Deutsche Bank National Trust Company, solely in its capacity as Trustee for the Harborview Mortgage Loan Trust Series 2007-7, Appellant,v.Flagstar Capital Markets Corporation, Defendant, Quicken Loans, Inc., Respondent.

Brief

N.Y.September 6, 2018

APL-2016-00237 New York County Clerk’s Index No. 653048/13 Court of Appeals of the State of New York DEUTSCHE BANK NATIONAL TRUST CO., solely in its capacity as Trustee of the Harborview Mortgage Loan Trust 2007-7, Plaintiff-Appellant, – against – FLAGSTAR CAPITAL MARKETS CORP., Defendant, – and – QUICKEN LOANS, INC., Defendant-Respondent. BRIEF FOR AMICI CURIAE LNR PARTNERS, LLC, CWCAPITAL ASSET MANAGEMENT LLC AND C-III ASSET MANAGEMENT LLC VENABLE LLP Attorney for Amici Curiae LNR Partners, LLC, CWCapital Asset Management LLC and C-III Asset Management LLC 1270 Avenue of the Americas, 24th Floor New York, New York 10020 Tel.: (212) 307-5500 Fax: (212) 307-5598 Date Completed: July 26, 2018 COURT OF APPEALS STATE OF NEW YORK DEUTSCHE BANK NATIONAL TRUST CO., solely in its Capacity as Trustee of the HarborView Mortgage Loan Trust 2007-7, Plaintiff-Appellant, -against- FLAGSTAR CAPITAL MARKETS CORP. and QUICKEN LOANS, INC., Defendants-Respondents. APL-2016-00237 New York County Clerk’s Index No. 653048/13 CORPORATE DISCLOSURE STATEMENT Pursuant to 22 N.Y.C.R.R. § 500.1(f), the undersigned counsel for amicus curiae C-III Asset Management LLC certifies that C-III Asset Management LLC is a wholly-owned subsidiary of C-III Capital Partners LLC, which is managed by a wholly-owned subsidiary of Island Capital Group LLC. No publicly held corporation owns 10% or more of Island Capital Group LLC or C-III Capital Partners LLC. C-III Asset Management LLC is also affiliated with C-III Realty Services LLC, C-III Commercial Mortgage LLC, New America Network Inc., C-III Investment Management LLC, and US Residential Group LLC. C-III Asset Management LLC has no subsidiaries. Dated: New York, New York July 26, 2018 VENABLE LLP, By: Gregory A. 1270ÿAvenueybf the Americas, 24th Floor New York, New York Telephone: (212)307-5500 Facsimile: (212)307-5598 Attorneys for Amici Curiae LNR Partners, LLC, CWCapital Asset Management LLC, and C-III Asset Management LLC -2-20965741 COURT OF APPEALS STATE OF NEW YORK DEUTSCHE BANK NATIONAL TRUST CO., solely in its Capacity as Trustee of the HarborView Mortgage Loan Trust 2007-7, Plaintiff-Appellant, -against- FLAGSTAR CAPITAL MARKETS CORP. and QUICKEN LOANS, INC., Defendants-Respondents. APL-2016-00237 New York County Clerk’s Index No. 653048/13 CORPORATE DISCLOSURE STATEMENT Pursuant to 22 N.Y.C.R.R. § 500.1(f), the undersigned counsel for amicus curiae CWCapital Asset Management LLC (“CWCAM”) certifies that CWCapital Asset Management LLC’s parent corporation is CW Financial Services LLC which is owned by CWFS Holdings LLC which in turn is owned by CW Financial Services Holdings LLC. CW Financial Services Holdings LLC is owned by Galaxy Acquisitions LLC. CWCAM’s affiliates are CWCapital Investments LLC, CompassRock Real Estate LLC, Convergent Risk Insurance Agency LLC, CWFS Insight LLC., CWFS-Reds LLC, CWCapital Commercial Funding Corp., ACGS 2004 LLC, and CWMarkets LLC. CWCAM has no subsidiaries. Dated: New York, New York July 26, 2018 VENABLE LLP By: Gregory A/Cross 1270(Aydnue of thb Americas, 24th Floor New York, New York Telephone: (212) 307-5500 Facsimile: (212)307-5598 Attorneys for Amicus Curiae LNR Partners, LLC, CWCapital Asset Management LLC, and C-III Asset Management LLC -2-20965622 COURT OF APPEALS STATE OF NEW YORK DEUTSCHE BANK NATIONAL TRUST CO., solely in its capacity as Trustee of the HARBERVIEWMORTGAGE LOAN TRUST 2007-7, Plaintiff-Appellant, -against- FLAGSTAR CAPITAL MARKETS CORP., Defendant, -and- QUICKEN LOANS, INC., Defendant-Respondent. APL-2016-00237 New York County Clerk’s Index No. 653048/13 CORPORATE DISCLOSURE STATEMENT Pursuant to 22 N.Y.C.R.R. § 500.1(f), the undersigned counsel for amicus curiae LNR Partners, LLC (“LNR”), certifies that LNR Partners, LLC’s ultimate parent corporation is Starwood Property Trust, Inc. (“SPT”). LNR Partners, LLC is also affiliated with SPT Management, LLC (“SPT Management”), which is the external manager of SPT. SPT Management is an affiliate of Starwood Capital Group. LNR has no publicly-traded subsidiaries. Dated: New York, New York July 26, 2018 VENABLE LLP By: Greg(fry A. Cross 1270 Avenuer of the Americas, 24th Floor New York,/New York Telephone: (212) 307-5500 Facsimile: (212)307-5598 Attorneys for Amici Curiae LNR Partners, LLC, CWCapital Asset Management LLC, and C-III Asset Management LLC -2-20964081 TABLE OF CONTENTS Page(s) STATEMENT OF INTEREST OF AMICI CURIAE ............................................1 INTRODUCTION .................................................................................................3 ARGUMENT.........................................................................................................5 I. The Accrual Clause In The MLPWA Is Precisely The Carve- Out Language Contemplated In ACE ..............................................5 II. The First Department’s Limitations Analysis Is Contrary To The Basic Structure Of Mortgage-Backed Securities....................10 III. The Impact Of Courts Misapplying ACE On CMBS Transactions In Particular .............................................................15 