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.
>> >>
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: June 26, 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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STATUS OF RELATED LITIGATION
On April 13, 2017, this Court granted leave to appeal in U.S. Bank
National Association, solely in its capacity as Trustee of the J.P. Morgan
Alternative Loan Trust 2007-A2 v. GreenPoint Mortgage Funding, Inc., APL-
2017-00072 (“JPALT”), which concerns a contractual provision similar to the
provision at issue here.
On June 12, 2017, the Appellant-Respondent in JPALT filed its
opening brief. The remaining briefing schedule in JPALT is below:
July 27, 2017 Opening brief of Respondent-Appellant
September 11, 2017 Responding brief of Appellant-Respondent
September 26, 2017 Reply brief of Respondent-Appellant
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TABLE OF CONTENTS
Page
CORPORATE DISCLOSURE STATEMENT .......................................................... i
STATUS OF RELATED LITIGATION .................................................................. ii
TABLE OF CONTENTS ......................................................................................... iii
TABLE OF CASES AND AUTHORITIES .............................................................. v
INTRODUCTION ..................................................................................................... 1
STATEMENT OF QUESTIONS PRESENTED ....................................................... 3
STATEMENT OF JURISDICTION.......................................................................... 4
STATEMENT OF THE CASE .................................................................................. 5
ARGUMENT ........................................................................................................... 12
THE ACCRUAL CLAUSE SHOULD BE ENFORCED AS
WRITTEN ........................................................................................... 12
New York’s Deeply Rooted Commitment to Freedom
of Contract Requires Enforcement of the Accrual
Clause ........................................................................................ 12
There Is No Valid Policy Reason for Refusing to
Enforce the Accrual Clause ...................................................... 15
Kassner Does Not Require Invalidation of the Accrual
Clause ........................................................................................ 18
New York Should Not Depart from Delaware’s
Acceptance of Accrual Clauses ................................................ 22
THE PLAIN LANGUAGE OF THE ACCRUAL CLAUSE
CREATES A SUBSTANTIVE CONDITION PRECEDENT ........... 24
The Demand Requirement in the Accrual Clause Is a
Condition to the Existence of a Cause of Action ...................... 24
The Appellate Division Erred in Extending ACE, Which
Did Not Involve an Accrual Clause, to this Case ..................... 28
The Second Circuit in Quicken Misconstrued ACE ................. 32
CONCLUSION ........................................................................................................ 35
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TABLE OF CASES AND AUTHORITIES
PAGES
CASES
ACE Securities Corp. v. DB Structured Products, Inc.,
25 N.Y. 3d 581 (2015) .................................................................................passim
Aircraft Services International, Inc. v. TBI Holdings Overseas, Inc.,
2014 WL 4101660 (Del. Super. Ct. Aug. 5, 2014) ............................................. 22
Allstate Ins. v. Spinelli,
443 A.2d 1286 (Del 1982) .................................................................................. 23
Am. Bldg. Contractors Assoc., Inc. v. Mica & Wood Creations, LLC,
23 A.D.3d 322 (2d Dep’t 2005) .......................................................................... 31
Beal Sav. Bank v. Sommer,
8 N.Y.3d 318 (2007) ........................................................................................... 30
Bear Stearns Mortg. Funding Trust 2006-SL1 v. EMC Mortg. LLC,
2015 WL 139731 (Del. Ch. Jan. 12, 2015) ............................................... 2, 22, 23
Bulova Watch Co. v. Celotex Corp.,
46 N.Y.2d 606 (1979) ......................................................................................... 29
Continental Casualty Co. v. Stronghold Insurance Co.,
77 F.3d 16 (2d Cir. 1996) ....................................................................... 26, 27, 28
Crocker v. Ireland,
235 A.D. 760 (4th Dep’t 1932) ........................................................................... 21
Deutsche Bank National Trust Co. v. Quicken Loans, Inc.,
810 F.3d 861 (2d Cir. 2015) ........................................................................passim
Ely-Cruikshank Co. v. Bank of Montreal,
81 N.Y.2d 399 (1993) ......................................................................................... 16
Fisher v. Mayor of N.Y.,
67 N.Y. 73 (1876) ......................................................................................... 29, 30
-v-
Flanagan v. Mount Eden Gen. Hosp.,
24 N.Y.2d 427 (1969) ......................................................................................... 17
Goodyear v. Fleece,
1988 WL 130470 (Del. Super. Ct. Nov. 16, 1988) ............................................. 23
Great Canal Realty Corp. v. Seneca Ins. Co.,
5 N.Y.3d 742 (2005) ........................................................................................... 27
Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co.,
18 N.Y.3d 765 (2012) ............................................................................. 24, 25, 26
IRB-Brasil Resseguros, S.A. v. Inepar Invs., S.A.,
20 N.Y.3d 310 (2012) ................................................................................... 15, 16
J. Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda) Ltd.,
37 N.Y.2d 220 (1975) ................................................................................... 14, 15
John J. Kassner & Co. v. City of New York,
46 N.Y.2d 544 (1979) ..................................................................................passim
Millsboro Fire Co. v. Constr. Mgmt. Serv. Inc.,
2009 WL 846614 (Del. Super. Ct. Mar. 31, 2009) ............................................. 23
Morlee Sales Corp. v. Mfrs. Trust Co.,
9 N.Y.2d 16 (1961) ............................................................................................. 14
New England Mut. Life Ins. Co. v. Caruso,
73 N.Y.2d 74 (1989) ..................................................................................... 14, 17
Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.,
86 N.Y.2d 685 (1995) ......................................................................................... 14
Pine v. Okoniewski,
256 A.D. 519 (4th Dep’t 1939) ........................................................................... 21
R/S Assocs. v. N.Y. Job Dev. Auth.,
98 N.Y.2d 29 (2002) ........................................................................................... 13
Rawlings v. Ray,
