On July 2, 2022, Justice Masley of the New York County Commercial Division issued a decision in Freedom Trust 2011-2 v. DB Structured Prods., Inc., 2022 NY Slip Op. 32096(U), dismissing a put-back brought by a certificateholder of an RMBS trust, with the trustee’s permission, against the trust’s sponsor because (1) the certificateholder lacked capacity under the trust’s no-action clause and (2) the claims were in any event time-barred.
In this case, the trustee purported to assign its authority to bring a put-back action to the plaintiff, a certificateholder. That is, rather than follow the procedure laid out in the no-action clause where a certain percentage of certificateholders can direct the trustee to bring an action, the plaintiff and the trustee agreed that the plaintiff would bring an action.
On the issue of capacity, the court explained that regardless of the plaintiff’s standing to sue (that is, whether it had suffered a redressable injury), failure to comply with the no-action clause meant that the plaintiff lacked the legal capacity to sue. The court noted that this rule did not apply in the distinguishable situation where a certificateholder was suing a trustee rather than bringing a put-back action. The court explained:
Freedom correctly points out that the concept of legal capacity is distinct from the concept of standing. Legal capacity is a threshold matter and concerns a party’s power to appear and bring its grievance before the court whereas standing concerns whether the party seeking relief has a sufficiently cognizable stake in the outcome so as to cast the dispute in a form traditionally capable of judicial resolution. The two concepts are not interchangeable, even though the terms legal capacity and standing have been used interchangeably. Legal capacity to sue, or lack thereof, often depends purely on the litigant’s status, thus application of the no action clause impacts Freedom’s capacity to sue on the PSA.
. . .
Generally, no-action clauses protect potential defendants from defending individual lawsuits by delegating the right to bring a suit to the trustee. No action clauses allow a trustee, acting as a stakeholder, to pursue litigation on behalf of all noteholders and ensure the proceeds are shared ratably among them. Such clauses must be strictly construed in accordance with general principles of contract interpretation. Applying these precepts, the no action clause in Section 12.03 clearly and unambiguously states that, unless certain conditions are met, no certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit, action, or proceeding with respect to the PSA and that no certificateholder shall have any right in any manner whatsoever by virtue of any provision of this Agreement to enforce any right under this Agreement. As discussed above, the no action clause
(Internal quotations and citations omitted) (emphasis added).
prohibited Freedom from maintaining the Original Action because it did not permit certificateholders to sue upon a notice of breaches of representations and warranties, and thus, Freedom lacked standing to assert the claim.
On the statute of limitations issue, the court’s reasoning was straightforward. It held that “[i]t has already been determined that the Trustee’s claim for breach of representation and warranties against DBSP is time-barred,” and the plaintiff had not showed “how the Trustee can assign a time-barred claim.”