CONCLUSION....................................................................................................19 20964231 -ii- TABLE OF AUTHORITIES Page(s) Cases ACE Securities Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581 (2015) ..................................................................................passim Aetna Life & Cas. v. Nelson, 67 N.Y.2d 169 (1986) .........................................................................................10 Albunio v. City of NY, 23 N.Y.3d 65 (2014) .............................................................................................6 Bank of New York Mellon v. WMC Mortg., LLC, 151 A.D.3d 72 (N.Y. App. Div. 2017) .................................................................4 Bank of N.Y. Mellon v. WMC Mortg., LLC, 53 Misc. 3d 967 (Sup. Ct., N.Y. Cty. 2016) .........................................................4 Bank of N.Y. Mellon v. WMC Mortg., LLC, 50 Misc. 3d 229 (Sup. Ct., N.Y. Cty. 2015) .........................................................4 Beal Sav. Bank v. Sommer, 8 N.Y.3d 318 328 (2007) ......................................................................................8 Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606 (1979) ...........................................................................................7 Cont’l Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996) ...................................................................................11 Deutsche Bank Nat’l Trust Co. v. Quicken Loans Inc., 810 F.3d 861 (2d Cir. 2015) .................................................................................4 Fed. Hous. Fin. Agency v. Equifirst Corp., 2016 WL 3906070 (Sup. Ct., N.Y. Cty. July 19, 2016) .......................................4 Fed. Hous. Fin. Agency v. Morgan Stanley ABS Capital I Inc., 2016 WL 1587345, (Sup. Ct., N.Y. Cty. Apr. 12, 2016) .....................................4 20964231 -iii- Fed. Hous. Fin. Agency v. WMC Mortg., LLC, 2015 WL 9450833 (S.D.N.Y. July 10, 2015).......................................................4 Fiore v. Fiore, 46 N.Y.2d 971 (1979) .........................................................................................14 Frigi-Giffin, Inc. v. Leeds, 52 A.D.2d 805 (N.Y. App. Div. 1976) ...............................................................11 Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765 (2012) .........................................................................................13 J.P. Morgan Secs. v. Vigilant Ins., 21 N.Y.3d 324 (2013) ...........................................................................................6 John J. Kassner & Co. v. City of New York, 46 N.Y.2d 544 (1979) .........................................................................................10 Kuntsammlungen Zu Weimar v. Elicofon, 678 F.2d 1150 (2d Cir. 1982) .......................................................................11, 12 LaSalle Bank N.A. v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618 (D. Md. 2002)....................................................................13 LaSalle Bank N.A. ex rel. Lennar Partners, Inc. v. Capco Am. Secur’n Corp., 2005 WL 3046292 (S.D.N.Y. Nov. 14, 2005)....................................................13 LaSalle Bank N.A. v. Nomura Asset Capital Corp., 47 A.D.3d 103 (1st Dep’t 2007) .........................................................................13 Lehman Bros. Holding v. Laureate Realty Servs., 2007 WL 2904591 (S.D. Ind. Sept. 28, 2007)....................................................13 Lehman XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc., 643 F. App’x 14 (2d Cir. 2016) ............................................................................4 Menzel v. List, 22 A.D.2d 647 (N.Y. App. Div. 1964) ...............................................................11 20964231 -iv- Morgan Guar. Trust Co. of N.Y. v. Bay View Franchise Mortg. Accept. Co., 2002 WL 818082 (S.D.N.Y. Apr. 30, 2002) ......................................................13 Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398 (2009) .........................................................................................14 Snyder v. Town Insulation, Inc., 81 N.Y.2d 429 (1993) .........................................................................................13 Solomon R. Guggenheim Found. v. Lubell, 77 N.Y.2d 311 (1991) .........................................................................................14 Trust for Certificate Holders of Merrill Lynch Mortg. Passthrough Certificates Series 1999-C1 v. Love Funding Corp., 2005 WL 2582177 (S.D.N.Y. Oct. 11, 2005).....................................................13 Two Guys from Harrison-N.Y., Inc. v. S.F.R. Realty Assocs., 63 N.Y.2d 396 (1984) ...........................................................................................8 U.S. Bank Nat’l Assoc. v. Bank of Am., N.A., 2016 WL 5118298 (S.D.N.Y. Sept. 19, 2016) .....................................................4 U.S. Bank N.A. v. Dexia Real Estate Capital Markets, 2014 WL 3368670 (S.D.N.Y. July 9, 2014).................................................16, 17 U.S. Bank, N.A. v. UBS Real Estate Sec., 205 F. Supp. 3d 386, 465 (S.D.N.Y. 2016) ........................................................15 U.S. Bank Nat’l Ass’n v. Dexia