312 U.S. 96 (1941) .............................................................................................. 23
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Shapley v. Abbott,
42 N.Y. 443 (1870) ............................................................................................. 21
Signature Realty, Inc. v. Tallman,
2 N.Y.3d 810 (2004) ........................................................................................... 13
U.S. Bank Nat’l Ass’n v. Greenpoint Mortg. Funding, Inc.,
No. 651954/2013, 2015 WL 915444 (Sup. Ct. N.Y. County Mar. 3, 2015) ...... 27
Vermont Teddy Bear Co. v. 538 Madison Realty Co.,
1 N.Y.3d 470 (2004) ..................................................................................... 29, 32
Wilheim v. Nationwide Gen. Ins. Co.,
2011 WL 4448061 (Del. Super. Ct. May 11, 2011) ........................................... 23
STATUTES
N.Y. General Obligations Law § 5-1401 ................................................................. 15
N.Y. General Obligations Law § 17-103 ................................................................. 22
OTHER AUTHORITIES
51 Am. Jur. 2d, Limitation of Actions § 127 ............................................................ 23
Black’s Law Dictionary (10th ed. 2014) .................................................................. 13
1A C.J.S. Actions § 301 ........................................................................................... 23
17A C.J.S. Contracts § 450 ..................................................................................... 23
George Bundy Smith & Thomas J. Hall, Interpreting Conflicting
Contractual Provisions, N.Y.L.J., June 2014 ..................................................... 14
N.Y. L. REV. COMM’N REP. NO. 65(E) ............................................................... 21, 22
Restatement (First) of Contracts § 250 (1932) ........................................................ 23
Restatement (Second) of Contracts § 225 (1981) .................................................... 23
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) ........ 15
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 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. (“Quicken”).
INTRODUCTION
This appeal raises an important issue of contractual freedom in the
State of New York. May a contract specify that no cause of action accrues until
enumerated events have occurred? The Appellate Division held that such a
contractual provision is contrary to public policy. The Trustee demonstrates below
that no such limitation on the freedom to contract is justified either by policy or
precedent. The Appellate Division confused a pre-dispute agreement to lengthen a
statute of limitations, which is invalid under settled law, with one to fix agreed-on
accrual conditions, which offends no public policy.
The Appellate Division also based its decision on what it believed to
be an independent ground: that the contract imposed only a procedural, not a
substantive, condition to bringing suit. This holding – and that of the decision of
the Second Circuit Court of Appeals in Deutsche Bank National Trust Co. v.
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Quicken Loans, Inc., 810 F.3d 861 (2d Cir. 2015) (“Quicken”), on which the
Appellate Division relied – rests on a misunderstanding of the procedural versus
substantive distinction made in ACE Securities Corp. v. DB Structured Products,
Inc., 25 N.Y. 3d 581 (2015) (“ACE”). Under ACE, whether a condition is
procedural or substantive depends on the intent of the parties as reflected in their
contract. Here, by including an accrual clause (which the ACE contract did not
have), the parties plainly expressed their intent that no cause of action would
accrue until stated conditions were met – in other words, that the conditions were
substantive, not procedural.
This Court should clarify that the rule in New York is no different
from the one in Delaware: 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 Trust 2006-SL1 v. EMC Mortg. LLC, No. 7701-
VCL, 2015 WL 139731, at *10 (Del. Ch. Jan. 12, 2015) (“Bear Stearns”).
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STATEMENT OF QUESTIONS PRESENTED
1. Are sophisticated commercial parties to a contract permitted to
agree that no “cause of action” “relating to or arising out of” a breach of
representation and warranty “shall accrue” until certain enumerated conditions are
met?
The Appellate Division erred in holding that the clause at issue (the
“Accrual Clause”), which was negotiated by sophisticated commercial parties, is
unenforceable as against New York public policy.
2. Is the condition in the Accrual Clause that demand must be
made – the fulfillment of which is required for a cause of action relating to or
arising out of a breach of representation and warranty to exist – a substantive
condition precedent to suit?
The Appellate Division erred in holding that the demand requirement
was a procedural, and not a substantive, condition precedent, even though the
parties clearly stated their intent to make it a substantive condition.
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STATEMENT OF JURISDICTION
This Court has jurisdiction over this appeal pursuant to CPLR §
5602(a)(1)(i) and CPLR § 5611 because the underlying action originated in
Supreme Court, New York County (R9-19); the decision below is an order of the
Appellate Division, First Department, entered on August 11, 2016, which finally
determined the action and is not appealable as a matter of right (R1566-81); and
the Appellate Division, First Department granted leave to appeal on December 15,
2016, certifying the following question of law to be reviewed by this Court: “Was
the order of the Supreme Court, as affirmed by [the Appellate Division], properly
made?” (R1582-83).
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STATEMENT OF THE CASE
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 Quicken originated and then sold for ultimate inclusion in a
securitized investment trust (the “Securitization”). Quicken made the mortgage
loans to home buyers and then, 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 later resold 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 in which the mortgage loans were placed was
created through a Pooling and Service Agreement (the “PSA”). Pursuant to the
PSA, the Depositor sold the mortgage loans to 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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The parties to the Securitization chose New York substantive law to
govern their contractual rights. All of the agreements described above – the
MLPWA, the ARA and the PSA – contained a choice of law provision stating that
they are governed by, and are to be construed in accordance with, the laws of New
York. (R106 § 20; R610 ¶ 5; R494 § 12.04.)
Quicken’s Representations and Warranties
As the originator and seller of the mortgage loans that were conveyed
to the Trust, Quicken made numerous representations and warranties 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.) 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.
