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

• Decision Date: 18 September 2015
• Docket Number: 653831/2013
• Parties: The BANK OF NEW YORK MELLON, Solely in its Capacity as Securities Administrator for J.P. Morgan Mortgage Acquisition Trust, SERIES 2006–WMC2, Plaintiff, v. WMC MORTGAGE, LLC, as Successor–by–Merger–to WMC Mortgage Acquisition Corp., J.P. Morgan Mortgage Acquisition Corporation, and J.P. Morgan Chase Bank, N.A., Defendants.
• Court: New York Supreme Court

50 Misc.3d 229

17 N.Y.S.3d 613

2015 N.Y. Slip Op. 25318

The BANK OF NEW YORK MELLON, Solely in its Capacity as Securities Administrator for J.P. Morgan Mortgage Acquisition Trust, SERIES 2006–WMC2, Plaintiff

v.WMC MORTGAGE, LLC, as Successor–by–Merger–to WMC Mortgage Acquisition Corp., J.P. Morgan Mortgage Acquisition Corporation, and J.P. Morgan Chase Bank, N.A., Defendants.

653831/2013

Supreme Court, New York County, New York.

Sept. 18, 2015.

Quinn Emanuel Urquhart & Sullivan, LLP, for plaintiff.

Jenner & Block LLP, for WMC.

Sullivan & Cromwell LLP, for JPMorgan.

Opinion

SHIRLEY WERNER KORNREICH, J.

Motion sequence numbers 001 and 002 are consolidated for disposition.

Defendants WMC Mortgage, LLC (WMC), J.P. Morgan Mortgage Acquisition Corporation (JPMMAC), and J.P. Morgan Chase Bank, N.A. (JPMC Bank, and together with JPMMAC, JPMorgan) move, pursuant to CPLR 3211, to dismiss the complaint. Defendants' motions are granted for the reason that follow.

I. Procedural History & Factual Background

This is a residential mortgage backed securities (RMBS) put-back action. Familiarity with this type of case is presumed.¹ See generally Morgan Stanley Mortg. Loan Trust 2007–2AX (MSM 2007–2AX) v. Morgan Stanley Mortg. Capital Holdings LLC,

2014 WL 6669698, at *1 (Sup.Ct., N.Y. County 2014) (Friedman, J.) (collecting cases); see also FHFA v. Nomura Holding Am. Inc., 2015 WL 2183875, at *5–13 (S.D.N.Y.2015) (Cote, J.) (detailed discussion of the origination and securitization process). This action concerns the J.P. Morgan Mortgage Acquisition Trust, Series 2006–WMC2 (the Trust), for which JPMMAC was the sponsor, JPMC Bank is the servicer, and WMC was the originator. Pursuant to a Mortgage Loan Sale and Interim Servicing Agreement, dated as of July 1, 2005 (the MLSA) (see Dkt. 7),² JPMMAC purchased loans from WMC, then sold some of those loans to a “depositor” (in this case, a non-party JPMorgan affiliate), and the loans were transferred to the Trust pursuant to a Pooling and Servicing Agreement (the PSA) (see Dkt. 8), which had a closing date of June 28, 2006.

On November 1, 2013, plaintiff, The Bank of New York Mellon, the Securities Administrator for the Trust, commenced the instant action seeking to put back non-conforming loans (i.e., those that do not conform to their applicable representations and warranties) by filing a summons with notice. Plaintiff filed a complaint on December 23, 2013. See Dkt. 6

Defendants originally moved to dismiss on March 14, 2014, arguing that plaintiff's put-back claims were time barred under ACE Secs. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc., 112 A.D.3d 522, 977 N.Y.S.2d 229 (1st Dept 2013), a decision issued by the Appellate Division on December 19, 2013. It is undisputed that, as in ACE, the transaction closed more than six years before this action was commenced. Therefore, in opposition, plaintiff attempted to distinguish this action from ACE, arguing that differences in the transaction and its claims render the case timely. Oral argument was held on May 6, 2014. See Dkt. 82 (5/6/14 Tr.).

In an order dated June 27, 2014 (Dkt. 83), the court stayed this action pending a decision by the Court of Appeals in ACE. On June 11, 2015, the Court of Appeals affirmed the ruling of the Appellate Division. See ACE Secs. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc.,

25 N.Y.3d 581, 15 N.Y.S.3d 716, 36 N.E.3d 623 (2015). Consequently, it is now the law in New York that to timely commence a put-back action, the trustee must commence suit within six years of the PSA's closing. As noted above, it is undisputed that this action was commenced after this six year period had elapsed.³ By order dated June 15, 2015 (Dkt. 90), the court directed further briefing to afford plaintiff the opportunity to argue that ACE does not render this case time-barred. The parties submitted supplemental briefing (see Dkt. 91–98), and the motions have now been marked fully submitted.