Real Estate Capital Mkts., 643 F. App’x 48 (2d Cir. 2016) ................................................................4, 16, 17 Wells Fargo Bank, NA v. JPMorgan Chase Bank, N.A., 2014 WL 1259630 (S.D.N.Y. Mar. 27, 2014)....................................................17 Wells Fargo Bank, NA v. JPMorgan Chase Bank, N.A., 643 F. App’x 44 (2d Cir. 2016) ....................................................................17, 18 LNR Partners, LLC (“LNR”), CWCapital Asset Management LLC (“CWCAM”), and C-III Asset Management LLC (“C-III”) respectfully submit this brief as amici curiae in support of Plaintiff-Appellant Deutsche Bank National Trust Company, in its capacity as Trustee of the Harborview Mortgage Loan Trust 2007- 7 (“Trustee”), in its appeal from an order of the Appellate Division, First Department, dismissing the Trustee’s breach of contract claims involving certain residential mortgage-backed securities (“RMBS”) transactions.1 STATEMENT OF INTEREST OF AMICI CURIAE LNR, CWCAM, and C-III are the three largest commercial mortgage-backed securities special servicers in the country and collectively are responsible for servicing approximately 80% of all U.S. commercial mortgage-backed securities (“CMBS”) trusts. They accordingly pursue the vast majority of CMBS repurchase claims that have arisen in the CMBS industry, the commercial-mortgage equivalents of the RMBS repurchase claims at issue in this case. LNR is the largest commercial mortgage special servicer in the United States. As of June 2018, it is the named special servicer on 20.45% (by balance) of all CMBS assets and 35.2% (by balance) of all CMBS special servicer/real estate- owned assets. As of June 2018, LNR was the special servicer on 165 CMBS trusts 1 No party to this appeal or their counsel contributed content to this brief or participated in its preparation in any other matter. No person or entity, other than the above amici curiae and their counsel, contributed money that was intended to fund preparation or submission of this brief. -2- representing 5,283 loans with an outstanding principal balance of $74.8 billion. LNR is also a market leader in real estate finance, asset management and property development, with a foundation in real estate. It has been focused on development and management of real estate since 1969 and began investing in non-performing loan pools in 1991 and in non-investment grade CMBS assets in 1993. Since its inception, LNR has successfully resolved over $73.2 billion in distressed loans. CWCAM is a commercial real estate-related investment services firm that includes special servicing, asset management, investment management, consulting, insurance, risk management and technology solutions. It is the named special servicer for $78.9 Billion in CMBS and other loans currently under its management. At the end of 2017, CWCAM was the named special servicer on 139 CMBS trusts representing 5,183 loans with an outstanding balance of loans in special servicing of $3.2 Billion. C-III provides primary and special loan servicing for third-party portfolio owners, CMBS trusts, collateralized debt obligations (“CDOs”), government agencies, and various corporate affiliates. As of June 30, 2018, it was the named special servicer for approximately 126 CMBS, CDO and affiliated and third party contracts representing approximately 1,643 first mortgage loans with an aggregated stated principal balance of approximately $20.8 billion. C-III is the primary servicer for a portfolio of approximately $5.8 billion in performing loans. Since its -3- (including predecessors’) inception in 2002 and through June 30, 2018, C-III has resolved 4,538 total assets, including multifamily, office, retail, hospitality, industrial and other types of income-producing properties, with an aggregate principal balance of more than $56 billion. Its parent entity, C-III Capital Partners LLC, is a national leader in real estate services and investment management. As the three leading CMBS special servicers, amici have a significant interest in explaining to the Court the legal and policy implications of the First Department’s decision, which relies principally on ACE Securities Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581 (2015) (“ACE”). Although the instant appeal involves an RMBS transaction, if left unaltered, it like ACE will have a significant impact on CMBS transactions. Amici thus have a compelling interest in the outcome of this appeal. Given their unique vantage point to explain how the reasoning of these cases will detrimentally affect the CMBS industry and why, in light of the important issues affecting CMBS transactions, such application has worked and will continue to work a serious injustice for CMBS securitizations, their participation as amici is appropriate. INTRODUCTION Resolution of the issues presented in this appeal will have far reaching ramifications for RMBS and CMBS securitizations. Each RMBS and CMBS repurchase agreement stands on its own andmust be assessed on a case-by-case basis -4- without applying a one-size fits all formulaic approach. The decision below demonstrates how the application of ACE is negating such a case-by-case application in favor of a meat cleaver evaluation of any repurchase agreement concerning a breach of representation and warranty claim. In the process, these