On June 11, 2015, the New York Court of Appeals, the state’s highest court, resolved the issue of when the statute of limitations begins to run on a claim for breach of representations and warranties against an RMBS sponsor in a put-back litigation. Prior to this decision, there was some uncertainty as to whether the statute of limitations started to run on the day that the transaction closed, or much later, when the sponsor did not comply with its put-back obligations. This issue was important because many of the RMBS cases filed in connection with the global financial crisis were filed more than six years after the transactions in question had closed.
In an opinion authored by Judge Read, with Chief Judge Lippman and Judges Pigott, Rivera, Stein and Fahey concurring, the Court held that a trustee’s cause of action against a sponsor for breach of representations and warranties accrues on date of closing of the transaction. The court also held that the notice procedure that acts as a condition precedent to the sponsor’s cure and repurchase obligations does not serve to extend the applicable six-year statute of limitations and that in this case the action against the sponsor was not validly commenced, because the certificateholders that filed the action failed to comply with the contractual condition requiring them to give the sponsor 60 days to cure and 90 days to repurchase from the date of notice of the alleged non-conforming loans.
Lower Court Proceedings
The lawsuit was commenced by two certificateholders in the ACE Securities Corp., Home Equity Loan Trust, Series 2006-SL2 (the “Trust”), who filed suit on March 28, 2012, exactly six years to the day after the securitization closed. In September of 2012, the trustee, HSBC Bank USA, N.A., substituted for the certificateholders and filed a complaint asserting claims on behalf of the Trust, alleging that the Sponsor of the securitization, DB Structured Products, Inc. (“DBSP”) had breached the representations and warranties in the Mortgage Loan Purchase Agreement (“MLPA”) governing the transaction. In November of 2012, DBSP moved to dismiss the complaint as untimely, arguing that the trustee’s claims accrued as of March 28, 2006, more than six years before the Trust filed its complaint, and that the summons with notice filed by the certificateholders was a nullity because DBSP had not been given the requisite 60 days to cure and 90 days to repurchase non-conforming loans before the suit was filed.
The trial court denied DBSP’s motion, holding that DBSP did not breach its repurchase obligations until it failed to timely cure or repurchase a loan following discovery of the nonconforming loan or receipt of a notice of a breach of a representation or warranty. The trial court concluded that the Trust’s claims were not time-barred, because DBSP’s cure or repurchase obligation was recurring, and that DBSP committed an independent breach of the Pooling and Servicing Agreement (“PSA”) every time it failed to cure or repurchase a defective loan. In 2013, the Appellate Division reversed this decision and granted DBSP’s motion to dismiss, holding that the Trust’s claims accrued on March 28, 2006, the closing date of the MLPA. The Appellate Division also held that although the certificateholders commenced their action on March 28, 2012, the last day of the 6-year statute of limitations, the 60- and 90-day periods for cure and repurchase had not elapsed, such that the certificateholders had “fail[ed] to comply with a condition precedent to commencing suit [that] rendered their summons with notice a nullity.” On June 26, 2014, the Court of Appeals granted the Trust leave to appeal.
Court of Appeals Decision
In the Court of Appeals, the Trust repeated the same argument it had made in the trial court, namely that the Sponsor’s repurchase obligation is a distinct and continuing obligation that DBSP breached each time it refused to cure or repurchase a non-conforming loan. The Court disagreed, distinguishing this case from one of its previous cases, Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606 (1979). In Bulova Watch, the defendant had made an express guarantee of future performance of roofing materials, and a separate and distinct promise to repair the guaranteed roof if it failed in the future. Here, by contrast, DBSP had made no guarantees, express or otherwise, of the future performance of the mortgage loans in the securitization pool. The representations and warranties applied to only the loans’ characteristics as of March 28, 2006, when the MLPA and PSA were executed, and the governing documents expressly stated that those representations and warranties did not survive the closing date.
The Court held that “[u]nlike the separate guarantee in Bulova Watch, DBSP’s cure or repurchase obligation could not reasonably be viewed as a distinct promise of future performance. It was dependent on, and indeed derivative of, DBSP’s representations and warranties, which did not survive the closing and were breached, if at all, on that date.” The Court noted that, absent the cure or repurchase obligation, the Trust’s only remedy for a breach of representations and warranties would be to bring an action for breach of contract, and that such an action could be brought only within six years of contract execution. The Court rejected the Trust’s argument that “the cure of repurchase obligation transformed a standard breach of contract remedy, i.e. damages, into one that lasted for the life of the investment – decades past the statutory period [of limitations].” The Court held that the Trust’s cause of action against DBSP, if any, accrued on the date of execution of the MLPA and PSA, and no later.
The Trust also argued that its cause of action did not accrue until its demand for cure or repurchase was refused by DBSP, but this argument was also rejected. The Court drew a distinction 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 the latter type of case, the demand is not a part of the plaintiff’s cause of action, but merely a procedural means of obtaining relief. Thus, the Court held that DBSP’s repurchase obligation was “a procedural prerequisite to suit” – but not a “separate undertaking” that would delay the accrual of the Trust’s breach of contract claim until more than six years after the representations and warranties had been breached. In other words, DBSP’s repurchase obligation was merely a remedy, and not a substantive, separate obligation of DBSP under the PSA and MLPA that would extend the time that the Trust had to file a claim for breach of those agreements. Here, the Court held that DBSP breached the representations and warranties in the MLPA “if at all, the moment the MLPA was executed” and that the Trust “simply failed to pursue its contractual remedy within six years of the alleged breach.”
Significant Victory for Sponsors
This case represents a significant victory for sponsors in RMBS securitizations, particularly those who structured transactions that closed in the years before and during the global credit crisis in 2006-2008. Assuming the language in the governing agreements is similar to those in this case, the law in New York is now that any cause of action against an RMBS sponsor for breach of representations and warranties will be barred six years after the closing date of the securitization. Further, the notice provisions triggering a sponsor’s put-back obligations will not affect the accrual of any cause of action for breach, and certificateholders and trustees will be required to comply with those provisions before bringing suit.