The Court of Appeals of New York recently held that a mortgage loan repurchase action for breach of representations and warranties accrued when the representations and warranties were made, and the obligation to cure and repurchase was not a separate and continuing promise of future performance.
A copy of the opinion is available at: Link to Opinion.
The sponsor of a residential mortgage-backed securities trust purchased 8,815 mortgage loans from third-party originators. This pool of loans was sold to an affiliate, known as a “depositor,” pursuant to a Mortgage Loan Purchase Agreement (MLPA) between the sponsor and the depositor dated March 28, 2006.
Also on March 28, 2006, the depositor transferred the loans and its rights under the MLPA to the trust pursuant to a Pooling and Servicing Agreement (PSA) between the depositor, the servicer, a bank as master servicer and securities administrator, and another bank as trustee.
In the MLPA, the sponsor made more than 50 representations and warranties as to the quality and other attributes of the loans as of the closing date, March 28, 2006. The MLPA also allowed the trust to examine each mortgage loan file and exclude from the final pool any that did not conform to the representations and warranties. The sole remedy in the event of a breach of the MLPA was for the sponsor to cure or repurchase the non-conforming loans.
The PSA provided that the trustee had the right to enforce the sponsor’s repurchase obligation by notifying the sponsor and servicer and demanding a cure within 60 days. If the default was not cured, the trustee had the right to enforce the sponsor’s obligation to repurchase under the MLPA within 90 days after the sponsor was notified of the breach. The PSA also provided that certificate holders with at least 25 percent of voting rights in the trust could enforce certain events of default after giving notice in writing to the trustee demanding that it file suit and the trustee failed or refused to do so within 15 days.
The trust and certificate holders allegedly lost almost $330 million due to borrower defaults and delinquencies, leading two independent investment fund certificate holders—who together held 25 percent of the voting rights—to hire a forensic mortgage loan review company to analyze a portion of the loan pool. The result was that 99 percent of the loans reviewed failed to comply with one or more representations and warranties.
In January 2012, the two certificate holders gave notice of default under the PSA to the trustee bank, demanded that the trustee require the sponsor to repurchase all of the loans in the trust, and also demanded that the trustee obtain a tolling agreement from the sponsor given potential problems with the statute limitations.
The trustee neither sued the sponsor nor obtained a tolling agreement, so the two certificate holders sued the sponsor for breach of contract on March 28, 2012, exactly six years after the MLPA and PSA were signed.
In September 2012, the trustee sought to substitute itself as the party plaintiff, filing a complaint on the trust’s behalf against the sponsor for breach of the representations and warranties and failure to cure and repurchase. The trustee alleged that it had notified the sponsor of the breaches in nine letters sent between February and July 2012.
In November 2012, the sponsor moved to dismiss the complaint, arguing that it was untimely because the trustee’s claims accrued on March 28, 2006, more than six years before the trustee filed its complaint, the certificate holders did not give the sponsor the required 60 days’ notice to cure and 90 days to repurchase before suing, the certificate holders lacked standing because only the trustee could sue for breaches of the representations and warranties, and the trustee’s substitution as plaintiff could not relate back to March 28, 2012 because the certificate holders’ action was not valid.
The trial court denied the sponsor’s motion to dismiss, concluding that the sponsor’s obligation to cure or repurchase was recurring, such that the sponsor breached the PSA each time it failed to cure or repurchase a defective loan after receiving notice of breach. The trial court also held that the trustee had satisfied the condition precedent to give notice of breach before filing suit because the sponsor repudiated its obligation to repurchase.
The New York Appellate Division reversed and granted the sponsor’s motion to dismiss the complaint as untimely, reasoning that the claims accrued on the closing date of the MLPA, March 28, 2006, when the breach occurred, the 60 and 90-day cure and repurchase periods had not expired when the certificate holders sued on March 28, 2012, and that the certificate holders lacked standing to sue on behalf of the trust and the trust’s substitution did not cure that defect and relate back to the certificate holders’ filing date.
The trustee sought leave to appeal, which the Court of Appeals granted.
The New York Court of Appeals began its analysis by stressing that New York’s law of contracts and statutes of limitation serve the same objectives of finality, certainty and predictability, and are designed “not only to save litigants from defending stale claims, but also express a societal interest or public policy of giving repose to human affairs.” In addition, the Court noted that New York courts have “rejected accrual dates which cannot be ascertained with any degree of certainty, in favor of a bright line approach.”
Thus, the New York Court of Appeals held that, under New York law, the statute of limitations for breach of contract does not begin to run when the plaintiff discovers that he has a cause of action, but “from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury.”
The Court of Appeals rejected the trustee’s argument that its claim did not accrue until the sponsor refused to cure or repurchase, at which point the trustee or certificate holders had six years to sue, distinguishing the ruling in Bulova Watch Co. v. Celotex Corp., 26 NY 2d 606 (1979), because although “parties may agree to undertake a separate obligation, the breach of which does not arise until some future date, the repurchase obligation undertaken by [the sponsor] does not fit this description.”
The New York Court of Appeals explained that Bulova Watch involved a provision in a contract for a new roof that obligated the seller to make repairs for 20 years. The Court held that the repair guarantee was an agreement separate and distinct from the agreement to supply roofing materials, and the agreement to repair was subject to a six-year statute of limitations, running from the time each breach of the obligation to repair occurred, not when the contract was signed.
In contrast, the Court held, in the case at bar, the sponsor never guaranteed the future performance of the mortgage loans, but rather only that certain facts were true as of a date certain – here, March 28, 2006, when the MLPA and PSA were signed. In addition, the Court held, the agreements expressly stated that the representations and warranties did not survive the closing date.
The Court of Appeals also rejected the trustee’s argument that the obligation to cure or repurchase was a condition precedent that delayed accrual of the cause of action, because the trustee could not sue the sponsor until the sponsor refused to cure or repurchase, and only then did the PSA allow the trustee to sue to enforce the obligation.
Relying on a decision more than 100 years old, Dickinson v. Mayor of City of N.Y., 92 NY 584, 590 (1883), the Court of Appeals reasoned that the trustee ignored “the difference between a demand that is a condition to a party’s performance, and a demand that seeks a remedy for a pre-existing wrong.”
In Dickinson, the Court of Appeals held that a 30-day statutory period that the city had to investigate claims before suit could be filed did not affect when the cause of action against the city accrued, contrasting that situation with one in which “a demand was a part of the cause of action and necessary to be alleged and proven, and without this no cause of action existed.”
Like in Dickinson, the Court of Appeals held, the trust “suffered a legal wrong” when the sponsor breached the representations and warranties, and the case before the Court was not one where no cause of action existed until the demand was made.
The Court held that the sponsor’s obligation to cure or repurchase was not a separate and continuing promise of future performance, but was instead the sole remedy if the sponsor breached its representations and warranties. Accordingly, the Court held, the obligation to cure or repurchase “was not an independently enforceable right, nor did it continue for the life of the investment.”
Accordingly, the Court of Appeals concluded that the trustee’s claim was subject to the six-year statute of limitations for contract actions, which accrued on March 28, 2006, when the MLPA was signed. In addition, the Court of Appeals held that the sponsor’s failure to cure or repurchase “was not a substantive condition precedent that deferred accrual of the trust’s claim; instead, it was a procedural prerequisite to suit.”
Finally, because the Court held the trust failed to fulfill the procedural condition precedent, the Court did not address the issues of standing and relation-back, and affirmed the order of the Appellate Division.