decisions are upending enforcement of RMBS and CMBS agreements alike nationwide, regardless of the differentiating language in the governing repurchase agreements.2 Indeed, since ACE was decided, amici are not aware of any New York decision involving RMBS or CMBS repurchase agreements in which a court has not looked 2 See, e.g., Bank of New York Mellon v. WMC Mortg., LLC, 151 A.D.3d 72, 76–77 (N.Y. App. Div. 2017) (affirming dismissal and holding that the trustee’s suit was untimely despite the existence of an accrual provision in contract under ACE); Deutsche Bank Nat’l Trust Co. v. Quicken Loans Inc., 810 F.3d 861, 865-68 (2d Cir. 2015) (affirming dismissal and holding that the trustee’s suit was “facially untimely” under ACE); U.S. Bank Nat’l Assoc. v. Bank of Am., N.A., 2016 WL 5118298, at *12-14 (S.D.N.Y. Sept. 19, 2016) (granting motion for judgment on the pleadings, relying on Ace, to dismiss trustee’s action as untimely), appeal filed, Case No. 16-3560 (2d Cir. 2016); Fed. Hous. Fin. Agency v. WMC Mortg., LLC, 2015 WL 9450833, at *3-5 (S.D.N.Y. July 10, 2015) (deciding, in part based on ACE, that the trustee’s breach claims relating to an RMBS pooling and services agreement were time-barred); Bank of N.Y. Mellon v. WMC Mortg., LLC, 53 Misc. 3d 967, 970-74 (Sup. Ct., N.Y. Cty. 2016) (dismissing securities administrator’s claims as time barred pursuant to ACE); Fed. Hous. Fin. Agency v. Equifirst Corp., 2016WL 3906070, at *2-3 (Sup. Ct., N.Y. Cty. July 19, 2016) (dismissing certain of conservator’s claims brought on behalf of trustee as untimely, relying in part on ACE); Fed. Hous. Fin. Agency v. Morgan Stanley ABS Capital I Inc., 2016 WL 1587345, at *4-5 (Sup. Ct., N.Y. Cty. Apr. 12, 2016) (relying in part on ACE to dismiss trustee’s first cause of action for breach); Bank of N.Y. Mellon v. WMCMortg., LLC, 50 Misc. 3d 229, 232-36 (Sup. Ct., N.Y. Cty. 2015) (relying on ACE to dismiss trust administrator’s RMBS breach claims); see also U.S. Bank Nat’l Ass’n v. Dexia Real Estate Capital Mkts., 643 F. App’x 48, 49-51 (2d Cir. 2016) (summary order reversing district court and granting summary judgment to dismiss trustee’s breach claims as time-barred based, in part, on ACE); Wells Fargo Bank, NA v. JPMorgan Chase Bank, N.A., 643 F. App’x 44, 46 (2d Cir. 2016) (summary order affirming dismissal of trustee’s breach claims as time-barred based, in part, on ACE); Lehman XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc., 643 F. App’x 14, 15-16 (2d Cir. 2016) (summary order relying in part on ACE to affirm dismissal of trustee’s claims against residential mortgage loan seller as time-barred). -5- to the decision in ACE to bar as untimely a breach of contract claim filed more than 6 years after the transaction closed and that related in any way to a breach of representations and warranties. No differentiation is being made by courts concerning the contractual and triggering language before them. This appeal presents the Court with its first opportunity to give meaning to the words it used in ACE. Parties may enter into a contract that applies New York law agreeing that a breach of a separate obligation does not occur until a future date even though it relates or refers to the breach of a contractual representation and warranty provision. Courts should not reflexively apply ACE, as occurred here, to every RMBS and CMBS action simply because it is filed more than six years after the repurchase agreement was executed. ARGUMENT I. The Accrual Clause In The MLPWA Is Precisely The Carve-Out Language Contemplated In ACE This appeal concerns a contractually negotiated accrual clause that specifies no cause of action shall accrue until certain enumerated events, including a contractually negotiated opportunity to cure, had occurred. No accrual clause was present in the contract that was at issue in ACE, and in fact, the court in ACE pointedly emphasized that a different contract in which the “parties [] contractually agree to undertake a separate obligation, the breach of which does not arise until some future date” would lead to a different result (i.e., timely action). ACE, 25 -6- N.Y.3d at 594 (emphasis added). Yet the First Department applied ACE and concluded that the Trustee’s claims were time barred. This case involves just the type of separate contractual obligation that this Court in ACE found would trigger a future breach. Indeed, if any contract language falls within the carve-out ACE identified, it is the “Accrual Clause” that is found in the Second Amended and Restated Mortgage Loan Purchase and Warranties Agreement (the “MLPWA”) now before the Court, which specifies that no cause of action “shall accrue” until certain enumerated events have occurred. In relevant part, the Accrual Clause provides: Any cause of action against [Quicken] relating to or arising out of the breach of any representations and warranties . . . 