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Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC, C.A. No. 7701-VCL (Del. Ch. Jan. 12, 2015) (Laster, V.C.)

January 12, 2015

In this memorandum opinion, the Court of Chancery granted in part the plaintiff’s motion for reargument under Rule 59(f) and reconsidered its dismissal of plaintiff’s complaint as time-barred.  The Court reconsidered its ruling on three grounds: (1) a previously unconsidered, but controlling Supreme Court decision on the application of 10 Del. C. § 8121 (the “Borrowing Statute”), (2) the application of an Accrual Provision in the controlling contract; and (3) recent amendments to 10 Del. C. § 8106(c) allowing parties to contract around Delaware’s default limitations periods. 

Defendant EMC Mortgage LLC (“EMC”) was the successor to a company that created and sold residential-mortgage-backed securities.  EMC sold 8,447 loans (the “Mortgage Loans”) to a Bear Stearns owned LLC, which in turn created plaintiff Bear Stearns Mortgage Funding Trust 2006-SL1 (the “Trust”) and designated the Mortgage Loans as the trust fund for the Trust.  The sale of the Mortgage Loans was governed by a Purchase Agreement between the LLC and the Trust dated July 28, 2006.  Pursuant to a Servicing Agreement, EMC became the servicer for the Mortgage Loans with responsibility for maintaining documents relating to the Mortgage Loans, modifying Mortgage Loans, and foreclosing on delinquent properties.  EMC was replaced as servicer on April 1, 2011, by defendant JPMorgan Chase Bank, N.A. (“JPMorgan”).  The Purchase Agreement contained numerous representations and warranties regarding the type and quality of the Mortgage Loans, and further contained a provision that provided for the survival of those representations and warranties post-closing.  The Purchase Agreement also contained an Accrual Provision that stated that any cause of action for breach of the representations and warranties did not accrue until the Trust discovers a breach or has notice of a breach and EMC fails to cure, repurchase, or replace non-conforming loans.

Within the first year, the Mortgage Loans experienced high rates of defaults and delinquencies, and the Trust suffered $136.6 million in losses by 2008 and $295 million in losses by February 2014, which represented 60% of the principal loan balance.  Suspecting it had been sold bad loans, in summer 2011, the Trust asked EMC for loan documentation and records for the Mortgage Loans held by the Trust.  The Trust discovered that certain Mortgage Loans did not comply with the representations and warranties EMC made about the quality of the loans.  After identifying the non-conforming loans, the Trust asked EMC to comply with the remedial procedure outlined in the Purchase Agreement that required EMC to repurchase non-conforming loans.  EMC agreed to repurchase some of the loans, but declined to repurchase the bulk of the non-conforming loans, leading the Trust to initiate a suit in the Court of Chancery.

Plaintiff filed its complaint on July 16, 2012, six years after the securitization was closed and the Purchase Agreement entered into.  The defendants moved to dismiss on April 7, 2014, asserting that the complaint was time-barred.  The Court of Chancery initially dismissed the complaint under a laches analysis that utilized Delaware’s three-year statute of limitations for breach of contract and relied upon Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings, LLC, 2012 WL 3201139 (Del. Ch.), to determine that the Borrowing Statute required the use of Delaware’s shorter limitations period rather than New York’s six-year statute of limitations.  The Court further determined that, notwithstanding the language of the Accrual Provision, the statute of limitations for any claim for breach of the representations and warranties could not be contractually extended and began to run at the time the securitization closed.

In reconsidering its prior ruling, the Court first revisited its analysis of what limitations period applied under the Borrowing Statute.  The Court had previously followed Central Mortgage, which dictated that when a cause of action accrued in another jurisdiction, the Borrowing Statute requires the application of the shorter of the two limitations periods between Delaware and the accrual jurisdiction.  The Court had not considered the Delaware Supreme Court decision in Saudi Basic Industries Corp. v. Mobil Yanbu Petrochemical Co., Inc., 866 A.2d 1 (Del. 2005).  In Saudi Basic, the Delaware Supreme Court observed that the Borrowing Statute was designed to prevent forum shopping in Delaware by preventing a plaintiff from circumventing a shorter limitations period mandated by the jurisdiction where the cause of action accrued.  But the Supreme Court declined to apply the Borrowing Statute where its application would require using Delaware’s shorter limitations period for claims that otherwise would be timely if brought in the jurisdiction where the claims arose.  While the plaintiff had failed to identify Saudi Basic in its response to the motion to dismiss, the Court found that it was controlling and determined that the Borrowing Statute was inapplicable.  The Court then determined that under Delaware’s general choice-of-law rules, the most significant relationship test set forth in the Restatement (Second) of Conflicts of Laws must be applied.  The most significant relationship test determined that New York law applied, and under a six-year limitations period the complaint was timely filed on July 16, 2012, because the limitations period did not expire until July 28, 2012.

Next, the Court considered the Accrual Provision in the Purchase Agreement and determined that even if Delaware’s three-year limitations period applied, the limitations period did not begin to run until the Accrual Provision was satisfied.  The Court had not considered a line of Delaware cases, culminating in Aircraft Service, International, Inc. v. TBI Overseas Holdings, Inc., 2014 WL 4101660 (Del. Super.), which held that a contractual accrual provision is a condition precedent to a plaintiff’s ability to sue such that the statute of limitations does not begin to run until the condition precedent is met.  The Accrual Provision of the Purchase Agreement required discovery or notice of a breach and failure to cure.  The Trust demanded that EMC repurchase the non-conforming loans in December 2011, and the Trust filed suit on July 16, 2012, well within Delaware’s three-year limitations period.

Last, the Court determined that even if Delaware’s three-year limitations period applied, recent amendments to 10 Del. C. § 8106(c) required reconsideration of its decision to dismiss.  10 Del. C. § 8106(c) became effective on August 1, 2014, before the Court’s ruling on defendants’ motion to dismiss.  As an initial matter, the Court found that retroactively applying Section 8106(c) to the plaintiff’s claims was appropriate because modification of a limitations period is a procedural matter affecting remedies rather than changing substantive law.  Thus, the modification applies to ongoing suits absent a showing of manifest injustice (which the Court determined was not a concern in this matter).  Section 8106(c) allows parties to contract around otherwise applicable statutes of limitations.  Prior Delaware decisions had held that parties could shorten the length of the statute of limitations but could not extend the length past the three-year maximum survival period.  The Court held that Section 8106(c) now allows parties to extend the limitations period up to twenty years.  Applying Section 8106(c) to the Purchase Agreement, the Court found that the combination of the language providing for the survival of the representations and warranties after closing and the remedial language of the Accrual Provision that required both discovery or notice and failure to cure extended the limitations period up to the statutory maximum of twenty years.  This language constituted “a period of time defined by reference to the occurrence of some other event or action” that was a sufficient “period specified” for purposes of Section 8106(c) because the limitations period for breach was extended so that it would not begin to run until after the events specified in the Accrual Provision.  And because the Purchase Agreement did not specify an outside date for bringing claims, the statutory maximum of twenty years mandated by Section 8106(c) applied. 

The Court reexamined the dismissal of plaintiff’s other claims, including failure to repurchase non-conforming loans, reimbursement, failure to provide documents, and unjust enrichment, and allowed those claims to proceed.  The Court dismissed plaintiff’s notice and indemnification claims as duplicative and only applying to third-party claims, respectively.

The full opinion is available here