Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca2-14-03373/USCOURTS-ca2-14-03373-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

______________                          

August Term, 2015

(Argued: October 15, 2015          Decided: November 16, 2015)

Docket No. 14‐3373‐cv

____________                          

DEUTSCHE BANK NATIONAL TRUST COMPANY,  

solely as Trustee of the GSR Mortgage Loan Trust 2007‐OA1,

Plaintiff‐Appellant,

–v.–  

QUICKEN LOANS INC.,

Defendant‐Appellee.*

______________

Before:

STRAUB, WESLEY, AND LIVINGSTON, Circuit Judges.

______________

Appeal from an August 4, 2014 opinion and order of the United States

District Court for the Southern District of New York (Paul A. Crotty, Judge).  

 

* The Clerk of the Court is respectfully directed to amend the official caption as noted

above.  

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After the Federal Housing Finance Agency (“FHFA”) filed a summons with

notice in state court asserting breach of contractual obligations to repurchase

mortgage loans that violated representations and warranties, Defendant‐

Appellee Quicken Loans Inc. (“Quicken”) removed the action to federal court.  

There, Plaintiff‐Appellant Deutsche Bank National Trust Company (“the

Trustee”), as trustee of the subject residential mortgage‐backed securities trust,

took control of the litigation and filed the Complaint.  Quicken moved to dismiss

the suit as, inter alia, barred by the statute of limitations.  The District Court

concluded (1) the statute of limitations ran from the date the representations and

warranties were made; (2) the extender provision of the Housing and Economic

Recovery Act did not apply to the Trustee’s claim; and (3) the Trustee’s claim for

breach of the implied covenant of good faith and fair dealing was duplicative.  

We agree with each conclusion.  We therefore AFFIRM the District Court’s

dismissal of the action.  

                         

ZACHARY D. ROSENBAUM, Lowenstein Sandler LLP,

New York, NY, for Plaintiff‐Appellant.

JEFFREY B. MORGANROTH, Morganroth &

Morganroth, PLLC, Birmingham, MI (Howard F.

Sidman, Heidi A. Wendel, Michael O. Thayer, Jones

Day, New York, NY), for Defendants‐Appellees.

                          

______________

WESLEY, Circuit Judge:

After the Federal Housing Finance Agency (“FHFA”) filed a summons

with notice in state court asserting breach of contractual obligations to

repurchase mortgage loans that violated representations and warranties,

Defendant‐Appellee Quicken Loans Inc. (“Quicken”) removed the action to

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federal court.  There, Plaintiff‐Appellant Deutsche Bank National Trust Company

(“the Trustee”), as trustee of the subject residential mortgage‐backed securities

trust, took control of the litigation and filed the Complaint.  Quicken moved to

dismiss the suit as, inter alia, barred by the statute of limitations.  The District

Court concluded (1) the statute of limitations ran from the date the

representations and warranties were made; (2) the extender provision of the

Housing and Economic Recovery Act did not apply to the Trustee’s claim; and

(3) the Trustee’s claim for breach of the implied covenant of good faith and fair

dealing was duplicative.  We now affirm each of the District Court’s conclusions.

BACKGROUND1

Quicken originated the mortgage loans at issue and sold them to nonparty

Goldman Sachs Mortgage Company (“the Sponsor”) pursuant to a Purchase

Agreement dated June 1, 2006.  That Purchase Agreement included a series of

representations and warranties (“R&Ws”) about the quality of the mortgage

loans and their compliance with specified underwriting and origination

 

1 Unless otherwise noted, the following facts are taken from the District Court’s opinion

and the parties’ briefs on appeal.  As required when reviewing a motion to dismiss, we

accept all factual allegations in the complaint as true and draw all reasonable inferences

in the Trustee’s favor.  See Shomo v. City of New York, 579 F.3d 176, 183 (2d Cir. 2009).