II. Discussion

Plaintiff proffers two arguments as to why this action is not time barred under ACE. First, plaintiff argues that the MLSA expressly provides that a put-back claim does not accrue until defendants breach the repurchase protocol and that such accrual provision is a substantive condition precedent to suit which is enforceable under well-settled New York law, as well as ACE. Indeed, plaintiff goes so far as to argue that “ACE mandates denial of Defendants' motions to dismiss.” See Dkt. 91 at 4. Defendants disagree, arguing that the accrual provision is a procedural condition precedent and, in any event, is unenforceable under New York law, which, defendants further aver, was not disturbed by ACE. Plaintiff's second argument is that it has pleaded a valid cause of action against JPMorgan for “failure to notify” which, plaintiff contends, may be maintained as an independent cause of action and which is not time barred. Defendants, again, disagree, arguing that every court to consider these arguments, including this one, has rejected them. For the reasons set forth below, defendants are correct in all respects and this action is dismissed as time barred.

A. The MLSA's Accrual Provision

Section 7.03 of the MLSA, titled “Remedies for Breach of Representations and Warranties”, contains what is colloquially known as the “repurchase protocol”. See Dkt. 8 at 42. It provides, inter alia, that:

Within sixty (60) days of the earlier of either discovery by or notice to either the Seller or the Servicer of any breach of a representation or warranty which materially and adversely affects the value of a Mortgage Loan or the Mortgage Loans or the interest of the Purchaser therein, the Seller or the Servicer, as the case may be, shall use its commercially reasonable efforts promptly to cure such breach in all material respects and, if such breach cannot be cured, the Seller shall repurchase such Mortgage Loan or Mortgage Loans at the Repurchase Price.

See id. Section 7.03, which spans approximately two single-spaced pages, concludes by stating:

It is understood and agreed that the obligations of the Seller or the Servicer, as applicable, set forth in this Subsection 7.03 to cure, repurchase or substitute for a defective Mortgage Loan and/or to indemnify the Purchaser constitute the sole remedies of the Purchaser respecting a breach of the representations and warranties set forth in Subsections 7.01 and 7.02.

See id. at 44 (emphasis added). The subject accrual language appears in the second to last paragraph of Section 7.03, which provides:

Any cause of action against the Seller or the Servicer, as applicable, relating to or arising out of the breach of any representations and warranties made in Subsection 7.01 or 7.02 shall accrue upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller or the Servicer to Purchaser, (ii) failure by the Seller or the Servicer, as applicable, to cure such breach, repurchase such Mortgage Loan as specified above, substitute a Substitute Mortgage Loan for such Mortgage Loan as specified above and/or indemnify the Purchaser, and (iii) demand upon the Seller or the Servicer, as applicable, by the Purchaser for compliance with the terms of this Agreement.

See id. at 43–44 (emphasis added). The word “and” prior to step three indicates that a put-back claim does not accrue until plaintiff serves a demand on defendants after defendants refuse to cure or repurchase an allegedly non-conforming loan. Plaintiff, therefore, contends that even though ACE held that put-back claims accrue at closing, the holding in ACE was a default rule that is applicable only when RMBS contracts are silent on accrual. Plaintiff avers that where, as here, the MLSA is not silent, and expressly provides a specific accrual date, that accrual date must govern for statute of limitations purposes.

There is much intuitive appeal to plaintiff's position. Plaintiff is basically arguing that the court should respect sophisticated parties' express contractual decisions with respect to accrual of their claims with the same level of deference courts ordinarily provide to all other unambiguous contractual provisions. See Quadrant Structured Prods. Co. v. Vertin, 23 N.Y.3d 549, 559–60, 992 N.Y.S.2d 687 (2014) (“In construing a contract we look to its language, for a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” '), quoting Greenfield v. Philles Records, 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, 780 N.E.2d 166 (2002). To wit, in the very decision ACE overturned, this court noted that “[i]t is highly peculiar that the PSA would leave out an effective 6–year statute of repose if such a limitations period were actually contemplated by the parties.” See ACE Secs. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc., 40 Misc.3d 562, 567, 965 N.Y.S.2d 844 (Sup.Ct., N.Y. County 2013). Here, the parties not only set forth a comprehensive repurchase protocol, they even set forth a precise three step process that would be used to define and determine the accrual of a claim for breach of Section 7.03—plaintiff's sole remedy for defendants' breaches of the MLSA's representations and warranties.

However, intuition, as we know, does not always carry the day. The Court of Appeals has reaffirmed this state's longstanding public policy of providing for statute of limitations rules that take precedence over competing contractual and equitable considerations. See ACE, 25 N.Y.3d at 593–94 (discussing the paramount “objectives of finality, certainty and predictability”). The ACE Court considered and rejected an RMBS trustee's arguments regarding why put-back claims should not be considered to accrue at closing. See ACE, 25 N.Y.3d at 593–97. That holding, as plaintiff concedes, is applicable to this case. The Court, however, also addressed what it deemed to be “The Trust's strongest argument”: “that the cure or...