Federal Housing Finance Agency v. Quicken Loans, Inc.

Filing 29

OPINION & ORDER re: 13 MOTION to Dismiss the Complaint filed by Quicken Loans, Inc. Accordingly, Defendant's motion to dismiss is GRANTED. Plaintiff is granted leave to replead only to the extent that it can make good-faith allegations regarding mortgage loans subject to Purchase Confirmation Letters dated on or after 5/8/2007. (Signed by Judge Paul A. Crotty on 8/4/2014) (cd)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
DEUTSCHE BANK NATIONAL TRUST
:
COMPANY, solely as Trustee of the GSR
:
Mortgage Loan Trust 2007-OA1,
:
:
Plaintiff,
:
:
-against:
:
QUICKEN LOANS INC.,
:
:
Defendant.
:
:
------------------------------------------------------------X

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: August 4, 2014

No. 13 Civ. 6482 (PAC)

OPINION & ORDER

HONORABLE PAUL A. CROTTY, United States District Judge:
Plaintiff alleges that Defendant breached its contractual obligation to repurchase
mortgage loans that it sold pursuant to materially false representations and warranties.
Defendant moves to dismiss the Complaint on the grounds that it is time-barred, among other
reasons. For the reasons set forth below, the motion is granted.
BACKGROUND
Plaintiff Deutsche Bank National Trust Company is a national banking association with
its principal place of business in California, and is the trustee of the GSR Mortgage Loan Trust
2007-OA1. (Compl. ¶ 8.) Defendant Quicken Loans Inc. is a Michigan corporation that
originated the mortgage loans at issue, which it initially sold to nonparty Goldman Sachs
Mortgage Company pursuant to a Purchase Agreement dated June 1, 2006. (Id. ¶¶ 10, 15;
Sidman Decl. Ex. 2 (Purchase Agreement).)
In the 2006 Purchase Agreement, Defendant made a series of representations and
warranties (“R&Ws”) regarding the quality of the mortgage loans, such as their compliance with
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certain underwriting standards. (See Purchase Agreement §§ 3.01, 3.02.) These R&Ws were
made “as of” the closing and transfer dates set forth in subsequent Purchase Confirmation
Letters. (See id. §§ 2.01, 3.01.) Plaintiff alleges that those R&Ws were false when made. (See
Compl. ¶¶ 34, 73.)
The Purchase Agreement provides that if either the buyer or seller discovers a material
breach of any of the R&Ws, the party discovering the breach must “give prompt written notice to
the other.” (Purchase Agreement § 3.03.) The seller then has 60 days either to cure the breach
or to repurchase the loans, and an additional 15 days if the seller “is diligently pursuing a cure
and the circumstances reasonably require” an extension. (Id.) The Purchase Agreement defines
the accrual of a cause of action against Defendant as follows:
Any cause of action against [Quicken] relating to or arising out of the Material
Breach of any representations and warranties made in Sections 3.01 and 3.02 shall
accrue as to any Mortgage Loan upon (i) the earlier of discovery of such breach by
[Quicken] or notice thereof by the Purchaser to [Quicken], (ii) failure by the
[Quicken] to cure such Material Breach or repurchase such Mortgage Loan as
specified above, and (iii) demand upon [Quicken] by the Purchaser for compliance
with this Agreement.
(Id.) The Purchase Agreement also provides that it is governed by New York law. (Id. § 9.04.)
Pursuant to three transactions, each dated April 1, 2007, the mortgage loans and rights
under the Purchase Agreement were sold to Plaintiff. (See Compl. ¶¶ 17–18.) The mortgage
loans were then securitized into a pool of residential mortgage-backed securities (“RMBS”) in a
transaction that closed on May 8, 2007. (Compl. ¶ 20.) The Complaint alleges that at an
unspecified later date, an investor 1 retained two firms to conduct analyses of the mortgage loans,
which revealed breaches of the R&Ws. (Id. ¶¶ 35–44.)

1

The summons with notice filed in New York Supreme Court indicates that this investor was the Federal Home
Loan Mortgage Corporation, also known as “Freddie Mac.” (See Sidman Decl. Ex. 7.)

