ACE Securities Corp. v. DB Structured Products, Inc.

This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 85
ACE Securities Corp., &c.,
Appellant,
v.
DB Structured Products, Inc.,
Respondent.

Paul D. Clement, for appellant.
David J. Woll, for respondent.
CXA-13 Corporation; Association of Mortgage Investors;
Association of Financial Guaranty Insurers; National Credit Union
Administration Board; LNR Partners, et al.; Chamber of Commerce
of the United States of America, et al.; Securities Industry and
Financial Markets Association; Mortgage Bankers Association;
Steven L. Schwarcz; Ethan J. Leib, et al.; Federal Home Loan Bank
of Boston, et al., amici curiae.

READ, J.:
This appeal stems from a transaction involving
residential mortgage-backed securities (RMBS). Two
certificateholders in the ACE Securities Corp., Home Equity Loan
Trust, Series 2006-SL2 (the Trust) sued DB Structured Products,

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Inc. (DBSP), the sponsor of the transaction, for failure to
repurchase loans that allegedly did not conform to DBSP's
representations and warranties. The Trust later sought to
substitute itself as plaintiff in place of the
certificateholders. The parties dispute the timeliness of this
lawsuit, whether the certificateholders or the Trust complied
with a condition precedent and whether the certificateholders
possessed standing to sue or, alternatively, the Trust's
complaint cured any defect in the certificateholders' standing.
We hold that the Trust's cause of action against DBSP for breach
of representations and warranties accrued at the point of
contract execution on March 28, 2006. Where, 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; DBSP's refusal to repurchase the allegedly
defective mortgages did not give rise to a separate cause of
action. Additionally, we hold that, even assuming standing, the
two certificateholders did not validly commence this action
because they failed to comply with the contractual condition
precedent to suit; namely, affording DBSP 60 days to cure and 90
days to repurchase from the date of notice of the alleged non-
conforming loans.
I.
In its role as sponsor of the securitization that is at
the core of this case, DBSP purchased 8,815 mortgage loans from

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at least three third-party mortgage originators. This pool of
loans was sold to an affiliate, ACE Securities Corp. (ACE), a
securitization conduit known as a "depositor," pursuant to a
Mortgage Loan Purchase Agreement (MLPA) executed between DBSP and
ACE. ACE then transferred the loans and its rights under the
MLPA to the Trust, pursuant to a Pooling and Servicing Agreement
(PSA). The parties to the PSA were ACE, as depositor, OCWEN Loan
Servicing, LLC (Ocwen), as servicer, Wells Fargo Bank, National
Association (Wells Fargo), as master servicer and securities
administrator, and HSBC Bank USA, National Association, as
trustee (HSBC or the trustee). DBSP was not a party or signatory
to the PSA except for two sections not relevant to this appeal;
its role was effectively complete at closing, when it transferred
(via ACE) its "rights, title and interest in, to and under the
Mortgage Loans" and the "contents of the related Mortgage File"
to the trustee and its agents. The MLPA and PSA were executed on
the same day, March 28, 2006.
HSBC acted as trustee for the holders of $500 million
in certificates issued by the Trust, and was authorized to bring
suit on the Trust's behalf. The individual mortgage loans served
as collateral for the certificates, which paid principal and
interest to certificateholders from the cash flow generated by
the mortgage loan pool;1 that is, certificateholders made money

1
As servicer, Ocwen collected the mortgage payments from
borrowers and contributed them to the Trust's accounts, and Wells
Fargo, the master servicer and securities administrator, oversaw

