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.