2

On May 8, 2013, the Federal Housing Finance Agency (“FHFA”) commenced this action
“as conservator of” Freddie Mac and “on behalf of” Plaintiff by filing a summons with notice in
New York Supreme Court. (Sidman Decl. Ex. 7.) These papers were served on Defendant on
September 4, 2013. (Id.) Defendant removed the action to this Court on September 13, 2013.
(Id. Ex. 7.) Although FHFA filed the action in state court, Plaintiff appeared in this Court and
filed the Complaint. FHFA apparently has ceased its pursuit of this action due to a contractual
provision that precludes investors from pursuing claims unless certain conditions are satisfied.
(See Def.’s Mem. at 1 n.2; Pl.’s Opp’n at 13 n.10; Sidman Decl. Ex. 4 § 12.07.) 2
Defendant contends that the six-year limitations period began to run on the dates
indicated in the Purchase Confirmation Letters, the last of which was April 2, 2007, and
accordingly that the action is time-barred. (Def.’s Mem. at 7.) Plaintiff disagrees, contending
that pursuant to the Purchase Agreement’s accrual provision, the period did not begin to run until
2013, when it first demanded compliance. Plaintiff also suggests that even if the accrual and
notice-and-cure provisions were ignored, the action is still timely because it was filed exactly six
years after the securitization transaction closed on May 8, 2007. (See Pl.’s Opp’n at 9; Compl. ¶
20.)

2

See generally Walnut Place LLC v. Countrywide Home Loans, Inc., 35 Misc. 3d 1207(A), at *3 (N.Y. Sup. Ct.
2012) (explaining the purposes of such “no-action clauses,” which include “deter[ring] individual [certificate]
holders from bringing independent law suits which are more effectively brought by the [mortgage loan] trustee”),
aff’d, 948 N.Y.S.2d 580 (App. Div. 1st Dep’t 2012).

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DISCUSSION
I.

Legal Standards
A.

Standard for a Motion to Dismiss

To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), “a
complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). The Court must accept well-pleaded factual allegations as
true, “drawing all reasonable inferences in the plaintiff’s favor.” Standard Inv. Chartered, Inc. v.
Nat’l Ass’n of Sec. Dealers, Inc., 637 F.3d 112, 115 (2d Cir. 2011).
Nonetheless, “[a]n action should be dismissed pursuant to Rule 12(b)(6) where
documents properly considered on a motion to dismiss reveal that the action is time barred.”
Noboa v. MSC Crociere S.p.A., No. 08-CV-2896, 2009 WL 1227451, at *2 (S.D.N.Y. May 5,
2009) (Leisure, J.); see Ghartey v. St. John’s Queens Hosp., 869 F.2d 160, 162 (2d Cir. 1989).
In addition to reviewing the complaint, “the court may also rely upon documents attached to the
complaint as exhibits and documents incorporated by reference in the complaint. . . . [,] matters
of which judicial notice may be taken, or documents either in plaintiffs’ possession or of which
plaintiffs had knowledge and relied on in bringing suit.” Halebian v. Berv, 644 F.3d 122, 130
n.7 (2d Cir. 2011) (alteration and quotation marks omitted).
B.

Statute of Limitations

Under New York law, “a claim for breach of contract is governed by a six-year statute of
limitations.” Hahn Auto. Warehouse, Inc. v. Am. Zurich Ins. Co., 967 N.E.2d 1187, 1190 (N.Y.
2012) (citing N.Y. C.P.L.R. § 213(2)). “[W]here a demand is necessary to entitle a person to
commence an action, the time within which the action must be commenced shall be computed

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from the time when the right to make the demand is complete . . . .” N.Y. C.P.L.R. § 206(a). In
other words, “the cause of action accrues when the party making the claim possesses a legal right
to demand payment . . . . , not when it actually made the demand.” Hahn, 967 N.E.2d at 1190–
91.
Nevertheless, “New York courts do not instinctively apply CPLR 206(a) in every case
where a demand is a predicate to suit. Rather, they distinguish between substantive demands and
procedural demands.” Cont’l Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16, 21 (2d Cir. 1996).
Thus, CPLR 206(a) applies only to “procedural” demand requirements, i.e., “where a right
exists, but a demand is necessary to entitle a person to maintain an action.” Id. at 21. For
example, “the demand upon the Board of Directors as a condition to bringing a shareholder
derivative action” is a procedural demand requirement. Id. at 18. A “substantive” demand
requirement, on the other hand, is not subject to CPLR 206(a). Id. at 21. A substantive demand
is “an essential element of the plaintiff’s cause of action.” Id. Examples include “bailment
cases,” “replevin cases involving good-faith purchasers of stolen art,” and actions for indemnity
by an insurer against a reinsurer. Id.
Therefore, the question is whether a given demand requirement is a procedural one,
which does not delay the running of the period of limitations for bringing suit, or a substantive
one, which does.
II.

