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TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ................................................................................... ii
COUNTERSTATEMENT OF THE QUESTIONS PRESENTED..........................1
NATURE OF THE CASE ........................................................................................2
A. The Sale of Loans by Quicken Loans to Morgan Stanley.........5
B. DB’s Untimely Complaint .........................................................7
C. Quicken Loans’ Motion to Dismiss ...........................................9
D. The Trial Court’s Well-Reasoned Decision.............................11
ARGUMENT ..........................................................................................................15
POINT I THE TRIAL COURT PROPERLY CONCLUDED
THAT THIS ACTION IS BARRED BY THE STATUTE
OF LIMITATIONS..................................................................15
A. The Breach of Contract Alleged Here Occurred More
than Six Years Before the Action Was Brought ......................15
B. The Contract Provision Requiring an Opportunity for
Cure or Repurchase Does Not Extend the Time in Which
DB Was Required to File Suit .................................................19
C. The Purported “Survival” of the Representations and
Warranties Does Not Extend the Time in Which DB
Was Required to File Suit ........................................................30
D. The Representations, Warranties and Covenants Made
By Quicken Loans Did Not Extend to the Securitization
Closing Date.............................................................................36
POINT II DB FAILED TO SATISFY THE CONDITIONS
PRECEDENT FOR BREACH OF CONTACT .....................38
CONCLUSION.......................................................................................................40
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TABLE OF AUTHORITIES
Page(s)
CASES
150 Broadway N.Y. Assocs., L.P. v. Bodner,
784 N.Y.S.2d 63 (1st Dep’t 2004)......................................................................10
ACE Sec. Corp. v. DB Structured Prods. Inc.,
112 A.D.3d 522 (1st Dep’t 2013) ................................................................passim
ACE Sec. Corp. v. DB Structured Prods. Inc.,
25 N.Y.3d 581 (2015) ..................................................................................passim
Angel Fabrics Ltd. v. Cravat Pierre, Ltd.,
381 N.Y.S.2d 497 (1st Dep’t 1976)....................................................................31
Arden Communications v. Abbate,
633 N.Y.S.2d 1 (1st Dep’t 1995)........................................................................30
The Bank of New York Mellon v. WMC Mortg., LLC,
17 N.Y.S.3d 613 (N.Y. Sup. Ct. 2015)...............................................................24
Bayridge Air Rights Inc. v. Blitman Constr. Corp.,
80 N.Y.2d 777 (1992) .........................................................................................29
Blue Grass Partners v. Bruns, Nordeman, Rea & Co.,
428 N.Y.S.2d 254 (1st Dep’t 1980)..............................................................30, 31
Bulova Watch Co., Inc. v. Celotex Corp.,
46 N.Y.2d 606 (1979) ...................................................................................33, 34
Corto v. Lefrak,
610 N.Y.S.2d 214 (1st Dep’t 1994)....................................................................10
Deutsche Alt-A Securities Mortg. Loan Trust, Series 2006-OA1 v. DB
Structured Products, Inc.,
958 F. Supp. 2d 488 (S.D.N.Y. 2013) ................................................................16
Deutsche Bank Nat’l Trust Co. v. Quicken Loans Inc.,
810 F.3d 861 (2d Cir. 2015) ........................................................................passim
-iii-
Ely-Cruikshank Co. v. Bank of Montreal,
81 N.Y.2d 399 (1993) .........................................................................................19
Fontanetta v. Doe,
898 N.Y.S.2d 569 (2d Dep’t 2010).....................................................................10
GRT, Inc. v. Marathon GTF Tech., Ltd.,
No. 5571-CS, 2011 WL 2682898 (Del. Ch. July 11, 2011) ...............................35
Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co.,
18 N.Y.3d 765 (2012) .........................................................................................17
Hurlbut v. Christiano,
405 N.Y.S.2d 871 (4th Dep’t 1978) ...................................................................35
In re Residential Capital, LLC,
524 B.R. 563 (2015) ...........................................................................................36
John J. Kassner & Co. v. City of New York,
46 N.Y.2d 544 (1979) ..................................................................................passim
Lehman XS Trust, Series 2006-4N ex rel. U.S. Bank Nat’l Ass’n v.
Greenpoint Mortg. Funding,
991 F. Supp. 2d 472, 474 (S.D.N.Y. 2014) ........................................................39
MASTR Asset Backed Sec. Trust 2006-HE3 v. WMC Mortg. Corp.,
843 F. Supp. 2d 996 (D. Minn. 2012).................................................................39
Miller v. Cont’l Ins. Co.,
40 N.Y.2d 675 (1976) .........................................................................................24
Oppenheimer & Co. v. Oppenheimer, Appel, Dixon & Co.,
86 N.Y.2d 685 (1995) .........................................................................................24
Ozdemir v. Caithness Corp.,
728 N.Y.S.2d 824 (3d Dep’t 2001).....................................................................10
T&N PLC v. Fred S. James & Co. of New York,
29 F.3d 57 (2d Cir. 1994) .............................................................................26, 29
U.S. Bank Nat’l Assn. v. Greenpoint Mtge. Funding, Inc.,
No. 651954/2013, 2015 WL 91544 (N.Y. Sup. Ct. Mar. 3, 2015)..............passim
-iv-
STATUTES
New York General Obligations Law § 17-103.................................................passim
CPLR 201.................................................................................................................25
CPLR 206(a) ................................................................................................18, 19, 33
CPLR 213(2) ......................................................................................................11, 36
CPLR 3211(a)(1)......................................................................................................10
CPLR 3211(a)(5)......................................................................................................10
CPLR 3211(a)(7)......................................................................................................10
OTHER AUTHORITIES
75 N.Y. Jur. 2d Limitations and Laches § 39 (2013) ..............................................26
A N.Y. Prac., Enforcing Judgments and Collecting Debts § 3:20
(2013)..................................................................................................................26
Carmody-Wait 2d, New York Practice § 13-19 (2013)...........................................26
Siegel, N.Y. Prac. § 39 (5th ed. 2013) .....................................................................26
-1-
Defendant-Respondent Quicken Loans Inc. (“Quicken Loans”) respectfully
submits this memorandum of law in response to the brief dated February 1, 2016,
filed by Deutsche Bank National Trust Company (“DB”), in its capacity as Trustee
for the HarborView Mortgage Loan Trust 2007-7 (“HVMLT 2007-7” or the
“Trust”), appealing a decision dated April 13, 2015, of the New York Supreme
Court, New York County (Friedman, J.), dismissing with prejudice, pursuant to
Civil Practice Law and Rules (“CPLR”) 3211(a)(1), (5) and (7), the complaint filed
on February 3, 2014 (the “Complaint” or “Compl.”) by DB, as barred by New
York’s six-year statute of limitations for breach of contract claims, and on the
other grounds discussed below.
COUNTERSTATEMENT OF THE QUESTIONS PRESENTED
1. Whether the trial court properly dismissed DB’s complaint alleging
breach of contract, where it was brought more than six years after the alleged
breach of the representations and warranties relating to the loans sold by Quicken
Loans and concerns purported defects in the loans at that time?
Answer: Yes.
2. Whether, as an alternative ground for affirming the trial court’s
decision dismissing the complaint, this Court should find that DB failed to satisfy
the conditions precedent for bringing an action for breach of the representations
-2-
and warranties because DB failed to provide Quicken Loans with an opportunity to
cure or repurchase the allegedly defective loans as required by the contract?
Answer: Yes.
NATURE OF THE CASE
In the landmark decision ACE Sec. Corp. v. DB Structured Prods. Inc., 25
N.Y.3d 581, 589 (2015) (“ACE”), the New York Court of Appeals held that an
action for alleged breach of representations and warranties with respect to
mortgages in residential mortgage-backed securities (“RMBS”) must be brought
within six years of the date on which the representations and warranties were made.
