14-3373
Deutsche Bank National v. Quicken Loans
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
______________
August Term, 2015
(Argued: October 15, 2015 Decided: November 16, 2015)
Docket No. 14‐3373‐cv
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DEUTSCHE BANK NATIONAL TRUST COMPANY,
solely as Trustee of the GSR Mortgage Loan Trust 2007‐OA1,
Plaintiff‐Appellant,
–v.–
QUICKEN LOANS INC.,
Defendant‐Appellee.*
______________
Before:
STRAUB, WESLEY, AND LIVINGSTON, Circuit Judges.
______________
Appeal from an August 4, 2014 opinion and order of the United States
District Court for the Southern District of New York (Paul A. Crotty, Judge).
The Clerk of the Court is respectfully directed to amend the official caption as noted
*
above.
After the Federal Housing Finance Agency (“FHFA”) filed a summons with
notice in state court asserting breach of contractual obligations to repurchase
mortgage loans that violated representations and warranties, Defendant‐
Appellee Quicken Loans Inc. (“Quicken”) removed the action to federal court.
There, Plaintiff‐Appellant Deutsche Bank National Trust Company (“the
Trustee”), as trustee of the subject residential mortgage‐backed securities trust,
took control of the litigation and filed the Complaint. Quicken moved to dismiss
the suit as, inter alia, barred by the statute of limitations. The District Court
concluded (1) the statute of limitations ran from the date the representations and
warranties were made; (2) the extender provision of the Housing and Economic
Recovery Act did not apply to the Trustee’s claim; and (3) the Trustee’s claim for
breach of the implied covenant of good faith and fair dealing was duplicative.
We agree with each conclusion. We therefore AFFIRM the District Court’s
dismissal of the action.
ZACHARY D. ROSENBAUM, Lowenstein Sandler LLP,
New York, NY, for Plaintiff‐Appellant.
JEFFREY B. MORGANROTH, Morganroth &
Morganroth, PLLC, Birmingham, MI (Howard F.
Sidman, Heidi A. Wendel, Michael O. Thayer, Jones
Day, New York, NY), for Defendants‐Appellees.
______________
WESLEY, Circuit Judge:
After the Federal Housing Finance Agency (“FHFA”) filed a summons
with notice in state court asserting breach of contractual obligations to
repurchase mortgage loans that violated representations and warranties,
Defendant‐Appellee Quicken Loans Inc. (“Quicken”) removed the action to
2
federal court. There, Plaintiff‐Appellant Deutsche Bank National Trust Company
(“the Trustee”), as trustee of the subject residential mortgage‐backed securities
trust, took control of the litigation and filed the Complaint. Quicken moved to
dismiss the suit as, inter alia, barred by the statute of limitations. The District
Court concluded (1) the statute of limitations ran from the date the
representations and warranties were made; (2) the extender provision of the
Housing and Economic Recovery Act did not apply to the Trustee’s claim; and
(3) the Trustee’s claim for breach of the implied covenant of good faith and fair
dealing was duplicative. We now affirm each of the District Court’s conclusions.
BACKGROUND1
Quicken originated the mortgage loans at issue and sold them to nonparty
Goldman Sachs Mortgage Company (“the Sponsor”) pursuant to a Purchase
Agreement dated June 1, 2006. That Purchase Agreement included a series of
representations and warranties (“R&Ws”) about the quality of the mortgage
loans and their compliance with specified underwriting and origination
1 Unless otherwise noted, the following facts are taken from the District Court’s opinion
and the parties’ briefs on appeal. As required when reviewing a motion to dismiss, we
accept all factual allegations in the complaint as true and draw all reasonable inferences
in the Trustee’s favor. See Shomo v. City of New York, 579 F.3d 176, 183 (2d Cir. 2009).
