New York County Clerk’s Index No. 653048/13
New York Supreme Court
APPELLATE DIVISION FIRST DEPARTMENT
DEUTSCHE BANK NATIONAL TRUST COMPANY, solely in its capacity
as Trustee of the HARBORVIEW MORTGAGE LOAN TRUST 2007-7,
Plaintiff-Appellant,
against
FLAGSTAR CAPITAL MARKETS CORPORATION,
Defendant,
and
QUICKEN LOANS, INC.,
Defendant-Respondent.
>> >>
To Be Argued By:
Zachary D. Rosenbaum
BRIEF FOR PLAINTIFF-APPELLANT
LOWENSTEIN SANDLER LLP
Attorneys for Plaintiff-Appellant
1251 Avenue of the Americas
New York, New York 10020
212-262-6700
zrosenbaum@lowenstein.com
Of Counsel:
Zachary D. Rosenbaum
Printed on Recycled Paper
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TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ................................................................................... iii
PRELIMINARY STATEMENT ............................................................................... 1
QUESTIONS INVOLVED ........................................................................................ 6
STATEMENT OF THE CASE AND FACTS .......................................................... 7
A. Quicken’s Transfer of Mortgage Loans to the Trust. ................. 7
B. Quicken’s Representations, Warranties and Covenants. ............ 8
C. The Accrual Clause ..................................................................... 9
D. Quicken Independently Discovered Breaches of Its
Representations, Warranties, and Covenants, and also
Received Notice of Such Breaches from the Trust. .................. 10
E. The Proceedings Below. ........................................................... 12
ARGUMENT ........................................................................................................... 14
I. LEGAL STANDARDS GOVERNING MOTIONS TO
DISMISS ............................................................................................. 14
II. IN HOLDING THAT THE TRUSTEE’S CLAIMS WERE
UNTIMELY, THE IAS COURT ERRONEOUSLY
DISREGARDED THE ACCRUAL CLAUSE’S CLEAR
AND EXPLICIT LANGUAGE. ......................................................... 15
A. The Court of Appeals Based Its Decision in ACE II on
the Contracting Parties’ Intent as Expressed by the
Terms of the Particular Agreement Before It, Which
Did Not Contain an Accrual Clause. ........................................ 16
B. The Accrual Clause in the MLPWA Is a Substantive
Condition Precedent to Suit that Delayed Accrual of the
Cause of Action. ........................................................................ 18
C. Quicken Undertook Express Obligations of Future
Performance. ............................................................................. 21
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III. THE IAS COURT MISINTERPRETED NEW YORK LAW
AND PUBLIC POLICY TO JUSTIFY ITS DELETION OF
THE ACCRUAL CLAUSE FROM THE CONTRACT. ................... 24
A. New York’s Commitment to the Principle of Freedom
of Contract Requires Enforcement of the Accrual
Clause. ....................................................................................... 24
B. The IAS Court Misinterpreted New York Law to Justify
Its Deletion of the Accrual Clause from the Contract. ............. 29
IV. THE IAS COURT ERRED IN FINDING THAT ALL OF
QUICKEN’S REPRESENTATIONS, WARRANTIES, AND
COVENANTS WERE MADE PRIOR TO AUGUST 30,
2013 ..................................................................................................... 34
CONCLUSION ........................................................................................................ 39
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TABLE OF AUTHORITIES
PAGES
CASES
219 Broadway Corp. v. Alexanders, Inc.,
46 N.Y.2d 506 (1979) ......................................................................................... 14
ACE Sec. Corp. Home Equity Loan Trust, Series 2007-HE3 v. DB
Structured Prods., Inc.,
5 F. Supp. 3d 543 (S.D.N.Y. 2014) .................................................................... 38
ACE Securities Corp. v. DB Structured Products., Inc.,
25 N.Y.3d 581 (2015) ..................................................................................passim
ACE Securities Corp. v. DB Structured Products, Inc.,
112 A.D.3d 522 (1st Dep’t 2013) ..................................................................... 3, 5
Beal Sav. Bank v. Sommer,
8 N.Y.3d 318 (2007) ........................................................................................... 23
Benefit Concepts New York, Inc. v. Benefit Concepts Sys., Inc.,
93-1961-CV (DLC), 1995 WL 133773 (S.D.N.Y. Mar. 28, 1995) .................... 37
Bulova Watch Co. v. Celotex Corp.,
46 N.Y.2d 606 (1979) ............................................................................. 22, 24, 33
Cont’l Cas. Co. v. Stronghold Ins. Co., Ltd.,
77 F.3d 16 (2d Cir. 1996) ................................................................................... 19
Deutsche Bank Nat. Trust Co. v. Quicken Loans Inc.,
14-3373-CV, 2015 WL 7146515 (2d Cir. Nov. 16, 2015) ..................... 20, 23, 33
Empire Properties Corp. v. Manufacturers Trust Co.,
288 N.Y. 242 (1942) ........................................................................................... 25
Flanagan v. Mount Eden Gen. Hosp.,
24 N.Y.2d 427 (1969) ......................................................................................... 27
Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co.,
18 N.Y.3d 765 (2012) ......................................................................................... 19
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Hartford Acc. & Indem. Co. v. Wesolowski,
33 N.Y.2d 169 (1973) ......................................................................................... 25
Hoag v. Chancellor, Inc.,
246 A.D.2d 224 (1st Dep’t 1998) ....................................................................... 14
J. Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda) Ltd.,
37 N.Y.2d 220 (1975) ......................................................................................... 28
Johnson v. Proskauer Rose LLP,
129 A.D.3d 59 (1st Dep’t 2015) ......................................................................... 15
Kassner & Co. v City of New York,
46 N.Y.2d 544 (1979) ..................................................................................passim
Lehman XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc.,
991 F. Supp. 2d 472 (S.D.N.Y. 2014) ................................................................ 33
Leon v. Martinez,
84 N.Y.2d 83 (1994) ........................................................................................... 14
Martin v. Martin,
5 A.D.2d 307 (2d Dep’t 1958) ............................................................................ 26
Miglino v. Bally Total Fitness of Greater N.Y., Inc.,
20 N.Y.3d 342 (2013) ......................................................................................... 14
Miller v. Cont’l Ins. Co.,
40 N.Y.2d 675 (1976) ......................................................................................... 26
Morlee Sales Corp. v. Manufacturers Trust Co.,
9 N.Y.2d 16 (1961) ............................................................................................. 25
Morris v. Snappy Car Rental, Inc.,
84 N.Y.2d 21 (1994) ........................................................................................... 26
Natixis Real Estate Capital Trust 2007-HE2, by Wells Fargo Bank, Nat’l
Assoc. v. Natixis Real Estate Holdings, LLC,
Index No. 153945/2013, Dkt No. 130, slip op. (Sup. Ct. N.Y. Cnty. July
1, 2015) ............................................................................................................... 38
New England Mut. Life Ins. Co. v. Caruso,
73 N.Y.2d 74 (1989) ........................................................................................... 26
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Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc.,
133 A.D.3d 96 (1st Dep’t 2015) ................................................................... 37-38
Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.,
86 N.Y.2d 685 (1995) ......................................................................................... 24
Overseas Shipholding Grp., Inc. v. Proskauer Rose, LLP,
130 A.D.3d 415 (1st Dep’t 2015) ....................................................................... 15
Rovello v. Orofino Realty Co.,
40 N.Y.2d 633 (1976) ......................................................................................... 14
Signature Realty, Inc. v. Tallman,
2 N.Y.3d 810 (2004) ............................................................................... 23, 25, 29
U.S. Bank Nat. Ass’n v. DLJ Mortgage Capital, Inc.,
121 A.D.3d 535 (1st Dep’t 2014) ....................................................................... 36
U.S. Bank National Association v. Greenpoint Mortgage Funding, Inc.,
2015 WL 915444 (N.Y. Sup. Ct. Mar. 3, 2015) ................................................. 29
Vermont Teddy Bear Co. v. 538 Madison Realty Co.,
1 N.Y.3d 470 (2004) ........................................................................................... 17
STATUTES
CPLR 206 ........................................................................................................... 19, 20
CPLR 213 ................................................................................................................. 15
CPLR 3026 ............................................................................................................... 14
CPLR 3211 ......................................................................................................... 14, 15
SECONDARY SOURCES
Black’s Law Dictionary (10th ed. 2014) ................................................................. 18
George Bundy Smith & Thomas J. Hall, Interpreting Conflicting
Contractual Provisions; Commercial Division Update,
251 N.Y.L.J. 1 (2014) ......................................................................................... 25
Karen B. Gelernt, Secondary Market Residential Mortgage Transactions
(2009) .................................................................................................................. 27
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Theodore Eisenberg & Geoffrey P. Miller, The Flight to New York: An
Empirical Study of Choice of Law and Choice of Forum Clauses in
Publicly-Held Companies’ Contracts,
30 CARDOZO L. REV. 1475 (2009) ...................................................................... 28
Plaintiff-Appellant Deutsche Bank National Trust Company, solely in
its capacity as Trustee of the Harborview Mortgage Loan Trust 2007-7 (the
“Trustee” of the “Trust”) respectfully submits this brief in support of its appeal
from the Decision and Order of the Honorable Marcy S. Friedman, Supreme Court
of New York, New York County (the “IAS Court”), dated April 13, 2015, which
granted the Motion to Dismiss of Defendant-Respondent Quicken Loans, Inc.