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 QualifiedMortgage 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). Unlike the defendant seller in ACE, Defendant-Respondent Quicken Loans, Inc. (“Quicken”) contractually agreed that it could be sued for breach of the MLPWA only when these events occurred. See U.S. v. Bedford Assoc., 657 F.2d 1300, 1313 (2d Cir. 1981) (“parties to a contract are basically free to make whatever agreement they wish”); Albunio v. City of NY, 23 N.Y.3d 65, 77 (2014) (under the parties’ unequivocal terms the “[a]greement should be enforced as written”); J.P. Morgan Secs. v. Vigilant Ins., 21 N.Y.3d 324, 334 (2013) (“[f]reedom of contract is -7- deeply rooted in public policy” of New York and parties may “contract as they wish and the courts will enforce their agreements without passing on the substance of them”). Once again, the Accrual Clause in the MLPWA was not present in the contract that was at issue in ACE, and is precisely the type of “separate obligation the breach of which does not arise until some future date” that was flagged in ACE. ACE, 25 N.Y.3d at 594 Where contracts expressly establish a distinct obligation for a party to act after notice of an underlying problem, courts typically view the requirement as a contractual duty and not as a remedy. See, e.g., Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606, 608-09 (1979) (holding that, even though limitations had expired on a warranty for a watertight roof, a separate bonding agreement to repair any leaks for the next twenty years created a separate agreement to perform a service in the future, which was triggered every time the defendant breached the obligation to repair the bonded roof). Just as in Bulovawhere the parties negotiated for and agreed to a separate contractual provision containing a future obligation to repair a defective roof, here, Quicken negotiated for and agreed to a separate contractual provision containing a future obligation to cure a defective mortgage. By its terms, contract language like the Accrual Clause here declaring that a party has an on-going obligation to do something (i.e., cure a defect) in the event a problem occurs in the future is not remedial. Long-term guaranties, such as the bonding agreement in -8- Bulova and the cure obligation that exists here, are premised on the fact that the obligation continues throughout the contract term, even if an underlying breach is no longer actionable due to limitations. The MLPWA contains both the Accrual Clause and a separate repurchase protocol.3 It is therefore clear that the Accrual Clause is not remedial. Nevertheless, the First Department treated the Accrual Clause and repurchase protocol in the MLPWA as one and the same, and relied on ACE to conclude that the claim was untimely. This was error. The First Department gave no meaning to the Accrual Clause and rendered it meaningless because (like other courts) it reflexively read ACE to preclude every contract claim that is in any way related to a representation and warranty. See Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324–25, 328 (2007) (rejecting interpretation of contract that would render contract provision meaningless, explaining that the “court should ‘construe the agreements so as to give full meaning and effect to the material provisions’. . . . A reading of the contract should not render any portion meaningless . . . .”); Two Guys from Harrison-N.Y., Inc. v. S.F.R. Realty Assocs., 63 N.Y.2d 396, 403 (1984) (in construing a contract, a 3 The repurchase protocol provides: “Within sixty (60) days of the earlier of either discovery by or notice to the Seller of any such breach of a representation or warranty, which materially and adversely affects the value of the Mortgage Loans or the interest of the Purchaser therein . . . , the Seller shall use its commercially reasonable efforts promptly to cure such breach in all material respects and, if such breach cannot be cured, the Seller shall, at the Purchaser’s option, repurchase such Mortgage Loan at the Repurchase Price.” (R95-96 § 9.03). -9- court should “avoid an interpretation that would leave contractual clauses meaningless”). The existence of an independent Accrual Clause makes the MLPWA fundamentally different than the repurchase agreement that was at issue in ACE. ACE does not “fit” all RMBS and CMBS repurchase agreements. The absence of an accrual clause in ACE differentiates the instant contract and the question it presents from ACE, compelling a different outcome. As this Court in ACE declared, parties to a repurchase agreement must be permitted to “agree to undertake a separate obligation, the breach of which does not arise until some future date.” ACE, 25 N.Y.3d at 594. The right to negotiate a separate contractual obligation of future performance is of critical importance to the CMBS industry where the parties to a repurchase agreement want to maintain a warranty of cure or repurchase for the life of the ten (10) year loans that populate the vast majority of CMBS securitization trusts. If, however, the First Department’s decision is not reversed, the freedom to contract for such a separate contractual obligation will be cast into serious doubt and ACE will be imbued with a sweeping effect that goes beyond the facts of ACE and the words of the ACE decision. -10- II. The First Department’s Limitations Analysis Is Contrary To The Basic Structure Of Mortgage-Backed Securities This appeal is also distinguishable from ACE, because unlike in ACE where everyone agreed that all of the elements of the plaintiff’s claim existed when the loans were sold to the trust,4 the events set forth in the Accrual Clause did not exist until many years later. See Aetna Life & Cas. v. Nelson, 67 N.Y.2d 169, 175 (1986) (a breach of