “Notice to cure” is not a phrase that appears in the MLPA and, thus,
cannot be identified as a condition precedent to Morgan Stanley’s MLPA cure‐or‐
repurchase obligation.
2. The request‐for‐cure obligation that the MLPA imposes on the
Special Servicer is properly construed as a promise rather than as a condition
40
precedent because it neither employs the linguistic conventions of condition nor
serves as a trigger for the cure period at issue.
3. Even if the MLPA’s notice‐of‐breach obligation could be construed
as a condition precedent because it triggers the 90‐day cure period—a matter we
need not decide as no party advances the argument—that rationale would not
extend to the timeliness of the notice, which has no triggering effect, much less to
a three‐day time limitation, which does not cabin the notice‐of‐breach obligation
as it does the request‐for‐cure obligation.
4. The fact that the notice‐of‐breach obligation arises upon a party’s
“discovering” breach while the request‐for‐cure obligation arises upon a
Servicer’s “becoming aware” of the breach does not admit the categorical
conclusion, urged by BNY, that the time for requesting cure cannot run before
notice of breach is given, particularly where, as here, the Servicer is the party
discovering breach.
5. Under New York law, a reasonable time for investigation is afforded
before a party can be said to have discovered or become aware of a breach.
41
6. Questions of fact as to the reasonableness of time taken to
investigate the alleged breach of the MLPA’s Environmental Conditions
Representation preclude finding, as a matter of law, that request for cure was
untimely, particularly when reviewed for substantial performance.
The judgment of the district court is, therefore, VACATED, and the case is
REMANDED for further proceedings consistent with this opinion.
42
WESLEY, Circuit Judge, dissenting:
In concluding that a request to cure was not a condition precedent to
Morgan Stanley’s repurchase obligation and that issues of fact preclude
summary judgment, the majority opinion both misapplies New York law and
misreads the plain language of the contract. The result is, in essence, judicial
reformation of the agreement, saving a sophisticated party from the
requirements of the bargain it made following arms‐length negotiation. Because
I cannot agree with these conclusions, I respectfully dissent.
It is indeed the case that New York law requires conditions precedent to be
“express”—that is, stated by the parties in “unmistakable language.”
Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 690–91 (1995)
(internal quotation marks omitted). But there is no indication in Oppenheimer
that the standard of “unmistakable language”—which the Court drew from the
Second Restatement of Contracts—requires specific, talismanic words. See
Oppenheimer, 86 N.Y.2d at 691 (quoting RESTATEMENT (SECOND) OF CONTRACTS
§ 229 cmt. a (1981)). In fact, the Restatement clearly rejects that view: “No
particular form of language is necessary to make an event a condition, although
such words as ‘on condition that,’ ‘provided that’ and ‘if’ are often used for this
1
purpose. An intention to make a duty conditional may be manifested by the
general nature of an agreement, as well as by specific language.” RESTATEMENT
(SECOND) OF CONTRACTS § 226 cmt. a.1
A recent case of the Court of Appeals confirms this analysis: the Court
construed a provision requiring negotiation and execution of additional terms as
an express condition precedent to a party’s obligation to supply fiber‐optic
capacity but relied on no conditional words, identifying the parties’ “clear
intent” solely from the nature and structure of the agreement. See IDT Corp. v.
Tyco Grp., S.A.R.L., 13 N.Y.3d 209, 212, 214 (2009).2 Similarly, lower New York
courts have concluded that an express condition precedent exists “despite the lack
of explicitly conditional language” so long as it “was unmistakably required” before
another obligation came into force. ALJ Capital I, L.P. v. David J. Joseph Co., 48
A.D.3d 208, 208 (N.Y. 1st Dep’t 2008) (emphasis added); see also Walton v. E.
1 See also 13 WILLISTON ON CONTRACTS § 38:16 (4th ed. 2000) (“Any words which,
when properly interpreted or construed by the court, make clear the notion that
the performance of a promise in a contract is dependent on some other act or
event will create an express condition.”).