The Court of Appeals rejected the argument that a breach does not occur until
demand is made for cure or repurchase of purportedly defective loans and the
demand is rejected. ACE is well recognized as establishing a bright-line rule for
when the statute of limitations runs on claims for alleged breach of representations
and warranties in RMBS actions.
In her decision below, Justice Marcy Friedman, the judge to whom all
RMBS actions have been assigned in the New York Supreme Court, New York
County, since May 23, 2013, by order of the Administrative Judge of that court,
granted Quicken Loans’ motion to dismiss DB’s action because it was brought
more than six years after the representations and warranties were made with
respect to the loans at issue here. The trial court’s decision is a straightforward and
-3-
well-reasoned application of the principles set forth in this Court’s ruling in ACE
Sec. Corp. v. DB Structured Prods. Inc., 112 A.D.3d 522 (1st Dep’t 2013), that
was subsequently affirmed by the Court of Appeals in ACE.
In a vain attempt to avoid ACE’s sweeping effect, DB claims the instant case
is distinguishable from ACE because the purchase agreement here contains a so-
called “accrual clause” as part of the repurchase protocol and provides that the
representations and warranties “survive” the sale of the loans. These are
distinctions without a difference. As the trial court properly found, the repurchase
protocol (which is part of the “Remedies” section of the purchase agreement)
merely sets forth the procedural requirements for suit; it does not affect when an
alleged breach itself occurs under the purchase agreement. Similarly, in a suit by
DB against Quicken Loans involving an RMBS transaction with virtually identical
contract language, the United States Court of Appeals for the Second Circuit
recently rejected the very same arguments that DB makes here regarding the
purported “accrual” and “survival” language in the purchase agreement. See
Deutsche Bank Nat’l Trust Co. v. Quicken Loans Inc., 810 F.3d 861 (2d Cir. 2015).
As the trial court below, the Second Circuit, and every other New York case to
address the issue have properly held, notwithstanding the presence of a so-called
“accrual clause” in the contract at issue, the statute of limitations on an action for
breach of representations and warranties starts running at the time the
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representations and warranties were made because the alleged breach concerns
purported defects in the loans at that time. The “accrual” language in the
repurchase protocol merely establishes the conditions precedent that DB was
required to meet before bringing suit. DB’s arguments on this appeal seek to turn
that condition precedent on its head by transforming it into a potentially decades-
long extension of the statute of limitations for DB’s benefit. Under DB’s
interpretation of the “accrual” language in the repurchase protocol, DB could wait
several decades to bring an action for alleged breach of representations and
warranties made in 2007. This is a facially unreasonable interpretation of the
contract language that is inconsistent with New York law and longstanding public
policy.
DB’s contention that dismissal here is inequitable should also be rejected.
The Federal Housing Finance Agency (“FHFA”), the holder of securities issued by
the Trust on behalf of which DB purports to have brought this action, sued the
securitization sponsor, Royal Bank of Scotland, for securities fraud in connection
with some of the same loans at issue here. However, the FHFA let years pass
before directing DB to file this action against Quicken Loans. Thus, rather than
being inequitable, the applicable limitations period here serves the interests of
finality, certainty and predictability that underlie the concept of statutes of
limitations in New York.
-5-
The trial court’s decision should therefore be affirmed, both for these
reasons and for the additional reasons set forth below.
COUNTERSTATEMENT OF FACTS
A. The Sale of Loans by Quicken Loans to Morgan Stanley.
On June 1, 2006, Quicken Loans entered into a contract, termed the Second
Amended and Restated Mortgage Loan Purchase and Warranties Agreement
(“MLPWA”), to sell mortgage loans to Morgan Stanley Mortgage Capital, Inc.
(“Morgan Stanley”) “from time to time . . . on various dates.” (R. 28 (Compl. ¶
14); R. 59 (MLPWA at 1 (WHEREAS Clause).) In the MLPWA, Quicken Loans
made various representations and warranties with respect to the characteristics of
the mortgage loans “as of” the date of the MLPWA and the “Closing Date” for
each loan. (R. 28-29, 31 (Compl. ¶¶ 14-16, 22); R. 78-95 (MLPWA at §§ 9.01,
9.02).) The “Closing Date” was defined in the MLPWA as “[t]he date or dates on
which the Purchaser from time to time shall purchase, and [Quicken Loans] from
time to time shall sell, the Mortgage Loans . . . with respect to the related Mortgage
Loan Package.” (R. 61.) The “Mortgage Loan Package” was defined to mean
“[e]ach pool of Mortgage Loans, which shall be purchased by the Purchaser from
[Quicken Loans] from time to time on each Closing Date.” 1 (R. 65)
1 The MLPWA provides that the contract “shall be construed in accordance with the
laws of the State of New York and the obligations, rights and remedies of the parties hereunder
-6-
The particular “Closing Date” for the sale of each pool of mortgage loans
was set forth in Purchase Price and Term Letters executed between Quicken Loans
and Morgan Stanley with respect to each Mortgage Loan Package. (R. 646-745.)
As indicated in these letters, the pools of loans had Closing Dates between
December 7, 2006 and May 30, 2007. (Id.) Moreover, accompanying Assignment
and Conveyance Agreements, through which each group of loans was sold by
Quicken Loans to Morgan Stanley pursuant to the MLPWA, conclusively show
that the last sale of loans at issue in this action was completed by May 31, 2007.
(R. 646-1514.) The Assignment and Conveyance Agreements, which correspond
to each Purchase Price and Term Letter for the separate groups of loans sold
pursuant to the Purchase Agreement, provide that the loan sales occurred between
December 7, 2006 and May 31, 2007. (R. 746-1514.)
The representations and warranties concerned the characteristics of the loans
at the time of their sale by Quicken Loans to Morgan Stanley. (R. 78-95.) For
example, the representations and warranties provided that, as of the Closing Dates
for the various sales of the loans, no mortgage loan had a loan to value (“LTV”)
ratio greater than 100% and no loan was in default. (Id.) Each of those
(continued…)
shall be determined in accordance with the substantive laws of the State of New York. . . .” (R.
106.)
-7-
representations and warranties was made “as to each Mortgage Loan, as of the
related Closing Date for such Mortgage Loan.” (R. 82 (MLPWA § 9.02)
(emphasis added).) The characteristics of the loans were not static but rather could
change over time.
The loans purchased from Quicken Loans were subsequently resold by
Morgan Stanley, resold again, and then included in a pool of RMBS, along with
mortgage loans originated by entities other than Quicken Loans, through several
transactions referenced in the Complaint. (R. 28-29 (Compl. ¶¶ 15-18).) The
securitization transaction, pursuant to which HVMLT 2007-7 issued the mortgage-
backed securities at issue in this case, closed on October 2, 2007. (R. 29 (Compl. ¶
16).) The Federal Home Loan Mortgage Corporation (“Freddie Mac”) was
allegedly one of the purchasers of the securities. (R. 47 (Compl. ¶ 75).)
B. DB’s Untimely Complaint.
On September 2, 2011, almost two years before this action was commenced,
the FHFA, as conservator for Freddie Mac, sued the Royal Bank of Scotland for
securities fraud in connection with HVMLT 2007-7. (R. 179-293 (Complaint filed
September 2, 2011 in Federal Housing Finance Agency, et al v. The Royal Bank of
Scotland, et al, Case No. 3:11-cv-01383-AWT (D. Conn.).) The complaint in that
action alleged many of the same purported loan defects that DB alleges in the
instant case. (Compare id. at ¶¶ 84-85, 90-91, 102, 106 (alleging LTV and owner
-8-
occupancy violations) with R. 41-43 (Compl. at ¶¶ 50-55 (alleging LTV and
owner occupancy violations).) Nevertheless, although DB alleged that its action
against Quicken Loans was brought at FHFA’s direction, it was not brought at that
time or at any time within the applicable limitations period. Rather, this action was
not filed until August 30, 2013, more than six years after the Closing Dates on
which the representations and warranties were effective with respect to all of the
loans sold pursuant to the MLPWA, through a summons with notice (“Summons
with Notice”) in New York Supreme Court, New York County, alleging that
Quicken Loans violated certain unspecified representations and warranties. (R.
