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

• Decision Date: 11 August 2016
• Citation: 36 N.Y.S.3d 135,2016 N.Y. Slip Op. 05780,143 A.D.3d 15
• Parties: DEUTSCHE BANK NATIONAL TRUST COMPANY, solely in its capacity as Trustee of the Harborview Mortgage Loan Trust 2007–7, Plaintiff–Appellant, v. FLAGSTAR CAPITAL MARKETS CORPORATION, Defendant, Quicken Loans, Inc., Defendant–Respondent. WMC Mortgage, LLC, Amicus Curiae.
• Court: New York Supreme Court — Appellate Division

143 A.D.3d 15

36 N.Y.S.3d 135

2016 N.Y. Slip Op. 05780

DEUTSCHE BANK NATIONAL TRUST COMPANY, solely in its capacity as Trustee of the Harborview Mortgage Loan Trust 2007–7, Plaintiff–Appellant,

v. FLAGSTAR CAPITAL MARKETS CORPORATION, Defendant,Quicken Loans, Inc., Defendant–Respondent.WMC Mortgage, LLC, Amicus Curiae.

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

Aug. 11, 2016.

Lowenstein Sandler LLP, New York (Zachary D. Rosenbaum, Michael J. Hampson and Jonathan C. Wishnia of counsel), for appellant.

Jones Day, New York (Howard F. Sidman, Heidi A. Wendel and Michael O. Thayer of counsel), for respondent.

Jenner & Block LLP, New York (Stephen L. Ascher of counsel), for WMC Mortgage, LLC, amicus curiae.

ROLANDO T. ACOSTA, J.P., DIANNE T. RENWICK, DAVID B. SAXE, ROSALYN H. RICHTER, JUDITH J. GISCHE, JJ.

ACOSTA

, J.

In this appeal, we must decide whether the statute of limitations bars a breach of contract action that was brought more than six years after the seller made allegedly false representations and warranties as to loans underlying residential mortgage-backed securities (RMBS). We find that dismissal of the action is mandated by the Court of Appeals' decision 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)

, which sets 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. Notwithstanding the parties' sophistication and their assent to a contract provision specifying a set of conditions that would have delayed the cause of action's accrual, we find that the accrual provision is unenforceable as against public policy, because it is tantamount to extending the statute of limitations based on an imprecise “discovery” rule, which the Court of Appeals has consistently rejected in the commercial sphere (see

id. at 593–594, 15 N.Y.S.3d 716, 36 N.E.3d 623 ). Moreover, the accrual provision does not compel defendant to undertake a promised future performance, separate from its obligations to cure or repurchase defective loans, so as to trigger the statute of limitations anew; nor does it contemplate a substantive condition precedent to defendant's performance that would delay accrual of the breach of contract claim (see id. at 595, 597, 15 N.Y.S.3d 716, 36 N.E.3d 623

; Deutsche Bank Natl. Trust Co. v. Quicken Loans Inc., 810 F.3d 861 [2d Cir.2015] ). Therefore, we affirm the motion court's dismissal of the action as barred by the six-year statute of limitations applicable to breach of contract actions (CPLR 213[2] ).

Facts and Background

Defendant Quicken Loans, Inc. originated mortgage loans that were sold to nonparty purchaser/sponsor Morgan Stanley Mortgage Capital, Inc. (Morgan Stanley), pursuant to a Second Amended and Restated Mortgage Loan Purchase and Warranties Agreement, dated June 1, 2006. In sections 9.01 and 9.02 of the agreement, defendant, as originator and seller of the loans, made various representations and warranties to Morgan Stanley, as purchaser, concerning the characteristics, quality, and risk profile of the loans. The representations and warranties were made effective as of the date of the agreement and as of the “closing date” of each loan.¹ It is undisputed that the closing date for the sale of each package of loans occurred between December 7, 2006, and May 31, 2007.

Section 9.03 of the agreement set forth remedies for breach of representations and warranties. Upon discovery by either the seller or the purchaser of a material breach of any of the representations and warranties, the discovering party was to give the other relevant parties prompt written notice. Within 60 days of either discovery by or notice to the seller of any material breach, the seller was required to cure the breach or either repurchase the defective loan or substitute a “Qualified” loan in its place (the repurchase protocol), and provide indemnification; these were to be the “sole remedies” for the breach.

Section 9.03 also included a provision that purported to delay the accrual of a breach of contract claim until three conditions were met. The accrual provision specified that any cause of action against defendant relating to a breach of representations and warranties “shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to [cure, repurchase or substitute] and (iii) demand upon the Seller by the Purchaser for compliance with this Agreement.”