2 Oppenheimer itself also relied on a case in which absolutely no conditional
language appeared: the contract simply required notice of shipment of goods,
and the failure to provide such notice was deemed a “failure to ‘perform[] all
conditions precedent’” and “barred [plaintiff] from recovery.” 86 N.Y.2d at 693–
94 (first alteration in original) (quoting Jungmann & Co. v. Atterbury Bros., 249
N.Y. 119, 122 (1928)).
2
Analytical Labs, Inc., 246 A.D.2d 532, 533 (N.Y. 2d Dep’t 1998) (finding condition
precedent premised on the structure of the provision, notwithstanding the lack of
conditional language); Winfield Capital Corp. v. Mahopac Auto Glass, Inc., 208
A.D.2d 715, 715 (N.Y. 2d Dep’t 1994) (same). In New York courts, therefore,
specific words are strong evidence of, but not necessary to, conditions precedent;
the core inquiry, as in all contracts, is to give effect to the parties’ “clear intent,”
as expressed through the “unmistakable language” they use.
So what then does the language and structure of the contract—negotiated
at arms’ length by sophisticated commercial entities—tell us about breaches of
the agreement and the remedies provided for those breaches? For ease of
reference, here again are the three obligations as identified in the majority
opinion, ante, at 15–16:
1. If a material breach exists, “the party discovering
such . . . Material Breach shall promptly notify, in
writing, the other party . . . .”
2. “Promptly (but in any event within three Business
Days) upon becoming aware of any such . . . Material
Breach, the Master Servicer shall, and the Special
Servicer may, request that the Seller, not later than 90
days from the Seller’s receipt of the notice of such . . .
Material Breach, cure such . . . Material Breach . . . .”
3. “The Seller hereby covenants and agrees that, if any
such . . . Material Breach cannot be corrected or cured in
3
all material aspects within the above cure period[], the
Seller shall, on or before the termination of such cure
period[], either (i) repurchase the affected Mortgage
Loan . . . or (ii) . . . at its option replace, without
recourse, any Mortgage Loan . . . to which such defect
relates with a [substitute mortgage].”
J.A. 454–55. We can all agree the third clause clearly conditions Morgan
Stanley’s repurchase‐or‐replace obligation on the existence of a particular
circumstance: that “any . . . Material Breach cannot be corrected or cured in all
material aspects within the above cure period[].” J.A. 455 (emphasis added); see
Majority Op., ante, at 21–22 (identifying this clause as an example of
“unmistakable language of condition”). Similarly, we agree that this language
makes the repurchase obligation dependent on the obligation to cure within the
cure period. But where the majority opinion and I depart is whether that
obligation to cure within the cure period arises from the notice of breach or from
the request to cure.
The majority opinion concludes that because the ninety‐day period is
calculated from the date of the notice of breach, the cure period must be triggered
by the notice. See Majority Op., ante, at 23 (“[A]s the MLPA makes clear, that cure
period is triggered exclusively by ‘the Seller’s receipt of the notice of . . . Material
breach,’ not the Servicer’s request for cure.” (quoting J.A. 454)). I cannot agree: A
4
ninety‐day clock may count down from the notice of breach, but it is only the
request to cure that gives that clock any legal meaning. The ninety‐day cure
period is written as a clause in the middle of the request provision, which states
that “the Special Servicer may[] request that the Seller, not later than 90 days from
the Seller’s receipt of the notice of such . . . Material Breach, cure such . . . Material
Breach.” J.A. 454 (emphasis added). In other words, the ninety days and their
legal significance are a part of the Special Servicer’s request. If there were no
request, ninety days would pass—in time’s typical fashion—but it would not be
a legally significant “cure period” for purposes of the repurchase obligation
because no one had requested cure by that date.
