Over the last several years, we have posted several times about whether the statute of limitations bars remedies against lenders (and sometimes sponsors and trustees) of residential mortgages. (See here, here, and here). One of the most important cases in this area has been ACE Sec. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc.
We had discussed the intermediate appellate court decision in ACE in 2013. In 2015, the New York Court of Appeals affirmed the intermediate court, holding “that a cause of action for breach of representations and warranties contained within a residential mortgage-backed securities contract accrued when the contract was executed because the representations and warranties were breached if at all, on that date.”
By a 4-2 decision, the New York Court of Appeals recently re-affirmed and extended ACE. In Deutsche Bank Nat’l Tr. Co. Tr. for Harborview Mortg. Loan Tr. v. Flagstar Capital Markets Corp., the plaintiff-appellant argued that ACE was distinguishable because the contracts at issue were different. The appellant also argued that the parties had contracted around the statute of limitations. Writing for the majority over two dissents, Judge Eugene Fahey rejected both contentions.
The plaintiff had argued that the contractual accrual clause—stating that “any cause of action . . . relating to or arising out of the breach of any representations and warranties . . . shall accrue” upon (among other things) the demand for repurchase—rendered ACE inapposite. But Judge Fahey found that the accrual clause did not create a substantive condition precedent to the defendant’s performance (i.e., delivery of the loans).
Under ACE, the absence of a substantive condition precedent postpones accrual of the statute of limitations, but the absence of a mere procedural perquisite—like demand for a remedy for a preexisting breach—does not. Likewise, under ACE, a promise of future performance can delay accrual of the statute of limitations, but the plaintiff in Deutsche Bank did not contend that the accrual clause was a promise of future performance.
In reaching the majority’s decision, Judge Fahey also applied a pair of New York rules governing tolling agreements. The first rule is that the statute of limitations requires that any tolling agreement must be made after accrual of the cause of action. The second rule is that a tolling agreement can extend the limitations period no longer than the time period that would apply if the claim had accrued on the date of the agreement. The appellant contended that the accrual clause was valid because the limitations period would still be triggered by a specific event and would last only six years.
But Judge Fahey concluded that the accrual clause violated both rules. First, the accrual clause would “effectively extend the limitations period that was made before a breach of contract cause of action had accrued[.]” Second, the clause “would extend the limitations period to a future date uncertain, inasmuch plaintiff’s discovery of the breach or defendant’s notice of the breach might occur decades into the future, for the life of the mortgage loans.” Both outcomes would be unenforceable under New York law.
Claims for cure or repurchase based on a breach of a representation or warranty accrue on the date of the contract (or, in some cases, the date on which a particular loan was sold), with rare exceptions. It is possible for a sponsor (or other entity) to insist upon either a substantive condition precedent or a promise of future performance, but the New York Court of Appeals has yet to find either one in the mortgage repurchase context. Likewise, it is possible to toll the accrual, but such an agreement can only (1) be made after the breach and (2) extend six years from the date of the agreement.
With the issue of accrual of the statute of limitations regarding cure and repurchase claims now firmly settled in New York, all eyes will turn to the same issue regarding so-called “indemnification” claims. As we have reported before, a federal court of appeals already has ruled that contractual indemnification claims do not accrue later than claims for any other contractual remedy, like cure or repurchase. Based on Deutsche Bank, New York should follow that federal precedent and apply ACE to contractual indemnification as well.
After all, “the default accrual rule for breach of contract causes of action is that the cause of action accrues when the contract is breached.” The breach of contract (i.e., breach of representations and warranties) is identical regardless of the contractual remedy (repurchase or indemnification) sought years later, and the accrual of the statute of limitations should be identical as well.