(CN) — Bank of New York Mellon, as trustee for a securitized trust, may sue Morgan Stanley for failing to inform a commercial tenant about a hazardous gas leak that ultimately caused it to default on an $81 million loan, the Second Circuit ruled.
In 2006, Morgan Stanley issued an $81 million mortgage loan to City View Center for the purchase of a retail center in Garfield Heights, Ohio.
Morgan Stanley sold this loan to one of its trusts, valued at $5 billion, which was later securitized and sold to investors.
The Bank of New York Mellon Trust Company serves as the trustee, responsible for enforcing the mortgage loan service agreements on the underlying assets.
As recounted in court documents, City View defaulted on the loan in 2008 after its main tenant, Wal-Mart, closed its store and canceled its lease due to methane gas intrusion into the store the result of its having been built on a landfill. Ohio found the gas release amounted to an urgent public hazard.
The mortgage agreement provided that Morgan Stanley had "no knowledge of any material and adverse environmental condition" affecting the property, when it had, in fact, learned of the problem before issuing the loan, the court documents said.
Under the terms of the contract, Morgan Stanley is obligated to repurchase the loan if it breached the notice requirements.
A federal judge ruled in Morgan Stanley's favor on timeliness grounds in a breach of contract suit, but on Wednesday a divided Second Circuit panel reversed that decision.
"The contract contains distinct provision for giving notice of breach and making request for cure, neither of which is cast in the express language of condition," Judge Reena Raggi said. "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 notice of breach, is properly construed as a promise."
Under this interpretation of the contract, the notice of breach is not untimely, the court ruled.
"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," Raggi said.
In dissent, Judge Richard Wesley said the in
concluding that a request to cure was not a condition precedent to Morgan Stanley's repurchase obligation, the majority opinion both misapplied New York law and
misread 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," Wesley said.
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