The majority opinion seems disturbed by the fact the deadline for cure is
not counted down from the request for cure and so concludes that the request
itself has no conditional force over the repurchase obligation. But the repurchase
obligation depends on the Seller not curing the breach within the cure period;
that circumstance can only exist if the Special Servicer first makes a request to
cure, which includes (and creates) the obligation to cure and the legal deadline
for it. Nothing about the fact that the deadline is established ninety days after
another event changes the fact that it is the request that brings it into existence.
5
For example, imagine two parties enter into a contract that reads: “Upon
becoming aware of a material breach, the Special Servicer may request that the
Seller, not later than ten days following the next full moon, cure such material
breach.” An obligation to cure within the cure period does not come into
existence as a result of the lunar cycle; it is triggered by the request—the “not
later than” clause simply provides a way to determine the deadline by which the
Seller must comply. Put simply, the request identifies an object (cure) and a
deadline (ninety days following a particular identified event); absent any
request, there is no object and no deadline.3
This interpretation is confirmed by a simple counterfactual: If the Special
Servicer had exercised its option not to request cure, would Morgan Stanley still
3 Stepping back, it makes sense that the request to cure calculates its deadline
from the notice of breach. Either party—the Seller or the Special Servicer—may
be the one to discover the breach in the first instance and must then notify the
other party. See J.A. 454. If the Seller discovers the breach and provides notice,
the Special Servicer then has three days to decide whether to request cure or lose
its right to do so. If it chooses to exercise its right to request cure on day three,
there may be only eighty‐seven days until the end of the cure period—but the
Seller already had three days of notice, by its own discovery, of the nature and
circumstances of the breach. By contrast, if the Special Servicer discovers the
breach, it can both notify the Seller of breach and request cure in the same
document, in which case the Seller has the same ninety days of notice. In either
event, this system ensures that the Seller has exactly ninety days of knowing
about the breach, no more and no less, before the deadline occurs.
6
have been obliged to cure or repurchase the loan? The answer—on the plain face
of the contract—must be “no.” The contract is conspicuously lacking any
language making cure of every material breach obligatory on the Seller absent a
request to cure.4 To construe the contract in that way would require reading the
repurchase obligation as creating, sub silentio, an obligation to cure that arises
simply from notification of breach.5 It is simply unfathomable that the parties
4 The majority opinion suggests this consideration is irrelevant because the
MLPA assigned the signaling function to the notice of breach and because the
Master Servicer had a “mandatory request‐for‐cure obligation.” Majority Op.,
ante, at 25 n.10. However, the loan at issue was transferred to the Special
Servicer in November 2008, see Majority Op., ante, at 7, at which point the Master
Servicer ceased to be “obligated to service and administer” the loan except as to
certain specified functions, none of which include requesting cure, see J.A. 217.
Only the Special Servicer’s contractual rights and obligations are therefore
relevant, and while the MLPA provided that the Master Servicer “shall” request
cure, it provided only that the Special Servicer “may” request cure. J.A. 454.
“May” in this context can only possess a permissive, rather than mandatory,
meaning, see N.Y. State Elec. & Gas Corp. v. Aasen, 157 A.D.2d 965, 967 (N.Y. 3d
Dep’t 1990), and the MLPA thus imposed no obligation on the Special Servicer to
request cure. As I have explained, notice of a breach does not trigger the
obligation to cure the breach—the request to cure is what obliges the Seller to cure
within the defined cure period. A request to cure by the Special Servicer
therefore told the Seller that the former was exercising its option to demand cure,
providing exactly the same signaling and demand functions as the notice of
disallowance in ALJ Capital. See infra note 7; see also Majority Op., ante, at 23
(acknowledging ALJ Capital’s notice as a condition precedent).
5 As described above, if the Special Servicer decides not to request a cure, then
the date of the notification of breach has no legal significance—ninety days later,
nothing happens, and no one cares.