Analysis
Here, the contracting parties agreed that “[a]ny cause of action . . . shall accrue” only

upon the occurrence of three events: (1) notice of a breach of the R&Ws, (2) Defendant’s failure
to cure the breach, and (3) Plaintiff’s demand for compliance. (Purchase Agreement § 3.03.)
Based on Plaintiff’s allegation that no demand was made until sometime in late 2013, the

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limitations period would not expire until 2019.
Recent cases, however, have concluded that such accrual clauses are ineffective in
delaying the start of the period of limitations beyond the date of an underlying breach of R&Ws.
In ACE Securities Corp. v. DB Structured Products, Inc., 977 N.Y.S.2d 229, 231 (App. Div. 1st
Dep’t 2013) (“ACE I”), 3 the applicable contracts provided that “the trustee was not entitled to
sue or to demand that defendant repurchase defective mortgage loans until it discovered or
received notice of a breach and the cure period lapsed.” The Appellate Division, however,
reversed the lower court’s decision that the plaintiff’s claims did not accrue until those
conditions were satisfied: “To the contrary, the claims accrued on the closing date of the
[mortgage loan purchase agreement], when any breach of the representations and warranties
contained therein occurred.” Id.
Following ACE I, three courts in this District have reached the same conclusion. In a
very similar case, involving a substantially identical accrual provision, Judge Scheindlin held
that “the statute of limitations began running” when the “alleged breach of Representations
occurred.” Lehman XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc., No, 13-CV4707, 2014 WL 108523, at *3 (S.D.N.Y. Jan. 10, 2014). Thus, “the Accrual Provision was
merely a procedural prerequisite to the filing of a suit, and . . . the substantive right to demand
relief arose the moment when [the defendant] sold and deposited the allegedly non-conforming
Loans into the Trust . . . .” Id. Noting that “[t]his issue has been repeatedly addressed and
resolved,” the court explained that under New York law, “parties may not contractually adopt an
accrual provision that effectively extends the statute of limitations before any claims have

3

The New York Court of Appeals has granted leave to appeal this decision. No. APL-2014-156, 2014 WL
2891678, 2014 N.Y. Slip Op. 76202 (June 26, 2014). The appeal is scheduled to be fully briefed on October 28,
2014.

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accrued.” Id. at *4. Also, Judge Nathan held in a similar case:
When a plaintiff alleges that a representation or warranty was false, the relevant
breach is the false representation or warranty, and the plaintiff has a legal right to
demand payment as of the date it was made. Numerous courts have held that a
defendant’s failure to repurchase a breached loan does not affect when the
plaintiff’s claim accrues, and therefore does not constitute a separate breach of
contract.
ACE Sec. Corp. Home Equity Loan Trust, Series 2007-HE3 v. DB Structured Prods., Inc., No.
13-CV-1869, 2014 WL 1116758, at *6 (S.D.N.Y. Mar. 20, 2014) (“ACE II”) (noting that “courts
have often approached this issue in the context of determining when a statute of limitations
began running”); accord Wells Fargo Bank, N.A. v. JPMorgan Chase Bank, N.A., No. 12-CV6168, 2014 WL 1259630, at *3 (S.D.N.Y. Mar. 27, 2014) (Cedarbaum, J.) (“[T]he statute of
limitations began running when [the plaintiff] first could have made its demand.”). 4
Plaintiff’s argument that all such decisions are “wrongly decided” is unpersuasive. (See
Pl.’s Opp’n at 10 n.8; Pl.’s 2/10/14 Ltr. at 2 (ECF No. 23).) U.S. courts are “bound to apply the
law as interpreted by New York’s intermediate appellate courts” absent “persuasive evidence
that the New York Court of Appeals would reach a different conclusion.” Cornejo v. Bell, 592
F.3d 121, 130 (2d Cir. 2010) (quotation marks and alteration omitted). Here, there is no
persuasive evidence that the New York Court of Appeals would abrogate the rule stated in ACE I
and the well-reasoned cases following it in this District. On the contrary, the Court of Appeals
recently expressed concern that delaying the running of the period of limitations until a demand
is made “would allow [a plaintiff] to extend the statute of limitations indefinitely by simply

4

One court in this District, however, reached a contrary conclusion prior to ACE I and denied a motion for
reconsideration after ACE I without further explanation. See FHFA v. WMC Mortg., LLC, No. 13-CV-584, 2013
WL 7144159, at *1 (S.D.N.Y. Dec. 17, 2013) (relying on the lower court decision that was subsequently reversed in
ACE I); No. 13-CV-584, ECF No. 57 (S.D.N.Y. Jan. 7, 2014) (denying motion for reconsideration by memo
endorsement).

