At least two lawsuits involving defective residential mortgage loans that were later securitized and sold to investors have been tossed out in the wake of a recent appellate decision narrowing the time frame in which suits can be brought against financial sponsors.
On December 19, a four-judge panel on the Appellate Division, First Department ruling in Ace Securities v. DB Structured Products, 650980/12-11384, held that New York’s six-year statute of limitations begins on the closing date of a transaction and not when a bank refuses to cure or repurchase faulty loans, as the lower court held on May 13, 2013.
Although the gap between these two trigger points is only a couple of months, it’s a significant difference for many pending RMBS actions in New York’s Commercial Division.
The First Department’s ruling was predicted to knock out up to a dozen trial-level cases that combined are worth billions of dollars, based on the same issue of whether plaintiff trustees’ claims are timely.
So far, that pattern is holding true.
On Dec. 23, just four days after the appellate decision was issued, Commercial Division Justice O. Peter Sherwood dismissed in its entirety the complaint in Nomura Asset Acceptance Corporation, Series 2006-S2 v. Nomura Credit & Capital, citing the Ace ruling which, indeed, corroborated Sherwood’s interpretation of the statute of limitations issue in a separate Nomura case.
Here, Sherwood held that the breach of contract claim was untimely since it was brought 24 days past the six-year window provided by the statute of limitations. Not only did the judge hold that the limitations period accrues on the transaction date, he stated that it begins the day the underlying mortgage loan purchase agreement was first made.
This is another point of disagreement: Other trial-level judges have held that the limitations period begins on the closing date of the transaction, which could occur as much as a month later from the date the agreement was first made. In the Ace decision, the date the reps and warranties were first made happened to be on the same date as the closing of the contract, therefore, the First Department did not have to distinguish this point.
Kasowitz, Benson, Torres & Friedman represented the plaintiff trustee in Nomura, while Orrick, Herrington & Sutcliffe represented Nomura Credit & Capital.
Kasowitz also represented the plaintiff trustee in Ace, the respondent, while Simpson Thacher & Bartlett represented appellant DB Structured Products.
In another state-level decision since Ace, Commercial Division Justice Eileen Bransten dismissed with prejudice a $936 million RMBS suit in Home Equity Asset Trust 2006-5 v. DLJ Mortgage Capital, 652344/2012.
In her January 3 decision, Bransten liberally cited Ace, ruling that the limitations period for breach of contract claims begin on the closing date of a transaction. She also held that the Federal Housing Finance Agency, in its capacity as conservator for Freddie Mac, which was one of the certificate-holders in these mortgage securities, lacked standing to bring suit against DLJ per the “no-action clause” in the underlying mortgage pooling and servicing agreement that bars certificate-holders from bringing suit.
The lawsuit against DLJ, a Credit Suisse subsidiary, related to an aggregate $2.8 billion in mortgage loans with alleged losses exceeding $936 million. In this case, the three transactions at issue closed on July 5, 2006; August 1, 2006; and Oct. 3, 2006.
FHFA first filed actions against these three transactions, respectively, on July 3, 2012; July 31, 2012; and Oct. 2, 2012. These were consolidated into one suit on Jan. 25, 2013.
U.S. Bank National Association was later substituted as the plaintiff trustee, filing a complaint against DLJ on Dec. 18, 2012 that asserted the same breach of contract claims while seeking specific performance of the repurchase protocol, compensatory damages and reimbursement of expenses. A consolidated complaint was filed on Jan. 31, 2013.
Because U.S. Bank was the only plaintiff that could have brought a breach of contract claim against the financial sponsor and since that December 18 date fell outside the six-year window of when the transactions closed, Bransten held that the claims were untimely.
Furthermore, she held that there was “no valid pre-existing action to which the consolidated complaint could relate back” to that first-filed action since FHFA had failed to allow the 90-day period in which a financial sponsor is allowed to cure or repurchase defective loans to elapse before filing a summons with notice against DLJ.
“There was no valid preexisting action in this instance, since FHFA lacked standing to sue,” she wrote.
As with the Nomura decision recently dismissed by Sherwood, Kasowitz represented the trustee while Orrick, Herrington & Sutcliffe represented DLJ Mortgage Capital. Attorneys at those firms could not be reached for comment.