(“Quicken”).
PRELIMINARY STATEMENT
Contracts must be interpreted according to their plain terms and the
parties’ evidenced intent. The parties to this RMBS
1
transaction carefully shaped
not only their rights and obligations, but also what constitutes a breach of their
contract and when a claim for such a breach “shall accrue”—when the Trustee
demands that Quicken repurchase mortgage loans that breach Quicken’s
representations and warranties, and not before (the “Accrual Clause”).
This case presents an issue never before addressed by the Appellate
Division or the Court of Appeals: Are highly sophisticated parties permitted to
agree, using clear and unmistakable language, that a demand for repurchase of a
mortgage loan is a substantive condition precedent to a cause of action for breach
that does not “accrue” until the condition is fulfilled? It is a question that brings to
1
As used herein, “RMBS” refers to residential mortgage-backed securities.
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the forefront one of New York’s most venerable principles—freedom of contract—
upon which sophisticated parties rely when choosing to do business in New York
and designating its law to govern their contracts.
The IAS Court declined to honor this touchstone of New York law,
refusing to enforce the Accrual Clause based on mistaken notions of public policy
that find no support in New York jurisprudence and threaten to undermine the
freedom to contract in this State. As a result, the IAS Court found that the
Trustee’s claims accrued on the date the securitization closed, rather than the date
the Trustee demanded repurchase, and dismissed the Trustee’s claims as untimely.
Enforcing the Accrual Clause does not contravene the public policy
served by statutes of limitations. While under New York law some agreements to
extend the limitations period are unenforceable, the Accrual Clause does not
extend the statute of limitations. Rather, it defines the elements of a claim for
breach of contract and determines when such a claim first accrues; put differently,
unless and until the Accrual Clause is satisfied, no legal wrong has occurred and
no claim for breach of contract exists. Having bargained for the Accrual Clause
and accepted its benefits Quicken should not be heard to demand the statute of
limitation’s protections of “repose” now. Given that the Accrual Clause was
agreed upon by sophisticated parties to address the complex commercial realities
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of this particular RMBS transaction, it is the public policy favoring freedom of
contract that is paramount.
In declining to enforce the parties’ agreement, the IAS Court largely
relied on this Court’s decision in ACE Securities Corp. v. DB Structured Products,
Inc., 112 A.D.3d 522 (1st Dep’t 2013) (“ACE I”), which held that, under the
particular RMBS contracts at issue in that case, the trustee’s repurchase claims
accrued when the seller made its representations and warranties, and not later when
the plaintiff trustee demanded repurchase. But in ACE I, the Court simply
interpreted the agreements before it—which did not expressly address accrual—
and did not purport to set a one-size-fits-all accrual rule for repurchase claims. In
any event, in affirming ACE I after the IAS Court issued the decision below, the
Court of Appeals emphasized that it is the parties’ intent—as evidenced by the
contract provisions they memoralized—that governs. See ACE Sec. Corp. v. DB
Structured Prods., Inc., 25 N.Y.3d 581 (2015) (“ACE II” and, together with ACE I,
“ACE”). The Court of Appeals held in ACE II that the repurchase remedy did not
“last[] for the life of the investment” because “nothing in the parties’ agreement
evidences such an intent,” and it would not imply “something which the parties
have neglected to specifically include.” Id. at 597 (internal quotes omitted).
In the case at bar, however, the governing agreement contains
precisely such a provision evidencing precisely that intent. The parties expressly
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agreed that any “cause of action” arising in connection with the false
representations and warranties by the seller “shall” not “accrue” until certain
conditions are met, the last of which is a demand that Quicken cure or repurchase
defective loans. Here, the Trustee made such a demand on Quicken in August
2013, and the Trustee filed suit just a few weeks later. Thus, the Trustee’s action
was timely under New York’s six-year statute of limitations for breach of contract.
The IAS Court disagreed. It found that Quicken’s representations and
warranties were made when it sold the breaching mortgage loans, that the Trustee’s
claims accrued on the date Quicken made them, and that the Trustee’s Summons
with Notice was filed more than six years after that date. In so holding, the IAS
Court brushed aside the Accrual Clause as superfluous (or, worse, meaningless),
which disregards this State’s long-recognized public policy of enforcing the plain
language of sophisticated parties’ contractual agreements.
The IAS Court’s decision should be reversed. First, in agreeing to the
Accrual Clause, the parties established a substantive condition precedent to the
accrual of the Trustee’s cause of action for breach of Quicken’s representations
and warranties. The parties agreed that “[a]ny” such “cause of action . . . shall
accrue upon” the completion of three conjunctive elements. The mere falsity of a
representation or warranty in and of itself was not an actionable wrong under the
parties’ agreement. Rather, the Trustee had no legal claim against Quicken until it
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made a repurchase demand and Quicken refused it. It is axiomatic that the
Trustee’s claims could not have accrued until they came into existence in the first
place. Because that did not happen until August 2013, the Trustee’s suit was
timely commenced.
Second, the contract here, unlike the contract in ACE, contains a
promise of future performance by Quicken. Specifically, the Accrual Clause,
when read in conjunction with the parties’ agreement that Quicken’s
representations and warranties survive its sale of the mortgage loans, evinces
Quicken’s intent that its repurchase obligation extends for the life of each
mortgage loan. The agreements in ACE contained no such provision, and nothing
in ACE I or ACE II bars the enforcement of the Accrual Clause.
Finally, even if the IAS Court is determined to have correctly
concluded that the Accrual Clause—negotiated and agreed to by sophisticated
commercial parties—was an empty contractual provision, the court nevertheless
erred in finding that all of Quicken’s representations, warranties and covenants
were breached no later than May 31, 2007. The Trustee alleged in its Complaint
the breach of a covenant by Quicken that could not have occurred until the
securitization closed on October 2, 2007. Thus, the IAS Court incorrectly ruled
that all of Quicken’s representations, warranties and covenants were made when
Quicken sold the mortgage loans.
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QUESTIONS INVOLVED
1. Whether Plaintiff-Appellant’s cause of action for breach of
contract against Defendant-Respondent is barred by the statute of limitations.
The trial court answered this question in the positive.
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STATEMENT OF THE CASE AND FACTS
A. Quicken’s Transfer of Mortgage Loans to the Trust.
This case arises from Quicken’s breaches of contract related to a pool
of mortgage loans that were originated by Quicken and ultimately transferred to a
securitized investment trust (the “Securitization”). Quicken originated the
mortgage loans and, pursuant to the Second Amended and Restated Mortgage
Loan Purchase and Warranties Agreement dated as of June 1, 2006 (the
“MLPWA”), sold them to Morgan Stanley Mortgage Capital, Inc. (“MSMC”)
(R28 ¶ 14.) The mortgage loans were subsequently sold to Greenwich Capital
Financial Products, Inc., and then to Greenwich Capital Acceptance, Inc. (the
“Depositor”). (R28-29 ¶ 15.) The Depositor was assigned the rights to enforce
Quicken’s obligations under the MLPWA pursuant to an Assignment and
Recognition Agreement dated October 2, 2007 (the “ARA”). (R29 ¶ 15.)
The Securitization was created through a Pooling and Service
Agreement (the “PSA”). Pursuant to the PSA, the Depositor sold the Quicken
mortgage loans to the HarborView Mortgage Loan Trust 2007-7 (the “Trust”), and
assigned to the Trust all of its rights in the mortgage loans and under the MLPWA.
(R29 ¶ 16.) Thus, all of Quicken’s obligations and MSMC’s rights under the
MLPWA were enforceable by the Trustee on behalf of the Trust as of October 2,
2007, the closing date of the Securitization. (R29 ¶¶ 16-17.)
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All of the applicable agreements described above—the MLPWA, the
ARA and the PSA—contained a choice of law provision stating that they are
governed by, and to be construed in accordance with, the laws of New York.
