Thanos, The Discovery Rule And Mortgage Putback Cases
“I know what it’s like to lose. To feel so desperately that you’re right, yet to fail nonetheless. It’s frightening. Turns the legs to jelly. I ask you, to what end? Dread it. Run from it. Destiny arrives all the same. And now, it’s here. Or should I say, I am.”
The above quote is from Thanos’s first lines in Avengers: Infinity War. And as any attorney who has practiced for any amount of time will tell you, Thanos is right, at least in the first two sentences: sometimes you will lose, even when you are certain that you are right. This is exactly how I felt in December 2016 when I lost on a single, dispositive issue in a mortgage putback case.
“Mortgage putback” claims involve investors in mortgage backed securities (“MBS”) who demand that previous owners of one or more residential mortgages repurchase the loan(s) due to some defect in the mortgage loan(s). The defect usually consists of some inaccuracy or misrepresentation by the borrower in the loan application materials and is typically discovered after the borrower defaults; Fannie Mae and Freddie Mac are often the initiators of these claims. Typically, these claims form a descending chain that goes all the way down through several layers of ownership to the mortgage originator, be it a lender or a mortgage company. If the previous owner refuses to repurchase the allegedly defective loan(s), the aggrieved downstream investor brings suit, in essence, for the full intended value of the problem loan(s).
On the global and national scale, these types of lawsuits may involve thousands of allegedly defective loans in disputes between large financial institutions that create and market MBS products, the investors in those MBS products and the companies and institutions from which the financial institutions purchase portfolios of mortgages. These large disputes may involve hundreds of millions of dollars. As the claims work their way back down the chain of ownership to the original lender, the dollar amounts and cases get smaller and smaller, but the fundamental proof, facts, elements of the claim and questions about liability remain the same. Eventually, many of these claims make it back to the original lender who, if still in business, is sued to either repurchase or pay the purchaser the value of the defaulted loan, plus expenses like interest, late fees, force-placed insurance fees, attorneys’ fees, etc. State courts in Williamson County and the federal court for the Middle District of Tennessee have been very active in resolving these cases at this level of litigation.
One pervasive issue that applies equally to the national-scale MBS cases and the retail level cases involving individual (or small groups of) mortgages, is when the statute of limitations commences. Tennessee has a six year statute of limitations on breach of contracts cases. Since many of the problem loans were originated in the years immediately preceding the Great Recession (i.e. before or during the 2007-2008 financial crisis), it is not hard to understand why certainty about the accrual date for such a claim is a vital issue.
The “discovery rule” is a legal maxim, typically found in negligence and other tort cases, that “the statute of limitations begins to run when the plaintiff knows or has reason to know of the injury which is the basis for its action.” Thus, the discovery rule tolls the commencement of a statute of limitations. Not many cases in Tennessee have applied the discovery rule to breach of contract claims, and those that have are typically unreported cases from the Court of Appeals, not the Tennessee Supreme Court. When applying the discovery rule to the six year breach of contract statute of limitations, courts have made clear that the breach has to be “inherently undiscoverable” by the plaintiff (i.e. the purchaser of the mortgage who is seeking to putback the loan onto the original lender).
The contracts between loan purchasers and sellers typically contain a provision that, effectively, excuses the purchaser from any obligation to perform due diligence on the mortgages it purchases. But the purchaser does, of course, maintain the ability to look at the circumstances of each loan it purchases. So the question becomes, does the statute of limitations commence on the day that the purchaser buys the allegedly offending loan, because the inaccuracy or misrepresentation existed on that day as surely as it did on the day it was putback by a subsequent downstream investor? That is, since the alleged defect is not “inherently undiscoverable” because all the purchaser had to do was look at the loan file, shouldn’t the six year period commence on the date of purchase?
State and federal courts in other parts of the country, especially New York state and federal courts—where the biggest MBS and putback cases have been litigated—have adopted this analysis and concluded that the statute of limitations, which is also six years in New York, is triggered when the purchaser buys the allegedly defective loan or loans. However, federal courts in Tennessee have rejected this theory and have instead applied the discovery rule to toll the statute of limitations in mortgage putback cases, potentially forever, based on the notion that the purchaser had no reason to conduct any diligence on the loan(s) it purchased.
In resolving my summary judgment motion on this point (which I lost), the Court concluded that the discovery rule did apply, and that it tolled the statute of limitation such that the purchaser’s claim against my client, the loan originator, was timely. I have never been comfortable with this resolution nor, indeed, have many other practitioners in Middle Tennessee, who have continued to advance the identical argument in state and federal courts despite the Court’s resolution of the issue against me back in December 2016.
SPOILER ALERT: The next paragraph contains spoilers for Infinity War.
In Avengers: Infinity War, of course, half of the Marvel superheroes die, along with half of all sentient life in the universe, and Thanos retires to his farm to “rest, and watch the sun rise on a grateful universe.” But we know that many of those dead superheroes have to come back to life, if for no other reason than that they’re needed for future MCU sequels. (In the comic books, Nebula takes the Gauntlet and restores the lives snapped out of existence by Thanos, and Adam Warlock ultimately disposes of the stones. For Avengers 4, the betting line is that some or all of the original six Avengers die to undo Thanos’s acts, almost certainly including Captain America.)
Likewise, the argument that the discovery rule, generally, does not apply to breach of contract claims, including mortgage putback claims, is not dead. It was brought back to life last summer when the Tennessee Supreme Court agreed to resolve the issue once and for all. The matter was argued in February 2018, and when the opinion is released in the coming months, we will find out whether I, and the other lawyers who made the same argument, were right all along, despite losing in the trial courts.
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