3
guidelines. Through a series of sales and assignments, the mortgage loans were
deposited into a securitization trust; the Trustee received all the rights, title, and
interest in the mortgage loans for the benefit of the certificateholders in the
securitization. Additionally, the Trustee received, as assignee, all the Sponsor’s
rights against Quicken, including its rights and remedies arising out of the
R&Ws. The securitization trust issued certificates representing interests in the
mortgage loans to investors in a public offering, pursuant to a shelf registration
statement filed with the U.S. Securities and Exchange Commission; the closing
date of the securitization was May 8, 2007. One of the certificate purchasers was
the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
The R&Ws contained in the Purchase Agreement contained both
transaction‐level R&Ws—representations as to the characteristics of the
transaction as a whole—and loan‐level R&Ws—representations as to the
characteristics of the individual mortgage loans. The R&Ws collectively covered
such subjects as Quicken’s characteristics as originator as well as the features,
quality, and risk profile of the loans contained in the securitization pool,
including the loans’ compliance with origination guidelines, the absence of
delinquencies and defaults, or the absence of originator fraud. These R&Ws
4
guaranteed these characteristics “as of” the closing and transfer dates set forth in
a series of Purchase Confirmation Letters, in which Quicken sold individual
batches of the mortgage loans to the Sponsor pursuant to the Purchase
Agreement. Joint App’x 90, 95–112 (Purchase Agreement §§ 2.01, 2.09, 3.01–.02).
The Purchase Agreement also created a contractual remedy for any
material breach of the R&Ws (“the Repurchase Protocol”). See Joint App’x 112–
14 (Purchase Agreement § 3.03). Upon discovering any breach of the R&Ws that
materially and adversely affected the value of the loan or the trust’s interests, the
discovering party was required to give prompt written notice to the other.
Quicken had sixty days—with a possible fifteen‐day extension—to cure the
material breach, calculated from the earlier of discovery or receipt of notice; if the
breach could not be cured within that time, Quicken had to repurchase the
mortgage loan at a prescribed price.2
2 For breaches of the transaction‐level R&Ws laid out in § 3.01 of the Purchase
Agreement, the Repurchase Protocol required repurchase of all the mortgage loans if
cure was not completed within sixty days. See Joint App’x 113. The Purchase
Agreement also included a mutual indemnification clause between the parties. See Joint
App’x 122–23 (Purchase Agreement § 5.01). Together, the Repurchase Protocol and the
indemnification provision constituted the “sole remedies” available to the Trustee for
breaches of the R&Ws. Joint App’x 114.
5
This section of the Purchase Agreement also contained a provision
imposing limits on when the counterparty may bring an action against Quicken
for material breach of the R&Ws (“the Accrual Clause”). Because of the
importance of this provision to the case’s resolution, we include it here:
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 [Trustee] to [Quicken], (ii) failure by [Quicken] to
cure such Material Breach or repurchase such Mortgage
Loan as specified above, and (iii) demand upon
[Quicken] by the [Trustee] for compliance with this
Agreement.
Joint App’x 114 (Purchase Agreement § 3.03).
On May 8, 2013, FHFA commenced an action in New York Supreme Court,
New York County, “as conservator of” Freddie Mac and “on behalf of” the
Trustee, by filing a summons with notice. It then served Quicken on September
4, 2013. Quicken removed the action to the United States District Court for the
Southern District of New York on September 13, 2013, claiming federal
jurisdiction under 28 U.S.C. § 1345.3 Once the case was removed to federal court,
3 This section provides the federal district courts with jurisdiction over “all civil actions,
suits or proceedings commenced by the United States, or by any agency or officer
thereof expressly authorized to sue by Act of Congress.” 28 U.S.C. § 1345.
6
however, FHFA entered no appearance and did not participate in the
proceedings. Instead, the Trustee appeared and filed the instant Complaint on
October 18, 2013. The Trustee’s Complaint asserted federal diversity jurisdiction
pursuant to 28 U.S.C. § 1332 and made no mention of § 1345.4
The Complaint alleged, among other things, that two independent audits
of loans in the securitization trust revealed material breaches of Quicken’s
R&Ws, including those related to (1) borrower income, (2) debt‐to‐income ratios,
(3) loan‐to‐value and combined‐loan‐to‐value ratios, and (4) owner occupancy.
