APL-2016-00237
New York County Clerk’s Index No. 653048/13
Court of Appeals
STATE OF NEW YORK
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.
>> >>
REPLY BRIEF FOR PLAINTIFF-APPELLANT
LOWENSTEIN SANDLER LLP
1251 Avenue of the Americas
New York, New York 10020
212-262-6700
and
FRIEDMAN, KAPLAN, SEILER
& ADELMAN LLP
7 Times Squre, 28th Floor
New York, New York 10036
212-833-1100
Attorneys for Plaintiff-AppellantDate Completed: September 8, 2017
Of Counsel:
Zachary D. Rosenbaum
Robert S. Smith
To Be Argued By:
Zachary D. Rosenbaum
Time Requested: 30 Minutes
-i-
CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 500.1(f) of the Court of Appeals State of New York
Rules of Practice, Deutsche Bank National Trust Company, solely in its capacity as
trustee of the Harborview Mortgage Loan Trust 2007-7, certifies that Deutsche
Bank National Trust Company is a wholly-owned subsidiary of Deutsche Bank
Holdings, Inc., which is a wholly-owned subsidiary of Deutsche Bank Trust
Corporation, which is a wholly-owned subsidiary of DB USA Corporation, which
is a wholly-owned subsidiary of Deutsche Bank AG, a publicly held banking
corporation organized under the laws of the Federal Republic of Germany. No
publicly held company owns 10% or more of Deutsche Bank AG’s stock.
Deutsche Bank National Trust Company serves as Trustee of the
subject trust. The subject trust is formed under the laws of the State of New York.
The Trust has issued mortgage-backed securities that are eligible for public
trading. Certain holders of those securities are believed to be publicly traded
corporations.
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TABLE OF CONTENTS
Page
CORPORATE DISCLOSURE STATEMENT .......................................................... i
TABLE OF CONTENTS .......................................................................................... ii
TABLE OF CASES AND AUTHORITIES ............................................................ iii
INTRODUCTION ..................................................................................................... 1
ARGUMENT ............................................................................................................. 4
I. QUICKEN FAILS TO SHOW THAT THE ACCRUAL
CLAUSE VIOLATES NEW YORK PUBLIC POLICY ..................... 4
II. THE ACCRUAL CLAUSE MEETS ACE’S TEST FOR
SUBSTANTIVE CONDITIONS PRECEDENT .................................. 9
III. THE CONTRACT IN ACE DID NOT HAVE AN
ACCRUAL CLAUSE ......................................................................... 11
IV. THE ACCRUAL CLAUSE DOES NOT CONTRAVENE
THE GENERAL OBLIGATIONS LAW ........................................... 17
CONCLUSION ........................................................................................................ 23
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TABLE OF CASES AND AUTHORITIES
PAGES
CASES
ACE Sec. Corp. v. DB Structured Prods., Inc.,
25 N.Y.3d 581 (2015) ..................................................................................passim
Bayridge Air Rights v. Blitman Construction Corp.,
80 N.Y.2d 777 (1992) ......................................................................................... 21
Beal Sav. Bank v. Sommer,
8 N.Y.3d 318 (2007) ........................................................................................... 12
Bear Stearns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC,
No. 7701-VCL, 2015 WL 139731 (Del. Ch. Jan. 12, 2015) ........................ 6, 7, 8
Bulova Watch Co. v. Celotex Corp.,
46 N.Y.2d 606 (1979) ................................................................................... 16, 20
Cont’l Cas. Co. v. Stronghold Ins. Co.,
77 F.3d 16 (2d Cir. 1996) ................................................................................... 20
Deutsche Bank Nat’l Tr. Co. v. Quicken Loans, Inc.,
810 F.3d 861 (2d Cir. 2015) ............................................................................... 14
Dickinson v. Mayor of City of N.Y.,
92 N.Y. 584 (1883) ............................................................................................... 9
Gorowitz v. Blumenstein,
184 Misc. 111 (Sup. Ct. N.Y. County 1944) ...................................................... 19
Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co.,
18 N.Y.3d 765 (2012) ............................................................................. 15, 16, 20
John J. Kassner & Co. v. City of New York,
46 N.Y.2d (1979) .................................................................................... 17, 21, 22
Lehman XS Tr., Series 2006-4N v. GreenPoint Mortg. Funding, Inc.,
643 F. App’x 14 (2d Cir. 2016) .......................................................................... 15
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Lehman XS Tr., Series 2006-GP2 v. GreenPoint Mortg. Funding, Inc.,
No. 12-cv-7935, 2014 WL 1301944 (S.D.N.Y. Mar. 31, 2014) ........................ 15
New England Mut. Life Ins. Co. v. Caruso,
73 N.Y.2d 74 (1989) ......................................................................................... 5, 6
Quadrant Structured Prods. Co. v. Vertin,
23 N.Y.3d 549 (2014) ........................................................................................... 6
Shapley v. Abbott,
42 N.Y. 443 (1870) ............................................................................................. 18
Signature Realty, Inc. v. Tallman,
2 N.Y.3d 810 (2004) ........................................................................................... 14
United States v. Curtiss Aeroplane Co.,
147 F.2d 639 (2d Cir. 1945) ............................................................................... 19
Vermont Teddy Bear Co. v. 538 Madison Realty Co.,
1 N.Y.3d 470 (2004) ........................................................................................... 14
Watertown Nat’l Bank v. Bagley,
134 App. Div. 831 (4th Dep’t 1909) ............................................................. 18, 19
STATUTES
General Obligations Law § 17-103. ..................................................................passim
RULES
Del. Sup. Ct. R. 42(b) ................................................................................................. 6
OTHER AUTHORITIES
Black’s Law Dictionary (10th ed. 2014) ................................................................ 1, 2
N.Y. L. REV. COMM’N REP. NO. 65(E) ......................................................... 17, 18, 19
Plaintiff-Appellant Deutsche Bank National Trust Company, solely in
its capacity as Trustee of the Harborview Mortgage Loan Trust 2007-7,
respectfully submits this reply brief in further support of its appeal from the
Decision and Order of the Appellate Division, First Department, entered on August
11, 2016, which affirmed the Decision and Order of the Supreme Court of New
York, New York County, entered on April 14, 2015, which granted the Motion to
Dismiss of Defendant-Respondent Quicken Loans, Inc.
