United States: Accrual Clauses In RMBS Contracts Violate New York Law And Public Policy

I. Introduction

On October 16, 2018, the New York State Court of Appeals held that contractual attempts to extend the statute of limitations for causes of action involving breaches of contract are unenforceable because they violate New York law and public policy.1

Before the mortgage crisis, many contracts for the transfer of mortgage loans into securitizations contained what are known as "accrual clauses." A typical accrual clause provides that causes of action for breaches of representations and warranties would only accrue upon (i) discovery of a breach by, or notice of breach to, the purchaser, (ii) failure by the seller to cure such breach, substitute a conforming mortgage loan for the non-conforming mortgage loan or repurchase the non-conforming mortgage loan and (iii) demand upon seller by the purchaser for compliance with the related transfer agreement.

In the case at issue, the plaintiff argued, first, that the accrual clause created a substantive condition precedent, namely that demand must be made upon the seller for compliance with the related transfer agreement and seller must fail to so comply and, second, that the accrual clause expressed the parties' clear intent to delay accrual of a breach of contract cause of action until the specified events had occurred. The plaintiffs argued that the court should therefore honor the parties' intent, consistent with New York's public policy supporting freedom of contract.

The New York State Court of Appeals disagreed with both arguments.2

The decision has important implications for all structured finance and other transactions governed by New York law that involve transfers of financial assets, the term of which exceeds the six year statute of limitations.

II. Background

In the case at issue, Quicken Loans (the "Defendant") was the originator of certain mortgage loans that were subsequently securitized in Harborview Mortgage Loan Trust 2007-7 (the "Trust"). Plaintiff Deutsche Bank National Trust Company, as trustee of the trust (the "Plaintiff"), brought suit to enforce representations and warranties that were made by the Defendant and ultimately assigned to the Trust. The representations and warranties concerning the mortgage loans were made "as of the related closing date for such Mortgage Loan." The mortgage loans were conveyed in two groups and the closing date for each group occurred between December 7, 2006 and May 31, 2007. The sole remedy for a breach of the representations and warranties was the Defendant's obligations to cure or repurchase any non-conforming mortgage loan.

In 2013, a certificateholder in the Trust engaged an underwriting firm to review a sample of the mortgage loans to determine whether they complied with the Defendant's representations and warranties. Based on the results of the review, the Plaintiff commenced an action against the Defendant on August 30, 2013. The Defendant moved to dismiss the complaint, arguing, among other things, that the action was time-barred by the six-year statute of limitations applicable to breach of contract actions because it was commenced more than six years after the closing date for the sale of each package of mortgage loans, the most recent of which was May 31, 2007. Plaintiff responded that the statute of limitations had yet to run because the related mortgage loan purchase and warranties agreement (the "Agreement") contained what is known as an "accrual clause." The accrual clause in the Agreement provided that:

"Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Subsections 9.01 and 9.02 shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach, substitute a Qualified Substitute Mortgage Loan or repurchase such Mortgage Loan as specified above and (iii) demand upon the Seller by the Purchaser for compliance with this Agreement."

The Supreme Court held that any breach had occurred on the closing date of the loans, i.e. no later than May 31, 2007, and therefore Plaintiff's cause of action accrued no later than that date.3 The Supreme Court further held that the accrual clause described above could not serve to extend the statute of limitations.4

The Appellate Division affirmed the Supreme Court's ruling and held that the accrual clause did not create a substantive condition precedent nor did the language requiring cure, substitution or repurchase constitute a promise of future performance.5 The Appellate Division further concluded that to the extent that the parties intended for the accrual clause to delay accrual of the breach of contract cause of action, the accrual clause was unenforceable because it violates New York public policy.6