The MLPWA provided that the representations and warranties
contained in Sections 9.01 and 9.02 of the MLPWA would survive the sale of the
mortgage loans by Quicken. (R95 § 9.03.) In other words, Quicken agreed that
the representations and warranties would have continued force and effect
prospectively after the Securitization closed.
-7-
The MLPWA contained a “repurchase protocol” that is similar to
provisions in every RMBS case this Court has heard in recent years. Quicken
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. (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 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.”).)
The Accrual Clause
In addition to the repurchase protocol, the MLPWA contained a
separate clause – the Accrual Clause – that this Court has not previously
considered in recent RMBS cases. The parties unambiguously agreed in the
Accrual Clause that a violation of the representations and warranties did not by
itself give rise to a cause of action for breach of contract, but that three conditions
must occur before such a cause of action would “accrue.” The clause provides:
Any cause of action against [Quicken] relating to or
arising out of the breach of any representations and
warranties made in Subsections 9.01 and 9.02 shall
accrue as to any Mortgage Loan upon (i) discovery of
-8-
such breach by the Purchaser or notice thereof by
[Quicken] to the Purchaser, (ii) failure by [Quicken] to
cure such breach, substitute a Qualified Substitute
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.) In other words, no cause of action accrues until the process
described in the repurchase protocol is complete.
Quicken’s Failure to Cure or Repurchase
In 2013, a certificateholder in the Trust – the Federal Home Loan
Mortgage Corporation, or Freddie Mac – engaged an underwriting firm to examine
the mortgage loans. (R37 ¶ 35.) The underwriting firm re-underwrote a sample of
124 mortgage loans that had been placed in the Trust and determined that not one
of them conformed to Quicken’s representations and warranties. (R37-38 ¶¶ 35-
36.) Additionally, a forensic examination was conducted of publicly available data
related to the mortgage loans. This examination revealed many breaches 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 extent of these breaches, it is a compelling inference
that Quicken’s own underwriting due diligence 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
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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 Freddie Mac, the Trustee learned
of Quicken’s breaches of representations and 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 Freddie Mac, 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. (R45 ¶ 62.)
Notwithstanding this notice and demand, Quicken neither cured nor
repurchased any of the deficient mortgage loans. (R47 ¶ 71.) Accordingly, it was
not until 2013 that each element of the Accrual Clause was met.
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Supreme Court Dismisses the Trustee’s Suit against Quicken as
Time-Barred
The Trustee began this suit against Quicken by filing a Summons with
Notice on August 30, 2013.1 (R13.) 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. (R25-55.) Quicken
filed a motion to dismiss, arguing primarily that the action was time-barred. (R20.)
By Decision and Order dated April 13, 2015, and entered on April 14,
2015, Supreme Court granted Quicken’s motion. (R11.) Supreme Court held that
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 Supreme Court, Quicken made its
representations and warranties when it sold the mortgage loans, which occurred no
later than May 31, 2007. (R15.) Turning to the Accrual Clause, Supreme Court
correctly held that the demand requirement is a substantive condition precedent
and that the parties intended the cause of action would not accrue until demand
was made and refused; Supreme Court held, however, that the parties’ agreement
1 The Summons with Notice also named Flagstar Capital Markets Corporation (“Flagstar”) as a
defendant. The Trustee later voluntarily discontinued its claims against Flagstar without
prejudice.
-11-
was void as against public policy. (R15-16.) Thus, Supreme Court dismissed the
Trustee’s Complaint as time-barred.2
The Appellate Division Affirms Supreme Court’s Dismissal of the
Complaint
The Trustee appealed (R-7-8), and on August 11, 2016, the Appellate
Division affirmed Supreme Court’s dismissal ruling (R1566-81). The Appellate
Division held that – notwithstanding the intent of the parties as expressed in the
unambiguous Accrual Clause – the Trustee’s cause of action against Quicken for
breach of contract accrued no later than May 31, 2007, the last date Quicken sold
the mortgage loans in question. (R1574-75.)
The Appellate Division held that the Accrual Clause is unenforceable
as against public policy. (R1575-76.) According to the Appellate Division, the
Accrual Clause improperly postponed the time from when the statute of limitations
begins to run. (Id. (quoting John J. Kassner & Co. v. City of New York, 46 N.Y.2d
544, 551 (1979) (“Kassner”).) The Appellate Division stated that to enforce the
Accrual Clause would be tantamount to applying a “discovery” rule to statutes of
limitations for breach of contract. (R1576 (quoting ACE, 25 N.Y.3d at 594).)
In an alternative holding, relying on the reasoning of the Second
Circuit’s 2015 decision in Quicken, 810 F.3d 861, the Appellate Division held that,
2 Supreme Court also made several other rulings that are not at issue on this appeal.
-12-
even if not unenforceable as against public policy, the Accrual Clause was not a
promise of future performance (R1577), and was not a substantive condition
precedent to a cause of action for breach of representations and warranties (R1578-
79). The Appellate Division determined that, even though the Accrual Clause
states that no claim shall “accrue” until the Trustee makes a demand on Quicken
for compliance with the MLPWA, the demand requirement does not “delay accrual
of the breach of contract claim” (R1578) because “the condition [that plaintiff
demand defendant’s compliance with the agreement] was a procedural prerequisite
to suit, not a substantive condition to defendant’s performance.” (R1579
(alteration in original, internal quotation mark omitted) (quoting ACE, 25 N.Y.3d
at 598, and citing Quicken, 810 F.3d at 867).) The court did not explain how its
holding that the Accrual Clause “does not delay accrual” was consistent with its
assumption that the clause – which says on its face that it does delay accrual – was
enforceable.