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when the borrowers made payments on their loans.
DBSP made over 50 representations and warranties in the
MLPA regarding the credit quality and characteristics of the
pooled loans "as of the Closing date," March 28, 2006. The MLPA
permitted the Trust to examine each mortgage loan file and
exclude from the final pool any loans that did not comply with
DBSP's representations and warranties. But the MLPA also
relieved the Trust and certificateholders from any obligation to
verify DBSP's representations and warranties, or to conduct due
diligence on the loan characteristics. Importantly, the Trust's
"sole remedy" in the event DBSP "breach[ed] any of the
representations and warranties contained in" the MLPA was for
DBSP to cure or repurchase a non-conforming loan.
The PSA authorized the trustee to enforce the
repurchase obligation in the following way: if HSBC learned of a
breach of a representation or warranty, it was required to
"promptly notify [DBSP] and the Servicer" of the breach and
request that DBSP cure the identified defect or breach within 60
days. If DBSP did not cure the defect or breach in all material
respects, the trustee was empowered to "enforce the obligations
of [DBSP] under the MLPA to repurchase such Mortgage Loan . . .
within ninety (90) days after the date on which [DBSP] was
notified of [the breach]." Finally, as relevant here, the PSA

Ocwen and was responsible for aggregating and distributing
monthly payments and performance reports to certificateholders.

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authorized certificate holders entitled to at least 25% of voting
rights to enforce certain default events after first requesting
in writing that the trustee institute an action and the trustee
refused or neglected to do so within 15 days.
A few years after the parties executed the MLPA and
PSA, borrower defaults and delinquencies on individual mortgages
caused the Trust and certificateholders to lose almost $330
million. Two certificate holders, RMBS Recovery Holdings 4, LLC
and VP Structured Products, LLC -- independent investment funds
which together held 25% of the voting certificates -- hired a
forensic mortgage loan review firm to review a portion of the
loans in the trust. Ninety-nine percent of the loans reviewed
allegedly failed to comply with at least one of DBSP's
representations and warranties in the MLPA about borrowers'
incomes, occupancy status or existing debt obligations.
By letter dated January 12, 2012, the two
certificateholders gave notice to HSBC of "breaches of
representations and warranties in the Mortgage Loans by the
Sponsor, [DBSP] under the relevant [PSA] and related trust
documents." Citing "the extremely high breach rates found in
loan file reviews," the certificateholders "demand[ed] that the
Mortgage Loans in the Trust in their entirety be put back to
[DBSP] for repurchase, including all of the individual defective
loans uncovered [during their] investigation" (emphasis added).
Further, the certificateholders alerted the trustee to "[t]he

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[u]rgent [n]eed for a Tolling Agreement . . . in light of
potential expiring statute of limitations deadlines," and
expressed their belief that "it [w]as imperative that the Trustee
act expeditiously to request such an agreement."2
When the trustee neither sought a tolling agreement nor
brought suit against DBSP, the two certificateholders sued DBSP
on March 28, 2012 -- six years to the day from the date of
contract execution -- by filing a summons with notice on behalf
of the Trust. The summons with notice alleged a single cause of
action for breach of contract based on DBSP's alleged material
breach of representations and warranties and failure to comply
with its contractual repurchase obligation. The
certificateholders asked for specific performance and damages to
the tune of $250 million.
On September 13, 2012, the trustee sought to substitute
for the certificateholders, and filed a complaint on the Trust's
behalf. In the complaint, the Trust alleged breaches of
representations and warranties and DBSP's refusal to comply with
its repurchase obligation. The Trust asserted that it had
promptly notified DBSP of the breaches of representations and
warranties on February 8, March 23, April 23, April 30, May 11,

2
Tolling agreements are hardly unheard-of in connection with
RMBS loan repurchase (or "put-back") litigation. For example,
JPMorgan Chase executed one in November 2013 with the Trustees of
several RMBS trusts as part of a massive settlement negotiation
(available at JPMorgan's RMBS settlement website
http://www.rmbstrusteesettlement.com).