1
INTRODUCTION
Quicken’s brief is an extended effort to avoid discussing the central
points that the Trustee made in its opening brief. Most conspicuously, Quicken
nowhere discusses the meaning of the word “accrue” in the Accrual Clause. (See
R98 § 9.03 (“Any cause of action . . . shall accrue . . . .”).) As pointed out in the
Trustee’s opening brief, Black’s Law Dictionary defines “accrue” as to “come into
existence as an enforceable claim or right.” Quicken never suggests another
definition. Indeed, it is possible to read Quicken’s brief from cover to cover
without getting the slightest idea of what Quicken thinks is meant by the word
“accrue.”
1
Capitalized terms used herein shall have the same meaning as in the Trustee’s Opening Brief,
filed with the Court on June 26, 2017 (“Trustee Br.”). References to “Quicken Br.” are to
Quicken’s brief, filed with the Court on August 10, 2017.
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But, because “accrue” means “come into existence as an enforceable
claim or right,” the Accrual Clause necessarily provides that the Trustee’s claim
here did not exist until 2013. See Black’s Law Dictionary (10th ed. 2014).
Therefore, unless the Accrual Clause is deemed invalid as a matter of public
policy, Quicken is simply incorrect in saying that a cause of action existed years
before the preconditions stated in the Accrual Clause occurred. Quicken’s statute
of limitations defense depends entirely on establishing that the Accrual Clause is
invalid.
Yet, curiously, Quicken does not defend the Appellate Division’s
holding that enforcement of the Accrual Clause violates New York public policy.
Instead, Quicken asks this Court to refuse to enforce the parties’ expressed intent
based on an argument that it unsuccessfully pressed before Supreme Court, the
Appellate Division, and the Second Circuit Court of Appeals – i.e., that the
Accrual Clause purportedly violates section 17-103 of the General Obligations
Law. That statute is inapposite here. Its plain language does not address the
Accrual Clause in any way, let alone bar its enforcement. Moreover, its legislative
history – which Quicken ignores in its brief – makes clear that the statute was
enacted simply to clarify the limits on post-accrual tolling agreements. The
Accrual Clause here does not attempt to waive or indefinitely extend the statute of
limitations before a dispute arises. It is a contractual provision that establishes
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when a breach arises, not a post-accrual tolling agreement governed by section 17-
103.
Without a basis to argue that the Accrual Clause is unenforceable,
Quicken attempts to render the Accrual Clause meaningless by stretching beyond
its breaking point the holding of ACE Securities Corp. v. DB Structured Products,
Inc., 25 N.Y.3d 581 (2015) (“ACE”). In ACE, the Court addressed what impact, if
any, a general repurchase provision in an RMBS contract had on the running of the
statute of limitations for breach of representations and warranties. The MLPWA
not only has a repurchase provision like that addressed in ACE, but it also has an
Accrual Clause, not present in the ACE contract, pursuant to which the parties
expressly agreed that no “cause of action” “relating to or arising out of” a breach of
representations and warranties “shall accrue” until certain conditions are satisfied.
(R98 § 9.03.)
The absence of an Accrual Clause from the ACE contract is fatal to
Quicken’s argument that ACE renders the Trustee’s suit untimely. And, apparently
recognizing that fatal distinction, Quicken declines to even acknowledge that it
agreed to the Accrual Clause in addition to the repurchase provision. Instead,
Quicken tries to side-step the Accrual Clause by characterizing it as “similar” to
the repurchase provision at issue in ACE, with “the additional word ‘accrue.’”
(Quicken Br. at 15.) Consequently, Quicken does not respond at all to the
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Trustee’s argument that Quicken’s position would render the Accrual Clause
meaningless and, further, would read out of the MLPWA the parties’ chosen words
“cause of action” “relating to or arising out of” and “shall accrue” – which have a
plain and clear meaning. (R98 § 9.03.) Quicken thus asks the Court to ignore
basic cannons of contract construction. The Trustee, by contrast, asks the Court to
give meaning to the entire MLPWA.