7
would silently imply, rather than lay out explicitly, such a significant obligation
as one requiring cure of every material breach for which a notice of breach was
transmitted. Instead, the parties explicitly conditioned the repurchase obligation
on the running of the cure period without actual cure, and the cure period only
comes into existence through the Special Servicer’s request.6
Compare this framework with the provisions considered by district courts
in our Circuit that have concluded timely notice did not constitute a condition
precedent to repurchase obligations: in those cases, the obligation was triggered
by either a party’s discovery of its own breach or its counterparty’s notification—
i.e., the obligation could come into existence through a mechanism other than a
request to cure. See LaSalle Bank Nat’l Ass’n v. Citicorp Real Estate, Inc., No. 02 Civ.
7868 (HB), 2003 WL 21671812, at *3 (S.D.N.Y. July 16, 2003); Tr. for Certificate
Holders of Merrill Lynch Mortg. Passthrough Certificates Series 1999‐C1 v. Love
Funding Corp., No. 04 Civ. 9890(SAS), 2005 WL 2582177, at *7 (S.D.N.Y. Oct. 11,
2005); see also U.S. Bank Nat’l Ass’n v. Dexia Real Estate Capital Mkts., No. 12‐CV‐
9412, 2014 WL 3368670, at *4 (S.D.N.Y. July 9, 2014), rev’d on other grounds, No. 14‐
6 The majority opinion appears distracted by the District Court’s “notice to cure”
misnomer—but we are engaged in de novo review, and even if we were applying
a more deferential standard, we are certainly not obligated to accept the District
Court’s labels.
8
2859‐cv, 2016 WL 1042090 (2d Cir. Mar. 18, 2016) (summary order). Here, by
contrast, there is no indication anywhere in the contract that Morgan Stanley’s
discovery of its own breach requires it to do anything other than “promptly
notify, in writing, the other party.” J.A. 454; see Morgan Guar. Tr. Co. of N.Y. v.
Bay View Franchise Mortg. Acceptance Co., No. 00 CIV. 8613(SAS), 2002 WL 818082,
at *4–5 (S.D.N.Y. Apr. 30, 2002) (concluding that a request to cure was necessary
to begin cure period, the expiration of which required the seller to repurchase the
loan).
In sum, regardless of whether the parties used any particular conditional
words, the language of the repurchase obligation is “clear” and “unmistakable”
that it arises only when cure does not occur within the cure period—and cure
within the period is an obligation that arises only out of the Special Servicer’s
request. See ALJ Capital, 48 A.D.3d at 208.7 Because the language and structure
of the provision makes the repurchase obligation unmistakably contingent on the
7 In fact, ALJ concerned just such a timely notice provision triggering a cure
period, after which time the plaintiff was permitted to seek recovery in court. See
ALJ Capital I, L.P. v. David J. Joseph Co., 15 Misc. 3d 1127(A), 2007 WL 1218355, at
*4–5 (N.Y. Sup. Ct. Mar. 13, 2007). The First Department affirmed the trial court’s
conclusion that timely notice was a condition precedent “despite the lack of
explicitly conditional language” because the written notice “was unmistakably
required by the agreement’s ‘Cure Period’ provision prior to the assertion of a
claim for repayment.” ALJ Capital, 48 A.D.3d at 208.
9
Special Servicer’s request to cure, that request must necessarily constitute an
express condition precedent. See IDT Corp., 13 N.Y.3d at 214.
Express conditions precedent are subject to “the requirement of strict
compliance,” in contrast to promises or constructive conditions, with which only
“substantial compliance” is required. Oppenheimer, 86 N.Y.2d at 690, 692
(internal quotation marks omitted). Further, “no mitigating standard of
materiality or substantiality [is] applicable to the non‐occurrence of [an express
condition precedent].” Id. at 692 (internal quotation marks omitted).
