NY High Court Rules that Accrual Clause Cannot Extend the Statute of Limitation for RMBS Claims

The New York Court of Appeals recently held that an accrual clause in an RMBS contract, containing language designating the occurrence of specific actions as the trigger for the statute of limitations period for a breach of contract action, violated New York law and public policy and was unenforceable.

At issue in this case were residential mortgage-backed securities (RMBS) sold between December 2006 and May 2007. In the agreement to sell the loans, the seller made certain representations and warranties regarding the quality of the loans, and included a “sole remedy” provision, which provided that in the event of a breach of the representations and warranties, the purchaser’s sole remedy was the seller’s obligation to cure, substitute or repurchase any non-conforming loans.

The agreement also included an accrual clause that provided that any cause of action against the seller arising out a breach of contract claim on those loans would not accrue until the following three conditions were met: (1) discovery of the breach by the purchaser; (2) failure by the seller to rectify the breach; and (3) a demand by the loan buyer for the seller to comply with the contract. According to the purchaser, the accrual clause was intended to delay commencement of the statute of limitations period until all three of the enumerated conditions were met.

This accrual clause stands in contrast to the general accrual rule for breach of contract claims in RMBS put-back actions in New York, which provides that the cause of action accrues on the closing date of the loans (i.e., the date the representations and warranties regarding the loans were made). The statute of limitations for such claims in New York is limited to six years.

In 2013, a certificate holder initiated a review of a sample of the sold mortgage loans that found that many of the loans packaged in the RMBS breached the agreement. When the trustee of the trust that owned the RMBS learned of the alleged breach of representation and warranties in August 2013, it filed a breach-of-contract action against the seller alleging that the seller breached the agreement by selling defective loans that did not comply with the representations of warranties. The seller moved to dismiss the complaint as time-barred by the applicable statute of limitations because the claim was filed more than six years after the date the loans were sold.

Both the Manhattan Supreme Court and the Appellate Division agreed with the seller and granted the motion to dismiss on the basis that the breach of contract claim was untimely. The courts ruled that the accrual provision was unenforceable and therefore could not serve to extend the statute of limitations. Both courts ruled that the statute of limitations began when the loans were sold, not when the three conditions set forth in the accrual clause were met.

The New York Court of Appeals affirmed the lower court decisions. The court concluded that “no substantive condition precedent was created [by the accrual clause], and that to the extent the parties otherwise intended to delay the commencement of the limitations period, their attempt to do so was inconsistent with New York law and public policy.”

The opinion is available here.