294-98 (Summons with Notice).)
Moreover, DB also failed to satisfy the condition precedent to bringing suit
prior to commencing this action. The MLPWA required that Quicken Loans be
given sixty days to cure or repurchase prior to the commencement of any action for
breach of the agreement. (R. 46 (Compl. ¶ 70); R. 95-98 (§ 9.03.) Section 9.03 of
the MLPWA provides that:
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 shall
accrue as to any Mortgage Loan upon (i) discovery of
such breach by the Purchase 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.
-9-
(R. 98.) As of the filing of the Summons with Notice on August 30, 2013, only
one repurchase demand letter, the August 6, 2013 letter cited in the Complaint, had
been served on Quicken Loans and that letter identified only a subset of the loans
at issue in this action.2 (R. 44-45 (Compl. ¶¶ 61-62).) Even with respect to the
subset of the loans identified in the August 6, 2013 letter, Quicken Loans was not
provided with a sixty-day cure period prior to DB’s suit. Id. The second letter
demanding repurchase was not served on Quicken Loans until after the filing of the
summons with notice. 3 (R. 44-45 (Compl. ¶¶ 61-62).) Accordingly, DB’s
complaint fails to comply with the contractual conditions precedent for suit.4
C. Quicken Loans’ Motion to Dismiss.
On March 17, 2014, Quicken Loans moved to dismiss the Complaint based
on the six-year statute of limitations applicable to breach of contract actions. (R.
20-21.) The loans at issue in this action were all sold between December 2006 and
May 31, 2007, and thus the representations and warranties on those loans were
effective—and any alleged breach of those representations and warranties would
have occurred, if at all—by no later than May 2007, which is more than six years
2 DB served the Summons with Notice on Quicken Loans on December 24, 2013. (R.
294-98 (Summons with Notice).)
3 In addition to being procedurally improper, the purported deficiencies identified in the
demand letters are without merit and reflect an after-the-fact attempt by the FHFA to recoup its
faulty investment decisions at the expense of Quicken Loans.
4 The claim against the other defendant in this action, Flagstar Capital Markets
Corporation, was dismissed on November 13, 2013.
-10-
before this action was brought.5 (R. 646-1514.) Quicken Loans also argued that
the Complaint should be dismissed because DB was required by the MLPWA to
make a demand for repurchase and to allow Quicken Loans sixty days to cure the
purported defects in the loans as a condition precedent to bringing an action for
breach of the contract.6
In opposition to the motion to dismiss, DB claimed that “Quicken’s
argument that the claims are untimely requires factual determinations that cannot
be made on a motion to dismiss.” (R. 13.) DB claimed that the record failed to
establish the dates on which the sales of loans took place and that it was therefore
5 In addition, because the FHFA is not a party to this action, Quicken Loans successfully
sought dismissal of the allegations in the Complaint that the Housing and Economic Recovery
Act of 2008 (“HERA”), 12 U.S.C. § 4617(b)(12), extended the statute of limitations. (R. 16-17.)
Quicken Loans also successfully sought dismissal of DB’s claims for rescission and rescissory
damages because the MLPWA provided that repurchase and indemnification were the sole
remedies for breach under that agreement. (R. 18.) Finally, Quicken Loans also successfully
sought dismissal of DB’s claim for breach of the implied covenant of good faith and fair dealing
because it was time-barred, duplicative of DB’s breach of contract cause of action and failed to
state a claim. (R. 18.) DB is not appealing the trial court’s decision with respect to any of these
issues or causes of action. (See DB’s Br. at 13 n.3.)
6 Quicken Loans moved to dismiss pursuant to CPLR 3211(a)(1), (5) and (7). CPLR
3211(a)(5) requires dismissal where the statute of limitations has run and the time in which to
commence an action has expired. See, e.g., Corto v. Lefrak, 610 N.Y.S.2d 214, 216 (1st Dep’t
1994). In addition, CPLR 3211(a)(l) authorizes dismissal of a plaintiff’s complaint based on a
defense founded upon documentary evidence. Where a written agreement referenced by the
plaintiff’s complaint “contradicts the allegations supporting a litigant’s cause of action for breach
of contract, the contract itself constitutes documentary evidence warranting dismissal of the
complaint.” 150 Broadway N.Y. Assocs., L.P. v. Bodner, 784 N.Y.S.2d 63, 65 (1st Dep't 2004);
see also Fontanetta v. Doe, 898 N.Y.S.2d 569 (2d Dep’t 2010). Dismissal pursuant to CPLR
3211(a)(1) is appropriate where “the documentary evidence upon which the motion is predicated
resolves all factual issues as a matter of law and definitively disposes of the plaintiff’s claim.”
Ozdemir v. Caithness Corp., 728 N.Y.S.2d 824, 826 (3d Dep’t 2001), lv. denied 97 N.Y.2d 605.
-11-
possible that sales took place within the six year statute of limitations. DB
repeated this assertion at oral argument, and the trial court gave DB the
opportunity to submit a sur-reply setting forth any facts that supported its argument.
(R. 1543-46.) However, rather than submitting a sur-reply, by letter dated
December 15, 2014, DB admitted that “[a]fter reviewing [the documents submitted
by Quicken Loans in support of its motion] . . . the Trustee does not, at this time,
challenge Quicken’s factual assertion concerning the sale dates of those mortgage
loans.” (R. 14-15 (citing Rosenbaum letter, Docket #48); see also SR. 1.)
D. The Trial Court’s Well-Reasoned Decision.
In a decision dated April 13, 2015, the trial court concluded that “the entire
complaint is barred by the statute of limitations” and dismissed the Complaint with
prejudice. (R. 19.) The court held that “any breach of Quicken’s representations
and warranties under the MLPWA occurred on or before . . . May 31, 2007, more
than six years prior to the commencement of the action,” which was therefore
“untimely under New York’s six year statute of limitations for breach of contract.
(CPLR 213(2)).” (R. 15.)
The trial court’s decision is straightforward and well reasoned. First, the
court found that DB failed to raise a fact issue as to when the representations and
warranties became effective. (R. 15.) The court noted that DB “does not dispute
that Quicken’s representations and warranties under the MLPWA were made
-12-
effective as of the Closing Date for the sale of the loans,” and “does not contend
that Quicken made, or restated, the representations and warranties in any
subsequent agreement.” (R. 13 (citing DB’s Memorandum of Law In Opposition
to the Motion to Dismiss at 3-4, and Transcript of the Oral Argument at 29-32).)
Rather, as the trial court stated, DB “argued in its opposition brief and at oral
argument that the documentary evidence submitted by Quicken Loans did not
eliminate factual issues as to the Closing Date of the loans.” (Id.) However, as the
court noted, “[b]y letter dated December 15, 2014, submitted in lieu of a sur-reply,”
DB “acknowledged that after a review of the ‘exhibits as well as additional
information presently available to the Trustee, the Trustee does not, at this time
challenge Quicken’s factual assertion concerning the sale dates’ of the mortgage
loans at issue in this action.” (R. 14-15 (citing Rosenbaum letter, Docket #48); see
also SR. 1.) Thus, as the court found, “the final Closing Date for the sale of the
mortgage loans is now undisputed” and accordingly, the dates on which the
representations and warranties became effective, all prior to May 31, 2007, were
similarly undisputed. (Id.)
Because these dates were all more than six years prior to commencement of
the action, the trial court held that DB’s suit was untimely. (R. 15) (citing ACE
Securities Corp. v. DB Structured Products, Inc., 112 A.D.3d 522 (1st Dep’t 2013)
aff’d, 25 N.Y.3d 581, 589 (2015)). The trial court rejected DB’s argument that
-13-
“the cause of action arises under an ‘Accrual Clause’ in the MLPWA, rather than
at the time the representations and warranties were made.” (R. 15-16.) It found
that “such a provision cannot serve to extend the statute of limitations for a cause
of action for breach of representations and warranties which, under this
Department’s decision in ACE, (112 A.D.3d at 522), accrues when the
representations and warranties are made, not when the repurchase demand is made
and refused.” (R. 15-16.)