The Complaint further alleged that, upon learning of these breaches, the Trustee
sent Quicken a series of letters between August 27, 2013, and October 17, 2013,
that notified Quicken of the loans and breaches and demanded cure or
repurchase. Finally, the Complaint alleged that Quicken failed to cure or
repurchase a single breaching loan without justification.
On December 16, 2013, Quicken moved to dismiss the Complaint, arguing
primarily that the breach of contract claim was time‐barred. The District Court
agreed, concluding that the cause of action accrued at the time the R&Ws were
4 FHFA’s decision to not pursue the matter further is discussed infra at note 8 and its
accompanying text.
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made. It further concluded that the extender provision of the Housing and
Economic Recovery Act (“HERA”), 12 U.S.C. § 4617(b)(12), did not apply because
FHFA abandoned prosecution of the action after realizing it was not the proper
plaintiff. Finally, it concluded that the Trustee’s remaining claim for breach of
the implied covenant of good faith and fair dealing was duplicative of the
contract claim and should be dismissed. The Trustee filed a timely notice of
appeal.
While this appeal was pending, the New York Court of Appeals granted
leave to appeal a decision of the First Department critical to the District Court’s
timeliness ruling below. See ACE Secs. Corp. v. DB Structured Prods., Inc., 112
A.D.3d 522 (N.Y. App. Div. 2013), leave to appeal granted by 23 N.Y.3d 906 (2014).
We then granted the Trustee’s motion to adjourn oral argument until the Court
of Appeals decided the case. Following release of the Court of Appeals’ opinion,
see ACE Secs. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581 (2015), the parties
submitted letter briefs under Federal Rule of Appellate Procedure 28(j), and the
panel heard oral argument on October 15, 2015.
8
DISCUSSION
We review de novo a district court’s grant of a motion to dismiss, including
its legal interpretation and application of a statute of limitations, see City of
Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 173 (2d Cir. 2011), and its
interpretation of contractual terms, see Oscar Gruss & Son, Inc. v. Hollander, 337
F.3d 186, 198 (2d Cir. 2003). When sitting in diversity jurisdiction and
determining New York state law claims, we must apply “the law of New York as
interpreted by the New York Court of Appeals.” Licci ex rel. Licci v. Lebanese
Canadian Bank, SAL, 739 F.3d 45, 48 (2d Cir. 2013) (per curiam).
New York’s six‐year limitations period on contractual claims generally
runs from the time the contract was breached. See N.Y.C.P.L.R. §§ 203(a), 213(2);
Ely‐Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402 (1993). Where “demand
is necessary to entitle a person to commence an action,” a cause of action accrues
“when the right to make the demand is complete.” N.Y.C.P.L.R. § 206(a).
Applying these rules, the New York Court of Appeals’ recent decision is
clear: A cause of action for breach of contractual representations and warranties
that guarantee certain facts as of a certain date—but do not guarantee future
performance—accrues on the date those representations and warranties become
9
effective. ACE, 25 N.Y.3d at 596. We must therefore determine whether the
R&Ws before us contain any guarantee of future performance or whether the
Accrual Clause constitutes a substantive condition precedent, which would delay
accrual of the cause of action. See id. at 599.
In ACE, the Court concluded that the representations and warranties
guaranteed only “certain facts about the loans’ characteristics as of” the
execution date, not how the mortgage would perform in the future. Id. at 595–96.
Further, as an “alternative remedy” to damages, the repurchase obligation there
was itself “dependent on, and indeed derivative of” the representations and thus
also “could not be reasonably viewed as a distinct promise of future
performance.” Ibid. We find the R&Ws in this case indistinguishable: The plain
text of the agreement “represents, warrants and covenants” that the facts stated
in the R&Ws are true “as of the Closing Date and as of the Transfer Date.” Joint
App’x 96 (Purchase Agreement § 3.01); see also Joint App’x 100 (Purchase
Agreement § 3.02) (substantially similar language).
