On December 19, 2013, correspondent lenders were the beneficiaries of a long-awaited common sense ruling on when the statute of limitations begins to run under New York law for purposes of a mortgage buyback claim. The common-sense answer: when the loan was sold by the correspondent lender (as we have been saying all along!).
Statute of Limitations Begins at Breach of Representation
The New York State Appellate Division unanimously reversed Judge Shirley Werner Kornreich’s May 13, 2013 decision in ACE Sec. Corp. Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Prods., Inc., 40 Misc. 3d 562 (Sup. Ct. N.Y. Cnty. 2013) which denied defendant-appellant’s motion to dismiss holding that the statute of limitations does not bar plaintiff-respondent’s claims. Reversing Judge Kornreich, the Appellate Division held that the statute of limitations for mortgage put-back claims begins to run on the date when the alleged breach of representations and warranties was made, rather than the later date on which the alleged failure to repurchase occurred.
Specifically, the Appellate Division stated that “[t]he motion court erred in finding that plaintiff’s claims did not accrue until defendant either failed to timely cure or repurchase a defective mortgage loan. To the contrary, the claims accrued on the closing date of the MLPA, March 28, 2006, when any breach of the representations and warranties contained therein occurred.”
Decision Resolves Lower Court Split; Aligns With Prevailing Federal Case Law
The decision resolves a split between New York’s lower courts in favor of Judge Peter Sherwood’s decision in Nomura Asset Acceptance Corp., etc. v. Nomura Credit & Capital, Inc., 39 Misc. 3d 1226(A), 2013 WL 2072817 (Sup. Ct. N.Y. Cty. May 10, 2013) and also aligns with the prevailing federal case law which holds that under New York law, the statute of limitations begins to run at the time of the breach of a representation and not years later when the demand to repurchase is usually made. See Lehman Bros. Holdings, Inc. v. Evergreen Moneysource Mortg. Co., 793 F. Supp. 2d 1189 (W.D. Wash. 2011); Structured Mortg. Trust 1997-2 v. Daiwa Fin. Corp., No. 02 Civ. 3232 (SHS), 2003 WL 548868 (S.D.N.Y. Feb. 25, 2003).
In the decision that was now reversed by the appeals court, Judge Kornreich had held that the statute of limitations does not run until a repurchase demand is made and that demand is refused. The holding was problematic because it suggested that there is effectively no statute of limitations at all. For example, the demand for repurchase could be made 29 years after the representations and warranties were made, and it would only be as of the time when the demand for repurchase was denied that the six year statute of limitations would commence. The problem is that this would mean that virtually any contract could expose the parties to litigation claims arising decades after the contract was signed if it contains representations and warranties along with an exclusive remedy for breaches of those representations and warranties. Such a result would eviscerate the policy of having a statute of limitations in the first instance— to provide fairness to a defendant by ensuring that a defendant is secure in his reasonable expectation that the slate has been wiped clean of ancient obligations and to prevent claims that were not brought while memories faded, evidence was lost and witnesses disappeared.
Decision Will Likely Influence Other Courts
The decision is extremely significant to originators, sellers and investors of mortgage backed securities because it makes the statute of limitations an even more formidable barrier to mortgage put-back claims. Though it is not binding on courts applying the laws of states other than New York, we expect that it will be highly influential to those other courts when they are asked to consider the statutes of limitations of their states.