2nd Circuit Affirms RMBS Claims Were Untimely
The U.S. Court of Appeals for the Second Circuit recently held that RMBS claims based upon breaches of representations and warranties were untimely. The court rejected arguments that an express accrual clause should delay the commencement of a limitations period under New York law, and characterized an “indemnification” claim as being for the underlying breach of contract where there was no third-party payment for which the plaintiff was seeking indemnification.
The case arises from three trusts made up of residential mortgage-backed securities that the defendant, a mortgage banking company, sold to plaintiff, a bank. The sales were governed by two mortgage loan purchase and warranties agreements (MLPAs). The MLPAs and the trust agreements created a contractual remedy in the event that the mortgage banking company breached. Under the MLPAs, upon learning of a breach, the MBC had sixty days to use its best efforts to promptly cure such breach in all material respects, if the breach could not be cured, the mortgage banking company had to repurchase the breaching loans. The trust agreements included an identical clause, except they gave the mortgage banking company ninety days from discovery of the breach to cure or repurchase. Further, the mortgage banking company entered into separate indemnification agreements for each trust, and these agreements provided that the mortgage banking company would indemnify and hold the bank harmless from and against any and all losses and claims.
Six years after the sale of the trusts, it was revealed that nearly all of the sample mortgages that the mortgage banking company sold to the bank were in breach of the representations and warranties the mortgage banking company made in the MLPAs. The Bank submitted breach notices to the MBC, who did not cure or repurchase within the sixty- or ninety-day periods established in the MLPAs and the trust agreements.
Almost immediately after the sixty-day cure periods expired, the FHFA began three actions against the MBC in New York Supreme Court as conservator for Freddie Mac and on behalf of the Bank as trustee. The FHFA filed summonses with notice for the trusts after the six-year anniversaries of the closing dates of the three trusts. The case was removed to federal court and the district court consolidated the three actions and allowed the plaintiffs to file a single consolidated complaint. The FHFA dropped out of the litigation and the Bank was then the sole plaintiff.
The Bank filed an amended complaint with the original two causes of action for breach of contract seeking specific performance and monetary damages based on the MBC’s failure to repurchase the noncompliant loans or cure its breach. The second amended consolidated complaint added a third cause of action for indemnification based on language in the MLPAs and the trust agreements. Finally, the second amended consolidated complaint also added a fourth cause of action for indemnification arising under the separate indemnification agreements.
The mortgage banking company moved for summary judgement on the first three claims, arguing they were time-barred by New York’s statute of limitations (6 years from when a breach occurs) and moved for dismissal of the fourth claim for lack of standing and failure to state a claim. The district court dismissed all four claims, finding they were time-barred.
The Second Circuit held that the two first causes of action were properly dismissed as they were untimely. The court cited a New York Court of Appeals decision that held that an express accrual clause cannot delay the commencement of a limitations period under New York law, regardless of the parties’ sophistication or clearly expressed intentions. In the current case, the parties, who were considered sophisticated parties, negotiated for a contract provision establishing that a cause of action for a breach of the representations and warranties would accrue only when the trustee made a demand for compliance. Nonetheless, this language was held to have no impact on when the statute of limitations would begin to run. Rather, the court held that the statute of limitations began to run the date the representations and warranties became effective and were breached, not when the mortgage banking company became aware of the breach and made a demand for compliance. Since the FHFA filed in state court more than six years after the statute of limitations on the breach began running, the court concluded that the district court properly granted summary judgment on the first two causes of action.
The Second Circuit also held that the claim for indemnification was properly dismissed as untimely because it was in fact a “repackaged version” of the breach of contract claim. The court explained that under New York law, unless there is “unmistakably clear” language in an indemnification provision that shows the parties intended the clause to cover first-party claims, an agreement between two parties to indemnify each other does not mean that one party’s failure to perform gives rise to a claim for indemnification, but rather, “indemnification” is just another breach of contract remedy since there is no third party being paid and no indemnified party. Finding no unequivocally or unmistakably clear language in the MLPAs that the mortgage banking company agreed to indemnify the bank for harm to the bank, and finding that the bank sought to recover the same thing it was trying to recover under its breach of contract claim, the court held that there was no independent claim for indemnification. Consequently, the statute of limitations for the third claim began to run at the same time as for the first two claims, and the third claim was untimely for the same reasons.
Finally, the Second Circuit upheld the district court’s dismissal of the Bank’s claim for breach of the Indemnification Agreements. The court held that this fourth cause of action was also untimely, as it did not relate back to the filing dates of the FHFA’s original complaint. The court explained that Federal Rule of Civil Procedure 15(c) states that an amendment to a pleading relates back to the date of the original pleading where the amendment asserts a claim or defense that arises out of the same conduct, transaction, or occurrence set out in the original pleading. The purpose of this rule is to make sure an opposing party was given adequate notice of the matters that may arise given the general fact situation alleged in the original pleading. The court further explained that even where an amended complaint tracks the legal theory of the original complaint, claims that are based on an entirely distinct set of factual allegations will not relate back. Because the original pleadings served in this case involved actions under the provisions of the MLPAs and contained no mention of the Indemnification Agreements, the court found that the mortgage banking company was not on notice when the FHFA filed the original complaint that the litigation would also involve the Indemnification Agreements. Thus, the fourth cause of action did not relate back to the original complaint and was untimely.