Consequently, once we determine that a request to cure “within three Business
Days[] upon becoming aware” of the material breach, J.A. 454, is an express
condition precedent to the repurchase obligation, the only remaining question on
summary judgment is whether there exists any genuine issue of material fact as
to the Special Servicer’s strict compliance with that condition. Under
longstanding New York law, no reasonable factfinder could determine that the
Special Servicer only became aware of the material breach on or after March 15,
2009—i.e., three days before the date of the request to cure.8
8 Because the majority opinion concludes the request to cure was merely a
promise, it analyzes the facts under the rubric of substantial compliance and
concludes summary judgment is inappropriate because reasonable factfinders
may differ as to the extent of any “reasonable investigation” including “some
10
As the majority opinion explains, the material breach identified here is
premised on Morgan Stanley’s representation that it had no knowledge of any
“material and adverse environmental condition or circumstance affecting any
Mortgaged Property that was not disclosed in such report.” J.A. 625; see also
Majority Op., ante, at 8 & n.3. The Special Servicer’s conclusion that a breach of
this representation had occurred rested primarily on a document showing that
Morgan Stanley’s counsel knew the environmental report neither addressed a
relevant state regulation nor the notices of violation issued thereunder; in fact,
this was the only piece of evidence identified in the formal notice of breach and
request to cure. See J.A. 625–26. However, in a document sent to the Special
Servicer’s Associate General Counsel on February 16, 2009, the Director of
Special Servicing—and the woman who ultimately signed the notice of breach
and request to cure—identified “additional facts . . . to demonstrate the material
and adverse effect” of the breach, including the anchor tenant’s departure and
subsequent lease terminations by other tenants, “discontinued . . . loan payments
to the Trust in November 2008 as a direct result of insufficient operating
degree of chain‐of‐command review.” Majority Op., ante, at 33–38. Even under a
substantial compliance analysis, however, as explained infra, New York law and
the undisputed facts would require us to conclude that the Special Servicer
became aware of the breach as of at least February 16, 2009.
11
income,” and rejection of the borrower’s insurance claim under a pollution legal
liability policy. J.A. 896–98.
The majority opinion’s approach places great weight on the internal
governance structure of the Special Servicer, essentially permitting the
corporation to deny its “awareness” of a fact simply because it required
authorization by the president to issue the notice. See Majority Op., ante, at 34–
36. But “a fundamental principle that has informed the law of agency and
corporations for centuries” is that “the acts of agents, and the knowledge they
acquire while acting within the scope of their authority are presumptively
imputed to their principals.” Kirschner v. KPMG LLP, 15 N.Y.3d 446, 465 (2010);
accord Corrigan v. Bobbs‐Merrill Co., 228 N.Y. 58, 68 (1920) (explaining that, if the
employee of a corporation obtains knowledge “while acting within the scope of
his authority, on behalf of [the corporation], for its benefit, [the corporation] is
chargeable with his knowledge”).9 This presumption of corporate knowledge is
conclusive, even if the corporate employee never communicated the information
to her superiors:
9 As a corporate legal entity, the Special Servicer “necessarily functions through
human actors—its officers, agents and employees—whose knowledge and
conduct may be imputed to the entity under the doctrine of respondeat
superior.” Prudential‐Bache Sec., Inc. v. Citibank, N.A., 73 N.Y.2d 263, 276 (1989).
12
[N]otice of facts to an agent is constructive notice
thereof to the principal himself, where it arises from or
is at the time connected with the subject‐matter of his
agency, for, upon general principles of public policy, it
is presumed that the agent has communicated such
facts to the principal, and, if he has not, still the
principal having [e]ntrusted the agent with the
particular business, the other party has a right to deem
his acts and knowledge obligatory upon the principal.