Quicken has failed to provide any reason why commercial parties in
New York, such as those here, should be denied the basic contractual right to
define when and how a breach of their contract arises. Accordingly, the Appellate
Division’s decision should be reversed, and the Complaint should be reinstated so
that the Trustee’s claims are heard on the merits.
ARGUMENT
I. QUICKEN FAILS TO SHOW THAT THE ACCRUAL CLAUSE
VIOLATES NEW YORK PUBLIC POLICY
The Appellate Division upheld Supreme Court’s dismissal of the
Trustee’s Complaint as time-barred on two separate grounds. First, the Appellate
Division determined that the Accrual Clause is unenforceable for public policy
reasons. (R1575-76.) Second, the Appellate Division found that the Accrual
Clause is not a promise of future performance and does not contain substantive
conditions precedent to accrual of a cause of action for breach of contract.
(R1577-79.) In its opening brief, the Trustee explained how the Appellate
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Division erred in refusing to enforce the plain language of the Accrual Clause
because enforcing the plain language promotes – rather than undermines – New
York public policy. (Trustee Br. at 12-23.) Moreover, the Trustee demonstrated
how the demand requirement in the Accrual Clause is a substantive condition to
the existence of a cause of action. (Id. at 24-34.)
Tellingly, Quicken does not argue that the Appellate Division was
correct in finding that enforcement of the Accrual Clause violates New York
public policy. Instead, as discussed more fully in Section IV infra, Quicken
attempts to make a statutory argument barring enforcement of the Accrual Clause –
an argument that was not accepted when Quicken previously pressed it before
Supreme Court, the Appellate Division, and the Second Circuit.
2
If the Accrual Clause does not violate public policy, its plain language
must be enforced. See New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74,
2
The only time Quicken (briefly) addresses the public policy issue, it does not contend that the
Accrual Clause is unenforceable under New York public policy, and instead blatantly
mischaracterizes the Trustee’s argument concerning the inapplicability of the “discovery rule” to
the Accrual Clause. Quicken incorrectly states that “Deutsche Bank claims that the First
Department ruling creates ‘an imprecisely ascertainable accrual date.’” (Quicken Br. at 23
(citing Trustee Br. at 16).) That is not true. Rather, the Trustee noted that the Appellate Division
“was concerned that the Accrual Clause would effectively apply a ‘discovery rule’ and create ‘an
imprecisely ascertainable accrual date.’” (Trustee Br. at 16.) The Trustee then explained that
“there is no basis for such concern here because, under the Accrual Clause, a cause of action
accrues not on discovery, but after ‘demand upon [Quicken] by the Purchaser for compliance
with [the MLPWA]’ – a date that is easily, and precisely, ascertainable.” (Id. at 16-17.) The
Trustee did not claim in its brief that “the First Department ruling creates ‘an imprecisely
ascertainable accrual date,’” as Quicken asserts. (Quicken Br. at 23.)
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81 (1989). And the plain language of the Accrual Clause could not be clearer: it
renders the Trustee’s action timely. (See Trustee Br. at 13.)
While this Court has not yet had occasion to rule on a provision
exactly like the Accrual Clause, Delaware – in analyzing an indistinguishable
provision – has recognized that contracting parties are free to agree on the events
that must occur before a cause of action for breach of contract will accrue. See
Bear Stearns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC, No. 7701-VCL,
2015 WL 139731, at *10 (Del. Ch. Jan. 12, 2015) (“Bear Stearns”).
3
The Trustee
submits that this Court should clarify that New York public policy is no different
from Delaware’s when it comes to freedom of contract. As in Delaware,
contracting parties in New York should be free to agree on the events that must
occur before a cause of action for breach of contract will accrue.
3
Quicken incorrectly asserts that the Trustee “fails to inform the Court that not only was Bear
Stearns an unpublished decision, but a petition for leave to appeal to the Delaware Supreme
Court was denied.” (Quicken Br. at 26.) The Trustee did not fail to inform the Court that Bear
Stearns is an unpublished opinion; in fact – in addition to properly citing the opinion in
accordance with Rule 10.8.1 of The Bluebook – the Trustee provided the Court with a copy of
the Bear Stearns opinion with its very first submission to the Court. (See Appellant’s SSM
Letter (Mar. 20, 2017).) Further, it is neither unusual for the Delaware Court of Chancery to not
publish important decisions, nor for this Court to rely on those unpublished opinions in rendering
its own decisions. See, e.g., Quadrant Structured Prods. Co. v. Vertin, 23 N.Y.3d 549, 561-62,
565-67 (2014) (relying on two Delaware Court of Chancery unpublished opinions in determining
how to interpret contractual provision under New York law). Moreover, under the uniform
citation rules of The Bluebook, parties are required to omit from the subsequent history portion of
a citation “denials of certiorari or denials of similar discretionary appeals, unless the decision is
less than two years old or the denial is particularly relevant.” The Bluebook R. 10.7 (20th Ed.).