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May 16, May 31, June 7 and July 19, 2012; and that each of these
notices specified the defective or non-conforming loans, detailed
specific breaches for each loan and supplied supporting
documentation. The Trust suggested that the pre-suit 60- and 90-
day condition precedent was satisfied because, as of the date of
its complaint, DBSP had still not repurchased any loans, and
"refuse[d] to recognize the [notices of breach] as sufficient to
trigger [DBSP's] cure or repurchase obligations."
On November 30, 2012, DBSP moved to dismiss the
complaint as untimely, arguing that the trustee's claims accrued
as of March 28, 2006, more than six years before the Trust filed
its complaint. Moreover, DBSP contended that the
certificateholders' summons and notice was a nullity because they
did not give DBSP 60 days to cure and 90 days to repurchase
before bringing suit; that the certificateholders lacked standing
because only the trustee was authorized to sue for breaches of
representations and warranties; and that the trustee's
substitution could not relate back to March 28, 2012 because
there was no valid pre-existing action.
Supreme Court denied DBSP's motion to dismiss (40 Misc
3d 562 [Sup Ct, NY County 2013]). The judge reasoned that DBSP
could not have breached its repurchase obligations until it
"fail[ed] to timely cure or repurchase a loan following discovery
or receipt of notice of a breach of a representation or warranty"
(id. at 566). In Supreme Court's view, "[t]he whole point of how

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the MLPA and PSA were structured was to shift the risk of
noncomplying loans onto DBSP" (id. at 567). Thus, the argument
"that the trustee's claims accrued in 2006 . . . utterly belies
the parties' relationship and turn[ed] the PSA on its head"
(id.). The court concluded instead that DBSP's cure or
repurchase obligation was recurring and that DBSP committed an
independent breach of the PSA each time it failed to cure or
repurchase a defective loan; therefore, the judge held the
Trust's action to be timely. Supreme Court also determined that
the Trust had satisfied the condition precedent to suit insofar
as DBSP affirmatively repudiated any obligation to repurchase.
The Appellate Division reversed and granted DBSP's
motion to dismiss the complaint as untimely (112 AD3d 522 [1st
Dept 2013]). The court held that "the claims accrued on the
closing date of the MLPA, March 28, 2006, when any breach of the
representations and warranties contained therein occurred" (id.
at 523). Further, although the certificateholders commenced
their action on March 28, 2012, the last day of the six-year
statute of limitations for contract causes of action, the 60- and
90-day periods for cure and repurchase had not by then elapsed;
accordingly, the certificateholders "fail[ed] to comply with a
condition precedent to commencing suit [that] rendered their
summons with notice a nullity" (id.). The Appellate Division
added that, in any event, the certificateholders lacked standing
to commence the action on behalf of the Trust and the Trust's

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substitution did not cure that defect and relate back to the
certificateholders' date of filing.
On June 26, 2014, we granted the Trust leave to appeal
(23 NY3d 906 [2014]). We now affirm.
II.
Accrual
Our statutes of limitation serve the same objectives of
finality, certainty and predictability that New York's contract
law endorses. Statutes of limitation not only save litigants
from defending stale claims, but also "express[] a societal
interest or public policy of giving repose to human affairs"
(John J. Kassner & Co. v City of New York, 46 NY2d 544, 550
[1979] [internal citations and quotation marks omitted]). And we
have repeatedly "rejected accrual dates which cannot be
ascertained with any degree of certainty, in favor of a bright
line approach" (MRI Broadway Rental v United States Min. Prods.
Co., 92 NY2d 421, 428 [1998]).
Accordingly, New York does not apply the "discovery"
rule to statutes of limitations in contract actions (Ely-
Cruikshank Co. v Bank of Montreal, 81 NY2d 399, 403 [1993]).
Rather, 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" (id. [citations omitted]). This is so even though the
result may at times be "harsh and manifestly unfair, and creates