(R106 § 20; R610 ¶ 5; R494 § 12.04.)
B. Quicken’s Representations, Warranties and Covenants.
As the originator and seller of the mortgage loans that were conveyed
to the Trust, Quicken made numerous representations, warranties, and covenants,
in the MLPWA. In Section 9.01 of the MLPWA, Quicken made certain
representations, warranties and covenants about itself and the information it was
providing in selling the mortgage loans. (R78-82.) Of particular importance to
this appeal, Quicken covenanted that when the mortgage loans that it originated
and sold to MSMC were to be ultimately placed into the Trust—an event that
occurred on October 2, 2007—no information furnished by Quicken “will contain
any untrue statement of fact or . . . will omit to state a fact necessary to make the
other statements contained herein or therein not misleading.” (R81 § 9.01(m).)
In Section 9.02 of the MLPWA, Quicken made numerous
representations and warranties about the mortgage loans that it had originated and
was selling. (R82-95.) In order to facilitate the sale of the mortgage loans,
Quicken promised that the characteristics, quality, and risk profile of the mortgage
loans would not run afoul of certain investment-grade standards. For example,
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Quicken represented, warranted and covenanted that: no mortgage loan was or
ever had been 30 days or more delinquent; no mortgage loan had a loan-to-value
ratio greater than 100%; and there existed no default, breach, violation, or event
which would permit acceleration of the mortgage loan. (R31-34 ¶¶ 21-22.)
The parties agreed that the representations and warranties contained in
Sections 9.01 and 9.02 of the MLPWA survived the sale of the mortgage loans by
Quicken. (R95 § 9.03.) That is, Quicken understood and agreed that the
representations and warranties would have continued force and effect prospectively
after the Securitization closed. (See id.) Quicken further agreed that if it
discovered or was notified of material breaches of its representations, warranties
and covenants, it would cure the breach (if possible) or repurchase the breaching
loan from the Trust. (R95-96 § 9.03.)
C. The Accrual Clause
As is clear from the length and specificity of the MLPWA, the
contracting parties painstakingly detailed their rights, obligations and remedies
thereunder. Among those, Quicken agreed upon a very specific provision that set
forth substantive conditions for when a cause of action for breach of its
representations and warranties in Sections 9.01 and 9.02 could accrue. Subsection
9.03 of the MLPWA provides:
Any cause of action against [Quicken] relating to or
arising out of the breach of any representations and
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warranties made in Subsections 9.01 and 9.02 shall
accrue as to any Mortgage Loan upon (i) discovery of
such breach by the Purchaser or notice thereof by
[Quicken] to the Purchaser, (ii) failure by [Quicken] to
cure such breach, substitute a Qualified Mortgage Loan
or repurchase such Mortgage Loan as specified above
and (iii) demand upon [Quicken] by the Purchaser for
compliance with this Agreement.
(R98 § 9.03; R35-36 ¶ 27.)
The Accrual Clause clearly, deliberately and decisively addressed the
economic realities of the parties’ deal. The mortgage loans sold by Quicken, by
their nature, were long-term obligations with typical maturities of thirty years
which, in turn, were to serve as collateral for long-term, publicly issued debt
instruments (i.e., certificates issued by the Trust). (R30 ¶ 20.) It was therefore
contractually accounted for that representation and warranty defects could be
revealed many years after the certificates were issued. Consequently, under the
terms of this MLPWA, the mere falsity of a representation or warranty was not a
legal wrong. (Id.) Rather, the parties agreed that a cause of action for breach
would only accrue against Quicken after the conjunctive elements of the Accrual
Clause were complete.
D. Quicken Independently Discovered Breaches of Its
Representations, Warranties, and Covenants, and also Received
Notice of Such Breaches from the Trust.
In 2013, a certificateholder engaged an underwriting firm to examine
the mortgage loans. (R37 ¶ 35.) The underwriting firm re-underwrote a sample of
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124 mortgage loans that had been placed in the Trust and determined that not one
of them conformed to Quicken’s representations, warranties and covenants. (R37-
38 ¶¶ 35-36.) Additionally, a forensic examination was conducted of publicly
available data related to the mortgage loans. This examination revealed numerous
mortgage loans in breach of Quicken’s representations and warranties, including
understated loan-to-value ratios and inaccurate occupancy characteristics. (R38
¶ 37; see also R38 ¶ 38, R40-43 ¶¶ 45-57 (identifying other defects in mortgage
loans).)
In light of the breadth of these breaches, Quicken’s own underwriting
due diligence would have alerted Quicken to its false representations and
warranties. (R36 ¶ 28.) Quicken not only had direct access to each borrower and
possession of the relevant loan files, but it also contractually agreed that it would
maintain internal quality control with respect to its mortgage loan underwriting.
(R36 ¶¶ 29-30.) Notwithstanding its superior knowledge, position, resources, and
contractual responsibilities, Quicken never notified the Trustee of the defective
mortgage loans as required under the MLPWA. (R37 ¶ 33.) Quicken thus failed to
provide notice to the Trustee or the other parties to the Securitization, as required
by Section 9.03 of the MLPWA. (Id., R44 ¶¶ 58-59.)
By letter dated July 26, 2013, from the certificateholder that prompted
the reviews, the Trustee learned of Quicken’s breaches of representations and
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warranties. On July 30, 2013, the Trustee forwarded that letter to Wells Fargo, as
well as the Sponsor, the Depositor, and others. By letter dated August 6, 2013,
Wells Fargo notified Quicken of the breaches and demanded that Quicken comply
with the MLPWA. (R44 ¶ 61.)
By letter dated August 30, 2013, also from the certificateholder that
prompted the reviews, Wells Fargo learned of additional breaches of
representations and warranties for which Quicken is responsible. By letter dated
September 3, 2013, Wells Fargo notified Quicken of those additional breaches
identified to it and demanded that Quicken comply with its obligations under the
MLPWA (such letter, together with the August 6, 2013 letter, the “Breach
Notices”). (R45 ¶ 62.)
Notwithstanding this notice and demand, Quicken neither cured nor
repurchased any of the deficient mortgage loans. (R46-47 ¶ 71.)
E. The Proceedings Below.
The Trustee filed suit against Quicken by filing a Summons with
Notice on August 30, 2013.
2
(R295-96.) The Trustee filed its Complaint against
Quicken on February 3, 2014, asserting causes of action for breach of contract and
breach of the implied covenant of good faith and fair dealing. (R48-54.) Quicken
filed a motion to dismiss, arguing primarily that the action is time-barred. (R12.)
2
The Complaint also named Flagstar Capital Markets Corporation (“Flagstar”) as a defendant.
The Trustee later voluntarily discontinued its claims against Flagstar without prejudice.
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The Trustee opposed. (R15.) The IAS Court heard oral argument on November
25, 2014. (R1515.)
By Decision and Order dated April 13, 2015, the IAS Court granted
Quicken’s motion. (R11.) The IAS Court held that, notwithstanding the Accrual
Clause, a cause of action for breach of representations and warranties “accrues
when the representations and warranties are made, not when the repurchase
demand is made and refused.” (R15-16.) According to the IAS Court, Quicken
made its representations and warranties when it sold the mortgage loans, which
occurred no later than May 31, 2007. (R15.) Thus, the IAS Court dismissed the
Trustee’s Complaint as time-barred.
3
On May 13, 2015, the Trustee timely filed a Notice of Entry and
Notice of Appeal. (R9; R7.)
3
The IAS Court also found that the extender provision of the Housing and Economic Recovery
Act of 2008 was inapplicable because the Federal Housing Finance Agency was not a party to
the case (R16-17), that equitable estoppel does not apply (R17-18), and that the cause of action
for breach of the implied covenant of good faith and fair dealing was “duplicative of the breach
of contract cause of action” and therefore also subject to dismissal. (R18). The Trustee does not
challenge those rulings in this appeal.
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ARGUMENT
I. Legal Standards Governing Motions to Dismiss
On a motion to dismiss pursuant to CPLR 3211, the Court “must
accept facts alleged as true and interpret them in the light most favorable to
plaintiff.” Miglino v. Bally Total Fitness of Greater N.Y., Inc., 20 N.Y.3d 342, 351
(2013). If a plaintiff can recover “‘upon any reasonable view of the stated facts’,
the complaint is legally sufficient and the motion must be denied.” Hoag v.