Through various assignments, the loan pool was ultimately conveyed to the HarborView Mortgage Loan Trust 2007–7 (the Trust) and securitized through the issuance of Mortgage Pass–Through Certificates, Series 2007–7, which were sold to investor certificateholders in a securitization that closed on October 2, 2007. Morgan Stanley's rights and remedies as purchaser were subsequently assigned to the Trust, of which plaintiff is the trustee.

In 2013, a certificateholder, Federal Home Loan Mortgage Corporation (Freddie Mac), engaged an underwriting firm to perform a forensic review of the loans underlying some of the certificates. The review process revealed that a large number of the loans breached representations and warranties made by defendant regarding the quality and characteristics of the loans. In July 2013, Freddie Mac informed plaintiff of the breaches, and plaintiff forwarded this information to the master servicer, who notified defendant of the breaches and demanded that defendant comply with the repurchase protocol. In August 2013, Freddie Mac informed the master servicer of additional breaches, and in September the master servicer notified defendant of those breaches and demanded compliance.

On August 30, 2013, plaintiff, at the direction of Freddie Mac, commenced this action against defendant by filing a summons with notice for breach of contract in connection with defendant's breaches and failure to cure or repurchase the loans. On February 3, 2014, plaintiff filed the complaint in this action seeking specific performance, damages and/or rescission, and asserting a cause of action for breach of contract and a cause of action for breach of the implied covenant of good faith and fair dealing.

Defendant moved to dismiss the complaint based upon the statute of limitations, in addition to other grounds not relevant here. In arguing that the action was untimely, defendant contended that the loans at issue were sold to Morgan Stanley in several groups, with the closing date for the sale of each package of loans occurring between December 7, 2006, and May 31, 2007, so that all claims accrued in or before May 2007. Thus, defendant argued, the action was untimely commenced on August 30, 2013, more than six years after the accrual date.

In opposition, plaintiff did not dispute that the representations under the agreement were effective as of the closing date for the sale of the loans (i.e., May 31, 2007, at the latest), but argued that the statute of limitations had not lapsed, under the agreement's accrual provision.

The motion court granted defendant's motion to dismiss, as relevant on appeal, the breach of contract claim as untimely.

Plaintiff appeals.

Discussion

“Statutes of limitation not only save litigants from defending stale claims, but also ‘express[ ] a societal interest or public policy of giving repose to human affairs' ” (ACE Sec. Corp. v. DB Structured Products, Inc. [ACE], 25 N.Y.3d 581, 593, 15 N.Y.S.3d 716, 36 N.E.3d 623 [2015]

, quoting John J. Kassner & Co. v. City of New York, 46 N.Y.2d 544, 550, 415 N.Y.S.2d 785, 389 N.E.2d 99 [1979], omitting internal quotation marks). “Because of the combined private and public interests involved, individual parties are not entirely free to waive or modify the statutory defense” (Kassner, 46 N.Y.2d at 550, 415 N.Y.S.2d 785, 389 N.E.2d 99 ). Although parties may agree after a cause of action has accrued to extend the statute of limitations, an “agreement to ... extend the Statute of Limitations [that] is made at the inception of liability [will be] unenforceable because a party cannot ‘in advance, make a valid promise that a statute founded in public policy shall be inoperative’ ” (id. at 551, 415 N.Y.S.2d 785, 389 N.E.2d 99, quoting Shapley v. Abbott, 42 N.Y. 443, 452 [1870] ).

In ACE, the Court of Appeals held that a breach of contract claim in an RMBS put-back action accrues on the date the allegedly false representations and warranties were made (25 N.Y.3d at 589, 15 N.Y.S.3d 716, 36 N.E.3d 623

). The Court stated, “Where ... representations and warranties concern the characteristics of [the loans] as of the date they are made, they are breached, if at all, on that date” (id. at 589 ). The agreement in the instant case made defendant's representations and warranties effective on the date of the agreement (June 1, 2006), and on the closing date of the sale of the loans. It is undisputed that the closing dates of the loan sales were between December 7, 2006, and May 31, 2007. Therefore, plaintiff's causes of action for breach of contract accrued, at the latest, on May 31, 2007, and this action, commenced more than six years later on August 30, 2013, is barred by the statute of limitations (CPLR 213[2]

).

Plaintiff's attempt to distinguish ACE by the absence of an accrual provision in that case is unavailing. The accrual provision in the agreement is unenforceable, despite the principle of freedom of contract upon which plaintiff relies. To be sure, freedom of contract is fundamental in New York law, but it is not absolute, and must give way to “countervailing public policy concerns” in appropriate circumstances (Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 695, 636 N.Y.S.2d 734, 660 N.E.2d 415 [1995]

). New York's statutes of limitation codify the public policies of “finality,...