The Trustee argues that, unlike those in ACE, the R&Ws here were
expressly stated to “survive the sale of the Mortgage Loans,” Joint App’x 112
(Purchase Agreement § 3.03), and therefore promise future performance. This
10
argument misses the mark. The R&Ws here guarantee, at their core, no more
than the present characteristics and quality of the loans as of a specific moment
in time. 5 Whether they “survive”—i.e., remain valid and enforceable—does not
alter the question of performance. A representation of present fact is either true
or false—and the contract therefore performed or breached—if the underlying
fact was true or false at the time the representation was made. See ABB Indus.
Sys., Inc. v. Prime Tech., Inc., 120 F.3d 351, 360 (2d Cir. 1997) (holding, in a case
alleging breach of representations under New York law, that the contract, which
“promised that the site was in compliance with all environmental laws,” was
“breached, if at all, on the day it was executed”). Immediately upon
effectiveness of the R&Ws, the Trustee was entitled to demand the contractual
remedy—cure or repurchase—as to any material breach, and the cause of action
therefore accrued at that time. See N.Y.C.P.L.R. § 206(a).
5 Like the Court of Appeals, we find illustrative Bulova Watch Co. v. Celotex Corp., 46
N.Y.2d 606 (1979). There, a supplier sold roofing materials to a contractor and
promised to repair any leaks in the roof for twenty years. The Court of Appeals
concluded that this promise was distinct and separate from the sale of materials,
because it obliged the supplier to perform a continuing service—and failure to perform
that service would independently breach the agreement. Id. at 610–12. By contrast,
Quicken agreed only to remedy defects that existed in the initial sale, not to ensure the
quality of the loans for their entire life. For example, the represented loan‐to‐value
ratios express a static condition—i.e., the value of the mortgaged property and its
relationship to the loan amount at the time of the loan.
11
Next, we address the Trustee’s argument, also made by the trust in ACE,
that the Accrual Clause makes demand “a substantive condition precedent to
suit that delayed accrual of the cause of action.” 25 N.Y.3d at 597. We have
previously observed that New York courts “distinguish between substantive
demands and procedural demands.” Cont’l Cas. Co. v. Stronghold Ins. Co., 77 F.3d
16, 21 (2d Cir. 1996). In the former case, CPLR § 206(a) does not apply and the
statute of limitations “begins to run only after such demand and refusal,” while
in the latter, § 206(a) governs and the limitations period “begins to run when the
right to make the demand is complete.” Kunstsammlungen Zu Weimar v. Elicofon,
678 F.2d 1150, 1161 (2d Cir. 1982) (internal quotation marks omitted).
We note the language of the Accrual Clause—that “[a]ny cause of
action . . . shall accrue” upon (1) discovery or notice of breach, (2) failure to cure or
repurchase, and (3) demand for compliance, Joint App’x 114 (Purchase
Agreement § 3.03) (emphasis added)—makes an initially appealing case for
inclusion as a substantive condition precedent. However, even under the
obvious obligation to enforce a contract “according to the plain meaning of its
terms,” Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002), ACE requires
us to examine the object of the demand, rather than merely apply the phrase
12
“shall accrue” as a talisman. Instead, we must ask whether demand “is a
condition to a party’s performance” (substantive) or whether it “seeks a remedy
for a preexisting wrong” (procedural). ACE, 25 N.Y.3d at 597. The answer is
fatal to the Trustee’s claim.
Because the Repurchase Protocol is not an independent obligation but
merely an alternative contractual remedy to damages, see ACE, 25 N.Y.3d at 596–
97, the relevant “performance” is the truth or falsity of the R&Ws. It is clear that
performance (or nonperformance) of the contract is not contingent on the
Trustee’s demand; the R&Ws were true or false—either performed or not—at the
moment they were made, without any need for the Trustee to make a demand.