Chancellor, Inc., 246 A.D.2d 224, 228 (1st Dep’t 1998) (quoting 219 Broadway
Corp. v. Alexanders, Inc., 46 N.Y.2d 506, 509 (1979)); see also Leon v. Martinez,
84 N.Y.2d 83, 87-88 (1994) (“We accept the facts as alleged in the complaint as
true, accord plaintiffs the benefit of every possible inference, and determine only
whether the facts as alleged fit within any cognizable legal theory.”); CPLR 3026
(“Pleadings shall be liberally construed.”). “[A]s long as a pleading is facially
sufficient, the plaintiff is not obligated to come forward with claim-sustaining
proof in response to a motion to dismiss unless the court treats the motion as one
for summary judgment and so advises the parties.” Miglino, 20 N.Y.3d at 351
(citing Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 635 (1976)).
Here, the IAS Court held that “[t]he dispositive issue on this motion is
the timeliness of the action under New York’s six year statute of limitations for
breach of contract.” (R12.) A motion to dismiss a cause of action predicated on a
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claim that the statute of limitations has run is governed by CPLR 3211(a)(5). “In
addressing a statute of limitations issue arising from a CPLR 3211 motion, the
allegations of the complaint must be given a liberal construction and accepted as
true.” Overseas Shipholding Grp., Inc. v. Proskauer Rose, LLP, 130 A.D.3d 415,
420 (1st Dep’t 2015). In undertaking the court’s analysis, “a plaintiff must be
accorded the benefit of every possible favorable inference, and ‘[w]hether a
plaintiff can ultimately establish its allegations is not part of the calculus in
determining a motion to dismiss.’” Id. at 420 (citing Johnson v. Proskauer Rose
LLP, 129 A.D.3d 59, 67 (1st Dep’t 2015)).
II. In Holding That the Trustee’s Claims Were Untimely, The IAS Court
Erroneously Disregarded the Accrual Clause’s Clear and Explicit
Language.
The IAS Court held that the Trustee’s cause of action for breach of the
MLPWA accrued at the time the representations and warranties were made, and
that this action therefore was untimely under New York’s six-year statute of
limitations for breach of contract. (R15-16 (citing CPLR 213(2)).) In so doing, the
IAS Court disregarded the plain language of the Accrual Clause, which sets forth
three specific conditions to be satisfied before such a cause of action accrues. As
discussed below, the last of those conditions was not satisfied until August 2013 at
the earliest. The IAS Court’s refusal to give effect to the parties’ agreement was
inconsistent with New York law, including the principle of freedom of contract
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that animates it, and resulted in the Trustee’s action being dismissed on the
mistaken proposition that it accrued years before it even ripened.
A. The Court of Appeals Based Its Decision in ACE II on the
Contracting Parties’ Intent as Expressed by the Terms of the
Particular Agreement Before It, Which Did Not Contain an
Accrual Clause.
In ACE II, the Court of Appeals held that the plaintiffs’ cause of
action for breach of representations and warranties, in that particular case, accrued
when those representations and warranties were made on the closing date of the
securitization at issue there. 25 N.Y.3d at 589. The Court, however, did not create
a blanket rule concerning when the statute of limitations begins to run in all RMBS
“putback” actions. On the contrary, the Court was clear that it was the plain terms
of the contract before it that formed the basis for its holding that the plaintiffs’
claims there were time-barred. Id. at 597.
The Court in ACE II recognized that “parties may contractually agree
to undertake a separate obligation, the breach of which does not arise until some
future date,” although the contract at issue in ACE II did not contain such an
obligation. Id. at 594. In fact, the Court of Appeals recited textbook principles of
contract construction and therefore refrained from interpreting the “agreement as
impliedly stating something which the parties have neglected to specifically
include.” Id. at 597 (citation omitted). The Court reasoned that:
-17-
[C]ourts may not by construction add or excise terms, nor
distort the meanings of those used and thereby make a
new contract for the parties under the guise of
interpreting the writing.
Id. (quoting Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470,
475 (2004)).
Hence, the Court of Appeals in ACE II emphasized the parties’
freedom of contract and the importance of interpreting the terms of the contract on
a case-by-case basis. In doing so, the Court recognized that contracting parties in
New York have the freedom to define when a cause of action accrues, id. at 593,
and the freedom to undertake obligations “the breach of which does not arise until
some future date,” id. at 594. The Court ultimately found that, under the terms of
that agreement, “[t]he Trust suffered a legal wrong at the moment [the defendant]
allegedly breached the representations and warranties,” at which point “a cause of
action existed.” Id. at 597-98 (emphasis added).
Here, in sharp contrast to the seller in ACE II, Quicken explicitly
agreed in the Accrual Clause that a “cause of action” would not “accrue”—hence,
no legal wrong occurred—unless and until the three conjunctive conditions were
complete. The Accrual Clause in the MLPWA provides that:
Any cause of action against the Seller relating to or
arising out of the breach of any representations or
warranties made in Subsections 9.01 and 9.02 shall
accrue as to any Mortgage Loan upon (i) discovery of
such breach by the Purchaser or notice thereof by the
-18-
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.
(R98 § 9.03 (emphasis added).) The Accrual Clause—and the parties’ intent in
drafting it—could not be plainer. To “accrue,” according to Black’s Law
Dictionary (10th ed. 2014), means to “come into existence as an enforceable claim
or right.” By agreeing that “[a]ny” such “cause of action . . . shall accrue upon”
the enumerated conditions, then, the parties agreed that there is no claim for breach
of contract at all unless and until those conditions are met.
That did not happen until August 2013 at the earliest. Thus, as further
explained below, the IAS Court erred in declining to honor the plain language of
the Accrual Clause.
B. The Accrual Clause in the MLPWA Is a Substantive Condition
Precedent to Suit that Delayed Accrual of the Cause of Action.
The Accrual Clause defined the earliest moment that a legal wrong by
Quicken with respect to any representation or warranty could occur. In other
words, the parties provided that no such claim “shall accrue” until (among other
things) the Trustee makes a repurchase demand. Because the final condition for
accrual was not satisfied until August 2013, when the Trustee demanded that
Quicken repurchase breaching Mortgage Loans, the Trustee’s action was timely
filed. (R44-45 ¶¶ 61-62.)
-19-
In ACE II, the Court of Appeals acknowledged that parties are free to
place in their contracts “a substantive condition precedent to suit that delay[s]
accrual of the cause of action.” 25 N.Y.3d at 597. Thus, the Court reaffirmed that
contracting parties may agree that a pre-suit demand is necessary for a cause of
action to exist. Id.; see also Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 18
N.Y.3d 765, 771-72 (2012) (rejecting claimant’s accrual argument because it could
not “point to any contract language unambiguously conditioning its right to
payment on its own demand”). That is exactly what the parties to this case did by
including the Accrual Clause in the MLPWA.
Under New York law, “parties are free, within limits of public policy,
to agree upon conditions precedent to suit,” including to condition accrual of a
claim for breach of contract upon the issuance and refusal of a demand. Cont’l
Cas. Co. v. Stronghold Ins. Co., Ltd., 77 F.3d 16, 19 (2d Cir. 1996). Notably,
although CPLR 206(a) provides a limitation on this general rule, such 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,” New York courts “distinguish between
substantive demands and procedural demands,” and they “do not instinctively
apply CPLR 206(a) in every case where a demand is a predicate to suit.” Id. at 21.
-20-
To the contrary, “where a demand is an essential element of the plaintiff’s cause of
action . . . CPLR 206(a) does not apply.” Id.
The Accrual Clause plainly memorializes the parties’ agreement that a
demand is an express element to the existence of a cause of action and is thus
substantive. Recently, however, in finding that the demand requirement in a
clause substantially similar to the Accrual Clause was procedural rather than
substantive, the Second Circuit disregarded the parties’ intent altogether. See
Deutsche Bank Nat. Trust Co. v. Quicken Loans Inc., No. 14-3373-CV, 2015 WL
7146515 (2d Cir. Nov. 16, 2015). The court instead misinterpreted ACE II to
“require[] [it] to examine the object of the demand,” id. at *4, and, consequently,
the court declined to “apply the phrase ‘shall accrue’ as a talisman.” Id. Yet, ACE
II instructs just the opposite. The court must enforce the plain and unambiguous
intent of the parties and may not search for an unexpressed “object” of the parties’
agreement. The Second Circuit’s interpretation defeats the intended result of the
Accrual Clause—a contractual provision conspicuously absent from the contract at
issue in ACE II—and renders it meaningless. For these reasons, the Trustee
respectfully submits that the Second Circuit misapplied ACE II.