ARGUMENT
THE ACCRUAL CLAUSE SHOULD BE ENFORCED AS WRITTEN
New York’s Deeply Rooted Commitment to Freedom of Contract
Requires Enforcement of the Accrual Clause
It is a basic principle of New York law that agreements are to be
enforced as written to effectuate the contracting parties’ intent. Where the
language of an agreement is clear and unambiguous, the contract is interpreted and
-13-
applied in accordance with its plain terms. R/S Assocs. v. N.Y. Job Dev. Auth., 98
N.Y.2d 29, 33 (2002); see also Signature Realty, Inc. v. Tallman, 2 N.Y.3d 810,
811 (2004) (“[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 quotations omitted)). The question here is whether a pre-dispute
agreement fixing conditions to accrual of a claim is an exception to that rule. The
Trustee submits that it is not.
In the MLPWA, Quicken expressly agreed that a “cause of action”
against it for breach of representations and warranties would not “accrue” unless
and until three specific conditions were satisfied. (R98 § 9.03.) There is no
ambiguity in the Accrual Clause. “Accrue” is a word with a precise legal meaning:
to “come into existence as an enforceable claim or right.” Black’s Law Dictionary
(10th ed. 2014). Thus, the parties agreed that a false representation and warranty
in and of itself is not a breach of the MLPWA; instead, a breach occurs – and a
cause of action for that breach comes into existence (accrues) – only after the
conditions of the Accrual Clause are complete. Quicken does not, and cannot,
dispute that those conditions were not satisfied until 2013. (R44 ¶ 61.)
The decisive issue is whether, as the Appellate Division held, public
policy precludes enforcement of the Accrual Clause. But the public policy most
relevant to this case is that favoring freedom of contract. As this Court has
-14-
emphasized repeatedly, “[f]reedom of contract itself is deeply rooted in public
policy.” New England Mut. Life Ins. Co. v. Caruso, 73 N.Y.2d 74, 81 (1989).
Thus, “[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). As aptly stated by former Associate Judge George
Bundy Smith, “it is bedrock law in New York that the intent of the parties is
paramount in interpreting contracts.” George Bundy Smith & Thomas J. Hall,
Interpreting Conflicting Contractual Provisions, N.Y.L.J., June 2014, at 1.
Accordingly, written contracts must be enforced according to their plain terms.
See, e.g., Morlee Sales Corp. v. Mfrs. 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.”).
This principle allows sophisticated parties who agree that New York
law governs their contract to participate in commercial transactions with the
confidence that their contractual intent will be given effect by the courts. As this
Court has recognized for decades, New York’s deeply rooted commitment to
freedom of contract is a significant contributing factor to New York’s status as 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
-15-
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.” Id.
Sophisticated commercial parties overwhelmingly select New York
law to govern their agreements more than any other jurisdiction in the United
States, with the expectation – based on longstanding judicial precedent – that New
York courts will enforce the plain terms of their written agreements. 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) (finding that nearly 46% of
commercial parties in the U.S. choose New York law to govern their contracts).
Indeed, the New York Legislature has expressed its desire “to promote and
preserve New York’s status as a commercial center and to maintain predictability
for [contracting] parties.” IRB-Brasil Resseguros, S.A. v. Inepar Invs., S.A., 20
N.Y.3d 310, 314-16 (2012) (citing General Obligations Law § 5-1401(1), which
“[t]he Legislature passed . . . in 1984 in order to allow parties without New York
contacts to choose New York law to govern their contracts.”).
There Is No Valid Policy Reason for Refusing to Enforce the
Accrual Clause
The Appellate Division acknowledged that “freedom of contract is
fundamental in New York law” (R1575), but found that this freedom must give
-16-
way in this case to countervailing public policies, specifically those of “finality,
certainty and predictability” that are codified in New York’s statutes of limitations.
(Id. (quoting ACE, 25 N.Y.3d at 593).) The Appellate Division was wrong,
however, in thinking that the Accrual Clause jeopardizes any public policies. A
contractually agreed-upon accrual date enhances “certainty and predictability”;
there is no surer way for the parties to know when a cause of action accrues than to
agree upon it in their contract. And the policy of finality is not undermined when a
claim is allowed to exist for no more than the statutory limitation period (six years,
in this case) from a contractually-chosen moment.
The Appellate Division, citing ACE, was concerned that the Accrual
Clause would effectively apply a “discovery rule” and create “an imprecisely
ascertainable accrual date.” (R1576.) The discovery rule generally is not applied
to breach of contract actions because it creates uncertainty about when the cause of
action accrues. See Ely-Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 403
(1993) (rejecting discovery rule because it “would be entirely dependent on the
subjective equitable variations of different Judges and courts instead of the
objective, reliable, predictable and relatively definitive rules”). But 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,
-17-
ascertainable. The conditions to accrual are clear and unambiguous. It is true, as
the Appellate Division noted, that, because “some of the loans extend for 30 years”
(R1576), accrual could occur long after the contract was signed. But that
possibility exists in many instances where parties enter into a contract of long
duration. The Appellate Division offered no reason why sophisticated parties who
are willing to risk such long-term exposure to liability should be prohibited from
doing so.
To the contrary, pardoning culpable parties who define precisely when
a “cause of action” against them “shall accrue” from the very bargain they struck,
perverts a crucial aim of statutes of limitations; that is, “fairness to the defendant.”
Flanagan v. Mount Eden Gen. Hosp., 24 N.Y.2d 427, 429 (1969).
