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3/27/2018 Applying N.Y.’s Borrowing Statute to Asset-Backed Securities Claims After ‘Deutsche Bank’ | New York Law Journal

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By Michael Hanin, Uri Itkin and Drew I. Grossman | U P D A T E D Mar 09, 2018 at 03:45 PM

Applying N.Y.’s Borrowing Statute to Asset-Backed Securities Claims After ‘Deutsche Bank’

     (http://www.almreprints.com)

Under New York’s borrowing statute, codi�ed in CPLR 202, when a

nonresident sues in New York, his or her claim must be timely both in New

York and the state where the cause of action accrued. CPLR 202 was

expressly intended not only to deter forum shopping by out-of-state

plainti�s, but also to add “clarity” and “predictability” to the law in respect of

the limitations periods applicable to non-resident plainti�s proceeding in

New York courts. Ins. Co. of N. Am. v. ABB Power Generation, 91 N.Y.2d 180, 187 (1997). A recent First Department decision, however, has potentially

injected some uncertainty into limitations periods applicable to claims

involving asset-backed securities where the trustee resides outside New

York. In Deutsche Bank Nat’l Trust Company v. Barclays Bank PLC, 156 A.D.3d 401 (1st Dep’t 2017) (the decision), the First Department dismissed

claims brought by a corporate trustee on behalf of two mortgage-backed

securitization trusts on the grounds that the borrowing statute required

3/27/2018 Applying N.Y.’s Borrowing Statute to Asset-Backed Securities Claims After ‘Deutsche Bank’ | New York Law Journal

https://www.law.com/newyorklawjournal/2018/03/09/applying-n-y-s-borrowing-statute-to-asset-backed-securities-claims-after-deutsche-bank/?slreturn=… 2/7

application of California’s four-year limitations period, not New York’s more

generous six-year period. Investors and trustees should be aware of the

potential rami�cations of the decision.

Background and Lower Court’s Decision

The two actions adjudicated by the decision are emblematic of the bevy of

residential mortgage-backed securities (RMBS) actions, generally referred to

as “putback” or “repurchase” cases, �led in New York and across the country

over the past decade. The trusts at issue were created in 2007 to securitize

residential mortgage loans. The certi�cates issued by the trusts were sold to

investors, who are repaid from principal and interest payments made by

the borrowers of the underlying loans. Plainti� Deutsche Bank National

Trust Company serves as trustee for both trusts. Defendants, the sponsors

of the securitizations, made certain contractual representations and

warranties concerning the credit quality and characteristics of the mortgage

loans deposited in the trusts.

In 2013, Deutsche Bank �led claims on behalf of both trusts for alleged

breaches of defendants’ representations and warranties. Defendants

moved to dismiss on several grounds, including that the claims were

untimely under California’s four-year statute of limitations. Defendants

argued that the borrowing statute required the application of California’s

limitations period because Deutsche Bank resides in California and because

the trusts had close ties to California.

The Supreme Court denied defendants’ motion. 2015 N.Y. Slip Op. 32252(U),

2015 WL 7625829 (Sup. Ct. Nov. 25, 2015). The court ruled that the

borrowing statute applied notwithstanding the New York choice of law

provision in the securitization agreements, because that provision

encompassed only substantive matters, not procedural issues like the

statute of limitations. Nevertheless, the court declined to apply California’s

limitation period to Deutsche Bank’s claims.

The court recognized that the borrowing statute generally looks to the place

where the plainti� resides—and consequently sustains the economic

impact of the loss—to determine which state’s limitations period should

apply. The court rejected the plainti�-trustee’s California residence as a

reliable indicator of where the injury occurred, however, because the loss

was sustained by the trusts (not the trustee) and because the trustee does

not make investment decisions for the trusts. Unable to rely on the

residence of the geographically dispersed trust investors as a proxy for

where the injury was sustained, the court focused on the physical location

of mortgage loan documents and the situs of tax liability. In the court’s view,

neither factor favored California, as mortgage loan notes could be stored in

several states and the trusts did not owe or pay any state taxes in

California. Based on this analysis, the court declined to “borrow” California’s

four-year statute of limitations and denied defendants’ motion to dismiss.

