New York Court of Appeals Affirms Decision on Statute of Limitations for RMBS “Put-Back” Claims
Recently, the New York Court of Appeals issued a decision that may finally close the door on contractual repurchase claims in connection with residential mortgage-backed securities (“RMBS”) sold years ago. The decision, issued in ACE Securities Corp. v. DB Structured Products, Inc., affirmed a prior ruling by the Appellate Division, First Department, and held that New York’s six-year statute of limitations for alleged breaches of representations and warranties accrues when the representations are made (i.e., the date of the securitization) and not, as the plaintiff-appellant argued, when a sponsor refuses to cure or repurchase the underlying mortgages.
As is typical in RMBS transactions, the mortgage loans at issue in ACE Securities were purchased by the sponsor, DB Structured Products, Inc. (“DBSP”), and sold to a depositor pursuant to a Mortgage Loan Purchase Agreement (“MLPA”).
On March 28, 2012—exactly six years after the closing of the transaction—two certificateholders filed suit against DBSP alleging breaches of the Representations in the MLPA, and failure to buy-back more than $250 million of mortgage loans in accordance with the agreements. The certificateholders, although they had notified DBSP of the alleged breaches on January 12, 2012, had not provided the requisite 90-day notice, as they filed suit before the 90-day period had run. Subsequently, in September 2012, the Trust sought to substitute itself as plaintiff.
DBSP moved to dismiss the Trust’s complaint as untimely arguing that, if the Representations were false, they were false when made on the closing date of the transaction, i.e., March 28, 2006, and therefore the Trust’s claims were barred by the applicable six-year statute of limitations.
In May 2013, the New York Supreme Court denied the motion to dismiss, finding plaintiff’s claims to be timely. Justice Shirley Werner Kornreich held that DBSP had a “recurring obligation” under the agreements to cure or repurchase non-conforming mortgage loans; when it failed to do so, it committed an independent breach of the RMBS agreements and each breach re-started the running of the statute of limitations.
The Appellate Division, First Department, unanimously reversed Judge Kornreich’s decision in December 2013, and dismissed the complaint. The First Department found that plaintiff’s claims accrued on March 28, 2006, the closing date of the MLPA, “when any breach of the representations and warranties contained therein occurred.”
The Court of Appeals’ Decision
On June 11, 2015, the Court of Appeals affirmed the First Department’s decision to dismiss the complaint, finding that plaintiff’s cause of action did, in fact, accrue at the time the RMBS agreements were executed. Judge Susan Phillips Read, writing for a unanimous court, highlighted the “finality, certainty and predictability” that New York statute of limitations are designed to foster, even when the result may “at times be harsh and manifestly unfair, and creates an obvious injustice.”
The Court of Appeals rejected the notion that DBSP’s repurchase obligation was a continuing promise of the loans’ future performance—separate from the Representations made in the agreements—that could give rise to an independent cause of action.
Finally, the Court of Appeals agreed that the Repurchase Protocol was a contractual condition precedent to bringing a lawsuit and, since neither the Trust nor the certificateholders provided DBSP with 60 days to cure and/or 90 days to repurchase, plaintiffs’ commencement of the lawsuit on March 28, 2006 (within the six year period) was not valid—i.e., the lawsuit could only be commenced 90 days after notice and since that would violate the statute of limitations, plaintiffs had no valid cause of action.
The ACE Securities decision makes clear that any new contractual put-back claims governed by New York law, in connection with RMBS sold more than six years ago, are likely foreclosed by the applicable statute of limitations. Although this decision is not binding on other jurisdictions, it should be highly influential to those courts when faced with the same issue, and may finally end the stream of RMBS repurchase litigations.
Separately, parties to any contract—irrespective of whether it involves mortgage-backed securities—must bear in mind the ACE Securities decision when crafting remedy provisions similar to the repurchase provisions in RMBS agreements. If, as the Trust argued in ACE Securities, the parties intend for the contractual remedies to be independent contractual obligations giving rise to a separate statute of limitations, the contract must be clearly drafted to reflect that intention.