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guidelines.  Through a series of sales and assignments, the mortgage loans were

deposited into a securitization trust; the Trustee received all the rights, title, and

interest in the mortgage loans for the benefit of the certificateholders in the

securitization.  Additionally, the Trustee received, as assignee, all the Sponsor’s

rights against Quicken, including its rights and remedies arising out of the

R&Ws.  The securitization trust issued certificates representing interests in the

mortgage loans to investors in a public offering, pursuant to a shelf registration

statement filed with the U.S. Securities and Exchange Commission; the closing

date of the securitization was May 8, 2007.  One of the certificate purchasers was

the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

The R&Ws contained in the Purchase Agreement contained both

transaction‐level R&Ws—representations as to the characteristics of the

transaction as a whole—and loan‐level R&Ws—representations as to the

characteristics of the individual mortgage loans.  The R&Ws collectively covered

such subjects as Quicken’s characteristics as originator as well as the features,

quality, and risk profile of the loans contained in the securitization pool,

including the loans’ compliance with origination guidelines, the absence of

delinquencies and defaults, or the absence of originator fraud.  These R&Ws

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guaranteed these characteristics “as of” the closing and transfer dates set forth in

a series of Purchase Confirmation Letters, in which Quicken sold individual

batches of the mortgage loans to the Sponsor pursuant to the Purchase

Agreement.  Joint App’x 90, 95–112 (Purchase Agreement §§ 2.01, 2.09, 3.01–.02).

The Purchase Agreement also created a contractual remedy for any

material breach of the R&Ws (“the Repurchase Protocol”).  See Joint App’x 112–

14 (Purchase Agreement § 3.03).  Upon discovering any breach of the R&Ws that

materially and adversely affected the value of the loan or the trust’s interests, the

discovering party was required to give prompt written notice to the other.  

Quicken had sixty days—with a possible fifteen‐day extension—to cure the

material breach, calculated from the earlier of discovery or receipt of notice; if the

breach could not be cured within that time, Quicken had to repurchase the

mortgage loan at a prescribed price.2

 

2 For breaches of the transaction‐level R&Ws laid out in § 3.01 of the Purchase

Agreement, the Repurchase Protocol required repurchase of all the mortgage loans if

cure was not completed within sixty days.  See Joint App’x 113.  The Purchase

Agreement also included a mutual indemnification clause between the parties.  See Joint

App’x 122–23 (Purchase Agreement § 5.01).  Together, the Repurchase Protocol and the

indemnification provision constituted the “sole remedies” available to the Trustee for

breaches of the R&Ws.  Joint App’x 114.

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This section of the Purchase Agreement also contained a provision

imposing limits on when the counterparty may bring an action against Quicken

for material breach of the R&Ws (“the Accrual Clause”).  Because of the

importance of this provision to the case’s resolution, we include it here:

Any cause of action against [Quicken] relating to or

arising out of the Material Breach of any representations

and warranties made in Sections 3.01 and 3.02 shall

accrue as to any Mortgage Loan upon (i) the earlier of

discovery of such breach by [Quicken] or notice thereof

by the [Trustee] to [Quicken], (ii) failure by [Quicken] to

cure such Material Breach or repurchase such Mortgage

Loan as specified above, and (iii) demand upon

[Quicken] by the [Trustee] for compliance with this

Agreement.

Joint App’x 114 (Purchase Agreement § 3.03).

On May 8, 2013, FHFA commenced an action in New York Supreme Court,

New York County, “as conservator of” Freddie Mac and “on behalf of” the

Trustee, by filing a summons with notice.  It then served Quicken on September

4, 2013.  Quicken removed the action to the United States District Court for the

Southern District of New York on September 13, 2013, claiming federal

jurisdiction under 28 U.S.C. § 1345.3  Once the case was removed to federal court,

 

3 This section provides the federal district courts with jurisdiction over “all civil actions,

suits or proceedings commenced by the United States, or by any agency or officer

thereof expressly authorized to sue by Act of Congress.”  28 U.S.C. § 1345.

