Quicken Loans successfully defends against RMBS putback suit in New York State court
Clients Quicken Loans, Inc.
Jones Day successfully defended Quicken Loans, Inc., a mortgage lender based in Detroit, Michigan, against a suit brought on behalf of investors in a residential mortgage-backed securities ("RMBS") trust in New York state court. The plaintiff claimed that Quicken Loans breached representations and warranties regarding the credit quality and characteristics of hundreds of mortgage loans with an original principal balance in excess of $33 million, which had been securitized by a third party and transferred to the RMBS trust at issue. The complaint also alleged that Quicken Loans breached the implied covenant of good faith and fair dealing by selling defective loans and remaining silent about the defects while investors in the RMBS securitization trust suffered losses. The plaintiff sought rescission, rescissory damages, specific performance of Quicken Loans' loan repurchase obligations, compensatory damages in a sum of money to be proven at trial, and indemnity for its losses.
On October 16, 2018, the New York Court of Appeals affirmed the 2015 dismissal of the complaint, with prejudice, as time-barred under New York’s six year statute of limitations for breach of contract. The court held 4-2 (with one judge recusing) that, under its 2015 decision in ACE Securities Corp. v. DB Structured Products, Inc., a cause of action for breach of the representations and warranties in an RMBS contract accrues when the contract was executed because that is when they were made and thus when any breach would have occurred. Although the contract at issue in ACE did not have a so-called "accrual clause" that purported to start the limitations period only after completion of the notice-and-cure process described above, the court held that this clause did not operate here to delay the start of the limitations period as the trustee contended because it only imposed procedural conditions to commencing a lawsuit; it did not re-define what would constitute a substantive breach. The court also held in the alternative that, if the accrual clause had delayed the start of the limitations period as the trustee contended, it would run afoul of two separate rules in New York’s General Obligations Law Section 17-103(1), specifically, parties may not agree to (1) toll the limitations period on a claim for breach of contract before that claim accrues; or (2) extend the limitations period to an uncertain future date. In endorsing Quicken Loans' interpretation of the contractual provision, the court held that the statute of limitations had been triggered on the date the representations and warranties were made, which was more than six years prior to the commencement of the action.