Ace Sec. Corp. v. DB Structured Prods., Inc.

• Decision Date: 13 May 2013
• Citation: 965 N.Y.S.2d 844,2013 N.Y. Slip Op. 23159,40 Misc.3d 562
• Parties: ACE SECURITIES CORP., Home Equity Loan Trust, Series 2006–SL2, by HSBC Bank USA, National Association, solely in its capacity as Trustee pursuant to a Pooling and Servicing Agreement, dated as of March 1, 2006, Plaintiff, v. DB STRUCTURED PRODUCTS, INC., Defendant.
• Court: New York Supreme Court

40 Misc.3d 562

965 N.Y.S.2d 844

2013 N.Y. Slip Op. 23159

ACE SECURITIES CORP., Home Equity Loan Trust, Series 2006–SL2, by HSBC Bank USA, National Association, solely in its capacity as Trustee pursuant to a Pooling and Servicing Agreement, dated as of March 1, 2006, Plaintiff,

v.DB STRUCTURED PRODUCTS, INC., Defendant.

Supreme Court, New York County, New York.

May 13, 2013.

Kasowitz, Benson, Torres & Friedman LLP, for plaintiff.

Simpson Thacher & Bartlett LLP, for defendant.

SHIRLEY WERNER KORNREICH, J.

Defendant DB Structured Products, Inc. (DBSP) moves to dismiss the Complaint pursuant to CPLR 3211(a)(1), (3), (7), & (8). Defendant's motion is denied for the reasons that follow.

Factual Background & Procedural History

This case concerns DBSP's alleged breach of its contractual obligation to repurchase certain non-conforming loans that were pooled, deposited into a trust, securitized, and sold to investors. Since this action arises from contractual obligations under a trust with a “no-action clause,” the Trustee, HSBC Bank USA, National Association, filed the Complaint on behalf of a certificateholder (plaintiff ACE Securities Corp.) (ACE) in the subject trust (Home Equity Loan Trust, Series 2006–SL2) (the Trust). As this decision involves a motion to dismiss, the facts recited are taken from the Complaint.

The loans at issue in this case were purchased by DBSP from at least three originators and then sold to ACE in a Mortgage Loan Purchase Agreement dated March 28, 2006 (the MLPA). Complaint ¶¶ 2–3. Following the usual protocol for creating residential mortgage backed securities, ACE deposited the loans into the Trust. ¶ 4. The loans were securitized through the issuance of over $500 million of certificates pursuant to a Pooling and Servicing Agreement dated as of March 1, 2006 (the PSA). Id. In the MLPA, DBSP made over fifty representations and warranties (the Representations) regarding the characteristics and quality of the loans, including those common in many MLPAs (e.g., representations about underwriting guidelines such as the borrower's income and loan-to-value ratio) and those that are somewhat rarer (e.g., a “no-fraud representation”).¹ ¶¶ 5–6. Under Section 2.03 of the PSA, DBSP was obligated to cure a breach of a Representation within 60 days of discovery or receipt of notice thereof, or, in the event that such breach could not be cured, DBSP had to repurchase the affected loans within 90 days at a defined Purchase Price. ¶ 26. Both the PSA and the MLPA provide that the Repurchase Protocol is the “sole remedy” with respect to loan losses caused by false Representations.

On March 28, 2012, this action was commenced by two certificateholders (RMBS Recovery Holdings 4, LLC and VP Structured Products, LLC) by filing a Summons with Notice. A single cause of action alleging breach of contract was stated. It is undisputed that these certificate-holders lacked standing to maintain this action under the PSA's no-action clause. They did so, apparently, due to concerns over their claims being time barred, a worry amplified by the Trustee's initial refusal to sue on their behalf. Ultimately, the Trustee was substituted as the plaintiff for the certificate-holders. As discussed infra, the manner in which this action was originally commenced, in the end, is not at issue because the relevant statute of limitations did not expire before the substitution.²

Discussion

On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v. Gani Realty Corp., 60 A.D.3d 491, 876 N.Y.S.2d 1 (1st Dept. 2009); Skillgames, L.L.C. v. Brody, 1 A.D.3d 247, 250, 767 N.Y.S.2d 418 (1st Dept. 2003), citing McGill v. Parker, 179 A.D.2d 98, 105, 582 N.Y.S.2d 91 (1992); see also Cron v. Hargro Fabrics, 91 N.Y.2d 362, 366, 670 N.Y.S.2d 973, 694 N.E.2d 56 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action. Skillgames, id., citing Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275, 401 N.Y.S.2d 182, 372 N.E.2d 17 (1977). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 A.D.3d at 491, 876 N.Y.S.2d 1. “However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration.” Skillgames, 1 A.D.3d at 250, 767 N.Y.S.2d 418, citing Caniglia v. Chicago Tribune–New York News Syndicate, 204 A.D.2d 233, 612 N.Y.S.2d 146 (1st Dept. 1994). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed if “the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law.” Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 (2002) (citation omitted); Leon v. Martinez, 84 N.Y.2d 83, 88, 614 N.Y.S.2d 972, 638 N.E.2d 511 (1994).