Here, the Bear Stearns decision is more than two years old and the denial of the discretionary
appeal has no relevance on the substance of the Court of Chancery’s findings. See Del. Sup. Ct.
R. 42(b) (setting forth criteria to be considered in determining whether to accept interlocutory
appeal).
-7-
In order to downplay the significance of Bear Stearns, Quicken
misconstrues the Delaware court’s decision. (See Quicken Br. at 25.) In Bear
Stearns, the Court initially granted the defendant’s motion to dismiss the complaint
as time-barred under Delaware’s three-year statute of limitations for breach of
contract. 2015 WL 139731, at *7. The plaintiff moved for reconsideration, which
the court granted on three separate and independent grounds: (1) that a Delaware
Supreme Court case required the application of New York’s six-year statute of
limitations, not Delaware’s three-year statute of limitations, id. at *8-10; (2) that
the court had not properly understood the accrual clause in the parties’ contract,
which on reconsideration it determined to be “a condition precedent to the running
of the statute of limitations,” id. at *10-12; and (3) that a Delaware statute allowed
parties to agree to extend the Delaware statute of limitations for breach of contract
for up to twenty years, id. at *12-15.
Quicken incorrectly reads the Bear Stearns ruling as being based
solely on the court’s application of a Delaware statute (i.e., the third independent
ground for reconsideration). (See Quicken Br. at 24-25.) To the contrary, the
Delaware court’s enforcement of the contractual accrual provision as “a condition
precedent to the running of the statute of limitations” (i.e., the second independent
ground for reconsideration) is the part of the court’s holding relevant to the case at
bar. Bear Stearns, 2015 WL 139731, at *10. Quicken also misses the point in
-8-
arguing that New York distinguishes between substantive and procedural
conditions precedent to suit, whereas Delaware does not. (See Quicken Br. at 25-
26.) The difference is only in the words used, not in their meaning. The Delaware
court determined that the accrual clause in that case defined “when a claim arose,”
i.e., when a cause of action of action existed. Bear Stearns, 2015 WL 139731, at
*11. That is the definition of a substantive condition precedent under New York
law. See ACE, 25 N.Y.3d at 597-98. Thus, the Delaware court – using different
but analogous language – effectively determined that the condition precedent was
substantive.
Quicken thus fails to answer the question squarely presented by Bear
Stearns: should this Court declare that the Accrual Clause is unenforceable under
New York’s public policy when it is enforceable under Delaware’s public policy?
In finding that enforcement of the Accrual Clause violates New York public
policy, the Appellate Division failed to afford adequate weight to New York’s
bedrock commitment to freedom of contract. If New York intends to retain its
position as the preferred jurisdiction whose substantive law commercial parties
designate to govern their agreements (see Trustee Br. at 15), then, the Trustee
submits, the answer to the above question must be “no.”
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II. THE ACCRUAL CLAUSE MEETS ACE’S TEST FOR
SUBSTANTIVE CONDITIONS PRECEDENT
Quicken incorrectly argues that the Accrual Clause sets forth
procedural rather than substantive conditions precedent. (See Quicken Br. at 15-
19.) The test for determining whether a condition is substantive or procedural is
simple: if the demand is “part of the cause of action,” then the condition is
substantive. ACE, 25 N.Y.3d at 597 (quoting Dickinson v. Mayor of City of N.Y.,
92 N.Y. 584, 591 (1883)); (see also Trustee Br. at 29-30). Quicken concedes that
is the test: “[w]ith a substantive condition precedent, there is no actionable ‘legal
wrong’ until the plaintiff satisfies the conditions laid out in the contract.”
(Quicken Br. at 17 (emphasis added) (quoting ACE, 25 N.Y.3d at 597) (stating that
ACE turned on determining when “a cause of action existed”).) Accordingly, the
question is whether a cause of action exists for breach of the MLWPA before or
after the conditions in the Accrual Clause occur.
Here, the Accrual Clause expressly states that a cause of action does
not exist until the three elements of the Accrual Clause occur. Those elements by
definition are “part of the cause of action” for breach of contract. See ACE, 25
N.Y.3d at 597. Accordingly, the Accrual Clause sets forth a substantive condition
precedent. The Trustee’s cause of action therefore did not exist until 2013, and
this action is timely.
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Quicken nonetheless argues that the plain meaning of the Accrual
Clause should be ignored on the theory that the relevant breach of contract here is
Quicken’s sale of a loan with a false representation and warranty, not Quicken’s
failure to cure, substitute, or repurchase the loan. (Quicken Br. at 18-19.) But the
parties could not have been clearer that that is not what they intended. In
agreements such as the MLPWA with an Accrual Clause, the sale of a loan that
violates a representation and warranty does not itself give rise to a claim for breach
of the agreement; rather, it is just one element of a claim for such breach. As the
Accrual Clause specifies, a “cause of action” “relating to or arising out of”
Quicken’s representations and warranties can only accrue – that is, come into
existence as a legal right – upon completion of the Accrual Clause’s elements.
