Ace Sec. Corp. v. DB Structured Prods., Inc.
| Decision Date | 11 June 2015 |
| Docket Number | No. 85,85 |
| Parties | ACE SECURITIES CORP., Home Equity Loan Trust, Series 2006–SL2, by HSBC Bank USA, National Association, as Trustee Pursuant to a Pooling and Servicing Agreement, Dated as of March 1, 2006, Appellant, v. DB STRUCTURED PRODUCTS, INC., Respondent. |
| Court | New York Court of Appeals Court of Appeals |
Bancroft PLLC, Washington, D.C. (Paul D. Clement, of the District of Columbia bar, admitted pro hac vice,
Erin E. Murphy, of the District of Columbia Bar, admitted pro hac vice, and Stephen V. Potenza of counsel), and Kasowitz, Benson, Torres & Friedman LLP, New York City (Marc E. Kasowitz, Michael M. Fay and Zachary W. Mazin of counsel), for appellant.
Simpson Thacher & Bartlett LLP, New York City (David J. Woll and Thomas C. Rice of counsel), for respondent.
Jones & Keller, P.C., Denver, Colorado (Michael A. Rollin and Maritza Dominguez Braswell, of the Colorado bar, admitted pro hac vice, of counsel), for CXA–13 Corporation, amicus curiae.
McKool Smith, New York City (Gayle R. Klein, Robert W. Scheef and John C. Briody of counsel), for Association of Mortgage Investors, amicus curiae.
Patterson Belknap Webb & Tyler LLP, New York City (Erik Haas and Henry J. Ricardo of counsel), for Association of Financial Guaranty Insurers, amicus curiae.
Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C. (Andrew C. Shen, David C. Frederick, Wan J. Kim, Gregory G. Rapawy and Matthew A. Seligman of counsel), and Korein Tillery LLC, Chicago, Illinois (George A. Zelcs, John Libra and Michael Klenov of counsel), for National Credit Union Administration Board, amicus curiae.
Venable LLP, Baltimore, Maryland (Gregory A. Cross, Mitchell Y. Mirviss, Colleen M. Mallon and C. Alexander Hortis of counsel), for LNR Partners, LLC and others, amici curiae.
Sullivan & Cromwell LLP, New York City (H. Rodgin Cohen of counsel), and Sullivan & Cromwell LLP, Washington, D.C. (Brent J. McIntosh and Jeffrey B. Wall of counsel), for Chamber of Commerce of the United States of America and another, amici curiae.
Wachtell, Lipton, Rosen & Katz, New York City (George T. Conway III, Theodore N. Mirvis, Charles D. Cording and Vladislav S. Vainberg of counsel), for Securities Industry and Financial Markets Association, amicus curiae.
Jenner & Block LLP, Washington, D.C. (Matthew S. Hellman of counsel), and Jenner & Block LLP, New York City (Stephen L. Ascher of counsel), for Mortgage Bankers Association, amicus curiae.
Steven L. Schwarcz, Duke Law School, Durham, North Carolina, amicus curiae.
Ethan J. Leib, Fordham Law School, New York City, and Patrick M. Connors, Albany Law School, for Ethan J. Leib, and others, amici curiae.
Keller Rohrback L.L.P. (Derek W. Loeser, admitted to the Washington bar, pro hac vice, of counsel), and Keller Rohrback L.L.P., New York City (David S. Preminger of counsel), for Federal Home Loan Bank of Boston and others, amici curiae.
READ
, J.
This appeal stems from a transaction involving residential mortgage-backed securities (RMBS). Two certificateholders in the ACE Securities Corp., Home Equity Loan Trust, Series 2006–SL2 (the Trust) sued DB Structured Products, Inc. (DBSP), the sponsor of the transaction, for failure to repurchase loans that allegedly did not conform to DBSP's representations and warranties. The Trust later sought to substitute itself as plaintiff in place of the certificateholders. The parties dispute the timeliness of this lawsuit, whether the certificateholders or the Trust complied with a condition precedent and whether the certificateholders possessed standing to sue or, alternatively, the Trust's complaint cured any defect in the certificateholders'standing.
We hold that the Trust's cause of action against DBSP for breach of representations and warranties accrued at the point of contract execution on March 28, 2006. Where, as in this case, representations and warranties concern the characteristics of their subject as of the date they are made, they are breached, if at all, on that date; DBSP's refusal to repurchase the allegedly defective mortgages did not give rise to a separate cause of action. Additionally, we hold that, even assuming standing, the two certificateholders did not validly commence this action because they failed to comply with the contractual condition precedent to suit; namely, affording DBSP 60 days to cure and 90 days to repurchase from the date of notice of the alleged non-conforming loans.