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however, FHFA entered no appearance and did not participate in the

proceedings.  Instead, the Trustee appeared and filed the instant Complaint on

October 18, 2013.  The Trustee’s Complaint asserted federal diversity jurisdiction

pursuant to 28 U.S.C. § 1332 and made no mention of § 1345.4

The Complaint alleged, among other things, that two independent audits

of loans in the securitization trust revealed material breaches of Quicken’s

R&Ws, including those related to (1) borrower income, (2) debt‐to‐income ratios,

(3) loan‐to‐value and combined‐loan‐to‐value ratios, and (4) owner occupancy.  

The Complaint further alleged that, upon learning of these breaches, the Trustee

sent Quicken a series of letters between August 27, 2013, and October 17, 2013,

that notified Quicken of the loans and breaches and demanded cure or

repurchase.  Finally, the Complaint alleged that Quicken failed to cure or

repurchase a single breaching loan without justification.

On December 16, 2013, Quicken moved to dismiss the Complaint, arguing

primarily that the breach of contract claim was time‐barred.  The District Court

agreed, concluding that the cause of action accrued at the time the R&Ws were

 

4 FHFA’s decision to not pursue the matter further is discussed infra at note 8 and its

accompanying text.

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made.  It further concluded that the extender provision of the Housing and

Economic Recovery Act (“HERA”), 12 U.S.C. § 4617(b)(12), did not apply because

FHFA abandoned prosecution of the action after realizing it was not the proper

plaintiff.  Finally, it concluded that the Trustee’s remaining claim for breach of

the implied covenant of good faith and fair dealing was duplicative of the

contract claim and should be dismissed.  The Trustee filed a timely notice of

appeal.

While this appeal was pending, the New York Court of Appeals granted

leave to appeal a decision of the First Department critical to the District Court’s

timeliness ruling below.  See ACE Secs. Corp. v. DB Structured Prods., Inc., 112

A.D.3d 522 (N.Y. App. Div. 2013), leave to appeal granted by 23 N.Y.3d 906 (2014).  

We then granted the Trustee’s motion to adjourn oral argument until the Court

of Appeals decided the case.  Following release of the Court of Appeals’ opinion,

see ACE Secs. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581 (2015), the parties

submitted letter briefs under Federal Rule of Appellate Procedure 28(j), and the

panel heard oral argument on October 15, 2015.

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DISCUSSION

We review de novo a district court’s grant of a motion to dismiss, including

its legal interpretation and application of a statute of limitations, see City of

Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 173 (2d Cir. 2011), and its

interpretation of contractual terms, see Oscar Gruss & Son, Inc. v. Hollander, 337

F.3d 186, 198 (2d Cir. 2003).  When sitting in diversity jurisdiction and

determining New York state law claims, we must apply “the law of New York as

interpreted by the New York Court of Appeals.”  Licci ex rel. Licci v. Lebanese

Canadian Bank, SAL, 739 F.3d 45, 48 (2d Cir. 2013) (per curiam).

New York’s six‐year limitations period on contractual claims generally

runs from the time the contract was breached.  See N.Y.C.P.L.R. §§ 203(a), 213(2);

Ely‐Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402 (1993).  Where “demand

is necessary to entitle a person to commence an action,” a cause of action accrues

“when the right to make the demand is complete.”  N.Y.C.P.L.R. § 206(a).   

Applying these rules, the New York Court of Appeals’ recent decision is

clear:  A cause of action for breach of contractual representations and warranties

that guarantee certain facts as of a certain date—but do not guarantee future

performance—accrues on the date those representations and warranties become

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effective.  ACE, 25 N.Y.3d at 596.  We must therefore determine whether the

R&Ws before us contain any guarantee of future performance or whether the

Accrual Clause constitutes a substantive condition precedent, which would delay

accrual of the cause of action.  See id. at 599.   

In ACE, the Court concluded that the representations and warranties

guaranteed only “certain facts about the loans’ characteristics as of” the

execution date, not how the mortgage would perform in the future.  Id. at 595–96.  

Further, as an “alternative remedy” to damages, the repurchase obligation there

was itself “dependent on, and indeed derivative of” the representations and thus

also “could not be reasonably viewed as a distinct promise of future

performance.”  Ibid.  We find the R&Ws in this case indistinguishable:  The plain

text of the agreement “represents, warrants and covenants” that the facts stated

in the R&Ws are true “as of the Closing Date and as of the Transfer Date.”  Joint

App’x 96 (Purchase Agreement § 3.01); see also Joint App’x 100 (Purchase

Agreement § 3.02) (substantially similar language).   

