Article: April 2018: Securities and Structured Finance Litigation Update

New York Court of Appeals to Decide Slew of “Relation Back” and Accrual Cases. Almost three years ago, in the context of RMBS repurchase litigation, the New York Court of Appeals issued a seminal decision on the date of accrual for breach of express warranty claims, ACE Sec. Corp. v. DB Structured Prod., Inc., 25 N.Y.3d 581 (2015). The Court held express warranty claims accrue when the warranty is made and breached—that is, the date the contract is signed. Id. at 630-31. In so holding, the Court rejected the plaintiffs’ argument that accrual did not occur until their contractual sole remedy of repurchase was ripe. Id. (holding notice or discovery conditions to the repurchase remedy were procedural conditions precedent, and as such did not affect date of accrual). This holding was therefore informative not only as to RMBS repurchase claims, but also as to the accrual of express warranty claims, and the contractual classification of contracted-for remedial schemes subject to conditions precedent (such as notice).

In the year ahead, the Court will once again use RMBS repurchase claims as a springboard to examine basic legal questions which could affect many cases with thorny statutes-of-limitations issues. The Court has accepted no fewer than four such plenary appeals to be heard in 2018: Deutsche Bank Nat’l Trust Co. v. Flagstar Capital Markets Corp., APL-2016-00237 (“Flagstar”); U.S. Bank Nat’l Ass’n v. DLJ Mortg. Capital, Inc., APL- 2017-00115 (the “HEAT Trusts Action”); U.S. Bank Nat’l Ass’n v. DLJ Mortg. Capital, Inc., APL-2017-00116 (the “ABSHE Action”); and
U.S. Bank Nat’l Ass’n v. GreenPoint Mortgage Funding, Inc., APL-2017-00072 (GreenPoint). These cases raise issues that encompass, both singly and in combination, limitations, standing, and remedies. In other words, anyone with a case where it matters when claims may be filed, who may file them, and what remedies, if any, they are entitled to receive, could be impacted. Summaries follow.

Flagstar raises several issues, including (similar to the ACE plaintiffs), the contract
at issue evinces an intent that a repurchase claim not accrue until a demand for
repurchase is made and refused and that their warranty claims could not have accrued until the securitization was completed—when all the loans were transferred in—as opposed to on the closing date of the at-issue trust.. However, the question raised by the Flagstar plaintiffs most broadly applicable outside the RMBS context is whether and when New York will enforce a contract provision purporting to extend the period of limitations that would otherwise be applicable. The contract at issue in Flagstar contains a provision providing that a breach of warranty claim shall not accrue until the discovery or notice condition to the repurchase remedy has been satisfied. Citing New York’s public policy against potentially interminable limitations periods, the First Department held such provisions are impermissible under New York law. (Notably, neither the First Department nor the parties appear to have cited
N.Y. Gen. Oblig. L. § 17-103(1), which provides that a promise to waive or extend the statute of limitations is valid only if made “after the accrual of the cause of action” and for a period no longer than the limitations period.) The plaintiffs challenge this holding on appeal, and the Court of Appeals decision should therefore provide guidance on the allowable scope of such accrual provisions generally, if not the ability to contract around the limitations period entirely.

The HEAT Trusts Action concerns the relationship between New York’s “saving statute,” CPLR 205(a), and its “relation back statute,” CPLR 203(f). In the proceedings below, a representative party filed an action on behalf of the trust,
but was held to lack standing. A party with standing (U.S. Bank) then re-filed the action under Section 205(a), the savings statute. The defendants moved to dismiss on limitations grounds, arguing the re-filed action did not relate back to the original action filed by a party without standing under Section 203(f). The question is whether U.S. Bank’s subsequent action, filed under the saving statute (205(a)), can be saved by relating back to an earlier- filed action when that action was filed by someone that lacks standing.

ABSHE also involves the interaction between CPLR Sections 205(a) and 203(f). In ABSHE, a plaintiff without standing filed timely but (arguably) unripe claims. After that plaintiff’s claims were dismissed without prejudice, a plaintiff with standing re-filed the action under CPLR 205(a), which permits re-filing for dismissals without prejudice. Because the re-filed action would be untimely had it been filed as an original matter, the second plaintiff sought to invoke relation-back under CPLR 203(f). ABSHE thus raises the issue of whether, to take advantage of relation-back, the original-filed action had to have been both timely and ripe at the time of the original filing. ((A further issue in ABSHE relates to when a backstop (or guaranty) obligation accrues under New York law. A now-defunct originator promised it would repurchase loans not in conformity with the originator’s warranties, and the defendant-sponsor promised to backstop the originator’s promise if the originator failed to carry it out. The ABSHE plaintiffs argue their claims did not accrue until the defendant-sponsor’s guaranty obligation kicked in, as opposed to when the originator’s original warranty breach occurred. However, the Court may not reach this issue, as the relation back issue just discussed would resolve the case and played a starring role in the parties’ briefing.))

Greenpoint, too, addresses issues relating to ripenessand relation back. It is helpful to contrast the case with ABSHE, where the principal question is whether a later-filed action asserting untimely, ripe claims may relate back to an earlier-filed action that was entirely unripe, but timely. In GreenPoint, the question is whether later-filed, untimely ripe claims may relate back to earlier-filed, timely, and ripe claims. The plaintiff brought timely claims based on both notice and discovery, but the
notice-based claims were not ripe upon filing. A divided First Department panel
dismissed the notice claims and upheld the discovery claims. The question on review is whether the notice claims, unripe upon filing, may be held to relate back to the discovery claims. In other words, the question in GreenPoint is whether it suffices for relation back to timely file some ripe claims, or whether all claims arising from the same set of transactions or occurrences must be ripe as of the original filing for that doctrine to apply.

In sum, the year ahead promises to bring much- needed clarity to issues relating to accrual, standing, and ripeness under New York law, which of course many other states often look to when complex issues arise. While these issues are raised in the context of RMBS repurchase cases, because the issues addressed are basic it is reasonable to suspect the Court of Appeals’ resolution of those cases will offer guidance across a wide range of practice areas.