III. The NYS Court of Appeals Ruling

In affirming the Appellate Division's decision, the Court of Appeals noted that the language of the accrual clause itself refers to a "breach" of the representations and warranties, and that the contract nowhere suggests that Defendant's transfer of non-conforming loans is not a "breach" of the Agreement.7 The Court of Appeals further noted that the Agreement provides that cure or repurchase are the "sole remedies" available to the Plaintiff for a breach of the representations and warranties relating to the mortgage loans.8 In addressing the Plaintiff's argument that the accrual clause created a substantive condition precedent, the Court of Appeals held that the performance required under the Agreement was delivery of mortgage loans that complied with the representations and warranties on the closing date and that the cure or repurchase protocol was merely the remedy for a breach of the representations and warranties.9 As a result, nothing in the accrual clause created a condition to the Defendant's obligation to deliver loans that complied with the representations and warranties on the closing date and nothing in the accrual clause created a subsequent condition precedent to the relevant performance that the Plaintiff alleged was breached.10

In addressing the Plaintiff's argument that the accrual clause manifested the parties' clear intent to extend the statute of limitations, the Court of Appeals pointed out that, while parties may agree to a shorter limitations period under New York law, New York's public policy precludes parties' ability to extend the statutory period before a claim accrues.11 According to the court, "[i]f the agreement to waive or extend the Statute of Limitations is made at the inception of liability it is unenforceable because a party cannot in advance make a valid promise that a statue founded in public policy shall be inoperative."12 The court went on to discuss extensions of statutes of limitation that are made after the related cause of action has accrued, which the court stated must be made in compliance with NY General Obligations Law Section 17-103.13 The Plaintiff contended that its accrual clause did not violate GOL Section 17-103 because the statute does not expressly prohibit contract provisions defining an accrual date. The court disagreed, citing language in the statute requiring any such extensions to be entered into "after accrual of the cause of action" as with typical tolling agreements.14 The court further found that the accrual clause violated GOL Section 17-103 because it purported to extend the statute of limitations to a future date uncertain, which, under the Plaintiff's theory, "might occur decades into the future."15

IV. Discussion and Conclusion

The Court of Appeals squarely held that, to the extent the parties intended at the time of the contract and before the breach, to postpone accrual of a breach of contract cause of action to a subsequent uncertain date, the accrual clause could not extend the statute of limitations.16 Because of the New York public policy in favor of enforcing the statutory period of limitations (or some shorter period agreed to by the parties), the bar to create contractual provisions that would either serve to create a true substantive condition precedent or to extend the statute of limitations in a way that does not run afoul of New York's law and public policy is very high. However, the court took pains to make clear that its holding had no impact on (i) contracts creating true substantive conditions precedent to a party's performance, (ii) separate promises of future performance or (iii) contractual provisions for post-accrual tolling agreements that comply with GOL Section 17-103.17

For New York law-governed RMBS transactions and other transactions involving the transfer of financial assets, the term of which exceeds the applicable statute of limitations, the Court of Appeals' holding likely means several things. First, existing contracts that provide that cure or repurchase are the sole remedies for a breach of representations and warranties are unlikely to support an argument that a cause of action for breach accrued at any time after the making of the related contract. Second, accrual clauses as currently drafted in typical agreements that purport to delay the accrual of causes of action need to be carefully evaluated in future transactions and redrafted to address the shortcomings identified by the court. Accrual clauses that simply attempt to delay the accrual of the cause of action are likely unenforceable. Rather, such clauses could be drafted to create true substantive conditions precedent to the seller's performance or promises of future performance.

Footnotes

1 Harborview Mortg. Loan Tr. Series 2007-7 v. Flagstar Capital Markets Corp., No. 96, 2018 WL 4976777 (N.Y. Oct. 16, 2018).

2 Id. at 2.

3 Id. at 4.

4 Id.

5 Id. at 4-5.

6 Id.

7 Id. at 8.

8 Id.

9 Id. at 9.

10 Id.

11 Id. at 12.

12 Id. at 13.

13 Id.

14 Id. at 15.

15 Id. at 16.

16 Id. at 18-19.

17 Id. at 18.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions