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Chancery Court Applies New Statutory Amendment Retroactively

February 4, 2015
Albert H. Manwaring, IV
Delaware Business Court Insider

Before the newly enacted statutory amendment, 10 Delaware Code Section 8106(c), parties could shorten, but were not permitted to lengthen, an applicable limitations period by contract because an extension of the statute of limitations by agreement violated public policy. (See, e.g., Bonanza Restaurant v. Wink, C.A. No. S10C-10-018 RFS (Del. Super. Apr. 17, 2012), aff'd, 65 A.3d 616 (Del. 2013); and Shaw v. Aetna Life Insurance, 395 A.2d 384, 386-87 (Del. Super. 1978).) The Delaware General Assembly recently enacted 10 Delaware Code Section 8106(c), which was effective Aug. 1, 2014. Section 8106(c) now permits contracting parties to extend the three-year limitations period, applicable to most contract actions brought in Delaware, by agreement for up to 20 years from the time a cause of action accrues, in a written contract "involving at least $100,000." Section 8106(c) allows parties to define the time period in which suit may be brought in their contract by reference to traditional measures of time (e.g., months, days or years), but also provides flexibility for contracting parties to define such period of time "by reference to the occurrence of some other event or action, another document or agreement or another statutory period," or even "an indefinite period of time" up to 20 years from the time a cause of action accrues.

In the first decision to interpret new Section 8106(c), Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC, C.A. No. 7701-VCL (Del. Ch. Jan. 12, 2015) (Laster, V.C.), the Court of Chancery held that Section 8106(c) applies retroactively, allowing the parties to extend by agreement the limitations period applicable to their contract, which was entered into before the statutory effective date. In its discussion of two alternate bases for its decision, the court further held that a "contractual accrual provision [was] 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." Thus, the accrual provision postponed the point when the claims arose and the limitations period began to run. Second, relying on the Delaware Supreme Court's decision in Saudi Basic Industries v. Mobil Yanbu Petrochemical, 866 A.2d 1 (Del. 2005), the court declined to apply Delaware's borrowing statute (or the shorter Delaware three-year statute of limitations) to bar "a claim that would be timely" if the action had been brought in New York, where the cause of action arose and which has a longer six-year statute of limitations. Accordingly, in a rare occurrence, the court granted a motion for reargument of its motion-to-dismiss ruling, which had dismissed all but one claim on the grounds of laches based on Delaware's analogous three-year statute of limitations. In the motion for reargument, the court held that the claims were timely filed.

Background

Plaintiff Bear Stearns Mortgage Funding Trust, a securitization trust, brought claims for the defendants' breaches of the representations and warranties in an agreement to purchase mortgage loans underlying residential mortgage-backed securities issued by the trust to investors. The representations and warranties in the purchase agreement concerned the quality and characteristics of the mortgage loans, and their conformity with certain mortgage loan underwriting requirements designed to minimize the risk of a borrower's default. The representations and warranties survived the closing of the purchase agreement.

The purchase agreement provided that claims for breach of the representations and warranties "shall accrue as to any mortgage loan upon [defendants' notice or discovery of the alleged breach of the representations and warranties, and their subsequent failure to cure the breach]." The trust's sole remedy for breach of the representations and warranties under the purchase agreement was the defendants' obligation to cure the breach by repurchasing the non-conforming mortgage loan, or substituting a new conforming loan.

Upon notice or discovery of certain non-conforming loans, the defendants failed to repurchase such loans, or substitute new conforming loans, in 2011. As a result, the trust commenced suit in Delaware for the defendants' breach of the representations and warranties in July 2012. The purchase agreement and breaches of the representations and warranties arose in New York, and were governed by New York law.

Parties May Contract To Extend Limitations Period

The court ruled that the purchase agreement's accrual provision, extending the statute of limitations for the trust's claims of breach of the representations and warranties, was valid under 10 Delaware Code Section 8106(c). The court reasoned that the purchase agreement's accrual provision, which provided that a claim for breach of the representations and warranties in connection with a mortgage loan accrued upon the defendants' notice or discovery of the breach, and their subsequent failure to cure by repurchasing the non-conforming mortgage loan, "constituted 'a period of time defined by reference to the occurrence of some other event or action' that is a sufficient 'period specified' for purpose of Section 8106(c)," the opinion said. Thus, the court found that the accrual provision in the purchase agreement operated to extend the limitations period for the trust's claims of the defendants' breach of the representations and warranties under Section 8106(c), such that the statute of limitations did not begin to run on the trust's claims until after both discovery of the breach by the defendants and their failure to cure.

Significantly for contracts entered into before the statutory effective date of Aug. 1, 2014, the court applied Section 8106(c) retroactively to a purchase agreement entered into eight years before the statutory effective date. The court reasoned that modifying a "limitations period is a procedural matter," and thus, the presumption against retroactive application of a statute was not applicable. The court next found that modification of the limitations period was applicable to the pending suit "absent a showing of manifest injustice." The court explained that retroactive application of Section 8106(c) to the pending suit was not unjust because: (1) the trust's claims were timely filed under the six-year statute of limitations of New York, where the cause of action arose; (2) this case was pending on the statutory effective date, and thus, the modified limitations period was not reviving extinguished claims, but rather was being applied to pending claims; and (3) the defendants had agreed to the accrual provision, which contemplated the assertion of claims for breach of the representations and warranties well after the securitization of the mortgage-backed securities closed.

The court also discussed two alternate bases for its decision. First, the court pointed out that a long line of Delaware decisions have found that a claim accrual provision in a contract constitutes a condition precedent that must be satisfied before a plaintiff could bring suit, "such that the statute of limitations does not begin to run until the condition precedent is met." The court found that the purchase agreement's accrual provision was a condition precedent that required both discovery of the breach by defendants and their failure to cure before the trust's claims arose and the limitations period began to run. Second, relying upon the Delaware Supreme Court's decision in Saudi Basic Industries, the court found that Delaware's borrowing statute was inapplicable to require application of Delaware's shorter three-year limitations period to bar the trust's claims for breach of the representations and warranties in the purchase agreement. The purpose of the borrowing statute to deter forum-shopping is only applicable "when a party seeks to take advantage of a longer Delaware statute of limitations to bring a claim that would be time-barred under the law of the jurisdiction governing the claim." Hence, Delaware's borrowing statute was not applicable because the trust's claims were timely filed under the longer six-year limitations period of New York, where the trust's claims arose.

Lesson Learned

In negotiating contracts, transactional practitioners should consider the effect of claim accrual provisions and other language that could result in an extension of the limitations period under 10 Delaware Code Section 8106(c). In consideration of the potential for retroactive application of Section 8106(c), practitioners should also review contracts entered into before the statutory effective date of Aug. 1, 2014, containing representations and warranties that survived the closing, to evaluate when any claims for such breach may accrue and the effect of any other language in the contract that could result in an extension of the limitations period under 10 Delaware Code Section 8106(c).

Delaware Business Court Insider  |  February 4, 2015