First Department Holds Obligation to Repurchase Residential Mortgage Backed Securities Terminates After 6 Years

In Bank of N.Y. Mellon v WMC Mtge., LLC, Bank of NY Mellon was left holding thousands of defective residential mortgage backed securities after the real estate market collapse in 2008.  The Bank of NY, which became the administrator of the loans in a securitized trust in June 2006, sued WMC Mortgage and JPMorgan Chase to force them to repurchase the bogus loans under a Mortgage Loan Sale and Interim Servicing Agreement (MLSA) and Pooling and Servicing Agreement (PSA).  Both agreements provided that upon a material breach of the representations and warranties, including that the loans were not defective, the Bank of NY had to give notice of the breach and WMC then had between 60 to 90 days to buy back the loans.  If WMC failed to do so, JPMC, which had guaranteed the sale of the loans, was on the hook.  “The MLSA further provided that a cause of action for repurchase did not accrue until after the purchaser made a demand for repurchase” (Opn, at 2).  

The Bank of NY gave notice of the material breach three weeks short of the six year anniversary of the 2006 sale, and demanded that WMC and JPMC take back the defective loans, but WMC and JPMC failed to repurchase the loans.  So, the Bank of NY commenced this put back action to force WMC and JPMC to do so.  Supreme Court dismissed the Bank of NY’s suit because it was not brought within 6 years after the misrepresentations were made in connection with the 2006 sale. 

The Appellate Division, First Department affirmed that portion of the Supreme Court order that dismissed the repurchase claims against WMC.  The Court held that the repurchase claims accrued when the sale was completed in June 2006 and the 6-year statute of limitations ended WMC’s obligation to repurchase the defective loans under the agreements because the Bank of NY was no longer entitled to any remedy for the misrepresentations.  The parties could not “decide to change the accrual of an otherwise accrued claim or extend the running of a limitations period,” the Court held, by trying to agree to a different accrual date for a repurchase cause of action under the MLSA (Opn, at 3). Nor could the parties choose to “adopt a discovery rule to delay the running of a limitations period for an existing breach of contract” (id.). Thus, the Bank of NY’s failure to file the repurchase claims against WMC within 6 years after the 2006 closing rendered those claims time-barred.

The First Department, however, declined to dismiss the backstop repurchase claims against JPMC. Although the underlying remedy against WMC was time-barred, the Court held that the Bank of NY could still try to make JPMC to repurchase the loans because JPMC’s guaranty obligation did not accrue until after WMC failed to buy back the loans within 90 days after the Bank of NY’s notice of the material breach.

Thus, the Court held, the mere fact that the Bank of NY’s remedy against WMC was time-barred did not similarly extinguish its claims against JPMC.

The First Department’s order can be found here.

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