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failing to make a demand.” Hahn, 967 N.E.2d at 1191.
Therefore, the Court holds that the period of limitations in this case began to run when
the R&Ws were breached. The R&Ws were made “as of” the closing and transfer dates set forth
in the various Purchase Confirmation Letters, and the R&Ws were allegedly false when made.
Therefore, the R&Ws were allegedly breached on those dates, and Plaintiff was immediately
legally entitled to make a demand for compliance. 5 That Plaintiff was unaware of the breach on
those dates is irrelevant because “the statute of limitation for breach of contract begins to run
from the day the contract was breached, not from the day the breach was discovered, or should
have been discovered.” ABB Indus. Sys., Inc. v. Prime Tech., Inc., 120 F.3d 351, 360 (2d Cir.
1997).
Defendant submits that the last sale-and-transfer date set forth in the Purchase
Confirmation Letters was April 2, 2007, which is more than six years before the action was
commenced on May 8, 2013. Although the latest Purchase Confirmation Letter that Defendant
submitted with its motion is dated March 7, 2007 (see Sidman Decl. Ex. 3), this does not, as
Plaintiff argues, raise “fact issues” that preclude dismissal. To the extent that Plaintiff makes
contract claims relating to the loans subject to those Purchase Confirmation Letters, the claims
are dismissed because any breach occurred more than six years before the action was
commenced. But to the extent that Plaintiff can make good-faith allegations regarding Purchase
Confirmation Letters dated on or after May 8, 2007, it may do so in an amended complaint. See
generally Fed. R. Civ. P. 11(b), 15(a)(2).

5

The relevant date is not, as Plaintiff suggests, the later date when the securitization transaction closed, May 8,
2007. By then, the underlying mortgage loans had already been sold to the trust and thus the R&Ws had already
become effective per the Purchase Agreement.

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III.

Plaintiff’s Remaining Arguments
The Court has considered Plaintiff’s other arguments and finds them to be without merit.
First, the Housing and Economic Recovery Act’s provision extending the statute of

limitations for actions “brought by the [FHFA] as conservator or receiver,” see 12 U.S.C.
§4617(b)(12), does not apply. The FHFA is not a party to this case, having apparently
abandoned prosecution of this action after realizing that it was not a proper plaintiff. 6
Furthermore, as Defendant notes, “FHFA is already seeking redress in this Court for losses
Freddie Mac suffered on its investment in this Trust in a separate matter.” (Def.’s Reply at 8
(citing FHFA v. Goldman Sachs, et al, No. 11-cv-6198 (DLC) (S.D.N.Y)).)
The Court also rejects Plaintiff’s argument that its claim for breach of the implied
covenant of good faith and fair dealing should survive notwithstanding dismissal of the contract
claim. Where, as here, “the conduct allegedly violating the implied covenant is also the
predicate for breach of covenant of an express provision of the underlying contract,” “a claim for
breach of the implied covenant will be dismissed as redundant.” Nat’l Gear & Piston, Inc. v.
Cummins Power Sys., LLC, 861 F. Supp. 2d 344, 365 (S.D.N.Y. 2012) (quotation marks
omitted). “Even where the breach of contract claim is dismissed, the good faith/fair dealing
claim will be dismissed if it is redundant.” See Lorterdan Properties at Ramapo I, LLC v.
Watctower Bible & Tract Soc’y of N.Y., Inc., No. 11-CV-3656, 2012 WL 2873648, *8 (S.D.N.Y.
July 10, 2012). Accordingly, Plaintiff’s claim for breach of the implied covenant is dismissed.
CONCLUSION
The New York Court of Appeals has held that New York’s “Statutes of Limitation are
statutes of repose representing a legislative judgment that occasional hardship is outweighed by

6

See supra n.2 and accompanying text.

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the advantage of barring stale claims." Ely-Cruikshank Co., Inc. v. Bank ofMontreal, 615
N.E.2d 985, 988 (N.Y. 1993) (citations, quotation marks, and alterations omitted). Plaintiff's
action was not commenced within the six-year period of limitations. Accordingly, Defendant's
motion to dismiss is GRANTED.
Plaintiff is granted leave to replead only to the extent that it can make good-faith
allegations regarding mortgage loans subject to Purchase Confirmation Letters dated on or after
May 8, 2007.

Dated: New York, New York
August 4, 2014

SO ORDERED

PAUL A. CROTTY
United States District Judge

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