Bank of N.Y. Mellon v. WMC Mortg., LLC

• Decision Date: 11 May 2017
• Citation: 56 N.Y.S.3d 1,151 A.D.3d 72
• Parties: The BANK OF NEW YORK MELLON, etc., Plaintiff–Appellant, v. WMC MORTGAGE, LLC, etc., et al., Defendants–Respondents.
• Court: New York Supreme Court — Appellate Division

151 A.D.3d 72

56 N.Y.S.3d 1

The BANK OF NEW YORK MELLON, etc., Plaintiff–Appellant,

v.WMC MORTGAGE, LLC, etc., et al., Defendants–Respondents.

Supreme Court, Appellate Division, First Department, New York.

May 11, 2017.

Quinn Emanuel Urquhart & Sullivan, LLP, New York (Philippe Z. Selendy, William B. Adams, Andrew R. Dunlap and Daniel P. Mach of counsel), for appellant.

Jenner & Block LLP, Washington, D.C. (Matthew S. Hellman of the bar of District of Columbia, admitted pro hac vice, of counsel) and Jenner & Block LLP, New York (Stephen L. Ascher of counsel), for WMC Mortgage, LLC, respondent.

Sullivan & Cromwell LLP, New York (Darrell S. Cafasso, Robert A. Sacks and Matthew L. Lippert of counsel), for J.P. Morgan Mortgage Acquisition Corporation and JPMorgan Chase Bank, N.A., respondents.

ROLANDO T. ACOSTA, J.P., RICHARD T. ANDRIAS, KARLA MOSKOWITZ, JUDITH J. GISCHE, TROY K. WEBBER, JJ.

MOSKOWITZ, J.

This case is one of many commenced in the wake of the 2008 global financial crisis. As in many of the other cases that have come before us—including one nearly identical to this case¹ —the action is based upon the sale of residential mortgage-backed securities (RMBS).

Under a Master Loan Sale and Interim Servicing Agreement (MLSA) dated July 1, 2005, defendant J.P. Morgan Mortgage Acquisition Corp. (JPMAC) bought from defendant WMC Mortgage Corp. (WMC), the originator, approximately 6,510 residential mortgage loans with a total principal balance of approximately $1.275 billion.² JPMAC sold the securitized loans to the J.P. Morgan Mortgage Acquisition Trust, Series 2006–WMC2 (Trust) under a Pooling and Servicing Agreement (PSA) dated June 1, 2006; plaintiff Bank of New York Mellon (BNY), was the securities administrator for the Trust. In a transaction that closed on June 28, 2006, the Trust issued RMBS securities and sold them to investors (certificate holders) in the Trust.

WMC and JPMAC made numerous representations and warranties (R&Ws) in the Mortgage Loan Sale and Interim Servicing Agreement (MLSA) and Pooling and Servicing Agreement (PSA) regarding the nature and quality of the loans. WMC and JPMAC also agreed to certain repurchase, indemnification, and notice obligations with respect to the Trust. First, as relevant here, the MLSA provided that when a party discovers a material breach of any R&W, that party shall give the other parties prompt written notice of the breach; the notified parties then have 60 days to cure the breach by repurchasing or substituting the defective loan and providing indemnification (the repurchase protocol). The MLSA further provided that a cause of action for repurchase did not accrue until after the purchaser made a demand for repurchase (the accrual provision).

Second, section 2.03(a)(i) of the PSA restated the repurchase protocol, and provided, in pertinent part, that if a party discovers a breach by WMC of any R&W under the MLSA, the discovering party, or BNY or the Trustee, must try to "cause [WMC] to ... cure such defect or breach within 90 days from the date [WMC] was notified of such missing document, defect or breach." Section 2.03(a)(I) further contained the so-called "backstop provision," which obliged JPMAC to purchase defective loans if WMC did not do so. Specifically, section 2.03(a)(I) stated, "In the event that [WMC] shall fail to cure the applicable breach or repurchase of a Mortgage Loan in accordance with the [repurchase protocol], [JPMAC] shall do so." Third and finally, section 2.02 of the PSA provided that, should the servicer (defendant JPMorgan Chase Bank, N.A. [JPM Bank] ), among others, discover any breach of WMC's R&Ws in the MLSA, it was to give prompt written notice to the other parties.

On May 24, 2012, January 22, 2013, and October 31, 2013, certain certificate holders provided notice to BNY, JPMAC, and

WMC of purported warranty breaches with respect to many of the loans in the Trust. Accordingly, by notices dated June 7, 2012, January 28, 2013, and November 5, 2013, BNY, in its capacity as securities administrator, notified WMC and JPMAC that over 1,593 mortgage loans breached one or more of the R&Ws, and demanded that WMC or JPMAC repurchase the defective loans. Despite this demand, however, neither JPMAC nor WMC repurchased the loans.

On November 1, 2013, BNY, in its capacity as securities administrator for the trust and on behalf of the certificate holders, commenced this "put back" action. As relevant to this appeal, BNY asserted claims seeking damages from WMC and JPMAC for breach of contract with respect to the R&Ws, and specific performance of the repurchase obligation. BNY also sought damages from WMC, JPMAC, and JPM Bank for breach of the PSA by failing to provide notice of defective loans.