Indeed, there is no need for interpretational acrobatics to determine
whether the demand requirement here is substantive or procedural: The Accrual
Clause makes plain it is the former. Absent a repurchase demand and refusal, “any
-21-
cause of action . . . relating to [Quicken’s] representations and warranties” cannot
“accrue” at all. (R98 § 9.03.) They are “essential elements” because the breach of
contract does not occur, and the plaintiff has no entitlement to recovery, until the
demand is made. The language of the Accrual Clause clearly evidences the
parties’ intent, and that is where contract interpretation starts and ends.
C. Quicken Undertook Express Obligations of Future Performance.
In addition to constituting a substantive condition precedent to suit,
the Accrual Clause memorializes a promise of future performance by Quicken. In
ACE II, the Court of Appeals examined the operative agreements to determine
whether the parties intended there to be an obligation of future performance by the
mortgage loan seller. 25 N.Y.3d at 596-97. Based on the contracts at issue there,
the Court found that “nothing in the parties’ agreement evinces such intent.” Id. at
597. The Court indeed emphasized that the agreements “expressly stated that th[e]
representations and warranties did not survive the closing date.” Id. at 595
(emphasis added).
Here, unlike in ACE II, the MLPWA contains the Accrual Clause,
which required future performance by using the unmistakable words “cause of
action” and “shall accrue.” (R98 § 9.03.) In addition, the MLPWA states that
Quicken’s representation and warranties “survive” the mortgage loans’ sale. (Id.
(emphasis added).) It is difficult to imagine a clearer expression of intent:
-22-
Quicken’s performance obligations under the MLPWA extended for the life of
each mortgage loan.
As ACE II reconfirms, under New York law parties are free to make
promises of future performance, the breach of which does not arise until
performance is due. See ACE II, 25 N.Y.3d at 594-95 (citing Bulova Watch Co. v.
Celotex Corp., 46 N.Y.2d 606, 608 (1979)). In ACE II, however, the Court of
Appeals drew a distinction between the guarantee bond in Bulova, which required
the seller of a roof to repair defects in its product for a period of twenty years, and
the repurchase protocol in the operative contracts in ACE. Id. at 595. In Bulova, it
did not matter that the component in need of repair was defective upon installation
of the roof by the seller and was discovered more than six years later. What
mattered was that the contracting parties clearly expressed their intent that the
repair obligation would extend for the life of the roof, i.e., twenty years. Bulova,
46 N.Y.2d at 610. In the ACE II agreements, by contrast to those in Bulova, the
Court of Appeals found no express indication that the seller’s obligations was
intended to extend for the life of each mortgage loan. ACE II, 25 N.Y.3d at
595-96.
The MLPWA here is markedly different from the agreement in ACE
II. It states in unmistakable terms that Quicken’s representations and warranties
“survive” closing and, then, leaving no possible doubt about the parties’ intent,
-23-
defines when and how a “cause of action” “shall accrue.” (R98 § 9.03.) The Court
of Appeals ascribed significance to the parties’ express disclaimer of survival in
ACE II, since the Court specifically mentioned that disclaimer in examining the
parties’ contractual intent, or lack thereof. 25 N.Y.3d at 595.
4
Logically, then, the
expression of survival in this MLPWA reflects the opposite intent; that is, an
obligation of future performance.
Furthermore, the MLPWA includes a general repurchase protocol
similar to the one in ACE II, which the Court of Appeals held was neither a
promise of future performance nor a substantive condition precedent to suit. But
the ACE II agreement did not contain an additional provision like the Accrual
Clause that defines when a cause of action “shall accrue.” Thus, as a basic tenet of
contract construction, a court may not read the Accrual Clause out of the MLPWA
or assume that it is superfluous. See Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324
(2007) (“A reading of the contract should not render any portion meaningless.”).
The Accrual Clause and the repurchase protocol are separate provisions and can
only be reconciled by giving independent meaning to the Accrual Clause. See
Signature Realty, Inc. v. Tallman, 2 N.Y.3d 810, 811 (2004) (“[W]hen parties set
4
The Second Circuit misapplied ACE II in Quicken, 2015 WL 7146515, at *4. There, the
Second Circuit stated that the representations and warranties provided “no more than the present
characteristics and quality of the loans as of a specific moment in time” and then erroneously
used that finding to justify reading all meaning out of the accrual clause. Id. Likewise, the court
gave no credence to the Court of Appeals’ emphasis that the contract in ACE II expressly
disclaimed survival of the operative representations and warranties. Id.
-24-
down their agreement in a clear, complete document, their writing should as a rule
be enforced according to its terms.” (internal quotes omitted)).
Applying those basic canons, the Court must ascribe purpose to the
Accrual Clause, which, facially, sets forth a promise of future performance, not a
remedy for a preexisting legal wrong. Indeed, as noted above, the Court of
Appeals observed in ACE II that “[c]ourts may not by construction add or excise
terms, nor distort the meaning of those used and thereby make a new contract for
the parties under the guise of interpreting the writing.” 25 N.Y.3d at 597.
Ultimately, here, the Trustee asks only for the benefit of its bargain and nothing
more: that is, enforcement of Quicken’s express obligation to repair the defects in
the loan pool it sold, in accordance with the Accrual Clause, like the guarantee
bond in Bulova. ACE II not only supports that result—ACE II mandates it.
III. The IAS Court Misinterpreted New York Law and Public Policy to
Justify Its Deletion of the Accrual Clause from the Contract.
A. New York’s Commitment to the Principle of Freedom of Contract
Requires Enforcement of the Accrual Clause.
Freedom of contract is one of the most significant principles espoused
by the New York legal system. It is a cornerstone of New York jurisprudence that
“[f]reedom of contract prevails in an arm’s length transaction between
sophisticated parties.” Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86
N.Y.2d 685, 695 (1995). Indeed, as aptly stated by George Bundy Smith, former
-25-
Associate Justice of the Court of Appeals, “[f]reedom to contract has long been
respected by New York courts, and it is a bedrock principle that the intent of the
parties is paramount in interpreting contracts.” George Bundy Smith & Thomas J.
Hall, Interpreting Conflicting Contractual Provisions; Commercial Division
Update, 251 N.Y.L.J. 1 (2014).
The Court of Appeals has long held that written contracts must be
enforced according to their plain terms. See, e.g., Signature Realty, 2 N.Y.3d at
811 (“[W]hen parties set down their agreement in a clear, complete document,
their writing should as a rule be enforced according to its terms.” (internal quotes
omitted)); Hartford Acc. & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 171-72
(1973) (“The objective in any question of the interpretation of a written contract, of
course, is to determine ‘what is the intention of the parties as derived from the
language employed.’” (citing 4 Williston on Contracts [3d ed.], § 600, p. 280));
Morlee Sales Corp. v. Manufacturers Trust Co., 9 N.Y.2d 16, 19 (1961) (“It is
axiomatic that a contract is to be interpreted so as to give effect to the intention of
the parties as expressed in the unequivocal language employed.”); Empire
Properties Corp. v. Manufacturers Trust Co., 288 N.Y. 242, 248 (1942) (“The
intention of the parties must be sought for in the language used.” (internal quotes
omitted)). This legal principle allows sophisticated parties who agree that New
York law will govern their contractual rights and obligations to enter into
-26-
commercial transactions with the expectation that the terms of their agreement will
be enforced as written.
The only commercial limits to what the parties can agree are those
proscribed by law or strong countervailing public policy. See Miller v. Cont’l Ins.
Co., 40 N.Y.2d 675, 679 (1976). However, “[f]reedom of contract itself is deeply
rooted in public policy . . . and therefore a decision to refrain from enforcing a
particular agreement depends upon a balancing of the policy considerations against
enforcement and those favoring the encouragement of transactions freely entered
into by the parties.” New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74, 81
(1989). Thus, when considering whether a countervailing public policy should
undermine sophisticated contracting parties’ expressed intent, the courts must
recognize that the policy of freedom to contract itself is of paramount importance.
See Morris v. Snappy Car Rental, Inc., 84 N.Y.2d 21, 29 (1994) (noting that the
“right of freedom of contract . . . is itself deeply rooted in public policy”); Martin
v. Martin, 5 A.D.2d 307, 309 (2d Dep’t 1958) (“In general, public policy holds
competent contracting parties to bargains made by them, freely and voluntarily,
and requires the courts to enforce such agreements. The interests of society and
public policy require the utmost freedom of contract, within the law.”).