(R98 § 9.03.) There is nothing inappropriate about that bargain these sophisticated
parties struck.
Since the Accrual Clause defines when the breach of contract occurs,
Quicken effectively shoots itself in the foot when it says:
The key difference between the two kinds of
preconditions is whether the breach exists prior to the
conditions being satisfied (in which case it is procedural)
or whether there is no breach until the conditions are
satisfied (in which case it is substantive).
(Quicken Br. at 20 (citing ACE, 25 N.Y.3d at 597-98).) In other words, under this
contract, as opposed to the one in ACE, a breach occurred – and a cause of action
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for that breach came into existence (accrued) – only after the conditions of the
Accrual Clause were complete. Thus, even applying Quicken’s interpretation of
ACE, the Trustee’s action was timely.
III. THE CONTRACT IN ACE DID NOT HAVE AN ACCRUAL CLAUSE
Notwithstanding the plain language of the Accrual Clause, Quicken
misconstrues the MLPWA in an attempt to fit the square peg that is the Accrual
Clause into the round hole that is ACE. (See Quicken Br. at 12-14.) In ACE, the
Court interpreted the contract before it and determined that the repurchase
provision in the agreement was neither a guarantee of future performance nor a
substantive condition precedent to suit. 25 N.Y.3d at 594-98. Critically, however,
the contract in ACE did not contain an Accrual Clause. ACE therefore is only
minimally relevant in determining what the Accrual Clause means. To the extent
ACE is relevant at all, it demonstrates that the Accrual Clause sets forth a
substantive condition precedent, lest the Accrual Clause be rendered superfluous.
The Accrual Clause is not, as Quicken suggests, the same “repurchase
clause” considered in ACE with the word “accrue” added. (Quicken Br. at 15.)
The MLPWA contains a repurchase provision substantially similar to the one the
Court reviewed in ACE.
4
But the MLPWA also has an additional contractual
4
Compare ACE, 25 N.Y.3d at 590-91, with (R96 § 9.03 (“Within 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
-12-
provision not appearing in the ACE contract – the Accrual Clause. (See R98 §
9.03.) The Accrual Clause is an independent contractual provision whose language
must be given its intended meaning separate and apart from the repurchase
provision. See Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324 (2007) (contracts
should not be interpreted in a way that renders any provision meaningless).
Quicken, however, never addresses this point. Rather, Quicken
contends that the Accrual Clause and the repurchase provision, while independent
of one another and worded differently, are identical in meaning. (See Quicken Br.
at 15-17.) Quicken never suggests what the Accrual Clause adds that was not
already in the MLPWA’s repurchase provision. The Trustee, by contrast, asks this
Court to give meaning to what the parties intended by including the Accrual Clause
in addition to a repurchase provision – namely, that a cause of action relating to or
arising from a representation or warranty made by Quicken can arise only after
Quicken has failed to cure, substitute, or repurchase a defective loan.
5
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.”)).
5
Quicken attempts to escape the plain language of the Accrual Clause by laying out a parade of
horribles if the Trustee were to discover breaches of representations and warranties by Quicken
but then not immediately make a repurchase demand on Quicken. (See Quicken Br. at 16.) That
attempt is pure fiction. The drafters of the MLPWA already anticipated that possibility and
addressed it. The MLPWA requires any party that discovers a breach of a representation and
warranty to give prompt notice to all other parties. (R96 § 9.03.) Indeed, Quicken was given
written notice of breaches of representations and warranties almost immediately after the Trustee
learned about them from Freddie Mac (even though Quicken was likely already aware of such
breaches). (R44-45 ¶¶ 61-62.) Moreover, Quicken’s assertion that enforcing the Accrual Clause
would somehow be unfair to Quicken rings hollow. (See Quicken Br. at 16.) On the contrary,
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Quicken, moreover, mischaracterizes ACE to support a proposition
that does not appear anywhere in the Court’s opinion. Specifically, Quicken states
that “ACE therefore distinguished procedural conditions – including the notify-
and-repurchase remedies provision at issue here – from situations in which ‘parties
. . . contractually agree to undertake a separate obligation, the breach of which does
not arise until some future date.’” (Quicken Br. at 17 (alteration in original)
(quoting ACE, 25 N.Y.3d at 594).) There are two major errors in this sentence.
First, as noted above, it is not the “notify-and-repurchase remedies provision” at
issue in ACE that is at issue here – this case concerns the Accrual Clause, which
did not exist in the ACE contract. Second, Quicken is conflating one part of the
Court’s ruling in ACE, concerning guarantees of future performance, 25 N.Y.3d at
594-96, with another part of the Court’s ruling, concerning conditions precedent,
id. at 597-98. Nowhere in ACE did the Court contrast procedural conditions
precedent with guarantees of future performance. The ACE Court instead
contrasted procedural conditions precedent with substantive conditions precedent.
Id. Moreover, nowhere in ACE did the Court equate substantive conditions
pardoning Quicken from the bargain it struck – after Quicken agreed precisely when a “cause of
action” against it “shall accrue” – would result in a manifest injustice to the Trustee and investors
like Freddie Mac.