The Trustee argues that, unlike those in ACE, the R&Ws here were

expressly stated to “survive the sale of the Mortgage Loans,” Joint App’x 112

(Purchase Agreement § 3.03), and therefore promise future performance.  This

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argument misses the mark.  The R&Ws here guarantee, at their core, no more

than the present characteristics and quality of the loans as of a specific moment

in time. 5  Whether they “survive”—i.e., remain valid and enforceable—does not

alter the question of performance.  A representation of present fact is either true

or false—and the contract therefore performed or breached—if the underlying

fact was true or false at the time the representation was made.  See ABB Indus.

Sys., Inc. v. Prime Tech., Inc., 120 F.3d 351, 360 (2d Cir. 1997) (holding, in a case

alleging breach of representations under New York law, that the contract, which

“promised that the site was in compliance with all environmental laws,” was

“breached, if at all, on the day it was executed”).  Immediately upon

effectiveness of the R&Ws, the Trustee was entitled to demand the contractual

remedy—cure or repurchase—as to any material breach, and the cause of action

therefore accrued at that time.  See N.Y.C.P.L.R. § 206(a).

 

5 Like the Court of Appeals, we find illustrative Bulova Watch Co. v. Celotex Corp., 46

N.Y.2d 606 (1979).  There, a supplier sold roofing materials to a contractor and

promised to repair any leaks in the roof for twenty years.  The Court of Appeals

concluded that this promise was distinct and separate from the sale of materials,

because it obliged the supplier to perform a continuing service—and failure to perform

that service would independently breach the agreement.  Id. at 610–12.  By contrast,

Quicken agreed only to remedy defects that existed in the initial sale, not to ensure the

quality of the loans for their entire life.  For example, the represented loan‐to‐value

ratios express a static condition—i.e., the value of the mortgaged property and its

relationship to the loan amount at the time of the loan.   

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Next, we address the Trustee’s argument, also made by the trust in ACE,

that the Accrual Clause makes demand “a substantive condition precedent to

suit that delayed accrual of the cause of action.”  25 N.Y.3d at 597.  We have

previously observed that New York courts “distinguish between substantive

demands and procedural demands.”  Cont’l Cas. Co. v. Stronghold Ins. Co., 77 F.3d

16, 21 (2d Cir. 1996).  In the former case, CPLR § 206(a) does not apply and the

statute of limitations “begins to run only after such demand and refusal,” while

in the latter, § 206(a) governs and the limitations period “begins to run when the

right to make the demand is complete.”  Kunstsammlungen Zu Weimar v. Elicofon,

678 F.2d 1150, 1161 (2d Cir. 1982) (internal quotation marks omitted).

We note the language of the Accrual Clause—that “[a]ny cause of

action . . . shall accrue” upon (1) discovery or notice of breach, (2) failure to cure or

repurchase, and (3) demand for compliance, Joint App’x 114 (Purchase

Agreement § 3.03) (emphasis added)—makes an initially appealing case for

inclusion as a substantive condition precedent.  However, even under the

obvious obligation to enforce a contract “according to the plain meaning of its

terms,” Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002), ACE requires

us to examine the object of the demand, rather than merely apply the phrase

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“shall accrue” as a talisman.  Instead, we must ask whether demand “is a

condition to a party’s performance” (substantive) or whether it “seeks a remedy

for a preexisting wrong” (procedural).  ACE, 25 N.Y.3d at 597.  The answer is

fatal to the Trustee’s claim.

Because the Repurchase Protocol is not an independent obligation but

merely an alternative contractual remedy to damages, see ACE, 25 N.Y.3d at 596–

97, the relevant “performance” is the truth or falsity of the R&Ws.  It is clear that

performance (or nonperformance) of the contract is not contingent on the

Trustee’s demand; the R&Ws were true or false—either performed or not—at the

moment they were made, without any need for the Trustee to make a demand.  

