Settling a long running dispute, the New York Court of Appeals held in ACE Securities Corp. v. DB Structured Products, Inc. that the statute of limitations for breaches of representations and warranties, or putback claims, in residential mortgage-backed securities (RMBS) litigation begins to run at the time securitization documents are executed, rather than at the time the seller refuses to repurchase the loans ( (June 11, 2015)).

DB Structured Products, Inc. (DBSP) sold a pool of mortgage loans to an affiliate, Ace Securities Corp. under a Mortgage Loan Purchase Agreement (MLPA). ACE then transferred the loans to Home Equity Loan Trust, Series 2006-SL2, under a Pooling and Servicing Agreement (PSA). The MLPA and PSA were executed on the same date, March 28, 2006.

DBSP made over 50 representations and warranties in the MLPA regarding the quality of the loans it was transferring. In early 2012, two certificateholders in the Trust notified the trustee of breaches of the representations and warranties in the MLPA. The certificateholders demanded DBSP either:

When the trustee did not take action, the certificateholders filed suit against DBSP on March 28, 2012, exactly six years from the date the contract was executed. Because the certificateholders had not given DBSP sufficient notice of its breach as required in the MLPA, the trustee sought to substitute itself as plaintiff for the certificateholders in September 2012, filing a complaint on behalf of the Trust.

DBSP moved to dismiss the trustee's complaint as untimely, arguing that the six-year statute of limitations had run out by the time the trustee filed its complaint. The trial court denied DBSP's motion to dismiss, holding that each time DBSP failed to repurchase the loans constituted an independent breach, and the statute of limitations began to run again each time. DBSP appealed, and the First Department granted DBSP's motion to dismiss, holding that the claims accrued on the closing date of the MLPA. The Trust appealed to the New York Court of Appeals.

The New York Court of Appeals held that the statute of limitations began to run when the representations and warranties were made through the execution and delivery of the MLPA and PSA, and not when DBSP failed to cure or repurchase the loans. The court reasoned that:

The court affirmed the First Department's ruling.

This decision brings relief to mortgage lenders that issued residential mortgage-backed securities during the peak of subprime lending. As a result of the court of appeals decision, RMBS investors who delayed in enforcing remedies for an alleged breach of a representation and warranty made in a mortgage loan purchase agreement cannot pursue a later claim for damages. Moving forward, investors' only effective remedy for breaches of RMBS representations and warranties will be to timely demand that the sellers cure or repurchase the deficient underlying loans.