On March 3, 2015, Justice Friedman of the New York County Commercial Division issued a decision in U.S. Bank N.A. v. Greenpoint Mortgage Funding, Inc., 2015 NY Slip Op. 30307(U), holding that a contract provision intended to delay accrual of a breach of contract claim for statute of limitations purposes was unenforceable.
U.S. Bank N.A. is one of many cases in the Commercial Division arising from breaches of representations and warranties made in connection with investments in mortgage-backed securities. The transaction documents underlying such investments typically require notice, and subsequent cure period, as a condition precedent to bringing a lawsuit for breaches of representations and warranties concerning the mortgages underlying the investment. In an important 2013 decision, ACE Sec. Corp. v. DB Structured Prods., Inc., 2013 NY Slip Op. 08517 – about which we have blogged here and here – the First Department held that claims for breach of representations and warranties accrue when the false statements are made, not when the contractually required demand is made and refused.
The transaction documents in U.S. Bank had a provision that purported to delay the accrual of claims for breach of representations and warranties until the discovery of the breach and the failure to cure. Justice Friedman found that an agreement to delay the accrual of a cause of action is unenforceable, and granted a motion to dismiss the claims as untimely. The Court explained:
The accrual provision cannot serve to delay the accrual of the breach of contract cause of action for purposes of the statute of limitations. As held by the Court of Appeals in Kassner & Co. v City of New York, if an “agreement to waive or extend the Statute of Limitations is made at the inception of liability it is unenforceable because a party cannot in advance, make a valid promise that a statute founded in public policy shall be inoperative.” (46 NY2d at 551 [internal citations and quotation marks omitted].) Statutes of limitations “express a societal interest or public policy of giving repose to human affairs.” (Id. at 550 [internal quotation marks and citations omitted].) Thus, although parties may contract to shorten an applicable statute of limitations, an agreement made prior to the accrual of a cause of action “to extend the period as provided by statute or to postpone the time from which the period of limitation is to be computed” conflicts with public policy and will not be enforced. (Id. at 551 [emphasis in original, internal quotation marks and citations omitted].)
The accrual provision . . . by its terms specifies conditions that must be met before any cause of action “accrue[s ]” for breach of representations and warranties regarding the mortgage loans. It is an unambiguous expression of the parties’ intent to delay accrual of a cause of action “arising out of the breach of any representations and warranties” until plaintiff discovers or is notified of the breach, defendant fails to cure, and plaintiff makes demand upon defendant for compliance. This accrual provision, which itself references an underlying breach, cannot redefine the elements of a claim for that breach. To enforce the provision would be to ignore the ACE holding that the cause of action for breach of the representations and warranties accrues when the underlying breach occurs – i.e., when the representations and warranties are made – and not when the repurchase demand is made and refused.