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precedent with guarantees of future performance. (See Quicken Br. at 17-18.)
6
Quicken relies heavily on the Second Circuit’s decision in Deutsche
Bank National Trust Co. v. Quicken Loans, Inc., 810 F.3d 861 (2d Cir. 2015)
(“Quicken”), which committed the same error as Quicken’s brief. The Second
Circuit failed to appreciate that ACE was a contract interpretation case. Rather
than apply the plain language of the Accrual Clause as written and as intended, the
Second Circuit determined that it was instead required under ACE to “examine the
object of the demand” element of the Accrual Clause. Id. at 866-67 (emphasis
added). ACE, however, instructs the opposite as a matter of basic contract
construction. 25 N.Y.3d at 597 (“Historically, we have been ‘extremely reluctant
to interpret an agreement as impliedly stating something which the parties have
neglected to specifically include.’” (quoting Vermont Teddy Bear Co. v. 538
Madison Realty Co., 1 N.Y.3d 470, 475 (2004))). Furthermore, as a general
matter, ignoring the parties’ intent as clearly expressed by the plain language of
their agreement is forbidden under New York law. See Signature Realty, Inc. v.
Tallman, 2 N.Y.3d 810, 811 (2004). The Second Circuit disregarded the contract’s
plain language, and its reasoning should not be followed.
6
Indeed, if anything, ACE underscores the Trustee’s point here, since the Court expressed no
reluctance in enforcing guarantees of future performance well over six years after a contract was
formed, as long as the parties’ intent was clear. See 25 N.Y.3d at 594-96.
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Quicken also relies on other decisions that have refused to apply the
plain language of an accrual clause in the RMBS context. (See Quicken Br. at 15
n.1.) However, those cases either simply followed the Second Circuit’s improper
application of ACE to an accrual clause, see, e.g., Lehman XS Tr., Series 2006-4N
v. GreenPoint Mortg. Funding, Inc., 643 F. App’x 14, 15 (2d Cir. 2016), or
incorrectly held that an accrual clause violates New York public policy, see, e.g.,
Lehman XS Tr., Series 2006-GP2 v. GreenPoint Mortg. Funding, Inc., No. 12-cv-
7935, 2014 WL 1301944, at *3 (S.D.N.Y. Mar. 31, 2014). None of those cases
bind this Court, which has never had occasion to rule on an accrual clause in an
RMBS contract. This Court is the ultimate arbiter of whether the Accrual Clause is
enforceable under New York public policy and whether the Accrual Clause creates
substantive conditions precedent to suit.
Similarly, Quicken fails to wrestle with the Trustee’s argument
concerning Hahn Automotive Warehouse, Inc. v. American Zurich Insurance Co.,
18 N.Y.3d 765 (2012) (“Hahn”). (See Quicken Br. at 21.) There, where the
claimant failed to send an invoice for ten years, the timing of the belated demand
for payment was not determinative of the accrual of a claim for nonpayment only
because the claimant could not “point to any contract language unambiguously
conditioning its right to payment on its own demand.” Hahn, 18 N.Y.3d at 771-72.
But, here, the Accrual Clause does exactly that. In Hahn, moreover, unlike here,
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the invoice did not give the respondent “any time to investigate” the amounts
claimed. Id. at 772 n.5. But, here, Quicken had a right to inspect the allegedly
defective loans before becoming obligated to cure, substitute, or repurchase them.
Hence, the Trustee’s right to payment of the repurchase price under the MLPWA
arose only after Quicken had an opportunity to investigate any defects and each of
the conditions set forth in the Accrual Clause was completed. (See R98 § 9.03.)
Finally, Quicken’s invocation of Bulova Watch Co. v. Celotex Corp.,
46 N.Y.2d 606 (1979), mischaracterizes the Trustee’s arguments and is a red
herring. (See Quicken Br. at 22-23.) The Court in Bulova addressed whether a
twenty-year repair provision in a roofing contract constituted a guarantee of future
performance, the breach of which gave rise to a cause of action more than six years
after the roof was installed. 46 N.Y.2d at 610-11; see also ACE, 25 N.Y.3d at 594-
95. The Trustee is not asserting here that the Accrual Clause is a guarantee of the
loans’ future performance. Rather, the Accrual Clause memorializes the parties’
agreement as to when and how a cause of action arises. The Trustee cited Bulova
simply as a reminder from a public policy standpoint that the Court did not in that
case – and should not here – hesitate to enforce the parties’ clearly expressed
contractual intent, even if it results in a cause of action for breach arising
significantly more than six years after the parties entered into the contract.
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IV. THE ACCRUAL CLAUSE DOES NOT CONTRAVENE THE
GENERAL OBLIGATIONS LAW
Quicken erroneously claims that the General Obligations Law bars
enforcement of the Accrual Clause. (See Quicken Br. at 26-32.) However,
General Obligations Law § 17-103 has no bearing on the Accrual Clause because
that provision was enacted simply to clarify the parameters pursuant to which
parties may contractually agree to toll a cause of action that has already accrued.