There is, in short, no public policy that would support invalidating the
Accrual Clause beyond the generalized one of repose. In a sense, “repose” is
always furthered when a claim is held to be time-barred sooner rather than later –
but it has never been the law that claims are presumed time-barred. The abstract
interest in repose is not sufficient to overcome New York’s strong countervailing
interest in freedom of contract. See New England Mut. Life Ins. Co., 73 N.Y.2d at
81. Public policy calls for the enforcement of the Accrual Clause.
-18-
Kassner Does Not Require Invalidation of the Accrual Clause
The Appellate Division relied on this Court’s decision in Kassner,
apparently reading that case to hold that a pre-dispute agreement may not fix
conditions to accrual of a cause of action. (See R1575-76.) But the Appellate
Division misread the case. The question Kassner addressed was a different one:
“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). To fix conditions
to accrual and to “extend” a statute of limitations by setting it to run from a date
later than the accrual date are two different things.
Kassner involved a claim for payment by a contractor against the City
of New York, which payment was only due after an audit by the Comptroller. The
Court held that the plaintiff’s cause of action for failure to pay accrued when the
Comptroller had completed its audit of the plaintiff’s bill. Id. at 550. The contract
also contained a clause providing that “[n]o action shall be maintained . . . unless
such action shall be commenced within six (6) months” after the plaintiff
submitted a requisition for payment and a certificate of final payment was filed
with the Comptroller, which did not occur until nearly seven years after the audit.
Id. at 548. Based on that clause, the plaintiff argued that its right of action
continued to exist from the time of accrual until six months after the certificate for
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the undisputed amount of the bill was filed. Id. at 549. This was, as the Court
recognized, an effort to “extend” the statute to create a limitations period longer
than six years. The Court held that this was something the parties could not do.
Id. at 550-52.
The Court held that the provision regarding the filing of a certificate
of final payment was a “limitations provision” that was “undoubtedly . . . included
to shorten the Statute of Limitations.” Id. at 552 (emphasis added). The Court
also found that an attempt to extend the statute of limitations for breach of contract
before a claim accrued would be unenforceable as against public policy. Id. at 551.
The Court said that such an attempt would likely be “the result of ignorance,
improvidence, an unequal bargaining position or was simply unintended.” Id.
Unlike the Accrual Clause, the contract in Kassner did not say, and
the Court held that it could not reasonably be read to mean, that no cause of action
existed until the filing of a certificate of final payment. The Accrual Clause is thus
markedly different from the clause in Kassner. Here, by using the words “cause of
action,” “relating to or arising out of,” and “shall accrue,” the parties made
unmistakably clear that no cause of action existed until the purchaser made demand
for compliance with the MLPWA. The Accrual Clause therefore does not
“extend” the statute of limitations. The statutory period remains at six years from
breach and no more. Rather, the Accrual Clause fixes the time when a breach
-20-
occurs, as contracting parties are permitted to do. The contract specifies conditions
precedent to the existence of a cause of action for breach, and no cause of action
for which to compute the period of limitations arose until the Accrual Clause was
satisfied.
The concerns expressed by the Court in Kassner regarding an
enlargement of the statute of limitations for breach of contract are absent here. The
Accrual Clause plainly is not the result of “ignorance, improvidence, an unequal
bargaining position or . . . simply unintended.” Id. Quicken is one of the country’s
most sophisticated mortgage lenders and it knowingly agreed to a clear and
unambiguous contractual provision.
The parties here included the Accrual Clause in the MLPWA for their
mutual benefit. While a clause extending a limitations period, by its nature,
benefits only the non-breaching party, here, by contrast, Quicken mutually benefits
from the Accrual Clause because the clause affords Quicken the opportunity to
investigate and cure or substitute a defective loan before a cause of action accrues
against it and enforcement is available to the Trustee.
The authorities cited by the Court in the Kassner passage relied on by
the Appellate Division do not discuss, let alone prohibit, a contractual clause like
this one, where private parties establish by contract when a cause of action for
breach accrues. Id. at 551. Rather, those authorities – the earliest of which dates
-21-
back well over a century – stand for the unremarkable proposition that a
borrower’s agreement never to assert the statute of limitations as a defense to a
claim for repayment is unenforceable as against public policy. See Shapley v.
Abbott, 42 N.Y. 443, 452 (1870) (finding that “no case has occurred to me in
which a party can, in advance, make a valid promise that a statute founded in
public policy shall be inoperative”); Crocker v. Ireland, 235 A.D. 760, 761 (4th
Dep’t 1932) (finding that the statute of limitations “may not be waived” in the
parties’ contract); Pine v. Okoniewski, 256 A.D. 519, 520 (4th Dep’t 1939)
(stating, in dictum, that, to the extent the motion court construed a contractual term
as a waiver of the statute of limitations, that term would be unenforceable).
The Appellate Division quoted the Kassner Court’s statement 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 Kassner, 46 N.Y.2d at 551 (emphasis in
original)).) The Kassner Court was in turn quoting from a report of the 1961 New
York Law Review Commission, N.Y. L. REV. COMM’N REP. NO. 65(E), at 98
(1961). But the Appellate Division here took the Commission’s language out of
context.
The Commission was not talking about contractual provisions like the
Accrual Clause, but rather about agreements to toll the statute of limitations.
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Writing in 1961, the Commission observed 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 97-99.
Consequently, the Commission recommended that the Legislature enact a law
explicitly permitting tolling agreements. See id. at 99-101. That recommendation
resulted in General Obligations Law § 17-103, which – as its legislative history
confirms – was enacted solely to clarify limits on post-accrual tolling agreements.
But this General Obligations Law provision has nothing to do with this case.
Indeed, the Accrual Clause is nothing like either the “limitations provision” in
Kassner that was intended to “shorten” the statute of limitations, or the tolling
agreements with which the Law Revision Commission was concerned.