Enforcing the Accrual Clause is fully consistent with the overarching
interests served by statutes of limitations—consonant with the rule’s reasons, as
-27-
well as the rule itself. The Court of Appeals has emphasized that the “primary
consideration underlying” statutes of limitations, and the “important policy of
giving repose to human affairs” that it embodies, “is undoubtedly one of fairness to
the defendant.” Flanagan v. Mount Eden Gen. Hosp., 24 N.Y.2d 427, 429 (1969)
(internal quotations omitted and emphasis added). While “[t]here comes a time
when” some defendants “ought to be secure in [their] reasonable expectation that
the slate has been wiped clean of ancient obligations,” id., Quicken expressly
agreed to make its repurchase obligation judicially enforceable for the 30-year life
of the Trust, which, not surprisingly, industry sources cite as an important deal
characteristic to RMBS investors. See Karen B. Gelernt, Secondary Market
Residential Mortgage Transactions §§ 4.04(1), 4:27-28, 3.02(3), 3:3-4 (2009)
(noting that “[i]n a typical secondary market sale, the purchaser will expect that
representations and warranties will survive indefinitely,” and “[m]issing or limited
representations and warranties will decrease the price the purchaser is willing to
pay.”). Having reaped the benefits of its bargain—i.e., selling mortgage loans into
the Trust—Quicken should be held to its promise. Thus, there is no countervailing
public policy against the enforcement of the Accrual Clause.
Failing to enforce the parties’ bargain, by contrast, would undermine
one of New York’s most fundamental public policies: freedom of contract. New
York’s deeply-rooted commitment to freedom of contract has been essential to the
-28-
development and sustainability of its economy, and has served as a significant
contributing factor in New York’s ascension to the financial capital of the world.
See J. Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda) Ltd., 37 N.Y.2d 220, 227
(1975) (“[New York] is a financial capital of the world, serving as an international
clearinghouse and market place for a plethora of international transactions, such as
to be so recognized by our decisional law. . . . In order to maintain its pre-eminent
financial position, it is important that the justified expectations of the parties to the
contract be protected.” (emphasis added)).
5
The parties to the contracts at issue in this litigation designated New
York as the governing law for all of their agreements, including the MLPWA.
(R106 § 20; R610 ¶ 5; R494 § 12.04.) They did so with the expectation that their
agreement would be enforced based on its plain language and the parties’ intent,
expecting that under New York law the carefully negotiated terms of their deal
would be honored. See Signature Realty, 2 N.Y.3d at 811.
In declining to enforce the plain language of the Accrual Clause (R15-
16), the IAS Court afforded no discernable weight to New York’s long-standing
5
Given New York’s commitment to the freedom of contract, it is not surprising that sophisticated
commercial parties overwhelmingly select New York law to govern their agreements more than
any other jurisdiction in the United States. According to a recent Cardozo Law Review study,
46% of commercial parties in the U.S. choose New York law to govern their contracts, with the
expectation—based on longstanding judicial precedent—that the New York courts will enforce
the plain terms of their written agreements. The next closest state is Delaware with 15%. See
Theodore Eisenberg & Geoffrey P. Miller, The Flight to New York: An Empirical Study of
Choice of Law and Choice of Forum Clauses in Publicly-Held Companies’ Contracts, 30
CARDOZO L. REV. 1475, 1490 (2009).
-29-
commitment to the freedom of contract, or the importance of that principle to New
York’s position as the financial center of the world, or the sophisticated contracting
parties’ expectations. Because the parties to the MLPWA expressly agreed that
“any cause of action against [Quicken] relating to or arising out of the breach of
any representations and warranties” did not “accrue” until the Trust demanded that
Quicken comply with its contractual obligations, the Trustee’s action—filed within
six years of such demand—was timely.
B. The IAS Court Misinterpreted New York Law to Justify Its
Deletion of the Accrual Clause from the Contract.
In declining to honor the Accrual Clause, the IAS Court relied on its
prior decision in U.S. Bank National Association v. Greenpoint Mortgage Funding,
Inc., 2015 WL 915444 (N.Y. Sup. Ct. Mar. 3, 2015). (R15-16.) In Greenpoint, the
court determined that an accrual clause was unenforceable, reasoning that under
the Court of Appeals’ decision in Kassner & Co. v City of New York, 46 N.Y.2d
544 (1979), the parties could not contract “‘to extend the [limitations] period as
provided by statute or to postpone the time from which the period of limitations is
to be computed.’” Greenpoint, 2015 WL 915444, at *5 (quoting Kassner, 46
N.Y.2d at 551). However, the IAS Court’s interpretation of Kassner was
erroneous.
Kassner did not involve an accrual clause. In Kassner, the Court of
Appeals held that the plaintiff’s cause of action did not accrue on December 13,
-30-
1967 when the plaintiff—which performed engineering services for defendant—
sent its bill for services rendered. 46 N.Y.2d at 550. Rather, the plaintiff’s cause
of action accrued, and the six-year limitations period began to run, seven months
later when the applicable conditions were satisfied. Id.
Because there were two contractual provisions at issue in Kassner, the
Court was tasked with deciding which condition or conditions needed to be
satisfied in order for the plaintiff’s cause of action to accrue. The first provision
stated that plaintiff’s billing was “subject to audit and revision by the [defendant].”
Id. at 547-48. Relying on this provision, the defendant argued that the statute of
limitations began to run after the plaintiff was notified of the results of defendant’s
audit, which occurred on or about July 1, 1968. The second provision stated that
“[n]o action shall be maintained against the [defendant] upon any claim based
upon this contract or arising out of this contract . . . unless such action shall be
commenced within six (6) months after the date of filing [with defendant] of the
certificate for the final payment hereunder.” Id. at 548. Relying on the latter
provision, the plaintiff argued that the statute of limitations did not begin to run
until the filing of a certificate of final payment on November 8, 1974.
The Court enforced the first provision, finding that the statute of
limitations began to run not when the plaintiff demanded or could have demanded
-31-
payment, but only after the audit was complete and the plaintiff was notified of the
results (i.e., when the conditions were satisfied):
[T]he plaintiff’s right to final payment and the city’s
obligation to pay were conditioned upon completion of
the audit. But once the audit was completed and the
plaintiff was informed of the results, the cause of action
accrued. The breach, if any, occurred at this point
because the comptroller—the only official responsible
and specifically designated in the contract to authorize
payment on behalf of the city—unequivocally refused to
pay the full amount demanded and allegedly due on the
contract. Therefore the cause of action for breach of
contract accrued, within the meaning of the Statute of
Limitations, no later than July 1, 1968.
Id. at 550 (citations omitted and emphasis added).
The Court found that the plaintiff’s commencement of suit on April
18, 1975 was untimely because it occurred more than six years after being notified
of the results of the audit on or about July 1, 1968. The Court expressly did not
find that the claim accrued when the plaintiff initially demanded payment on
December 13, 1967.
The Accrual Clause here functions similarly to the audit provision in
Kassner. There, the Court of Appeals found that the plaintiff’s claim only accrued
when it was notified of the outcome of the defendant’s audit. Likewise, the
Accrual Clause affords Quicken a sixty-day period—following notice to it or
discovery by it—to cure or substitute a defective mortgage loan. That notice and
-32-
cure period is the functional equivalent of the audit provision in the contract at
issue in Kassner.
Apart from the audit provision in Kassner, the Court of Appeals also
examined the second contractual provision, under which the plaintiff argued that
its claim did not accrue until six months after it submitted a certificate for final
payment. The Court rejected the plaintiff’s argument, finding that “[t]he
contractual limitations provision in this case [was] apparently . . . included to
shorten the Statute of Limitations . . . . It is doubtful that the parties actually
intended to postpone the accrual of the cause of action.” Id. at 552 (citations
omitted and emphasis added). The Court held that an attempt to extend or waive
the statute of limitation would be unenforceable in any event, citing a general
assumption that such a provision would necessarily be “the result of ignorance,
improvidence, an unequal bargaining position or was simply unintended.” Id. at
551.
The Accrual Clause at issue in the case at bar neither extends nor
waives the applicable statute of limitations period. Rather, as explained above, it
memorializes Quicken’s promise to perform in the future, as well as the
substantive conditions to a suit for breach of Quicken’s repurchase obligation.
Hence, unless and until the elements of the Accrual Clause were complete, there
-33-
was no cause of action for breach of contract at all. Thus, the IAS Court’s
reliance on Kassner was misplaced.
6
To be clear, the Trustee does not seek to extend the statute of
limitations—not by a single day. The applicable limitations period for any claim
to which the Accrual Clause applies is still six years. The Accrual Clause simply
defines when a claim accrues and the six-year limitations period begins to run.
That some claims may accrue later than others, and thus remain timely more than
six years after the Securitization closed, is not the same as extending the
limitations period. Rather, it is the natural result of the parties’ freedom to
undertake ongoing contractual obligations that extend beyond six years from the
day the contract is executed. See, e.g., Bulova, 46 N.Y.2d at 608–09. Indeed, in
bargaining for the Accrual Clause, Quicken intended to undertake precisely this
type of ongoing obligation.
