The parties directly involved in a case that’s headed to the Appellate Division, First Department, on the issue of when the statute of limitations begins to accrue on breach of contract claims for the repurchasing of residential mortgage-backed securities are not the only ones who feel they have a stake in the outcome.
In motion papers dated Nov. 5, Orrick, Herrington & Sutcliffe, on behalf of its client DLJ Mortgage Capital, asked Manhattan Supreme Court Justice Melvin Schweitzer to stay any discovery and a decision on pending motions to dismiss in parallel RMBS actions brought by Home Equity Mortgage Trust Series (HEMT), in light of upcoming oral arguments and a forthcoming ruling by the First Department in Ace Securities v. Deutsche Bank Structured Products, 965 N.Y.S.2d 844 (Sup. Ct. N.Y. Cnty. 2013).
Lawyers for Orrick contend in motion papers that the appellate decision will “materially affect whether the core of Plaintiff’s case will proceed” in the HEMT cases and that judicial economy favors halting discovery and other rulings until the key issue over the statute of limitations in these RMBS repurchase cases is settled.
DLJ, a wholly-owned subsidiary of Credit Suisse Holdings, contends that the plaintiff Trust is barred by New York’s six-year statute of limitations from bringing breach of contract claims relating to residential mortgage loans that were securitized and transferred over to the plaintiff trust in 2006.
Just when that limitations’ period kicks in is the question before the First Department, which will hear arguments in its Dec. 2013 term.
In Ace, Manhattan Supreme Court Justice Shirley Kornreich held in her May 13 decision that the event triggering this period is the date when the alleged breaching loans failed to be repurchased. That directly conflicted with a decision issued three days prior by Justice O. Peter Sherwood, who held in Nomura Asset Acceptance v. Nomura Credit & Capital, 653541/2011, that the statute of limitations period begins on the securitization date, or when the underlying representations and warranties in the pooling agreements were made.
Deutsche Bank Structured Products, or DBSP, which is represented by Simpson Thacher & Bartlett, has appealed Kornreich’s ruling, sending the matter to the First Department, which, Orrick points out in its papers, “historically” hands down rulings 30 days after argument. In this case, that would mean the end of January 2014.
“There is no prejudice to Plaintiff, having already waited more than six years before filing suit, from a three-month stay,” Orrick’s memorandum in support of an order to show cause states.
In the pair of purportedly similar cases pending before Schweitzer—Home Equity Mortgage Trust Series 2006-5 v. DLJ Mortgage Capital, 653787/2012, and Home Equity Mortgage Trust Series 2006-1 v. DLJ Mortgage Capital, 156016/2012—DLJ argues that the plaintiff’s repurchase-related breach of contract claims are untimely since the claims accrued when the respective pooling and service agreements took effect—Oct. 1, 2006 in the former and Feb. 1, 2006 in the latter, or more than six years before the suits were brought.
The plaintiff, represented by Quinn Emanuel Urquhart & Sullivan, argues that the claims did not accrue until DLJ refused to repurchase the loans in these transactions, therefore, the claims are timely.
“These arguments mirror the positions of the parties in the ACE case,” Orrick argues in its brief dated Nov. 5. “The First Department’s resolution of the arguments in the ACE appeal will, at a bare minimum, eliminate the need for the Court to consider these arguments in this case.”
In the HEMT 2006-1 action, DLJ purportedly has turned over 126,070 documents comprising 1.7 million pages to the plaintiff trustee, which also recently sent over a request to depose more than 30 individuals.
Discovery in HEMT 2006-1 is scheduled to be completed by the end of this year and the deadline for all fact discovery is Feb. 6, 2014.
“DLJ should not have to spend hundreds of thousands of dollars collecting, reviewing, and producing discovery on claims that will likely go away,” Orrick’s brief states.
Quinn Emanuel opposes the request for a stay of discovery, contending that it’s “highly inappropriate” regardless of the pending Ace appeal since the parties comprise different entities and the actions involve separate contracts. Moreover, the firm asserts that the Ace ruling would not be dispositive of the issues in the HEMT cases. Its position is that their client filed the actions within six years of the effective dates of the underlying agreements whereas in Ace and Nomura, those plaintiffs filed the actions more than six years after the effective dates of their agreements.
In an Oct. 18 letter to the court, Quinn Emanuel partner Erica Taggart pointed out that DLJ also has raised a separate issue in its motion to dismiss than that raised in Ace: Whether the statute of limitations begins to accrue even prior to the closing date—that is, on the “cut-off” date when the contract became enforceable.
Taggart’s letter also argues that a stay of discovery would be “highly prejudicial” to the plaintiffs, “hindering their ability to prove their claims” and by “delaying their recovery of damages.”
The letter also questions whether a First Department ruling would realistically stay discovery by a matter of months, since “regardless of the outcome, the ACE decision is likely to be appealed to the Court of Appeals, so the stay could last years in total.”