The trial court also rejected DB’s argument that “Quicken breached its
obligation under MLPWA § 9.03 to notify the Trustee of Quicken’s own discovery
of breaches of the representations and warranties, and that the dates of Quicken’s
discovery cannot be resolved on a motion to dismiss.” 7 (R. 16.) The court found
that “[c]onsistent with this Department’s holding in ACE that the failure to comply
with a repurchase demand is not an independent breach of contract, this court has
previously held that a seller’s failure to notify the trustee of breaching loans is also
not an independent breach of contract.” (Id.) “[N]on-compliance with the notice
requirement under the repurchase protocol, a remedial provision,” the court found,
“does not give rise to an independent breach of contract by the sellers, or expand
the remedies available against the seller under the contract.” (Id.)
7 DB does not renew these arguments on appeal.
-14-
In parts of the decision below that DB does not challenge on this appeal, the
trial court also rejected DB’s other arguments in opposition to Quicken Loans’
motion to dismiss. The court found that HERA did not extend the limitations
period because the FHFA was not a party to the case. (R. 16-17.) The court found
that Quicken Loans was not equitably estopped from asserting the statute of
limitations because DB failed to plead that Quicken Loans in any way induced DB
to believe there were no breaches of the representations and warranties and, in any
event, “information regarding the breaches of the representations and warranties
underlying this action was publicly available at least as early as September 2011,
when the FHFA filed a securities fraud action alleging defects in the same loans at
issue here.” (R. 17-18.) Finally, the trial court also found that DB’s cause of
action for breach of the implied covenant of good faith and fair dealing was
duplicative of DB’s breach of contract cause of action. (R. 18.) Because the trial
court concluded that the Complaint was barred by the statute of limitations, it did
not reach the other grounds for dismissal put forth by Quicken Loans. (Id.)
-15-
ARGUMENT
POINT I
THE TRIAL COURT PROPERLY CONCLUDED THAT THIS ACTION IS
BARRED BY THE STATUTE OF LIMITATIONS
A. The Breach of Contract Alleged Here Occurred More than Six Years
Before the Action Was Brought.
On June 11, 2015, in ACE Sec. Corp. v. DB Structured Prods. Inc., 25
N.Y.3d 581, 589 (2015), the Court of Appeals definitively resolved the issue of
when the statute of limitations runs on an action for breach of representations and
warranties with respect to mortgages in RMBS transactions. The Court held that
such actions must be brought within six years of the date on which the
representations and warranties were made. It stated that “[w]here . . .
representations and warranties concern the characteristics of their subject as of the
date they are made, they are breached, if at all, on that date.” Id. The Court
rejected the argument that an alleged breach does not occur until demand is made
for repurchase of the purportedly defective loans and the defendant refuses the
demand. Id. It held that the date on which the representations and warranties were
allegedly breached is the triggering event for the running of the statute of
limitations, not the later date on which demand is made. Id.
In ACE, the trustee for a pool of mortgage loans that were securitized and
placed in a trust sued the sponsor of the securitization, Deutsche Bank Structured
-16-
Products (“DBSP”),8 alleging that it transferred defective mortgages into the trust
in violation of representations and warranties it provided regarding the quality of
the loans. Id. The trustee alleged that it had lost more than $330 million on
defective and defaulting loans, that more than 99% of the loans failed to comply
with the representations and warranties, and that DBSP had nevertheless refused to
repurchase the defective loans as required by the transaction documents. Id. at 591.
DBSP moved to dismiss on the ground that more than six years had elapsed since
the date on which the representations and warranties were made. Id. at 592.
The trial court denied the motion, holding that the trustee’s claim for breach
did not accrue until DBSP failed to comply with the demand that it cure or
repurchase the defective loans. Id. The court found that although the
representations and warranties were made at the time of the contract, which was
more than six years before suit was filed, DBSP breached the contract on the
8 In ACE, and numerous other cases, DB took the position diametrically opposed to the
one it is taking in this case that the statute of limitations runs on a claim for alleged breach of
representations and warranties at the time they are made, rather than at the later date when
demand for cure or repurchase is made and refused. See, e.g., Deutsche Alt-A Securities Mortg.
Loan Trust, Series 2006-OA1 v. DB Structured Products, Inc., 958 F. Supp. 2d 488 (S.D.N.Y.
2013); ACE Sec. Corp. Home Equity Loan Trust, Series 2006-HE2 v. DB Structured Prod's, Inc.,
No. 651414/2012 (N.Y. Sup. Ct. 2012); ACE Sec. Corp. Home Equity Loan Trust, Series 2006-
HE3 v. DB Structured Prod's, Inc., No. 652231/2012 (N.Y. Sup. Ct. 2012); ACE Sec. Corp.
Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Prod's, Inc., No. 650980/2012 (N.Y.
Sup. Ct. 2012); Freedom Trust 2011-2, on behalf of ACE Sec. Corp. Home Equity Loan Trust,
Series 2006-FM1, No. 652985/2012 (N.Y. Sup. Ct. 2012); ACE Sec. Corp. Home Equity Loan
Trust, Series 2006-FM1, No. 652978/2012 (N.Y. Sup. Ct. 2012).
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subsequent dates on which it failed to cure or repurchase defective loans. Id. at
592-93.
On December 19, 2013, this Court reversed the trial court’s decision and
granted DBSP’s motion to dismiss. See 977 N.Y.S.2d 229 (Dec. 19, 2013). The
Court held that the claims accrued on the date when the representations and
warranties were made, not on the later date on which DBSP refused to repurchase
the loans. Id.
On June 11, 2015, the Court of Appeals affirmed. See 25 N.Y.S.3d 581.
The Court rejected the trustee’s argument that the cure and repurchase obligation
constituted “a separate promise of future performance that continued for the life of
the instrument (i.e., the mortgage loans).” Id. at 594. What mattered for statute of
limitations purposes, the Court found, was that the representations and warranties
concerned “facts about the loans’ characteristics as of” the date on which they were
made. Id. at 595. The cure and repurchase obligation was merely “the Trust’s
remedy for a breach of those representations and warranties, not a promise of the
loans’ future performance.” Id. (emphasis in original). The cure or repurchase
obligation was “dependent on, and indeed derivative of, DBSP’s representations
and warranties.” Id.
Accordingly, the Court of Appeals applied a “bright-line rule,” previously
enunciated in cases such as Hahn Automotive Warehouse, Inc. v. American Zurich
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Ins. Co., 18 N.Y.3d 765 (2012), that the statute of limitations on breach of contract
claims runs from the date of the alleged breach of those obligations, “not years
later when [the plaintiff] actually made the demand” that the breach be remedied.
ACE, 25 N.Y.S.2d at 594. As the Court of Appeals stated, “the underlying act the
Trustee complains of is . . . the quality of the loans and their conformity with the
representations and warranties.” Id. at 596 (emphasis in original). Any contrary
approach would “transform[] a standard breach of contract remedy, i.e., damages,
into one that lasted for the life of the investment—decades past the statutory
period.” Id. at 597.
The Court of Appeals addressed the issues of fairness and equity that
underlie statutes of limitation, stating that “[o]ur statutes of limitation serve the
same objectives of finality, certainty and predictability that New York’s contract
law endorses.” Id. at 593. 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.” Id. (internal quotations omitted).