The IAS Court’s concern that the Accrual Clause “extend[s] the
statute of limitations for a cause of action for breach of representations and
6
To the extent that some federal courts have held that the presence of an accrual provision does
not change the outcome, such opinions are not binding on this Court and are inconsistent with
established principles of New York law. See Quicken, 2015 WL 7146515, at *4 (finding that
similar accrual provision is not a condition to performance but instead merely a remedial
provision, but explicitly refusing to apply the parties’ agreed-upon contractual language
providing that a cause for breach “shall accrue” only upon satisfaction of conditions); Lehman
XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc., 991 F. Supp. 2d 472, 478-79
(S.D.N.Y. 2014) (unlike here, contract explicitly defined when “Breach” occurred and accrual
provision referred to claims arising out of “Breach”).
-34-
warranties” (R15-16) rests on its misapplication of the holdings in ACE I. Under
the agreements in ACE I, a cause of action for breach of contract arose the moment
a representation or warranty was false; the repurchase protocol then set certain
procedural conditions precedent that entitled the Trustee to the remedy of
repurchase. See ACE II, 25 N.Y.3d at 598. The Accrual Clause, which the parties’
agreed upon in addition to a repurchase protocol, imposes express substantive
conditions to the existence of a cause of action. In that context, it makes no sense
to speak of delaying the accrual of a cause of action that the contracting parties
agreed does not yet exist. The IAS Court cited no controlling New York authority
that suggests otherwise, and the Trustee is not aware of any.
Ultimately, the IAS Court’s refusal to enforce the MLPWA
immunizes Quicken from liability for its breach of the very bargain it struck.
There is no principle of New York law or policy that dictates such a result.
IV. The IAS Court Erred in Finding that All of Quicken’s Representations,
Warranties, and Covenants Were Made Prior to August 30, 2013
Even if the IAS Court was correct in declining to apply the Accrual
Clause as it was intended, the court erred in holding that all of the Trustee’s claims
for breaches of representations, warranties, and covenants against Quicken were
time-barred. The Trustee filed this action on August 30, 2013. At least one of the
covenants alleged in the Complaint was breached by Quicken no earlier than
October 2, 2007. Thus, even assuming that the six-year statute of limitations
-35-
began to run at the time the representations and warranties were made, the
Trustee’s action was still timely as to at least one breach of covenant.
The Trustee has asserted, among other breaches, that Quicken
transferred the mortgage loans to the Trust in violation of MLPWA Section
9.01(m), wherein Quicken represented, warranted and covenanted:
(m) To [Quicken]’s knowledge, neither this Agreement
nor any information, statement, tape, diskette, report,
form, or other document furnished or to be furnished
pursuant to this Agreement or in connection with the
transactions contemplated hereby (including any
Securitization Transaction) contains or will contain any
untrue statement of fact or omits or will omit to state a
fact necessary to make the statements contained herein or
therein misleading.
(See R28-29 ¶¶ 14-18, R31 ¶ 22, R49 ¶ 84; R81 § 9.01(m) (emphasis added).)
The term “Securitization Transaction” as used in MLPWA means the
Securitization at issue here, which closed on October 2, 2007.
7
Likewise, the
ARA, which was entered into by Quicken and the Trustee on October 2, 2007,
provides in Section 1: “From and after the date hereof [October 2, 2007],
[Quicken] shall and does hereby recognize that the Assignee will transfer the
Mortgage Loans and assign its rights under the Purchase Agreement (solely to the
7
The MLPWA defines a “Securitization Transaction” as “Any transaction involving either (1) a
sale or other transfer of some or all of the Mortgage Loans directly or indirectly to an issuing
entity in connection with an issuance of publicly offered or privately placed, rated or unrated
mortgage-backed securities or (2) an issuance of publicly offered or privately placed, rated or
unrated securities, the payments on which are determined primarily by reference to one or more
portfolios of residential mortgage loans consisting, in whole or in part, of some or all of the
Mortgage Loans.” (R70 § 1.)
-36-
extent set forth herein) of this Agreement to [the Trust] created pursuant to the
[PSA].” (R607-08 (emphasis added).)
The Trustee alleges in its Complaint that the Securitization closed on
October 2, 2007 (R29 ¶ 16), and it asserts further that, among other things: “[i]n
violation of its contractual representations and warranties [including MLPWA
Section 9.01(m)], Quicken sold for placement in the Trust numerous defective
mortgage loans that were not originated in accordance with applicable
underwriting standards, that involved error, fraud or other inaccuracies on the part
of any person involved in the origination process, that were in material breach
under the terms of the applicable mortgage or mortgage note or that were otherwise
not in accordance with Quicken’s representations and warranties[.]” (R49 ¶ 84;
see also R31 ¶ 22.)
Quicken covenanted under the MLPA that when the mortgage loans
were securitized and sold into the Trust—on October 2, 2007 as it came to be—no
information furnished by Quicken “will contain any untrue statement of fact or . . .
will omit to state a fact necessary to make the other statements contained herein or
therein not misleading.” (R81 § 9.01(m) (emphasis added).) Neither the Trust nor
the Trustee as assignee under the ARA existed until the Securitization closed on
October 2, 2007. See U.S. Bank Nat. Ass’n v. DLJ Mortgage Capital, Inc., 121
A.D.3d 535, 536 (1st Dep’t 2014) (“[I]t should be noted that the claim cannot
-37-
generally accrue before the contract, because the trust that is the recipient of the
representations and warranties typically does not come into existence prior to the
closing of the transaction.”). Moreover, by definition, a covenant is a promise to
perform prospectively. Benefit Concepts New York, Inc. v. Benefit Concepts Sys.,
Inc., 93-1961-CV (DLC), 1995 WL 133773, at *3 (S.D.N.Y. Mar. 28, 1995) (“A
covenant is simply a promise to perform.”).
Thus, Quicken’s breach of its covenant to the Trustee under Section
9.03(m) did not accrue, and could not have accrued, before the Securitization
contemplated in that provision closed. Because this action was instituted on
August 30, 2013—within six years of October 2, 2007—the Trustee’s claim for
breach of MLPWA Section 9.01(m) is timely. This conclusion is buttressed by
ACE II since the Court of Appeals looked to black-letter principles of contract
construction, which, here, again, support a plain reading of the MLPWA and thus
the timeliness of the Trustee’s action for breach of Section 9.01(m). See ACE II,
25 N.Y.3d at 597.
Furthermore, because Section 9.01(m) includes a covenant by
Quicken, and by its express language, the repurchase protocol in Section 9.03 is
applicable to only “representations or warranties” (R95-96 § 9.03), the notice and
cure provisions of Section 9.03 do not apply to this claim. See Nomura Home
Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96, 107-08 (1st
-38-
Dep’t 2015). That notwithstanding, however, even if the repurchase protocol were
deemed applicable to a breach of covenant under Section 9.01(m), it does not
matter that the notice period measured from the date of the Trustee’s breach letters
had not expired before the Trustee commenced suit. The Trustee alleges that
Quicken discovered its false representations and warranties (and in this instance
covenants) years before this suit was instituted, which under the plain language of
the repurchase protocol triggered Quicken’s repurchase obligation without a single
breach notice from another contract party. Indeed, construing agreements
substantially similar to the MLPWA here, numerous New York state and federal
trial courts—including the IAS Court—have “repeatedly” and uniformly held that
independent discovery of breaches triggers the repurchase obligation regardless of
whether the trustee sends any breach notices. See, e.g., Natixis Real Estate Capital
Trust 2007-HE2, by Wells Fargo Bank, Nat’l Assoc. v. Natixis Real Estate
Holdings, LLC, Index No. 153945/2013, Dkt No. 130, slip op. at 7 (Sup. Ct. N.Y.
Cnty. July 1, 2015); ACE Sec. Corp. Home Equity Loan Trust, Series 2007-HE3 v.
DB Structured Prods., Inc., 5 F. Supp. 3d 543, 559 (S.D.N.Y. 2014).
Accordingly, at a minimum, the trial court erred by dismissing the
Trustee’s claim for breach of Quicken’s covenant under Section 9.01(m) of the
MLPWA.
CONCLUSION
For the foregoing reasons, the lAS Court's Decision and Order
dismissing this action should be reversed.
Dated: February I , 20 16
Jon
Michael J. Hampson
LOWENSTEIN SANDLER LLP
1251 A venue of the Americas
New York, NY 10020
212.262.6700
Attorneys for Plaintiff-Appellant
-39-
PRINTING SPECIFICATION STATEMENT
I hereby certify pursuant to 22 NYCRR § 600.1 0( d)(l )(v) that this computer
generated brief was prepared using a proportionally spaced typeface.