See ABB Indus. Sys., 120 F.3d at 360.  Thus, notwithstanding the “shall accrue”

language, the Trustee’s demand seeks only the remedy to which it is already

entitled, not performance of the underlying contractual obligation.6  Accordingly,

 

6 Further, construing the demand requirement as the Trustee suggests results in a

circular absurdity.  If the Accrual Clause were a substantive condition precedent, then

the Trustee would not be entitled to its contractual remedy until the three criteria—(1)

discovery or notice, (2) failure to cure or repurchase, and (3) demand—had been

satisfied.  However, because demand and failure to cure are now substantive elements,

the Trustee would be in the odd position of having to demand a contractual remedy to

which it would not be entitled until Quicken had refused its demand.  Put differently,

Quicken would have to choose whether to remedy a breach that had not occurred—

because it had not yet refused—or to refuse and, by its refusal, breach the contract and

become obligated to remedy that breach.

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the demand is merely procedural and does not delay accrual of the cause of

action.  See ACE, 25 N.Y.3d at 597.

Our decision in Continental Casualty is not to the contrary.  There, we

concluded that, under the reinsurance contract, notice of actual losses (i.e., a

demand) was necessary to start the running of the statute of limitations.  Cont’l

Cas., 77 F.3d at 21.  However, payment of covered losses is performance of a

reinsurance contract, not a remedy for breach.  Thus, our precedent is consistent

with ACE’s statement that demand as a prerequisite to performance forms a

substantive condition precedent, while demand of a remedy for a preexisting

breach is merely procedural.  See 25 N.Y.3d at 597.  Similarly, in the “right to final

payment” cases cited by the Trustee, the payment in question was one party’s

performance of the contract, not a remedy for breaching it.  See Hahn Auto.

Warehouse, Inc. v. Am. Zurich Ins. Co., 18 N.Y.3d 765, 768–69 (2012); John J. Kassner

& Co. v. City of New York, 46 N.Y.2d 544, 550 (1979).

In sum, the Trustee has not persuaded us that the instant contract

functions differently than that considered by the New York Court of Appeals in

ACE, and we are thus bound to reach the same conclusion.  We therefore agree

with the District Court that the statute of limitations began to run on the date the

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R&Ws became effective and were either true or false at that time.  Since the

Trustee’s suit is therefore facially untimely, 7 the only remaining inquiry is

whether HERA extends the statute of limitations for the Trustee’s claim.  

HERA’s extender provision provides, in relevant part, that for “any action

brought by [FHFA] as conservator or receiver,” “the date on which the statute of

limitations begins to run on any claim . . . shall be the later of—(i) the date of the

appointment of [FHFA] as conservator or receiver; or (ii) the date on which the

cause of action accrues.”  12 U.S.C. § 4617(b)(12).  The Trustee argues that this

suit was commenced by—i.e., “brought by”—FHFA through a summons with

notice in state court.  Thus, in the Trustee’s view, HERA delays accrual of the

cause of action until September 6, 2008, when FHFA was appointed conservator

of Freddie Mac.   

 

7 The District Court concluded that the R&Ws were executed as of the date of the

closing and transfer dates in the Purchase Confirmation Letters for particular groups of

loans—the last of which occurred on April 2, 2007—rather than the securitization’s

closing date of May 8, 2007.  On appeal, the Trustee has not briefed any argument to the

contrary.  We therefore accept the District Court’s interpretation.  See Norton v. Sam’s

Club, 145 F.3d 114, 117 (2d Cir. 1998).  As a result, the Trustee’s relation‐back argument

is irrelevant, since the action would be untimely whether commenced on May 8, 2013,

or October 18, 2013.  Further, the Trustee raised its argument only in a footnote, and

thus we would decline to consider it in any event.  See United States v. Restrepo, 986 F.2d

1462, 1463 (2d Cir. 1993).

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As we have previously noted in interpreting HERA, statutory

interpretation must “begin with the plain language, giving all undefined terms

their ordinary meaning” while “attempt[ing] to ascertain how a reasonable

reader would understand the statutory text, considered as a whole.”  Fed. Hous.