This case is squarely governed by ACE. As the trial court below held, DB’s
cause of action for breach of contract accrued on the Closing Dates from December
2006 through May 2007 when the representations and warranties were made with
respect to the loans at issue, and the alleged breaches occurred. (R. 14-15); see
CPLR 206(a) (New York’s limitations period on contractual claims runs from the
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time the contract was breached); Ely-Cruikshank Co. v. Bank of Montreal, 81
N.Y.2d 399 (1993) (same). Those alleged breaches are the underlying act of which
DB complains in this action. The cure or repurchase provision of the MLPWA
merely sets forth the remedy for the alleged breaches. It does not transform the
remedy into one that lasts for the life of the mortgages, which would extend the
six-year statute of limitations for several decades past the date of the alleged
breaches of the representations and warranties. Under the rule of finality on which
statutes of limitations are based, by August 30, 2013, when DB filed the summons
with notice in this action, the six-year limitations period had already run on DB’s
claims.
B. The Contract Provision Requiring an Opportunity for Cure or
Repurchase Does Not Extend the Time in Which DB Was Required to
File Suit.
In an attempt to avoid ACE’s sweeping effect, DB argues that the instant
case is distinguishable from ACE because the cure and repurchase clause at issue
here, though similar to that in ACE, includes the additional word “accrue.” (See
DB’s Br. at 15-21.) On that slender reed, DB argues that the running of the statute
of limitations was delayed indefinitely until DB decided to make a demand on
Quicken Loans for cure or repurchase of any allegedly defective loan and was
refused. Id.
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The trial court rejected DB’s argument, finding that the cure or repurchase
clause was merely a procedural condition for suit, not a substantive requirement
that affected when the cause of action arose. (R. 15-16.) The court referred to its
reasoning in U.S. Bank Nat’l Assn. v. Greenpoint Mtge. Funding, Inc., No.
651954/2013, 2015 WL 91544, at *4-6 (N.Y. Sup. Ct. Mar. 3, 2015)
(“Greenpoint”), decided shortly before the instant case, in which the trustee made
the same argument with respect to a similar so-called “Accrual Clause.” (R. 15.)
In Greenpoint, the court found that “[t]his accrual provision, which itself
references an underlying breach, cannot redefine the elements of a claim for that
breach.” 2015 WL 91544, at *5 (emphasis added). Rather than operating as a
substantive condition that determined when the cause of action for breach arose,
the accrual language “[wa]s part of the remedy provision, which defines and limits
plaintiff’s remedies for any breach.” Id. at *4 (emphasis added).
The trial court’s reasoning is entirely consistent with ACE, in which the
Court of Appeals rejected the trustee’s argument that “it had no right at law to sue
DBSP until DBSP refused to cure or repurchase the loans within the requisite time
period.” 25 N.Y.3d at 597. The Court of Appeals found that “[w]hile this
argument is persuasive-sounding, we are unconvinced.” Id. The Court found that
“[t]he Trust ignores the difference between a demand that is a condition to a
party’s performance, and a demand that seeks a remedy for a preexisting wrong.”
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Id. “[T]he cure or repurchase obligation was not an independently enforceable
right, nor did it continue for the life of the investment.” Id. at 599. The trust
“suffered a legal wrong at the moment DBSP allegedly breached the
representations and warranties”; the trustee “was just limited in its remedies for
that breach” under the repurchase provision of the contract. Id. at 597.
DB argues that ACE is nevertheless distinguishable because the repurchase
clause at issue in that case did not use the word “accrue.” See DB’s Br. at 18-21.
DB argues that ACE actually supports its argument, citing language in the decision
stating that parties may agree to enter into a substantive condition that must be
satisfied before a cause of action arises. Id. at 19 (citing ACE, 25 N.Y.3d at 597).
DB maintains that, in finding the cure or repurchase clause in the MLPWA to be a
procedural provision rather than a substantive condition, the trial court ignored the
express language of the MLPWA. Id.
The identical argument was previously made by DB and rejected by the
United States Court of Appeals for the Second Circuit recently in Deutsche Bank
Nat’l Trust Co. v. Quicken Loans Inc., 810 F.3d 861 (2d Cir. 2015) (“Quicken
Loans”). The Second Circuit found that the use of the word “accrue” in the
repurchase clause, which was otherwise similar to the provision in ACE, did not
transform the clause into a substantive condition for suit. Id. The Second Circuit
stated that:
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We note the language of the Accrual Clause—that “[a]ny
cause of action . . . shall accrue” upon (1) discovery or
notice of breach, (2) failure to cure or repurchase, and (3)
demand for compliance—makes an initially appealing
case for inclusion as a substantive condition precedent.
However, even under the obvious obligation to enforce a
contract “according to the plain meaning of its terms,”
ACE requires us to examine the object of the demand,
rather than merely apply the phrase “shall accrue” as a
talisman. Instead, we must ask whether demand “is a
condition to a party’s performance” (substantive) or
whether it “seeks a remedy for a preexisting wrong”
(procedural). The answer is fatal to the Trustee’s claim.
Because the Repurchase Protocol is not an independent
obligation but merely an alternative contractual remedy
to damages, the relevant “performance” is the truth or
falsity of the R&Ws. It is clear that performance (or
nonperformance) of the contract is not contingent on the
Trustee’s demand; the R&Ws were true or false—either
performed or not—at the moment they were made,
without any need for the Trustee to make the demand.
Id. at 866-67 (citations omitted) (emphasis in original). Thus, the court found,
“notwithstanding the ‘shall accrue’ language, the Trustee’s demand seeks only the
remedy to which it is already entitled, not performance of the underlying
contractual obligation. Accordingly, the demand is merely procedural and does not
delay accrual of the cause of action.” Id. at 867.
Moreover, as the Second Circuit noted, “construing the demand
requirements as the Trustee suggests results in a circular absurdity.” Id. at 866 n.6.
Interpreting the repurchase provision as a substantive condition precedent would
mean that the trustee would not be able to bring an action for breach until it had
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demanded repurchase. That would place the trustee in “the odd position of having
to demand a contractual remedy to which it would not be entitled until Quicken
had refused its demand.” Id. “Put differently,” the Second Circuit stated,
“Quicken would have to choose whether to remedy a breach that had not
occurred—because it had not yet refused—or to refuse and, by its refusal, breach
the contract and become obligated to remedy that breach.” Id.
Rather than “misinterpret[ing]” ACE, as DB claims (see DB’s Br. at 20), the
Second Circuit’s decision, like the trial court’s below, properly applied the
principles set forth in that case, including the Court of Appeals’ observation that
parties may agree on conditions precedent to suit. See ACE, 25 N.Y.3d at 597. Far
from giving effect to the parties’ intent, DB’s interpretation of the repurchase
protocol of the MLPWA seeks to transform a clause—contained in the “Remedies”
section of the MLPWA—from a procedural condition precedent that DB was
required to satisfy prior to bringing suit into an indefinite extension of the statute
of limitations applicable to DB’s claims. The repurchase clause affords Quicken
Loans an opportunity to cure or repurchase allegedly defective loans prior to being
sued based on the purported defects; it cannot operate as a decades-long extension
of DB’s time to bring suit for alleged breach of the MLPWA.
Like the Second Circuit, the New York Supreme Court, New York County,
has also held that, based on ACE, so-called “accrual clauses” do not serve to delay
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the running of the statute of limitations on a breach of contract action in the RMBS
context. See The Bank of New York Mellon v. WMC Mortg., LLC, 17 N.Y.S.3d
613 (N.Y. Sup. Ct. 2015) (“BNYM”). In BNYM, the court held that “though ACE
did not involve an accrual provision,” that was not a basis for distinguishing it. Id.
at 617. As here, “the substance of the pre-suit demand process” was “similar to the
contracts in ACE,” despite the absence of the word “accrue” from the provision at
issue in ACE. Id. The court also observed that “every New York court to consider
the issue” of whether an “accrual clause” delays the running of the statute of
limitations “has held that the repurchase protocol is a procedural condition
precedent” and that the limitations period therefore commences on the date the
representations and warranties are made. Id. (collecting cases).
