Deutsche Bank Nat'l Trust Co. v. Quicken Loans Inc.

• Citation: 810 F.3d 861
• Decision Date: 16 November 2015
• Docket Number: Docket No. 14–3373–cv.
• Parties: DEUTSCHE BANK NATIONAL TRUST COMPANY, solely as Trustee of the GSR Mortgage Loan Trust 2007–OA1, Plaintiff–Appellant, v. QUICKEN LOANS INC., Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

810 F.3d 861

DEUTSCHE BANK NATIONAL TRUST COMPANY, solely as Trustee of the GSR Mortgage Loan Trust 2007–OA1, Plaintiff–Appellant,

v.QUICKEN LOANS INC., Defendant–Appellee.^*

Docket No. 14–3373–cv.

United States Court of Appeals, Second Circuit.

Argued: Oct. 15, 2015.

Decided: Nov. 16, 2015.

Zachary D. Rosenbaum, Lowenstein Sandler LLP, New York, N.Y., for Plaintiff–Appellant.

Jeffrey B. Morganroth, Morganroth & Morganroth, PLLC, Birmingham, MI (Howard F. Sidman, Heidi A. Wendel, Michael O. Thayer, Jones Day, New York, N.Y.), for Defendants–Appellees.

Before: STRAUB, WESLEY, and LIVINGSTON, Circuit Judges.

WESLEY, Circuit Judge:

After the Federal Housing Finance Agency ("FHFA") filed a summons with notice in state court asserting breach of contractual obligations to repurchase mortgage loans that violated representations and warranties, Defendant–Appellee Quicken Loans Inc. ("Quicken") removed the action to federal court. There, Plaintiff–Appellant Deutsche Bank National Trust Company ("the Trustee"), as trustee of the subject residential mortgage-backed securities trust, took control of the litigation and filed the Complaint. Quicken moved to dismiss the suit as, inter alia, barred by the statute of limitations. The District Court concluded (1) the statute of limitations ran from the date the representations and warranties were made; (2) the extender provision of the Housing and Economic Recovery Act did not apply to the Trustee's claim; and (3) the Trustee's claim for breach of the implied covenant of good faith and fair dealing was duplicative. We now affirm each of the District Court's conclusions.

BACKGROUND¹

Quicken originated the mortgage loans at issue and sold them to nonparty Goldman Sachs Mortgage Company ("the Sponsor") pursuant to a Purchase Agreement dated June 1, 2006. That Purchase Agreement included a series of representations and warranties ("R & Ws") about the quality of the mortgage loans and their compliance with specified underwriting and origination guidelines. Through a series of sales and assignments, the mortgage loans were deposited into a securitization trust; the Trustee received all the rights, title, and interest in the mortgage loans for the benefit of the certificateholders in the securitization. Additionally, the Trustee received, as assignee, all the Sponsor's rights against Quicken, including its rights and remedies arising out of the R & Ws. The securitization trust issued certificates representing interests in the mortgage loans to investors in a public offering, pursuant to a shelf registration statement filed with the U.S. Securities and Exchange Commission; the closing date of the securitization was May 8, 2007. One of the certificate purchasers was the Federal Home Loan Mortgage Corporation ("Freddie Mac").

The R & Ws contained in the Purchase Agreement contained both transaction-level R & Ws—representations as to the characteristics of the transaction as a whole—and loan-level R & Ws—representations as to the characteristics of the individual mortgage loans. The R & Ws collectively covered such subjects as Quicken's characteristics as originator as well as the features, quality, and risk profile of the loans contained in the securitization pool, including the loans' compliance with origination guidelines, the absence of delinquencies and defaults, or the absence of originator fraud. These R & Ws guaranteed these characteristics "as of" the closing and transfer dates set forth in a series of Purchase Confirmation Letters, in which Quicken sold individual batches of the mortgage loans to the Sponsor pursuant to the Purchase Agreement. Joint App'x 90, 95–112 (Purchase Agreement §§ 2.01, 2.09, 3.01–.02).

The Purchase Agreement also created a contractual remedy for any material breach of the R & Ws ("the Repurchase Protocol"). See Joint App'x 112–14 (Purchase Agreement § 3.03). Upon discovering any breach of the R & Ws that materially and adversely affected the value of the loan or the trust's interests, the discovering party was required to give prompt written notice to the other. Quicken had sixty days—with a possible fifteen-day extension—to cure the material breach, calculated from the earlier of discovery or receipt of notice; if the breach could not be cured within that time, Quicken had to repurchase the mortgage loan at a prescribed price.²

This section of the Purchase Agreement also contained a provision imposing limits on when the counterparty may bring an action against Quicken for material breach of the R & Ws ("the Accrual Clause"). Because of the importance of this provision to the case's resolution, we include it here:

Any cause of action against [Quicken] relating to or arising out of the Material Breach of any representations and warranties made in Sections 3.01 and 3.02 shall accrue as to any Mortgage Loan upon (i) the earlier of discovery of such breach by [Quicken] or notice thereof by the [Trustee] to [Quicken], (ii) failure by [Quicken] to cure such Material Breach or repurchase such Mortgage Loan as specified above, and (iii) demand upon [Quicken] by the [Trustee] for compliance with this Agreement.