Hyatt v. Clark, 118 N.Y. 563, 569 (1890); accord N.Y. Univ. v. First Fin. Ins. Co., 322
F.3d 750, 753 & n.2 (2d Cir. 2003) (applying these principles to a timeliness
inquiry and calculating the insurer’s delay in notice from the date its investigator
discovered grounds for liability); Apollo Fuel Oil v. United States, 195 F.3d 74, 76–
77 (2d Cir. 1999) (applying the same rule to conclude the corporation knew of
intentional misconduct through its employees’ knowledge). This rule applies
even where such knowledge works the waiver of a contractual right and the
corporate agent does not have any authorization under the contract to make such
a waiver affirmatively. See, e.g., Hurley v. John Hancock Mut. Life Ins. Co., 247 A.D.
547, 550 (N.Y. 4th Dep’t 1936).
Put simply, as a matter of law, the Special Servicer knew the facts of the
breach and their material and adverse effect on the loan well before March 15,
2009. The Director of Special Servicing drafted a memorandum containing
sufficient facts to constitute awareness of both the breach and its material and
13
adverse effects on February 16, 2009.10 Even after that, on February 19, 2009, an
Associate General Counsel at the company confirmed that “there is evidence that
[Morgan Stanley] knew” there were undisclosed environmental conditions in
breach of the representation and concluded “I think that the breach notice should
be sent.” J.A. 1266. Yet, despite two employees responsible for investigating
material breaches concluding there was sufficient evidence of such a breach, no
notice was sent until March 18, 2009, during which time no new material facts
were obtained by the Special Servicer. Though the Trustee’s brief makes much of
the fact that neither the Director of Special Servicing nor the Associate General
Counsel had authority to issue a notice of breach, authority to make the ultimate
decision is irrelevant to imputation; what matters is whether the knowledge was
obtained within the scope of the employee or agent’s employment. See N.Y.
Univ., 322 F.3d at 753 & n.2; Hyatt, 118 N.Y. at 569; Hurley, 247 A.D. at 550. There
can be no dispute that the Director of Special Servicing, who ultimately signed the
10 Note also that this memorandum was based on an investigation of the loan’s
status beginning in November 2008. See J.A. 1109–15. Thus, we are not even
considering a situation in which the corporation merely had access to (and thus
only arguably constructive notice of) these facts—the February 16, 2009
memorandum memorializes facts actually known by the Director of Special
Servicing. See J.A. 1111–17. To borrow the majority opinion’s analogy, see
Majority Op., ante, at 31 n.11, she was aware both that she had found the
Americas (the fact) and that they were new (its significance).
14
formal notice of breach and request to cure, see J.A. 626, obtained her knowledge
of the breach and its effects in the scope of her authority to investigate potential
breaches. See J.A. 1110–11; see also N.Y. Univ., 322 F.3d at 753 & n.2 (calculating
delay in insurance coverage denial from the date the investigator learned of the
grounds for denial, notwithstanding his lack of authority to deny coverage
himself).
Just as importantly, none of the post–February 16 activities described by
the majority opinion contributed in any material way to the Special Servicer’s
“awareness” of any breach. None of the internal “chain of command” reviews—
not the removal of one paragraph of supporting facts from the notice and request
to cure by the Associate General Counsel, see J.A. 1341–45, nor the approvals
without change by both a senior managing director and the president of the
company, see J.A. 1347, 1829–30—made any additional facts available to the
corporation, either of the nature of the breach or of its material and adverse
effects. The only potentially new fact arose from the appraisal setting the
collateral’s market value at $22.3 million, the initial estimate of which was
received on February 27, 2009. See J.A. 1739. The Trustee argues that this
appraisal was needed “to confirm that Morgan Stanley’s breach was ‘material’
15
under the terms of the MLPA.” Appellant Br. 17. But this lone data point could
hardly have tipped the scales of the Special Servicer’s awareness of the breach’s
materiality in light of what it already knew as of February 16, 2009:
(1) The loan was in default;
(2) The anchor tenant had departed, which precipitated rent
reductions, lease terminations, and discontinued rent
payments by other tenants;
(3) An Ohio regulatory body had filed a lawsuit against the
borrower arising from the same environmental regulatory
violations at issue in the breach;
(4) The borrower’s insurance claim for the legal liability was
denied;
(5) The Trust was seeking receivership for the property; and
(6) The Trust would have to fund any legal costs associated with
attempts to recoup value.