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an obvious injustice" because a contrary rule "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" (id.). Indeed, "[t]o extend the
highly exceptional discovery notion to general breach of contract
actions would effectively eviscerate the Statute of Limitations
in this commercial dispute arena" (id.). We applied the same
bright-line rule just three years ago in the insurance context
with respect to retrospective premiums, holding that breach of
contract counterclaims "began to run when [insurers] possessed
the legal right to demand payment from the insured," not years
later when they actually made the demand (Hahn Automotive
Warehouse, Inc. v American Zurich Ins. Co., 18 NY3d 765, 767
[2012]).
The Trust does not dispute this precedent, but rather
seeks to persuade us that its claim did not arise until DBSP
refused to cure or repurchase, at which point the Trust, either
through the trustee or the certificateholders, had six years to
bring suit. Thus, the Trust views the repurchase obligation as a
distinct and continuing obligation that DBSP breached each time
it refused to cure or repurchase a non-conforming loan. Stated
another way, the Trust considers the cure or repurchase
obligation to be a separate promise of future performance that
continued for the life of the investment (i.e., the mortgage

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loans).
Although parties may contractually agree to undertake a
separate obligation, the breach of which does not arise until
some future date, the repurchase obligation undertaken by DBSP
does not fit this description. To support its contrary position,
the Trust relies on our decision in Bulova Watch Co. v Celotex
Corp. (46 NY2d 606 [1979]), where we considered whether the
separate repair clause in a contract for the sale of a roof
constituted a future promise of performance, the breach of which
created a cause of action. The separate clause the seller
included in that contract was a "20-Year Guaranty Bond," which
"expressly guaranteed that [the seller] would 'at its own expense
make any repairs . . . that may become necessary to maintain said
Roof'" (id. at 608).
We held that the guarantee "embod[ied] an agreement
distinct from the contract to supply roofing materials," the
breach of which triggered the statute of limitations anew (id. at
610). This was so because the defendant in Bulova Watch "did not
merely guarantee the condition or performance of the goods, but
agreed to perform a service" (id. at 612). That service was the
separate and distinct promise to repair a defective roof -- a
critical component of the parties' bargain and "a special,
separate and additional incentive to purchase" the defendant's
product (id. at 611). Accordingly, the "agreements contemplating
services[] were subject to a six-year statute [] running

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separately for the damages occasioned each time a breach of the
obligation to repair the bonded roof occurred" (id.).
The remedial clause in Bulova Watch expressly
guaranteed future performance of the roof and undertook a promise
to repair the roof if it did not satisfy the seller's guarantee.
DBSP, by contrast, never guaranteed the future performance of the
mortgage loans. It represented and warranted certain facts about
the loans' characteristics as of March 28, 2006, when the MLPA
and PSA were executed, and expressly stated that those
representations and warranties did not survive the closing date.
DBSP's cure or repurchase obligation was the Trust's remedy for a
breach of those representations and warranties, not a promise of
the loans' future performance. In fact, nothing in the contract
specified that the cure or repurchase obligation would continue
for the life of the loans. Unlike the separate guarantee in
Bulova Watch, DBSP's cure or repurchase obligation could not
reasonably be viewed as a distinct promise of future performance.
It was dependent on, and indeed derivative of, DBSP's
representations and warranties, which did not survive the closing
and were breached, if at all, on that date.3

3
The Brief of Amici Curiae New York Law Professors helpfully
analogizes the guarantees in this case and in Bulova Watch to UCC
warranties: Under the New York UCC, claims based on breaches of
warranty are covered by a four-year statute of limitations
running from the date of delivery. Claims based on express
guarantees of future performance, by contrast, are treated as
arising on the future date when those express and separate
guarantees are breached (NY UCC Law §§ 2-725[1], [2]). The

