ACE Securities Case Determined that Statute of Limitations Begins at Sale of the Loan; Other Courts Have Begun to Follow Suit

We recently posted about a critical ruling out of New York’s intermediate state appellate court, the case of ACE Securities Corp. v. DB Structured Products, Inc., 977 N.Y.S.2d 229, 231 (N.Y.A.D. 1st Dept. Dec. 19, 2013). In that case, the Appellate Court held that, under New York law, the statute of limitations on a mortgage buyback claim begins to run when the loan was sold by the correspondent lender. We noted that the decision was extremely significant to originators, sellers, and investors in mortgage-backed securities because it makes the statute of limitations an even more formidable barrier to mortgage put-back claims. We predicted that other courts would take note of the decision and follow suit. On January 10, 2014, a federal court, the United States District Court for the Southern District of New York, did just that.

In Lehman XS Trust, Series 2006-4N, by U.S. Bank National Association v. Greenpoint Mortgage Funding, Inc., No. 13 Civ. 4707(SAS), 2014 WL 108523 (S.D.N.Y. January 10, 2014), Judge Shira A. Scheindlin followed ACE Securities and held that, under New York law, the Trust’s suit for breach of representations and warranties against by GreenPoint was barred by the six-year statute of limitations.

Decision Rejects Accrual Provision

Judge Scheindlin’s decision is particularly significant because the Court found that the statute of limitations begins to run at the time of the sale of the loan even though the parties’ contract had a specific accrual provision, which stated that a cause of action for breach of the representations and warranties would not accrue until, among other things, discovery of the breach by the purchaser and demand upon the seller by the purchaser to repurchase the loan. The Trust argued that this provision made its case different from ACE Securities. The Court agreed that the facts were different, but held that the factual difference did not change the outcome because, under New York law, “parties may not contractually adopt an accrual provision that effectively extends the statute of limitations before any claims have accrued.”

Like the ACE Securities decision, Judge Scheindlin’s decision is extremely significant to originators, sellers, and investors in mortgage-backed securities. And, though it is not binding on courts applying the laws of states other than New York, we expect that it will be highly influential to those other courts when they are asked to consider the statutes of limitations of their states.