Accrual Clauses In RMBS Contracts Violate New York Law And Public Policy

1. Introduction

   On October 16, 2018, the New York State Court of Appeals held that contractual attempts to extend the statute of limitations for causes of action involving breaches of contract are unenforceable because they violate New York law and public policy.1

   Before the mortgage crisis, many contracts for the transfer of mortgage loans into securitizations contained what are known as "accrual clauses." A typical accrual clause provides that causes of action for breaches of representations and warranties would only accrue upon (i) discovery of a breach by, or notice of breach to, the purchaser, (ii) failure by the seller to cure such breach, substitute a conforming mortgage loan for the non-conforming mortgage loan or repurchase the non-conforming mortgage loan and (iii) demand upon seller by the purchaser for compliance with the related transfer agreement.

   In the case at issue, the plaintiff argued, first, that the accrual clause created a substantive condition precedent, namely that demand must be made upon the seller for compliance with the related transfer agreement and seller must fail to so comply and, second, that the accrual clause expressed the parties' clear intent to delay accrual of a breach of contract cause of action until the specified events had occurred. The plaintiffs argued that the court should therefore honor the parties' intent, consistent with New York's public policy supporting freedom of contract.

   The New York State Court of Appeals disagreed with both arguments.2

   The decision has important implications for all structured finance and other transactions governed by New York law that involve transfers of financial assets, the term of which exceeds the six year statute of limitations.

2. Background

   In the case at issue, Quicken Loans (the "Defendant") was the originator of certain mortgage loans that were subsequently securitized in Harborview Mortgage Loan Trust 2007-7 (the "Trust"). Plaintiff Deutsche Bank National Trust Company, as trustee of the trust (the "Plaintiff"), brought suit to enforce representations and warranties that were made by the Defendant and ultimately assigned to the Trust. The representations and warranties concerning the mortgage loans were made "as of the related closing date for such Mortgage Loan." The mortgage loans were conveyed in two groups and the closing date for each group occurred between December 7, 2006 and May 31, 2007. The sole remedy for a breach of the representations and...