DB cites numerous cases for the unremarkable proposition that freedom of
contract is a cornerstone of contract law in New York and that contracts should be
enforced according to their terms.9 See DB’s Br. at 24-26. However, there is no
9 DB cites Oppenheimer & Co. v. Oppenheimer, Appel, Dixon & Co. and related cases for
the point that “[f]reedom of contract prevails in an arm’s length transaction between
sophisticated parties.” 86 N.Y.2d 685, 695 (1995); DB Br. at 24. However, even the Court of
Appeals in Oppenheimer & Co. recognized that: “Freedom of contract prevails” only “in the
absence of countervailing public policy concerns. . .” 86 N.Y.2d at 695 (emphasis added).
Indeed, DB itself concedes that freedom of contract is limited where “proscribed by law or
strong countervailing public policy.” DB Br. at 26; see Miller v. Cont’l Ins. Co., 40 N.Y.2d 675,
679 (1976). Here, it is well-established that, pursuant to New York General Obligations Law 17-
103, contracting parties are not free to enter into agreements that extend the applicable statute of
limitations at the time of the contract’s execution, as discussed further below. See John J.
Kassner & Co., Inc. v. City of New York, 46 N.Y.2d 544, 551 (1979); see also Greenpoint, 2015
-25-
support for DB’s claim that the parties intended the accrual provision to toll the
statute of limitations rather than simply impose conditions precedent on an action
for breach of the representations and warranties. The accrual provision neither
mentions nor refers to the statute of limitations.
In any event, regardless of the intent of the parties, the repurchase protocol
cannot extend or delay the running of the statute of limitations without violating
public policy in New York. New York law does not permit parties to delay the
running of the statute of limitations by agreement entered into at the inception of
the contract, as DB seeks here. CPLR 201 provides that:
An action . . . must be commenced within the time specified in
this article unless a different time is prescribed by law or a
shorter time is prescribed by written agreement. No court shall
extend the time limited by law for the commencement of an
action.
(emphasis added). In addition, under New York law, parties may not validly
contract to delay the running of the statute of limitations prior to the accrual of a
cause of action under the contract. New York General Obligations Law § 17-103,
entitled “Agreements waiving the statute of limitation,” provides that an agreement
(continued…)
WL 915444, at *5 (accrual clause purporting “to extend the [limitations] period . . . or to
postpone the time from which the period . . . is to be computed conflicts with public policy and
will not be enforced”) (internal quotes omitted).
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modifying the statute of limitations is only effective “if made after the accrual of
the cause of action.”10
In accordance with this policy, in John J. Kassner & Co. v. City of New York
(“Kassner”), 46 N.Y.2d 544 (1979), the New York Court of Appeals invalidated an
accrual provision in a contract adopted at the contract’s inception. The case
involved a contract between an engineering company and the City for the
relocation of utility facilities at the site of a proposed new police headquarters in
Manhattan. Id. at 547-49. The contract, entered into in 1967, contained a
“limitations provision” delaying accrual of any cause of action under the contract
until a certificate of final payment was filed in the City comptroller’s office. Id. at
548. After various disputes arose between the parties regarding the amounts
remaining due on the contract after work was completed, in 1974 a certificate of
final payment was filed in the comptroller’s office, and in 1975, the plaintiff
engineering company sued the City for the disputed amounts. Id. In its answer,
10 See Siegel, N.Y. Prac. § 39 (5th ed. 2013) (“An agreement to lengthen the statute of
limitations is invalid if made before the cause of action accrues . . . .”); 75 N.Y. Jur. 2d
Limitations and Laches § 39 (2013) (stating N.Y. GEN. OBLIG. LAW § 17-103 “is exclusive and
agreements made prior to the accrual of the cause of action have no effect”); A N.Y. Prac.,
Enforcing Judgments and Collecting Debts § 3:20 (2013) (“An agreement to lengthen the statute
of limitations is invalid if made before the cause of action accrues . . . .”); Carmody-Wait 2d,
New York Practice § 13-19 (2013) (“If the agreement to extend the statute of limitations is made
at the inception of liability it is unenforceable, because a party cannot, in advance, make a valid
promise that a statute founded in public policy will be inoperative.”); T&N PLC v. Fred S. James
& Co. of New York, 29 F.3d 57, 61 (2d Cir. 1994) (“New York law allows parties to a contract to
extend the applicable statute of limitations once a cause of action has accrued.”) (citing N.Y.
GEN. OBLIG. LAW § 17-103(1)).
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the City asserted the six-year statute of limitations for breach of contract. Id. The
plaintiff moved to dismiss the defense, and the City cross-moved for summary
judgment on the defense. Id. The trial court found that the accrual provision in the
contract was controlling, granted plaintiff’s motion, and denied the City’s motion.
Id. at 549. The Court of Appeals reversed, dismissing the case based on General
Obligations Law § 17-103(1). Id. at 550-52. The court held that under this law,
which “is exclusive,” contractual agreements to extend a statute of limitations
“made prior to the accrual of the cause of action . . . have ‘no effect.’” Id. at 103.
Because the accrual provision “was adopted at the inception of the contract,” the
court held that “it may not serve to extend the Statute of Limitations.” Id. at 104.
“If the agreement to waive or extend the Statute of Limitations is made at the
inception of liability it is unenforceable,” the Court of Appeals stated, “because a
party cannot in advance, make a valid promise that a statute founded in public
policy shall be inoperative.” Id. at 103 (citations and internal quotation marks
omitted).
Accordingly, in Greenpoint, which, as noted above, was relied on by the
trial court below, the court determined that the so-called accrual clause was
unenforceable under Kassner based on public policy. 2015 WL 91544, at *5. The
trial court stated in Greenpoint that “[a]s held by the Court of Appeals in Kassner v.
City of New York, if an ‘agreement to waive or extend the Statute of Limitations is
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made at the inception of liability it is unenforceable because a party cannot in
advance, make a valid promise that a statute founded in public policy shall be
inoperative.”’ Id. (quoting Kassner, 46 N.Y.2d at 551).
DB asserts that “the IAS Court’s interpretation of Kassner was erroneous”
but does not explain the basis for that assertion. DB’s Br. at 29. DB’s discussion
of the contractual provisions at issue in Kassner is not relevant to the trial court’s
interpretation of the case or to the case’s applicability here. The trial court cited
Kassner for its holding that in New York parties cannot agree to an extension of
the statute of limitations prior to the accrual of a cause of action. See Greenpoint,
2015 WL 915444, at *4. DB does not deny that such a public policy exists in New
York or that the Court of Appeals applied it in Kassner. See DB’s Br. at 32. DB’s
argument that its interpretation of the repurchase protocol would not extend the
statute of limitations that would otherwise apply here (see DB’s Br. at 33) is
illogical. DB acknowledges that unless the limitations period were delayed by the
so-called “accrual clause,” it would run from the time of the alleged breach of the
representations and warranties under ACE. Id. at 16. Accordingly, DB cannot
rationally deny that it is arguing for an extension of the statute of limitations
beyond that date. Yet such an extension would be against public policy.
In addition, under DB’s interpretation, the repurchase protocol would doubly
violate public policy in New York because it would extend the statute of
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limitations to an indefinite time in the future. Under DB’s interpretation of the
repurchase protocol, DB could unilaterally delay the running of the statute of
limitations indefinitely by delaying its issuance of any demand on Quicken Loans
until whatever time in the future it desires. Not surprisingly, such an extension,
which would completely defeat the purposes behind statutes of limitations, would
be against public policy. In Bayridge Air Rights Inc. v. Blitman Constr. Corp., 80
N.Y.2d 777, 779-780 (1992), the New York Court of Appeals struck down as
invalid and void a contract provision that purported to delay accrual of a breach of
contract claim until a final payment from an escrow account was made. The Court
held that New York law prohibited contract provisions that “extend the limitations
period to an indefinite date in the future in contravention of the six-year maximum
provided by the statute.” Id. at 778. Similarly, in T&N PLC v. Fred S. James &
Co. of New York, Inc., 29 F.3d 57, 61-62 (2d Cir. 1994), the Second Circuit applied
New York law to invalidate a tolling agreement because it purported to delay
commencement of the limitations period indefinitely. The court held that the
parties’ attempt to contractually redefine accrual was impermissible “tamper[ing]”
with the statute of limitations. T&N, 29 F.3d at 61. Thus, DB’s interpretation of
the repurchase protocol should be rejected on this ground as well.
