Arguments Test Time Limits for MBS Put-Back Claims
Attorneys litigating a threshold issue on appeal in breach of contract repurchase actions over residential mortgage-backed securities faced a tough line of questioning Wednesday during oral arguments before the Appellate Division, First Department.
Although the key issue in Ace Securities Corp., Home Equity Loan Trust, Series 2006-SL2 v. Deutsche Bank Securities Products, 650980/2012, was relatively straightforward – when does New York’s six-year statute of limitations begin to run in RMBS breach of contract actions? – the panel’s questions revealed some level of unease with the broader implications present on both sides of the case.
Chief among those is the presumed capability of HSBC Bank, as the plaintiff trustee, to sue defendant Deutsche Bank for breach of a defective mortgage loan’s representations and warranties within the entire life of the loan—even if it’s as long as 30 years—under the plaintiff’s interpretation of the contract.
Justice Richard Andrias asked plaintiff’s attorney Marc Kasowitz of Kasowitz Benson Torres & Friedman whether the fact that the trustee could bring suit in year “27, 28 or 29” places the baseline six-year statute of limitations on a shifting scale in this context.
“[Manhattan Commercial Division Justice Shirley] Kornreich recognized very well that the allocation of risk was on Deustche Bank,” Kasowitz stated in response.
Associate Justice Rosalyn Richter also honed in on the timeframe. “So, at any point in these 30 years, a suit could be brought?” she asked Kasowitz.
He replied that a suit could be brought only when Deutsche Bank was on notice that there was a problem with a mortgage loan and then refused to cure the defect within 60 days or take an additional 30 days to repurchase the loan, per the repurchase protocol.
“That was the deal,” he told the panel. “The deal was very, very clear.”
In a decision dated May 10, 2013, Kornreich refused to dismiss Deutsche Bank’s motion to dismiss the breach of contract suit on the basis that the plaintiff trustee is time-barred from bringing claims since more than six years had elapsed since the closing of the agreement containing these representations and warranties.
Kornreich held that the statute runs from the time the trustee makes a cure or repurchase demand upon the sponsoring financial institution – and that only after the 60-day or 90- periods expire with the sponsor failing to take remedial action – does breach occur.
In a conflicting decision issued several days earlier in the separate case, Nomura Asset Acceptance Corp. v. Nomura Credit & Capital, 39 Misc. 3d 1226(A), 2013 WL 2072817 (Sup. Ct. N.Y. Cty. May 10, 2013), Manhattan Commercial Division Justice O. Peter Sherwood held that the statute begins the day the loans’ representations and warranties were first made – in other words, upon the signing of the agreement.
“They were either right or wrong the day they were made,” defendant’s attorney David Woll, a partner at Simpson Thacher & Bartlett said in remarks to the panel.
Wednesday’s oral arguments were held before a four-judge panel consisting of Justices Andrias, Richter, Peter Tom and Leland DeGrasse. Justice David Saxe recused himself shortly before arguments began. Tom, the justice presiding, told the parties that in the event of a 2-2 split, a fifth judge would be brought in to broker a tie.
The roughly 24-minute long arguments took place before a room packed with spectators including attorneys from Orrick, Herrington & Sutcliffe, who represent Nomura Credit & Capital in similar repurchase RMBS cases pending before Sherwood and Commercial Division Justice Marcy Friedman.
The audience also included at least one former First Department justice—New York Court of Appeals judge Sheila Abdus-Salaam—who walked into the room shortly before arguments began and took a seat on the north side of the spectators’ gallery.
During arguments, the panel also wrestled with the circumstances surrounding the commencement of this RMBS action: HSBC, as trustee, was later substituted as the plaintiff after it was held that certificate-holders, or the investors in these RMBS, have no standing to sue the financial sponsor under a “no-action” clause in the contract.
Andrias asked Woll whether there was “anything to prevent” a trustee who harbored second thoughts about purchasing these RMBS from making a cure or repurchase demand “on day two” of the contract’s effective date.
“There is absolutely nothing to prevent that, Your Honor,” Woll responded, later re-stating to the panel that it was “crystal clear” the trustee could have made a cure or repurchase demand “the day the representations and warranties were made.”
But the plaintiff contends that there is no way such breaches could have been discovered that early on, due to the fact that the trustee was under no obligation to perform any due diligence on the health of these 9,000 mortgage loans for which it paid more than $500 million.
“That’s critical to this entire case,” Kasowitz told the panel. “They [the plaintiffs] have no obligation to do due diligence. The responsibility to fix these loans was entirely on Deutsche Bank. The plaintiffs could not bring an action until the 90 days was over.”
The subject of so-called “made-for-litigation” hedge funds also came up during the arguments, with Woll telling the panel that the trustee made “a conscious decision not to pursue claims,” only doing so when directed by these certificate holders who bought these RMBS “after the market crashed.”
“If they were a little faster, you’d be out of luck,” Andrias pointed out, to which Woll conceded that the statute of limitations issue would then be moot in this case.
Andrias also focused on whether there was any “good faith” obligation on the part of the trustee to bring these repurchase actions once they discovered that many of these mortgage loans breached the sponsor’s representations and warranties.
“What do they need, proof positive, to get going?” Andrias asked Woll, adding, “What’s a certificate holder to do?”
Justice DeGrasse also asked Kasowitz to explain the nature of the relationship between the trustee and certificateholders and whether the certificateholders could have continued to maintain the action if they weren’t later substituted due to lack of standing. He also asked the attorney how the relation-back doctrine applied to this case.
“There couldn’t be a closer relationship,” Kasowtiz replied, adding there was no prejudice suffered by the defendant when served with the trustee’s complaint. “We believe that they [the certificateholders] could have [maintained this action]. But the trustee came in and took over this action.”
If Woll, in his remarks to the panel, emphasized the “indefinite” period in which the plaintiff could bring suit if Kornreich’s ruling is upheld, Kasowitz directed the panel’s attention to the scope of the alleged losses in the case and the fact that “99 percent” of the loans, upon later forensic analysis, were found to have defects.
“Do you want to know how many [loans] Deutsche Bank has chosen to repurchase?” Kasowitz said, raising his arms to form a zero shape with his hands.
“None. None at all,” he said.