contract claim accrues only once “all of the facts necessary to the cause of action have occurred so that the party would be entitled to obtain relief in court”); John J. Kassner & Co. v. City of New York, 46 N.Y.2d 544, 550 (1979) (“[W]hen the right to final payment is subject to a condition, the obligation to pay arises and the cause of action accrues, only when the condition has been fulfilled.”). Under the facts of this case, the legal right to sue for breach of the MLPWA did not arise until the conditions enumerated in the Accrual Clause had occurred. Therefore, the Trustee’s breach of contract claim did not accrue until August 2013 when Quicken was first demanded to comply with the MLPWA because prior to that time the Trustee did not possess a legal right to sue Quicken for breach of the MLPWA. 4 The plaintiff in ACE alleged that “these breaches...materially and adversely affected the value of the [] Loans because, among other things, they overstated the [] Loan’s quality and value as of the date the [] Loans were purchased by the Trust.” ACE Compl. at ¶ 30. -11- To put the same point differently, the Trustee’s demand is a substantive requirement of the claim for breach. The Second Circuit explained the principle as follows: Where the demand requirement is substantive, that is, where a demand and refusal are requisite elements of the cause of action, it accrues and the statute of limitation begins to run only after such demand and refusal. On the other hand, where the demand is merely procedural, that is, where demand and refusal are not requisite elements of the cause of action and the defendant's actionable conduct was complete prior to demand, § 206(a) of the N.Y.C.P.L.R [] governs and the limitation period begins to run when the “right to make the demand is complete.” Kuntsammlungen Zu Weimar v. Elicofon, 678 F.2d 1150, 1161 (2d Cir. 1982) (emphasis added); accord Cont’l Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16, 21 (2d Cir. 1996) (explaining that under CPLR 206(a), “where a demand is a predicate to suit” New York courts “distinguish between substantive demands and procedural demands”); Frigi-Giffin, Inc. v. Leeds, 52 A.D.2d 805, 806 (N.Y. App. Div. 1976) (holding that under CPLR 206(a), where a “demand is of a substantive nature (i.e. an essential element of the cause of action), the statute runs only after a demand has been refused”) (citing 1 Weinstein, et al., N.Y. Civ. Prac. § 206.01));Menzel v. List, 22 A.D.2d 647, 647 (N.Y. App. Div. 1964) (holding that under CPLR 206(a), limitations “did not begin to run until demand and refusal” for conversion action by purchaser of personal property against seller, as “a demand by the rightful owner is a substantive, rather than a procedural, prerequisite to the bringing of an action for conversion by the owner”). -12- The contractual requirements that trigger a breach under the MLPWA, as well as the terms of a CMBS transaction, are “integral” to the claim and thus are inherently substantive because no claim exists in their absence. Indeed, contrary to the First Department’s holding, the demand here is not a remedy for a pre-existing breach. It could not be, because the parties agreed that there could be no breach unless and until a demand had been made. The Accrual Clause states that a “cause of action against [Quicken] relating to or arising out of the breach of any representation and warranty . . . shall accrue” only after a demand is made. (R98, § 9.03). Thus, Quicken cannot satisfy the test that “the defendant’s actionable conduct was complete prior to demand,” as used in CPLR 206(a). Kuntsammlungen, 678 F.2d at 1161. Finally, the demand provision serves the seller’s interests, here Quicken, by providing a period within which the seller has an opportunity to cure before being required to repurchase the loan or facing litigation for breach of contract.5 Having chosen a contractual structure that makes demand the sine qua non of a breach of contract claim, Quicken should not benefit from a contrary rule that the claim accrued before that demand occurs. 5 The demand requirement is not the only accommodation to the sellers. Even in the context of a breach of contract action, the sellers’ interests are protected because the amount of their liability is limited by a contractually agreed-upon formula. -13- Importantly, no claim of any kind exists when a cure notice is sent. Similarly, it is typical in CMBS transactions that the special servicer who delivers the notice of cure is barred from taking any action or claiming damages resulting from a breach of a representation and warranty. The only action that a CMBS trustee can take is to request cure or repurchase of the defective loan. The MLPWA also addresses the policy concern regarding potential delay that was raised by the First Department. The MLPWA provides that the Trustee cannot unduly delay litigation by sitting on its hands despite knowledge of breaches of representations. The MLPWA expressly obligates the Trustee to provide “prompt written notice” of a false representation and warranty. (R96 § 9.03).6 Indeed, if the MLPWA had not done so, courts commonly impose a requirement of timely notice on such provisions. See, e.g., Cont’l Cas. Co., 77 F.3d at 21 (a provision that limitations commenced to run when the plaintiff sent demand to defendant could