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C. The Purported “Survival” of the Representations and Warranties Does
Not Extend the Time in Which DB Was Required to File Suit.
DB also claims that ACE is distinguishable because the repurchase clause at
issue in that case did not state that the representations and warranties “survive” the
mortgage loans’ sale, as the MLPWA does here. (DB Br. at 21-24). Based on
language in the MLPWA stating that the representations and warranties “survive
the sale of the Mortgage Loans to the Purchaser,” DB argues that the contract
imposed on Quicken Loans what DB calls an “obligation of future performance.”
Id. at 21. DB conclusorily asserts—without explaining the logic behind its
assertion—that somehow the fact that the representations and warranties were to
“survive” the sale of the loans made Quicken Loans liable for breaches of those
representations and warranties long after the sale of loans. Id. Moreover, DB
makes this claim even though there is no question that Quicken Loans no longer
had any control over the fate of the loans after the sale dates. DB’s argument
should be rejected for several reasons.
As a threshold matter, DB’s argument based on the “survival language” was
not raised before the trial court below and relies on documentation—specifically,
the ACE purchase agreement—that is not part of the record on appeal. Under these
circumstances, it is well-settled that DB’s “survival language” argument has been
waived. See, e.g., Arden Communications v. Abbate, 633 N.Y.S.2d 1 (1st Dep’t
1995) (refusing to consider argument “raised for the first time on appeal”); Blue
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Grass Partners v. Bruns, Nordeman, Rea & Co., 428 N.Y.S.2d 254, 256 (1st Dep’t
1980) (refusing to consider new argument raised for first time on appeal where
“the record before [the court] . . . is insufficient” to evaluate the legal argument).
DB’s argument hinges on its assertion that “[t]he MLPWA here is markedly
different from the agreement in ACE.” DB Br. at 22. The ACE agreement,
however, is not part of the appellate record and DB offers no citation for the
preceding assertion. Id.
If this new argument had been raised at the trial level, Quicken Loans would
have submitted the ACE agreement—which is publicly available—to conclusively
establish that contrary to DB’s unfounded assertions raised for the first time on
appeal, the ACE agreement does in fact contain a survival clause substantively
identical to the one in the purchase agreement at issue here. Compare ACE
MLPA at § 16 (“the representations, warranties and agreements made by the
Sponsor herein . . . shall survive the delivery of and payment for the Mortgage
Loans”) with R. 95 at §9.03 (the representations and warranties set forth
[herein] . . . shall survive the sale of the Mortgage Loans to the Purchaser”).
Because the record is insufficient to allow this Court to confirm that DB has
mischaracterized the ACE agreement’s contractual language, DB’s belated
“survival language” argument should be rejected. See Angel Fabrics Ltd. v. Cravat
Pierre, Ltd., 381 N.Y.S.2d 497, 498 (1st Dep’t 1976) (“this issue was not raised
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below and our review should be limited to issues raised in the record and passed
upon by Special Term”).
In any event, even if the ACE agreement were a part of the record and even
if it said what DB mistakenly claims it says, DB’s “survival language” argument
nevertheless fails on the merits. The MLPWA is clear that the representations and
warranties were made with regard to the loans “as of the date [of the MLPWA] and
as of each Closing Date.” (R. 78 (§ 9.01 (first paragraph).) It expressly states that
“[t]he characteristics of the related Mortgage Loan Package,” which were the
groups of mortgage loans sold under the MLPWA, “are as set forth in the
description of the pool characteristics for the applicable Mortgage Loan Package
delivered pursuant to” the MLPWA “on the related Closing Date.” (R. 81
(definition of “Mortgage Loan Characteristics).)
DB’s argument based on the “survival” language was previously advanced
and rejected by the Second Circuit in Quicken Loans, based on an application of
the principles of ACE. 810 F.3d at 866. The Second Circuit noted that “[i]n ACE,
the Court concluded that the representations and warranties guaranteed only
‘certain facts about the loans’ characteristics as of’ the execution date, not how the
mortgage would perform in the future.” Id. (citing ACE at 595-96). The Second
Circuit further noted that “as an ‘alternative remedy’ to damages, the repurchase
obligation there was itself ‘dependent on, and indeed derivative of’ the
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representations and thus also ‘could not be reasonably viewed as a distinct promise
of future performance.’” Id. The Second Circuit found “the R&Ws in this case
indistinguishable” from those in ACE because in both cases, despite some language
differences, “[t]he plain text of the agreement ‘represents, warrants and covenants’
that the facts stated in the R&Ws are true ‘as of’” the dates on which the loans
were sold by Quicken Loans to the purchaser. Id. at 865-66. With respect to DB’s
argument about “survival,” the Second Circuit stated as follows:
The Trustee argues that, unlike those in ACE, the R&Ws
here were expressly stated to ‘survive the sale of the
Mortgage Loans.’ Purchase Agreement 3.03, and
therefore promise future performance. This argument
misses the mark. The R&Ws here guarantee, at their
core, no more than the present characteristics and quality
of the loans as of a specific moment in time. Whether
they ‘survive’—i.e., remain valid and enforceable—does
not alter the question of performance. A representation
of present fact is either true or false—and the contract
therefore performed or breached—if the underlying fact
was true or false at the time the representation was made.
Id. at 866. What mattered for purposes of the statute of limitations, the Second
Circuit concluded, is that “[i]mmediately upon effectiveness of the R&Ws, the
Trustee was entitled to demand the contractual remedy—cure or repurchase—as to
any material breach, and the cause of action therefore accrued at that time.” Id.
(citing CPLR 206(a).).
Moreover, DB’s reliance on Bulova Watch Co., Inc. v. Celotex Corp., 46
N.Y.2d 606 (1979) (see DB Br. at 22-23), is unavailing. As DB acknowledges (id.
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at 22), the Court held in ACE that the repurchase obligation does not create a
“separate obligation” from the representations and warranties to which a separate
statute of limitations would attach. 25 N.Y.3d at 594-95. Bulova involved a
contract for the installation of a roof and twenty years of maintenance. 46 N.Y.2d
at 608-09. Not surprisingly, the Court of Appeals held in Bulova that the statute of
limitations on any claims regarding improper repairs did not start running until the
defendant allegedly failed to perform adequate repairs during the twenty years in
which the maintenance obligation was in effect. Id. at 612. The duty to make
proper repairs was clearly independent of the duty to install the roof, rather than
merely a remedy for failure to install the roof adequately in the first place, unlike
the repurchase provision here. See id. The Court of Appeals in ACE found no
future obligation in the repurchase protocol. It stated that “DBSP’s cure or
repurchase obligation was the Trust’s remedy for a breach of th[e] representations
and warranties, not a promise of the loans’ future performance.” 25 N.Y.3d at 595.
DB advanced the same argument with respect to the “survival” language in
the MLPWA and the Second Circuit rejected it in Quicken Loans. 810 F.3d at 866
n.5. Citing ACE, the Second Circuit stated that “[l]ike the Court of Appeals” it
found Bulova “illustrative” as a case in which parties entered into an agreement for
performance in the future that was separate from the performance required in the
present. Id. “By contrast,” the Second Circuit found, “Quicken agreed only to
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remedy defects that existed in the initial sale, not to ensure the quality of the loans
for their entire life. For example, the represented loan-to-value ratios express a
static condition—i.e., the value of the mortgaged property and its relationship to
the loan amount at the time of the loan.” Id.