Fin. Agency v. UBS Ams. Inc., 712 F.3d 136, 141 (2d Cir. 2013) (internal quotation

marks omitted).  Here, FHFA’s only involvement was filing a summons with

notice in state court—arguably while contractually barred from doing so by a no‐

action clause.8  After removal of the action, the Trustee filed the federal

complaint and prosecuted the action based on diversity jurisdiction with no

apparent participation from FHFA.   

In these circumstances, we conclude that the present action cannot

reasonably be said to have been “brought by” FHFA.  To conclude otherwise

would confound common‐sense notions of claims to which the statute applies

and invite litigation gamesmanship by private parties seeking to obtain the

 

8 A “no action” clause generally bars “individual [certificate] holders from bringing

independent law suits which are more effectively brought by the [trustee],” unless

certain exceptions are met.  Walnut Place LLC v. Countrywide Home Loans, Inc., No.

650497/11, Misc.3d 1207(A), 2012 WL 1138863, at *3 (N.Y. Sup. Ct. 2012) (internal

quotation marks omitted), aff’d, 96 A.D.3d 684 (N.Y. App. Div. 2012).  The no‐action

clause here is contained in § 12.07 of the Master Servicing and Trust Agreement.  See

Exhibit 7 to the Declaration of Howard Sidman at 90, Fed. Hous. Fin. Agency v. Quicken

Loans Inc., No. 13‐cv‐06482 (PAC) (S.D.N.Y. filed Dec. 16, 2013), ECF No. 17‐7.

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benefits of the extender statute for themselves.  See Johnson v. United States, 123

F.3d 700, 703 (2d Cir. 1997) (“[T]he appropriate methodology to employ in

interpreting a statute is to look to the common sense of the statute, to its purpose,

[and] to the practical consequences of the suggested interpretations . . . .”

(internal quotation marks omitted)).  Whether “brought by” means mere

commencement or commencement and continued prosecution, see Serna v. Law

Office of Joseph Onwuteaka, P.C., 732 F.3d 440, 445 (5th Cir. 2013) (concluding

“bring an action” is ambiguous as to commencement or prosecution of a suit,

given its use in differing contexts), we need not engage in an exhaustive

existential analysis to conclude the procedural posture here does not fit

comfortably within a reasonable reading of the statute.  It suffices to say that

HERA’s extender provision does not apply to the unique circumstances before

us, and the Trustee’s claim remains untimely.

Finally, the Trustee argues that its claim for breach of the implied covenant

of good faith and fair dealing was erroneously dismissed as duplicative.  We

disagree.  Under New York law, claims are duplicative when both “arise from

the same facts and seek the identical damages for each alleged breach.”  Amcan

Holdings, Inc. v. Canadian Imperial Bank of Commerce, 70 A.D.3d 423, 426 (N.Y.

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App. Div. 2010) (citation omitted); see also, e.g., Deer Park Enters., LLC v. Ail Sys.,

Inc., 57 A.D.3d 711, 712 (N.Y. App. Div. 2008) (claims are duplicative where “the

conduct and resulting injury alleged” are identical).  The Trustee’s argument that

Quicken knowingly sold defective loans arises from the same facts and seeks the

same remedy as its claim for breach of contract; its claim that Quicken hid the

knowledge from it in an effort to run out the statute of limitations involves the

same facts as a purported failure to notify the Trustee promptly of material

defects.  Thus, because the facts underlying both claims are identical and the

Trustee seeks identical remedies, the claim for breach of the implied covenant

was properly dismissed as duplicative.

CONCLUSION

In summary, the R&Ws here made no guarantees of future performance

and therefore could only be breached at the time of execution.  The Accrual

Clause merely constitutes a procedural demand and does not delay the accrual of

the cause of action.  Since the extender statute does not apply, the six‐year statute

of limitations ran from the date the R&Ws were made.   The Trustee’s breach of

contract claim is therefore untimely, and its second claim is duplicative.  For

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these reasons, the District Court’s opinion and order of August 4, 2014, is hereby

AFFIRMED.

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