not be used to put off limitations indefinitely because the plaintiff “could not unreasonably delay reporting [its] losses” to the defendant) (citing, e.g., Snyder v. 6 The following cases are illustrative of the attention courts have paid to this issue. See, e.g., Lehman Bros. Holding v. Laureate Realty Servs., 2007 WL 2904591, at *12-13 (S.D. Ind. Sept. 28, 2007); LaSalle Bank N.A. ex rel. Lennar Partners, Inc. v. Capco Am. Secur’n Corp., 2005 WL 3046292, at *4 (S.D.N.Y. Nov. 14, 2005); Trust for Certificate Holders of Merrill Lynch Mortg. Passthrough Certificates Series 1999-C1 v. Love Funding Corp., 2005 WL 2582177, at *7 (S.D.N.Y. Oct. 11, 2005); LaSalle Bank N.A. v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618, 637-38 (D. Md. 2002); Morgan Guar. Trust Co. of N.Y. v. Bay View Franchise Mortg. Accept. Co., 2002 WL 818082, at *7 (S.D.N.Y. Apr. 30, 2002); Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765, 771 (2012); LaSalle Bank N.A. v. Nomura Asset Capital Corp., 47 A.D.3d 103 (1st Dep’t 2007). -14- Town Insulation, Inc., 81 N.Y.2d 429, 435 (1993); Solomon R. Guggenheim Found. v. Lubell, 77 N.Y.2d 311, 319 (1991)). Further, as the Trustee makes clear in its submission, this Court has recognized for decades that “New York’s deeply rooted commitment to freedom of contract is a significant contributing factor in New York’s status as the financial capital of the world.” (Trustee’s Brief at 12-15). The First Department’s decision undercuts the freedom sophisticated parties have always enjoyed when entering into New York contracts, and in fact creates unpredictability for contracting parties. Indeed, here, the sophisticated parties bargained for certain events that “shall” have occurred before the Trustee could sue for breach of the MLPWA, including a demand that Quicken comply with the MLPWA (i.e., cure the defect). The Accrual Clause provided benefits to both contracting parties, and also provided them with certainty as to when a cause of action for breach of the MLPWA accrued. The First Department undid all of that by re-writing their contract, and did so in a manner that benefited only Quicken. Fiore v. Fiore, 46 N.Y.2d 971, 973 (1979) (“The courts may not rewrite a term of a contract by ‘interpretation’ when it is clear and unambiguous on its face.”); Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 404 (2009) (“Courts may not ‘by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the -15- parties under the guise of interpreting the writing’”). Public policy in fact requires this Court to enforce the parties’ agreed upon Accrual Clause. III. The Impact Of Courts Misapplying ACE On CMBS Transactions In Particular In CMBS repurchase agreements, the seller generally has no obligation to repurchase a loan until triggering conditions have occurred. Pursuant to some CMBS contracts, no claim for breach of a representation and warranty arises until the loan actually defaults or is transferred to special servicing. There are any number of contractually agreed upon restrictions and triggers contained in repurchase agreements that should be allowed by the courts and not swallowed by ACE. But because of the way ACE is being interpreted by the courts, these contractually negotiated restrictions and triggering conditions are being cast aside. In a typical CMBS transaction, in order for a claim for a false or inaccurate representation and warranty to exist, the repurchase agreements require that the misrepresentation have had a material adverse effect on the value of the loan or the certificateholders. However, the material and adverse effect rarely exists in CMBS transactions at the time of the closing, and, indeed, is written in the future tense.7 See, e.g., U.S. Bank, N.A. v. UBS Real Estate Sec., 205 F. Supp. 3d 386, 465 7 The material-and-adverse-effect requirement also inures to the seller’s benefit. The trust cannot sue for a representation or warranty violation that has not caused harm; rather, it must wait until material and adverse effect is manifested. This is a real requirement that benefits both sides of a CMBS transaction. -16- (S.D.N.Y. 2016) (explaining that the “timing of a material adverse-effect is grounded in the language of the [contract], which uses the word ‘affects’ in the present tense”). Although the existence of a material and adverse effect and the timing of such an event are critical issues in CMBS cases, this requirement has lost all meaning because of how ACE is being haphazardly applied by courts. Two recent summary orders from the Second Circuit are illuminating. InU.S. Bank N.A. v. Dexia Real Estate Capital Markets, the seller represented and warranted in the repurchase agreement that all documents executed in connection with the subject loan were “legal, valid, and binding” and that “there [was] no valid offset, defense or right to rescission with respect to [any such document].” 