In its role as sponsor of the securitization that is at the core of this case, DBSP purchased 8,815 mortgage loans from at least three third-party mortgage originators. This pool of loans
was sold to an affiliate, ACE Securities Corp. (ACE), a securitization conduit known as a “depositor,” pursuant to a mortgage loan purchase agreement (MLPA) executed between DBSP and ACE. ACE then transferred the loans and its rights under the MLPA to the Trust, pursuant to a pooling and servicing agreement (PSA). The parties to the PSA were ACE, as depositor, OCWEN Loan Servicing, LLC (Ocwen), as servicer, Wells Fargo Bank, National Association (Wells Fargo), as master servicer and securities administrator, and HSBC Bank USA, National Association, as trustee (HSBC or the trustee). DBSP was not a party or signatory to the PSA except for two sections not relevant to this appeal; its role was effectively complete at closing, when it transferred (via ACE) its “right, title and interest in, to and under the Mortgage Loans” and the “contents of the related Mortgage File” to the trustee and its agents. The MLPA and PSA were executed on the same day, March 28, 2006.
HSBC acted as trustee for the holders of $500 million in certificates issued by the Trust, and was authorized to bring suit on the Trust's behalf. The individual mortgage loans served as collateral for the certificates, which paid principal and interest to certificateholders from the cash flow generated by the mortgage loan pool;1 that is, certificateholders made money when the borrowers made payments on their loans.
DBSP made over 50 representations and warranties in the MLPA regarding the credit quality and characteristics of the pooled loans “as of the Closing date,” March 28, 2006. The MLPA permitted the Trust to examine each mortgage loan file and exclude from the final pool any loans that did not comply with DBSP's representations and warranties. But the MLPA also relieved the Trust and certificateholders from any obligation to verify DBSP's representations and warranties, or to conduct due diligence on the loan characteristics. Importantly, the Trust's “sole remedy ” in the event DBSP “breach[ed] ... any of the representations and warranties contained in” the MLPA was for DBSP to cure or repurchase a non-conforming loan.
The PSA authorized the trustee to enforce the repurchase obligation in the following way. First, if HSBC learned of a breach of a representation or warranty, it was required to “promptly notify [DBSP] and the Servicer” of the breach and request that DBSP cure the identified defect or breach within 60 days. In the event DBSP failed to cure the defect or breach in all material respects, the trustee was empowered to “enforce the obligations of [DBSP] under the [MLPA] to repurchase such Mortgage Loan ... within ninety (90) days after the date on which [DBSP] was notified of [the breach].” Finally, as relevant here, the PSA authorized certificateholders entitled to at least 25% of voting rights to enforce certain default events if the trustee refused or neglected to institute action within 15 days of a written request to do so.
A few years after the parties executed the MLPA and PSA, borrower defaults and delinquencies on individual mortgages caused the Trust and certificateholders to lose almost $330 million. Two certificateholders, RMBS Recovery Holdings 4, LLC and VP Structured Products, LLC—independent investment funds which together held 25% of the voting certificates—hired a forensic mortgage loan review firm to examine a portion of the loans in the trust. Ninety-nine percent of these loans allegedly failed to comply with at least one of DBSP's representations and warranties in the MLPA about borrowers' incomes, occupancy status or existing debt obligations.
By letter dated January 12, 2012, the two certificateholders gave notice to HSBC of “breaches of representations and warranties in the Mortgage Loans by the Sponsor, [DBSP] under the relevant [PSA] and related Trust documents.” Citing “the extremely high breach rates found in loan file reviews,” the certificateholders “demand[ed] that the Mortgage Loans in the Trust in their entirety be put back to [DBSP] for repurchase, including all of the individual defective loans uncovered [during their] investigation” (emphasis added). Further, the certificateholders alerted the trustee to “[t]he [u]rgent [n]eed for a Tolling Agreement ... in light of potential expiring statute of limitations deadlines,” and expressed their belief that “it [w]as imperative that the Trustee act expeditiously to request such an agreement.”2
When the trustee neither sought a tolling agreement nor brought suit against DBSP, the two certificateholders sued
DBSP on March 28, 2012—six years to the day from the date of contract execution—by filing a summons with notice on behalf of the Trust. The summons with notice alleged a single cause of action for breach of contract based on DBSP's alleged material breach of representations and warranties and failure to comply with its contractual repurchase obligation. The certificateholders asked for specific performance and damages to the tune of $250 million.
On September 13, 2012, the trustee sought to substitute for the certificateholders, and filed a complaint on the Trust's behalf. In the complaint, the Trust alleged breaches of representations and warranties and DBSP's refusal to comply with its repurchase obligation. The Trust asserted that it had promptly notified DBSP of...
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