This plain reading of the statute is also confirmed by the legislative history of
section 17-103, which is discussed at length in the Trustee’s opening brief (Trustee
Br. at 21-22), but which Quicken ignores.
7
The Accrual Clause is by no means a pre-accrual promise “to waive,
to extend, or not to plead” the six-year statute of limitations for breach of contract;
nor is it a post-breach promise to extend the statute of limitations for an indefinite
period beyond six years. See General Obligations Law § 17-103. Only when the
conditions of the Accrual Clause have been met does a cause of action for breach
of contract against Quicken come into existence. And from that point on, the
7
Quicken accuses the Trustee of “not even mention[ing] these provisions of the General
Obligation [sic] Law” in its brief. (Quicken Br. at 27.) To the contrary, the Trustee discussed
section 17-103 and its legislative history in its opening brief to explain how the Appellate
Division erred in stating that “enforcement of the accrual provision, entered into at the inception
of the breach, [would] serve to ‘postpone the time from which the period of limitation is to be
computed’ . . . .” (See R1575-76 (quoting John J. Kassner & Co. v. City of New York, 46 N.Y.2d
544 551 (1979) (“Kassner”)).) The Kassner Court was quoting from a report of the 1961 New
York Law Review Commission, but the quoted language arose in an inapplicable context.
(Trustee Br. at 21-22.)
-18-
Trustee has six years to institute an action against Quicken. Quicken did not agree
in the Accrual Clause to waive, extend, or not to plead the statute of limitations as
a defense. Quicken agreed to when a cause of action for breach accrues.
The legislative history of General Obligations Law § 17-103 is
instructive. In 1961, the New York Law Review Commission (the “Commission”)
recommended to the Legislature an amendment to the personal property law “in
relation to agreements waiving the statute of limitations.” N.Y. L. REV. COMM’N
REP. NO. 65(E), at 95 (1961).
8
The Commission drafted the relevant amendment,
which was enacted by the Legislature and codified as General Obligations Law §
17-103. In its report, the Commission recognized that tolling agreements were
becoming increasingly popular, but that the parameters of such agreements were
unclear under existing law. N.Y. L. REV. COMM’N REP. NO. 65(E), at 97. In
reviewing then-existing case law in New York, the Commission determined that
“an oral promise not to plead the statute of limitations if the debt becomes barred is
unenforceable, at least where it is not supported by consideration,” id. at 98 (citing
Shapley v. Abbott, 42 N.Y. 443 (1870)), but that “a contract to waive the statute,
made on good consideration and after the accrual of the cause of action, has been
enforced as a contract, so as to bar the defense of the statute if [the] action is
brought within a ‘reasonable’ time.” Id. (citing Watertown Nat’l Bank v. Bagley,
8
Pursuant to Rule 500.1(h) of this Court’s Rules of Practice, the Trustee submitted a copy of the
Commission’s report to this Court in the Compendium of Cited Authority filed on June 26, 2017.
-19-
134 App. Div. 831 (4th Dep’t 1909), and Gorowitz v. Blumenstein, 184 Misc. 111
(Sup. Ct. N.Y. County 1944)).
The Commission then discussed a case in which the Second Circuit
enforced a written tolling agreement that suspended the running of the statute of
limitations for longer than six years after the tolling agreement was executed. Id.
at 99 (citing United States v. Curtiss Aeroplane Co., 147 F.2d 639 (2d Cir. 1945)).
In that case, the Second Circuit enforced the tolling agreement because, in its view,
the length of the tolling period was “by no means unreasonable” in light of the
circumstances of that case, even though suit was not instituted until more than
nineteen years after the tolling agreement was entered into. See Curtiss Aeroplane
Co., 147 F.2d at 639-40, 644.
The Commission concluded that post-accrual promises not to plead
the statute of limitations “should not be indefinite and subject merely to tests of
reasonableness, and that the parties should not be permitted to create periods
between themselves in excess of the periods set by the Legislature.” N.Y. L. REV.
COMM’N REP. NO. 65(E), at 99. Thus, the Commission recommended that the
Legislature enact a law that requires tolling agreements to be: (1) entered into
post-accrual; (2) in writing; and (3) for a period no longer than if the statute of
limitations was reset as of the date of the tolling agreement. See id. at 99-101.
-20-
This legislative history confirms that General Obligations Law § 17-
103 has nothing to do with a contractual provision setting forth the elements upon
which a “cause of action” “shall accrue.” The Commission had no occasion to
address, and the statute does not govern, commercial agreements defining the first
moment a breach occurs. Rather, General Obligations Law § 17-103 was enacted
only to place limits on post-accrual tolling agreements, and thus is inapposite here.
Quicken’s expansive interpretation of General Obligations Law § 17-
103 is also inconsistent with this Court’s precedent. In ACE, this Court reinforced
longstanding New York precedent that parties may agree on a demand that is “a
condition to a party’s performance,” and that if they do, such a demand is “a
substantive condition precedent to suit that delay[s] accrual of the cause of action.”