2014 WL 3368670, at *1 (S.D.N.Y. July 9, 2014), rev’d, 643 F. App’x 48 (2d Cir. 2016). However, a guaranty agreement given by the borrower was proven years later to be unenforceable under its terms. Id. at *2-3. Although the repurchase agreement expressly stated that the trust could only sue for breach when the violation of a representation and warranty had a material and adverse effect on the interests of certificateholders,8 and further stated the defective guaranty could 8 The relevant language from the contract provided: “[p]romptly upon becoming aware of any ‘Document Defect’ or ‘Breach,’ ... any party [who] ... determines that such Document Defect or Breach materially and adversely affects the value of the affected Mortgage Loan, the interest of the Trust Fund therein or the interests of any Certificateholder ... shall notify the Master Servicer of such determination and promptly after receipt of such notice, the Master Servicer [or Special Servicer], shall request in writing ... that the applicable Mortgage Loan Seller, not later than ninety (90) days from receipt of such written request ... (i) cure such Document Defect or Breach ... [or] -17- not have a material and adverse effect until a point in time after the representations and warranties were given (i.e., when it impeded an enforcement action),9 the Second Circuit ruled that the claim was untimely. U.S. Bank N.A. v. Dexia Real Estate Capital Markets 643 F. App’x 48 (2d Cir. 2016). In misapplying ACE, the Second Circuit concluded that it was not relevant that the trust had no right to make a demand until the material and adverse effect requirement was satisfied, because it understood ACE as standing for the proposition that representations and warranties in repurchase agreements are violated when they are made, and that is the date that controls when the claim accrued. Id. Similarly, inWells Fargo Bank v. JPMorgan Chase Bank, the breach involved a lease restriction on utilization of a retail shopping mall. 2014 WL 1259630 (S.D.N.Y. Mar. 27, 2014), aff’d, 643 F. App’x 44 (2d Cir. 2016). At the time of securitization, the mall was fully occupied so no material and adverse effect had yet occurred; the event causing a material and adverse effect occurred years later, when the anchor stores vacated the mall. Id. at *1-2. Once again, the Second Circuit rejected the trust’s argument that its right to make a demand on the seller was not (ii) repurchase [s] the affected Mortgage Loan ....” Dexia Real Estate Capital Markets, 2014 WL 3368670, at *2. 9 The contract provided that a document defect is “considered to materially and adversely affect” the value of the loan or interest of any certificateholder only when “the document with respect to which the Document Defect exists is required in connection with an imminent enforcement of the mortgagee’s rights or remedies under the related Mortgage Loan.” Dexia Real Estate Capital Markets, 2014 WL 3368670, at *2. -18- complete until the seller’s violation of the representation and warranties materially and adversely affected the interests of certificateholders. Wells Fargo Bank v. JPMorgan Chase Bank, 643 F. App’x 44 (2d Cir. 2016). The Second Circuit stated that ACE foreclosed this argument, and concluded that the material and adverse effect requirement did not impact when the right to make the demand was complete; rather, it simply affected when the demand could be made. Id. ACE did not limit the life of representations and warranties in all repurchase agreements to six years after the representations were made. ACE also did not undo contractually agreed upon restrictions and triggering conditions in repurchase agreements. ACE merely applied New York’s six year limitations period to a contract where everyone involved in the case agreed that all of the events giving rise to the claim for breach existed as of the date the representations and warranties were made. It expressly carved out of its decision the circumstance where “parties [] contractually agree to undertake a separate obligation, the breach of which does not arise until some future date.” ACE, 25 N.Y.3d at 594. Unlike here, the repurchase agreement in ACE contained no separate contractual obligation or future triggering condition. ACE should not have controlled the outcome here. This Court should make clear that whether an RMBS or CMBS claim for breach of a representation and warranty may be brought turns on the language agreed upon by the parties as reflected in the repurchase agreements. CONCLUSION For the foregoing reasons, amici respectfully submit that the order of the Appellate Division, First Department should be reversed. Dated: New York, New York July 26, 2018 VENABLE LL1 By: Gregory A/Cross / 1270 Avenue of the Americas, 24th Floor New York, New York Telephone: (212) 307-5500 Facsimile: (212) 307-5598 Attorneys for Amicus Curiae LNR Partners, LLC, CWCapital Asset Management LLC, and C-III Asset Management LLC -19- NEW YORK STATE COURT OF APPEALS CERTIFICATE OF COMPLIANCE I hereby certify pursuant to 22 NYCRR PART 500.1(j) that the foregoing letter submission was prepared on a computer using Microsoft Word. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double Word Count. The total number of words in this letter submission, inclusive of point headings and footnotes and exclusive of pages containing the proof of service, certificate of compliance, corporate disclosure statement, or any authorized addendum containing statutes, rules, regulations, etc., is 5038 words. Dated: New York, New York July 26, 2018 VENABLE LLP By: Gregor/AXCross' 1ÿ0.Avemk-eftf le Americas, 24th Floor New York, New York Telephone: (212)307-5500 Facsimile: (212)307-5598 Attorneys for Amici Curiae LNR Partners, LLC, CWCapital Asset Management LLC, and C-III Asset Management LLC