Homeward Residential, Inc. v. Sand Canyon Corporation

Background

These consolidated cases concerned two residential mortgage-backed securities transactions from 2006. Homeward Residential, acting as master servicer for two trusts and for the benefit of the trusts’ trustees and certificateholders, asserted breach-of-warranty and breach-of-contract claims against Sand Canyon Corporation, formerly known as Option One Mortgage Corporation.

In each transaction, Sand Canyon sold mortgage loans to its wholly owned subsidiary, Option One Mortgage Acceptance Corporation (OOMAC), under a Mortgage Loan Purchase Agreement. OOMAC then transferred the loans and its rights under those agreements to the relevant trust under a Pooling and Servicing Agreement. Homeward became master servicer in 2008 and later received authorization from Wells Fargo, the trustee, to sue Sand Canyon. Homeward filed the first case on May 31, 2012, and the second on September 28, 2012. The cases were later consolidated.

Motions and limitations issue

The parties filed cross-motions for summary judgment and motions to preclude expert testimony. Summary judgment is judgment without a trial when the evidence shows no genuine dispute over a material fact and the moving party is entitled to judgment under the law.

Sand Canyon argued that Homeward’s claims were barred by the statute of limitations. The parties agreed that the claims accrued when the transactions occurred in 2006 and that Homeward filed each case more than five but less than six years later. Sand Canyon argued that a four-year limitations period applied; Homeward argued for six years and alternatively argued that the period had been paused under discovery rules.

The court applied New York’s borrowing statute. That statute requires a claim accruing outside New York to be timely under both New York’s limitations period and the limitations period of the place where the claim accrued. The court explained that New York’s period was six years, so the dispute concerned the place of accrual and the applicable out-of-state period.

Place of accrual

The court relied substantially on the New York Court of Appeals’ decision in a materially similar residential mortgage-backed securities case. That decision generally applied the plaintiff-residence rule, under which the place of economic injury is usually the plaintiff’s residence, even when the plaintiff sues in a representative capacity.

If that rule applied, Homeward’s residence was Texas, and Texas law supplied a four-year limitations period. The court also held that, even if this was an appropriate case to depart from the plaintiff-residence rule, the result would be the same. The court concluded that the claims were held by OOMAC when they accrued, because the alleged breaches occurred when the Mortgage Loan Purchase Agreements were executed. OOMAC’s residence was California, which also had a four-year limitations period.

The court rejected Homeward’s proposal to use Wells Fargo’s residence as the place of accrual. It reasoned that the controlling precedent did not establish a trustee-residence rule and that using a fact-specific or trustee-based approach would create uncertainty. The court also declined to disregard OOMAC’s separate corporate identity merely because OOMAC was Sand Canyon’s wholly owned subsidiary.

Discovery tolling

The court separately rejected Homeward’s argument that discovery rules made the claims timely. Under the applicable law, a discovery rule can delay accrual in limited circumstances when the injury could not reasonably have been discovered earlier. The court found that the alleged breaches were not secret breaches of the type covered by California’s rule. Wells Fargo had access to relevant information from 2006, and Homeward had access at least from 2008.

The court reached the same conclusion under Texas law. Texas applies its discovery rule only when the injury is both inherently undiscoverable and objectively verifiable. The court found that the alleged breaches were not inherently undiscoverable because they could have been, and were, discovered within the limitations period. The opinion noted allegations of investor demands concerning alleged breaches as early as October 2009.

Disposition

Judge Jesse M. Furman concluded that Homeward’s claims were untimely under either possible four-year limitations period and that the discovery rule did not apply. Sand Canyon’s motion for summary judgment was granted. Homeward’s cross-motion for summary judgment was denied. Homeward’s claims were dismissed in their entirety. The motions to preclude expert testimony were denied as moot.

The court also ordered any party seeking to keep materials sealed or redacted to show, document by document, why continued sealing was consistent with the presumption of public access. The Clerk was directed to enter judgment for Sand Canyon and close the case.