Joint App'x 114 (Purchase Agreement § 3.03).

On May 8, 2013, FHFA commenced an action in New York Supreme Court, New York County, "as conservator of" Freddie Mac and "on behalf of" the Trustee, by filing a summons with notice. It then served Quicken on September 4, 2013. Quicken removed the action to the United States District Court for the Southern District of New York on September 13, 2013, claiming federal jurisdiction under 28 U.S.C. § 1345.³ Once the case was removed to federal court, however, FHFA entered no appearance and did not participate in the proceedings. Instead, the Trustee appeared and filed the instant Complaint on October 18, 2013. The Trustee's Complaint asserted federal diversity jurisdiction pursuant to 28 U.S.C. § 1332 and made no mention of § 1345.⁴

The Complaint alleged, among other things, that two independent audits of loans in the securitization trust revealed material breaches of Quicken's R & Ws, including those related to (1) borrower income, (2) debt-to-income ratios, (3) loan-to-value and combined-loan-to-value ratios, and (4) owner occupancy. The Complaint further alleged that, upon learning of these breaches, the Trustee sent Quicken a series of letters between August 27, 2013, and October 17, 2013, that notified Quicken of the loans and breaches and demanded cure or repurchase. Finally, the Complaint alleged that Quicken failed to cure or repurchase a single breaching loan without justification.

On December 16, 2013, Quicken moved to dismiss the Complaint, arguing primarily that the breach of contract claim was time-barred. The District Court agreed, concluding that the cause of action accrued at the time the R & Ws were made. It further concluded that the extender provision of the Housing and Economic Recovery Act ("HERA"), 12 U.S.C. § 4617(b)(12), did not apply because FHFA abandoned prosecution of the action after realizing it was not the proper plaintiff. Finally, it concluded that the Trustee's remaining claim for breach of the implied covenant of good faith and fair dealing was duplicative of the contract claim and should be dismissed. The Trustee filed a timely notice of appeal.

While this appeal was pending, the New York Court of Appeals granted leave to appeal a decision of the First Department critical to the District Court's timeliness ruling below. See ACE Secs. Corp. v. DB Structured Prods., Inc., 112 A.D.3d 522, 977 N.Y.S.2d 229 (N.Y.App.Div.2013), leave to appeal granted by 23 N.Y.3d 906, 2014 WL 2891678 (2014). We then granted the Trustee's motion to adjourn oral argument until the Court of Appeals decided the case. Following release of the Court of Appeals' opinion, see ACE Secs. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581, 15 N.Y.S.3d 716, 36 N.E.3d 623 (2015), the parties submitted letter briefs under Federal Rule of Appellate Procedure 28(j), and the panel heard oral argument on October 15, 2015.

DISCUSSION

We review de novo a district court's grant of a motion to dismiss, including its legal interpretation and application of a statute of limitations, see City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 173 (2d Cir.2011), and its interpretation of contractual terms, see Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 198 (2d Cir.2003). When sitting in diversity jurisdiction and determining New York state law claims, we must apply "the law of New York as interpreted by the New York Court of Appeals." Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 739 F.3d 45, 48 (2d Cir.2013) (per curiam).

New York's six-year limitations period on contractual claims generally runs from the time the contract was breached. See N.Y.C.P.L.R. §§ 203(a), 213(2) ; Ely–Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402, 599 N.Y.S.2d 501, 615 N.E.2d 985 (1993). Where "demand is necessary to entitle a person to commence an action," a cause of action accrues "when the right to make the demand is complete." N.Y.C.P.L.R. § 206(a).

Applying these rules, the New York Court of Appeals' recent decision is clear: A cause of action for breach of contractual representations and warranties that guarantee certain facts as of a certain date—but do not guarantee future performance—accrues on the date those representations and warranties become effective. ACE, 25 N.Y.3d at 596, 15 N.Y.S.3d 716, 36 N.E.3d 623. We must therefore determine whether the R & Ws before us contain any guarantee of future performance or whether the Accrual Clause constitutes a substantive condition precedent, which would delay accrual of the cause of action. See id. at 599, 15 N.Y.S.3d 716, 36 N.E.3d 623.

In ACE, the Court concluded that the representations and warranties guaranteed only "certain facts about the loans' characteristics as of" the execution date, not how the mortgage would perform in the future. Id. at 595–96, 15 N.Y.S.3d 716, 36...