New York Should Not Depart from Delaware’s Acceptance of
Accrual Clauses
In Bear Stearns, the Delaware Court of Chancery was faced with an
accrual provision that was indistinguishable from the Accrual Clause here. 2015
WL 139731, at *4. The court found the “Accrual Provision” was enforceable
under Delaware’s statute of limitations principles. The Vice Chancellor explained:
A long line of Delaware decisions follows hornbook law
in treating a contractual accrual provision as a condition
precedent to a plaintiff’s ability to sue such that the
statute of limitations does not begin to run until the
condition precedent is met. The most recent decision in
this line of authority is [Aircraft Services International,
-23-
Inc. v. TBI Holdings Overseas, Inc., 2014 WL 4101660
(Del. Super. Ct. Aug. 5, 2014)] . . . .
. . .
Under [Delaware rules governing its statute of
limitations], the Accrual Provision operated as a
condition precedent to when a claim arose and the statute
of limitations began to run. That condition could not
have been met until the Trust demanded in December
2011 that EMC comply with the Repurchase Provision
and then EMC failed to repurchase loans within 90 days
of notice.
Id. at *10-12 (citing Allstate Ins. v. Spinelli, 443 A.2d 1286, 1287 (Del 1982);
Wilheim v. Nationwide Gen. Ins. Co., 2011 WL 4448061, at *3 (Del. Super. Ct.
May 11, 2011); Goodyear v. Fleece, 1988 WL 130470, at *2 (Del. Super. Ct. Nov.
16, 1988); Millsboro Fire Co. v. Constr. Mgmt. Serv. Inc., 2009 WL 846614, at *7
(Del. Super. Ct. Mar. 31, 2009); Rawlings v. Ray, 312 U.S. 96, 98 (1941); 51 Am.
Jur. 2d, Limitation of Actions § 127; 1A C.J.S. Actions § 301; 17A C.J.S. Contracts
§ 450; Restatement (Second) of Contracts § 225 (1981); Restatement (First) of
Contracts § 250 (1932)).
There is no sound reason why commercial parties in New York, any
more than in Delaware, should be prohibited from specifying in their contract
conditions upon which a claim for breach arises.
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THE PLAIN LANGUAGE OF THE ACCRUAL CLAUSE CREATES
A SUBSTANTIVE CONDITION PRECEDENT
The Demand Requirement in the Accrual Clause Is a Condition to
the Existence of a Cause of Action
In determining whether a cause of action for breach of contract
accrues before or after a demand for payment, New York courts make the useful
distinction between “substantive” demands that are a condition to a party’s
performance and “procedural” demands that merely seek a remedy for a
preexisting wrong. See ACE, 25 N.Y.3d at 597. This Court’s decisions make plain
the test to determine whether a demand is substantive or procedural: if the demand
is “part of the cause of action,” id., then the demand is substantive; if the demand
merely memorializes a right to a remedy, it is procedural. See, e.g., Kassner, 46
N.Y.2d at 550; Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765,
772 n.5 (2012) (“Hahn”). It is clear from the cases that the question is one of
contract interpretation: ultimately, the parties’ intent controls. That makes the
substantive versus procedural question easy to resolve here, because the parties
said in so many words that demand was a pre-condition to accrual of a cause of
action – i.e., that it was substantive. Because the Accrual Clause states that “the
cause of action . . . shall accrue” only when demand for compliance is made, the
demand is by definition “part of the cause of action,” and the Accrual Clause
-25-
therefore meets the test for identifying a substantive condition precedent. ACE, 25
N.Y.3d at 597.
Kassner and Hahn exemplify the distinction between a substantive
and a procedural condition precedent. In Kassner, the plaintiff’s charges to the city
for its work were “‘subject to audit and revision by the Comptroller’ of the city.”
46 N.Y.2d at 547-48. The Court held the cause of action did not accrue until after
the audit because the purpose of the audit provision was to allow the defendant
time to investigate the demand for payment before determining whether the
demand was justified. See id. at 550. Hence, completion of the audit was a
substantive condition. In Hahn, 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 because, unlike in Kassner, the contract
“contained no condition precedent” and did not give the respondent “any time to
investigate” the amounts claimed in the invoice. See 18 N.Y.3d at 772 n.5
(emphasis added); id. at 771–72 (discussing Kassner).
Here, just as the City in Kassner had a right under the contract to audit
the plaintiff’s statements before making payment – and unlike the contract in
Hahn, which contained no condition precedent or right to investigate – Quicken
had a right to inspect the allegedly defective loans before becoming obligated to
cure, substitute or repurchase them. The Trustee’s right to payment of the
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repurchase price under the MLPWA arose only after Quicken had an opportunity
to investigate any asserted defects and, in addition, each of the conditions set forth
in the Accrual Clause were completed. (See R98 § 9.03.) The Accrual Clause thus
falls squarely within New York’s “general rule” that, when a “right . . . is subject
to a condition, the obligation . . . arises and the cause of action accrues, only when
the condition has been fulfilled.” See Kassner, 46 N.Y.2d at 550 (addressing
accrual with respect to a right to final payment). Quicken therefore does not
breach the contract, and no cause of action exists, unless Quicken has an
opportunity to investigate the loans and refuses to cure or repurchase them.
Indeed, in Hahn, the Court found that, “[u]nlike [Kassner], where the
plaintiff’s right to payment was expressly conditioned on an audit by a third party,
[the claimant] cannot point to any contract language unambiguously conditioning
its right to payment on its own demand.” 18 N.Y.3d at 771-72. In this case, by
contrast, the Accrual Clause does exactly that. The Court in Hahn also recognized
the Second Circuit’s holding, in the reinsurance context, that a demand for
payment is a substantive condition precedent to suit. Id. at 772 n.5 citing
Continental Casualty Co. v. Stronghold Insurance Co., 77 F.3d 16, 19-21 (2d Cir.
