Consumer Finance Litigation

In a ruling that may signal the end to much of the litigation over mortgage-backed securities, New York's highest court held limitations for breach of warranty litigation over portfolio loans run from the MLSA closing date and not from breach of the contractual repurchase obligation. Many investors have argued that a sponsor's obligation to repurchase non-conforming loans constitutes a separate "springing" obligation 150 days after notice of a non-conforming loan (60 for cure, then 90 for repurchase). The Court rejected that notion, in favor of its long-standing preference for "bright-line" rules and New York's rejection of any "discovery rule" of limitations in contract actions. The Court held the "cause of action for breach of representations and warranties accrued at the point of contract execution" and there was no separate cause of action for failure to repurchase. The repurchase obligation was not a separate promise of future performance, but instead was derivative of and dependent upon the representations and warranties which did not survive closing and were limited to (and expired upon) the condition of the underlying loans as of that date. The Court regarded the "alternative remedy" of repurchase demand, along with the notice and cure provisions, both as conditions precedent to any claim of breach, thereby requiring that both periods have expired within the six-year contract limitations period. Thus, the Court held that an earlier certificate-holder's suit was a nullity, for failure of those conditions precedent. The Court noted that none of the representations and warranties in the MLSA survived the closing - potentially a key point of differentiation, because some pooled mortgage sales agreements contain survival clauses that extend some key portfolio-loan warranties. The decision, ACE Securities Corp. v. DB Structured Products, Inc., 2015 NY Slip Op 042873 (NY App. June 11, 2015), can be found here: https://www.nycourts.gov/ctapps/Decisions/2015/Jun15/Jun15.htm Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Resident in the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.