Statute of Limitations on Mortgage Repurchase Claims

Six years, running from the day the representations were made, which is the closing date. Not from the day the defect is discovered, and not from the day the seller refuses to repurchase. The New York Court of Appeals settled this in ACE Securities Corp. v. DB Structured Products, Inc., decided June 11, 2015, holding that the trust’s claim “accrued at the point of contract execution on March 28, 2006,” and that “[w]here, as in this case, representations and warranties concern the characteristics of their subject as of the date they are made, they are breached, if at all, on that date.”

The practical deadline is shorter still, and that is the part that catches people.

Why does the clock not start when you find the problem?

Because New York does not apply a discovery rule to contract claims, and the court said so in terms. Quoting its own earlier decision in Ely-Cruikshank Co. v. Bank of Montreal, the court held that the “statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury.”

The court was candid that this produces hard outcomes, acknowledging that the result may at times be “harsh and manifestly unfair, and creates an obvious injustice,” and explaining that the alternative “would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules that have long governed this aspect of commercial repose.”

For a loan pool, that means a defect sitting undiscovered in a file for seven years is not a late claim. It is no claim at all.

Does the refusal to repurchase start a new clock?

No, and this was the trust’s main argument. It contended that the cure or repurchase obligation was a separate, continuing promise, breached afresh each time the sponsor declined. The court rejected it: the obligation “was not a separate and continuing promise of future performance; rather, it was the Trust’s sole remedy in the event of [DBSP’s] breach of representations and warranties,” and was “dependent on, and indeed derivative of,” representations that “did not survive the closing and were breached, if at all, on that date.”

The distinction the court drew is worth carrying into your own drafting. A seller can undertake a genuine promise of future performance, and where it does, the clock runs from the future breach. The court’s example was a 20-year roof guarantee in Bulova Watch Co. v. Celotex Corp., where the seller “did not merely guarantee the condition or performance of the goods, but agreed to perform a service.” A loan-level repurchase obligation tied to closing-date representations is not that.

The court also noted the point in UCC terms: warranty claims run four years from delivery, while “express guarantees of future performance” are “treated as arising on the future date when those express and separate guarantees are breached.”

How much of the six years do you actually have?

Less than six years, by the length of your own notice and cure machinery. This is the trap in ACE and it is the reason the case is worth reading rather than summarizing.

The certificateholders filed on March 28, 2012, which the court described as “six years to the day from the date of contract execution.” They still lost, because the agreement required that the sponsor be given 60 days to cure and 90 days to repurchase before suit, and those periods had not elapsed. The court held that the failure to cure or repurchase “was not a substantive condition precedent that deferred accrual of the Trust’s claim; instead, it was a procedural prerequisite to suit.”

So the sequence runs backwards from the anniversary. In ACE, the 60-day cure period and the 90-day repurchase period both ran from the date of notice, so notice had to go out at least 90 days before the six-year anniversary. If your agreement runs the windows back to back instead, add them together and send notice earlier still. A claim identified in month 70 of a 72-month clock may already be too late to save.

Is this just a New York problem?

No. The court recorded in a footnote that “the overwhelming majority of courts agree that cure or repurchase provisions in similar MLPAs do not give rise to a separate and independent cause of action that accrues on the date when the sponsor refuses to cure or repurchase individual loans,” and cited decisions from the Southern District of New York, the District of Colorado, the Western District of Washington, and an Illinois circuit court among others.

New York law governs most of this paper by choice of law, so the question usually does not arise. Where it does, the answer has been traveling.

What should you negotiate?

If you are the purchaser and you want a longer runway, you have to build it expressly, because the default rule runs against you. New York law, however, limits what that drafting can do. In Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., decided October 16, 2018, the Court of Appeals held that parties may not postpone accrual by contract, because General Obligations Law § 17-103 enforces a promise to extend the limitations period only if it is in writing and made after the claim accrues. The levers that hold are a written tolling agreement signed after closing and a notice, cure, and repurchase timetable short enough to leave time to sue. The ACE certificateholders asked their trustee for a tolling agreement and flagged “[t]he [u]rgent [n]eed” for one; the trustee did not obtain it, and the claim died on that fact.

If you are the seller, Flagstar is the answer to accrual language that tries to stretch a closing-date representation across the life of the loan, and a tolling request after closing is a negotiation, not an obligation.

We have written on the mechanics of a demand once it lands in how a mortgage repurchase request works from demand to final award, on the agency version in how to appeal a Fannie Mae repurchase request, and on what else a purchaser can reach in what an MLPA lets a purchaser do besides demand repurchase.

The date to diary is the one nobody writes down

Diary the closing date, not the discovery date. Then subtract your own cure and repurchase windows from the six-year anniversary and diary that date instead, because it is the one that actually governs whether you can file. A repurchase claim is not lost when it is denied. It is lost when the calendar runs out on a file nobody was watching.

This article is general information about market practice and the cited authorities. It is not legal advice, and no attorney-client relationship is created by reading it.