See J.A. 619, 897–98. The substantive portion of the February 16, 2009
memorandum concluded with these words: “All of the above results stem from
the state code violations which were present prior to, during and after the sale of
the Mortgage Loan to the Trust. The Mortgage Loan should be repurchased
pursuant to the terms and conditions set forth in the PSA and the applicable
MLPA.” J.A. 898. It exceeds all bounds of credulity to think that, in the face of
16
all these known facts, the Special Servicer was anything but aware of the
circumstances of the breach as well as its material and adverse consequences.11
The majority opinion’s approach thus drastically departs from New York
law governing corporate knowledge and timely request obligations under a
contract. Under the majority opinion, all any corporation need do now is require
authorization for such requests at its highest level—and regardless of the facts
known by employees below the highest executive officer, the corporation cannot
be charged with “awareness” of those facts.12 Not only is this type of passing‐
the‐buck approach wholly contrary to “a fundamental principle that has
11 Even accepting the dubious proposition that confirmation of the loan valuation
somehow moved the Special Servicer from “unaware” to “aware,” that appraisal
was confirmed on March 13, 2009. See J.A. 1730; Majority Op., ante, at 10. It took
another five days for the Special Servicer to send the notice of breach and request
to cure. See J.A. 624–26.
12 The majority opinion criticizes this dissent for not citing cases related to
investigations by agents and employees. See Majority Op., ante, at 35 n.12.
However, our prior decision in New York University offers precisely this situation:
a line investigator at a company contracted as an insurer’s agent discovered
grounds for denying coverage, and that knowledge was imputed to the insurer
for purposes of determining timeliness. See 322 F.3d at 753 & n.2. The majority
opinion’s error arises from its failure to recognize that investigation was clearly
within the scope of the Director of Special Servicing’s employment, regardless of
her ability to take some subsequent external action on behalf of the company.
The results of her investigation—i.e., knowledge of the facts and significance of
breach—are therefore imputed to the Special Servicer, who must then take
whatever steps are necessary in its internal governance structure to act within the
time provided by the contract.
17
informed the law of agency and corporations for centuries,” Kirschner, 15 N.Y.3d
at 465, but it would completely defeat the purpose of a temporal limitation on a
contractual remedy—namely, the valuable certainty and diligence obtained
when a sophisticated counterparty must exercise that remedy within a defined
period of time. Particularly when a timely request is a condition precedent to a
contractual remedy, requiring strict compliance, the majority opinion’s approach
dramatically undercuts the force and value of such provisions.
The Oppenheimer Court considered and rejected a rule that would obviate
the harsh consequences of an express condition precedent, concluding that strict
compliance was necessary. See 86 N.Y.2d at 691–92. Yet the majority opinion
here releases a sophisticated party from the burden of complying with the
agreement it made. At the risk of stating the obvious, if the corporation’s
internal governance did not permit a three‐day turnaround between awareness
of breach and a request to cure, it should have bargained for more time.13 On
these facts, no reasonable factfinder could determine that the Special Servicer
13 “Freedom of contract prevails in an arm’s length transaction between
sophisticated parties such as these, and in the absence of countervailing public
policy concerns there is no reason to relieve them of the consequences of their
bargain. If they are dissatisfied with the consequences of their agreement, the
time to say so was at the bargaining table.” Oppenheimer, 86 N.Y.2d at 695
(alteration and internal quotation marks omitted).
18
only became aware of the breach on or after March 15, 2009. As a result, no
reasonable factfinder could find strict compliance with the condition precedent
to Morgan Stanley’s repurchase obligation, and that obligation never came into
force.
I respectfully dissent.
19