In March 2014, defendants moved to dismiss the complaint under CPLR 3211, arguing, among other things, that BNY's causes of action for breach of the repurchase obligations were untimely under this Court's decision in ACE Sec. Corp. v. DB Structured Prods., Inc., (112 A.D.3d 522, 977 N.Y.S.2d 229 [1st Dept.2013], affd. 25 N.Y.3d 581, 15 N.Y.S.3d 716, 36 N.E.3d 623 [2015] ) because they were filed more than six years after the PSA's June 28, 2006 closing date.

The IAS court dismissed the action in its entirety. As to BNY's causes of action against WMC for breach of the MLSA by failing to repurchase defective loans (the first, second, sixth, and seventh causes of action), the IAS court dismissed these claims as untimely. The court also dismissed BNY's cause of action against JPMAC for breach of the "backstop" repurchase obligations under the PSA (the fourth cause of action) and against JPMAC and JPM Bank for failure to notify (the fifth cause of action).³ We now modify to the extent of partially reinstating the fourth cause of action, and reinstating the fifth cause of action only as against JPM Bank.

To begin, we find that the IAS court properly granted the motion to dismiss the claims against WMC for breach of the repurchase obligation, as those claims were untimely filed despite the existence of the MLSA's accrual provision. As defendants aptly note, the Court of Appeals definitively settled this issue in ACE Sec. Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581, 590, 15 N.Y.S.3d 716, 36 N.E.3d 623 (2015) [ACE ], setting forth "a clear rule that a breach of contract claim in an RMBS put-back action accrues on the date the allegedly false representations and warranties were made" (Deutsche Bank Natl. Trust v. Flagstar Capital Mkts. Corp., 143 A.D.3d 15, 16, 36 N.Y.S.3d 135 [1st Dept.2016] [Flagstar ] ). Here, BNY commenced the action more than six years after the closing, thus placing the action outside the six-year statute of limitations.

BNY acknowledges, as it must, that our recent decision in Flagstar rejected the very arguments BNY makes here; indeed, Flagstar addressed an accrual provision nearly identical to the one found in the MLSA between the parties. Nonetheless, BNY asserts that our decision in Flagstar was erroneous and should be disregarded. In support of this argument, BNY asserts that Flagstar conflicts with our prior decision in Highland Mech.Indus. v. Herbert Constr. Co., 216 A.D.2d 161, 628 N.Y.S.2d 655 [1st Dept.1995] [Highland ], and is also incompatible with the Court of Appeals' decision in John J. Kassner & Co. v. City of New York, 46 N.Y.2d 544, 415 N.Y.S.2d 785, 389 N.E.2d 99 [1979] [Kassner ].

Neither of these arguments has any merit. First of all, the decision in Flagstar does not conflict with the decision in Highland . In the latter, we enforced a contractual provision stating that a subcontractor was not entitled to receive any form of payment before the contractor's actual receipt of that payment. In reaching that conclusion, we found that it was implicit in the contract clause that the contractual limitation period begins to run only upon notification of payment by the contractor to its subcontractor. Highland , therefore, merely held that parties to a contract can agree on when a payment obligation arises, and hence, when a breach arises. This holding does not imply that parties can decide to change the accrual of an otherwise accrued claim or extend the running of a limitations period.

Similarly, Kassner concerned a contractual provision stating that the plaintiff was obliged to bring a cause of action for nonpayment within six months of the filing of a certificate of nonpayment. In light of that clause, the Court found that when the right to final payment is subject to a condition, the obligation to pay arises and the cause of action accrues only when the condition has been fulfilled (Kassner, 46 N.Y.2d at 550, 415 N.Y.S.2d 785, 389 N.E.2d 99 ). This principle has no bearing here. As the Kassner Court noted, statutes of limitations "express[ ] a societal interest or public policy ‘of giving repose to human affairs' " (Kassner, 46 N.Y.2d at 550, 415 N.Y.S.2d 785, 389 N.E.2d 99, quoting Flanagan v. Mount Eden Gen. Hosp., 24 N.Y.2d 427, 429, 301 N.Y.S.2d 23, 248 N.E.2d 871 [1969] ). Parties may therefore agree to shorten the time period within which to commence an action, but are not entirely free to waive or modify the statutory defense. Thus, agreements made at the inception of liability to waive or extend the statute of limitations are "unenforceable because a party cannot ‘in advance, make a valid promise that a statute founded in public policy shall be inoperative’ " (Kassner, 46 N.Y.2d at 551, 415 N.Y.S.2d 785, 389 N.E.2d 99 ) (citations omitted). Certainly, nothing in Kassner suggests that parties may agree to adopt a discovery rule to delay the running of a limitations period for an existing breach of contract, as BNY proposes to do here.

We turn now to that part of the IAS court's order granting the motions to dismiss the fourth cause of action, which sought JPMAC's specific performance of the backstop repurchase obligation found in section 2.03 of the PSA. Upon review, we partially reinstate that cause of action.

The law...