Deutsche Bank Nat'l Trust Co. v. Flagstar Capital Markets Corp.

• Citation: 32 N.Y.3d 139,88 N.Y.S.3d 96,112 N.E.3d 1219
• Decision Date: 16 October 2018
• Docket Number: No. 96,96
• Parties: DEUTSCHE BANK NATIONAL TRUST COMPANY, solely in its capacity as TRUSTEE FOR the HARBORVIEW MORTGAGE LOAN TRUST Series 2007–7, Appellant, v. FLAGSTAR CAPITAL MARKETS CORPORATION, Defendant, Quicken Loans, Inc., Respondent.
• Court: New York Court of Appeals

32 N.Y.3d 139
112 N.E.3d 1219
88 N.Y.S.3d 96

DEUTSCHE BANK NATIONAL TRUST COMPANY, solely in its capacity as TRUSTEE FOR the HARBORVIEW MORTGAGE LOAN TRUST Series 2007–7, Appellant,
v.
FLAGSTAR CAPITAL MARKETS CORPORATION, Defendant,

Quicken Loans, Inc., Respondent.

No. 96

Court of Appeals of New York.

October 16, 2018

OPINION OF THE COURT

FAHEY, J.

32 N.Y.3d 143

This case steps into an area of subtle interplay that exists between the freedom to contract and New York public policy. In ACE Sec. 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] [hereinafter ACE ] ), we held that a cause of action for breach of representations and warranties contained within a residential mortgage-backed securities contract accrued when the contract was executed because the representations and warranties were breached "if at all, on that date" ( id. at 589, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). On this appeal, plaintiff contends that contractual language different from the language at issue in ACE either created a substantive condition precedent to suit or represented the clear intent of the parties to postpone commencement of the statutory limitations period until certain specified events had occurred. We conclude that no substantive condition precedent was created, and that to the extent the parties otherwise intended to delay the commencement of the limitations period, their attempt to do so was inconsistent with New York law and public policy. The lower courts there

88 N.Y.S.3d 98

112 N.E.3d 1221

fore correctly concluded that plaintiff's action was untimely.

I.

Defendant Quicken Loans, Inc. was the originator of certain mortgage loans that it sold to nonparty Morgan Stanley Mortgage Capital, Inc. pursuant to a contract entitled "Second Amended and Restated Mortgage Loan Purchase and Warranties Agreement" (MLPWA), dated June 1, 2006. Pursuant to a series of subsequent agreements, the loans were eventually sold to the HarborView Mortgage Loan Trust 2007–7 (the Trust) for the purpose of issuing residential mortgage-backed securities. Plaintiff Deutsche Bank National Trust Company serves as trustee of the Trust. It is undisputed that defendant's obligations and the rights of Morgan Stanley Mortgage Capital, Inc. under the MLPWA are enforceable by plaintiff as trustee on behalf of the Trust.

In sections 9.01 and 9.02 of the MLPWA, defendant made a series of representations and warranties concerning itself, the

32 N.Y.3d 144

transaction, and the characteristics and quality of the mortgage loans it was conveying. The representations and warranties concerning the individual mortgage loans were made "as of the related Closing Date for such Mortgage Loan." The parties agree that the loans were sold in groups, and that the closing date for each group of loans occurred between December 7, 2006 and May 31, 2007. The MLPWA also contained a "sole remedy" provision, which provided that in the event of a breach of the representations and warranties, the purchaser's sole remedy was defendant's obligation to cure or repurchase a non-conforming loan.

In 2013, a certificateholder engaged an underwriting firm to review a sample of the mortgage loans and determine whether they complied with defendant's representations and warranties. According to the complaint, many of the loans reviewed did not conform to the representations and warranties, such as those concerning borrower income, debt-to-income ratios, and occupancy status.

Plaintiff commenced this action against defendant on August 30, 2013, by filing a summons with notice.¹ Plaintiff's complaint was filed on February 3, 2014. As relevant here, plaintiff alleged that defendant breached the MLPWA by selling defective mortgage loans that did not comply with the representations and warranties. Defendant subsequently moved to dismiss the complaint, arguing, inter alia, that plaintiff's action was time-barred by the six-year statute of limitations applicable to breach of contract actions because it was commenced more than six years after the closing date for the sale of each package of mortgage loans, the most recent of which occurred on May 31, 2007 (see CPLR 213[2] ).