25 N.Y.3d at 597; see also Hahn, 18 N.Y.3d at 772 n.5 (citing Cont’l Cas. Co. v.
Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996)). Quicken’s overly broad reading
of General Obligations Law § 17-103 is inconsistent with New York law that
contracting parties may agree on such substantive conditions precedent.
9
Additionally, the limited case law that Quicken cites to ostensibly
support its statutory argument is inapplicable. (See Quicken Br. at 31.) The
9
In ACE, this Court also stated that “parties may contractually agree to undertake a separate
obligation, the breach of which does not arise until some future date.” 25 N.Y.3d at 594; see
also Bulova, 46 N.Y.2d at 608-9, 611. Quicken’s strained interpretation of General Obligations
Law § 17-103 as prohibiting any contractual provision that allows a cause of action for breach to
be brought more than six years after execution of the agreement also contradicts ACE’s
discussion of guarantees of future performance.
-21-
Court’s decision in Bayridge Air Rights v. Blitman Construction Corp., 80 N.Y.2d
777 (1992), concerned a tolling agreement entered into after a cause of action
arose, not an accrual clause specifying conditions to the very existence of a cause
of action. The Court in Bayridge found that the tolling agreement there violated
General Obligations Law § 17-103 because the tolling agreement did not include a
specific termination date and had an indefinite term. Id. at 779-80. By contrast,
the Accrual Clause is not a post-accrual tolling agreement with an indefinite term.
Once the conditions of the Accrual Clause have been satisfied, a cause of action
accrues, and the Trustee has exactly six years to file suit.
Finally, Quicken’s truncated discussion of the Court’s decision in
Kassner misconstrues that case. (See Quicken Br. at 29-30.) Quicken erroneously
accuses the Trustee of “omit[ting] from its discussion that in Kassner the Court
squarely addressed ‘when did the cause of action accrue within the meaning of the
statute of limitations.’” (Id. at 29 (quoting Kassner, 46 N.Y.2d at 549).) But the
analysis from Kassner on which the Appellate Division relied in striking down the
Accrual Clause was not the analysis cited by Quicken concerning the issue of when
the cause of action accrued.
10
Instead, the portion of Kassner on which the
10
That issue required the Kassner Court to determine whether the cause of action for breach of
contract accrued when the Comptroller completed its audit of the plaintiff’s work, or when a
certificate of final payment was filed in the office of the Comptroller. 46 N.Y.2d at 548-49. The
Court held that the cause of action accrued when the Comptroller’s “audit was completed and the
plaintiff was informed of the results” because that is when the plaintiff had a right to final
payment and the city had an obligation to pay. Id. at 550.
-22-
Appellate Division relied addressed the following issue articulated by the Kassner
Court: “can a contractual limitations clause, which begins to run at a later date
than the time of accrual under the statute, effectively extend the Statute of
Limitations in an action on the contract.” 46 N.Y.2d at 549-50 (emphasis added).
11
As explained at length in the Trustee’s opening brief, the Appellate Division’s
reliance on the Kassner Court’s analysis of the latter issue was misplaced because
fixing conditions to accrual by defining in a contract when a cause of action
accrues and attempting to use a contractual limitations clause to extend the
statutory period are two markedly different things. (Trustee Br. at 18-22.) The
former exists here; the latter does not.
Although Quicken relied on the General Obligations Law below, the
Appellate Division did not even mention the statute in its opinion. (See R1567-
81.) General Obligations Law § 17-103 does not apply to the MLPWA.
Quicken’s argument that the Accrual Clause violates the General Obligations Law
is thus meritless.
11
That issue required the Kassner Court to determine whether a contractual provision stating that
“[n]o action shall be . . . maintained against the City 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 in the office of the Comptroller of the City of the certificate for the final
payment hereunder” served to extend the statute of limitations to six years and eight months after
the cause of action accrued. 46 N.Y.2d at 548, 550. The Court held that it did not. Id. at 550-
52.
CONCLUSION
For the foregoing reasons, and for the reasons set forth in the
Trustee’s opening brief, the judgment of the Appellate Division should be
reversed.
Dated: September 8, 2017 Respectfully subrircitted,
Zachary DJ RosenbaumzrosenbWim@lowenstein.com
Michael J. Hampson
mhampson@lowenstein.com
LOWENSTEIN SANDLER LLP
1251 Avenue of the Americas
New York, NY 10020
212.262.6700
Counsel for Plaintiff-Appellant
Robert S. Smith
rsmith@fklaw.com
FRIEDMAN KAPLAN SEILER &
ADELMAN LLP
7 Times Square
New York, NY 10036
212.833.1100
Of Counsel to Plaintiff-Appellant
-23-
CERTIFICATE OF COMPLIANCE
I hereby certify pursuant to 22 NYCRR § 500.13(c) that this brief was
prepared on a computer.
A proportionally spaced typeface was used as follows:
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 corporate disclosure statement,
the table of contents, the table of cases and authorities, and any addendum
containing material required by subsection 500.1(h) is 5,992.
Dated: September 8, 2017
Zachi URosenbaum