1996) (“Continental”) (the Second Circuit “reason[ed] that such conditions are
-27-
common in insurance contracts because they ‘allow[] the insurance company time
to investigate and pay the claim.’”). 3
In this case, as Supreme Court correctly observed, by adding the
Accrual Clause to the MLPWA, the parties intended to “specif[y] conditions that
must be met before any cause of action ‘accrue[s]’ for breach of representations
and warranties regarding the mortgage loans.” U.S. Bank Nat’l Ass’n v.
Greenpoint Mortg. Funding, Inc., No. 651954/2013, 2015 WL 915444, at *6 (Sup.
Ct. N.Y. County Mar. 3, 2015) (second alteration in original) (reasoning
incorporated by reference by Supreme Court at R15). In the context of a
securitization of hundreds of thirty-year mortgages, the Accrual Clause expresses
the parties’ commercial intent that demand is a substantive condition to the
existence of a cause of action. Because of the Accrual Clause, Quicken benefits by
avoiding the automatic repurchase of every single loan that it discovers is
3 While this Court has been averse to adopting a “discovery rule” in interpreting statutes of
limitations, it has never held that parties may not, if they choose, adopt such a rule contractually.
But this case does not present that question. Under the MLPWA, discovery, while a necessary
precondition to accrual of a cause of action, is not the triggering event for the running of the
statute of limitations. What discovery does trigger is a requirement of prompt notice. (R96 §
9.03.) Provisions for prompt notice after discovery of an injury or loss are not suspect on public
policy grounds. They are commonplace in insurance policies, and are routinely applied and
enforced. See, e.g., Great Canal Realty Corp. v. Seneca Ins. Co., 5 N.Y.3d 742, 743 (2005)
(holding that “[w]here a policy of liability insurance requires that notice of an occurrence be
given ‘as soon as practicable,’ such notice must be accorded the carrier within a reasonable
period of time”); Continental, 77 F.3d at 21 (“[O]nce Continental suffered losses on the
underlying policies, it could not unreasonably delay reporting those losses to the reinsurers.”)).
-28-
defective, instead narrowing the disputes to only those loans for which the Trustee
demands repurchase after learning of a defect.
There is no principled justification to defer to the parties’ intent
expressed in Continental, for example, yet dishonor the Accrual Clause, where the
parties expressed the same intent in even clearer and more precise terms. Having
reaped the benefits – i.e., selling mortgage loans into the Securitization – Quicken
should be held to its full bargain.
The Appellate Division Erred in Extending ACE, Which Did Not
Involve an Accrual Clause, to this Case
The Appellate Division erred in applying ACE to find that the Accrual
Clause, despite its “shall accrue” language, creates only a procedural condition
precedent to suit. (See R1578-79.) In ACE, the Court interpreted the contract
before it to provide that the plaintiff’s cause of action for breach of representations
and warranties accrued when those representations and warranties were made. 25
N.Y.3d at 589. It did not hold, or suggest, that a contract providing otherwise, as
the one now before the Court does, is contrary to public policy.
ACE was a contract interpretation case. First, in examining whether
the parties had agreed to a guarantee of future performance that extended beyond
the closing date of the securitization, the Court found that “nothing in the parties’
agreement evidences such an intent,” and that, “[h]istorically, we have been
‘extremely reluctant to interpret an agreement as impliedly stating something
-29-
which the parties have neglected to specifically include.’” Id. at 597 (quoting
Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004)).
The Court’s objective was to give meaning to the parties’ intent, but not to read
into their agreement an interpretation that was not expressed. See id. The Court
observed that, when the parties’ intent to create an obligation arising at a future
date is clear, it is not hesitant to enforce that intent, regardless of how many years
after the contract was entered into a breach may occur. Id. at 594-95 (citing
Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606 (1979)).
After finding that the contract at issue in ACE did not evidence the
parties’ intent to guarantee future performance, the Court examined the parties’
contractual repurchase protocol in the operative provision to determine when a
cause of action existed – i.e., whether the demand requirement was a procedural or
a substantive condition precedent. Id. at 597-98. In the absence of an expression
of intent to the contrary, the Court determined that the demand requirement was
procedural, not substantive. Id. at 598. But, nowhere in the contract examined in
ACE did the parties state that “no cause of action existed until demand was made.”
See id. at 597.4
4 In ACE, this Court relied on its decision in Fisher v. Mayor of N.Y., 67 N.Y. 73 (1876), to
illustrate the parameters of a substantive condition precedent to suit. 25 N.Y.3d at 597. In
Fisher, the plaintiff brought an action to recover the balance owed to him by the City of New
York after a taking of his property by eminent domain nine years earlier. 67 N.Y. at 75. Under
the takings statute, the mayor was required to pay for the taking of private property within four
months of the city’s assessment of the value of the property. Id. The takings statute further
-30-
Here, unlike in ACE, there is no room for argument about what the
parties meant in their contract. The MLPWA contains both a “repurchase
protocol” virtually identical to that in ACE plus the Accrual Clause. By agreeing
that “[a]ny cause of action . . . shall accrue” upon the occurrence of certain named
conditions, the parties were saying, “these conditions are substantive.” If the
Accrual Clause sets forth merely procedural conditions precedent, then the Clause
would be superfluous because ACE already held that RMBS contracts without an
Accrual Clause make similar conditions procedural. See Beal Sav. Bank v.
Sommer, 8 N.Y.3d 318, 324 (2007) (finding that courts should not interpret a
contract in a manner that would render any portion meaningless). Thus, under the
reasoning that this Court applied to the protocol in ACE, no “cause of action”
existed under this MLPWA for breach of representations and warranties until the
conditions of the Accrual Clause had been met. See ACE, 25 N.Y.3d at 597-98.
