Summary
holding that demand requirement did not toll the statute of limitations because plaintiff had a right to make a demand at the time of breach
Summary of this case from Lehman Bros. Holdings Inc. v. Universal Am. Mortg. Co.Opinion
02 Civ. 3232 (SHS)
February 25, 2003
OPINION ORDER
Structured Mortgage Trust 1997-2 ("SMT"), assignee of CAX DTR Securitization Corp. ("CAX"), brings this diversity action against Daiwa Finance Corp. ("Daiwa") alleging that Daiwa breached certain representations and warranties regarding a mortgage loan (the "Brentwood Apartments Loan") that backed a certificate (the "Certificate") representing SMT's ownership of certain mortgage-backed securities (the "Securities") issued by Daiwa and placed in a Trust administered by LaSalle National Bank on behalf of SMT and other certificate holders. Daiwa now moves pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the complaint on the ground that plaintiffs have failed to comply with the applicable statute of limitations. For the reasons that follow, the motion is granted and the complaint is dismissed.
I. BACKGROUND
The representations and warranties at issue are contained in the March 1994 Pooling Agreement through which Daiwa issued the Certificate and placed its underlying Securities in the Trust. Daiwa warranted in the Pooling Agreement that, as of February 28, 1994, the property related to the Brentwood Apartments Loan had an occupancy rate of at least 90% and a debt service coverage ratio of at least 1.15. (Compl. ¶ 115-18.) Sometime in 1995, the Brentwood Apartments Loan went into default. A review of the property's operating statement for the nine-month period ending February 28, 1994 showed an estimated occupancy rate of only 76%, and an estimated debt service coverage ratio of negative 0.31.
SMT did not take action directly against Daiwa upon its discovery of the alleged breaches. Instead, because Daiwa had pledged the Securities underlying the Certificate to Federal National Mortgage Association ("Fannie Mae") as security for a loan, SMT notified Fannie Mae of the breaches it had discovered. (Compl. ¶ 114.) As a result, Fannie Mae, which had a prior claim to the Securities due to Daiwa's pledge, demanded on October 28, 1996 that Daiwa live up to its obligation under the Pooling Agreement to repurchase the Brentwood Loan. (Compl. ¶ 23.) Daiwa, however, refused to repurchase the Loan, even after Fannie Mae reiterated its demand on April 27, 1997. (Compl. ¶ 25.) Faced with that refusal, Fannie Mae opted not to pursue its repurchase claim against Daiwa. (Compl. ¶ 28.) Instead, it partially mitigated its damages via foreclosure on the Brentwood Loan, and processed its remaining loss in accordance with the applicable loan documents between it and Daiwa. (Compl. ¶¶ 26-27.) The result was that in May 1999, the remaining loss on the Brentwood Loan — $321,537.73 — was passed on to SMT, the holder of the Certificate backed by the Brentwood Loan. (Compl. ¶ 28.)
SMT commenced an action in this Court identical to the current one on February 28, 2000. On January 4, 2001, this Court dismissed the complaint in that action without prejudice on the grounds that SMT had failed to comply with section 8.03 of the Pooling Agreement. Section 8.03 requires SMT to make a proper demand on the Trustee (LaSalle National Bank) to file suit against Daiwa before SMT can do so itself. See Structured Mortgage Trust 1997-2 v. Daiwa Finance Corp., No. 00 Civ. 1544 (S.D.N.Y. January 4, 2001). Subsequent to that determination, SMT complied with section 8.03 of the Pooling Agreement.
II. DISCUSSION
Daiwa contends that this second suit — filed on April 26, 2002 — must be dismissed as well because it is time-barred by the applicable New York statute of limitations. The Court agrees.
Presuming the plaintiffs' allegations to be true for purpose of this motion, Daiwa's false warranties and representations breached the contract at its inception in March 1994 since, according to the complaint, the occupancy rate and debt service coverage ratio was not as warranted in the March 1994 Pooling Agreement. New York's statute of limitations for breach of contract is six years. See N.Y. C.P.L.R. § 213(2). Pursuant to New York law, a cause of action for breach of contract accrues, and the statute of limitation begins to run, at the time of the breach. See TN PLC v. Fred S. James Co., 29 F.3d 57, 59 (2d Cir. 1994); Elv-Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402, 599 N.Y.S.2d 501, 502, 615 N.E.2d 985, 986 (1993). The New York Court of Appeals applies an accrual-at-breach rule even when the breach and injury are not simultaneous. See TN PLC, 29 F.3d at 59,Elv-Cruikshank, 81 N.Y.S.2d at 502, 615 N.E.2d at 986, National Life Ins. Co. v. Frank B. Hall Co., 67 N.Y.2d 1021, 503 N.Y.S.2d 318, 319, 494 N.E.2d 449, 450 (1986). Thus, since the facts warranted in the March 1994 Pooling Agreement were not true when made, the statute of limitations began to run at that time, and expired six years later, i.e., in March 2000, which was prior to the commencement of this litigation in April 2002.
Plaintiffs next contend that even if the statute of limitations accrued from the alleged March 1994 breach, it was tolled pursuant to N.Y. C.P.L.R. § 206(a) from the breach until March 1999, when Fannie Mae's actions first caused the Trust to show a loss. Section 206(a) provides that "where a demand is necessary to entitle a person to commence an action, the time within which the action must be commenced shall be computed from the time when the right to make the demand is complete . . ." N.Y. C.P.L.R. § 206(a). Contrary to plaintiffs' contentions, however, the right to make that demand that the Trustee sue for breach of contract is complete "when the wrong is committed, and not when the plaintiff discovers it." 7B Joseph McLaughlin, Practice Commentaries, C.P.L.R. § 206 (McKinney's 1990).
There is no language in the Pooling Agreement to support plaintiffs' position that they were barred until March 1999 from making such a demand. The relevant language states as follows:
No Certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of default . . . and the Trustee, for 30 days after its receipt of such notice . . . shall have neglected or refused to institute any such action, suit or proceeding . . . .
(Compl., Ex.A., Pooling Agreement § 803(b)).
It is undisputed that the alleged default by defendants occurred in March of 1994. By the plain language of Section 803(b), there was no bar to the plaintiffs making a demand of the Trustee as of that default. In effect, plaintiffs are asking this Court to find that, in contract cases where there is a demand requirement, C.P.L.R. § 206(a) imposes the otherwise rejected accrual-at-injury rule. Plaintiffs' argument must be rejected.
CONCLUSION
Because this action was filed after the expiration of the statute of limitations on plaintiffs' claim, defendant's motion to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) is hereby granted.
SO ORDERED: