Court holds that claims begin to accrue at the time contracts were executed and there is no separate claim for failure to cure or repurchase.
On June 11, New York State’s highest court, the Court of Appeals, rendered a highly anticipated decision in ACE Secs. Corp. v. DB Structured Prods., Inc., __ -- __ (2015) (ACE Court of Appeals Decision). The decision resolves several issues related to the timeliness of claims for breaches of representations and warranties—or “putback” claims—in the context of residential mortgage-backed securities (RMBS) litigation. In rendering its decision, the court held that the statute of limitations for putback claims accrues at the time that the underlying representation or warranty regarding the loan was breached by the loan seller (in this case, at contract execution on March 28, 2006), not when the loan seller refuses to repurchase the loan as a remedy for the underlying breach of representation and warranty.
Recently, the issue of when a putback claim accrues under New York’s six-year statute of limitations for breach of representation and warranty claims has been hotly contested by parties in both New York state and federal courts. Putback claims generally arise when an RMBS investor claims that the loan seller breached representations and warranties regarding one or more loans in the RMBS transaction, and subsequently directs the RMBS trustee to demand that the loan seller either cure the breach (if possible) or repurchase the loan in accordance with the underlying transaction documents. Over the last few years, courts have come out differently on whether a putback claim accrues at the time the underlying representation or warranty was breached (typically, when made) or when the loan seller refuses to comply with a demand to repurchase the loan based on that underlying breach, which can occur several years later. This issue came to a head in the ACE litigation, culminating in the Court of Appeals’ decision.
The ACE litigation involves an RMBS transaction known as ACE Securities Corp., Home Equity Loan Trust, Series 2006–SL2 (the Trust), which closed in March 2006. The loan seller, DB Structured Products, Inc. (DBSP) made certain representations and warranties regarding the loans in the RMBS transaction. In early 2012, two investors in the Trust notified the trustee that DBSP had breached certain of those representations and warranties, and demanded that DBSP either cure the breaches or repurchase the loans pursuant to the “repurchase protocol” in the transaction documents. When the trustee did not take action, the investors sued DBSP on March 28, 2012. The trustee then sought to substitute for the investors and filed a complaint.
DBSP moved to dismiss the claims filed by the trustee as untimely, arguing that the suit was commenced more than six years after the underlying representations and warranties were made. In the trial court, Justice Kornreich denied DBSP’s motion, holding that each failure of DBSP to repurchase the loans in question constituted an independent breach of its contractual repurchase obligation, thereby starting the statute of limitations running anew. DBSP appealed to the First Department (one of New York’s intermediate appellate courts), which reversed, holding that the breach of representation and warranty claims began to accrue at the time that the transaction documents were executed, when the representations and warranties (which were allegedly false when made) occurred. The trustee appealed the decision to the Court of Appeals.
In an 18-page ruling, the Court of Appeals affirmed the First Department’s decision in favor of DBSP. The court began its discussion of the merits of the parties’ arguments by noting “[o]ur statutes of limitations serve the same objectives of finality, certainty and predictability that New York’s contract law endorses.” The court further emphasized its repeated rejection of indefinite accrual dates in favor of a “bright line approach.” Against that backdrop, the Court of Appeals rejected the trustee’s argument that the failure to repurchase a loan constitutes an independent breach of the agreement that begins to accrue at the time the repurchase demand is rejected. Instead, the court held that the cure or repurchase clause is a remedy and not a “separate promise of future performance that continued for the life of the investment.” The court also rejected the trustee’s argument that the cure or repurchase obligation constituted a condition precedent to suit that delayed accrual of the claim, holding instead that the clause was a procedural prerequisite to suit.
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Compare Nomura Asset Acquisition Corp. Alt. Loan Trust v. Nomura Credit Capital, Inc., 971 N.Y.S.2d 73 (N.Y. Sup. Ct. N.Y. Co. 2013) (claim accrues at time of deal, when underlying representation and warranty was made); Lehman XS Trust, Series 2006-4N, by U.S. Bank National Association v. Greenpoint Mortgage Funding, Inc., 991 F. Supp. 2d 472 (S.D.N.Y. 2014) (same) with Deutsche Bank National Trust Company, solely in its capacity as Trustee of Securitized Asset Backed Receivables LLC Trust 2006-WM4 v. WMC Mortgage, LLC, No. 13-CV-0584, 2013 WL 7144159 (S.D.N.Y. Dec. 17, 2013) (claim accrues anew each time loan seller fails to repurchase the loan in question).
 ACE Secs. Corp. v. DB Structured Prods., Inc., 965 N.Y.S.2d 844 (N.Y. Sup. Ct. N.Y. Co. 2013).
 ACE Secs. Corp. v. DB Structured Prods., Inc., 112 A.D. 522, 522-23, 977 N.Y.S. 2d 229 (1st Dep’t 2013).
 ACE Court of Appeals Decision at 9.
 Id. at 14.
 Id. at 10-11.
 Id. at 17-18.