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And it makes sense that DBSP, as sponsor and seller,
would not guarantee future performance of the mortgage loans. A
sponsor does not guarantee payment for the life of the
transaction because loans may default 10 or 20 years after they
have been issued for reasons entirely unrelated to the sponsor's
representations and warranties. The sponsor merely warrants
certain characteristics of the loans, and promises that if those
warranties and representations are materially false, it will cure
or repurchase the non-conforming loans within the same statutory
period in which remedies for breach of contract (i.e., rescission
and expectation damages) could have been sought.4

promise in Bulova Watch was an express guarantee of future
performance, whereas the cure or repurchase obligations in this
case were directly tied to DBSP's warranties and thus did not
arise on a future date.
4
Even without reference to the Appellate Division's decision
in this case, 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
(see e.g., Lehman Bros. Holdings v Universal Am. Mtge. Co., LLC,
2014 WL 4269118, *3-4 [D Colo, Aug. 28, 2014, No. 13-Civ-0092];
Wells Fargo Bank, N.A. v JPMorgan Chase Bank, N.A., 2014 WL
1259630, *3-4 [SD NY, Mar. 27, 2014, No. 12-CV-6168]; ACE Sec.
Corp. Home Equity Loan Trust, Series 2007-HE3 v DB Structured
Prods., Inc., 5 F Supp 3d 543, 552 [SD NY 2014]; Aurora
Commercial Corp. v Standard Pac. Mtge., Inc., 2014 WL 1056383,
*4-5 [D Colo, Mar. 19, 2014, No. 12-civ-3138]; Deutsche Alt-A
Sec. Mtge. Loan Trust, Series 2006-OA1 v DB Structured Prods.,
Inc., 958 F Supp 2d 488, 499 [SD NY 2013]; Deutsche Bank Natl.
Trust Co. v Decision One Mtge. Co., LLC, 2013 WL 6284438, *7 [Ill
Cir Ct, Nov. 19, 2013, No. 2013L005823]; Lehman Bros. Holdings,
Inc. v Evergreen Moneysource Mtge. Co., 793 F Supp 2d 1189, 1194
[WD Wash 2011]; Nomura Asset Acceptance Corp. Alterantive Loan
Trust, Series 2005-S4 v Nomura Credit & Capital, Inc., 39 Misc 3d

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If the cure or repurchase obligation did not exist, the
Trust's only recourse would have been to bring an action against
DBSP for breach of the representations and warranties. That
action could only have been brought within six years of the date
of contract execution. The cure or repurchase obligation is an
alternative remedy, or recourse, for the Trust, but the
underlying act the Trust complains of is the same: the quality of
the loans and their conformity with the representations and
warranties. The Trust argues, in effect, that the cure or
repurchase obligation transformed a standard breach of contract
remedy, i.e. damages, into one that lasted for the life of the
investment -- decades past the statutory period. But nothing in
the parties' agreement evidences such an intent. Historically,
we have been "extremely reluctant to interpret an agreement as
impliedly stating something which the parties have neglected to
specifically include. . . . [C]ourts may not by construction add
or excise terms, nor distort the meanings of those used and
thereby make a new contract for the parties under the guise of
interpreting the writing" (Vermont Teddy Bear Co. v 538 Madison
Realty Co., 1 NY3d 470, 475 [2004] [internal quotation marks and
citations omitted]).
Condition Precedent
The Trust's strongest argument is that the cure or

1226(A), [Sup Ct, NY County, May 10, 2013]; Structured Mtge.
Trust 1997-2 v Daiwa Fin. Corp., 2003 WL 548868, *2 [SD NY, Feb.
25, 2003, No. 02-CV-3232]).

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repurchase obligation was a substantive condition precedent to
suit that delayed accrual of the cause of action. In that vein,
the Trust claims it had no right at law to sue DBSP until DBSP
refused to cure or repurchase the loans within the requisite time
period; only then did the PSA permit the Trust to bring suit to
enforce that distinct contractual obligation. While this
argument is persuasive-sounding, we are unconvinced.
The Trust ignores the difference between a demand that
is a condition to a party's performance, and a demand that seeks
a remedy for a pre-existing wrong. We observed the distinction
over 100 years ago in Dickinson v Mayor of City of N.Y. (92 NY
584, 590 [1883]). There, we held that a 30-day statutory period
during which the City of New York was free from litigation while
it investigated claims did not affect accrual of the cause of
action against the City. In such a case, where a legal wrong
occurred and the only impediment to recovery is the defendant's
discovery of the wrong and notice to the defendant, the claim
accrues immediately. We contrasted that situation, however, to
one in which "a demand . . . was a part of the cause of action
and necessary to be alleged and proven, and without this no cause
of action existed" (id. at 591, distinguishing Fisher v Mayor of
City of N.Y., 67 NY 73 [1876]).
The Trust suffered a legal wrong at the moment DBSP
allegedly breached the representations and warranties. This is
like the situation in Dickinson, and unlike the situation in