The parties could not have been more clear that, for purposes of the
MLPWA, the “cause of action . . . shall accrue” upon demand for compliance.
provided that if the City failed to pay within four months of the assessment, the property owner
could sue “at any time or times, after application first made by him.” Id. (emphasis added). The
Court held that “the omission of the mayor . . . to pay an award within four months after the
confirmation of the report, does not alone give a right of action for its recovery.” Id. Instead,
“[t]here must, in addition, have been an application to the city for payment, after expiration of
the four months, by the party entitled, before the right of action accrues.” Id. Therefore, despite
the passage of nine years following the mayor’s failure to pay, “[t]he demand in th[at] case was
not made until a short time before the commencement of the action, and the statute of limitations
[wa]s not a defence to the plaintiff’s claim.” Id. at 76. Similarly, here, even though Quicken
sold loans based upon false representations and warranties, a cause of action for breach of those
representations and warranties did not accrue until demand for compliance was made.
-31-
Thus the outcome of this case must be different from the outcome in ACE, where
the Court found that “a cause of action existed” before the demand was made.
ACE, 25 N.Y.3d at 597-98; see also Am. Bldg. Contractors Assoc., Inc. v. Mica &
Wood Creations, LLC, 23 A.D.3d 322, 323 (2d Dep’t 2005) (“[T]he payment bond
itself . . . contained a possibly more liberal accrual date – the date on which the
[defendant] ceased work on the contract. If, on the facts of this case, the bond’s
accrual provision is more favorable to the plaintiff, it governs rather than the
[accrual date] prescribed by [law].”).
The Appellate Division failed to appreciate that the procedural versus
substantive distinction explained in ACE is a matter of contract interpretation.
Once that point is understood, the Appellate Division’s alternative holding here,
that “[a]ssuming arguendo that the accrual provision is not unenforceable as a
matter of public policy, we are persuaded by the Second Circuit’s reasoning . . .
and similarly apply ACE here” (R1576), will not withstand analysis. If “the
accrual provision is not unenforceable,” then all that remains is to interpret it – and
there can be no possible doubt about the interpretation. It says, in so many words,
that “[a]ny cause of action . . . shall accrue upon” three events (R98 § 9.03), the
last of which did not occur until 2013.
-32-
The Second Circuit in Quicken Misconstrued ACE
The Appellate Division’s reliance on the Second Circuit’s decision in
Quicken, 810 F.3d 861, was misplaced. (See R1576.) In attempting to construe an
accrual clause similar to the one at issue here, the Second Circuit erroneously
found that it was prohibited from enforcing the plain meaning of the contract,
believing that this Court’s decision in ACE “require[d] [it] to examine the object of
the demand, rather than merely apply the phrase ‘shall accrue’ as a talisman.”
Quicken, 810 F.3d at 866-67 (emphasis added). Nowhere in ACE, however, did
this Court ever suggest that the parties’ clear expression of their intent should be
disregarded. Ignoring the parties’ intent is contrary to New York law, and in ACE,
this Court made clear that what the parties actually say is controlling. ACE, 25
N.Y.3d at 596 (“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., 1 N.Y.3d at 475)).
That error was the root of the Second Circuit’s other errors. Like the
Appellate Division, the Second Circuit interpreted the Accrual Clause to be
duplicative of the repurchase protocol even though the two provisions are
independent – thus rendering the Accrual Clause meaningless. See Quicken, 810
F.3d at 866-67. The Second Circuit also erred in concluding that Quicken’s
“relevant ‘performance’” under the contract “is the truth or falsity of the R&Ws,”
-33-
not the cure or repurchase of a defective loan. Id. at 867. That was the ruling in
ACE, where the contract did not contain the “shall accrue” language, but it does
not apply here. Under the Accrual Clause, the “relevant performance” is the
repurchase of a defective loan because a cause of action for failure to perform only
accrues when all the conditions of the Accrual Clause are complete. A
nonconforming loan in and of itself does not constitute a “breach” of the contract.
This fundamental understanding also resolves what the Second Circuit
perceived to be “a circular absurdity.” Quicken, 810 F.3d at 867 n.6. The Second
Circuit said that “Quicken would have to choose whether to remedy a breach that
had not occurred – because it had not yet refused – or to refuse and, by its refusal,
breach the contract and become obligated to remedy that breach.” Id. There is
nothing absurd about the Accrual Clause: if the Trustee never makes a demand,
then Quicken does not need to cure or repurchase any loan; demand is therefore a
condition to performance. If the Trustee makes a demand for repurchase, and if
Quicken fails to perform, then Quicken has breached the contract, and the Trustee
has a cause of action to pursue in court. In every breach of contract case, of
course, the breaching party “refuse[s]” to perform “and, by its refusal, breach[es]
the contract and become[s] obligated to remedy that breach.” Id. Thus, when the
intended meaning of the Accrual Clause is honored rather than disregarded, the
-34-
parties’ agreement does not create the Catch-22 situation that the Second Circuit
envisaged.
The Appellate Division was wrong to be “persuaded by the Second
Circuit’s reasoning” in Quicken. (R1576.) There is simply no logically consistent
way to conclude that the Accrual Clause is valid, and yet that it creates merely
procedural conditions to suit – i.e., that the Accrual Clause has no effect on when a
cause of action accrues. If public policy does not forbid the parties from
specifying when a cause of action accrues, the Appellate Division must be
reversed.
CONCLUSION
For the foregoing reasons, the judgment of the Appellate Division
should be reversed.
Dated: June 26, 2017 Respectfully submitted,
senbaum
enba @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 &
ADELMANLLP
7 Times Square
New York, NY 1003 6
212.833.1100
Of Counsel to Plaintiff-Appellant
-35-
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:
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The total number of words in the brief, inclusive of point headings
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authorities, the statement of questions presented, and any addendum containing
material required by subsection 500.l (h) is 7,879.
Dated: June 26, 201 7