Statute of Limitations

Pursuant to CPLR 213(2), breach of contract claims are subject to a six year statute of limitations. Mendelsohn v. City of New York, 89 A.D.3d 569, 934 N.Y.S.2d 3 (1st Dept. 2011). The claim accrues at the time of breach, even if plaintiff does not suffer damages until a later date. 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). “Knowledge of the occurrence of the wrong on the part of the plaintiff is not necessary to start the Statute of Limitations.” Id. at 403, 599 N.Y.S.2d 501, 615 N.E.2d 985, quoting Varga v. Credit–Suisse, 5 A.D.2d 289, 292, 171 N.Y.S.2d 674 (1st Dept. 1958). Additionally, CPLR 206(a) provides that “where a demand is necessary to entitle a person to commence an action, the time within which the action must be commenced shall be computed from the time when the right to make the demand is complete.” Parker v. Town of Clarkstown, 217 A.D.2d 607, 608, 629 N.Y.S.2d 787 (2d Dept. 1995). “However, where a contract provides for continuing performance over a period of time, each breach may begin the running of the statute anew such that accrual occurs continuously and plaintiffs may assert claims for damages occurring up to six years prior to filing of the suit.” Airco Alloys Div. v. Niagara Mohawk Power Corp., 76 A.D.2d 68, 80, 430 N.Y.S.2d 179 (2d Dept. 1980), citing Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606, 415 N.Y.S.2d 817, 389 N.E.2d 130 (1979); see also N.Y. Cent. Mut. Fire Ins. Co. v. Glider Oil Co., 90 A.D.3d 1638, 1642, 936 N.Y.S.2d 815 (4th Dept. 2011) (“Where, as here, a contract provides for a recurring obligation, a claim for damages accrues each time the contract is allegedly breached.”); Beller v. William Penn Life Ins. Co. of N.Y., 8 A.D.3d 310, 314, 778 N.Y.S.2d 82 (2d Dept. 2004) (same); Guilbert v. Gardner, 480 F.3d 140, 150 (2d Cir.2007) (same).

DBSP argues that plaintiff's claim for breach of the PSA accrued when the contract was executed in 2006. They argue that if the Representations were false, they were false in 2006 since the mortgage loans had already been made. Plaintiff disagrees and argues that their claims did not accrue until DBSP breached its repurchase obligations (which, regardless of the exact date of accrual, would be within six years of the date the Complaint was filed).

In 2003, well before the financial crisis and subsequent flurry of mortgage backed securities litigation, a federal district court dealt with this exact situation. See Structured Mortg. Trust 1997–2 v. Daiwa Finance Corp., 2003 WL 548868 (S.D.N.Y.2003)( Daiwa ). In Daiwa, the court held that the claim accrued when the PSA was executed because the subject representations “were not true when made” and that the trustee could have made a repurchase demand at that time. Id. at *2. Consequently, Daiwa held, the statute of limitations runs from the execution of the contract because the claim accrues “when the wrong is committed, and not when the plaintiff discovers it.” Id., citing 7B Joseph McLaughlin, Practice Commentaries, CPLR 206 (McKinney's 1990). For the reasons discussed below, this court disagrees with the Daiwa holding. CPLR 206(a), the “ continuing performance” doctrine, and the nature of the parties' relationship under the PSA militate against Daiwa.³

Under CPLR 206(a), “ ‘demand is complete’ [means] that the Statute of Limitations runs from the time when the party making the demand first becomes entitled to make the demand, and not from the time the actual demand is made.” Woodlaurel, Inc. v. Wittman, 199 A.D.2d 497, 497–98, 606 N.Y.S.2d 39 (2d Dept. 1993) (emphasis added). In Section 2.03, as in other similar PSAs entered into by DBSP, three steps must be followed before the Trustee can sue DBSP for breach of its repurchase obligations: discovery or receipt of notice by the bank, cure, and repurchase. The Trustee is not entitled to sue or make a repurchase demand until discovery or notice by the bank occurs and the cure period lapses. It, therefore, follows that DBSP does not breach the PSA and the claim for the breach does not accrue until DBSP fails to timely cure or repurchase a loan.

Though DBSP characterizes a Representation as being “breached” if it is false, in this contract action, the mere fact that a Representation is false does not mean that DBSP “breached” the PSA. Under the PSA, DBSP has no duty to ensure that the Representations are true. Thus, upon discovery or notice of falsity, DBSP's obligationis to follow the Repurchase Protocol. Whatever due diligence DBSP conducted was a matter of its sole discretion. If DBSP knew of or recklessly disregardedsigns that the Representations were false, it did so at its own peril because of its...