In Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC et al, the Delaware Court of Chancery explained the operation of Section 8106(c) of the Delaware statutes for the first time. The results are surprising to many, as the new statute can apply to M&A agreements executed years ago.
Section 8106(c), which became effective on August 1, 2014, provides as follows:
Notwithstanding anything to the contrary in this chapter (other than Section 8106(b)) or in § 2-725 of Title 6, an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.
According to the court, Section 8106(c) was intended to allow parties to contract around Delaware’s otherwise applicable statute of limitations for certain actions based on a written contract, agreement or undertaking. By stating that the written contract, agreement, or undertaking could refer to a “period specified,” Section 8106(c) created a flexible framework for defining the time in which suit can be brought. If the contract specified an indefinite period, then the action nevertheless must be brought “prior to the expiration of 20 years from the accruing of the cause of such action.”
The court explained that Delaware precedent explains that a modification of a limitations period is a procedural matter affecting remedies rather than a change in substantive law. Ordinary presumptions against retroactivity do not apply, and the modification applies to ongoing suits absent a showing of manifest injustice. If the Delaware legislature chooses to alter the statute of limitations, then the change applies not only to future claims, but also presumptively governs existing claims.
A court may limit the retroactive application of a change in the statute of limitations where retroactive application would cause injustice. According to the court, there was no injustice here. The defendants did not assert a timeliness defense until two years after the dispute arose, including after the parties had engaged in a lengthy meet-and-confer process that contemplated resolving loan disputes on their merits. During the meet-and-confer process, the defendants never argued that the Trustee’s claims were untimely. In addition, the case was still pending when the Delaware legislature enacted Section 8106(c) and when the statute became effective, so the amendment addressed live claims. It did not have the effect of reviving extinguished claims.
Turning to the purchase agreement used in connection with the securitization, the court observed the agreement contained provisions designed to modify the statute of limitations for purposes of claims for breaches of representations and warranties. Under Section 8106(c), those provisions are valid and effective. Analogizing to a real estate agreement, the court stated “Absent contract language providing to the contrary, pre-closing representations about the acquired property interest become ineffective post-closing.”
Once a transaction agreement provides for representations to survive closing, the next question is how long they can survive. Before the effectiveness of Section 8106(c), the maximum survival period was three years, because of certain Delaware decisions which held that parties could shorten but not lengthen a statute of limitations. But with the effectiveness of Section 8106(c), parties can now extend the statute of limitations up to a maximum of twenty years.
The court interpreted this purchase agreement to provide the defendant had 20 years to discover the breach under the new Delaware statute. Because this structure of the purchase agreement did not specify an outside date for bringing claims, it is subject to the 20 year statutory maximum in Section 8106(c).
The upshot of the decision is most parties will likely want to specificy a time certain for brining claims. Language such as “indefinite survival” should no longer be used if it can be avoided. M&A agreements should also explicitly provide that representations and warranties survive closing.