A Deutsche Bank AG (DBK) unit won dismissal of a suit brought by mortgage-bond investors after an appeals court determined the claims were subject to a six-year statute of limitations that began to run when the deal closed -- a ruling that may limit new suits.
A four-judge appellate panel in Manhattan yesterday unanimously reversed a May decision by New York state Supreme Justice Shirley Werner Kornreich, who had ruled that six-year period began when DB Structured failed to timely cure or repurchase defective loans in the pool.
The appellate panel’s ruling should “significantly” limit new claims on residential mortgage-backed securities because many securitizations occurred more than six years ago, said Scott D. Musoff, a partner with Skadden Arps Slate Meagher & Flom LLP in New York who has litigated similar cases.
“There are potentially numerous securitizations out there that people have not yet brought actions on behalf of that could have been brought if this case had gone the other way,” Musoff said in a phone interview. “Some of these securitizations could last the life of the underlying loans which could be 20- or 30-year mortgages and, if this decision had gone the other way, there could be potential putback claims throughout the life of those deals.”
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
“We respectfully disagree with the First Department’s decision,” Marc Kasowitz, a lawyer for the plaintiffs, said in an e-mail. “Justice Kornreich’s opinion was well-reasoned, thorough and correct. We are confident that the First Department will be reversed on appeal.”
Investors sued DB Structured Products in March 2012 seeking more than $250 million in damages. The company allegedly breached its obligations to repurchase loans in a pool of more than 8,000 that didn’t conform with statements made about their characteristics and quality. The trustee, HSBC Bank USA, later replaced the investors in the suit.
The loans were bought by DB Structured Products from at least three originators and sold to Ace Securities Corp., another unit of Deutsche Bank. It then deposited the loans into the trust, according to the suit, and the loans were securitized through the issuance of more than $500 million of certificates under a pooling and servicing agreement in March 2006.
The trust had suffered more than $330 million in losses on non-performing loans by September 2012, according to a court filing.’’
Kornreich said in her May ruling that if a six-year statute of limitations began to run at closing, the contracts, which included “specific deadlines for the demand and cure period and involve loans with a 30-year term,” could have said that the repurchase demands could be made only within that time frame.
The loan purchase agreement and the pooling and servicing agreement didn’t give the trustee the right to sue or demand the buyback of defective loans until it discovered or received notice of a breach and the cure period had elapsed, according to the appeals court’s decision.
Kornreich “erred in finding that plaintiff’s claims did not accrue until defendant either failed to timely cure or repurchase a defective mortgage loan,” the panel said. “To the contrary, the claims accrued on the closing date” of the loan purchase agreement, “March 28, 2006, when any breach of the representations and warranties contained therein occurred.”
The appeals court said the investors sued on March 28, 2012, the last day of the period of limitations and before a 60-day period to cure the defective loans and a 90-day period to repurchase them expired.
The investors weren’t authorized to file the suit on behalf of the trust under the contracts, which required them to notify the trustee of defaults by the servicer or master servicer for the loans, not the sponsor, the appeals court said.
“This is a welcomed decision,” said Ken Markison, a vice president and regulatory counsel at the Mortgage Bankers Association. “Clarity on this issue is important to the industry and consumers. An indefinite or undefined period of when these claims can be brought only adds unnecessary caution and costs” to granting home loans.
Deutsche Bank is pleased with the court’s decision, Renee Calabro, a spokeswoman for the lender in New York, said in an e-mail.
The case is Ace Securities Corp. v. DB Structured Products Inc., 650980/2012, New York State Supreme Court, New York County (Manhattan).
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