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Fisher, where no cause of action existed until the demand was
made. Here, a cause of action existed for breach of a
representation and warranty; the Trust was just limited in its
remedies for that breach. Hence, the condition was a procedural
prerequisite to suit. If DBSP's repurchase obligation were truly
the separate undertaking the Trust alleges, DBSP would not have
breached the agreement until after the Trust had demanded cure
and repurchase. But DBSP breached the representations and
warranties in the parties' agreement, if at all, the moment the
MLPA was executed (see e.g. ABB Indus. Sys. v Prime Tech., Inc.,
120 F 3d 351, 360 [2d Cir 1997] [under CPLR 213 [2], a warranty
of compliance with environmental laws "was breached, if at all,
on the day (the contract) was executed, and therefore, the
district court correctly concluded that the statute began to run
on that day]; West 90th Owners Corp. v Schlechter, 137 AD2d 456,
458 [1st Dept 1988] ["The representation . . . was false when
made. Thus, the breach occurred at the time of the execution of
the contract"]). The Trust simply failed to pursue its
contractual remedy within six years of the alleged breach.
The only cases the Trust relies on to support its
position are inapposite. The court in Resolution Trust Corp. v
Key Financial Serv., Inc. (280 F3d 12, 18 [1st Cir 2002])
specifically stated that it was not deciding the question of
"[w]hether or not [the defendant] committed an independent breach
by failing to repurchase" (id.). It affirmed the lower court on

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other grounds. The other cases the Trust cites either mistakenly
rely on Resolution Trust as deciding something it expressly
refrained from resolving (see Lasalle Bank Natl Assn. v Lehman
Bros. Holdings, 237 F Supp 2d 618, 638 [D Md 2002] [citing only
Resolution Trust for the proposition that "a loan seller's
failure to repurchase non-conforming loans upon demand as
required by contract is an independent breach of the contract
entitling plaintiff to pursue general contract remedies for
breach of contract"]; Lehman Bros. Holdings, Inc. v Natl Bank of
Arkansas, 875 F Supp 2d 911, 917 [ED Ark 2012] [same]) or rely on
Supreme Court's decision in this case, which the Appellate
Division subsequently reversed (see FHFA v WMC Mtge., LLC, 2013
WL 7144159, *1 [SD NY, Dec. 17, 2013]).
III.
In sum, DBSP's cure or repurchase obligation was not a
separate and continuing promise of future performance; rather, it
was the Trust's sole remedy in the event of DPSP's breach of
representations and warranties. Viewed in this light, the cure
or repurchase obligation was not an independently enforceable
right, nor did it continue for the life of the investment.
Accordingly, the Trust's claim, subject to the six-year statute
of limitations for breach-of-contract actions, accrued on March
28, 2006, when the MLPA was executed. Moreover, DBSP's failure
to cure or repurchase was not a substantive condition precedent
that deferred accrual of the Trust's claim; instead, it was a

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procedural prerequisite to suit. Finally, because the Trust
admittedly failed to fulfill the condition precedent, we need not
and do not address the issues of standing and relation back
disputed by the parties.
Accordingly, the order of the Appellate Division should
be affirmed, with costs.
* * * * * * * * * * * * * * * * *
Order affirmed, with costs. Opinion by Judge Read. Chief Judge
Lippman and Judges Pigott, Rivera, Stein and Fahey concur. Judge
Abdus-Salaam took no part.

Decided June 11, 2015

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