The issue of how long the statute of limitations runs and when the statute clock starts on representations and warranties provisions in RMBS is under active litigation and adds another layer of risk that investors must consider, according to a recent Standard & Poor’s report.
S&Plooked at two recent New York State Supreme Court decisions regarding claims arising from breaches of representations and warranties in RMBS that significantly differed in their analyses of how the six-year statutes of limitations on R&Ws are applied.
New York sets a six-year statute of limitations for contractual R&W claims. Other jurisdictions have various statutes of limitations, but none is over 10 years—California's is four years and Florida's is five years.
What is being disputed in the courts is when the clock starts ticking on the statute of limitations. One court ruling stated that the statute of limitations began when the R&Ws were made and the second ruling states that the statute of limitation began when the defendant refused a repurchase demand.
On May 10, the Supreme Court of the State of New York granted the defendant's motion to dismiss the action in Nomura Asset Acceptance Corp. Alternative Loan Trust Series 2005-S4 v. Nomura Credit & Capital.
According to the report, HSBC Bank USA NA, the trustee of a 2005 RMBS securitization, sued Nomura Credit, the seller/sponsor, for various breaches of R&Ws.
The court concluded that the action was barred because “the plaintiff initiated it after the applicable statute of limitation for contract claims had expired.”
The court reasoned that the R&Ws were false when they were made and constituted a breach at the time. Therefore the statute of limitation ran from the time the R&Ws were originally made rather than from the time the trustee demanded repurchases.
In a second ruling, that came three days later, on the ACE Sec. Corp v. DB Structured Prods., a different judge in the same court rejected the seller/sponsor's rationale that the statute of limitations ran from the time the R&Ws were made.
Instead the court determined that the statute of limitations began only when the plaintiff's repurchase demand was refused.
Investors, said S&P, should consider both possible results when looking at R&W provisions in U.S. RMBS transactions.
“In our opinion, these decisions demonstrate the potential difficulty of pursuing claims arising from breaches of R&Ws in U.S. RMBS transactions, and therefore the importance of upfront due diligence and consideration of operational factors, points we have previously stressed,” said analysts at S&P.
S&P said that these limitations set by the court decisions are as key to its R&W analysis as the
