Case Name: MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage Corporation, Civil No. 11-2542, 2012 WL 4511065 (D. Minn. Oct. 1, 2012)
A recent federal decision out of the District of Minnesota has caused some concern regarding the viability of breach claims after a foreclosure sale. For the reasons discussed below, we believe the case is unlikely to affect many CMBS breach claims, although you should expect to see it cited frequently in the near term.
In September 2011, the Trustee of a residential mortgage-backed securities trust, U.S. Bank National Association, filed a three-count lawsuit against two mortgage loan originators, WMC Mortgage Corporation ("WMC") and EquiFirst Corporation ("EquiFirst"), for breaching various representations and warranties when they sold loans to the Trust claiming that the origination practices used did not comply with customary industry standards. Two of the three counts pleaded in the Complaint alleged breach of contract and sought two different remedies: specific performance and damages. The facts giving rise to each of these counts were identical.
Both EquiFirst and WMC moved to dismiss the Complaint for various reasons. On February 16, 2012, the district court granted in part and denied in part the motions. See Dkt. 35, MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage Corporation, Civil No. 11-2542, 2012 WL 4511065 (D. Minn. Oct. 1, 2012). Specifically, the court dismissed all claims against EquiFirst because it ruled that the Trustee's notice of alleged breaches to EquiFirst was untimely in that the Trustee failed to give the requisite notice within 60 days of learning of such breaches. The court also dismissed the Trust's request for a declaratory judgment as duplicative, and ruled that the Trust's sole remedy for WMC's breaches of the representations and warranties was to cure, substitute or repurchase the defective loan based on the express terms of the contract. Significantly, the Trust had not alleged an independent breach of the contract based on WMC's refusal to cure, substitute or repurchase the allegedly defective loans; therefore, the court did not address remedies available to the Trust for a breach of contract based on WMC's refusal to repurchase.
In May 2012, WMC filed a motion for partial summary judgment on certain of the loans, contending (as had EquiFirst) that the Trust's sole remedy was for specific performance and that specific performance was not available because the Trust had liquidated the collateral that secured the allegedly defective loans. Therefore, WMC argued that there were no loans for WMC to repurchase. The undisputed record showed that, on September 30, 2010, the Trustee notified WMC of breaches of its representations and warranties, and requested that WMC cure, substitute, or repurchase the loans within 60 days. The Trustee, however, had already liquidated the allegedly defective loans before it even provided notice to WMC of its alleged breaches. Thus, WMC was effectively deprived of any opportunity to cure, substitute, or repurchase the allegedly defective loans. Based on these undisputed facts, the court agreed with WMC. The court granted WMC's motion, concluding that, because the Trust had liquidated the collateral securing certain of the loans, specific performance was not available to the Trust. See MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage Corporation, Civil No. 11-2542, 2012 WL 4511065 (D. Minn. Oct. 1, 2012).
These decisions are unlikely to affect future CMBS breach claims, provided that the mortgage loan seller, unlike WMC and EquiFirst, is given the opportunity to repurchase the loans at issue before a foreclosure sale occurs. The decision also highlights the need to: (1) strictly comply with the notice requirements of your PSA and (2) allege an additional, independent breach of the operative contract based on the mortgage loan seller's failure to adhere to the terms of the operative contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.