Name of typeface: Times New Roman
Point size: 14
Line spacing: Double
The total number of words in the brief, inclusive of point headings and footnotes
and exclusive of pages containing the table of contents, table of authorities, proof
of service, printing specification statement, or any authorized addendum containing
statutes, rules, and regulations, etc. is 9, 172.
Dated: February l , 2016
SUPREME COURT OF THB STATE OF NEW YORK
COUNTY OF NEW YORK
DEUTSCHE BANK NATIONAL TRUST
COMPANY, solely in its capacity as Trustee
for HARBORVIEW MORTGAGE LOAN
TRUST, SERIES 2007-7 (HVMLT 2007-7),
Plaintiff-Appe11ant,
-against-
QUICKEN LOANS, INC.,
Defendant-Respondent.
Index No. 653048/2013
Motion Sequence No. 001
PLAINTIFF ~APPELLANT'S
PRE-ARGUMENT STATEMENT
Plaintiff-Appellant Deutsche Bank Nationa1 Trust Company, solely in its capacity
as Trustee for Harborview Mortgage Loan Trust, Series 2007-7 (HVMLT 2007-7) (the "Trustee"
of the ''Trust"), respectfu11y submits the following Pre-Argument Statement pursuant to Section
600.17(a) of the Rules of the Supreme Court of the State of New York, Appellate Division, First
Department.
above.
1. Title of Action: The complete title of the action is set forth above.
2. Parties: The fu11 names of the parties to this action are set forth in the caption
3. Counsel for P1aintiff-Appe11ant:
Zachary D. Rosenbaum
Jonathan C. Wishnia
Richard C. Wolter
Marina Shvarts
LOWENSTEIN SANDLER LLP
1251 Avenue of the Americas
New York New York 10020
Telephone: 212.262.6700
4. Counsel for Defendant-Respondent:
Heidi A. Wendel
Howard F. Sidman
Michael 0. Thayer
JONES DAY
222 East 41st Street
New York, New York 10017
Telephone: 212.326.3939
Jeffrey B. Morganroth
MORGANROTH & MORGANROTH, PLLC
344 N. Old Woodward Ave., #200
Birmingham, MI 48009
Telephone: 248.864.4000
5. Court And County From Which Appeal Is Taken: Supreme Court, New York
County I.A.S. Part 60 (Marcy S. Friedman, J.S.C.).
6. Nature of the Action: This action arises out of Defendant-Respondent Quicken
Loans, Inc.'s ("Quicken") breaches of contract relating to a pool of mortgage loans originated by
Quicken (the "Mortgage Loans") that were sold into the Trust for the issuance of residential
mortgage-backed securities ("RMBS"). In the agreements governing their sale, Quicken made
numerous representations and warranties concerning the origination and characteristics of each
Mortgage Loan. As to Mortgage Loans for which Quicken discovered a material representation
and warranty breach on its own, Quicken was required to provide notice of the breach to the
Trustee, among others, and cure the breach or repurchase the Mortgage Loan. likewise, where
Quicken was given notice of a representation and warranty breach, it was also required to cure or
repurchase the Mortgage Loan.
Quicken represented and warranted, among other things, that each Mortgage Loan
conformed to specified mortgage loan underwriting standards and that there was no fraud or
2
error on the part of any party (including the borrower) in the loan-origination process. Quicken,
nonetheless, sold numerous Mortgage Loans that breached its representations and warranties,
and failed to cure a single breach or to repurchase a single breaching Mortgage Loan, whether
based on Quicken's own knowledge and discovery of the breaches, or notice from the Trustee.
Quicken discovered its representation and warranty breaches years before this action was
filed but failed to provide notice of such breaches. The number and nature of breaches that have
now come to light, combined with the diligence Quicken performed in originating the Mortgage
Loans, demonstrate that Quicken knew the Mortgage Loans contained pervasive representation
and warranty defects.
Because the Mortgage Loans were transferred to the Trust to serve as coJlateral for-and
more specifically, to provide the cash flows on-RMBS marketed and sold to investors, the
characteristics of the Mortgage Loans, the underlying borrowers, and the loan-origination
process were vital terms of the parties' agreements. Information concerning these matters was
uniquely within the possession of Quicken and therefore, as the originator of the Mortgage
Loans, the risk that a borrower's fmancial information was misrepresented, or that the Mortgage
Loans were not underwritten in accordance with applicable guidelines, among other risks, was
allocated squarely to Quicken.
Quicken has breached and repudiated its obligations, including, without limitation, its
obligation to cure or repurchase based on its own discovery of breaches. The Trustee is entitled
to damages for breach of contract and indemnification for its losses. The Tmstee is also entitled
to specific performance of Quicken's obligation to cure or repurchase each Mortgage Loan sold
in breach of Quicken's representations and warranties. The Trustee is further entitled to recover
3
aU of the costs and expenses incurred in enforcing the Trustee's rights, including attorneys' fees
and costs.
7. Result Reached in the Court Below: The trial court held that the Trustee's cause
of action for breach of contract accrued on the closing and transfer dates set forth in various
purchase confinnation letters without regard to when Quicken discovered and failed to notify the
Trustee of the breaches or when Quicken failed to repurchase the defective loans. The trial court
also held that the "Accrual Provision" in the agreement did not alter the result. The Accrual
Provision expressly provides that a cause of action against Quicken arising out of a breach of
representation and warranty does not accrue until: (i) the Trustee's discovery or receipt of notice
of the breach; (ii) Quicken's failure to cure such breach or repurchase such Mortgage Loan, and
(iii) demand that Quicken repurchase the Mortgage Loan. Despite the parties' agreement, the
trial court held that the Accrual Provision was ineffective.
The trial court also dismissed the Trustee's alternative claim for breach of the
implied covenant of good faith and fair dealing as duplicative of its breach of contract claim
despite the fact that Quicken knowingly sold defective loans but sat silently for years while
foreclosure proceedings occurred and the clock ran on the Trustee's repurchase claims. In
addition, the trial court rejected the Trustee's argument that the extender provision of the federal
Housing and Economic Recovery Act of 2008 ("HERA") extended the statute of limitations,
despite the fact that this action was originally "brought by the [FHFA] as conservator or
receiver'' in accordance with the statute. See 12 U.S .C. § 4617(b )(12).
8. Grounds for Reversal: Without limitation of grounds or arguments, the Trustee
appeals on the grounds that the trial court erred by ruling that: (i) the statute of limitations began
to run on the Trustee's breach of contract claim at the time the Mortgage Loans were purchased;
4
(ii) the statute of limitations began to run on the Trustee's breach of contract claim when the
Mortgage Loans were purchased, despite the contract at issue expressly providing that such a
claim does not accrue until: (a) the Trustee's discovery or receipt of notice of the breach; (b)
Quicken's failure to cure such breach or repurchase such Mortgage Loan, and (c) demand that
Quicken repurchase the Mortgage Loan; (iii) the statute of limitations began to run on the
Trustee's breach of contract claim when the Mortgage Loans were purchased, despite New York
law providing that such a claim does not accrue until the Trustee's substantive demand for cure
or repurchase was made and rejected by Quicken; (iv) HERA's extender provision did not extend
the statute of limitations despite the fact that this action was commenced by FHFA, as
conservator for Federa1 Home Loan Mortgage Corporation (Freddie Mac) and despite the fact
that the extender statute explicitly applies to such actions; and (v) the Trustee's claim for breach
of the implied covenant of good faith and fair dealing was duplicative of its claim for breach of
contract despite the Trustee's a11egations that Quicken undertook specific conduct intended to
circumvent its contractua1 obligations and deprive the Trustee of the benefits of its bargain.
9. Pending Aopeals or Related Actions: There are no related actions currently
pending before this Court.
5
DATED:
To:
New York New York
May 13,2015
JONES DAY
Heidi A. Wendel
Howard F. Sidman
Michael 0. Thayer
222 East 41 8 t Street
New York, New York 10017
MORGANROTH & MORGANROTH, PLLC
Jeffrey B. Morganroth
344 N. Old Woodward Ave., #200
Birmingham, MI 48009
Attorneys for Defendant
6
LOWENSTEIN SANDLER LLP
By: /sf Zachary D. Rosenbaum
Zachary D. Rosenbaum
Jonathan C. Wishnia
Richard C. Wolter
Marina Shvarts
1251 Avenue of the Americas
New York, New York 10020
T: 212.262.6700
Attorneys for Plaintiff