In opposition to the motion, plaintiff did not dispute that the representations and warranties made by defendant in the MLPWA were effective as of the closing date. Instead, plaintiff argued that the statute of limitations had yet to lapse, relying upon a provision in the MLPWA that it refers to as the "accrual clause," which states as follows:

"Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Subsections 9.01 and 9.02

32 N.Y.3d 145

shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the

88 N.Y.S.3d 99

112 N.E.3d 1222

Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach, substitute a Qualified Substitute Mortgage Loan or repurchase such Mortgage Loan as specified above and (iii) demand upon the Seller by the Purchaser for compliance with this Agreement."

Supreme Court, among other things, granted defendant's motion to dismiss the breach of contract claim as untimely. The court held that any breach of defendant's representations and warranties concerning the individual mortgage loans occurred on the closing date of the loans, no later than May 31, 2007, and therefore plaintiff's breach of contract cause of action accrued no later than that date. The court further concluded that the accrual clause could not serve to extend the statute of limitations.²

On appeal, the Appellate Division affirmed insofar as appealed from ( 143 A.D.3d 15, 36 N.Y.S.3d 135 [1st Dept 2016] ). Relying on our decision in ACE , the court held that the accrual clause did not create a substantive condition precedent or constitute a promise of future performance (see id. at 20–22, 36 N.Y.S.3d 135 ). The Appellate Division further concluded that to the extent the parties intended for the accrual clause to delay accrual of the breach of contract cause of action, the accrual clause was unenforceable because it violates New York public policy (see id. at 20, 36 N.Y.S.3d 135 ).

The Appellate Division granted plaintiff leave to appeal to this Court. We now affirm.

II.

In New York, the default accrual rule for breach of contract causes of action is that the cause of action accrues when the contract is breached (see ACE , 25 N.Y.3d at 593–594, 15 N.Y.S.3d 716, 36 N.E.3d 623, citing Ely–Cruikshank Co. v. Bank of Montreal , 81 N.Y.2d 399, 403–404, 599 N.Y.S.2d 501, 615 N.E.2d 985 [1993] ). "[E]xcept in cases of fraud where the statute expressly provides otherwise, the statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury" ( Ely–Cruikshank Co. , 81 N.Y.2d at 403, 599 N.Y.S.2d 501, 615 N.E.2d 985

32 N.Y.3d 146

internal quotation marks omitted] ). This Court has "repeatedly rejected accrual dates which cannot be ascertained with any degree of certainty, in favor of a bright line approach," and for that reason, we do not "apply the discovery rule to statutes of limitations in contract actions" ( ACE , 25 N.Y.3d at 593–594, 15 N.Y.S.3d 716, 36 N.E.3d 623 [internal quotation marks omitted] ). "To extend the highly exceptional discovery notion to general breach of contract actions would effectively eviscerate the Statute of Limitations in this commercial dispute arena" ( Ely–Cruikshank Co. , 81 N.Y.2d at 404, 599 N.Y.S.2d 501, 615 N.E.2d 985 ).

We applied these rules in ACE to reject the plaintiff's contention that its breach of contract claims, which were also based on a breach of the representations and warranties in a residential mortgage-backed securities contract, did not accrue until the defendant failed to cure or repurchase the non-conforming loans. We concluded that the cure or repurchase protocol did not constitute a "separate promise of future performance" that could be breached at some later date because the cure or repurchase protocol was merely "the Trust's

[88 N.Y.S.3d 100

112 N.E.3d 1223

remedy for a breach of [the] representations and warranties, not a promise of the loans' future performance" ( ACE , 25 N.Y.3d at 594–595, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). We reasoned that

"[i]f the cure or repurchase obligation did not exist, the Trust's only recourse would have been to bring an action against [the defendant] for breach of the representations and warranties. That action could only have been brought within six years of the date of contract execution. The cure or repurchase obligation is an alternative remedy, or recourse, for the Trust, but the underlying act

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