See ABB Indus. Sys., 120 F.3d at 360. Thus, notwithstanding the “shall accrue”
language, the Trustee’s demand seeks only the remedy to which it is already
entitled, not performance of the underlying contractual obligation.6 Accordingly,
6 Further, construing the demand requirement as the Trustee suggests results in a
circular absurdity. If the Accrual Clause were a substantive condition precedent, then
the Trustee would not be entitled to its contractual remedy until the three criteria—(1)
discovery or notice, (2) failure to cure or repurchase, and (3) demand—had been
satisfied. However, because demand and failure to cure are now substantive elements,
the Trustee would be in the odd position of having to demand a contractual remedy to
which it would not be entitled until Quicken had refused its demand. Put differently,
Quicken would have to choose whether to remedy a breach that had not occurred—
because it had not yet refused—or to refuse and, by its refusal, breach the contract and
become obligated to remedy that breach.
13
the demand is merely procedural and does not delay accrual of the cause of
action. See ACE, 25 N.Y.3d at 597.
Our decision in Continental Casualty is not to the contrary. There, we
concluded that, under the reinsurance contract, notice of actual losses (i.e., a
demand) was necessary to start the running of the statute of limitations. Cont’l
Cas., 77 F.3d at 21. However, payment of covered losses is performance of a
reinsurance contract, not a remedy for breach. Thus, our precedent is consistent
with ACE’s statement that demand as a prerequisite to performance forms a
substantive condition precedent, while demand of a remedy for a preexisting
breach is merely procedural. See 25 N.Y.3d at 597. Similarly, in the “right to final
payment” cases cited by the Trustee, the payment in question was one party’s
performance of the contract, not a remedy for breaching it. See Hahn Auto.
Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765, 768–69 (2012); John J. Kassner
& Co. v. City of New York, 46 N.Y.2d 544, 550 (1979).
In sum, the Trustee has not persuaded us that the instant contract
functions differently than that considered by the New York Court of Appeals in
ACE, and we are thus bound to reach the same conclusion. We therefore agree
with the District Court that the statute of limitations began to run on the date the
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R&Ws became effective and were either true or false at that time. Since the
Trustee’s suit is therefore facially untimely, 7 the only remaining inquiry is
whether HERA extends the statute of limitations for the Trustee’s claim.
HERA’s extender provision provides, in relevant part, that for “any action
brought by [FHFA] as conservator or receiver,” “the date on which the statute of
limitations begins to run on any claim . . . shall be the later of—(i) the date of the
appointment of [FHFA] as conservator or receiver; or (ii) the date on which the
cause of action accrues.” 12 U.S.C. § 4617(b)(12). The Trustee argues that this
suit was commenced by—i.e., “brought by”—FHFA through a summons with
notice in state court. Thus, in the Trustee’s view, HERA delays accrual of the
cause of action until September 6, 2008, when FHFA was appointed conservator
of Freddie Mac.
7 The District Court concluded that the R&Ws were executed as of the date of the
closing and transfer dates in the Purchase Confirmation Letters for particular groups of
loans—the last of which occurred on April 2, 2007—rather than the securitization’s
closing date of May 8, 2007. On appeal, the Trustee has not briefed any argument to the
contrary. We therefore accept the District Court’s interpretation. See Norton v. Sam’s
Club, 145 F.3d 114, 117 (2d Cir. 1998). As a result, the Trustee’s relation‐back argument
is irrelevant, since the action would be untimely whether commenced on May 8, 2013,
or October 18, 2013. Further, the Trustee raised its argument only in a footnote, and
thus we would decline to consider it in any event. See United States v. Restrepo, 986 F.2d
1462, 1463 (2d Cir. 1993).
15
As we have previously noted in interpreting HERA, statutory
interpretation must “begin with the plain language, giving all undefined terms
their ordinary meaning” while “attempt[ing] to ascertain how a reasonable
reader would understand the statutory text, considered as a whole.” Fed. Hous.
