The Second Circuit recently REVERSED a S.D.N.Y decision granting summary judgment in favor of a CMBS Trust whose Special Servicer sued commercial loan Originator client seeking repurchase of a loan due to the Originator's alleged breaches of representations and warranties. The Originator countered that it had not breached any representations and warranties and that in any event the Trust's claim was barred by New York's six-year statute of limitations applicable to contract suits. The Originator contended that the statute of limitations began to run on the closing date of the loan sale. The Trust argued that the statute of limitations did not begin to run until after the trust suffered harm from the alleged breaches and demanded repurchase of the loan, years after the loan sale closed. The District Court initially ruled in favor of the Trust, granting a $19.6 million summary judgment to the Trust. The District Court, citing a fee-shifting provision in the loan sale contract, included $1.2 million in the judgment for the Trust's litigation costs.

The Second Circuit REVERSED, agreeing with the Originator that the statute of limitations began to run on the date that the loan sale closed, which was more than six years before the trust filed suit. The Second Circuit remanded the case to the District Court with instructions to enter judgment in the Originator's favor.

On remand, the Originator asked for an award of its litigation costs under the fee-shifting clause in the loan sale agreement. The Trust objected, arguing that the clause was intended only for the benefit of the Trust. But the District Court disagreed, and ordered the Trust to pay, the Originator's litigation costs, including appeal costs, of $1.8 million. The District Court also declined to require the Originator to offset against the fee award any amounts the Originator had recovered from third party insurers, observing that the fee-shifting clause was agreed to by sophisticated parties and did not contain language requiring offset for recoveries against third parties.

The Trust is likely to appeal the District Court's fee ruling.

Of course the case raises drafting issues re the form of MLPA current in use by particular issuers. Also these decisions caution Special Servicers to carefully review the MLPA and PSA before filing suit against an Originator to determine whether the documents contain fee-shifting provisions and the risk of having to pay the Originator's legal fees and expenses if the Trust loses the case. Moreover, these rulings create a dilemma for Special Servicers and lower-in-the-stack Bondholders re the timing of investigation and action re possible rep breaches.