Page 8 - Litigation

S8 | MONDAY, JULY 14, 2014 | Litigation | NYLJ.COM

Breach Warranties
Courts Limit Exposure for of

Cases are a setback for trusts enforcing rights against sellers of mortgages.

appear to have included mortgages that did
not comply with the quality warranties given

by sellers. In the complaints underlying many
of the recent cases, the plaintiffs alleged that
as high as 80 percent of the loans reviewed
breached the representations made in the
MLPAs. Id., Nomura, 2013 WL 2072817 at *4
(“. [the] investigation has identiied material
breaches of the Mortgage Representations in
510 out of the 565 Mortgage Loan Files . a

whopping 91.8% failure rate.”).

The Recent Decisions

Faced with motions to dismiss grounded on
statute of limitations, the plaintiffs in Lehman
XS, Ace and Nomura raised arguments based
on the language of clauses similar to the one
cited above, that can be summarized as fol-

lows: (1) the claim did not accrue until it was
discovered; (2) the parties agree in their con-
tract that the claim would not accrue until
the conditions speciied in the clause above
occurred; and (3) the failure to cure or repur-
chase is a separate breach, independent from
the warranty breach, that triggers a new limita-
tion period. Applying New York law, the courts
rejected these arguments.

First, under New York law, a cause of action
for breach of contract accrues, and the stat-
ute of limitation begins to run, at the time of
the breach. See Nomura, 2013 WL 2072817 at
*5; Structured Mortgage Trust 1997-2 v. Dai-
wa Finance, 2003 WL 548868 (S.D.N.Y. 2003).
“Knowledge of the occurrence of the wrong OCK
on the part of the plaintiff is not necessary to GST
BI
start the Statute of Limitations running in [a]
contract [action].” Nomura, 2013 WL 2072817
at *5 (citing Ely-Cruikshank v. Bank of Mon-
mously, the courts have been holding that Agreement (MLPA). The MLPA sets forth the treal, 81 N.Y.2d 399, 403 (1993)). The New York
BY EDUARDO J. GLAS
such suits by the trusts are barred by the rights of the trust in the event of a breach of Court of Appeals applies an accrual-at-breach
applicable six-year statute of limitations on the warranties or representations made by the rule, even when the breach and injury are not
Several recent New York cases involv- breach of contract actions despite contrac- seller in connection with the loans. It typically simultaneous. Ely-Cruikshank, 81 N.Y.2d at 402.
ing securitized-mortgage trusts have tual language that purports to establish the provides that if the seller breaches a represen- Applying these principles, the courts reasoned
dealt setbacks to the trusts seeking to accrual of the claims not at the time the war- tation and “it is determined that such breach that the breaches occurred at the time the

enforce contractual rights against the sell- ranties are made but at a later period. To the affects the value of the [loans] or the interest warranties are given, and not when the plaintiff
ers of the mortgages for breach of warran- extent the decisions are upheld on appeal, of the purchaser,” then the seller must either discovers the wrong. See, e.g., ACE Securities,
ties. See, e.g., Lehman XS Trust, Series 2006- they may signal the tail end of the exposure cure the breach or repurchase the affected 977 N.Y.S.2d at 231. In other words, the breach
4N, by U.S. Bank, as Trustee v. Greenpoint faced by the sellers of the mortgages to the loan. Lehman XS Trust, 2014 WL 108523 at *2. that triggers the statute of limitations occurs
Mortgage Funding, 2014 WL 108523 (S.D.N.Y. trusts for breach of warranties regarding the The MLPA may further provide:
upon the closing of the sale of the mortgages
2014); Home Equity Asset Trust 2007-1 v. DLJ credit quality of the mortgages sold prior to Any cause of action against the Seller to the trust. Id.
Mortgage Capital, 2013 WL 6997183 (N.Y. Sup. the inancial crisis of 2008, the peak of sales relating or arising out of the Breach of Second, the argument that the parties agreed
Court, Jan. 15, 2014); Home Equity Asset Trust activity and perceived abuses in connection in their contract that the claim would not arise
2006-5 (Heat 2006-5) v. DLJ Mortgage Capital, with such sales.any representations and warranties . until a demand is made on the seller does not
1
shall accrue as to any mortgage loan
2014 WL 27961 (N.Y. Sup. Court, Jan. 3, 2014); upon (i) discovery of such Breach by pass muster under New York law either. “[C]
ACE Securities v. DB Structured Products, 977 The Securitization Process
the Purchaser (ii) failures by the Seller laims which are subject to a pre-suit cure or
N.Y.S.2d 229, 112 A.D.3d 522 (1st Dept. 2013) to cure such Breach or repurchase such demand requirement accrue when the under-
(reversing denial of motion to dismiss by The securitization of mortgages involves the Mortgage Loan . and (iii) demand upon lying breach occurs, not when the demand is
the trial court); Nomura Asset Acceptance purchase of pools of mortgages from a seller the Seller by the Purchaser for compliance subsequently made or refused.” Lehman XS
Corporation Alternative Loan Trust, Series that either purchases the loans from third par- with this Agreement.
Trust, 2014 WL 108523 at *3. Parties may not
2005-S4, by HSBC Bank USA, as Trustee v. ties or originates the loans itself. The pool of contractually adopt an accrual provision that
Nomura Credit & Capital, 2013 WL 2072817 mortgages is deposited into a trust; it is secu- See Lehman XS Trust, 2014 WL 108523 at *2.
extends the statute of limitations before any

(N.Y. Sup. Ct. May 10, 2013). Almost unani-
ritized and subsequently resold to investors Generally, the trust must give notice of the claims have accrued. Id. at *4 (citing John J.
in the form of certiicates. The seller of the breach and allow for a certain cure period at Kassner & Co. v. City of New York, 46 N.Y.2d 544,
pooled mortgages typically warrants the credit the end of which, if no cure has been effected, 551 (1979) and Caronia v. Philip Morris USA,
EDUARDO J. GLAS is a partner at McCarter & English quality and several other characteristics of the the affected loan must be repurchased. After 715 F.3d 417, 431 (2d Cir. 2013) for the proposi-
in New York, where his practice focuses on commer- underlying loans in the agreement to sell the the inancial crisis hit in 2008, these rights tion that if an agreement is made to waive or
cial law.
loans, referred as the Mortgage Loan Purchase
came into play often as many mortgage pools
extend the statute of limitations » Page S11