The First Department Decision

3/27/2018 Applying N.Y.’s Borrowing Statute to Asset-Backed Securities Claims After ‘Deutsche Bank’ | New York Law Journal

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The First Department unanimously reversed. 156 A.D.3d 401 (1st Dep’t

2017). The appellate panel held that the claims accrued in California under

the general rule of plainti�’s residence, as well as under the multi-factored

analysis applied by the court below. In addition to Deutsche Bank’s

California residence, the panel noted that the majority of the mortgage

loans were made by California lenders for California properties, that

Deutsche Bank administered the loans in California, and that the trust

agreements contemplate payment of state taxes (if any) in California and

the storage of loan documents in California.

Having held that the claims accrued in California, the First Department

applied California’s four-year statute of limitations to bar the claims

asserted by Deutsche Bank. The First Department held that plainti�s’ claims

accrued in 2007—i.e., when the allegedly non-conforming mortgage loans

were deposited into the trusts—and nearly six years before plainti�s

commenced the actions. The First Department also rejected plainti�s’

tolling arguments under both New York and California law. Applying the

contractual New York choice of law provision to substantive issues, the

panel rejected Deutsche Bank’s argument that a contractual pre-suit notice

and demand requirement was a condition precedent to suit that could toll

the limitations period. Similarly, applying California’s discovery rule, the First

Department held that Deutsche Bank could have discovered the alleged

breaches within four years from closing based on information available to

Deutsche Bank in the trusts’ o�ering documents, as well as in post-closing

due diligence and loan performance reports.

The Aftermath

On Jan. 4, 2018, Deutsche Bank requested that the First Department grant

leave to appeal to the New York Court of Appeals. Deutsche Bank’s motion

identi�ed a number of perceived inconsistencies in the First Department’s

decision and argued that the decision could impact dozens of similar

actions pending in New York. Deutsche Bank’s motion was fully submitted

as of March 1, 2018.

Absent further elucidation by the Court of Appeals or First Department,

substantial questions remain regarding the application of the borrowing

statute to asset-backed securities claims. For example, the relevance of the

trustee’s residence to the accrual analysis is unclear, not only with respect

to claims �led by trustees on behalf of trusts, but also with respect to (1)

claims �led derivatively on behalf of trusts by investors, and (2) claims �led

by so-called “separate” trustees appointed solely to pursue litigation.

Questions also remain as to whether the borrowing statute requires that

conditions precedent to suit contained in securitization agreements be

analyzed under New York law, as opposed to the law of the jurisdiction

where the claim accrued. And there seems to be no bright line rule for what

is necessary under the borrowing statute to show at the pleading stage

whether a corporate trustee based in California or another jurisdiction that

applies a discovery rule could have discovered alleged breaches.

3/27/2018 Applying N.Y.’s Borrowing Statute to Asset-Backed Securities Claims After ‘Deutsche Bank’ | New York Law Journal

https://www.law.com/newyorklawjournal/2018/03/09/applying-n-y-s-borrowing-statute-to-asset-backed-securities-claims-after-deutsche-bank/?slreturn=… 4/7

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Until these questions are resolved, trustees and investors seeking to

enforce trust rights should take certain precautions whenever possible. For

actions relating to existing trusts—even those formed in New York and

governed by New York law—litigants should assume the application of the

(potentially shorter) limitations periods of other states, particularly states

where the trustee resides, trust assets are located, and/or the trusts have

state-speci�c obligations. Litigants should further assume that the claims

will not be tolled by contractual provisions or a discovery rule. In the future,

deal parties may consider drafting broader choice of law provisions to avoid

the borrowing statute altogether, though it is unclear whether courts would

abide by such language.

In sum, where the trustee resides outside New York in an asset-backed

securities case, the prudent course is to assume the shortest potentially

applicable limitations period.

Michael Hanin and Uri Itkin are partners in the complex commercial litigation practice of Kasowitz Benson Torres. Drew I. Grossman is an associate with the practice.

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