DB claims that the Second Circuit “misapplied” ACE in rejecting DB’s
argument that the “survival” language in the MLPWA distinguished Quicken
Loans from ACE. DB makes much of the fact that the ACE court noted that there
was no indication in the repurchase protocol at issue there that the representations
and warranties survived the closing date for the sale of the loans. See DB’s Br. at
22-23. However, DB does not and cannot maintain that the language in the
MLPWA stating that the representations and warranties “survive” the closing dates
for the sales of the loans meant that Quicken Loans guaranteed that the loans
would have no defects during the life of the loans, even after Quicken Loans no
longer had any control over the loans. See, e.g., GRT, Inc. v. Marathon GTF Tech.,
Ltd., No. 5571-CS, 2011 WL 2682898, at *15 (Del. Ch. July 11, 2011) (“a survival
clause that states generally that the representations and warranties will survive
closing, or . . . indefinitely, is treated as if it expressly provided that the
representations and warranties would survive for the applicable statute of
limitations”) (applying Delaware law); Hurlbut v. Christiano, 405 N.Y.S.2d 871,
873 (4th Dep’t 1978) (agreement that representations would survive closing for
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three years had no effect on “the applicable six-year statute of limitation”) (citing
CPLR 213(2)) (applying New York law); In re Residential Capital, LLC, 524 B.R.
563, 592, n. 22 (2015) (rejecting “Plaintiff's argument that [survival clause]
effectively extends the statute of limitations . . . for the life of the loans” as
“unreasonable” on grounds that “under the Plaintiff's logic, 15-year mortgage
loans . . . would have a 15 year statute of limitations”) (applying Minnesota law).
Even if the law were not squarely against DB’s position, DB has in any event
failed to allege in its Complaint that Quicken Loans guaranteed that the loans
would continue to conform to all representations throughout the life of each loan,
instead asserting only that Quicken Loans breached the MLPWA based on
purported defects at the time of sale. (R. 25-55.)
D. The Representations, Warranties and Covenants Made By Quicken
Loans Did Not Extend to the Securitization Closing Date.
DB also argues that the trial court erred in holding that DB’s claims were
breached more than six years prior to commencement of this action. See DB Br. at
34-38. DB claims that Quicken Loans could not have breached Section 9.01(m) of
the MLPWA until the date of the securitization transaction at issue here, which
closed on October 2, 2007.
This new argument was not asserted by DB at the trial court level, and for
good reason. The fact that the MLPWA recognized that certain unspecified loans
may potentially be included in some future unspecified “Securitization
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Transaction” did not create future obligations that extended the statute of
limitations for the breaches alleged by DB in connection with the MLPWA. Under
a plain reading of the contract, in order for Quicken Loans to have breached
MLPWA Section 9.01(m) on October 2, 2007—i.e., the closing date of the
securitization transaction at issue—some sort of false information would have had
to be contained in a statement or document furnished by Quicken Loans on that
date. However, the only statements furnished by Quicken Loans in connection
with the securitization transaction on October 2, 2007 are found in Section 2 of the
Assignment and Recognition Agreement (“ARA”). (R. 610 § 2(a)-(d).) These
October 2, 2007 “Representations and Warranties of the Company [i.e., Quicken
Loans]” state only that Quicken Loans is duly organized and has the proper
authority to execute the ARA. (Id.)
There is no allegation that any statement or information “furnished” by
Quicken Loans on October 2, 2007 contained any untrue statement in breach of
MLPWA Section 9.01(m). (Id.) The only allegations in DB’s complaint
regarding untrue statements relate to the representations and warranties Quicken
Loans made about the Mortgage Loans in the MLPWA in 2006. And there is no
allegation these representations and warranties were renewed in the ARA dated
October 2, 2007. Accordingly, it is not surprising that DB fails to cite a single case
in support of its tortured reading of the relevant agreements. In fact, DB’s
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argument directly contradicts the Court of Appeal’s holding in ACE that the statute
of limitations runs at the time the representations and warranties are made with
respect to the loans at issue, not at some future date. See 25 N.Y.3d at 625.
POINT II
DB FAILED TO SATISFY THE CONDITIONS PRECEDENT
FOR BREACH OF CONTACT
The trial court’s dismissal of this action should also be affirmed on the
alternative ground that DB failed to satisfy the procedural condition precedent for
bringing the action. Under the express terms of the MLPWA, DB was required to
make a demand for repurchase and allow Quicken Loans sixty days to cure the
purported defects as a condition precedent to bringing an action for breach of the
agreement. (R. 94-98 (MLPWA § 9.03).) The MLPWA states that upon discovery
of a material breach of the representations and warranties, the purchaser “shall give
prompt written notice” to Quicken Loans, and afford Quicken Loans at least sixty
days in which to cure such breach. (Id.) Thus, in order for DB to have brought a
valid and timely claim against Quicken Loans, DB would have had to give notice
of purported breaches to Quicken Loans no later than sixty days prior to the
expiration of the limitations period.
Although the trial court did not reach this ground for dismissal in its decision
on the motion below, ACE supports dismissal of the action for failure to satisfy the
condition precedent for suit. In ACE, after finding that the repurchase clause was a
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procedural rather than a substantive condition precedent to suit, the Court of
Appeals held that the trustee’s action should be dismissed for failure to satisfy the
condition by providing the defendant with the requisite opportunity, prior to
commencement of the suit, to cure or repurchase allegedly defective loans. 25
N.Y.3d at 589. The Court of Appeals stated that “we hold that . . . [the plaintiff]
did not validly commence this action because they failed to comply with the
contractual condition precedent to suit; namely, affording DBSP 60 days to cure
and 90 days to repurchase from the date of notice of the alleged non-conforming
loans.”11 Id. Likewise, here, plaintiff did not validly commence this action and it
must be dismissed on this ground as well.
DB admits that it failed to satisfy the conditions precedent for suit. DB
commenced this action on August 30, 2013, before the expiration of the sixty-day
cure period in the August 6, 2013 letter and before the September 3, 2013 letter
was sent. Because DB did not satisfy the conditions precedent for its breach of
11 Other courts applying New York law have also dismissed claims for breach of contract
where plaintiff failed to satisfy the conditions precedent for a suit. In MASTR Asset Backed Sec.
Trust 2006-HE3 v. WMC Mortg. Corp., 843 F. Supp. 2d 996, 1000 (D. Minn. 2012), the trustee
for a pool of mortgage-backed securities brought suit against the loan originators without giving
them notice of the alleged breach and an opportunity to cure or repurchase. As in the instant
case, the purchase agreements required the purchaser to provide notice and an opportunity to
cure prior to bringing a suit for breach. Id. The court held that because the trustee failed to
satisfy the conditions precedent to suit, the action must be dismissed. Id.; see also Lehman XS
Trust, Series 2006-4N ex rel. U.S. Bank Nat’l Ass’n v. Greenpoint Mortg. Funding, 991 F. Supp.
2d 472, 474 (S.D.N.Y. 2014) (analyzing similar contractual language and noting that the Trustee
“could not sue before three conditions were met discovery, lapse of cure period and demand
for repurchase”).
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contract claim before the statute of limitations expired, its claims should be
dismissed on this ground as well.
CONCLUSION
For the foregoing reasons, the trial court decision and order should be
affirmed.
Dated: March 2, 2016 Respectfully Submitted
________________________
Howard F. Sidman
Heidi A. Wendel
Michael O. Thayer
JONES DAY
222 East 41st Street
New York, New York 10017
(212) 326-3939
hsidman@jonesday.com
hwendel@jonesday.com
mothayer@jonesday.com
Jeffrey B. Morganroth
MORGANROTH & MORGANROTH,
PLLC
344 N. Old Woodward Ave., #200
Birmingham, MI 48009
(248) 864-4000
jmorganroth@morganrothlaw.com
Attorneys for Defendant-Respondent
Quicken Loans Inc.
/s/ Howard F. Sidman
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