Fin. Agency v. UBS Ams. Inc., 712 F.3d 136, 141 (2d Cir. 2013) (internal quotation
marks omitted). Here, FHFA’s only involvement was filing a summons with
notice in state court—arguably while contractually barred from doing so by a no‐
action clause.8 After removal of the action, the Trustee filed the federal
complaint and prosecuted the action based on diversity jurisdiction with no
apparent participation from FHFA.
In these circumstances, we conclude that the present action cannot
reasonably be said to have been “brought by” FHFA. To conclude otherwise
would confound common‐sense notions of claims to which the statute applies
and invite litigation gamesmanship by private parties seeking to obtain the
8 A “no action” clause generally bars “individual [certificate] holders from bringing
independent law suits which are more effectively brought by the [trustee],” unless
certain exceptions are met. Walnut Place LLC v. Countrywide Home Loans, Inc., No.
650497/11, Misc.3d 1207(A), 2012 WL 1138863, at *3 (N.Y. Sup. Ct. 2012) (internal
quotation marks omitted), aff’d, 96 A.D.3d 684 (N.Y. App. Div. 2012). The no‐action
clause here is contained in § 12.07 of the Master Servicing and Trust Agreement. See
Exhibit 7 to the Declaration of Howard Sidman at 90, Fed. Hous. Fin. Agency v. Quicken
Loans Inc., No. 13‐cv‐06482 (PAC) (S.D.N.Y. filed Dec. 16, 2013), ECF No. 17‐7.
16
benefits of the extender statute for themselves. See Johnson v. United States, 123
F.3d 700, 703 (2d Cir. 1997) (“[T]he appropriate methodology to employ in
interpreting a statute is to look to the common sense of the statute, to its purpose,
[and] to the practical consequences of the suggested interpretations . . . .”
(internal quotation marks omitted)). Whether “brought by” means mere
commencement or commencement and continued prosecution, see Serna v. Law
Office of Joseph Onwuteaka, P.C., 732 F.3d 440, 445 (5th Cir. 2013) (concluding
“bring an action” is ambiguous as to commencement or prosecution of a suit,
given its use in differing contexts), we need not engage in an exhaustive
existential analysis to conclude the procedural posture here does not fit
comfortably within a reasonable reading of the statute. It suffices to say that
HERA’s extender provision does not apply to the unique circumstances before
us, and the Trustee’s claim remains untimely.
Finally, the Trustee argues that its claim for breach of the implied covenant
of good faith and fair dealing was erroneously dismissed as duplicative. We
disagree. Under New York law, claims are duplicative when both “arise from
the same facts and seek the identical damages for each alleged breach.” Amcan
Holdings, Inc. v. Canadian Imperial Bank of Commerce, 70 A.D.3d 423, 426 (N.Y.
17
App. Div. 2010) (citation omitted); see also, e.g., Deer Park Enters., LLC v. Ail Sys.,
Inc., 57 A.D.3d 711, 712 (N.Y. App. Div. 2008) (claims are duplicative where “the
conduct and resulting injury alleged” are identical). The Trustee’s argument that
Quicken knowingly sold defective loans arises from the same facts and seeks the
same remedy as its claim for breach of contract; its claim that Quicken hid the
knowledge from it in an effort to run out the statute of limitations involves the
same facts as a purported failure to notify the Trustee promptly of material
defects. Thus, because the facts underlying both claims are identical and the
Trustee seeks identical remedies, the claim for breach of the implied covenant
was properly dismissed as duplicative.
CONCLUSION
In summary, the R&Ws here made no guarantees of future performance
and therefore could only be breached at the time of execution. The Accrual
Clause merely constitutes a procedural demand and does not delay the accrual of
the cause of action. Since the extender statute does not apply, the six‐year statute
of limitations ran from the date the R&Ws were made. The Trustee’s breach of
contract claim is therefore untimely, and its second claim is duplicative. For
18
these reasons, the District Court’s opinion and order of August 4, 2014, is hereby
AFFIRMED.
19