Mortgage Loans: Deutsche Bank v. Quicken Loans

by Bilzin Sumberg

We previously posted about ACE Securities Corp. v. DB Structured Products, Inc., 977 N.Y.S.2d 229, 231 (N.Y.A.D. 1st Dept. Dec. 19, 2013), which is a critical ruling out of New York’s intermediate state appellate court. In that case, the Appellate Court held that under New York law, the statute of limitations on a mortgage buyback claim begins to run when the loan was sold by the correspondent lender. We noted that the decision was extremely significant to originators, sellers and investors in mortgage-backed securities because it makes the statute of limitations an even more formidable barrier to pursuing mortgage put-back claims. We predicted that other courts would take note of the decision and follow suit. Thereafter, federal courts in Lehman XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc., No, 13-CV-4707, 2014 WL 108523 (S.D.N.Y. Jan. 10, 2014); ACE Sec. Corp. Home Equity Loan Trust, Series 2007-HE3 v. DB Structured Prods., Inc., No.13-CV-1869, 2014 WL 1116758 (S.D.N.Y. Mar. 20, 2014); Wells Fargo Bank, N.A. v. JPMorgan Chase Bank, N.A., No. 12-CV-6168, 2014 WL 1259630, at *3 (S.D.N.Y. Mar. 27, 2014) have all reached the same conclusion.

On August 4, 2014, also following this body of law, Judge Paul A. Crotty issued his opinion in Deutsche Bank Nat. Trust Co. v. Quicken Loans Inc., No, 13-CV-6482, 2014 WL 3819356 (S.D.N.Y. Aug. 4 2014). Plaintiff, Deutsche Bank National Trust Company in its capacity as trustee of the GSR Mortgage Loan Trust 2007-0Al (“Deutsche Bank”) claimed that Quicken Loans Inc. (“Quicken”) breached its contractual representations and warranties relating to the quality of the mortgage loans sold by Quicken in 2006 and 2007, and thereafter breached its obligation to repurchase these loans. In its motion to dismiss the complaint, Quicken countered that any alleged breaches of the representations and warranties occurred when Quicken sold the allegedly defective loans on several dates from November 2006 through April 2007. Quicken argued that any alleged failure to repurchase the loans was not a separate breach of the contract. Quicken thus maintained that Deutsche Bank’s claims were time-barred by New York’s 6-year statute of limitations for contract claims because the alleged breaches of the representations and warranties occurred more than six years prior to May 8, 2013, the date the suit against Quicken was filed.

The Court agreed with Quicken. Judge Crotty rejected Deutsche Bank’s assertion that the statute of limitations did not begin to run until 2013 when Deutsche Bank demanded that Quicken repurchase the loans. Instead, Judge Crotty held that the period of limitations in this case began to run when the representations and warranties were breached which the Judge determined were the respective dates in 2006 and 2007 on which the loans were sold. “The R&Ws were made ‘as of’ the closing and transfer dates set forth in the various Purchase Confirmation Letters and the R&Ws were allegedly false when made. Therefore, the R&Ws were allegedly breached on those dates, and Plaintiff was immediately legally entitled to make a demand for compliance.” Accordingly, the Court dismissed Deutsche Bank’s complaint.

Judge Crotty’s decision is particularly significant because the Court found that the statute of limitations begins to run at the time of the sale of the loan even though the parties’ contract had a specific accrual provision, which stated that a cause of action for breach of the representations and warranties would accrue only upon (1) notice of a breach of the representations and warranties, (2) Defendant’s failure to cure the breach, and (3) Plaintiff’s demand for compliance.

Echoing the concerns expressed by New York’s highest Court in Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 967 N.E.2d 1187, 1190 (N.Y. 2012)–that delaying the running of the period of limitations until a demand is made “would allow [a plaintiff] to extend the statute of limitations indefinitely by simply failing to make a demand”–Judge Crotty rejected Deutsche Bank’s contention that the statute of limitations did not begin to run until the date when the repurchase of the loans was demanded. Judge Crotty’s decision aligns with Judge Scheindlin’s opinion in Lehman XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc., No, 13-CV-4707, 2014 WL 108523 (S.D.N.Y. Jan. 10, 2014) which we previously highlighted.

Like the ACE Securities and Greenpoint decisions, Judge Crotty’s decision is significant to originators, sellers, and investors in mortgage-backed securities. We expect that this case will be influential to other courts when they are asked to consider the statutes of limitations of their states.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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